SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 8-K/A
CURRENT REPORT
Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
Date of Report (Date of earliest event reported): March 31, 2004
--------------
VERINT SYSTEMS INC.
-------------------
(exact name of registrant as specified in its charter)
Delaware 000-49790 11-3200514
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(State or other jurisdiction of (Commission File Number) (IRS Employer
incorporation) Identification No.)
330 South Service Road, Melville, New York 11747-3201
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(Address of principal executive offices) (zip code)
Registrant's Telephone Number, including Area Code: (631) 962-9600
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N/A
(Former name or former address, if changed since last report)
1
ITEM 5. OTHER EVENTS AND REQUIRED FD DISCLOSURE
On March 31, 2004, the Registrant announced the completion of its
acquisition of the Government Surveillance Business of ECtel Ltd. for $35
million in cash (the "Acquisition").
ITEM 7. FINANCIAL STATEMENTS AND EXHIBITS
This Form 8-K/A supplements the Form 8-K filed by the Registrant on March
31, 2004. Pursuant to Item 7 of Form 8-K, all required historical financial
statements of the acquired business and all required pro forma financial
statements are being filed herewith.
The unaudited pro forma condensed combined consolidated financial
information of the Registrant, included in Item 7(b) of this Form 8-K/A, is
based on and should be read in conjunction with, the audited financial
statements and notes thereto appearing in the Registrant's Annual Report on Form
10-K for the fiscal year ended January 31, 2004, ECtel Ltd. Government
Surveillance Business audited financial statements and the notes thereto
included in this Form 8-K/A, and the notes to such unaudited pro forma condensed
combined consolidated financial information. The Registrant's fiscal year ends
on January 31 of each year. The acquired business was operated on a calendar
fiscal year. The unaudited pro forma condensed combined consolidated statement
of operations for the fiscal year ended January 31, 2004 gives effect to the
Acquisition as of the beginning of the period presented, for an aggregate
purchase price of $36.1 million, including approximately $1.1 million of related
direct acquisition costs. Accordingly, the assets acquired and liabilities
assumed in the Acquisition were recorded at their estimated fair values at the
date of the Acquisition. The unaudited pro forma condensed combined consolidated
financial statements have been prepared by the Registrant based upon available
information and certain assumptions that management believes are reasonable in
the circumstances. The unaudited pro forma financial information presented
herein is shown for illustrative purposes only and are not intended to represent
or be indicative of the results of operations or financial condition of the
Registrant that would have been reported had the Acquisition been completed as
of the date or for the periods presented and should not be taken as
representative of the future consolidated results of operations or financial
condition of the Registrant. The Registrant's consolidated statements of
operations will reflect the Acquisition beginning April 1, 2004.
(a) Financial Statements of the Acquired Business.
Page
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1. Report of Independent Auditors
2. ECtel Ltd. Government Surveillance Business Balance Sheet as of December 31, 2003 7
3. ECtel Ltd. Government Surveillance Business Statement of Operations for the Year 10
ended December 31, 2003
4. ECtel Ltd. Government Surveillance Business Statement of Cash Flows for the Year 11
ended December 31, 2003
5. Notes to ECtel Ltd. Government Surveillance Business Financial Statements 12
2
(b) Pro Forma Financial information.
1 Unaudited Pro Forma Condensed Combined Consolidated Balance Sheet as of January 35
31, 2004
2. Unaudited Pro Forma Condensed Combined Consolidated Statement of Operations for 36
the Fiscal Year ended January 31, 2004
3. Notes to Unaudited Pro Forma Condensed Combined Consolidated Financial Statements 37
(c) Exhibits.
Exhibit No. Description
---------- -----------
2.01 Asset Purchase Agreement between Verint Systems Ltd. and
ECtel Ltd. dated as of February 9, 2004. Filed as Exhibit
2.01 to the Registrant's Current Report on Form 8-K filed
March 31, 2004.
23.01 Consent of Somekh Chaikin Certified Public Accountants
(Israel) A member of KPMG International, Independent
Auditors.
99.01 Press release announcing the completion of the acquisition
of certain assets, dated March 31, 2004. Filed as Exhibit 99
to the Registrant's Current Report on Form 8-K filed March
31, 2004.
3
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, as
amended, the Company has duly caused this report to be signed on its behalf by
the undersigned hereunto duly authorized.
VERINT SYSTEMS INC.
(Registrant)
Dated: June 8, 2004 By: /s/ Igal Nissim
------------------------
Name: Igal Nissim
Title: Chief Financial Officer
4
ECTEL LTD.
GOVERNMENT SURVEILLANCE BUSINESS
FINANCIAL STATEMENTS
AS AT DECEMBER 31, 2003
5
ECTEL - THE GOVERNMENT SURVEILLANCE BUSINESS FINANCIAL STATEMENTS AS AT DECEMBER
31, 2003
CONTENTS
PAGE
Report of Independent Auditors 7
The Government Surveillance Business Balance Sheet as at
December 31, 2003 8
The Government Surveillance Business Statement of Operations and Equity for the
year ended December 31, 2003 10
The Government Surveillance Business Statement of Cash Flows for the
year ended December 31, 2003 11
Notes to the Government Surveillance Business Financial Statements 12
6
REPORT OF INDEPENDENT AUDITORS
To the Board of Directors and Shareholders
of ECtel Ltd.
We have audited the accompanying balance sheets of ECtel Ltd. - The Government
Surveillance business ("the business"), as of December 31, 2003 and the related
statements of operations and equity and cash flows for the year ended December
31, 2003. These financial statements are the responsibility of the Company's
Board of Directors and of its management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing standards
in the United States. Such auditing standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by the Board of Directors and 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 aforementioned financial statements present fairly, in all
material respects, the financial position of the business as at December 31,
2003, and the results of operations and equity and changes in cash flows for the
year ended December 31, 2003 in conformity with generally accepted accounting
principles in the United States of America.
Somekh Chaikin
Certified Public Accountants (Israel)
A member of KPMG International
Tel Aviv, March 28, 2004
7
ECtel Ltd.
THE GOVERNMENT SURVEILLANCE BUSINESS BALANCE SHEET AS AT DECEMBER 31, 2003
NOTE IN THOUSANDS
----------- -------------
ASSETS
Current assets
Receivables:
Trade $ 14,455
Other 893
Unbilled receivables 7,175
Inventories 3 2,914
------------
Total current assets 25,437
------------
LONG-TERM DEPOSITS 220
PROPERTY, PLANT AND EQUIPMENT 4
Cost 1,999
Less - accumulated depreciation 583
------------
1,416
------------
OTHER ASSETS 588
------------
TOTAL ASSETS $ 27,661
============
/s/ Avi Goldstein
---------------------------
Avi Goldstein
Chief Financial Officer
Petach Tikva, March 28, 2004
The accompanying notes are an integral part of the financial statements.
8
NOTE IN THOUSANDS
LIABILITIES AND EQUITY ---------- ------------
Current liabilities
Trade payables $ 2,179
Related parties 213
Other payables and accrued liabilities 5,478
------------
Total current liabilities 7,870
------------
LONG-TERM LIABILITIES
Liability for employee severance benefits, net 5 296
------------
TOTAL LIABILITIES 8,166
------------
COMMITMENTS AND CONTINGENCIES 6
EQUITY 7 19,495
------------
TOTAL LIABILITIES AND EQUITY $ 27,661
============
9
ECtel Ltd.
THE GOVERNMENT SURVEILLANCE BUSINESS STATEMENTS OF OPERATIONS AND EQUITY FOR THE
YEAR ENDED DECEMBER 31, 2003
NOTE IN THOUSANDS
----------- ------------
REVENUES $ 12,399
COST OF REVENUES 9,605
------------
GROSS PROFIT 2,794
Research and development costs 4,601
Selling and marketing expenses 2,351
General and administrative expenses 776
------------
OPERATING LOSS (4,934)
Financial expenses (172)
Financial income 254
Other income, net 1
------------
LOSS BEFORE TAXES ON INCOME (4,851)
Taxes on income 8 16
------------
NET LOSS FOR THE YEAR $ (4,867)
Equity balance at December 31, 2002 24,362
------------
EQUITY BALANCE AT DECEMBER 31, 2003 $ 19,495
============
The accompanying notes are an integral part of the financial statements.
10
ECtel Ltd.
THE GOVERNMENT SURVEILLANCE BUSINESS STATEMENTS OF CASH FLOWS FOR THE YEAR ENDED
DECEMBER 31, 2003
CASH FLOWS FROM OPERATING ACTIVITIES IN THOUSANDS
-----------
Net loss for the year $ (4,867)
Adjustments to reconcile net income to cash provided by operating activities:
Depreciation and amortization 469
Increase in deferred tax (40)
Increase in trade receivables (1,450)
Increase in other receivables (124)
Decrease in recoverable costs and estimated earnings - not yet billed 3,724
Increase in inventories (967)
Decrease in long-term receivables 1,928
Decrease in trade payables (887)
Increase in amounts due to related parties 222
Decrease in other payables and accrued liabilities (4,257)
Increase in liability for employee severance benefits, net 76
-----------
NET CASH USED IN OPERATING ACTIVITIES $ (6,173)
CASH FLOWS FROM INVESTING ACTIVITIES
Investment in property, plant and equipment $ (476)
Investment in technology (435)
Long-term deposit funding (16)
Employee severance rights funding (26)
-----------
NET CASH USED IN INVESTING ACTIVITIES $ (953)
-----------
CASH FLOWS FROM FINANCING ACTIVITIES
Cash provided by ECtel $ 7,126
-----------
NET DECREASE IN CASH AND CASH EQUIVALENTS --
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR --
-----------
CASH AND CASH EQUIVALENTS AT END OF YEAR $ --
===========
The accompanying notes are an integral part of the financial statements.
11
ECtel Ltd.
NOTES TO THE GOVERNMENT SURVEILLANCE BUSINESS FINANCIAL STATEMENTS AS AT
DECEMBER 31, 2003
NOTE 1 - GENERAL
ECtel Ltd. and its subsidiaries (hereinafter - "the Company") provides
telecommunication service providers with comprehensive solutions for
their quality of service monitoring, fraud prevention and interconnect
billing needs and provide government agencies and others with
comprehensive solutions for their telecommunication monitoring needs.
The Company is a subsidiary of ECI Telecom Ltd. (hereinafter - the
"parent company" or "ECI") ECI beneficiary owns 58.3% of ECtel's
outstanding shares as at December 31, 2003. The Company was established
and commenced operations in April 1990. In October 1999 the Company
completed an initial public offering of its ordinary shares on the
Nasdaq National Market. See subsequent events, Note 11B.
On February 9, 2004 the Company signed a definitive agreement to sell
its Government Surveillance Business (hereinafter - "the Business") to
Verint Systems Ltd. (hereinafter - "Verint"). According to the terms of
the transaction, the Company will transfer to Verint the Government
Surveillance business comprised of various assets and liabilities.
Set forth below are details of the assets and liabilities of the
Business which will be transferred:
DECEMBER 31
2003
------------
IN THOUSANDS
------------
Assets
Inventories $ 332
Property, plant and equipment, net 1,416
Other assets 589
------------
$ 2,337
============
Liabilities
Other payables $ 541
Liability for employee severance benefits, net 194
------------
$ 735
============
The Business presented in these financial statements is not a separate
legal entity. These financial statements reflect the financial
position, results of operations and equity and cash flows of the
Business as if it was a standalone separate entity for the year 2003.
These financial statements have been prepared using the historical
basis of the assets and liabilities and historical results of
operations related to the Business.
These financial statements have been prepared by specifically
identifying assets, liabilities, revenues and expenses related to the
Business or by allocating certain assets,
12
ECtel Ltd.
NOTES TO THE GOVERNMENT SURVEILLANCE BUSINESS FINANCIAL STATEMENTS AS AT
DECEMBER 31, 2003
liabilities and expenses of ECtel that were incurred on behalf of or
relate to the Business. These allocations are based on ratios that
take into account Business revenue, purchase of material and
components, labor expenses and overhead expenses. Management believes
that these allocations are reasonable, however allocated items would
not necessarily be indicative of the items that would have been
presented if the Business was operating as a stand alone entity.
The Business was able to specifically identify trade receivables,
unbilled receivables, finished and in progress inventory, property,
plant and equipment, commissions payable, product warranty, customer
advances and most of the other payables. Other receivables, long-term
deposits for the benefit of employees and employees social benefits
were allocated based on the ratio of wages allocated to the Business to
total wages of the Company. Stock options and related information
figures were allocated by using the actual number of options
outstanding held by employees dedicated to the Business and for
corporate personnel that are not specific to the Business were
allocated based on the ratio of wages allocated as stated above. Raw
materials were allocated based on the ratio of purchases by the
Business to the purchases of the Company. Other assets (technology) was
estimated by the management to be 50% related to the Business. Trade
and related party payables were allocated based on the ratio of the
purchase of the Business to total purchases of the Company. Interest
was calculated based on the ratio of revenues of the Business to total
revenues of the Company. Taxes were allocated based on the ratio of the
taxable income of the Business to total taxable income of the Company.
Loss for tax purposes for fiscal 2003 was calculated for the Business
based on its operations as presented in these financial statements.
NOTE 2 - SIGNIFICANT ACCOUNTING POLICIES
The financial statements have been prepared in conformity with
generally accepted accounting principles (GAAP) in the United States.
A. FINANCIAL STATEMENTS IN U.S. DOLLARS
The currency of the primary economic environment in which the
operations of the Business conducted is in the U.S. dollar ("dollar").
Most of the Business sales are made outside of Israel - and are made
primarily in dollars. Most purchases of materials and components, as
well as most selling and other expenses incurred outside Israel, are in
dollars. In view of the foregoing, the dollar has been determined to be
the Business functional currency.
Transactions and balances denominated in dollars are presented at their
original amounts. Non-dollar transactions and balances have been
translated into dollars in accordance
13
ECtel Ltd.
NOTES TO THE GOVERNMENT SURVEILLANCE BUSINESS FINANCIAL STATEMENTS AS AT
DECEMBER 31, 2003
with the principles set forth in Statement No. 52 of the Financial
Accounting Standards Board (FASB) of the United States.
All exchange gains and losses resulting from monetary balance sheet
items denominated in non-dollar currencies are reflected in the income
statement when they arise. Such exchange gains and losses are included
in the same income statement items in which the related transactions
are included.
B. INVENTORIES
Inventories are stated at the lower of cost or market. Cost is
determined as follows:
Raw materials (including components) - on the moving average basis.
Work in process and finished products:
Raw materials and components - on the moving average basis. Labor and
overhead components - on the basis of actual manufacturing costs.
C. PROPERTY, PLANT AND EQUIPMENT
1. These assets are stated at cost less accumulated depreciation.
2. Depreciation is computed using the straight-line method, over
the estimated useful life of the assets as estimated by the
Company.
Annual rate of depreciation is as follows:
Machinery and equipment 6% - 20% (principally 20%)
3. Major renewals and improvements are capitalized, while repairs
and maintenance are expensed as incurred.
D. ALLOWANCE FOR DOUBTFUL DEBTS
The Business record allowance for doubtful debts which management
believes reflects adequately the loss inherent in receivables for which
collection is in doubt. In determining the fairness of the allowance
management bases its determination, among other factors, on information
available about the debtor's financial situation, the volume of their
operations and evaluation of the security received from them. No
allowance was recorded in relation to the existing trade receivables.
14
ECtel Ltd.
NOTES TO THE GOVERNMENT SURVEILLANCE BUSINESS FINANCIAL STATEMENTS AS AT
DECEMBER 31, 2003
E. AMORTIZATION OF INTANGIBLE ASSETS
SFAS No. 142 requires that intangible assets with definite useful lives
be amortized over their respective estimated useful lives to their
estimated residual values, and reviewed for impairment in accordance
with Statement of Financial Accounting Standards No. 144, "Accounting
for the Impairment or Disposal of Long-Lived Assets".
Other purchased technology is amortized over its estimated useful life
of five years.
F. REVENUE RECOGNITION
1. Revenue from product sales (which include software) is
recognized, in accordance with SOP 97-2, "Software Revenue
Recognition", upon delivery to customers and when the
following criteria are met: (1) persuasive evidence of an
arrangement exists, (2) delivery has occurred, (3) the
vendor's fee is fixed or determinable and (4) collectibility
is probable.
The Business includes post contract customer support (PCS)
within the price of the product sale. This PCS is for a
one-year period and includes a standard product warranty and
upgrades and enhancements to correct minor bugs or errors in
the software. The cost of providing the PCS is insignificant
and the warranty and bug fixes have been infrequent.
Therefore, the PCS revenue is recognized upon delivery of the
product in accordance with SOP 97-2."
2. In certain cases, when the sale contract includes customer
acceptance provisions with respect to performance guarantees,
i.e. installation, revenue is recognized when the Business has
demonstrated that the criteria specified in the provisions
have been satisfied.
3. Revenue is recognized from the initial sale of a new
technology product only after the customer has notified the
Business of its acceptance. Subsequent sales are recognized as
per paragraphs 1 and 2 above.
4. Revenues from sales involving long-term credit arrangements at
less than normal commercially acceptable interest rates are
recorded at the present value of the related future cash
flows. The difference between the amounts receivable and their
present value is recognized as interest income over the period
of the debt.
5. Service revenues from product maintenance contracts and
separately priced extended warranty contracts are recognized
ratably over the contract period.
15
ECtel Ltd.
NOTES TO THE GOVERNMENT SURVEILLANCE BUSINESS FINANCIAL STATEMENTS AS AT
DECEMBER 31, 2003
6. Long-term contracts are those requiring design, development,
engineering and modification and are of a significantly longer
duration than contracts for system sales. Revenue from
long-term contracts is recognized using the percentage of
completion method, which is in accordance with statement of
position (SOP 81-1). The percentage of completion is
determined as a ratio of accumulated costs incurred (including
materials, labor and overhead) to total estimated costs of the
contract. In the event that management anticipates a loss on a
particular contract, such anticipated loss is provided for in
full in the period when the loss is first anticipated.
7. When a sale involves multiple elements, the Business accounts
for the sale according to the provisions of EITF 00-21,
"Revenue Arrangements with Multiple Deliverables (hereinafter
EITF 00-21). According to EITF 00-21 in an arrangement with
multiple deliverables, the delivered item(s) should be
considered a separate unit of accounting if all of the
following criteria are met: (1) the delivered item(s) has
value to the customer on a standalone basis, (2) there is
objective and reliable evidence of the fair value of the
undelivered item(s), (3) if the arrangement includes a
general right of return, delivery or performance of the
undelivered item(s) is considered probable and substantially
in the control of the vendor. If all the conditions above are
met and there is objective and reliable evidence of fair
value for all units of accounting in an arrangement, the
arrangement consideration should be allocated to the separate
units of accounting based on their relative fair value.
However, there may be cases in which there is objective and
reliable evidence of the fair value(s) of the undelivered
item(s) in an arrangement but no such evidence for one or
more of the delivered items. In those cases, the residual
method should be used to allocate the arrangement
consideration.
G. RESEARCH AND DEVELOPMENT
Research and development costs are charged to the statement of income
as incurred.
Software development costs are expensed as incurred until technological
feasibility has been established, at which time subsequent costs are
capitalized until the product is available for general release to
customers. To date, either the establishment of technological
feasibility of the Company's products and their general release has
substantially coincided or costs incurred subsequent to the achievement
of technological feasibility have not been material. As a result,
software development costs qualifying for capitalization have been
insignificant, and the Business has not capitalized any software
development costs.
16
ECtel Ltd.
NOTES TO THE GOVERNMENT SURVEILLANCE BUSINESS FINANCIAL STATEMENTS AS AT
DECEMBER 31, 2003
H. LIABILITY FOR EMPLOYEE SEVERANCE BENEFITS, NET
The value of deposits for severance pay funds is netted with severance
pay expense accruals (see Note 5).
I. TAXES ON INCOME
The Business accounts for income taxes under Statement of Financial
Accounting Standards (SFAS) No. 109 "Accounting for Income Taxes"
("SFAS 109").
Under SFAS 109 deferred tax assets or liabilities are recognized in
respect of temporary differences between the tax bases of assets and
liabilities and their financial reporting amounts as well as in respect
of tax losses and other deductions which may be deductible for tax
purposes in future years, based on statutory tax rates as these will be
applicable to the periods in which such deferred taxes will be
realized. Deferred tax assets do not include future tax benefits the
realization of which is less than "more likely than not". Valuation
allowances are established when necessary to reduce deferred tax assets
to the amount expected to be realized. Deferred tax assets and
liabilities are presented as current or long-term items in accordance
with the nature of assets or liabilities to which they relate,
according to the date of their realization.
Deferred taxes were not recorded in respect of the following matters -
1. Differences between the rate of change in the Israeli Consumer
Price Index (which serves as a basis for measurement for tax
purposes) and the rate of change in the NIS/US dollar exchange
rate. This is in accordance with SFAS 109. These differences
are not material.
2. Permanent differences between expenses allowable for tax
purposes in respect of stock options to employees and expenses
included in the Statement of Income.
Income tax expense represents the tax payable for the period and the
change during the period in deferred tax assets and liabilities.
J. STOCK OPTION PLANS
Stock option and related information were allocated by using the actual
number of options outstanding held by employees dedicated to the
Business and for corporate personnel that are not specific to the
Business were allocated based on the ratio of wages of the Business to
total wages of the Company. The Business applies the intrinsic
value-based method of accounting prescribed by Accounting Principles
Board ("APB") Opinion No. 25, Accounting for Stock Issued to Employees,
and related interpretations,
17
ECtel Ltd.
NOTES TO THE GOVERNMENT SURVEILLANCE BUSINESS FINANCIAL STATEMENTS AS AT
DECEMBER 31, 2003
in accounting for its fixed plan stock options. As such, compensation
expense is determined on the date of grant only if the current market
price of the underlying stock exceeded the exercise price and amortized
over the vesting period.
In October 1995 the Financial Accounting Standards Board (FASB) issued
SFAS No. 123 "Accounting for Stock-based Compensation" ("SFAS 123")
which establishes financial accounting and reporting standards for
stock-based compensation plans. The statement defines a fair value
based method of accounting for an employee stock option. The Company
adopted the disclosure provisions of SFAS 123 but opted to remain under
the expense recognition provisions of APB 25.
The following table illustrates the effect on net income and earnings
if the Business had applied the fair value recognition provisions of
SFAS 123 (in thousands):
YEAR ENDED
DECEMBER 31
2003
-----------
Net loss as reported $ (4,867)
Less: Application of compensation expenses according to SFAS 123 (898)
-----------
Pro forma net loss $ (5,765)
===========
K. ESTIMATIONS AND ASSUMPTIONS IN THE FINANCIAL STATEMENTS
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the
date of the financial statements and the reported amounts of revenues
and expenses during the reporting period.
These are management's best estimates based on experience and
historical data, however actual results could differ from these
estimates.
L. TRANSFER OF FINANCIAL ASSETS
The Business accounts for transfer of financial assets in accordance
with the provisions of SFAS No. 140 "Accounting for Transfers and
Servicing of Financial Assets". The Standard requires recognizing the
sale of financial instruments when the control over the financial
assets transferred and the consideration from the sale does not include
any beneficial interests in the transferred asset.
18
ECtel Ltd.
NOTES TO THE GOVERNMENT SURVEILLANCE BUSINESS FINANCIAL STATEMENTS AS AT
DECEMBER 31, 2003
M. IMPAIRMENT OF LONG-LIVED ASSETS AND ASSETS TO BE DISPOSED OF
The Business accounts for long-lived assets under the provisions of FAS
No. 144, "Accounting for the Impairment or Disposal of Long-Lived
Assets" (hereinafter SFAS 144). SFAS 144 addresses financial accounting
and reporting for the impairment or disposal of long-lived assets. SFAS
144 requires that long-lived assets be reviewed for impairment 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 future net cash flows expected to be generated by the asset. If the
carrying amount of an asset exceeds its estimated future cash flows, an
impairment charge is recognized by the amount by which the carrying
amount of the asset exceeds the fair value of the asset. SFAS 144
requires companies to separately report discontinued operations and
extends that reporting to a component of an entity that either has been
disposed of (by sale, abandonment, or in a distribution to owners) or
is classified as held for sale.
N. GUARANTOR'S ACCOUNTING AND DISCLOSURE REQUIREMENTS FOR
GUARANTEES, INCLUDING INDIRECT GUARANTEES OF INDEBTEDNESS OF
OTHERS
The Business has adopted the provision of FIN No. 45, "Guarantor's
Accounting and Disclosure Requirements for Guarantees, Including
Indirect Guarantees or Indebtedness of Others" (hereinafter the
Interpretation). The Interpretation requires the guarantor to recognize
a liability for the non-contingent component of the guarantee i.e. the
obligation to stand ready to perform in the event that specific
triggering events or conditions occur. The initial measurement of this
liability is the fair value of the guarantee at inception. The
recognition of the liability is required even if it is not probable
that payments will be required under the guarantee or if the guarantee
was issued with a premium payment or as part of a transaction with
multiple elements. The Business also complies with the disclosure
requirements in the Interpretation in regard to its obligations under
guarantees. These disclosure requirements are included in Note 6B to
the Government Surveillance business financial statements.
NOTE 3 - INVENTORIES
Inventories consist of the following (in thousands):
DECEMBER 31
2003
============
Raw materials and components $ 1,877
Work in process 746
Finished products 291
------------
$ 2,914
============
19
ECtel Ltd.
NOTES TO THE GOVERNMENT SURVEILLANCE BUSINESS FINANCIAL STATEMENTS AS AT
DECEMBER 31, 2003
NOTE 4 - PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consists of the following (in thousands):
MACHINERY
AND
EQUIPMENT
---------
COST
Balance at January 1, 2003 $ 1,486
Additions 513
Disposals --
---------
BALANCE AT DECEMBER 31, 2003 1,999
---------
ACCUMULATED DEPRECIATION
Balance at January 1, 2003 $ 342
Additions 241
Disposals --
---------
BALANCE AT DECEMBER 31, 2003 583
---------
UNDEPRECIATED BALANCE AT December 31, 2003 $ 1,416
=========
NOTE 5 - LIABILITY FOR EMPLOYEE SEVERANCE BENEFITS, NET
Under Israeli law and labor agreements, Israeli companies are required
to make severance and pension payments to its retired or dismissed
employees and to employees leaving employment in certain other
circumstances.
1. The liability in respect of the relevant employees is
discharged by participating in a defined contribution pension
plan and making regular deposits with a pension fund. The
custody and management of the amounts so deposited is
independent of any control by the Israeli companies and
accordingly such amounts funded (included in expenses on an
accrual basis) and related liabilities are not reflected in
the balance sheet.
2. In respect of the liability to other employees, individual
insurance policies are purchased and deposits are made with
recognized severance pay funds.
The liability for severance pay is calculated on the basis of
the latest salary paid to each employee multiplied by the
number of years of employment. The
20
ECtel Ltd.
NOTES TO THE GOVERNMENT SURVEILLANCE BUSINESS FINANCIAL STATEMENTS AS AT
DECEMBER 31, 2003
liability is covered by the amounts deposited including
accumulated income thereon as well as by the unfunded
provision. Withdrawals from the funds may be made only for the
purpose of disbursement of severance pay.
3. Expenses recorded in respect of severance and pension pay for
the year ended December 31, 2003 are $ 150,000.
NOTE 6 - COMMITMENTS AND CONTINGENCIES
A. LEASE COMMITMENTS
The Business has entered into operating leases (in respect of premises
and motor vehicles) in Israel. The agreements expire on various dates
from 2004 to 2007 (some have renewal options) and are in local
currencies or linked to the US dollar.
Future minimum annual rental payments which the Business is committed
to pay under the above leases, at rates in effect at December 31, 2003,
are as follows (in thousands):
YEAR ENDING DECEMBER 31:
------------------------
2004 $ 667
2005 $ 372
2006 $ 278
2007 $ 1
B. GUARANTEES
At December 31, 2003, the Business has granted guarantees to third
parties in the sum of $3 million mainly as performance guarantees that
can be demanded in case of material breach of contracts. The expiration
dates of the guarantees are from January 2004 through February 2006.
C. NEGATIVE PLEDGE
In September 2002, the Company executed a negative pledge to an Israeli
Bank in which it undertook not to perform the following without the
Bank's prior written consent:
(1) Mortgage, or undertake to mortgage, in any manner or form, any
of its assets;
21
ECtel Ltd.
NOTES TO THE GOVERNMENT SURVEILLANCE BUSINESS FINANCIAL STATEMENTS AS AT
DECEMBER 31, 2003
(2) Sell assets (other than in the ordinary course of business)
the value of which exceed $1 million in the aggregate. On the
basis of the above mentioned negative pledge, the Bank has
agreed to grant various credit facilities to the Company. As
of December 31, 2003, the bank has granted the Company credit
facilities of approximately $ 2,500 thousand for guarantees
the Company has granted to third parties.
The Company received a waiver from the bank to sell the
Business.
NOTE 7 - EQUITY
SHARE INCENTIVE AND STOCK OPTION PLANS
Employees of the Business participate in stock-based compensation plans
that are administered through the Company and involve options to
acquire the Company shares. Accordingly, option information presented
herein represents the Business's portion of the overall plans.
1. The Company has few current share incentive and stock option plans -
1.a The Company's Share Option Plan (the "ECtel Plan")
was adopted by the Board of Directors on June 15,
1998.
The ECtel Plan provides that options may be granted
to senior employees or managers of the Company or its
subsidiary pursuant to (a) one or more sub-plans
designed to benefit Israeli employees from the
provisions of Section 102 of the Israeli Income Tax
Ordinance (New Version) 1961 and (b) any other share
incentive plan approved by the Board of Directors of
the Company.
The Board of Directors initially authorized the
Company to grant options under the ECtel Plan. The
option awards are personal and non-assignable and
terminate automatically upon termination of
employment (except for approved retirement or
termination caused by death or disability). The
vesting for these options is in three equal annual
installments commencing two years after the date of
grant.
In November 1998 and May 1999, the Company granted to
employees options to purchase ordinary shares.
The exercise price per share under the option awards
was determined based on factors considered by the
Board of Directors. The exercise price per share for
these stock options is $ 1.04 per share.
22
ECtel Ltd.
NOTES TO THE GOVERNMENT SURVEILLANCE BUSINESS FINANCIAL STATEMENTS AS AT
DECEMBER 31, 2003
1.b In September 1999, the Company granted to employees
options to purchase ordinary shares. The exercise
price is $ 4.66 per share. These options vest in
three equal annual installments commencing September
2001.
1.c In May 2000, the Board of Directors amended the ECtel
Plan (the "Amended Plan") and authorized the Company
to grant to employees additional options. In May
2000, the Company granted to employees options. The
exercise price is $ 15.75 per share. These options
vest in two equal annual installments commencing at
May 2002.
1.d In January 2001, the Board of Directors authorized,
under the above plans, the grant of options to
employees. In January 2001, the Company granted
options to employees. The exercise price is $ 8.82
per share. These options vest in two equal annual
installments commencing at January 2002.
1.e In October 2001, the Board of Directors authorized,
under the above plans, the grant of options to
employees. In October 2001, the Company granted
options to employees. The exercise price is $ 11.55
per share. The options vest in two equal annual
installments commencing October 2002.
1.f In October 2002, the Board of Directors authorized,
under the, above plans, the grant of options to
employees. In October 2002, the Company granted
options to employees. The exercise price is $ 7.9 per
share. These options vest in three equal annual
installments, commencing in October 2003.
1.g In August 2003 the Board of Directors authorized a
new share option plan. Under said 2003 plan, in
December 2003, the Company granted options to
employees. The exercise price for said options is $
4.67 per share. These options vest over three years
in twelve equal quarterly installments, commencing on
various dates from March 2003 to May 2003.
2. Stock options under all the share incentive and option plans
as allocated to the Business as described in Note 1 are as follows:
23
ECtel Ltd.
NOTES TO THE GOVERNMENT SURVEILLANCE BUSINESS FINANCIAL STATEMENTS AS AT
DECEMBER 31, 2003
YEAR ENDED
DECEMBER 31, 2003
-----------------
NUMBER OF
SHARES
-----------------
Balance outstanding at beginning of year 1,061,282
Changes during the year:
Granted 34,800
Exercised (22,556)
Forfeited (36,905)
-----------------
Balance outstanding at end of year 1,036,621
=================
WEIGHTED DECEMBER 31, 2003
AVERAGE -----------------
EXERCISE PRICE NUMBER OF
PER SHARE SHARES
-------------- -----------------
Options may be exercised as follows:
First year or thereafter $ 8.71 926,556
Second year or thereafter $ 7.52 102,508
Third year or thereafter $ 4.67 7,557
-----------------
1,036,621
=================
Shares covered by unexercised options have no voting rights or rights
to cash dividends.
3. In October 1995 the Financial Accounting Standards Board issued
SFAS 123 "Accounting for Stock Based Compensation" which
establishes financial accounting and reporting standards for
stock-based compensation plans. The statement defines a fair value
based method of accounting for an employee stock option.
In 1998, following the adoption of the ECtel Plan, the Company
adopted the disclosure provisions of SFAS 123 but opted to remain
under the expense recognition provisions of "Accounting for Stock
Issued to Employees" in accordance with the methods prescribed by
APB 25.
As required by SFAS 123 the Company has determined the fair value
of stock-based arrangements as follows:
24
ECtel Ltd.
NOTES TO THE GOVERNMENT SURVEILLANCE BUSINESS FINANCIAL STATEMENTS AS AT
DECEMBER 31, 2003
FAIR MARKET VALUE
-----------------
GRANT $
----------------- -----------------
1998 3.57
May 1999 8.54
September 1999 9.59
2000 12.32
January 2001 4.81
October 2001 5.60
2002 5.93
2003 1.85
The fair values of stock-based compensation awards granted were
estimated using the "Black-Scholes" pricing model with the
following assumptions:
EXPECTED EXPECTED RISK FREE
YEAR OF GRANT DIVIDEND OPTION LIFE VOLATILITY INTEREST RATE
------------- -------- ----------- ---------- -------------
1998 -- 4 0% 6.0%
1999 -- 4 0% 6.0%
1999 -- 4 112.9% 6.0%
2000 -- 3 101.3% 6.5%
January 2001 -- 2 99.75% 5.5%
October 2001 -- 2 88.63% 3.0%
2002 -- 3 66.64% 3.0%
2003 -- 3 29.95% 1%
Had compensation expenses for stock options granted under the
ECtel Plans been determined based on fair value at the grant dates
consistent with SFAS 123 requirements, the Business's net loss
would have been reduced to the pro forma amounts shown below:
YEAR ENDED
DECEMBER 31
2003
------------
Net loss (in thousands)
As reported $ (4,867)
Less: Application of compensation expenses according to SFAS 123 (898)
------------
Pro forma net loss $ (5,765)
============
25
ECtel Ltd.
NOTES TO THE GOVERNMENT SURVEILLANCE BUSINESS FINANCIAL STATEMENTS AS AT
DECEMBER 31, 2003
NOTE 8 - TAXES ON INCOME
A. TAX PROGRAMS UNDER VARIOUS ISRAELI TAX LAWS:
1. Tax benefits under the Law for the Encouragement of
Capital Investments, 1959.
Pursuant to the above Law the Company and the Business as
apart of it, are entitled to tax benefits relating to
investments in "Approved Enterprises" in accordance with
letters of approval received.
A major part of the production facilities of the Company has
been granted the status of an "Approved Enterprise" under the
above Law. Income arising from the Company's "Approved
Enterprise" is subject to zero tax rates under the
"Alternative Benefit Method" and reduced tax rates based on
the level of direct or indirect foreign ownership, for
specified periods.
The period of benefits in respect of most of the Company's
production facilities will terminate in the years 2000 - 2014.
The Company's current investments in development facilities
are made under new approvals.
At December 31, 2003, approximately 45% of the cost of the
Company's production facilities represented approved
enterprise facilities.
In the event of distribution by the Company of a cash dividend
out of retained earnings which were taxed at zero rate due to
the "Approved Enterprise" status, the Company would be
subjected to 20% corporate tax on the amount distributed, and
the recipients would have to pay 15% tax (to be withheld at
source) on the amounts of such distribution received by them.
The Company has not recorded a deferred tax provision in
respect of the above, as there is no intention to pay a
dividend in the foreseeable future and, in any event, there is
a tax strategy available whereby a distribution in liquidation
will not create additional taxes for the Company.
2. Measurement of results for tax purposes under the Income Tax
Law (Inflationary Adjustments), 1985.
Under this law, operating results for tax purposes are
measured in real terms, in accordance with the changes in the
Israeli CPI, or changes in the exchange rate of the dollar -
for a "Foreign Investors' Company", as defined by the Law for
the Encouragement of Capital Investments, 1959. The Company
elected to measure its operating results on the basis of the
changes in the Israeli CPI. As a result, the
26
ECtel Ltd.
NOTES TO THE GOVERNMENT SURVEILLANCE BUSINESS FINANCIAL STATEMENTS AS AT
DECEMBER 31, 2003
Company is entitled to deduct from its taxable income an
"Inflation deduction" (which partially compensates for the
decrease in the value of shareholders' equity resulting from
the annual rise in the Israeli CPI).
3. Tax benefits under the Law for the Encouragement of
Industry (Taxation), 1969.
The Company is an "Industrial Company" as defined by this Law,
and as such is entitled, among other benefits, to claim
accelerated depreciation of machinery and equipment as
prescribed by regulations issued under the inflationary
adjustments tax law.
4. Tax rates applicable to income from other sources in Israel.
Income not eligible for "Approved Enterprise" benefits as
mentioned above is taxed at the ordinary tax rate of 36%.
B. TAXES ON INCOME
Taxes on income (tax benefit) included in the Government Surveillance
Business statements of income are comprised as follows (in thousands):
YEAR ENDED
DECEMBER 31
2003
-----------
Current and previous years taxes $ 56
Deferred taxes (40)
-----------
$ 16
===========
C. RECONCILIATION OF THE STATUTORY TAX EXPENSE TO ACTUAL TAX
EXPENSE
A reconciliation of the statutory tax expense, assuming all income is
taxed at the statutory rate (see A4 above) applicable to the income of
companies in Israel, and the actual tax expense is as follows (in
thousands):
27
ECtel Ltd.
NOTES TO THE GOVERNMENT SURVEILLANCE BUSINESS FINANCIAL STATEMENTS AS AT
DECEMBER 31, 2003
YEAR ENDED
DECEMBER 31
2003
-----------
Income (loss) from continuing operations before taxes on income, as reported
in the consolidated statements of income $ (4,851)
===========
Theoretical tax on the above amount (36%) (1,746)
Tax benefit arising from the "Approved Enterprise" 1,303
Differences for which deferred taxes were not recorded 1,046
Taxes in respect of prior years for which deferred taxes were not recorded 19
Adjustments arising from differences in the basis of measurement for tax
purposes and for financial reporting purposes and other* (606)
-----------
Taxes on income for the reported year $ 16
===========
* Resulting from the difference between the changes in the Israeli
CPI (the basis for computation of taxable income of the Company -
(see A2 above) and the changes in the exchange rate of Israeli
currency relative to the dollar.
D. COMPONENTS OF DEFERRED INCOME TAX
The Business has decided to recognize deferred tax benefits based on
the Business' history and management's expectation that future taxable
earnings will be achieved. A valuation allowance has been made for
certain deferred tax assets of the Business and subsidiary companies,
where management believes that it is more likely than not that a
portion of the deferred tax assets will not be realized.
The increase in valuation allowance is mainly because of operating loss
from 2003.
(1) Deferred income tax consists of future tax assets attributable
to the following (in thousands):
28
ECtel Ltd.
NOTES TO THE GOVERNMENT SURVEILLANCE BUSINESS FINANCIAL STATEMENTS AS AT
DECEMBER 31, 2003
DECEMBER 31
2003
-----------
CURRENT DEFERRED TAX BENEFIT
Vacation pay accruals $ 108
Allowance for doubtful debts 840
Research and development costs 256
-----------
Gross current deferred tax benefit 1,204
Less - valuation allowance (601)
-----------
Net current deferred tax benefit* $ 603
===========
LONG TERM DEFERRED TAX BENEFIT
Liability for employee severance benefits $ 36
Operating and capital loss carry forwards 1,387
Fixed assets 75
Research and development costs 256
Others 21
-----------
Gross long term deferred tax benefit 1,775
Less - valuation allowance (1,775)
-----------
Net long-term deferred tax benefit --
===========
Total net deferred tax benefit $ 603
===========
* This item is included in "other receivables" in the Business balance sheets.
E. TAX ASSESSMENTS
Final tax assessments have been received by the Israeli company through
the 1992 tax year. In accordance with the provisions of the Income Tax
Ordinance tax returns submitted up to and including the 1997 tax year
can be regarded as final. The Company has received tax assessments for
the years 1999 to 2001 and is in process of appealing these
assessments. The amounts of tax in dispute are approximately $ 2
million, part of which relate to temporary differences. The Company has
made a provision, which in opinion of management is adequate.
No final tax assessments have been received by the Subsidiary Companies
since inception. Tax returns filed up to and including the 1997 tax
year for the U.S. subsidiary can be regarded as final.
29
ECtel Ltd.
NOTES TO THE GOVERNMENT SURVEILLANCE BUSINESS FINANCIAL STATEMENTS AS AT
DECEMBER 31, 2003
The Business has a tax loss carryforward of approximately $ 6.9 million
which can be carried forward indefinitely.
F. ISRAEL TAX REFORM WITH EFFECT FROM JANUARY 1, 2003
During the year 2002, tax reform legislation was enacted with effect
from January 1, 2003, which significantly changed the taxation basis of
corporate and individual taxpayers from a territorial basis to a
worldwide basis. From such date an Israel resident taxpayer will be
taxed on income produced and derived both in and out of Israel. The
main provisions of the tax reform that may affect the Business are as
follows:
1. Transfer pricing of international transactions with related parties.
The Income Tax Ordinance was amended to include provisions concerning
transfer pricing between related parties, where one of the parties is
situated abroad. Detailed provisions are to be included in Income Tax
Regulations that have yet to be issued. Although the Business believes
that the transfer pricing policy adopted with foreign affiliates is
economically fair, an adjustment may be required following the issue of
the said Regulations.
2. Employee stock incentive plans.
The tax reform codified past practice and determined three alternative
tracks for taxing employee stock option plans. Where a trustee
arrangement is in place, the employer can either claim an expense for
tax purposes while the employee will be fully taxed up to the maximum
marginal tax rate of 50% or the Business can waive the tax expense and
the employee will pay a reduced tax rate of 25%. Where there is no
trustee arrangement, the employee is fully taxable and no expense is
allowed to the Business. There are detailed provisions for implementing
these tracks. The Business is considering the alternatives.
3. Capital gains tax is reduced to 25% from 36%, except with respect to
capital gains from marketable securities, with transitional provisions
for assets acquired prior to January 1, 2003.
4. The seven year limit for carrying forward of capital losses has been
removed with respect to capital losses arising from 1996 and
thereafter.
30
ECtel Ltd.
NOTES TO THE GOVERNMENT SURVEILLANCE BUSINESS FINANCIAL STATEMENTS AS AT
DECEMBER 31, 2003
NOTE 9 - RELATED PARTY TRANSACTIONS
A. Related parties are comprised of principal shareholders (10%
or more of the Business share capital) and their subsidiaries
and affiliates as well as other affiliates of the Business.
Transactions with related parties are mainly comprised of
sales of some of the Business products and purchases from
related parties in respect of cost of sales.
All transactions with related parties were in the ordinary
course of business and at terms identical to those applied to
transactions with other customers or suppliers.
B. THE COMPANY HAD VARIOUS AGREEMENTS WITH ECI DURING THE YEARS
2000 TO 2003. THE AGREEMENTS EFFECTIVE TO THE BUSINESS
THROUGHOUT 2003 ARE AS FOLLOWS:
1. An administrative services agreement, for various services
including inter alia, insurance (including D&O insurance),
security and limited human resources related services,
maintenance, catering and transportation services and general
and administrative services (all mainly through third party
providers) as well intellectual property services. For the
performance of each service the Business pays ECI amounts
agreed upon therein.
2. A supply agreement, (which was originally for a 5-year term,
from October 1999, with automatic renewal for an additional 5
years, unless the Business terminates, upon six months prior
notice), in which payments to ECI are in accordance with
agreed pricing.
C. BALANCES AND TRANSACTIONS WITH RELATED PARTIES
DECEMBER 31
2003
------------
LIABILITIES (IN THOUSANDS)
Trade payables $ 183
Other 30
YEAR ENDED
DECEMBER 31
2003
------------
INCOME FROM AND EXPENSES TO RELATED PARTIES
Sales $ 37
Purchases from related parties 1,440
Research and development costs, net 100
Sales and marketing expenses 72
Financial expenses 20
31
ECtel Ltd.
NOTES TO THE GOVERNMENT SURVEILLANCE BUSINESS FINANCIAL STATEMENTS AS AT
DECEMBER 31, 2003
NOTE 10 - RECENTLY ENACTED ACCOUNTING STANDARDS
A. FASB STATEMENT NO. 149, AMENDMENT OF STATEMENT 133 ON
DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES - SAB 74
DISCLOSURE
On April 30, 2003, the FASB issued FASB Statement No. 149, "Amendment
of Statement 133 on Derivative Instruments and Hedging Activities,
which amends FASB Statement No. 133, "Accounting for Derivative
instruments and Hedging Activities", to address (1) decisions reached
by the Derivatives Implementation Group, (2) developments in other
Board projects that address financial instruments, and (3)
implementation issues related to the definition of a derivative.
Statement 149 has multiple effective date provisions depending on the
nature of the amendment to Statement 133. The adoption of SFAS 149 has
no effect on the Business financial statements.
B. FASB STATEMENT NO. 150, ACCOUNTING FOR CERTAIN FINANCIAL
INSTRUMENTS WITH CHARACTERISTICS OF BOTH LIABILITIES AND
EQUITY
On May 15, 2003, the FASB issued FASB Statement No. 150, "Accounting
for Certain Financial Instruments with Characteristics of both
Liabilities and Equity". This Statement established standards for how
an issuer classifies and measures certain financial instruments with
characteristics of both liabilities and equity. It requires that an
issuer classify a financial instrument that is within its scope as a
liability (or an asset in some circumstances). Many of those
instruments were previously classified as equity. This Statement is
effective for financial instruments entered into or modified after May
31, 2003, and otherwise is effective at the beginning of the first
interim period beginning after June 15, 2003, except for mandatory
redeemable financial instruments of nonpublic entities. It is to be
implemented by reporting the cumulative effect of a change in an
accounting principle for financial instruments created before the
issuance date of the Statement and still existing at the beginning of
the interim period of adoption. Restatement is not permitted. For
nonpublic entities, mandatory redeemable financial instruments are
subject to the provisions of this Statement for the first fiscal period
beginning after December 15, 2003. The adoption of FASB 150 will not
have an impact on the Business financial statements.
C. FASB INTERPRETATION NO. 46, CONSOLIDATION OF VARIABLE INTEREST
ENTITIES
In January 2003, the FASB issued FASB Interpretation No. 46,
"Consolidation of Variable Interest Entities" ("FIN 46"). FIN 46
clarifies the application of Accounting Research Bulletin No. 51,
Government segment Financial Statements ("ARB 51"), to certain entities
in which equity investors do not have the characteristics of a
controlling financial interest or do not have sufficient equity at risk
for the entity to finance its activities without additional
subordinated financial support from other parties. ARB 51 requires that
an
32
ECtel Ltd.
NOTES TO THE GOVERNMENT SURVEILLANCE BUSINESS FINANCIAL STATEMENTS AS AT
DECEMBER 31, 2003
enterprise's Government segment financial statements include
subsidiaries in which the enterprise has a controlling financial
interest. That requirement usually has been applied to subsidiaries in
which an enterprise has a majority voting interest. The voting interest
approach is not effective in identifying controlling financial
interests in entities that are not controllable through voting interest
or in which the equity investors do not bear the residual economic
risk. FIN 46 explains how to identify variable interest entities and
how an enterprise assesses its interests in a variable interest entity
to decide whether it is its primary beneficiary and therefore is
required to consolidate that entity. FIN 46 also addresses the initial
valuation of the assets and liabilities to be Business, the treatment
of any gain or loss resulting from the initial measurement and
disclosures requirements for the primary beneficiary.
All entities with variable interest in variable interest entities
created after January 31, 2003 shall apply the provisions of FIN 46
immediately. Public entities with a variable interest in variable
interest entities created before February 1, 2003 shall apply the
provisions of this Interpretation no later than the first interim or
annual reporting period beginning after December 15, 2003. On December
24, 2003, FASB issued an Interpretation which clarified and modified
FASB Interpretation No. 46. The Company is in the process of analyzing
FIN 46, as modified.
NOTE 11 - SUBSEQUENT EVENTS
A. In January 2004, the Company received resignation from its Chief
Executive Officer ("CEO") Aharon Shech, starting February 2004.
The Company appointed Eitan Naor as its new President and CEO.
B. On March 9 2004, the Board of Directors of ECI decided, in
principle, that ECI will distribute 7.6 million of its shares in
ECtel Ltd. to ECI's shareholders. ECI currently holds
approximately 10.5 million, or 58%, of ECtel's shares. After
distribution of the shares, ECI will hold approximately 16% of
ECtel's outstanding shares. The distribution of the shares is
subject to approval by the Tel Aviv District Court, the consent of
ECI's banks and a ruling from the tax authorities. The Board
intends to declare the distribution and fix the record date when
these approvals are obtained.
33
VERINT SYSTEMS INC.
UNAUDITED PRO FORMA
CONDENSED COMBINED CONSOLIDATED FINANCIAL STATEMENTS
The unaudited pro forma condensed combined consolidated financial statements
presented below are derived from the historical consolidated financial
statements of each of Verint Systems Inc. (collectively with its subsidiaries,
the "Company") and ECtel Ltd. Government Surveillance Business ("ECtel"). The
unaudited pro forma condensed combined consolidated financial statements are
prepared using the purchase method of accounting, with the Company treated as
the acquirer and as if the ECtel acquisition had been completed as of the
beginning of the period presented for the statement of operations purposes and
as of January 31, 2004 for balance sheet purposes.
The unaudited pro forma condensed combined consolidated financial statements
should be read in conjunction with the Company's Annual Report on Form 10-K,
ECtel Ltd. Government Surveillance Business audited financial statements, and
the notes thereto, included in this form 8-K, and the notes accompanying the
unaudited pro forma condensed combined consolidated financial statements. The
unaudited pro forma condensed combined consolidated financial statements are
provided for illustrative purposes only and do not purport to represent or be
indicative of the results of operations or financial condition of the Registrant
that would have been reported had the Acquisition been completed as of the date
or for the periods presented and should not be taken as representative of the
future consolidated results of operations or financial condition of the
Registrant. The Registrant's consolidated statements of operations will reflect
the Acquisition beginning April 1, 2004.
The unaudited pro forma condensed combined consolidated financial statements do
not include the realization of any cost savings from operating efficiencies,
synergies or other restructuring from the ECtel acquisition.
34
VERINT SYSTEMS INC. AND SUBSIDIARIES
UNAUDITED PRO FORMA CONDENSED COMBINED CONSOLIDATED BALANCE SHEET
JANUARY 31, 2004
(IN THOUSANDS, EXCEPT SHARE DATA)
VERINT ECTEL PRO FORMA
------------ ------------- -------------------------------
JANUARY 31, DECEMBER 31,
2004 2003 ADJUSTMENTS COMBINED
------------ ------------- ----------- ------------
ASSETS
------
CURRENT ASSETS:
Cash and cash equivalents $ 200,716 $ -- $ (35,000) (C) $ 165,716
Short-term investments 27,997 27,997
Accounts receivable, net 33,654 14,455 (14,455) (A) 33,654
Unbilled receivables 7,175 (7,175) (A) --
Inventories, net 15,833 2,914 (2,582) (A) 15,833
(332) (B)
Prepaid expenses and other current assets 6,007 893 (893) (A) 6,007
------------ ------------- ----------- ------------
TOTAL CURRENT ASSETS 284,207 25,437 (60,437) 249,207
PROPERTY AND EQUIPMENT, net 14,129 1,416 332 (B) 15,546
(331) (C)
INTANGIBLE ASSETS 16,415 588 34,189 (C) 49,711
(1,481) (D)
OTHER ASSETS 13,955 220 (220) (A) 13,955
------------ ------------- ----------- ------------
TOTAL ASSETS $ 328,706 $ 27,661 $ (27,948) $328,419
============ ============= =========== ============
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
CURRENT LIABILITIES:
Accounts payable and accrued expenses $ 50,301 $ 7,870 $ (7,330) (A) $ 53,850
1,067 (C)
1,942 (C)
Convertible note 2,200 -- 2,200
Current maturities of long-term bank loan 441 -- 441
Advance payments from customers 26,701 -- 26,701
------------ ------------- ----------- ------------
TOTAL CURRENT LIABILITIES 79,643 7,870 (4,321) 83,192
LONG-TERM LIABILITIES 4,395 296 (102) (A) 5,194
-- -- 605 (C)
------------ ------------- ----------- ------------
TOTAL LIABILITIES 84,038 8,166 (3,818) 88,386
STOCKHOLDERS' EQUITY 244,668 19,495 (17,893) (A) 240,033
(3,154) (C)
(1,602) (C)
-- -- (1,481) (D) --
------------ ------------- ----------- ------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 328,706 $ 27,661 $ (27,948) $ 328,419
============ ============= =========== ============
The accompanying notes are an integral part of these financial statements.
35
VERINT SYSTEMS INC. AND SUBSIDIARIES
UNAUDITED PRO FORMA CONDENSED COMBINED CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED JANUARY 31, 2004
(IN THOUSANDS, EXCEPT PER SHARE DATA)
VERINT ECTEL PRO FORMA
JANUARY 31, DECEMBER 31, ------------------------------
2004 2003 ADJUSTMENTS COMBINED
------------ ------------ ----------- ------------
Sales $ 192,744 $ 12,399 $ $ 205,143
Cost of sales 89,302 9,605 1,659 (E) 100,566
------------ ------------- ------------ ------------
Gross profit 103,442 2,794 (1,659) 104,577
------------ ------------- ----------- ------------
Operating expenses:
Research and development, net 23,233 4,601 27,834
Selling, general and administrative 63,020 3,127 499 (E) 66,646
------------ ------------- ----------- ------------
Income (loss) from operations 17,189 (4,934) (2,158) 10,097
------------ ------------- ----------- ------------
Interest and other income, net 2,670 83 (385) (F) 2,368
------------ ------------- ----------- ------------
Income (loss) before income tax provision 19,859 (4,851) (2,543) 12,465
Income tax provision 1,921 16 (815) (G) 1,122
------------ ------------- ----------- ------------
Net income (loss) $ 17,938 $ (4,867) $ (1,728) $ 11,343
============ ============= ============ ============
Earning per share:
Basic $ 0.65 $ 0.41
============ ============
Diluted $ 0.61 $ 0.39
============ ============
Weighted average shares:
Basic 27,690 27,690
============ ============
Diluted 29,437 29,437
============ ============
The accompanying notes are an integral part of these financial statements.
36
VERINT SYSTEMS INC. AND SUBSIDIARIES
NOTES TO UNAUDITED PRO FORMA CONDENSED COMBINED CONSOLIDATED
FINANCIAL STATEMENTS
1. BASIS OF PRO FORMA PRESENTATION
On March 31, 2004, the Company acquired certain assets and assumed
certain liabilities of the government surveillance business of ECtel
Ltd. ("ECtel"). The purchase price consisted of $35 million. In
connection with this acquisition, the Company incurred transaction
costs, consisting primarily of professional fees, amounting to
approximately $1,067,000. The acquisition was accounted for using the
purchase method.
The combining companies have different year-ends for reporting
purposes. Verint's fiscal year end is January 31, whereas ECtel's
fiscal year end is December 31. The unaudited pro forma combined
balance sheet at January 31, 2004 combines Verint's balance sheet as at
January 31, 2004 and ECtel's balance sheet as at December 31, 2003, as
if the acquisition had been consummated on January 31, 2004. The pro
forma unaudited statement of operations for the year ended January 31,
2004 combines Verint's statement of operations for the year ended
January 31, 2004 and ECtel's statement of operations for the year ended
December 31, 2003, as if the acquisition occurred at the beginning of
the reporting period.
2. PRELIMINARY PURCHASE PRICE ALLOCATION
The purchase price was allocated to the assets and liabilities of ECtel
based on the estimated fair value of those assets and liabilities as of
March 31, 2004. Identifiable intangible assets consist of sales
backlog, acquired technology, customer relationships, in-process
research and development and non-competition agreements and have an
estimated useful life of up to ten years. In accordance with SFAS 142,
goodwill will not be amortized and will be tested for impairment
periodically. The following is a summary of the allocation of the
purchase price for this acquisition:
(IN THOUSANDS)
Purchase price $ 35,000
Acquisition costs 1,067
-------------
Total purchase price $ 36,067
=============
Fair value of assets acquired $ 1,417
Fair value of liabilities assumed (3,282)
Identifiable intangible assets 9,764
In-process research and development 3,154
Goodwill 25,014
-------------
Total consideration $ 36,067
=============
37
Purchased in-process research and development represents the value assigned
to research and development projects of the acquired business that were
commenced but not completed at the date of acquisition, for which
technological feasibility had not been established and which have no
alternative future use in research and development activities or otherwise.
In accordance with Statement of Financial Accounting Standards No. 2,
"Accounting for Research and Development Costs," as interpreted by FASB
Interpretation No. 4, amounts assigned to purchased in-process research and
development meeting the above criteria must be charged to expense at the
acquisition date. At the acquisition date, it was estimated that the
purchased in-process research and development was approximately 40%
complete and it was expected that the remaining 60% would be completed
during the ensuing year with approximately $1.5 million in remaining costs,
net of approximately $1 million in reimbursements from ECtel. The fair
value of the purchased in-process research and development was determined
by an independent valuation using the income approach, which reflects the
projected free cash flows that will be generated by the purchased
in-process research and development projects and discounting the projected
net cash flows back to their present value using a discount rate of 21%.
As a result of the acquisition of the government surveillance business of
ECtel, the Registrant had certain capitalized software development costs
that became impaired due to the existence of duplicative technology and,
accordingly, were written-down to their net realizable value at the date of
acquisition. Such impairment charge amounted to $1,481,000.
3. PRO FORMA ADJUSTMENTS
BALANCE SHEET
The accompanying unaudited pro forma condensed combined consolidated
balance sheet has been prepared as if the acquisition had been
completed on January 31, 2004 and reflect the following proforma
adjustments:
(A) Represents the assets and liabilities that were not acquired
in the acquisition of ECtel's Government Surveillance
Business:
Assets not acquired /Liabilities not assumed, as at Dec, 31,
2003:
38
(IN THOUSANDS)
ASSETS:
Accounts receivable, net $ 14,455
Unbilled receivables 7,175
Inventories 2,582
Prepaid expenses and other current assets 893
Other Assets 220
--------------
25,325
LIABILITIES
Accounts payable and accrued expenses 7,330
Other liabilities 102
--------------
7,432
--------------
Effect on shareholders' equity $ (17,893)
==============
(B) Represents the reclassification entry of inventories purchased
which are intended to be used as property and equipment as
follows:
(IN THOUSANDS)
Inventories $ (332)
Property and equipment 332
--------------
$ --
==============
(C) Represents the allocation of the purchase price of $35
millions and approximately $1.1 million of acquisition related
costs.
The purchase price was allocated to the assets acquired and
liabilities assumed or incurred in connection with the
acquisition of ECtel's Government Surveillance Business as
follows:
39
(IN THOUSANDS)
Cash paid $ (35,000)
Acquisition related costs (1,067)
--------------
Total estimated purchase price (36,067)
Purchase accounting adjustment for:
Acquired property and equipment (331)
Short term provisions:
For employees (642)
For customization (1,300)
-------------
(1,942)
Long term provisions:
For employees 95
For customization (700)
-------------
(605)
Intangible assets:
Acquired technology 4,718
Non-competition agreements 2,221
Customer relationships 1,382
Sales backlog 854
Goodwill 25,014
-------------
34,189
In-process research and development 3,154
----------
Elimination of the equity of the acquired business $ (1,602)
==========
(D) Represents certain capitalized software development costs that
became impaired due to the existence of duplicative technology
and, accordingly, were written-down to their net realizable
value at the date of acquisition.
STATEMENT OF OPERATIONS
The accompanying unaudited proforma condensed combined
consolidated statements of operations have been prepared as
if the acquisition had been completed as of the beginning of
the fiscal year ended January 31, 2004 and reflects the
following pro forma adjustments:
(E) Represents amortization expenses of identifiable intangible
assets. The estimated useful life is one to ten years.
(F) Represents interest income foregone on net cash used at
1.1% interest rate per annum.
(G) Represents tax effect of the business combination calculated
to yield a 9% overall theoretical tax rate.
40
INDEX TO EXHIBITS
Exhibit No. Description
---------- -----------
2.01 Asset Purchase Agreement between Verint Systems Ltd. and ECtel Ltd.
dated as of February 9, 2004. Filed as Exhibit 2.01 to the Registrant's
Current Report on Form 8-K filed March 31, 2004.
23.01 Consent of Somech Chaikin, Certified Public Accountants, a member of
KPMG International, Independent Auditors
99.01 Press release announcing the completion of the acquisition of certain
assets, dated March 31, 2004. Filed as Exhibit 99 to the Registrant's
Current Report on Form 8-K filed March 31, 2004.