UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
AMENDMENT NO. 2
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
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. 2 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 the consolidated financial statements of Surf Communication Solutions
Ltd. ("Surf"), as well as the reports of the independent auditors of Surf and
its subsidiaries, Surf Communication Solutions, Inc. and Surf Communication
Solutions BV.
ITEM 18: FINANCIAL STATEMENTS
The restated financial statements of the Registrant have been previously filed
in Amendment No. 1 of Form 20-F.
The consolidated financial statements of Surf Communication 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.
2
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.
10.2 Consent of Walter Fey, CPA.
10.3 Consent of Mazars Paardekooper Hoffman.
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
3
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. 2 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: February 28, 2005
4
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 -
WALTER FEY, CPA
366 Mass Ave, Suite 303
Arlington, MA 02474
TEL (781) 641-9889
To the Board of Directors and shareholders
Surf Communication Solutions, Inc.
495 Old Connecticut Path, Suite 320
Framingham, MA 01701
INDEPENDENT AUDITOR'S REPORT
I have audited the accompanying balance sheets of Surf Communication Solutions,
Inc. as of December 31, 2003 and 2002 and the related statements of operations
and accumulated deficit and cash flows for the years then ended. These financial
statements are the responsibility of the Company's management. My responsibility
is to express an opinion on these financial statements based on my audit.
I conducted my audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that, I 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. I believe that my audits provides a reasonable
basis for my opinion.
As explained in Note D to the financial statements, certain related party
transactions with the Company's parent have not been recorded in the financial
statements. U.S. generally accepted accounting principles require such related
party transactions to be recorded at their fair value at the date they were
incurred. It was not practical to determine the effects of the unrecorded
related party transactions on the financial statements.
In my opinion, except for the effects of not recording certain related party
transactions, as discussed in the preceding paragraph, the financial statements
referred to above present fairly, in all material respects, the financial
position of Surf Communication Solutions, Inc. as of December 31, 2003 and 2002
and the results of its operations and changes in cash flows for the years then
ended in conformity with accounting principles generally accepted in the United
States.
/S/ Walter Fey
January 16, 2004
AUDITOR'S REPORT
INTRODUCTION
We have audited the accompanying balance sheets of Surf Communication Solutions
BV. (the "Company") as of December 31, 2002 and 2003, and the related 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.
SCOPE
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.
OPINION
In our opinion, based on our audit, the financial statements referred to above,
present fairly, in all material respects, the financial position of the Company
as of December 31, 2002 and 2003, and the 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.
Amsterdam, April 2, 2004
/S/ MAZARS PAARDEKOOPER HOFFMAN
MAZARS PAARDEKOOPER HOFFMAN
F.D.N. Walta RA
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 -