UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
AMENDMENT NO. 1
TO
FORM 20-F/A
[_] 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, 2003
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
Commission file number 001-14184
B.O.S BETTER ON LINE SOLUTIONS LTD.
(Exact name of Registrant as specified in its charter)
ISRAEL
(Jurisdiction of incorporation or organization)
BEIT RABIN, 100 BOS ROAD, TERADYON INDUSTRIAL PARK, MISGAV, 20179, ISRAEL
(Address of principal executive offices)
Securities registered or to be registered pursuant to Section 12(b) of the Act:
NONE
(Title of each class)
Securities registered or to be registered pursuant to Section 12(g) of the Act:
ORDINARY SHARES, PAR VALUE NIS 4.00 PER SHARE
(Title of Class)
Securities for which there is a reporting obligation pursuant to Section 15(d)
of the Act:
NONE
(Title of Class)
Indicate the number of outstanding shares of each of the issuer's classes of
capital or common stock as of the close of the period covered by the annual
report:
4,167,509 ORDINARY SHARES, NIS 4.00 PAR VALUE PER SHARE, AS OF DECEMBER 31, 2003
1
Indicate by check mark 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 preceding 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.
Yes [X] No [_]
Indicate by check mark which financial statement item the registrant has elected
to follow:
Item 17 [_] Item 18 [X]
EXPLANATORY NOTE
This Amendment no. 1 to the Annual Report on Form 20-F for the year ended
December 31, 2003, of B.O.S Better On-Line Solutions Ltd. (the "Company")
includes restated consolidated financial statements and related information that
reflect the accounting for the Company's investment in Surf Communications
Solutions Ltd. ("Surf") according to the equity method rather than the cost
method. As a result of the acquisition of additional voting securities of Surf
in 2003, which resulted in the Company's owing securities representing more than
20% of the voting rights of Surf, the Company has the ability to exercise
significant influence over Surf. In order to present financial statements in
accordance with accounting principles generally accepted in the United States,
the Company has restated its financial statements with respect to its investment
in Surf which was previously accounted for based on the cost method, to
accounting for it based on the equity method of accounting. Additionally, this
Amendment includes the consolidated financial statements of Surf for the year
ended December 31, 2003 in accordance with item 3.09 of Regulation S-X.
This Amendment no. 1 contains the following affected items only: 3A, 4A, 5, 8,
18 and 19. Other items remain unchanged.
2
ITEM 3: KEY INFORMATION REGARDING B.O.S.
Unless the context in which such terms are used would require a different
meaning, all references to "BOS", "we" or "our" or the "Company" refer to B.O.S.
Better On-Line Solutions Ltd.
3A. SELECTED CONSOLIDATED FINANCIAL DATA
The consolidated statement of operations data for B.O.S Better On-Line Solutions
Ltd. set forth below with respect to the years ended December 31, 2003, 2002 and
2001, and the consolidated balance sheet data as of December 31, 2003 and 2002,
have been derived from the Consolidated Financial Statements listed in Item 18,
which have been prepared in accordance with generally accepted accounting
principles ("GAAP") in the United States. The consolidated statement of
operations data set forth below with respect to the years ended December 31,
2000 and 1999, and the consolidated balance sheet data as of December 31, 2001,
2000 and 1999, have been derived from other consolidated financial statements
not included herein and have been prepared in accordance with U.S. GAAP. The
financial statements for the years ended December 31, 2001, 2002 and 2003 were
audited by Kost, Forer Gabbay & Kasierer, independent certified public
accountants in Israel and a member of Ernst & Young Global, while the financial
statements for the years ended December 31, 1999 and 2000 were audited by Somekh
Chaikin, independent certified public accountants in Israel and members of KPMG
International. The selected consolidated financial data presented below should
be read in conjunction with Item 5: "Operating and Financial Review and
Prospects" and the Notes to the Financial Statements included in this Form 20-F.
On May 29, 2003, the Company effected a one-for-four reverse stock split. All
share and per share numbers herein reflect adjustments resulting from this
reverse stock split.
3
Statement of Operations Data: (In US thousands of dollars with the exception of
per share data)
YEAR ENDED DECEMBER 31:
2003* 2002* 2001* 2000 1999
------- ------- ------- ------- -------
Revenues 5,728 9,441 6,042 7,294 6,720
Cost of revenues 1,455 2,300 2,703 2,399 1,936
------- ------- ------- ------- -------
GROSS PROFIT 4,273 7,141 3,339 4,895 4,784
OPERATING EXPENSES:
Research and development, net 1,846 2,182 1,757 2,177 1,486
Selling and marketing 2,178 3,705 4,811 4,185 3,024
General and administrative 1,317 1,697 1,425 2,279 2,181
Restructuring costs 678 - 132 83
------- ------- ------- ------- -------
TOTAL OPERATING EXPENSES 6,019 7,584 8,125 8,724 6,691
OPERATING LOSS: (1,746) (443) (4,786) (3,829) (1,907)
Financial income (expense), net 109 295 427 639 (91)
Other income (expenses) 45 (95) (298) (479) 2,150
------- ------- ------- ------- -------
EARNING (LOSS) BEFORE EQUITY IN
LOSSES OF AN AFFILIATED COMPANY (1,592) (243) (4,657) (3,669) 152
Equity in losses of an
affiliated company (465) (570) (137) (1,283) (696)
------- ------- ------- ------- -------
NET LOSS FROM CONTINUING
OPERATIONS (2,057) (813) (4,794) (4,952) (544)
Net earning (loss) related to
discontinued operations 2,036 (7,674) (8,313) (2,743) (522)
------- ------- ------- ------- -------
NET LOSS (21) (8,487) (13,107) (7,695) (1,066)
======= ======= ======= ======= =======
Basic and diluted net loss
per share from continuing
operations $ (0.56) $ (0.26) $ (1.55) $ (1.66) $ (0.23)
======= ======= ======= ======= =======
Basic and diluted net
earning (loss) per share
related to discontinued
operations $ 0.55 $ (2.46) $ (2.68) $ (0.92) $ (0.22)
======= ======= ======= ======= =======
Basic and diluted net loss per
share $ (0.01) $ (2.72) $ (4.23) $ (2.58) $ (0.45)
======= ======= ======= ======= =======
Weighted average number of
shares used in computing basic
and diluted net earning (loss)
per share 3,683 3,117 3,102 2,982 2,388
======= ======= ======= ======= =======
*) Restated
4
YEAR ENDED DECEMBER 31:
BALANCE SHEET HIGHLIGHTED DATA: 2003* 2002* 2001* 2000 1999
------------------------------- ------ ------ ------ ------ ------
CASH AND CASH EQUIVALENTS 3,872 5,246 8,325 16,470 261
Working Capital (*) 5,082 5,980 7,008 17,378 290
Total Assets 14,023 16,485 31,144 46,128 33,637
Short-term bank credit and
current maturities of long-term
debt - - 286 429 421
Long-term debt 951 794 794 1,049 1,542
Shareholders equity 10,541 8,015 16,341 29,444 13,675
(*)Working capital comprises of:
Current assets 7,239 9,525 10,677 20,795 3,411
Less: current liabilities 2,157 3,545 3,669 3,417 3,121
------ ------ ------ ------ ------
5,082 5,980 7,008 17,378 290
====== ====== ====== ====== ======
*) RESTATED
ITEM 4: INFORMATION ON THE COMPANY
4A. HISTORY AND DEVELOPMENT OF THE COMPANY
We were incorporated in Israel in 1990 as a private corporation under the
Israeli Companies Ordinance, 1983. Our headquarters and manufacturing facilities
are located at 100 Bos Road, Teradyon Industrial Zone, Misgav 20179 Israel. Our
telephone number is 972-4-990-7555.
In January 2002, the Company changed its organizational structure. As part of
this change, the Company 's marketing, development, production and support
activities were sold to Lynk, a B.O.S. subsidiary founded in 1995, to develop
and market high-quality data access convergence and remote access solutions, and
later VOIP hardware and software telephony, for the corporate market. Following
the reorganization, Lynk changed its name to BOScom Ltd.
On May 24, 2002, the Company announced its intention to sell PacInfoSystems (see
Risk Factors and Note 1c to the Consolidated Financial Statements) due to a
change in the Company's business strategy. PacInfoSystems was the Company's
wholly-owned U.S. subsidiary that resold, installed and provided computer
networking products to various business entities. Management formulated a new
strategic plan that provided for the discontinuation of the computer networking
business. As a result, the Company decided in May 2002 to sell PacInfoSystems
and to write-off amortized goodwill associated with PacInfoSystems in the amount
of $3.9 million.
5
However, the Company's efforts to sell PacInfoSystems, whose financial situation
was deteriorating, were not successful. Further developments, such as an
arbitration judgment rendered against PacInfoSystem in the sum of approximately
$650,000, continuation of poor sales results, termination of line of credit, as
well as the loss of some key employees and members of the sales force, left the
Company with little choice but to wind up the business. PacInfoSystems has
already settled with a majority of its creditors, however, there can be no
assurance that such a settlement will be reached with the remainder of the
creditors.
Our U.S. subsidiaries are Lynk USA, Inc., and its subsidiary PacInfoSystems,
Inc. (into which our U.S. subsidiary, Better On-Line Solutions Inc. was merged
in early 2001). Both are non-operational and commencing the beginning of year
2003 we market our products in the U.S. through one Master Distributor.
Our other subsidiaries are BOScom Ltd., in Israel, and its subsidiaries - Better
On-Line Solutions Ltd. in the U.K; Better On-Line Solutions S.A.S. in France;
and BOSDelaware, Inc., in the US. During 2003, the operation of the BOScom
subsidiaries was ceased (although all subsidiaries still exist except for the
French one) and the sales and marketing in Europe and USA have since been
conducted through master distributors.
In addition, we have an interest in Surf Communications Solutions Ltd. ("Surf"),
the leading supplier of embedded network convergence software that lends
flexibility and scalability to network products handling data modem, fax, and
voice transmissions. In March 2003, the Company purchased from Catalyst
Investors L.P. ("Catalyst") most of the Surf shares held by Catalyst. Under the
terms of the transaction, the Company purchased 191,548 of Catalyst's Preferred
C shares in Surf, and a pro rata share of the Surf Preferred C warrants held by
Catalyst, and in exchange it issued to Catalyst 2,529,100 ordinary shares of the
Company (representing 19.9% of its current outstanding shares pre-issuance, as a
result of which Catalyst held 16.6% of the outstanding Company shares, after the
issuance). The Company has an option to purchase the remaining Catalyst
Preferred C shares in Surf by January 31, 2006, and until such purchase has
voting rights in these Surf shares, in addition to being entitled to profits
resulting from the sale of these shares to a third party. In February 2004,
these voting rights were assigned to Mr. Yair Shamir, one of the Company's
directors. Thus, the Company now holds 19.8% in Surf, and 15.3% on a fully
diluted basis (assuming the Company does not exercise its option to purchase the
additional shares from Catalyst). Yair Shamir holds 0.2% in Surf (and 0.2% on a
fully diluted basis), in addition to his holdings of 2.8% of the voting rights
in Surf (2.3% on a fully diluted basis) assigned to him by the Company.
As a result of the Catalyst transaction, the Company has the ability to exercise
significant influence over Surf and therefore applied the equity method of
accounting with respect to its investment in Surf. In order to present financial
statements in accordance with accounting principles generally accepted in the
United States, the Company has restated its financial statements as detailed
below, with respect to its investment in Surf which was previously accounted for
based on the cost method, to account for it based on the equity method of
accounting.
6
Consequently the investment, results of operations (current and prior periods
presented), and retained earnings of the Company were adjusted retroactively in
a manner consistent with the accounting for a step-by-step acquisition of a
subsidiary. Since its investment in Common stock was reduced to zero in prior
years, the Company recognized equity losses only with respect to its share in
the Preferred C shares (8.4% since November 2001 through March 2003 and
thereafter 15.7%). As a result, the Company recorded equity losses in the total
amount of $ 1,172 thousands for the years 2001 through 2003 and reversed the
impairment expenses of $ 840 thousands recorded in 2003 due to the fact that the
equity losses recorded, reduced the book value of the investment in Surf below
its fair value. The accumulated equity losses net of the impairment expenses
were $ 332 thousands.
We design, integrate and test our products in our facilities in northern Israel.
In early 1996, we moved into a new facility, which resulted in the expansion of
our production capabilities and has allowed us to continue to benefit from
substantial Israeli tax incentives.
ITEM 5: OPERATING AND FINANCIAL REVIEW AND PROSPECTS
The following management's discussion and analysis of financial condition and
results of operations should be read in conjunction with our financial
statements and notes thereto. Certain matters discussed below and throughout
this annual report are forward-looking statements that are based on our beliefs
and assumptions as well as information currently available to us. Such
forward-looking statements may be identified by the use of the words
"anticipate", "believe", "estimate", "expect", "plan" and similar expressions.
Such statements reflect our current views with respect to future events and are
subject to certain risks and uncertainties. While we believe such
forward-looking statements are based on reasonable assumptions, should one or
more of the underlying assumptions prove incorrect, or these risks or
uncertainties materialize, our actual results may differ materially from those
described herein. Please read the section below entitled "Factors That May
Affect Future Results" to review conditions that we believe could cause actual
results to differ materially from those contemplated by the forward-looking
statements.
The Company's discussion and analysis of its financial condition and result of
operations is based upon the Company's consolidated financial statements which
have been prepared in accordance with generally accepted accounting principles
("GAAP ") in the United States of America. Prior to 2003, the consolidated
financial statements were prepared in accordance with Israeli GAAP with
reconciliation to U.S.GAAP. The Company believes that investors and other users
of its financial statements would benefit if the primary financial statements
were prepared in accordance with U.S., rather than Israeli, GAAP.
CRITICAL ACCOUNTING POLICIES
The preparation of these financial statements required the Company to make
estimations and judgments, in accordance with U.S. GAAP, that affect the
reporting amounts of assets, liabilities, revenues and expenses and related
disclosure of contingent assets and liabilities. On an ongoing basis, the
Company evaluates its estimates, including those related to revenue recognition,
bad debts, inventories and legal contingencies. The Company based its estimates
on historical experience and on various other assumptions that are believed to
be reasonable under the circumstances, the results of which form the basis of
making judgments about the values of assets and liabilities that are not readily
apparent from other sources. Actual results may differ from these estimates
under different assumptions or conditions.
For a review of the accounting policies that form the basis of the
above-referenced estimates and judgments that the Company made in preparing its
consolidated financial statements, please see Note 2 (Significant Accounting
Policies) to the Consolidated Financial Statements. The following accounting
policies had the most significant impact on the Financial Statements for the
year ended December 31, 2003.
7
REVENUE RECOGNITION
We recognize revenues from sales of product and services in accordance with
Staff Accounting Bulletin No. 101 "Revenue Recognition in Financial Statements"
("SAB 101"), Staff Accounting Bulletin No. 104 "Revenue Recognition in Financial
Statements" ("SAB 104") and Statement of Position No. 97-2 "Software Revenue
Recognition" ("SOP 97-2") when delivery has occurred, persuasive evidence of an
arrangement exists, the vendor's fee is fixed or determinable, no further
obligation exists, and collection is reasonably assured. When a right of return
exists, the Company defers revenues until the right of return expires.
Determination of the probability of collection is based on management's
judgments regarding the payment of fees for services rendered and products
delivered. This determination is based on management's periodic assessment of
the credit worthiness and other known factors of its customers and distributors.
If this assessment will not properly reflect the actual collection, revenue
recognized for any reporting period could be adversely affected.
ALLOWANCE FOR DOUBTFUL ACCOUNTS
The Company maintains an allowance for doubtful accounts for estimated losses,
which may result from the inability of its customers to make required payments.
Management exercises judgment as to its ability to collect outstanding
receivables. Allowances for doubtful accounts are made based upon a specific
review of all significant outstanding invoices. For those invoices not
specifically reviewed, allowances for doubtful accounts are made based upon the
age of the receivable. In determining the allowance, the Company analyzes its
historical collection experience and current economic trends. If the historical
data used to calculate the allowances for doubtful accounts do not reflect the
future ability to collect outstanding receivables, additional allowances for
doubtful accounts may be needed and the future results of operations could be
materially affected.
INVENTORIES
Inventories are valued at the lower of cost or market value. Cost is determined
as follows:
Raw and packaging materials - Moving Average Cost Method
Products in progress and finished products - On the production costs basis with the addition
of allocable indirect manufacturing costs
If actual market conditions prove less favorable than those projected by
management, additional inventory write-downs may be required. Inventories are
written down for estimated obsolescence based upon assumptions about future
demand and market conditions. Likewise, favorable future demand and market
conditions could positively impact future operating results if inventory that
has been written down is sold. As of December 31, 2003, inventory is presented
net of $300,000 general provision for technological obsolescence and slow moving
items (see also Note 5 to the Consolidated Financial Statements).
LEGAL CONTINGENCIES
The Company has been a party to various legal proceedings in the normal course
of its business (see Item 8A for more details). The results of legal proceedings
are difficult to predict and an unfavorable resolution of a lawsuit or
proceeding may occur. Management believes that the prospects of these
proceedings to prevail and recover a significant amount, seem remote, and
accordingly no provision was recorded. As additional information becomes
available, management will reassess the potential liability related to these
legal proceedings and may revise its estimate of the probable cost of this
proceedings. Such revisions in the estimates of the probable cost could have a
material adverse effect on the Company's future results of operations and
financial position.
8
5A. RESULTS OF OPERATIONS
On May 29, 2003 we effected a 1:4 reverse stock split. All share and per share
data for periods prior to that date have been retroactively adjusted to reflect
this reverse stock split.
COMPARISON OF 2003 AND 2002
Year 2003 results of operation reflected the reorganization made in the sales
and marketing organization. In the United States, up until the fourth quarter of
2002, we marketed our BOScom products through a US subsidiary (the BOS US
division of PacInfoSystems). Currently, we market our products through one
Master Distributor (Bosanova, Inc.)
In Europe, up until the second quarter of 2003, we marketed our BOScom products
through subsidiaries in the U.K. and France. Currently, we market our products
through local distributors that provide pre and post sales support. Products
sold in the rest of the world are serviced from our headquarters in Israel.
As a result of the above reorganization, the Company experienced a significant
decrease in revenues in 2003, due to the distributors' margin, which was only
partially compensated for by the decrease in sales and marketing expenses.
Furthermore, as a result of the reorganization, in 2003 the Company recorded a
restructuring cost of $680,000.
Consolidated revenues for 2003 were $5,728,000 compared with $9,441,000 in 2002,
a 39% decrease.
The major reasons for the decrease were: (a) sales through master distributors
in year 2003 compared to sales through subsidiaries in year 2002, as the margins
of the master distributors decreased revenues; and (b) slowdown in sales due to
global slowdown in the telecommunications industry.
Gross profit in 2003 totaled $4,273,000, representing 75% of revenues, compared
with $7,141,000, constituting 76% of revenues in 2002. Cost of revenues of year
2003 includes income of $339,000 due to a reversal of a non-recurring royalty
for the Office of the Chief Scientist (see also Note 14a to the Consolidated
Financial Statements). Excluding such income, the gross profit for year 2003
represented 69% of revenues compared to 76% in year 2002, the major reasons for
the decrease being (a) sales through master distributors in year 2003 compared
to sales through subsidiaries in year 2002 which caused a decrease in the sale
price while the cost of revenue remained virtually the same; and (b) revenues of
BOSANOVA PrintBoss in year 2003 decreased to $448,000 compared to $1,387,000 in
year 2002. Since the BOSANOVA PrintBoss is a software product with a relatively
low cost of production, the decrease in its revenues in year 2003 compared to
year 2002 significantly affected the gross profit.
Net research and development costs in 2003 decreased by 15% to $1,846,000
compared to $2,182,000 in 2002. The expenses in 2003 included $283,000 funding
that the Company received from the Office of the Chief Scientist. In 2002 the
company did not receive such funding. Excluding the effect of the funds received
from the Office of the Chief Scientist in 2003, the research and development
costs in 2003 remained virtually the same as in year 2002.
Selling and marketing expenses in year 2003 decreased by 41% to $2,178,000,
compared to $3,705,000 in 2002. The major reason for such decrease was sales
through subsidiaries in 2002, as opposed to sales through distributors in year
2003 after the operation of the subsidiaries was ceased.
9
General and administrative expenses in year 2003 decreased by 22% to $1,317,000
compared to $1,697,000 in 2002. The major reason was the reduction in payroll of
employees and directors, by 17%, effected July 2003.
Restructuring costs in year 2003 amounted to $678,000 which resulted from
ceasing the operation of the Company's subsidiaries in Europe.
As a result of the foregoing, our operating loss in 2003 was $1,746,000 compared
to an operating loss of $443,000 in 2002.
The Company had net financial income of $109,000 in 2003 compared with net
financial income of $295,000 in 2002. The decrease in the financial income is
related to the decrease in cash and investment balances during 2003 and to
decrease of financial income from translation of foreign currency into dollar.
Equity in losses of an affiliated company refers to the Company's investment in
Surf which amounted to $465,000 in 2003 compared to $570,000 in 2002. The
investment in Surf is accounted for using the equity method, since the Company
has the ability to exercise significant influence over Surf (through the
Company's ownership of voting securities representing more than 20% of the
voting rights of Surf) and therefore applied the equity method. In order to
present financial statements in accordance with accounting principles generally
accepted in the United States, the Company has restated its financial statements
as detailed below, with respect to its investments in Surf which was previously
accounted for based on the cost method, to accounting for it according to the
equity method of accounting (see Item 4A).
As a result, net loss from the continuing operations for 2003 amounted to
$2,057,000 compared with $813,000 in 2002. On a per share basis, the net loss
from the continuing operations in 2003 was $0.56 per share compared with a $0.26
net loss per share in 2002. (For details regarding computation of net loss per
share, see Note 14d to the Consolidated Financial Statements.)
The net earnings related to the discontinuing operations for 2003 was $2,036,000
compared with a loss of $7,674,000 in 2002. The earnings of 2003 resulted from
debt settlement with more than 95% of PacInfoSystems' external creditors for an
amount which was significantly lower than the face value of the debt.
The total net loss for 2003 was $21,000, compared with $8,487,000 in 2002. On a
per share basis, the net loss in 2003 was $0.01 per share compared with a $2.72
net loss per share in 2002.
COMPARISON OF 2002 AND 2001
Consolidated revenues for 2002 were $9,441,000, compared with $6,042,000 in
2001, a 56% increase.
During 2002 we focused our sales on our core business products. The S&M activity
was aimed to expand our customer base and distribution channels.
During 2002 we succeeded in closing a software deal with one customer which
represented about 13% of the total revenues.
Gross profit in 2002 totaled $7,141,000, representing 76% of revenues, compared
with $3,339,000, constituting 55% of revenues in 2001. The difference is related
mainly to high provisions for slow inventory that the company made in 2001
relating to its IP old product line.
Net research and development costs in 2002 increased 24% to $2,182,000, compared
with $1,757,000 in 2001. The expenses in 2001 included $989,000 funding that the
Company received from the Office of the Chief Scientist. In 2002 the company did
not receive such funding.
10
Gross research and development costs in 2002 decreased 21% to $2,182,000,
compared with $2,746,000 in 2001, mainly due to HR costs reduction. We improved
the R&D staff by replacing some of our engineers with new ones, who are better
skilled and more efficient but paid lower salaries.
In Europe we closed branches that were not economically efficient and made some
personnel changes. These steps saved us $500,000 in operational and other
expenses compared to 2001. In addition, we reduced our operational costs in the
US by $550,000 compared to 2001.
Selling and marketing expenses decrease by 23% to $3,705,000 in 2002 compared to
$4,811,000 in 2001 mainly due to the closing of branches in Europe and the
reduction of operations in the US.
General and administrative expenses increased by 19% to $1,697,000 in 2002,
compared to $1,425,000 in 2001. This increase is due to expenses related to 2002
reorganization of the US subsidiary and the closing of branches in Europe.
As a result of the foregoing, our operating loss in 2002 was $443,000 compared
with an operating loss of $4,786,000 in 2001.
The Company had net financial income of $295,000 in 2002 compared with net
financial income of $427,000 in 2001. The decrease in the financial income is
related to a decrease in cash and investment balances during 2002.
Other expenses for 2002 were $95,000, compared with other expenses of $298,000
in 2001. (For more details regarding other expenses, see Note 14c to the
Consolidated Financial Statements).
Equity in losses of an affiliated company refers to investment in Surf which
amounted to $570,000 in 2002 compared to $137,000 in 2001. The investment in a
company is stated at equity method, since the Company has the ability to
exercise significant influence over Surf and applied the equity method. In order
to present financial statements in accordance with accounting principles
generally accepted in the United States, the Company has restated its financial
statements as detailed below, with respect to its investments in Surf which was
previously accounted based on the cost method, to accounting for it according to
the equity method of accounting (see Item 4A).
As a result of the foregoing, net loss from the continuing operations for 2002
amounted to $813,000 compared with $4,794,000 in 2001. On a per share basis, the
net loss from continuing operations in 2002 was $0.26 per share compared with a
$1.55 net loss per share in 2001.
The net loss related to the discontinuing operations for 2002 was $7,674,000
compared with $8,313,000 in 2001. On a per share basis, the net loss from the
discontinuing operations in 2002 was $2.46 per share compared with a $2.68 net
loss per share in 2001.
The total net loss for 2002 was $8,487,000, compared with $13,107,000 in 2001.
On a per share basis, the net loss in 2002 was $2.72 per share compared with a
$4.23 net loss per share in 2001.
VARIABILITY OF QUARTERLY OPERATING RESULTS
Our revenues and profitability may vary in any given year, and from quarter to
quarter, depending on the number of products sold. In addition, due to potential
competition, uncertain market acceptance and other factors, we may be required
to reduce prices for our products in the future.
11
Our future results will be affected by a number of factors including our ability
to:
o increase the number of products sold,
o develop, introduce and deliver new products on a timely basis,
o anticipate accurately customer demand patterns and
o manage future inventory levels in line with anticipated demand.
These results may also be affected by currency exchange rate fluctuations and
economic conditions in the geographical areas in which we operate. There can be
no assurance that our historical trends will continue, or that revenues, gross
profit and net income in any particular quarter will not be lower than those of
the preceding quarters, including comparable quarters.
IMPACT OF INFLATION AND CURRENCY FLUCTUATIONS
The US Dollar cost of our operations in Israel is influenced by the differential
between the rate of inflation in Israel and any change in the value of the NIS
relative to the Dollar.
A devaluation of the NIS in relation to the US Dollar will have the effect of
decreasing the costs in NIS and a converse effect in case of devaluation of the
US Dollar in relation to the NIS.
A devaluation of the NIS in relation to the US Dollar will have the effect of
decreasing the Dollar value of any of our assets which consist of NIS (unless
such asset is linked to the Dollar). Such a devaluation would also have the
effect of reducing the Dollar amount of any of our liabilities which are payable
in NIS (unless such payables are linked to the Dollar). Conversely, any increase
in the value of the NIS in relation to the Dollar will have the effect of
increasing the Dollar value of our assets which consist of NIS (unless such
asset is linked to the Dollar). Such an increase would also have the effect of
increasing the Dollar amount of any of our liabilities which are payable in NIS
(unless such payables are linked to the Dollar).
In the years ended December 31 2003, 2002, 2001, 2000 and 1999, the annual
inflation rate in Israel as adjusted for the devaluation of the Israeli currency
in relation to the Dollar was 5.7% (0.8)%, (7.8)%, 2.7% and 1.5%, respectively.
The closing representative exchange rate of the Dollar at the end of each such
period, as reported by the Bank of Israel, was NIS 4.379 NIS 4.737, NIS 4.416,
NIS 4.041 and NIS 4.153, respectively. As a result, the Company experienced
increases in the Dollar costs of operations in Israel in 1999, 2000 and 2003,
and decreases in 2001 and 2002.
EFFECTIVE CORPORATE TAX RATE
The Israeli regular tax rate imposed on companies is 36%, however, the effective
tax rate payable by a company (such as ours) which derives income from an
"Approved Enterprise," may be considerably less. See Note 13 to the Consolidated
Financial Statements and Item 10E ahead. Subject to relevant tax treaties,
dividends or interest received by an Israeli corporation from subsidiaries are
generally subject to tax (unless the subsidiary's income is subject to Israeli
corporate tax) regardless of its status as an Approved Enterprise. We anticipate
that most of our taxable income over the next several years will be tax exempt
in Israel. Our U.S. and U.K. subsidiaries, however, will be subject to U.S. and
U.K. corporate income taxes, respectively, on their taxable income.
On January 1, 2003, a comprehensive tax reform took effect in Israel. Pursuant
to the reform, resident companies are subject to Israeli tax on income accrued
or derived in Israel or abroad. In addition, the concept of "controlled foreign
corporations" was introduced, according to which an Israeli company may become
subject to Israeli taxes on certain income of a non-Israeli subsidiary if the
subsidiary's primary source of income is passive income (such as interest,
dividends, royalties, rental income or capital gains). The tax reform also
substantially changed the system of taxation of capital gains.
12
GRANTS AND PARTICIPATION
Under the Law for the Encouragement of Industrial Research and Development, 1984
(the "Research Law"), research and development programs approved by a research
committee appointed by the Israeli Government are eligible for grants in
exchange for payment to the Government of royalties from the sale of products
developed in accordance with the Program. Regulations issued under the Research
Law generally provide for the payment of royalties to the Office of the Chief
Scientist of 3.5% on sales of products developed as a result of a research
project so funded until 100% of the dollar-linked grant is repaid. Royalties
payable with respect to grants received under programs approved by the OCS after
January 1, 1999, are subject to interest on the U.S. dollar-linked value of the
total grants received at the annual rate of LIBOR applicable to U.S. dollar
deposits at the date the grants received.
The Research Law requires that the manufacture of any product developed as a
result of research and development funded by the Israeli Government take place
in Israel. It also provides that know-how from the research may not be
transferred to third parties without the approval of the Israeli Office of the
Chief Scientist in the Ministry of Industry and Trade. As of December 31, 2003,
the total amount of grants which we received from the Office of the Chief
Scientist, net of royalties paid or accrued, accumulated interest and net of non
recurring royalty reversal recorded in year 2003 in the amount of $339,000,
totaled $5,621,000, compared with $ 5,875,000 as of December 31, 2002. We are
committed to paying royalties to the Fund for the Encouragement of Exports for
its participation, by way of grants, in our marketing expenses outside of
Israel. Royalties payable are 3% of the growth in exports, from the year we
received the grant, up to 100% of the dollar-linked amount of the grant received
at the date the grants received.
The total amount of the grants we received from the Fund, net of royalties paid
or accrued, was $144,000 on December 31, 2003, compared with $225,000 on
December 31, 2002.
CONDITIONS IN ISRAEL
We are incorporated under the laws of Israel. Our offices and product
development and manufacturing facilities are located in Israel. As a
consequence, we are directly affected by political, economic and military
conditions in Israel. Our operations would be substantially impaired if major
hostilities involving Israel should occur or if trade between Israel and its
present trading partners should be curtailed. See also Item 3D - Risk Factors.
POLITICAL AND ECONOMIC CONDITIONS
Since the establishment of the State of Israel in 1948, a number of armed
conflicts have taken place between Israel and its Arab neighbors and a state of
hostility, varying from time to time in intensity and degree, has led to
security and economic problems for Israel. A peace agreement between Israel and
Egypt was signed in 1979. However, economic relations have been limited.
Since 1993, a joint Israeli - Palestinian Declaration of Principles and several
agreements between Israel and Palestinian representatives have been signed
outlining interim self-government arrangements. Israel has since transferred the
civil administration of the Gaza Strip and several major towns and villages in
the West Bank to the Palestinian Authority.
In addition, Israel and several other Arab States announced their intention to
establish trade and other relations and are discussing certain projects. As of
the date hereof, Israel has not entered into any peace agreement with Syria or
Lebanon. There is substantial uncertainty with regard to how the "peace process"
will develop or what effect it may have on us.
Furthermore, full diplomatic ties between Israel and Jordan were created
following a peace treaty signed in 1994. The treaty expressed a mutual desire
for full economic cooperation, the lifting of economic barriers and a strive
towards the lifting of any economic boycotts by third parties.
13
Despite the progress towards peace between Israel, its Arab neighbors and the
Palestinians, certain countries, companies and organizations continue to
participate in a boycott of Israeli firms. We do not believe that the boycott
has had a material adverse effect on us, but there can be no assurance that
restrictive laws, policies or practices directed towards Israel or Israeli
businesses will not have an adverse impact on our business or financial
condition in the future.
Some of our employees are obligated to perform annual reserve duty in the Israel
Defense Forces and may, at any time, be called for active military duty. While
we have operated effectively under those and similar requirements in the past,
no assessment can be made of the full impact of such requirements on us in the
future, particularly if emergency circumstances occur.
Israel's economy has been subject to many destabilizing factors including a
period of high inflation in the early to mid-1980s. It has also been subject to
low foreign exchange reserves, fluctuations in world commodity prices, military
conflicts and civil unrest. The Government of Israel has intervened in several
sectors of the economy, employing among other means, fiscal and monetary
policies, import duties, foreign currency restrictions and control of wages, as
well as prices and foreign currency exchange rates.
In 1998, the Israeli currency control regulations were liberalized dramatically.
As a result, Israeli citizens can generally freely purchase and sell Israeli
currency and assets. The Government of Israel has periodically changed its
policies in these areas. There are currently no Israeli currency control
restrictions on remittances of dividends on ordinary shares or proceeds from the
sale of ordinary shares; however, legislation remains in effect pursuant to
which currency controls can be imposed by administrative action at any time.
The costs of our operations in Israel are generally incurred in New Israeli
Shekels ("NIS"). If the inflation rate in Israel exceeds the rate of devaluation
of the NIS against the US Dollar in any period, the costs of our Israeli
operations, as measured in US Dollars, could increase. Israel's economy has, at
various times in the past, experienced high rates of inflation.
Like many Israeli companies, we receive grants and tax benefits from the Israeli
Government. We also participate in programs sponsored by the Israeli Government.
The reduction or termination of any such grants, programs or tax benefits,
especially those benefits available as a result of the "Approved Enterprise"
status of certain facilities in Israel, could have a materially adverse effect
on future investments by us in Israel.
TRADE AGREEMENTS
Israel is a member of the United Nations, the International Monetary Fund, the
International Bank for Reconstruction and Development, and the International
Finance Corporation. Israel is also a signatory to the General Agreement on
Tariffs and Trade, which provides for reciprocal lowering of trade barriers
among its members. In addition, Israel has been granted preferences under the
Generalized System of Preferences, from Australia, Canada and Japan. These
preferences allow Israel to export the products covered by such programs either
duty-free or at reduced tariffs.
Israel and the European Union signed a Free Trade Agreement, which became
effective on July 1, 1975, that confers certain advantages with respect to
Israeli exports to most European countries and obligates Israel to lower its
tariffs with respect to imports from these countries over a number of years. In
1985, Israel and the United States entered into an agreement to establish a Free
Trade Area ("FTA"). The FTA has eliminated all tariff and certain non-tariff
barriers on most trade between the two countries.
On January 1, 1993, Israel and the European Free Trade Association ("EFTA"),
entered into an agreement establishing a free-trade zone between Israel and the
EFTA nations. In recent years, Israel has established commercial and trade
relations with a number of other nations, including Russia, the People's
Republic of China, India and the nations of Eastern Europe, with which Israel
had not previously had such relations.
14
5B. LIQUIDITY AND CAPITAL RESOURCES
We finance our activities by different means, including proceeds of equity
financing, long-term loans, grants from the Office of the Chief Scientist in
Israel and income from operating activities.
In December 2003 we received net proceeds of $928,000 from a private placement
with two European private investors. We issued these investors 357,143 ordinary
shares at a price per share of $2.80. We also granted these investors certain
incidental registration rights with respect to the ordinary shares they
purchased.
On June 10, 2004 the Company entered into a Securities Purchase Agreement (the
"Purchase Agreement"), with Laurus Master Fund Ltd. (the "Investor"), under
which the Company issued and sold to the Investor in a private placement (i) a
Secured Convertible Term Note of a $2 million principal amount, due June 10,
2007 (the "Note") and (ii) a warrant to purchase 130,000 Ordinary Shares at an
exercise price of $4.04 per share (the "Warrant"). The Warrant is exercisable,
in whole or in part, until June 10, 2011. The Note bears interest at a
fluctuating interest rate equal at all times to the prime rate plus 3%, subject
to reduction if the average closing price of the Registrant's Ordinary Shares
exceeds certain benchmarks. The proceeds from the private placement will be used
for general working capital purposes and/or mergers and acquisitions.
The Note is convertible into Ordinary Shares at a price of $3.08 per share
(subject to adjustment). The principal amount of the Note is repayable in
monthly installments, commencing as of October 1, 2004, in the initial amount of
$20,000 eventually increasing to $73,600, and may be paid in cash or, subject to
certain conditions, in Ordinary Shares. Interest on the Note is payable monthly
and may be paid in cash or, subject to certain conditions, in Ordinary Shares.
The Note is secured by a security interest in certain assets of the Company.
The Company also entered into a Registration Rights agreement with the Investor
pursuant to which the Company agreed to prepare and file with the Securities and
Exchange Commission within 45 days a registration statement covering the resale
of Ordinary Shares that is issuable upon conversion of the Note and/or exercise
of the Warrants, and/or issuable in payment of principal and interest on the
Note.
As of December 31, 2003, we had $3,872,000 in cash and cash equivalents,
$2,876,000 in marketable securities, and positive working capital of $5,082,000.
Net cash used in operating activities of continuing operations in 2003 was
$1,937,000 compared to cash provided by operating activities in 2002 in the
amount of $127,000. The cash used in operating activities in year 2003 was
adversely affected by a number of factors. First, a decrease in gross profit due
to the sales through distributors instead of subsidiaries from mid 2003, which
was not immediately compensated by decrease in the sales and marketing expenses
in 2003. Second, the revenues of BOSANOVA PrintBoss in year 2003 amounted to
$448,000 compared to $1,387,000 in year 2002. Since the BOSANOVA PrintBoss is a
software product with a relatively low cost of production, the decrease in its
revenues in year 2003 compared to year 2002 adversely affected the cash used in
operating activities. Net cash provided by investing activities in 2003 was
$519,000 which was mainly due to realization of restricted cash into cash and
cash equivalents.
The Company does not currently have borrowings from financial institutions.
Working capital and working capital requirements will vary from time-to-time and
will depend on numerous factors, including but not limited to operating results,
the level of resources devoted to research and development, new product
introductions, grants from the Office of the Chief Scientist in Israel,
marketing and acquisition activities.
15
We have in-balance sheet financial instruments and off-balance sheet contingent
commitments. Our in-balance sheet financial instruments consist of our assets
and liabilities. Our cash is invested in short-term (less than 3 months) U.S.
dollars and NIS interest bearing deposits with banks. Our receivables' aging is
between 60 to 70 days and our current liabilities' aging is approximately 60
days. The fair value of our financial instruments is similar to their book
value. Our off-balance sheet contingent commitments consist of: (a) royalty
commitments that are directly related to our future revenues, (b) lease
commitments of our premises and vehicles, (c) directors and officers'
indemnities, in excess of the proceeds received from liability insurance which
we obtain and (d) legal proceeding.
We believe that cash resources are sufficient to meet our needs for at least 12
months following the date of this submission. However, it is our intention to
engage in equity and loan financing to further feature-rich products of the
Company and establish distribution channels in new markets. There is, however,
no assurance that we shall be able to obtain such financing.
5C. RESEARCH AND DEVELOPMENT
We believe that our future growth will depend upon our ability to enhance our
existing products and introduce new products on a timely basis. Since we
commenced operations, we have conducted extensive research and development
activities. In 2003, gross research and development costs totaled $2,129,000,
compared to $2,182,000 in 2002 and $2,746,000 in 2001.
Our research and development efforts have been focused on VOIP solutions, and
our existing products for the IBM midrange market. We intend to finance our
research and development activities with our own resources and grants from the
Office of the Chief Scientist. Grants from the Chief Scientist totaled $283,000
in 2003 and $989,000 in 2001 (no grants were received for the year 2002).
5D. TREND INFORMATION
The global slowdown in the telecommunications industry has taken its toll on our
company. The effect of a prolonged slowdown may continue to result in lower
sales and lower gross margins as our products may be subject to price pressure
due to reduced demand, write-downs and write-offs.
Over the past few years there has been a continuous global decrease in sales and
revenues from the connectivity solutions sector (also known as the legacy family
products) (see Item 4B). Although the Company's revenues in this sector have
decreased as a result, in comparison to other players in this field, we have
fared quite well.
Currently the Company's R&D focuses mainly on the company's VOIP line of
products, that will successfully compete with Legacy telephony quality and
reliability, and will allow special CTI (Computer Telephony Integration)
features that are not available in Legacy telephony today. These products will
allow seamless integration with legacy telephony systems, thus reducing the
implementation price. In addition, the products will guaranty the quality of
service and will allow the end users to use the telephone system in the same way
that they used their non-IP-enabled system. Until now, complicated installation,
non-transparent usage and inconsistent quality of service were the major issues
that slowed-down the implementation of VOIP in the corporate market. With the
new line of intelligent gateways, these hurdles are solved, thus opening new
opportunities in this market. According to market research performed by
professional market analysis firms such as Advanced Business Link, the revenues
in this VOIP market are expected to grow for at least the next five years.
Although the Company's business in this market has not fared well until now, we
hope to overcome marketing and other hurdles, and become a significant player in
this field, although there is no assurance that we will be able to do so.
16
5E. OFF-BALANCE SHEET ARRANGEMENTS
In 1998, as part of PacInfoSystems' Share Purchase Agreement between the Company
and Mr. Jacob Lee (the seller of PacInfoSystems who became a shareholder of the
Company), certain actions involving PacInfoSystems, if occurring before the end
of 2003, may trigger a tax event for Mr. Jacob Lee. In such event, the Company
may be obligated, under the purchase agreement, to grant Mr. Lee a loan on a
full recourse basis for certain tax payments Mr. Lee may be liable for,
currently estimated at approximately $1.5 million. The purchase agreement
provides that the Company is to receive a security interest in shares of the
Company that Mr. Lee holds at the time of the loan with a fair market value as
of the date of the loan of at least 125% of the amount of the loan as security
for the repayment of the loan. In addition, in the event the Company is required
to loan such sum to Mr. Lee, the Company may also be required to reimburse Mr.
Lee for certain interest on taxes that he may owe. It is possible that the
windup of PacInfoSystems during 2002 and 2003 may have triggered such a tax
event for Mr. Lee, which would result in an obligation by the Company to loan
Mr. Lee such amount and to reimburse him for interest expenses incidental to the
tax event.
5F. TABULAR DISCLOSURE OF CONTRACTUAL OBLIGATIONS
The following table summarizes our contractual obligations as of December 31,
2003:
Payment due by period
Less than 1 More than 5
Total year 1-3 years 3-5 years years
Operating lease $471 $286 $185 - -
Purchase obligation $415 $415 - - -
Total $886 $701 $185 - -
The above table does not include contingent obligations to pay royalties to the
Office of the Chief Scientist and to the Overseas Marketing Fund since the total
amount to be paid under the terms of those agreements are a function of future
sales (see note 11(a)(1) of the Consolidated Financial Statements).
ITEM 8: FINANCIAL INFORMATION.
8A. CONSOLIDATED STATEMENTS AND OTHER FINANCIAL INFORMATION
CONSOLIDATED FINANCIAL STATEMENTS
See Item 18.
SALES OUTSIDE ISRAEL
The total amount of export sales of the Company has been as follows:
2003- $4,173,000 (totaling 73% of all revenues); 2002 - $7,147,000 (totaling 76%
of all revenues); 2001 - $4,787,000 (totaling 79% of all revenues);
17
LEGAL PROCEEDINGS
In 2001, our US subsidiary, PacInfoSystems acquired 100% of Dean Tech. The
effective date of the acquisition was January 1, 2001. The total purchase price,
including acquisition costs, consisted of $275,000 in cash plus Dean Tech's
total amount of cash and accounts receivables, less accounts payable, and plus
payments to the sellers of certain annual earn-out payments until April 15,
2004. During the second quarter of 2002, the sellers of Dean Tech disputed the
financial audit and earnings calculations of Dean Tech for the year ended 2001,
which directly affected their earn-out payment for that year. Their dispute was
submitted to the American Arbitration Association ("AAA") and contained a claim
for an earn-out payment in the amount of $900,000 against PacInfoSystems. In
October 2002, the AAA resolved that PacInfoSystems should pay the sellers of
Dean Tech $618,000 plus $29,000 arbitration costs. In July 2003 BOS entered into
an Agreement and Assignment of the AAA Judgment with the sellers of Dean Tech,
and negotiated a final payment of $324,000, made by BOS to the sellers of Dean
Tech
PacInfoSystems is responsible for collecting sales taxes on sales of products to
customers in various states. Between 1999 and 2001 PacInfoSystems had not
remitted collected sales taxes to several states on a timely basis. As of
December 31, 2001, the financial statements included a liability for taxes,
interest and estimated penalties amounting to $1,392,000. During 2002,
PacInfoSystems paid its unpaid sales taxes according to certain amnesties with
state authorities in the amount of $772,000. As a result, PacInfoSystems
reversed the provision for interests and penalties in the amount of $568,000.
During year 2003 the Company reached a final settlement with the tax
authorities, which resulted in additional sales tax expenses in year 2003 in the
amount of $28,000. As of December 31, 2003 there is no sales tax debt.
In July 2002, Operate Lease, Ltd., a company from which the Company leased cars
for its employees, claimed that the Company's termination notice of the leasing
agreement in March 2002 constituted a breach of the agreement and Operate Lease
demanded compensation in the amount of NIS 1,278,968 (the nominal sum of the
claim is equivalent to approximately $292,000, as of December 31, 2003). The
Company denied the claim and to date, no legal proceeding has been filed. The
Company does not believe that the chances of Operate Lease prevailing and
recovering a significant amount, are high, and therefore no provision was
recorded.
On the basis of an audit conducted by the Office of the Chief Scientist in
October 2002, the Company was required to pay royalties in the sum of $473,200
for the years 1991-1999 (in excess of royalties already paid for this period).
The Company paid $23,367 and appealed with respect of the remainder of the sum
claimed. In July 2003 the company entered into an agreement with the Chief
Scientist pursuant to which the required royalties for the years 1991-1999 were
reduced from $473,200 to $247,000. The Company has recorded a provision for the
reduced amount.
DIVIDEND POLICY
We intend to reinvest our earnings and therefore do not anticipate paying any
cash dividends in the foreseeable future. The declaration and payment of any
cash dividends in the future will be determined by the Board of Directors in
light of the conditions existing at the time. This will include our earnings and
financial condition. We may only pay cash dividends in any fiscal year out of
"profits," as determined under Israeli statutory standards. Any dividends paid
out of Approved Enterprise earnings (i.e. tax exempt income) will be liable to
tax. As we do not intend to distribute these earnings, no provision has been
made for this additional tax in our Financial Statements.
18
8B. SIGNIFICANT CHANGES
Not applicable.
ITEM 18: FINANCIAL STATEMENTS
The following restated financial statements are filed as part of this Annual
Report:
PAGE
----
Report of Independent Auditors F-2
Consolidated Balance Sheets F-3 - F-4
Consolidated Statements of Operations F-5
Statement of Changes in Shareholders' Equity F-6
Statements of Cash Flows F-7 - F-8
Notes to Consolidated Financial Statements F-9 - F-33
The consolidated financial statements of Surf Communications Solutions Ltd., are
also filed as part of this Annual Report.
ITEM 19: EXHIBITS
The following exhibits are filed as part of this Annual Report:
1.1 Memorandum of Association, as amended (incorporated by reference to the
Company's Annual Report on Form 20-F filed on June 27, 2003).
1.2 Articles of Association, as amended (incorporated by reference to the
Company's Annual Report on Form 20-F filed on June 27, 2003).
4.1 Form of Indemnification Agreement between the Company and its officers and
directors (incorporated by reference to the Company's Current Report on
Form 6-K filed on January 17, 2003).
4.2* Share Purchase Agreement, dated as of February 23, 2003, and Option
Agreement and Registration Rights Agreement, dated as of March 30, 2003, by
and between Catalyst Investments L.P. and the Registrant.
4.3* Share Purchase Agreement and Registration Rights Agreement, dated as of
December 14, 2003, by and between Hillswood Holdings Limited and Vamos Inc.
and the Registrant.
4.4* Services Agreement, dated as of April 15, 2003, between Cukierman & Co.
Investment House Ltd., BOScom Ltd. and the Registrant.
4.5* Management Agreement between Signum Ltd., Adiv Baruch and the Registrant,
dated as of January 1, 2004.
4.6* Securities Purchase Agreement, Master Security Agreement and Registration
Rights Agreement, dated as of June 10, 2004, by and between Laurus Master
Fund Ltd. and the Registrant.
4.7 Distribution Agreement, dated as of January 15, 2003, by and between Boscom
Ltd. and Bosanova Inc.
8.1 List of subsidiaries (incorporated by reference to Item 4C of this Annual
Report on Form 20-F).
10.1 Consent of Kost Forer Gabbay & Kasierer, a member of Ernst &Young Global.
19
31.1 Certification by Chief Executive Officer pursuant to Rule 13a-14(a) or Rule
15d-14(a) of the Securities Exchange Act of 1934.
31.2 Certification by Chief Financial Officer pursuant to Rule 13a-14(a) or Rule
15d-14(a) of the Securities Exchange Act of 1934.
32.1 Certification by Chief Executive Officer and Chief Financial Officer
pursuant to Rule 13a-14(b) or Rule 15d-14(b) of the Securities Exchange Act
of 1934.
* previously filed
20
SIGNATURES
The Registrant hereby certifies that it meets all of the requirements for filing
on Form 20-F and that it has duly caused and authorized the undersigned to sign
this Amendment No. 1 to its annual report on its behalf.
B.O.S. Better On-Line Solutions, Ltd.
/s/ Adiv Baruch /s/ Nehemia Kaufman
------------------------------------- -----------------------
Adiv Baruch Nehemia Kaufman
President and Chief Executive Officer Chief Financial Officer
Date: January 6, 2005
21
B.O.S. BETTER ONLINE SOLUTIONS LTD.
AND ITS SUBSIDIARIES
CONSOLIDATED FINANCIAL STATEMENTS
AS OF DECEMBER 31, 2003
IN U.S. DOLLARS
INDEX
PAGE
REPORT OF INDEPENDENT AUDITORS F2
CONSOLIDATED BALANCE SHEETS F3 - F4
CONSOLIDATED STATEMENTS OF OPERATIONS F5
STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY F6
CONSOLIDATED STATEMENTS OF CASH FLOWS F7 - F8
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS F9 - F33
- - - - - - - - - - - -
ERNST & YOUNG o KOST FORER GABBAY & KASIERER o Phone: 972-3-6232525
3 Aminadav St. Fax: 972-3-5622555
Tel-Aviv 67067, Israel
REPORT OF INDEPENDENT AUDITORS
THE BOARD OF DIRECTORS AND SHAREHOLDERS OF
B.O.S. BETTER ONLINE SOLUTIONS LTD. AND SUBSIDIARIES
We have audited the accompanying consolidated balance sheets of B.O.S
Better OnLine Solution Ltd. ("the Company") and subsidiaries as of December 31,
2003 and 2002, and the related consolidated statements of operations, changes in
shareholders' equity and cash flows for each of the three years in the period
ended December 31, 2003. 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 the standards of the Public
Company Accounting Oversight Board (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 financial statements referred to above present fairly,
in all material respects, the consolidated financial position of the Company and
subsidiaries at December 31, 2003 and 2002, and the consolidated results of
their operations and cash flows for each of the three years in the period ended
December 31, 2003, in conformity with U.S. generally accepted accounting
principles.
As described in Note 1e of the notes to the consolidated financial
statements, the accompanying financial statements have been restated to correct
amounts with respect to the Company's investment in an affiliated company.
As discussed in the notes to the consolidated financial statements,
effective January 1, 2002 the Company changed its method of accounting for
goodwill to conform with Statement of Financial Accounting Standards
No.142,"Goodwill and Other Intangible Assets" see Note 2(k).
Tel-Aviv, Israel KOST FORER GABBAY & KASIERER
March 22, 2004, Except for note 1e, as to A Member of Ernst & Young Global
which the date is January 6,
2005
F - 2
B.O.S. BETTER ONLINE SOLUTIONS LTD.
AND ITS SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
-------------------------------------------------------------------------------
U.S. DOLLARS IN THOUSANDS
DECEMBER 31,
----------------------
2003*) 2002*)
------- -------
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 3,872 $ 5,246
Restricted cash (Note 3) - 700
Marketable securities (Note 6) 1,014 819
Trade receivables (net of allowance for doubtful accounts of $ 171 in 2003 and
$ 347 in 2002) 1,075 1,523
Other accounts receivable and prepaid expenses (Note 4) 317 382
Inventories (Note 5) 961 855
------- -------
7,239 9,525
------- -------
LONG-TERM INVESTMENTS:
Long-term marketable securities (Note 6) 1,862 2,226
Long-term prepaid expenses - 15
Severance pay funds 684 563
Investment in an affiliated company (Note 7) 2,780 1,335
------- -------
Total long-term investments 5,326 4,139
------- -------
PROPERTY AND EQUIPMENT, NET (Note 8) 598 965
------- -------
GOODWILL (Note 9) 741 741
------- -------
ASSETS RELATED TO DISCONTINUED OPERATIONS (Note 1c) 119 1,115
------- -------
$14,023 $16,485
======= =======
*) Restated, see Note 1e.
The accompanying notes are an integral part of the consolidated financial
statements.
F - 3
B.O.S. BETTER ONLINE SOLUTIONS LTD.
AND ITS SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
-------------------------------------------------------------------------------
U.S. DOLLARS IN THOUSANDS, EXCEPT SHARE DATA
DECEMBER 31,
--------------------------
2003*) 2002*)
-------- --------
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Trade payables $ 464 $ 1,044
Employee and payroll accruals 404 717
Deferred revenues 378 491
Accrued expenses and other liabilities (Note 10) 911 1,293
-------- --------
Total current liabilities 2,157 3,545
-------- --------
ACCRUED SEVERANCE PAY 951 794
-------- --------
LIABILITIES RELATED TO DISCONTINUED OPERATIONS (Note 1c) 374 4,131
-------- --------
COMMITMENTS AND CONTINGENT LIABILITIES (Note 11)
SHAREHOLDERS' EQUITY:
Share capital (Note 12)-
Ordinary shares of NIS 4.00 par value: Authorized: 8,750,000 shares at
December 31, 2003 and 2002; Issued 4,167,509 and 3,177,264 shares at
December 2003 and 2002, respectively; Outstanding: 4,162,126 and 3,171,881
shares at December 2003 and 2002, respectively 4,309 3,690
Additional paid-in capital 43,247 41,319
Treasury shares (5,383 Ordinary shares at December 31, 2003 and 2002) (150) (150)
Accumulated deficit (36,865) (36,844)
-------- --------
10,541 8,015
-------- --------
$ 14,023 $ 16,485
======== ========
The accompanying notes are an integral part of the consolidated financial
statements.
*) Restated, see Note 1e.
F - 4
B.O.S. BETTER ONLINE SOLUTIONS LTD.
AND ITS SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
-------------------------------------------------------------------------------
U.S. DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA
YEAR ENDED DECEMBER 31,
------------------------------------------
2003*) 2002*) 2001*)
-------- -------- --------
Revenues $ 5,728 $ 9,441 $ 6,042
Cost of revenues 1,794 2,300 2,703
Non recurring royalty reversal (Note 14a) (339) - -
-------- -------- --------
Gross profit 4,273 7,141 3,339
-------- -------- --------
Operating costs and expenses:
Research and development 2,129 2,182 2,746
Less - grants and participation (283) - (989)
Sales and marketing 2,178 3,705 4,811
General and administrative 1,317 1,697 1,425
Restructuring and related costs 678 - 132
-------- -------- --------
Total operating costs and expenses 6,019 7,584 8,125
-------- -------- --------
Operating loss (1,746) (443) (4,786)
Financial income, net (Note 14b) 109 295 427
Other income (expenses) (Note 14c) 45 (95) (298)
-------- -------- --------
Loss before equity in losses of an affiliated company (1,592) (243) (4,657)
Equity in losses of an affiliated company 465 570 137
-------- -------- --------
Net loss from continuing operations (2,057) (813) (4,794)
-------- -------- --------
Net income (loss) related to discontinued operations (Note 1c) 2,036 (7,674) (8,313)
-------- -------- --------
Net loss $ (21) $ (8,487) $(13,107)
======== ======== ========
Basic and diluted net loss per share from continuing operations
(Note 14d) $ (0.56) $ (0.26) $ (1.55)
======== ======== ========
Basic and diluted net income (loss) per share from discontinued
operations (Note 14d) $ 0.55 $ (2.46) $ (2.68)
======== ======== ========
Basic and diluted net loss per share NIS 4.00 par value (Note 14d) $ (0.01) $ (2.72) $ (4.23)
======== ======== ========
*) Restated, see Note 1e.
The accompanying notes are an integral part of the consolidated financial
statements.
F - 5
B.O.S. BETTER ONLINE SOLUTIONS LTD.
AND ITS SUBSIDIARIES
STATEMENTS OF SHAREHOLDERS' EQUITY
-------------------------------------------------------------------------------
U.S. DOLLARS IN THOUSANDS, EXCEPT SHARE DATA
TREASURY
NUMBER ADDITIONAL SHARES TOTAL
OF ORDINARY SHARE PAID-IN ACCUMULATED HELD BY SHAREHOLDERS'
SHARES CAPITAL CAPITAL DEFICIT *) A TRUSTEE EQUITY*)
--------- --------- --------- --------- --------- ---------
Balance at January 1, 2001 3,102,264 $ 3,628 $ 41,216 $ (15,250) $ (150) $ 29,444
Stock based compensation - - 4 - - 4
Net loss - - - (13,107) - (13,107)
--------- --------- --------- --------- --------- ---------
Balance at December 31, 2001 3,102,264 3,628 41,220 (28,357) (150) 16,341
Issuance of shares 3,750 3 27 - - 30
Issuance of shares related to the private
placement in 2000 71,250 59 (1) - - 58
Reversal of accrued issuance expenses - - 66 - - 66
Stock based compensation related to warrants issued
to service providers - - 7 - - 7
Net loss - - - (8,487) - (8,487)
--------- --------- --------- --------- --------- ---------
Balance at December 31, 2002 3,177,264 3,690 41,319 (36,844) (150) 8,015
Issuance of shares related to share swap
transaction 633,102 537 1,059 - - 1,596
Issuance of shares related to the private
placement in 2003 357,143 82 846 - - 928
Stock based compensation related to warrants
issued to service providers - - 23 - - 23
Net loss - - - (21) - (21)
--------- --------- --------- --------- --------- ---------
Balance at December 31, 2003 4,167,509 $ 4,309 $ 43,247 $ (36,865) $ (150) $ 10,541
========= ========= ========= ========= ========= =========
*) Restated, see Note 1e.
The accompanying notes are an integral part of the consolidated financial
statements.
F - 6
B.O.S. BETTER ONLINE SOLUTIONS LTD.
AND ITS SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
-------------------------------------------------------------------------------
U.S. DOLLARS IN THOUSANDS
YEAR ENDED YEAR ENDED YEAR ENDED
DECEMBER 31, DECEMBER DECEMBER
2003 *) 31, 2002 *) 31, 2001 *)
-------- -------- --------
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss $ (21) $ (8,487) $(13,107)
Adjustments to reconcile net loss to net cash provided by (used in)
operating activities:
Net loss (income) from discontinuing operations (2,036) 7,674 8,313
Depreciation and amortization 307 390 568
Impairment of property and equipment 110 95 -
Accrued severance pay, net 36 (49) (26)
Amortization of premium on marketable securities 101 89 28
Interest on investment in affiliate - - (42)
Equity in losses of an affiliated company 465 570 137
Capital loss from sale of property and equipment 6 - 32
Gain on sale of marketable securities (13) - -
Stock based compensation related to warrants issued to service
providers 23 7 4
Decrease (increase) in trade receivables 448 (28) 832
Decrease in other accounts receivable and prepaid expenses 131 186 106
Decrease (increase) in inventories (106) (548) 1,024
Increase (decrease) in trade payables (580) 596 (500)
Increase (decrease) in employees and payroll accruals, deferred
revenues, accrued expenses and other liabilities (808) (368) 961
-------- -------- --------
Net cash flows provided by (used in) continuing operations (1,937) 127 (1,670)
Net cash provided by (used in) operating activities from discontinuing
operations (1,032) 728 2,576
-------- -------- --------
Net cash provided by (used in) operating activities (2,969) 855 906
-------- -------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment (64) (163) (389)
Proceeds from sale of property and equipment 8 9 23
Purchase of other assets - - (4)
Investment in long-term marketable securities (971) (196) (2,912)
Investment in an affiliated company (155) - (2,000)
Realization of (investment in) restricted cash 700 (700) -
Proceeds from sale of marketable securities 1,001 - -
-------- -------- --------
Net cash provided by (used in) investing activities from continuing
operations 519 (1,050) (5,282)
Net cash used in investing activities from discontinuing operations - (160) (1,909)
-------- -------- --------
Net cash provided by (used in) investing activities 519 (1,210) (7,191)
-------- -------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Repayment of long-term loan - (286) (429)
Proceeds from issuance of shares 928 58 -
Payment for acquisition of a subsidiary - - (66)
Issuance expenses related to investment in an affiliated company (159) - -
-------- -------- --------
Net cash provided by (used in) financing activities from
continuing operations 769 (228) (495)
Net cash used in financing activities from discontinuing operations (47) (3,216) (1,095)
-------- -------- --------
Net cash provided by (used in) financing activities 722 (3,444) (1,590)
-------- -------- --------
Decrease in cash and cash equivalents (1,728) (3,799) (7,875)
Decrease (increase) in cash and cash equivalents of discontinuing
operations 354 720 (270)
Cash and cash equivalents at the beginning of the year 5,246 8,325 16,470
-------- -------- --------
Cash and cash equivalents at the end of the year $ 3,872 $ 5,246 $ 8,325
======== ======== ========
*) Restated, see Note 1e.
The accompanying notes are an integral part of the consolidated financial
statements.
F - 7
B.O.S. BETTER ONLINE SOLUTIONS LTD.
AND ITS SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
-------------------------------------------------------------------------------
U.S. DOLLARS IN THOUSANDS
YEAR ENDED YEAR ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31, DECEMBER 31,
2003 *) 2002 *) 2001 *)
--------- --------- ---------
Supplemental disclosure of cash flow activities:
(i) Net cash paid during the year for:
Interest $ 1 $ 82 $570
========== ==== ====
(ii) Non-cash activities:
Investment in an affiliated company against issuance of shares $ 1,755 $ 30 $ -
========== ==== ====
Reversal of issuance expenses payable $ - $ 66 $ -
========== ==== ====
*) Restated, see Note 1e.
The accompanying notes are an integral part of the consolidated financial
statements.
F - 8
B.O.S. BETTER ONLINE SOLUTIONS LTD.
AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
-------------------------------------------------------------------------------
U.S. DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA
NOTE 1:- GENERAL
B.O.S. Better Online Solutions Ltd. is an Israeli corporation together with
its subsidiaries (hereinafter "the Company" or "BOS"):
a. Since January 2002, the Company's structure was re organized by
transforming the Company into a holding company specializing in high
tech investments and by merging the Company's connectivity operations
into BOScom. As such, on January 1, 2002, the net assets pertaining to
the connectivity operations were transferred to BOScom.
The Company's wholly owned subsidiary, "BOScom" operates in
connectivity, software utilities and communication solution product
lines.
Connectivity - A solutions for seamless integration of personal
computers and Local Area Networks into the midrange host environment.
"BOScom" also design, integrate, test, market and support superior
products that provide efficient solutions to personnel connecting
personal computers to IBM midrange hosts.
Software Utilities - Powerful solutions for document design,
distribution and management solutions for a wide range of operating
systems, including mainframe and UNIX.
Communication Solutions - BOScom developed a series of Voice over
Internet protocol (" VOIP ") communication products designed for the
corporate market. The gateways enable enterprises to reduce or
eliminate inter-office communication costs or bypass long-distance
costs using their private Intranet or the public Internet to carry
telephone calls. They also provide a powerful means to extend Private
Branch Exchange ("PBX") functionality to the enterprise's branch
offices.
In 2003, the Company reorganized BOScom activity by ceasing the
operation off all of its wholly owned marketing subsidiaries in the UK
and France and began to sell its products directly through independent
distributors. As a result, the Company reduced the total worldwide
employees by approximately 49 employees and incurred $ 678 thousand in
restructuring costs in accordance with SFAS 146 "Accounting for Costs
Associated with Exit or Disposal Activities". SFAS No.146 requires
that a liability for a cost associated with an exit or disposal
activity be recognized and measured, initially at fair value, only
when the liability is incurred. The provisions of SFAS No.146 are
effective for exit or disposal activities that are initiated after
December 31, 2002.
b. Accounting principles:
The consolidated financial statements for all years presented are
prepared in accordance with generally accepted accounting principles
("GAAP ") in the United States of America. Prior to 2003, the
consolidated financial statements were prepared in accordance with
Israeli GAAP with reconciliation to U.S.GAAP.
c. Discontinued operation:
On June 1, 1998, the Company acquired 100% of the share capital of
Pacinfo ("Pacinfo"), a U.S. corporation. Pacinfo is a reseller of
computer networking products. In April 2001, Pacinfo acquired Dean
Technologies Associated LLC. ("DT") Texas limited Liability Company,
which was also engaged in the computer-networking segment.
F - 9
B.O.S. BETTER ONLINE SOLUTIONS LTD.
AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
-------------------------------------------------------------------------------
U.S. DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA
NOTE 1:- GENERAL (CONT.)
In May 2002, the Board of Directors of the Company decided to sell all
Pacinfo activity. During the fourth quarter of 2002, following
unsuccessful efforts to sell Pacinfo and due to poor economic
condition and continued operating losses together with a loss of key
officers and employees, the Company initiated a plan to cease
operations of Pacinfo and to proceed with a voluntary liquidation of
the Company.
The results of operations including revenue, operating expenses and
other income and expenses of Pacinfo for 2003, 2002 and 2001 have been
reclassified in the accompanying statements of operations as
discontinued operations.
The Company's balance sheets at December 31, 2003 and 2002 reflect the
net liabilities of the Pacinfo as liabilities and assets related to
discontinued operations within liabilities related to discontinuing
operations and assets related to discontinuing operations.
The carrying amounts of the major classes of assets and liabilities
included as part of the discontinued operation are:
DECEMBER 31,
--------------------
2003 2002
------ ------
Cash $ 69 $ 423
Trade receivables, other receivables and prepaid
expenses 18 597
Property and equipment, net 32 95
------ ------
Assets of discontinued operation $ 119 $1,115
====== ======
Trade payables $ 299 $2,456
Accrued expenses and other liabilities 75 1,675
------ ------
Liabilities of discontinued operation $ 374 $4,131
====== ======
The results of operations, including revenues, cost of revenues and
operating expenses of Pacinfo operation for 2003, 2002 and 2001 have
been reclassified in the statements of operations. Taxes were not
attributed to the discontinued operation due to utilization of losses
from previous years, for which a valuation allowance was provided.
Summarized selected financial information of the discontinued
operation is as follows:
YEAR ENDED DECEMBER 31,
-----------------------------------------
2003 2002 2001
-------- -------- --------
Revenues $ 25 $ 32,912 $ 53,168
======== ======== ========
Net income (loss) $ 2,036 $ (7,674) $ (8,313)
======== ======== ========
d. The Company had one major customer in 2003, which constituted 52 % of
the revenues. This major customer is the Company's master distributor
in the U.S. In the event that the Company encounters problems working
with the master distributor, the Company may experience an
interruption in sales until an alternative source of distribution can
be found, which may have a material adverse effect on the financial
statements.
F - 10
B.O.S. BETTER ONLINE SOLUTIONS LTD.
AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
-------------------------------------------------------------------------------
U.S. DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA
e. Restatement of financial statements:
The Company has restated its financial statements for 2001, 2002 and
2003 to reflect revised accounting treatment in its investment in an
affiliated company, Surf Communications Solution LTD. ("Surf") as a
result of an additional investment in an affiliated company that
occurred during 2003. Following the restatement the Company accounted
for its investment in an affiliated company under the equity method of
accounting, which was previously accounted based on the cost method.
In February 2003, the Company entered into an agreement with Catalyst
Investors L.P. ("Catalyst") to issue Catalyst 633,102 Ordinary shares.
In consideration for the issued shares, Catalyst granted 191,548
series C Preferred shares it held in Surf and additional voting rights
of 124,936 Preferred C shares that increased the Company's voting
rights from 10.7% to 23% of Surf. As a result of the Catalyst
transaction, the Company has the ability to exercise significant
influence over Surf. Consequently, the results of operations (current
and prior periods presented), and retained earnings of the Company
were adjusted retroactively in a manner consistent with the accounting
for a step-by-step investment in an affiliated company. Since its
investment in Common stock was reduced to zero in prior years, the
Company recognized equity losses only with respect to its share in the
Preferred C shares (8.4% since November 2001 through March 2003 and
thereafter 15.7%), in accordance with EITF 99-10 "Percentage Used to
Determine the Amount of Equity Method Losses"
To adjust the investment according to the equity method, the Company
recorded equity losses in the amounts of $ 465, $ 570 and $ 137
for the years 2003, 2002 and 2001 respectively. As a result, the
Company reversed the impairment expense of $ 840 recorded in 2003 due
to the fact that the equity losses recorded, reduced the carrying
amount of the investment in Surf below its fair value. The accumulated
equity losses net of the impairment expenses were $ 332.
THE FOLLOWING TABLE SHOWS THE RECONCILIATIONS OF ALL AMOUNTS AS
PREVIOUSLY REPORTED AND AS RESTATED:
YEAR ENDED
DECEMBER 31, 2003
----------------------------------------
AS PREVIOUSLY
REPORTED RESTATEMENT AS RESTATED
--------- --------- ---------
Operating loss (1,746) - (1,746)
Other income (795) 840 45
Loss before equity in losses of an
affiliated company (2,432) 840 (1,592)
Equity in losses of an affiliated company - (465) (465)
Net loss from continuing operations (2,432) 375 (2,057)
Net loss (396) 375 (21)
Basic and diluted net income (loss) per
share from continuing operations (0.66) 0.10 (0.56)
Basic and diluted net loss per share (0.11) 0.10 (0.01)
Accordingly as of December 31, 2003 the investment in surf was reduced
by $ 332.
F - 11
B.O.S. BETTER ONLINE SOLUTIONS LTD.
AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
-------------------------------------------------------------------------------
U.S. DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA
NOTE 1:- GENERAL (CONT.)
YEAR ENDED
DECEMBER 31, 2002
------------------------------------------
AS PREVIOUSLY
REPORTED RESTATEMENT AS RESTATED
------------ ------------ ------------
Operating loss (443) - (443)
Equity in losses of an affiliated company - (570) (570)
Net loss from continuing operations (243) (570) (813)
Net loss (7,917) (570) (8,487)
Basic and diluted net loss per share
from continuing operations (0.08) (0.18) (0.26)
Basic and diluted net loss per share (2.54) (0.18) (2.72)
YEAR ENDED
DECEMBER 31, 2001
------------------------------------------
AS PREVIOUSLY
REPORTED RESTATEMENT AS RESTATED
------------ ------------ ------------
Operating loss (4,786) - (4,786)
Equity in losses of an affiliated company - (137) (137)
Net loss from continuing operations (4,657) (137) (4,794)
Net loss (12,970) (137) (13,107)
Basic and diluted net loss per share
from continuing operations (1.50) (0.05) (1.55)
Basic and diluted net loss per share (4.18) (0.05) (4.23)
YEAR ENDED
DECEMBER 31, 2003
------------------------------------------
AS PREVIOUSLY
REPORTED RESTATEMENT AS RESTATED
------------ ------------ ------------
Cash flows from operating activities:
Net loss (396) 375 (21)
Equity in losses of an affiliated company - (465) (465)
Impairment of investment in a company 840 (840) -
Net cash flows used in continuing
operations (1,937) - (1,937)
F - 12
B.O.S. BETTER ONLINE SOLUTIONS LTD.
AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
-------------------------------------------------------------------------------
U.S. DOLLARS IN THOUSANDS
NOTE 1:- GENERAL (CONT.)
YEAR ENDED
DECEMBER 31, 2002
------------------------------------------
AS PREVIOUSLY
REPORTED RESTATEMENT AS RESTATED
------------ ------------ ------------
Cash flows from operating activities:
Net loss (7,917) (570) (8,487)
Equity in losses of an affiliated company - (570) (570)
Net cash flows provided by continuing
operations 127 - 127
YEAR ENDED
DECEMBER 31, 2001
------------------------------------------
AS PREVIOUSLY
REPORTED RESTATEMENT AS RESTATED
------------ ------------ ------------
Cash flows from operating activities:
Net loss (12,970) (137) (13,107)
Equity in losses of an affiliated company - (137) (137)
Net cash flows used in continuing
operations (1,670) - (1,670)
DECEMBER 31, 2003
---------------------------------------------
AS PREVIOUSLY
REPORTED RESTATEMENT AS RESTATED
------------ ------------ ------------
Investment in an affiliated company 3,112 (332) 2,780
Total long-term investments 5,658 (332) 5,326
Total assets 14,355 (332) 14,023
Accumulated deficit (36,533) (332) (36,865)
Total shareholders' equity 10,873 (332) 10,541
Total liabilities and shareholders'
equity 14,355 (332) 14,023
DECEMBER 31, 2002
----------------------------------------------
AS PREVIOUSLY
REPORTED RESTATEMENT AS RESTATED
------------ ------------ ------------
Investment in an affiliated company 2,042 (707) 1,335
Total long-term investments 4,846 (707) 4,139
Total assets 17,192 (707) 16,485
Accumulated deficit (36,137) (707) (36,844)
Total shareholders' equity 8,722 (707) 8,015
Total liabilities and shareholders'
equity 17,192 (707) 16,485
F - 13
B.O.S. BETTER ONLINE SOLUTIONS LTD.
AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
-------------------------------------------------------------------------------
U.S. DOLLARS IN THOUSANDS
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 amounts reported in the financial
statements and accompanying notes. Actual results could differ from
those estimates.
b. Financial statements in U.S. dollars ("dollar"):
A substantial portion of the Company's revenues is generated in U.S.
dollar ("dollars"). In addition, most of the Company's costs are
incurred in dollars.
Company's management believes that the dollar is the primary currency
of the economic environment in which the Company operate. Thus, the
functional and reporting currency of the Company is the dollar.
Accordingly, monetary accounts maintained in currencies other than the
dollar are remeasured into U.S. dollars in accordance with Statement
No. 52 of the Financial Accounting Standards Board ("FASB") "Foreign
Currency Translation". All transactions gains and losses from the
remeasurement of monetary balance sheet items are reflected in the
statements of operations as financial income or expenses as
appropriate.
c. Principles of consolidation:
The consolidated financial statements include the accounts of the
Company and its wholly owned subsidiaries. Inter-company transactions
and balances including profits from inter-company sales not yet
realized outside the group have been eliminated upon consolidation.
d. Cash equivalents:
Cash equivalents are short-term highly liquid investments that are
readily convertible to cash originally purchased with maturities of
less than three months.
e. Marketable securities:
The Company accounts for investments in debt securities in accordance
with Statement of Financial Accounting Standard No.115,"Accounting for
Certain Investments in Debt and Equity Securities"("SFAS No.115").
Management determines the appropriate classification of its
investments in debt and equity securities at the time of purchase and
reevaluates such determinations at each balance sheet date. Debt
securities are classified as held-to-maturity
When the Company has the positive intent and ability to hold the
securities to maturity and are stated at amortized cost. The amortized
cost of held-to-maturity securities is adjusted for amortization of
premiums and accretion of discounts to maturity. Such amortization and
decline in value judged to be other than temporary and interest are
included in financial income, net.
F - 14
B.O.S. BETTER ONLINE SOLUTIONS LTD.
AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
-------------------------------------------------------------------------------
U.S. DOLLARS IN THOUSANDS
NOTE 2:- SIGNIFICANT ACCOUNTING POLICIES (CONT.)
f. Restricted cash
Restricted cash is primarily invested in certificates of deposit,
which mature within one year and was used as security for the line of
credit granted to Pacinfo in 2002 (see Notes 1c and Note 3).
g. Inventories:
Inventory write-offs are provided to cover risks arising from
slow-moving items or technological obsolescence. As of December 31,
2003, inventory is presented net of $ 300 general provision for
technological obsolescence and slow moving items (see also note 5).
Inventories are valued at the lower of cost or market value. Cost is
determined as follows: Raw and packaging materials- Moving average
cost method.
Products in progress and finished products - On the production costs
basis with the addition of allocable indirect manufacturing costs.
h. Grants and royalty-bearing grants:
Grants and royalty-bearing grants from the Chief Scientist of the
Ministry of Industry and Trade in Israel for funding certain approved
research projects and for funding marketing activities are recognized
at the time the Company is entitled to such grants, on the basis of
the related costs incurred, and are presented as a deduction of
research and development costs.
i Investment in an affiliated company:
An affiliated company is a company in which the Company is able to
exercise significant influence, but that is not a consolidated
subsidiary and is accounted for by the equity method, net of
write-down for decrease in fair value which is not of a temporary
nature.
Investment in affiliated company represents investments in Ordinary
shares and Preferred shares. The Company applies EITF 99-10,
"Percentage Used to Determine the Amount of Equity Method Losses"
(EITF No. 99-10"). Accordingly, losses of the affiliated company are
recognized based on the ownership level of the particular investee
security held by the investor.
The Company's investment in this company is reviewed for impairment
whenever events or changes in circumstances indicate that the carrying
amount of the investment may not be recoverable, in accordance with
Accounting Principle Board Opinion No. 18 "The Equity Method of
Accounting for Investments in Common Stock" ("APB No. 18"). As of
December 31, 2003, based on management's most recent analyses, no
impairment losses have been identified.
F - 15
B.O.S. BETTER ONLINE SOLUTIONS LTD.
AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
-------------------------------------------------------------------------------
U.S. DOLLARS IN THOUSANDS
NOTE 2:- SIGNIFICANT ACCOUNTING POLICIES (CONT.)
j. Property and equipment:
Property and equipment are stated at cost, net of accumulated
depreciation. Depreciation is calculated by using the straight-line
method over the estimated useful lives of the assets, at the following
annual rates:
%
------------------
Computers and peripheral equipment 20 - 33
Office furniture and equipment 6 - 15
Leasehold improvements 10
The Company's property and equipment are reviewed for impairment in
accordance with Statement of Financial Accounting Standard No. 144
"Accounting for the Impairment or Disposal of Long- Lived Assets"
("SFAS No. 144") whenever events or changes in circumstances indicate
that the carrying amount of an asset may not be recoverable.
Recoverability of assets to be held and used is measured by a
comparison of the carrying amount of an asset to the future
undiscounted cash flows expected to be generated by the assets. If
such assets are considered to be impaired, the impairment to be
recognized is measured by the amount by which the carrying amount of
the assets exceeds the fair value of the assets. Impairment losses
have been recorded amounted to $ 110, $ 95 and $ 0 for the years ended
December 31, 2003, 2002 and 2001, respectively.
k. Goodwill:
Goodwill represents excess of the costs over the net assets of
businesses acquired. Under Statement of Financial Accounting Standard
No. 142, "Goodwill and Other Intangible Assets" ("SFAS No. 142")
goodwill acquired in a business combination on or after July 1, 2001,
is not amortized.
SFAS No. 142 requires goodwill to be tested for impairment on adoption
and at least annually thereafter or between annual tests in certain
circumstances, and written down when impaired, rather than being
amortized as previous accounting standards required. Goodwill
attributable to each of the reporting units is tested for impairment
by comparing the fair value of each reporting unit with its carrying
value. Fair value is determined using discounted cash flows.
Significant estimates used in the methodologies include estimates of
future cash flows, future short-term and long-term growth rates,
weighted average cost of capital and estimates of market multiples for
each of the reportable units. As of December 31, 2003, no impairment
losses have been identified.
l. Research and development costs:
Statement of Financial Accounting Standards No. 86 "Accounting for the
Costs of Computer Software to be Sold, Leased or Otherwise Marketed,"
("SFAS No. 86") requires capitalization of certain software
development costs subsequent to the establishment of technological
feasibility. Based on the Company product development process,
technological feasibility is established upon completion of a working
model. Research and development costs incurred in the process of
developing product improvements or new products, are generally charged
to expenses as incurred, net of participation of the Office of the
Chief Scientist of the Israeli Ministry of Industry and Trade. Costs
incurred by the Company between completion of the working model and
the point at which the product is ready for general release are
insignificant.
F - 16
B.O.S. BETTER ONLINE SOLUTIONS LTD.
AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
-------------------------------------------------------------------------------
U.S. DOLLARS IN THOUSANDS
NOTE 2:- SIGNIFICANT ACCOUNTING POLICIES (CONT.)
m. Severance pay:
The Company's liability for severance pay for Israeli resident
employees is calculated pursuant to Israeli severance pay law based on
the most recent salary of the employees multiplied by the number of
years of employment as of the balance sheet date. Employees are
entitled to one month's salary for each year of employment or a
portion thereof. The Company's liability for its Israeli resident
employees is covered by insurance policies designed solely for
distributing severance pay. The value of these policies is recorded as
an asset in the Company's balance sheet.
The insurance policies include profits accumulated up to the balance
sheet date. The insurance policies may be withdrawn only upon
complying with the Israeli severance pay law or labor agreements. The
value of the deposited funds is based on the cash surrendered value of
these policies and includes profits. Severance expenses for 2003, 2002
and 2001, amounted to $ 178, $ 114, and $ 264, respectively.
n. Revenue recognition:
The Company's products are generally a bundled hardware and software
solution that are delivered together. The Company sells its products
primarily through distributors and resellers.
The Company derives its revenues from the sale of products, license
fees for its products, maintenance, support and services.
Revenues from product sales are recognized in accordance with Staff
Accounting Bulletin No. 104 "Revenue Recognition in Financial
Statements" ("SAB 104") when delivery has occurred, persuasive
evidence of an arrangement exists, the vendor's fee is fixed or
determinable, no further obligation exists, and collectibility is
reasonably assured. When a right of return exists, the Company defers
revenues until the right of return expires. Revenues subject to
certain price protection and stock rotation are deferred until
distributor sells the products, or until the right expires.
Revenue from license fees is recognized in accordance with Statement
of Position (SOP 97-2) "Software Revenue Recognition", when persuasive
evidence of an agreement exists, delivery of the product has occurred,
no significant obligations with regard to implementation remain, the
fee is fixed or determinable, and collectibility is probable. The
Company generally does not grant a right of return to its customers.
When a right of return exists, the Company defers revenue until the
right of return expires, at which time revenue is recognized provided
that all other revenue recognition criteria have been met.
The provision for product returns is based on prior experience and is
net of estimated manufacturing reimbursements.
Revenues from maintenance and support are recognized ratably over the
period of the maintenance contract. Revenues from software license
that require significant customization, integration and installation
are recognized as they are completed, in accordance with SOP 81-1
"Accounting for Performance of Construction-Type and Certain
Production-Type Contracts" guidelines.
F - 17
B.O.S. BETTER ONLINE SOLUTIONS LTD.
AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
-------------------------------------------------------------------------------
U.S. DOLLARS IN THOUSANDS
NOTE 2:- SIGNIFICANT ACCOUNTING POLICIES (CONT.)
o. Warranty:
The Company provides a warranty between 3 to 36 months at no extra
charge, whereby defective hardware covered by the warranty should be
sent back to the Company. The Company estimates the costs that may be
incurred under its warranty and records a liability in the amount of
such costs at the time product revenue is recognized. Factors that
affect the Company's warranty liability include the number of
installed units, historical and anticipated rates of warranty claims,
and cost per claim. The Company periodically assesses the adequacy of
its recorded warranty liabilities and adjusts the amounts as
necessary.
Changes in the Company's product warranty during the year 2003 period
are as follows:
Balance, beginning of the year $ 174
Changes in warranties during the year (42)
------
Balance, end of the year $ 132
p. Income taxes:
The Company account for income taxes in accordance with Statement of
Financial Accounting Standards, SFAS 109, "Accounting for Income
Taxes". This Statement prescribes the use of the liability method
whereby deferred tax assets and liability account balances are
determined based on differences between financial reporting and tax
bases of assets and liabilities and are measured using the enacted tax
rates and laws that will be in effect when the differences are
expected to reverse. The Company provide a valuation allowance, if
necessary, to reduce deferred tax assets to their estimated realizable
value.
q. Concentrations of credit risk:
Financial instruments that potentially subject the Company to
concentrations of credit risk consist principally of cash and cash
equivalents, trade receivables, other accounts receivable and
marketable securities.
Cash and cash equivalents are invested mainly in U.S. dollars in
deposits with major banks in Israel. Such deposits may be in excess of
insured limits and are not insured in other jurisdictions. Management
believes that the financial institutions that hold the investments of
the Company are financially sound and, accordingly, minimal credit
risk exists with respect to these investments.
The trade receivables of the Company derived from sales to customers
located primarily in the United States, Europe and Israel. The Company
generally do not require collateral; however, in certain
circumstances, the Company may require letters of credit, other
collateral, additional guarantees or advanced payments. The Company
performs ongoing credit evaluations of its customers and to date
(except for customer relating to the discontinuing operations) has not
experienced material losses. An allowance for doubtful accounts is
determined with respect to specific debts that are doubtful of
collection.
Investments in marketable securities are conducted through a bank in
Israel, and include investments in corporate and governmental
debentures. Management believes that the financial institutions that
hold the Company's investments are financially sound, the portfolio is
well diversified and accordingly, minimal credit risk exists with
respect to these investments.
The Company have no off-balance-sheet concentration of credit risk
such as foreign exchange contracts, option contracts or other foreign
hedging arrangements.
F - 18
B.O.S. BETTER ONLINE SOLUTIONS LTD.
AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
-------------------------------------------------------------------------------
U.S. DOLLARS IN THOUSANDS
NOTE 2:- SIGNIFICANT ACCOUNTING POLICIES (CONT.)
r. Basic and diluted net loss per share:
Basic net loss per share is calculated based on the weighted average
number of Ordinary shares outstanding during each year. Diluted net
loss per share is calculated based on the weighted average number of
Ordinary shares outstanding during each year, plus dilutive potential
Ordinary shares considered outstanding during the year, in accordance
with SFAS No. 128, "Earnings Per Share".
The total weighted average number of shares related to the outstanding
options and warrants excluded from the calculations of diluted net
loss per share, since they would have an anti-dilutive effect, were
505,178, 288,804 and 243,380 for the years ended December 31, 2003,
2002 and 2001, respectively.
s. Accounting for stock-based compensation:
The Company has elected to follow Accounting Principles Board Opinion
No. 25, "Accounting for Stock Issued to Employees" ("APB-25"), and
Interpretation No. 44, "Accounting for Certain Transactions Involving
Stock Compensation" ("FIN 44"), in accounting for its employee stock
option plan. Under APB-25, when the exercise price of the Company's
employee stock options equals or is above than the market price of the
underlying shares on the date of grant, no compensation expense is
recognized.
The Company applies SFAS No. 123 "Accounting for stock Based
Compensation" ("SFAS No. 123") and EITF 96-18, "Accounting for Equity
Instruments that are Issued to Other Than Employees for Acquiring, or
in Conjunction With, Selling, Goods or Services", with respect to
warrants issued to non-employees. SFAS No. 123 requires the use of
option valuation models to measure the fair value of the warrants at
the date of grant.
Pro-forma disclosure is required by SFAS No. 123 , had the
compensation expense for stock options granted under the Company's
plans, been determined based on the fair value at the date of grant.
The Company's net loss and loss per Ordinary share in 2003, 2002 and
2001 would have changed to the pro forma amounts shown below:
YEAR ENDED DECEMBER 31,
------------------------------------------
2003 *) 2002 *) 2001 *)
-------- -------- --------
Net loss as reported $ (21) $ (8,487) $(13,107)
Deduct: stock-based compensation expense
determined under fair value method for all
awards 124 341 1,187
-------- -------- --------
Pro forma net loss $ (145) $ (8,828) $(14,294)
======== ======== ========
Pro forma basic and diluted net loss per share $ (0.04) $ (2.83) $ (4.61)
======== ======== ========
The fair value of each option granted is estimated on the date of
grant, using the Black Scholes option pricing model with expected
volatility of approximately 64%, 71% and 79% in 2003, 2002 and 2001,
respectively and using the following weighted average assumptions:
(1) Dividend yield of zero percent for each year.
(2) Risk-free interest rate of 1.8%, 1.5% and 2% in 2003, 2002 and
2001, respectively.
(3) Expected average lives of the options of three years from the
date of grant as of 2003, 2002 and 2001.
*) Restated, see Note 1e
F - 19
B.O.S. BETTER ONLINE SOLUTIONS LTD.
AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
-------------------------------------------------------------------------------
U.S. DOLLARS IN THOUSANDS
NOTE 2:- SIGNIFICANT ACCOUNTING POLICIES (CONT.)
t. Fair value of financial instruments:
The following methods and assumptions were used by the Company in
estimating their fair value disclosures for financial instruments:
The carrying amounts of cash and cash equivalents, restricted cash,
trade receivables, other accounts receivable and trade payables
approximate their fair value due to the short-term maturities of such
instruments.
The fair value for marketable securities is based on quoted market
prices.
u. Impact of recently issued accounting standards:
In April 2003, the FASB issued SFAS No. 149, "Amendment of Statement
133 on Derivative Instruments and Hedging Activities". SFAS No. 149
amends and clarifies (1) the accounting guidance on derivative
instruments (including certain derivative instruments embedded in
other contracts) and (2) hedging activities that fall within the scope
of SFAS No. 133, "Accounting for Derivative Instruments and Hedging
Activities". SFAS No. 149 amends SFAS No. 133 to reflect decisions
made (1) as part of the Derivatives Implementation Group ("DIG")
process that effectively required amendments to SFAS No. 133, (2) in
connection with other projects dealing with financial instruments, and
(3) regarding implementation issues related to the application of the
definition of a derivative. SFAS No. 149 is effective (1) for
contracts entered into or modified after June 30, 2003, with certain
exceptions, and (2) for hedging relationships designated after June
30, 2003. The guidance is to be applied prospectively.
Generally, SFAS No. 149 improves financial reporting by (1) requiring
that contracts with comparable characteristics be accounted for
similarly and (2) clarifying when a derivative contains a financing
component that warrants special reporting in the statement of cash
flows. SFAS No. 149 is not expected to have a material impact on the
Company's financial statements.
In November 2002, the FASB issued FASB Interpretation No. 45,
"Guarantor's Accounting and Disclosure Requirements for Guarantees,
Including Indirect Guarantees of Indebtedness of Others, an
interpretation of FASB Statements No. 5, 57, and 107 and Rescission of
FASB Interpretation No. 34" ("FIN No. 45"). FIN No. 45 elaborates on
the disclosures to be made by a guarantor in its interim and annual
financial statements about its obligations under certain guarantees
that it has issued. It also clarifies that a guarantor is required to
recognize, at the inception of a guarantee, a liability for the fair
value of the obligation undertaken in issuing the guarantee. FIN No.
45 does not prescribe a specific approach for subsequently measuring
the guarantor's recognized liability over the term of the related
guarantee. It also incorporates, without change, the guidance in FASB
Interpretation No. 34, "Disclosure of Indirect Guarantees of
Indebtedness of Others," which is being superseded. The disclosure
provisions of FIN No. 45 are effective for financial statements of
interim or annual periods that end after December 15, 2002, and the
provisions for initial recognition and measurement are effective on a
prospective basis for guarantees that are issued or modified after
December 31, 2002, irrespective of a guarantor's year-end. The
adoption of FIN No. 45 did not have a material impact on the results
of operations or financial position.
F - 20
B.O.S. BETTER ONLINE SOLUTIONS LTD.
AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
-------------------------------------------------------------------------------
U.S. DOLLARS IN THOUSANDS
NOTE 2:- SIGNIFICANT ACCOUNTING POLICIES (CONT.)
In January 2003, the FASB issued Interpretation No. 46, Consolidation
of Variable Interest Entities" ("FIN 46"). The objective of FIN No. 46
is to improve financial reporting by companies involved with variable
interest entities. A variable interest entity is a corporation,
partnership, trust, or any other legal structure used for business
purposes that either (a) does not have equity investors with voting
rights or (b) has equity investors that do not provide sufficient
financial resources for the entity to support its activities. FIN No.
46 requires a variable interest entity to be consolidated by a company
if that company is subject to a majority of the risk of loss from the
variable interest entity's activities or entitled to receive a
majority of the entity's residual returns or both. FIN No. 46 also
requires disclosures about variable interest entities that the company
is not required to consolidate but in which it has a significant
variable interest. The consolidation requirements of FIN No. 46 apply
immediately to variable interest entities created after January 31,
2003. The consolidation requirements apply to older entities in the
first fiscal year or interim period ending after March 15, 2004.
Certain of the disclosure requirements apply in all financial
statements issued after January 31, 2003, regardless of when the
variable interest entity was established. As of December 31, 2003, the
Company does not expect the adoption of FIN No. 46 to have a material
impact on its consolidated financial statements.
In November 2002, Emerging Issues Task Force ("EITF") reached a
consensus on Issue No. 00-21, "Revenue Arrangements with Multiple
Deliverables". EITF Issue No. 00-21 provides guidance on how to
account for arrangements that involve the delivery or performance of
multiple products, services and/or rights to use assets. The
provisions of EITF Issue No. 00-21 applied to revenue arrangements
entered into in fiscal periods beginning after June 15, 2003.
Additionally, companies will be permitted to apply the consensus
guidance in this issue to all existing arrangements as the cumulative
effect of a change in accounting principle in accordance with APB
Opinion No. 20, "Accounting Changes". The adoption of EITF Issue No.
00-21 did not have a material impact upon the Company's financial
position, cash flows or results of operations.
v. Reclassification:
Certain amounts from prior years have been reclassified to conform to
the current year presentation. As a result of the decision of the
Board of Directors to cease the operations of Pacinfo (the Computer
Networking Segment), the financial statements of the Company classify
the assets, liabilities and operations of Pacinfo as a discontinued
operations.
NOTE 3:- RESTRICTED CASH
As of December 31, 2003, a fixed charge that was granted in order to secure
the line of credit to Pacinfo has expired.
F - 21
B.O.S. BETTER ONLINE SOLUTIONS LTD.
AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
-------------------------------------------------------------------------------
U.S. DOLLARS IN THOUSANDS
NOTE 4:- OTHER ACCOUNTS RECEIVABLE AND PREPAID EXPENSES
DECEMBER 31,
-----------------
2003 2002
---- ----
Government authorities $ 62 $104
Prepaid expenses 107 189
Other 148 89
---- ----
$317 $382
==== ====
NOTE 5:- INVENTORIES
DECEMBER 31,
----------------
2003 2002
---- ----
Raw materials (including packaging materials) $299 $429
Products in progress 277 228
Finished products 385 198
---- ----
$961 $855
==== ====
The inventories are presented net of provision for technological
obsolescence and slow-moving items of $ 300 as of December 31, 2003
and 2002.
NOTE 6:- MARKETABLE SECURITIES
The following is a summary of held-to-maturity securities:
DECEMBER 31,
---------------------------------------------------------------------------------------------
2003 2002
------------------------------------------- --------------------------------------------
ESTIMATED ESTIMATED
GROSS GROSS FAIR GROSS GROSS FAIR
AMORTIZED UNREALIZED UNREALIZED MARKET AMORTIZED UNREALIZED UNREALIZED MARKET
COST GAINS LOSSES VALUE COST GAINS LOSSES VALUE
------- ------- ------- ------- ------- ------- ------- -------
HELD-TO-MATURITY:
Government debts $ 612 $ 9 $ - $ 621 $ 1,036 $ 17 $ - $ 1,053
Corporate
debentures 2,264 50 - 2,314 2,009 8 (35) 1,982
------- ------- ------- ------- ------- ------- ------- -------
$ 2,876 $ 59 $ - $ 2,935 $ 3,045 $ 25 $ (35) $ 3,035
======= ======= ======= ======= ======= ======= ======= =======
Aggregate maturities of held-to-maturity securities for years
subsequent to December 31, 2003 are:
ESTIMATED FAIR
AMORTIZED COST MARKET VALUE
------ ------
HELD-TO-MATURITY:
2004(short-term marketable securities) $1,014 $1,027
2005 1,568 1,604
2006 294 304
------ ------
$2,876 $2,935
====== ======
F - 22
B.O.S. BETTER ONLINE SOLUTIONS LTD.
AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
-------------------------------------------------------------------------------
U.S. DOLLARS IN THOUSANDS
NOTE 7:- INVESTMENT IN A COMPANY
a. Investment in Surf
In November 2001, the Company invested $ 1,000 as part of a private
placement in Surf. At the same time, the Company converted its
convertible loan in the amount of $ 1,042 (principal and accrued
interest) into Preferred shares in Surf at an exercise price equal to
Surf's fair value as determined in the investment agreement. As a
result of this private placement, the Company's holding in Surf was
diluted to 17%, Accordingly the investment was accounted based on the
cost accounting method.
In March 2003, the Company engaged with Catalyst Investors L.P.
("Catalyst"), in order to purchase additional 191,548 series C
Preferred shares of Surf. In consideration, the Company issued to
Catalyst Ordinary Shares, representing 19.90% of the issued and
outstanding share capital of the Company immediately prior to the
transaction and prior to the issuance of the shares, at a purchase
price of $2.776, aggregating to $ 1,755. Catalyst also granted the
Company, at no additional consideration, an option to purchase on or
prior to January 31, 2006, any shares of Surf then held by Catalyst at
an exercise price of $9.1632 plus interest of 4.75%. In the event that
Catalyst will sell its remaining shares in Surf prior to January 1,
2006, the Company will be entitled to the gain that will be realized
in such sale.
As a result of this investment, the Company has the ability to
exercise significant influence over Surf and therefore applied the
equity method. According to APB 18 when an investment qualifies for
use of the equity method, the investor should adopt the equity method
of accounting by adjusting retroactively the investment, results of
operations (current and prior periods presented), and retained
earnings, in a manner consistent with the accounting for a
step-by-step acquisition of a subsidiary.
NOTE 8:- PROPERTY AND EQUIPMENT
DECEMBER 31,
---------------------
2003 2002
------ ------
Cost:
Computers and software $1,798 $1,816
Office furniture and equipment 532 682
Leasehold improvements 778 774
Vehicles 6 6
------ ------
3,114 3,278
------ ------
Accumulated depreciation:
Computers and software 1,561 1,398
Office furniture and equipment 351 385
Leasehold improvements 598 526
Vehicles 6 4
------ ------
2,516 2,313
------ ------
Depreciated cost $ 598 $ 965
====== ======
Depreciation expenses amounted to $ 307, $ 390 and $ 386 for the years
ended December 31, 2003, 2002 and 2001, respectively.
F - 23
B.O.S. BETTER ONLINE SOLUTIONS LTD.
AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
-------------------------------------------------------------------------------
U.S. DOLLARS IN THOUSANDS
NOTE 9:- GOODWILL
a. Purchase of additional holdings in BOScom:
In February 2002, the Company purchased additional 3% of the share
capital of BOScom in consideration of $ 30. The consideration was paid
by the issuance of 3,750 Ordinary shares of the Company. Consequently,
BOScom became a wholly owned subsidiary. As a result of the purchase,
the Company recorded an additional amount $ 30 as goodwill.
As of December 31, 2002 and 2003 the amortized goodwill amounted to $
741.
b. The pro forma results of operations presented below for the years
ended December 31, 2001, 2002 and 2003, reflect the impact on results
of operations had the Company adopted the non-amortization provisions
of SFAS No. 142 effective January 1, 2001:
YEAR ENDED DECEMBER 31,
--------------------------------------------
2003 *) 2002 *) 2001 *)
---------- ---------- ----------
Reported net loss $ (21) $ (8,487) $ (13,107)
Goodwill amortization - - 182
---------- ---------- ----------
Adjusted net loss $ (21) $ (8,487) $ (12,925)
========== ========== ==========
Basic net loss per share:
Reported net loss $ (0.01) $ (2.72) $ (4.23)
Goodwill amortization - - 0.06
---------- ---------- ----------
Adjusted basic and diluted net loss per share $ (0.01) $ (2.72) $ (4.17)
========== ========== ==========
*) Restated, see Note 1e
NOTE 10:- ACCRUED EXPENSES AND OTHER LIABILITIES
DECEMBER 31,
---------------------
2003 2002
------ ------
Government of Israel $ 635 $ 882
Provision for warranty 132 174
Other 144 237
------ ------
$ 911 $1,293
====== ======
NOTE 11:- COMMITMENTS AND CONTINGENT LIABILITIES
a. Commitments:
1. Royalty commitments:
i) Under the Company's research and development agreements with
the Office of the Chief Scientist ("OCS") and pursuant to
applicable laws, the Company is required to pay royalties at
the rate of 3.5% of sales of products developed with funds
provided by the OCS, up to an amount equal to 100% of the
research and development grants (dollar-linked) received
from the OCS. The obligation to pay these royalties is
contingent upon actual sales of the products. Royalties
payable with respect to grants received under programs
approved by the OCS after January 1, 1999, are subject to
interest on the U.S. dollar-linked value of the total grants
received at the annual rate of LIBOR applicable to U.S.
dollar deposits at the time the grants are received.
F - 24
B.O.S. BETTER ONLINE SOLUTIONS LTD.
AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
-------------------------------------------------------------------------------
U.S. DOLLARS IN THOUSANDS
As of December 31, 2003, the Company has an outstanding
contingent obligation to pay royalties in the amount of
approximately $ 5,621, in respect of these grants.
ii) The Israeli Government, through the Overseas Marketing Fund,
awarded the Company grants for participation in expenses for
overseas marketing. The Company is committed to pay
royalties to the Fund for Encouragement of Marketing
Activities at the rate of 3% of the increase in export
sales, up to the amount of the grants received by the
Company linked to the dollar and bearing interest of LIBOR
(for a period of six months).
As of December 31, 2003, the Company had outstanding
contingent obligations to pay royalties of $ 144 with
respect to these grants.
2. Other commitments:
The premises occupied by the Company and the Company's motor
vehicles are rented under various operating lease agreements. The
lease agreements for the premises and the motor vehicles expire
on various dates ending in 2005.
F - 25
B.O.S. BETTER ONLINE SOLUTIONS LTD.
AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
U.S. DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA
NOTE 11:- COMMITMENTS AND CONTINGENT LIABILITIES (CONT.)
Minimum future rental payments due under the above leases, at
rates in effect at December 31, 2003, are as follows:
YEAR ENDED DECEMBER 31,
-------------------------------------
2004 $286
2005 185
----
$471
====
Rental payments in 2003, 2002 and 2001 amounted to $ 426, $ 383
and $ 283, respectively.
b. In July 2002, the Company received a claim letter from Operate Lease
Ltd., under which it claims that the Company's termination notice of
the leasing agreement in March 2002 constitutes a breach of the
agreement and Operate Lease is demanding compensation in which the
nominal claim amount of $ 292. No legal proceeding has yet been filed.
At this stage, according to the Company's counsel assessment, the
prospects of Operate Lease to prevail and recover a significant
amount, seem remote. The financial statements do not include any
provision in that regard.
c. In 1998, as part of Pacinfo Share Purchase Agreement between the
Company and Mr. Jacob Lee (the seller of Pacinfo who became a
shareholder of the Company), certain actions involving PacInfoSystems,
if occurring before the end of 2003, may trigger a tax event for Mr.
Jacob Lee. The Company may be obligated, under the purchase agreement,
to grant Mr. Lee a loan on a full recourse basis for certain tax
payments Mr. Lee may be liable for, currently estimated at
approximately $1,500. The Company will receive a security interest in
shares of the Company that Mr. Lee holds at the time of the loan with
a fair market value as of the date of the loan of at least 125% of the
amount of the loan as security for the repayment of the loan. In
addition, in the event the Company is required to loan such sum to Mr.
Lee, the Company may also be required to reimburse Mr. Lee for certain
interest on taxes that he may owe. It is possible that the windup of
PacInfoSystems during 2002 and 2003 may have triggered such a tax
event for Mr. Lee, which would result in an obligation by the Company
to loan Mr. Lee such amount and to reimburse him for interest expenses
incidental to the tax event.
NOTE 12:- SHAREHOLDERS' EQUITY
a. In February 2003, the Board of Directors resolved to effect a
one-to-four reverse split. The reverse split was approved by the
shareholders in May 2003 and became effective on May 29, 2003. Upon
effecting the reverse split; 4 Ordinary shares of NIS 1 par value
each, have been converted and reclassified as one Ordinary share of
NIS 4 par value.
All shares, options and earnings per share amounts have been
retroactively adjusted for all periods presented to reflect the stock
splits.
b. In December 2003, the Company completed a private placement for the
Company's Ordinary Shares with two European private investors. The
Company issued to the investors 357,143 shares at a purchase price of
$ 2.80, for consideration of $ 928 (net of $ 72 issuance expenses).
F - 26
B.O.S. BETTER ONLINE SOLUTIONS LTD.
AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
U.S. DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA
NOTE 12:- SHAREHOLDERS' EQUITY (CONT.)
c. Stock options plan:
During 1994, 1995, 1999, 2000, 2001 the Board of Directors of the
Company adopted stock option plans ("the Plans") pursuant to which
656,250 options for the purchase of the Company's Ordinary shares may
be granted to officers, directors, consultants and employees of the
Company. The Board of Directors has resolved that no further grants
shall be made from the existing plans which, as of December 31, 2003,
had in the aggregate 337,902 options left for issuance from the
existing option pools previously approved by the shareholders. In May
2003 the Company's shareholders approved the adoption of the 2003
Stock Option Plan, pursuant to which 625,000 Ordinary Shares are
reserved for purchase by employees, directors, consultants and service
providers of the Company. As of December 31, 2003, an aggregate to
414,424 of these options are still available for future grant.
Each option granted under the plans expires between 5-10 years from
the date of the grant. The options vest gradually over a period
ranging between two to three years. Any options, which are cancelled
or forfeited before expiration, become available for future grants.
The following is a summary of the Company's stock options granted to
officers, directors, and employees among the various plans:
YEAR ENDED DECEMBER 31,
--------------------------------------------------------------------
2003 2002 2001
-------------------- ------------------- -------------------
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
NUMBER EXERCISE NUMBER EXERCISE NUMBER EXERCISE
OF OPTIONS PRICE OF OPTIONS PRICE OF OPTIONS PRICE
---------- ----- ---------- ----- ---------- -----
Options outstanding
at beginning
of year 211,929 16.00 243,380 16.48 224,740 21.16
Changes during the
year:
Granted 278,076 8.97 55,000 6.76 98,048 8.20
Forfeited or
cancelled (63,753) 12.53 (86,451) 11.40 (79,408) 19.48
-------- -------- --------
Options outstanding
at end of year 426,252 11.93 211,929 16.00 243,380 16.48
======== ===== ======== ===== ======== =====
Options exercisable
at the end of
the year 194,926 20.36 169,054 16.24 127,293 18.32
======== ===== ======== ===== ======== =====
The options outstanding as of December 31, 2003, have been separated
into ranges of exercise price as follows:
WEIGHTED
OPTIONS WEIGHTED OPTIONS AVERAGE
OUTSTANDING WEIGHTED AVERAGE EXERCISABLE EXERCISE
RANGE OF AS OF AVERAGE REMAINING AS OF PRICE OF
EXERCISE DECEMBER 31, EXERCISE CONTRACTUAL DECEMBER 31, OPTIONS
PRICE 2003 PRICE LIFE (YEARS) 2003 EXERCISABLE
----- ------- ----- ---- ------ -----
1.84-2.00 203,076 1.95 8.07 - -
6.80 39,168 6.80 7.78 35,918 6.8
10.60 3,695 10.60 3.76 3,695 10.60
14.00 14,000 14.00 3.27 14,000 14.00
17.00-18.00 45,988 17.83 5.27 45,988 17.83
28.00 120,325 28.00 3.84 95,325 28.00
------- -------
426,252 11.93 6.13 194,926 20.36
======= ======= ======= =======
F - 27
B.O.S. BETTER ONLINE SOLUTIONS LTD.
AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
U.S. DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA
NOTE 12:- SHAREHOLDERS' EQUITY (CONT.)
Options granted to employees in 2003, 2002 and 2001, have an exercise
price equal to the fair market value of Ordinary share at the grant
date. The weighted average fair values of the options granted during
2003, 2002 and 2001 were $ 3.91, $ 3.2 and $ 4.27, respectively.
d. Options issued to service providers:
The Company accounts for these options in accordance with the
provisions of SFAS 123 and EITF 96-18. The fair value for these
options was estimated at the date of grant using an option pricing
model with the following assumptions: risk-free interest rate of 1.5%,
dividend yields of 0% volatility of 0.7, and an expected life of 2.5
year.
The compensation expense that has been recorded in the consolidated
financial statements regarding these warrants for the years 2003, 2002
and 2001 were $ 23, $ 7 and $ 4, respectively.
The Company's outstanding warrants to service providers as of December
31, 2003 are as follows:
WARRANTS FOR EXERCISE
ORDINARY PRICE PER WARRANTS EXERCISABLE
ISSUANCE DATE SHARES SHARE EXERCISABLE THROUGH
------------- ------ ----- ----------- -------
October 2002 75,000 $ 4.00 31,250 June 2011
December 2002 938 $ 8.00 938 December 2005
December 2002 937 $ 4.00 937 December 2005
March 2003 1,025 $ 8.00 1,025 December 2005
March 2003 1,026 $ 4.00 1,026 December 2005
------ ------
78,926 35,176
====== ======
NOTE 13:- TAXES ON INCOME
a. Tax benefits under the Law for the Encouragement of Capital
Investments, 1959:
The Company's production facilities have been granted an "Approved
Enterprise" status under the above Law under four separate investment
programs. According to the Capital Investments Law, the Company has
elected to receive for the first program state-guaranteed loans and
grants, for the second and third programs, the Company has elected to
receive only state-guaranteed loans. As for the fourth program, the
Company has elected the "alternative benefits" and has waived
Government grants in return for a tax exemption.
The Company is also a "Foreign Investors' Company", as defined by the
abovementioned law, and as such, is entitled to a 10-year period of
benefits and to an additional reduction in tax rates, up to 10% or 25%
(based on the percentage of foreign ownership in each taxable year).
Income from the second, third, fourth programs, which commenced
operations in 1992, 1994, 1997, respectively, are exempt from income
tax for a period of ten years commencing with the first year in which
they generate taxable income. During 2002, as part of the transfer of
operations from the Company to BOScom, all tax benefits that were
related to the Approved Enterprise of the Company, were transferred to
BOScom. In addition, since 2002, the Company's investment are not
subject to Approved Enterprise program. Accordingly, taxable income
generated in that period will be split by the assets ratio into a
taxable income that is entitled to the benefits of the approved
enterprise and into an income that will be taxed at the 36% corporate
tax rate.
F - 28
B.O.S. BETTER ONLINE SOLUTIONS LTD.
AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
U.S. DOLLARS IN THOUSANDS
NOTE 13:- TAXES ON INCOME (CONT.)
BOScom has also a production facility, which was granted an "Approved
Enterprise" status and had a separate investment program. BOScom
elected to receive the "alternative benefits". Income derived from
BOScom investment program, which commenced operations in 1997 and
2002, are exempt from income tax for a period of ten years commencing
with the first year in which taxable income is generated.
The period of tax benefits detailed above is subject to limits of the
earlier of 12 years from commencement of production, or 14 years from
receiving the approval. Accordingly, the period of benefits relating
to all investment programs expire in the years 2001 through 2014.
The entitlement to the above benefits is conditional upon the
Company's and BOScom's fulfilling the conditions stipulated by the
above law, regulations published thereunder and the instruments of
approval for the specific investments in "Approved Enterprises". In
the event of failure to comply with these conditions, the benefits may
be canceled and the Company and BOScom may be required to refund the
amount of the benefits, in whole or in part, including interest.
The tax-exempt income attributable to the "Approved Enterprise" can be
distributed to shareholders without imposing tax liability on the
Company only upon the complete liquidation of the Company. In the
event of a distribution of such tax-exempt income as a cash dividend
in a manner other than in the complete liquidation of the Company and
BOScom, the Company and BOScom will be required to pay tax at the rate
of 10% to 25% on the amount distributed. In addition, these dividends
will be subject to 15% withholding tax.
The Company's Board of Directors has determined that such tax-exempt
income will not be distributed as dividends. Accordingly, no deferred
taxes have been provided on income attributable to the Company
"Approved Enterprise".
If the Company and BOScom derive income from sources other than an
"Approved Enterprise", such income will be taxable at the regular
corporate tax rate of 36%.
b. Loss carryforwards:
Domestic:
The Company and its Israeli subsidiary have accumulated losses for
Israel income tax purposes as of December 31, 2003, in the amount of
approximately $ 14,000. These losses may be carryforward (linked to
the Israeli Consumer Price Index ("CPI")) and offset against taxable
income in the future for an indefinite period.
Foreign:
As of December 31, 2003, the U.S. subsidiaries which were classified
as discontinuing operations had U.S. Federal and State net operating
loss carryforward of approximately $ 11,300, that can be carried
forward and offset against taxable income and expire through 2021.
Utilization of U.S. net operating losses may be subject to substantial
annual limitations due to the "change in ownership" provisions of the
Internal Revenue Code of 1986 and similar state law provisions. The
annual limitations may result in the expiration of net operating
losses before utilization.
As of December 31, 2003, B.O.S. U.K. had net operating loss
carryforward of approximately $ 3,900, which can be carried forward
indefinitely and offset against taxable income.
F - 29
B.O.S. BETTER ONLINE SOLUTIONS LTD.
AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
U.S. DOLLARS IN THOUSANDS
NOTE 13:- TAXES ON INCOME (CONT.)
c. Taxable income under the Inflationary Income Tax (Inflationary
Adjustments) Law 1985:
Results of the Company and its Israeli subsidiary for tax purposes are
measured and reflected in real terms in accordance with the changes in
the Israeli CPI. As explained in Note 2b, the financial statements are
presented in U.S. dollars. The difference between the change in the
Israeli CPI and in the NIS/U.S. dollar exchange rate causes a
difference between taxable income or loss and the income or loss
before taxes reflected in the financial statements. In accordance with
FASB 109, the Company has not provided deferred income taxes on this
difference between the reporting currency and the tax bases of assets
and liabilities.
d. Deferred income taxes:
Deferred income taxes reflect the net tax effects of temporary
differences between the carrying amounts of assets and liabilities for
financial reporting purposes and the amounts used for income tax
purposes. Significant components of the Company's deferred tax assets
are as follows:
DECEMBER 31,
----------------------
2003 2002
------- -------
Net operating loss carryforward $ 5,975 $ 4,013
Reserves and allowances 105 598
------- -------
Net deferred tax asset before valuation allowance 6,080 4,611
Valuation allowance (6,080) (4,611)
------- -------
Net deferred tax asset $ - $ -
======= =======
The Company has provided valuation allowances in respect of deferred
tax assets resulting from tax loss carryforwards and other reserves
and allowances due to its history of operating losses and current
uncertainty concerning its ability to realize these deferred tax
assets in the future.
e. Tax assessments:
The Company and BOScom received final assessments through the 1997 tax
year.
NOTE 14:- SUPPLEMENTARY INFORMATION TO STATEMENTS OF OPERATIONS
a. Non recurring royalty reversal:
Certain research and development activities of the Company are
supported by the OCS. In return for the OCS's participation, the
Company was committed to pay royalties as described in Note 11a.1.
During the third quarter of 2003, the OCS completed its examination of
the Company's technology and use of grant funding for the years 1991
through 1999, which reduced the royalties' expenses provision.
Accordingly, the Company reversed $339 of accrued royalties as a
reduction in cost of sales during the third quarter of 2003.
F - 30
B.O.S. BETTER ONLINE SOLUTIONS LTD.
AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
U.S. DOLLARS IN THOUSANDS
NOTE 14:- SUPPLEMENTARY INFORMATION TO STATEMENTS OF OPERATIONS (CONT.)
YEAR ENDED DECEMBER 31,
------------------------------------------
2003*) 2002*) 2001*)
-------- -------- --------
b. Financial income:
Interest on bank deposits and marketable
securities $ 158 $ 243 $ 504
Other (mainly translation gains) 48 140 330
-------- -------- --------
206 383 834
-------- -------- --------
Financial expenses:
In respect of long-term loans - (14) (46)
Other (mainly translation losses) (97) (74) (361)
-------- -------- --------
(97) (88) (407)
-------- -------- --------
$ 109 $ 295 $ 427
======== ======== ========
c. Other income (expenses):
Capital loss from sale of property and
equipment $ (6) $ - $ (32)
Impairment of property and equipment - (95) -
Prior year's royalties to the Israeli Chief
Scientist - - (100)
Legal settlement - - (111)
Other 51 - (55)
-------- -------- --------
$ 45 $ (95) $ (298)
======== ======== ========
d. Loss per share:
1. Numerator:
Numerator for basic and diluted net
earnings (loss) per share -
Net loss from continuing operations $ (2,057) $ (813) $ (4,794)
======== ======== ========
Net income (loss) from discontinued
operation $ 2,036 $ (7,674) $ (8,313)
======== ======== ========
Net loss available to Ordinary shareholders $ (21) $ (8,487) $(13,107)
======== ======== ========
2. Denominator (in thousands): Denominator for basic and
diluted net
earnings (loss) per share -
Weighted average number of shares 3,683 3,117 3,102
======== ======== ========
*) Restated, see Note 1e
F - 31
B.O.S. BETTER ONLINE SOLUTIONS LTD.
AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
U.S. DOLLARS IN THOUSANDS
NOTE 15:- RELATED PARTIES
The Company has entered an engagement with an Investment House, to
provide non-exclusive investment-banking services and business
development services to the Company, effective April 15, 2003. The
Investment House is a company indirectly controlled by the Chairman of
our Board of Directors, and is a co-manager of the Catalyst Fund, the
Company's largest shareholder. For its services, The Investment House
is paid a monthly sum of $10, in addition to a success fee of 4-6% for
a consummated private placement. According to its terms the Company
may terminate the agreement at any time, by giving one month prior
written notice.
NOTE 16:- SEGMENTS AND GEOGRAPHICAL INFORMATION
a. Subsequent to the liquidation of Pacinfo operation, the Computer
Networking Segment, the Company manages its business on a basis
of one reportable segment, which consists of three product lines.
See Note 1 for a description of the Company's business. Total
revenues are attributed to geographic areas based on the location
of customers in accordance with Statement of Financial Accounting
No. 131, "Disclosures about Segments of an Enterprise and Related
Information": ("SFAS 131").
The following presents total revenues and long-lived assets for
the years ended December 31, 2003, 2002 and 2001:
YEAR ENDED DECEMBER 31,
----------------------------------------------------------------------------
2003 2002 2001
-------------------- -------------------- --------------------
TOTAL * LONG-LIVED TOTAL *LONG-LIVED TOTAL *LONG-LIVED
REVENUES ASSETS REVENUES ASSETS REVENUES ASSETS
------ ------ ------ ------ ------ ------
United States $2,974 $ 5 $4,989 $ 10 $3,184 $ 134
Europe 1,198 - 2,148 154 1,491 184
Israel 1,556 1,334 2,294 1,542 1,255 1,689
Other - 10 - 112 -
------ ------ ------ ------ ------ ------
$5,728 $1,339 $9,441 $1,706 $6,042 $2,007
====== ====== ====== ====== ====== ======
*) Long-lived assets comprise goodwill and property and equipment.
b. Product lines:
Total revenues from external customers divided on the basis of
the Company's product lines are as follows:
YEAR ENDED DECEMBER 31,
------------------------------------
2003 2002 2001
------ ------ ------
Connectivity $4,670 $7,156 $5,028
Software Utilities 492 1,387 428
Voice over IP 566 898 586
------ ------ ------
$5,728 $9,441 $6,042
====== ====== ======
c. Major customers data as a percentage of total revenues:
Customer A 52% - -
====== ====== ======
Customer B 2% 13% -
====== ====== ======
F - 32
B.O.S. BETTER ONLINE SOLUTIONS LTD.
AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
U.S. DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE
NOTE 17:- SUBSEQUENT EVENT (UNAUDITED)
On June 10, 2004 the Company has entered into a Securities Purchase
Agreement (the "Purchase Agreement"), with Laurus Master Fund Ltd.
(the "Investor"), under which the Company issued to the Investor in a
private placement (i) a Secured Convertible Term Note of a $2,000
principal amount, due June 10, 2007 (the "Note"). The Note is
convertible into Ordinary Shares at a price of $3.08 per share
(subject to adjustment). The principal amount of the Note is repayable
in monthly installments, commencing as of October 1, 2004, in the
initial amount of $20 eventually increasing to $74, and may be paid in
cash or, subject to certain conditions, in Ordinary Shares. Interest
on the Note is payable monthly and may be paid in cash or, subject to
certain conditions, in Ordinary Shares. The Note is secured by a
security interest in certain assets of the Company, and (ii) a warrant
to purchase 130,000 Ordinary Shares at an exercise price of $4.04 per
share (the "Warrant"). The Warrant is exercisable, in whole or in
part, until June 10, 2011. The Note bears interest at a fluctuating
interest rate equal at all times to the prime rate plus 3%, subject to
reduction if the average closing price of the Company's Ordinary
Shares exceeds certain benchmarks.
F - 33
SURF-COMMUNICATION SOLUTIONS LTD. AND SUBSIDIARIES
CONSOLIDATED FINANCIAL STATEMENTS
AS OF DECEMBER 31, 2003
IN U.S. DOLLARS
INDEX
PAGE
--------------
REPORT OF INDEPENDENT AUDITORS 2
CONSOLIDATED BALANCE SHEETS 3 - 4
CONSOLIDATED STATEMENTS OF OPERATIONS 5
STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY 6
CONSOLIDATED STATEMENTS OF CASH FLOWS 7
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 8 - 20
ERNST & YOUNG o KOST FORER GABBAY & KASIERER o Phone: 972-3-6232525
3 Aminadav St. Fax: 972-3-5622555
Tel-Aviv 67067, Israel
REPORT OF INDEPENDENT AUDITORS
TO THE SHAREHOLDERS OF
SURF-COMMUNICATION SOLUTIONS LTD.
We have audited the accompanying consolidated balance sheets of
Surf-Communication Solutions Ltd. (the "Company") and its subsidiaries as of
December 31, 2002 and 2003, and the related consolidated statements of
operations, changes in shareholders' equity (deficiency) and cash flows for each
of the two years in the period ended December 31, 2003. 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 did not audit the financial statements of two wholly-owned
subsidiaries, which statements reflect total assets constituting 7% and 12% as
of December 31, 2002 and 2003, respectively, and total revenues constituting 27%
and 36% of the related consolidated totals for the years ended December 31, 2002
and 2003, respectively. Those statements were audited by other auditors whose
reports have been furnished to us, and our opinion, insofar as it relates to
data included for those subsidiaries is based solely on the reports of the other
auditors.
We conducted our audits in accordance with the standards of the Public
Company Accounting Oversight Board (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 and the reports of the other auditors provide a reasonable basis for our
opinion.
In our opinion, based on our audit and the reports 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 its
subsidiaries as of December 31, 2002 and 2003, and the consolidated results of
their operations and cash flows for each of the two years in the period ended
December 31, 2003, in conformity with accounting principles generally accepted
in the United States.
Tel-Aviv, Israel KOST FORER GABBAY & KASIERER
April 4, 2004 A Member of Ernst & Young Global
- 2 -
SURF-COMMUNICATION SOLUTIONS LTD. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
-------------------------------------------------------------------------------
U.S. DOLLARS IN THOUSANDS
DECEMBER 31,
-------------------
2002 2003
------ ------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $7,048 $3,552
Short-term deposits 121 1,124
Trade receivables (Note 3) 475 434
Other accounts receivable (Note 4) 208 229
------ ------
Total current assets 7,852 5,339
------ ------
LONG-TERM INVESTMENTS:
Long-term deposits 73 34
Severance pay fund 391 388
------ ------
Total long-term investments 464 422
------ ------
PROPERTY AND EQUIPMENT, NET (Note 5) 818 471
------ ------
$9,134 $6,232
====== ======
The accompanying notes are an integral part of the consolidated financial
statements.
- 3 -
SURF-COMMUNICATION SOLUTIONS LTD. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
--------------------------------------------------------------------------------
U.S. DOLLARS IN THOUSANDS (EXCEPT FOR SHARE DATA)
DECEMBER 31,
------------------------
2002 2003
-------- --------
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Trade payables $ 177 $ 133
Accrued expenses and other liabilities (Note 6) 609 1,042
-------- --------
Total current liabilities 786 1,175
-------- --------
LONG-TERM LIABILITIES:
Accrued severance pay 470 472
-------- --------
COMMITMENTS AND CONTINGENT LIABILITIES (Note 7)
SHAREHOLDERS' EQUITY (Note 8):
Ordinary shares of NIS 0.01 par value:
Authorized: 15,631,286 shares as of December 31, 2002 and 2003; Issued and
outstanding: 965,000 and 1,055,471 shares as of December 31, 2002 and
2003, respectively 3 3
Preferred shares of NIS 0.01 par value:
Authorized: 4,368,714 shares as of December 31, 2002 and 2003; Issued and
outstanding: 3,300,034 shares as of December 31, 2002 and 2003;
Aggregate liquidation preference of $ 43,062 as of December 2002 and 2003 7 7
Additional paid-in capital 30,773 30,881
Deferred stock compensation (207) (181)
Accumulated deficit (22,698) (26,125)
-------- --------
Total shareholders' equity 7,878 4,585
-------- --------
$ 9,134 $ 6,232
======== ========
The accompanying notes are an integral part of the consolidated financial
statements.
- 4 -
SURF-COMMUNICATION SOLUTIONS LTD. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
-------------------------------------------------------------------------------
U.S. DOLLARS IN THOUSANDS
YEAR ENDED
DECEMBER 31,
----------------------
2002 2003
------- -------
Revenues:
Software licenses $ 798 $ 1,242
Royalties 310 161
------- -------
Total revenues 1,108 1,403
------- -------
Cost of revenues:
Software license 687 522
Royalties 71 41
------- -------
Total cost of revenues 758 563
------- -------
Gross profit 350 840
------- -------
Operating expenses:
Research and development, net 3,797 2,035
Selling and marketing (Note 10a) 2,518 1,486
General and administrative 640 577
Non-recurring costs 224 234
------- -------
Total operating expenses 7,179 4,332
------- -------
Operating loss 6,829 3,492
Financial income, net (Note 10b) (70) (72)
Other expenses 10 -
------- -------
Loss before income taxes 6,769 3,420
Income taxes 4 7
------- -------
Net loss $ 6,773 $ 3,427
======= =======
The accompanying notes are an integral part of the consolidated financial
statements.
- 5 -
SURF-COMMUNICATION SOLUTIONS LTD. AND SUBSIDIARIES
STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
-------------------------------------------------------------------------------
U.S. DOLLARS IN THOUSANDS (EXCEPT FOR SHARE AMOUNTS)
ORDINARY SHARES PREFERRED SHARES ADDITIONAL DEFERRED TOTAL
--------------------- --------------------- PAID-IN STOCK ACCUMULATED SHAREHOLDERS'
SHARES AMOUNT SHARES AMOUNT CAPITAL COMPENSATION DEFICIT EQUITY
--------- --------- --------- --------- --------- --------- --------- ---------
Balance as of January 1, 2002 965,000 $ 3 2,308,475 $ 5 $ 22,624 $ (217) $ (15,925) $ 6,490
Issuance of Preferred C shares, net - - 991,559 2 8,016 - - 8,018
Deferred compensation related to
options issued to employees - - - - 133 (133) - -
Amortization of deferred stock
compensation - - - - - 143 - 143
Net loss - - - - - - (6,773) (6,773)
--------- --------- --------- --------- --------- --------- --------- ---------
Balance as of December 31, 2002 965,000 3 3,300,034 7 30,773 (207) (22,698) 7,878
Deferred compensation related to
options issued to employees - - - - 108 (78) - 30
Amortization of deferred stock
compensation - - - - - 104 - 104
Exercise of stock options 90,471 *) - - - - - - -
Net loss - - - - - - (3,427) (3,427)
--------- --------- --------- --------- --------- --------- --------- ---------
Balance as of December 31, 2003 1,055,471 $ 3 3,300,034 $ 7 $ 30,881 $ (181) $ (26,125) $ 4,585
========= ========= ========= ========= ========= ========= ========= =========
*) Represents an amount lower than $ 1.
The accompanying notes are an integral part of the consolidated financial
statements.
- 6 -
SURF-COMMUNICATION SOLUTIONS LTD. AND SUBSIDIARIES
--------------------------------------------------------------------------------
CONSOLIDATED STATEMENTS OF CASH FLOWS
U.S. DOLLARS IN THOUSANDS
YEAR ENDED DECEMBER 31,
----------------------
2002 2003
------- -------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $(6,773) $(3,427)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation 490 382
Increase (decrease) in accrued severance pay, net (100) 5
Loss on sale and write-off of property and equipment 10 -
Amortization of deferred stock compensation 143 134
Interest rate income on short-term deposits - (3)
Decrease in trade receivables 1,239 41
Increase in other accounts receivable (133) (21)
Decrease in trade payables (206) (44)
Increase (decrease) in accrued expenses and other liabilities (1,679) 433
------- -------
Net cash used in operating activities (7,009) (2,500)
------- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment (46) (35)
Long-term deposits 60 39
Short-term bank deposit - (1,000)
------- -------
Net cash provided by (used in) investing activities 14 (996)
------- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Repayment of third party's loan (3,214) -
Proceeds from issuance of Preferred shares, net 8,018 -
------- -------
Net cash provided by financing activities 4,804 -
------- -------
Decrease in cash and cash equivalents (2,191) (3,496)
Cash and cash equivalents at the beginning of the year 9,239 7,048
------- -------
Cash and cash equivalents at the end of the year $ 7,048 3,552
======= =======
NON-CASH ACTIVITY:
Write-off of property against other liabilities $ 12 $ -
======= =======
The accompanying notes are an integral part of the consolidated financial
statements.
- 7 -
SURF-COMMUNICATION SOLUTIONS LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
-------------------------------------------------------------------------------
U.S. DOLLARS IN THOUSANDS
NOTE 1:- GENERAL
Surf-Communication Solutions Ltd. ("the Company") was incorporated and
commenced its activities under the laws of Israel in 1996. The Company is a
developer and global supplier of universal access and network convergence
software solutions to the wireline and wireless telecommunications and data
communications industries.
The Company owns and controls 100% of its subsidiaries "Surf Communication
Solutions Inc.". registered in the USA and " Surf Communication Solutions
B.V." registered in Holland.
NOTE 2:- SIGNIFICANT ACCOUNTING POLICIES
The consolidated financial statements have been prepared in accordance with
accounting principles generally accepted in the United States.
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 amounts reported in the financial
statements and accompanying notes. Actual results could differ from
those estimates.
b. Financial statements in U.S. dollars:
The functional currency of the Company and its subsidiaries is the U.S
dollar, as the U.S. dollar is the primary currency of the economic
environment in which the Company and its subsidiaries have operated
and expect to continue to operate in the foreseeable future. The
majority of the Company's operations is currently conducted in Israel
and most of the Israeli expenses are currently paid in new Israeli
shekels ("NIS"). A majority of the revenues of the Company and its
subsidiaries is generated in U.S. dollars ("dollar"). Financing
activities including loans, equity transactions and cash investments,
are made in U.S. dollars.
The Company's transactions and balances denominated in U.S. dollars
are presented at their original amounts. Non-dollar transactions and
balances have been remeasured to U.S. dollars in accordance with
Statement No. 52 of the Financial Accounting Standards Board ("SFAS").
All transaction gains and losses from remeasurement of monetary
balance sheet items denominated in non-dollar currencies are reflected
in the statements of operations as financial income or expenses, as
appropriate. For the years ended December 31, 2002 and 2003, these
expenses were immaterial (see Note 10b)
c. Principles of consolidation:
The consolidated financial statements include the accounts of the
Company and its wholly-owned subsidiaries. Intercompany transactions
and balances have been eliminated upon consolidation.
- 8 -
SURF-COMMUNICATION SOLUTIONS LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
-------------------------------------------------------------------------------
U.S. DOLLARS IN THOUSANDS
NOTE 2:- SIGNIFICANT ACCOUNTING POLICIES (CONT.)
d. Cash equivalents:
Cash equivalents are short-term highly liquid investments that are
readily convertible to cash with original maturities of three months
or less.
e. Short-term deposits:
Bank deposits with maturities of more than three months but less than
one year are included in short-term deposits. The short-term deposits
are presented at their cost, including accrued interest.
f. Property and equipment:
Property and equipment are stated at cost, net of accumulated
depreciation. Depreciation is calculated by the straight-line method
over the estimated useful lives of the assets at the following annual
rates:
%
------
Computers and peripheral equipment 33
Office furniture and equipment 6 - 15
Motor vehicles 15
Leasehold improvements over the term of the lease
The Company and its subsidiaries periodically assess the
recoverability of the carrying amount of property and equipment and
provide for any possible impairment loss based upon the difference
between the carrying amount and fair value of such assets. As of
December 31, 2003, no impairment losses have been identified.
g. Research and development costs:
FASB No. 86, "Accounting for the Costs of Computer Software to be
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 working model. The
Company does not incur material costs between the completion of the
working model and the point at which the products are ready for
general release. Therefore, research and development costs are charged
to the statement of operations as incurred.
- 9 -
SURF-COMMUNICATION SOLUTIONS LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
-------------------------------------------------------------------------------
U.S. DOLLARS IN THOUSANDS
NOTE 2:- SIGNIFICANT ACCOUNTING POLICIES (CONT.)
h. Income taxes:
The Company accounts for income taxes in accordance with FASB No. 109,
"Accounting for Income Taxes". This Statement prescribes the use of
the liability method whereby deferred tax assets and liability account
balances are determined based on differences between financial
reporting and tax bases of assets and liabilities and are measured
using the enacted tax rates and laws that will be in effect when the
differences are expected to reverse. The Company provides a valuation
allowance, if necessary, to reduce deferred tax assets to their
estimated realizable value.
i. Revenue recognition:
The Company has adopted Statement of Position ("SOP") 97-2, "Software
Revenue Recognition," as amended. SOP 97-2, generally requires revenue
earned on software arrangements involving multiple elements to be
allocated to each element based on the relative fair value of the
elements. The Company has also adopted SOP 98-9, "Modification of SOP
97-2, Software Revenue Recognition with Respect to Certain
Transactions," for all transactions entered into after January 1,2000.
SOP 98-9 requires that revenue be recognized under the "residual
method" when vendor specific objective evidence (VSOE) of fair value
exists for all undelivered elements and no VSOE exists for the
delivered elements.
To date, the Company has derived its revenue from licensing fees and
royalties on its products, maintenance and support, and rendering of
consulting services, including implementation, training and
installation. The Company sells its products primarily through its
direct sales force.
Revenue from license fees is recognized when persuasive evidence of an
agreement exists, delivery of the product has occurred, no significant
obligations with regard to implementation remain, the fee is fixed or
determinable, and collectibility is probable. The Company generally
does not grant a right of return to its customers. When a right of
return exists, the Company defers revenue until the right of return
expires, at which time revenue is recognized provided that all other
revenue recognition criteria have been met. The Company considers all
arrangements with payment terms extending beyond 180 days not to be
fixed or determinable. If the fee is not fixed or determinable,
revenue is recognized as payments become due from the customer
provided that all other revenue recognition criteria have been met.
Maintenance and support revenue included in multiple element
arrangements is deferred and recognized on a straight-line basis over
the term of the maintenance and support agreement. The VSOE of fair
value of the undelivered elements (maintenance, support and services)
is determined based on the price charged for the undelivered element
when sold separately.
- 10 -
SURF-COMMUNICATION SOLUTIONS LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
-------------------------------------------------------------------------------
U.S. DOLLARS IN THOUSANDS
NOTE 2:- SIGNIFICANT ACCOUNTING POLICIES (CONT.)
The Company is entitled to royalties from revenue sharing upon the
sublicensing of the Company's products to end-users. Royalties out of
revenue sharing arrangements are recognized when such royalties are
reported to the Company.
Arrangements that include consulting services are evaluated to
determine whether those services are essential to the functionality of
other elements of the arrangement. When services are considered
essential, revenue under the arrangement is recognized using contract
accounting. When services are not considered essential, the revenue
allocable to the software services is recognized as the services are
performed. To date, the Company had determined that the services are
not considered essential to the functionality of other elements of the
arrangement.
Revenues from software license that require significant customization,
integration and installation are recognized using contract accounting
on a percentage of completion method based on the relationship of
actual costs incurred to total costs estimated to be incurred over the
duration of the contract.
j. Concentrations of credit risk:
Financial instruments that potentially subject the Company and its
subsidiaries to concentrations of credit risk consist principally of
cash, cash equivalents, short-term deposits and trade receivables.
Cash and cash equivalents and short-term deposits are invested in
major banks in Israel and the United States. Such deposits in the
United States may be in excess of insured limits and are not insured
in other jurisdictions. Management believes that the financial
institutions that hold the Company's investments are financially sound
and, accordingly, minimal credit risk exists with respect to these
investments.
The trade receivables of the Company and its subsidiaries are mainly
derived from sales to customers located primarily in the U.S., Europe
and Asia. The Company performs ongoing credit evaluations of its
customers and to date has not experienced any material losses. An
allowance for doubtful accounts is determined with respect to those
amounts that the Company has determined to be doubtful of collection.
The Company has no significant off-balance-sheet concentration of
credit risk such as foreign exchange contracts, option contracts or
other foreign hedging arrangements.
- 11 -
SURF-COMMUNICATION SOLUTIONS LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
-------------------------------------------------------------------------------
U.S. DOLLARS IN THOUSANDS
NOTE 2:- SIGNIFICANT ACCOUNTING POLICIES (CONT.)
k. Accounting for stock-based compensation:
The Company has elected to follow Accounting Principles Board Opinion
No. 25 ("APB 25") "Accounting for Stock Issued to Employees" and
Interpretation No. 44 "Accounting for Certain Transactions Involving
Stock Compensation" ("FIN 44") in accounting for its employee stock
option plans. Under APB 25, when the exercise price of the Company's
share options is less than the market price of the underlying shares
on the date of grant, compensation expense is recognized.
The Company applies FASB 123 and EITF 96-18, "Accounting for Equity
Instruments that are Issued to Other than Employees for Acquiring, or
in Conjunction with Selling Goods or Services" with respect to options
issued to non-employees. FASB 123 requires use of an option valuation
model to measure the fair value of the options at the grant date.
l. Government grant:
Royalty-bearing grants from the Government of Israel for funding
approved research and development projects are recognized at the time
the Company is entitled to such grants, on the basis of the costs
incurred and included as a deduction of research and development
costs. Research and development grants amounted to $ 257 in 2003.
Total royalties, accrued or paid, amounted to $ 19 in 2003, and were
recorded as part of the cost of goods sold.
m. Severance pay, net:
The Company's liability for severance pay is calculated pursuant to
Israeli severance pay law based on the most recent salary of the
employees multiplied by the number of years of employment, as of the
balance sheet date. Employees are entitled to one month's salary for
each year of employment or a portion thereof. The Company's liability
for all of its employees, is fully provided by monthly deposits with
insurance policies and by an accrual. The value of these policies is
recorded as an asset in the Company's balance sheet.
The deposited funds include profits accumulated up to the balance
sheet date. The deposited funds may be withdrawn only upon the
fulfillment of the obligation pursuant to Israeli severance pay law or
labor agreements. The value of the deposited funds is based on the
cash surrendered value of these policies, and includes immaterial
profits.
Severance pay expenses for the years ended December 31, 2002 and 2003,
amounted to approximately, $ 183 and $ 92, respectively.
- 12 -
SURF-COMMUNICATION SOLUTIONS LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
-------------------------------------------------------------------------------
U.S. DOLLARS IN THOUSANDS
NOTE 2:- SIGNIFICANT ACCOUNTING POLICIES (CONT.)
n. Fair value of financial instruments:
The following methods and assumptions were used by the Company and its
subsidiaries in estimating their fair value disclosures for financial
instruments:
The carrying amounts of cash and cash equivalents, short-term
deposits, trade receivables, other accounts receivable, short-term
loans and trade payables approximate their fair value due to the
short-term maturity of such instruments.
The carrying amount of the Company's long-term borrowing approximates
its fair value. The fair value was estimated using discounted cash
flow analyses, based on the Company's incremental borrowing rates for
similar type of borrowing arrangements.
NOTE 3:- TRADE RECEIVABLES
DECEMBER 31,
-------------------
2002 2003
------ ------
Accounts receivable $ 605 $ 486
Less: allowance for doubtful accounts 130 52
------ ------
$ 475 $ 434
====== ======
NOTE 4:- OTHER ACCOUNTS RECEIVABLE
Government authorities $ 163 $ 186
Prepaid expenses and others 45 43
------ ------
$ 208 $ 229
====== ======
NOTE 5:- PROPERTY AND EQUIPMENT
Cost:
Computers and peripheral equipment $1,735 $1,780
Office furniture and equipment 271 256
Leasehold improvements 180 188
Motor vehicles 22 22
------ ------
2,208 2,246
------ ------
Accumulated depreciation:
Computers and peripheral equipment 1,243 1,577
Office furniture and equipment 64 93
Leasehold improvements 72 91
Motor vehicles 11 14
------ ------
1,390 1,775
------ ------
Depreciated cost $ 818 $ 471
====== ======
- 13 -
SURF-COMMUNICATION SOLUTIONS LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
-------------------------------------------------------------------------------
U.S. DOLLARS IN THOUSANDS
NOTE 6:- ACCRUED EXPENSES AND OTHER LIABILITIES
DECEMBER 31
-------------------
2002 2003
------ ------
Accrued expenses and other liabilities $ 71 $ 336
Employees and payroll accruals 423 421
Deferred revenue 37 207
Provision for warranty costs 78 78
------ ------
$ 609 $1,042
====== ======
NOTE 7:- COMMITMENTS AND CONTINGENT LIABILITIES
a. Lease commitments:
The facilities of the Company and its subsidiaries are rented under
operating leases, for periods ending in 2005. Future minimum lease
commitments under non-cancelable leases for the years ended December
31, are as follows:
2004 209
2005 136
-----
$ 345
=====
Rent expenses for the years ended December 31, 2002 and 2003, amounted
to $ 267 and $ 234, respectively.
b. Guarantees:
The Company purchased bank guarantees in the amount of $ 100 as
security for the rental of its facilities.
c. Royalties:
The Company participated in a program sponsored by the Israeli
Government for the support of research and development activities.
Through December 31, 2003, the Company had obtained a grant from the
Office of the Chief Scientist of the Israeli ministry of Industry and
Trade ("the OCS") aggregating to $ 257 for certain of the Company's
research and development projects. The Company is obligated to pay
royalties to the OCS, amounting to 3-5% of the sales of the products
and other related revenues generated from such projects, up to
100%-150% of the grants received, linked to the U.S. dollars and
bearing interest at the rate of LIBOR. The obligation to pay these
royalties is contingent on actual sales of the products and in the
absence of such sales no payment is required.
- 14 -
SURF-COMMUNICATION SOLUTIONS LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
U.S. DOLLARS IN THOUSANDS (EXCEPT FOR SHARE DATA)
NOTE 8:- SHAREHOLDERS' EQUITY
a. Share capital:
DECEMBER 31, DECEMBER 31
------------------------------------------------------------- ---------------------------
2002 2003 2002 2003
--------------------------- --------------------------- ---------- ----------
ISSUED AND ISSUED AND
AUTHORIZED OUTSTANDING AUTHORIZED OUTSTANDING LIQUIDATION PREFERENCE
---------- ---------- ---------- ---------- ---------------------------
NUMBER OF SHARES U.S. DOLLARS IN THOUSANDS
------------------------------------------------------------- ---------------------------
Shares of NIS 0.01par
value:
Ordinary shares (1) 15,631,286 965,000 15,631,286 1,055,471 $ - $ -
Preferred "A" shares (2) 340,000 336,704 340,000 336,704 3,030 3,030
Preferred "A1" shares (2) 130,000 128,300 130,000 128,300 1,155 1,155
Preferred "B" shares (2) 169,500 169,500 169,500 169,500 250 250
Preferred "B1" shares (2) 18,834 18,834 18,834 18,834 2,250 2,250
Preferred "C" shares (2) 3,710,380 2,646,696 3,710,380 2,646,696 36,377 36,377
---------- ---------- ---------- ---------- ---------- ----------
20,000,000 4,265,034 20,000,000 4,355,505 $ 43,062 $ 43,062
========== ========== ========== ========== ========== ==========
In October 2001, the Company issued 2,428,432 Preferred "C" shares of
NIS 0.01 par value each. 1,655,137 of those shares were fully paid for
net proceeds in the amount of $ 14,488, of which $ 2,580 were received
by conversion of bridge loans. The net proceeds for the remaining
shares in the amount of $ 6,201, including an accumulated interest
rate of $ 142, were accepted in November 2002.
In March 2002, the Company issued additional 218,264 Preferred "C"
shares to new investors for net proceeds of $ 1,817.
The Company granted to the Preferred C investors and previous bridge
loan lender a total of 866,297 warrants to purchase Preferred C shares
at exercise prices between $ 7.33 and $ 9.16 per share, exercisable
until four years from the grant date.
(1) The Ordinary shares confer upon the holders the right to receive
notice to participate and vote in shareholders meetings of the
Company and to receive dividend, if declared.
(2) The Preferred shares ("A", "A1", "B", "B1" and "C") have the same
rights as the Ordinary shares (except for the Preferred "A1" and
"B1" shares, which do not confer voting rights). In addition, the
shares are convertible into Ordinary shares, have an aggregate
preference in liquidation of $ 43,062 as of December 31, 2003 and
2002 and have veto rights in certain matters. The Preferred
shares are convertible, at the holders' option, upon an IPO of
the Company, into Ordinary shares.
- 15 -
SURF-COMMUNICATION SOLUTIONS LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
U.S. DOLLARS IN THOUSANDS (EXCEPT FOR SHARE DATA)
NOTE 8:- SHAREHOLDERS' EQUITY (CONT.)
b. Stock Option Plans:
Under the Company's 1999 and 2003 Stock Option Plans, options may be
granted to officers, directors, employees and consultants of the
Company or its subsidiaries.
The 2003 Employee Stock Option Plan is designed to benefit from, and
is made pursuant to the provisions of Section 102 of the Israeli
Income Tax Ordinance.
As of December 31, 2003, an aggregate of 1,992,737 Ordinary shares of
the Company are still available for future grant.
Each option granted under the Plans is exercisable until ten years
from the grant date. The exercise price of the options granted under
the Plans may not be less than the nominal value of the shares, into
which such options are exercised. Each option granted can be exercised
to one Ordinary share of the Company. The options vest over one to
four years. Any options, which are forfeited or not exercised before
expiration, become available for future grants.
In February 2002, 211,521 previously granted options with exercise
prices ranging from $ 6 to $ 14 were repriced to par value of NIS
0.01, which resulted in a total compensation expense of $ 133, of
which an amount of $ 87 was recognized in 2002 for the portion already
vested, and the remaining amount of $ 46 was deferred to be recognized
over the remaining vesting period ending in 2006.
In July 2003, 175,155 previously granted options with an exercise
price of $ 6 were repriced to par value of NIS 0.01 resulting in a
total compensation expense of $ 108, of which 30 was recognized in
2003 for the portion already vested and $ 78 was deferred to be
recognized over the remaining vesting period ending in 2006.
A summary of the Company's stock option activity and related
information is as follows:
YEAR ENDED DECEMBER 31,
----------------------------------------------------
2002 2003
--------------------- ----------------------
WEIGHTED WEIGHTED
NUMBER AVERAGE NUMBER AVERAGE
OF EXERCISE OF EXERCISE
OPTIONS PRICE OPTIONS PRICE
------- ------ -------- ------
Outstanding at the beginning of
the year 667,139 $ 4.69 837,369 $ 1.93
Granted 237,015 $ 6 779,046 $ -
Exercised - $ - (90,471) $ -
Forfeited (66,785) $ 14 (145,887) $ 2.23
---------- ----------
Outstanding at the end of the year 837,369 $ 1.93 1,380,057 $ 0.15
========== ======= ========== ======
Exercisable options 305,502 $ 0.57 502,838 $ 0.41
========== ======= ========== ======
- 16 -
SURF-COMMUNICATION SOLUTIONS LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
U.S. DOLLARS IN THOUSANDS (EXCEPT FOR SHARE DATA)
NOTE 8:- SHAREHOLDERS' EQUITY (CONT.)
The options outstanding as of December 31, 2003, have been separated
into ranges of exercise price as follows:
OPTIONS WEIGHTED OPTIONS
OUTSTANDING AVERAGE WEIGHTED EXERCISABLE EXERCISE
AS OF REMAINING AVERAGE AS OF PRICE OF
EXERCISE DECEMBER 31, CONTRACTUAL EXERCISE DECEMBER 31, OPTIONS
PRICE 2003 LIFE PRICE 2003 EXERCISABLE
---------- ---------- ---------- ---------- ---------- ----------
$ 0.01-1.36 1,360,457 8 $ 0.03 483,238 $ 0.08
$ 6-9.75 14,100 6 $ 7.33 14,100 $ 7.33
$ 10-14 5,500 5 $ 13.64 5,500 $ 13.64
---------- ----------
1,380,057 502,838
========== ==========
c. Options issued to consultants:
1. The Company's outstanding options to consultants as of December
31, 2002, are as follows:
OPTIONS FOR EXERCISE PRICE OPTIONS
ISSUANCE DATE ORDINARY SHARES PER SHARE EXERCISABLE
------------------------------------- ----------------- ------------------ ----------------
April 1998 22,012 $ 1.36 22,012
====== ======== ======
2. The fair value for these options was estimated using a
Black-Scholes option-pricing model with the following
weighted-average assumptions for 2002 and 2003: risk-free
interest rates of 0%, dividend yields of 0%, volatility factors
of the expected market price of the Company's Ordinary shares of
0 for each year, and a weighted-average expected life of the
options of approximately 4 years.
d. Dividends:
In the event that cash dividends are declared in the future, such
dividends will be paid in NIS. The Company does not intend to pay cash
dividends in the foreseeable future.
NOTE 9:- TAXES ON INCOME
a. Measurement of taxable income under the Income Tax (Inflationary
Adjustments) Law, 1985:
Results for tax purposes are measured in terms of earnings in NIS
after certain adjustments for increases in the Israeli CPI. As
explained in Note 2b, the financial statements are measured in U.S.
dollars. The difference between the annual change in the Israeli CPI
and in the NIS/dollar exchange rate causes a further difference
between taxable income and the income before taxes shown in the
financial statements. In accordance with paragraph 9(f) of SFAS No.
109, the Company has not provided deferred income taxes on the
difference between the reporting currency and the tax bases of assets
and liabilities.
- 17 -
SURF-COMMUNICATION SOLUTIONS LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
U.S. DOLLARS IN THOUSANDS (EXCEPT FOR SHARE DATA)
NOTE 9:- TAXES ON INCOME (CONT.)
b. Tax benefits under the Law for the Encouragement of Capital
Investments, 1959 ("the Law"):
The Company's production facilities were granted the status of
"Approved Enterprise", under the law. According to the provisions of
said law, the Company elected the "alternative benefits" and waived
Government grants, in return for a tax exemption. Income derived from
the "Approved Enterprise" will be tax exempt for a period of ten
years, commencing with the year in which the Company first earns
taxable income. The period of benefits has not yet commenced.
Two expansion projects have been granted "Approved Enterprises" status
under the Law.
The two expansion programs are as follows:
1. In December 1997, the Company received approval for the first
program, which entitles the Company to a ten-year tax exemption
period. The period of benefits for this expansion has not yet
commenced.
2. In July 2001, the Company received approval for the second
program of its "Approved Enterprises". This program entitles the
Company to a ten-year tax exemption period. The period of
benefits for this expansion has not yet commenced.
The entitlement to the above benefits is conditional upon the Company
fulfilling the conditions stipulated by the above law, regulations
published thereunder and the instruments of approval for the specific
investments in "Approved Enterprises". In the event of failure to
comply with these conditions, the benefits may be canceled and the
Company may be required to refund the amount of the benefits, in whole
or in part, including interest. As of December 31, 2003, management
believes that the Company is meeting all of the aforementioned
conditions.
In the event of a distribution of such tax-exempt income as cash
dividend in a manner other than in the complete liquidation of the
Company, the Company will be taxed at the rate of 10% to 25% on the
amount distributed (based on the percentage of foreign ownership in
each taxable year).
The period of tax benefits described above is limited to 12 years from
the commencement of production, or 14 years from date of approval,
whichever is earlier.
Income from sources other than the "Approved Enterprise" will be
taxable at the regular tax rate of 36%.
The Law also allows the Company to claim accelerated depreciation on
machinery and equipment used by the "Approved Enterprise", during five
tax years.
- 18 -
SURF-COMMUNICATION SOLUTIONS LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
U.S. DOLLARS IN THOUSANDS (EXCEPT FOR SHARE DATA)
NOTE 9:- TAXES ON INCOME (CONT.)
c. Tax benefits under the Law for the Encouragement of Industry
(Taxation), 1969:
The Company is qualified as an "industrial company" under the above
law and as such is entitled to certain tax benefits, including
accelerated depreciation and the deduction of public offering expenses
in three equal annual installments.
d. Net operating losses carryforward:
As of December 31, 2003, the Company's operating loss carryforward
amounted to approximately $ 16,235, which can be carried forward and
offset against taxable income in the future for an indefinite period.
As of December 31, 2003, the U.S. subsidiary's operating loss
carryforward amounted to approximately $ 3,789, which can be carried
forward and offset against taxable income for 20 years no later than
2022.
NOTE 10:- SELECTED STATEMENTS OF OPERATIONS DATA
a. Selling and marketing expenses, net:
YEAR ENDED
DECEMBER 31,
----------------------
2002 2003
------- -------
Salaries $ 1,128 $ 856
Advertising 74 47
Other 1,316 583
------- -------
$ 2,518 $ 1,486
======= =======
b. Financial income, net:
Financial expenses:
Interest $ 8 $ 12
Foreign currency remeasurement differences 29 107
------- -------
37 119
------- -------
Financial income:
Interest 84 74
Foreign currency remeasurement differences 23 117
------- -------
107 191
------- -------
$ (70) $ (72)
======= =======
- 19 -
SURF-COMMUNICATION SOLUTIONS LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
U.S. DOLLARS IN THOUSANDS (EXCEPT FOR SHARE DATA)
NOTE 11:- RELATED PARTIES TRANSACTIONS AND BALANCES
The balances with and the revenues derived from related parties were
as follows:
a. Balances with related parties:
YEAR ENDED
DECEMBER 31,
---------------
2002 2003
---- ----
Texas Instruments *) $ 38 $ -
==== ====
b. Revenues from related parties:
YEAR ENDED
DECEMBER 31,
---------------
2002 2003
---- ----
Texas Instruments $ 91 $ -
Motorola Inc. - 51
---- ----
$ 91 $ 51
==== ====
c. Expenses to related parties:
Motorola Inc. $ 11 $ -
==== ====
*) The balance is unlinked and bears no interest.
- 20 -