Company Quick10K Filing
Sapiens
20-F 2020-12-31 Filed 2021-03-25
20-F 2019-12-31 Filed 2020-04-07
20-F 2018-12-31 Filed 2019-03-27
20-F 2017-12-31 Filed 2018-04-10
20-F 2016-12-31 Filed 2017-04-27
20-F 2015-12-31 Filed 2016-03-29
20-F 2014-12-31 Filed 2015-03-30
20-F 2013-12-31 Filed 2014-04-23
20-F 2012-12-31 Filed 2013-03-11
20-F 2011-12-31 Filed 2012-04-04
20-F 2010-12-31 Filed 2011-03-17
20-F 2009-12-31 Filed 2010-04-29

SPNS 20F Annual Report

Item 17 ¨ Item 18 ¨
Part I
Item 1.Identity of Directors, Senior Management and Advisers
Item 2.Offer Statistics and Expected Timetable
Item 3.Key Information
Item 4.Information on The Company
Item 4A.Unresolved Staff Comments
Item 5.Operating and Financial Review and Prospects
Item 6.Directors, Senior Management and Employees
Item 7.Major Shareholders and Related Party Transactions
Item 8.Financial Information
Item 9.The Offer and Listing
Item 10.Additional Information
Item 11.Quantitative and Qualitative Disclosure About Market Risk.
Item 12.Description of Securities Other Than Equity Securities.
Part II
Item 13.Defaults, Dividend Arrearages and Delinquencies.
Item 14.Material Modifications To The Rights of Security Holders and Use of Proceeds.
Item 15.Controls and Procedures
Item 16.Reserved
Item 16A.Audit Committee Financial Expert.
Item 16B.Code of Ethics.
Item 16C.Principal Accountant Fees and Services.
Item 16D.Exemptions From The Listing Standards for Audit Committees
Item 16E.Purchase of Equity Securities By The Issuer and Affiliated Purchasers
Item 16F.Change in Registrant's Certifying Accountant.
Item 16G.Corporate Governance.
Item 16H.Mine Safety Disclosure.
Part III
Item 17.Financial Statements.
Item 18.Financial Statements.
Note 1: General
Note 2:Significant Accounting Policies
Note 3: Marketable Securities
Note 4: Other Long-Term Assets
Note 5: Property and Equipment, Net
Note 6: Capitalized Software Development Costs, Net
Note 7: Other Intangible Assets, Net
Note 8: Goodwill
Note 9: Accrued Expenses and Other Liabilities
Note 10: Series B Debentures
Note 11: Commitments and Contingent Liabilities
Note 12: Taxes on Income
Note 13: Equity
Note 14: Related Parties Transactions
Note 15: Basic and Diluted Net Earnings per Share
Note 16:Geographic Information
Note 17: Selected Statements of Operations Data
Note 18: Subsequent Event
Item 19.Exhibits
EX-4.6 tv489080_ex4-6.htm
EX-8.1 tv489080_ex8-1.htm
EX-12.1 tv489080_ex12-1.htm
EX-12.2 tv489080_ex12-2.htm
EX-13.1 tv489080_ex13-1.htm
EX-15.1 tv489080_ex15-1.htm

Sapiens Earnings 2017-12-31

Balance SheetIncome StatementCash Flow

20-F 1 tv489080_20f.htm FORM 20-F

 

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

 

Form 20-F

 

¨REGISTRATION STATEMENT PURSUANT TO SECTION 12(b) OR (g) OF THE SECURITIES EXCHANGE ACT OF 1934

 

OR

 

xANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the fiscal year ended December 31, 2017

 

OR

 

¨TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the transition period from ____________ to _______________

 

OR

 

¨SHELL COMPANY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

Date of event requiring this shell company report. . . . . . . . . . .

 

Commission file number 000-20181

 

 

 

 

SAPIENS INTERNATIONAL CORPORATION N.V.

(Exact name of Registrant as specified in its charter)

 

Curacao

(Jurisdiction of incorporation or organization)

 

Azrieli Center

26 Harokmim St.

Holon, 5885800 Israel

(Address of principal executive offices)

 

Roni Giladi, Chief Financial Officer

Tel: +972-3-790-2000

Fax+972-3-790 2942

Azrieli Center

26 Harokmim St.

Holon, 5885800 Israel

(Name, Telephone, E-mail and/or Facsimile number and Address of Company Contact Person)

 

Securities registered or to be registered pursuant to Section 12(b) of the Act:

 

Title of Class:   Name of each exchange on which registered:
Common Shares, par value € 0.01 per share   NASDAQ Capital Market

 

Securities registered or to be registered pursuant to Section 12(g) of the Act: None

 

Securities for which there is a reporting obligation pursuant to Section 15(d) of the Act: None

 

 

 

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

 

As of December 31, 2017, the issuer had 49,758,434 Common Shares, par value € 0.01 per share, outstanding (which excludes 2,328,296 Common Shares held in treasury).

 

Indicate by check mark if the registrant is well-known seasoned issuer, as defined in Rule 405 of the Securities Act.

 

Yes  ¨          No  x

 

If this report is an annual or transition report, indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934.

 

Yes  ¨          No  x

 

Indicate by checkmark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the 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 whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

 

Yes  x          No  ¨

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or an emerging growth company. See definition of “accelerated filer” and “large accelerated filer” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer:  ¨   Accelerated filer:  x
Non-accelerated filer:  ¨   Emerging growth company  ¨

 

If an emerging growth company that prepares its financial statements in accordance with U.S. GAAP, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act      ¨

 

Indicate by check mark which basis of accounting the registrant has used to prepare the financial statements included in this filing:

 

x  U.S. GAAP          ¨  International Financial Reporting Standards as issued           ¨  Other

by the International Accounting Standards Board

 

If “Other” has been checked in response to the previous question, indicate by check mark which financial statement item the registrant has elected to follow:

 

Item 17  ¨           Item 18  ¨

 

If this is an annual report, indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

 

Yes  ¨          No  x


 

 

 

 

 

 

TABLE OF CONTENTS

 

    Page
     
Introduction   1
     
PART I   1
     
Item 1 Identity of Directors, Senior Management and Advisers 1
     
Item 2 Offer Statistics and Expected Timetable 2
     
Item 3 Key Information 2
     
Item 4 Information on the Company 20
     
Item 4A Unresolved Staff Comments 41
     
Item 5 Operating and Financial Review and Prospects 41
     
Item 6 Directors, Senior Management and Employees 66
     
Item 7 Major Shareholders and Related Party Transactions 72
     
Item 8 Financial Information 75
     
Item 9 The Offer and Listing 76
     
Item 10 Additional Information 78
     
Item 11 Quantitative and Qualitative Disclosures About Market Risk 93
     
Item 12 Description of Securities Other Than Equity Securities 93
     
PART II   93
     
Item 13 Defaults, Dividend Arrearages and Delinquencies 93
     
Item 14 Material Modifications to the Rights of Security Holders and Use of Proceeds 93
     
Item 15 Controls and Procedures 94
     
Item 16 [Reserved] 94
     
Item 16A Audit Committee Financial Expert 94
     
Item 16B Code of Ethics 94
     
Item 16C Principal Accountant Fees and Services 95
     
Item 16D Exemptions from the Listing Standards for Audit Committees 95
     
Item 16E Purchases of Equity Securities by the Issuer and Affiliated Purchasers 95
     
Item 16F Change in Registrant’s Certifying Accountant 95
     
Item 16G Corporate Governance 95
     
Item 16H Mine Safety Disclosures 96
     
PART III   96
     
Item 17 Financial Statements 96
     
Item 18 Financial Statements 96
     
Item 19 Exhibits 97
     
Signature   98

 

 

 

 

INTRODUCTION

 

Definitions

 

In this annual report, unless the context otherwise requires:

 

·references to “Sapiens,” the “Company,” the “Registrant,” “our company,” “us,” “we” and “our” refer to Sapiens International Corporation N.V., a Curaçao company, and its consolidated subsidiaries;

 

·references to “our shares,” “Common Shares” and similar expressions refer to Sapiens’ Common Shares, par value € 0.01 per share;

 

·references to “Sapiens Poland” refer to Sapiens Software Solutions (Poland) Sp.Z.O.O (formerly Insseco Sp. Z O.O), a Poland-based software and services provider for the insurance market that Sapiens acquired in the third quarter of 2015;

 

·references to “Adaptik”, refer to Adaptik Corporation, a New Jersey company engaged in the development of software solutions, which Sapiens acquired during the first quarter of 2018;

 

·references to “KnowledgePrice.com” refer to KnowledgePrice.com, a Latvian company that specializes in digital insurance services and consulting, which Sapiens acquired in the fourth quarter of 2017;

 

·references to “StoneRiver” refer to StoneRiver, Inc., a Denver, Colorado- based provider of technology solutions and services to the insurance industry that Sapiens acquired in the first quarter of 2017;

 

·references to “dollars”, “U.S. dollars”, “U.S. $” and “$” are to United States Dollars;

 

·references to “Euro” or “€” are to the Euro, the official currency of the Eurozone in the European Union;

 

·references to “shekels” and “NIS” are to New Israeli Shekels, the Israeli currency;

 

·references to the “Articles” are to our Amended Articles of Association, as currently in effect;

 

·references to the “Securities Act” are to the Securities Act of 1933, as amended;

 

·references to the “Exchange Act” are to the Securities Exchange Act of 1934, as amended;

 

·references to “NASDAQ” are to the NASDAQ Stock Market;

 

·references to the “TASE” are to the Tel Aviv Stock Exchange; and

 

·references to the “SEC” are to the United States Securities and Exchange Commission.

 

Cautionary Note Regarding Forward-Looking Statements

 

Certain matters discussed in this annual report are forward-looking statements within the meaning of Section 27A of the Securities Act, Section 21E of the Exchange Act and the safe harbor provisions of the U.S. Private Securities Litigation Reform Act of 1995, that are based on our beliefs and assumptions as well as information currently available to us. Such forward-looking statements may be identified by the use of the words “anticipate,” “believe,” “estimate,” “expect,” “may,” “will,” “plan” and similar expressions. Such statements reflect our current views with respect to future events and are subject to certain risks and uncertainties. While we believe such forward-looking statements are based on reasonable assumptions, should one or more of the underlying assumptions prove incorrect, or these risks or uncertainties materialize, our actual results may differ materially from those expressed or implied by the forward-looking statements. Please read the risks discussed in Item 3 – “Key Information” under the caption “Risk Factors” and cautionary statements appearing elsewhere in this annual report in order to review conditions that we believe could cause actual results to differ materially from those contemplated by the forward-looking statements.

 

We undertake no obligation publicly to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise. In light of these risks, uncertainties, and assumptions, the forward-looking events discussed in this annual report might not occur.

 

PART I

 

Item 1.Identity of Directors, Senior Management and Advisers

 

Not applicable.

 

1 

 

 

Item 2.Offer Statistics and Expected Timetable

 

Not applicable.

 

Item 3.Key Information

 

A.Selected Financial Data.

 

The following tables summarize certain selected consolidated financial data for the periods and as of the dates indicated. We derived the statement of operations financial data for the years ended December 31, 2015, 2016 and 2017 and the balance sheet data as of December 31, 2016 and 2017 from our audited consolidated financial statements included elsewhere in this annual report. The selected consolidated statement of income financial data for the years ended December 31, 2013 and 2014 and the balance sheet data as of December 31, 2013, 2014 and 2015 are derived from our audited financial statements not included in this annual report. Our historical consolidated financial statements are prepared in accordance with U.S. generally accepted accounting principles, or U.S. GAAP, and presented in U.S. dollars. You should read the information presented below in conjunction with those statements.

 

The summary consolidated balance sheet data as of December 31, 2014, as derived from our audited consolidated balance sheet as of that date that is not included in this annual report, reflects the carrying amounts combination between Sapiens and Sapiens Poland as of that date, consistent with the pooling of interest accounting method that we accorded to our acquisition of Sapiens Poland. Also, consistent with that accounting method, our consolidated statements of income data for the year ended December 31, 2015 includes the revenues and expenses of Insseco for the entire year (although the acquisition was actually consummated during the third quarter of 2015). See also Note 1(e) to our consolidated financial statements contained elsewhere in this annual report.

 

The information presented below is qualified by the more detailed historical consolidated financial statements, the notes thereto and the discussion under “Operating and Financial Review and Prospects” included elsewhere in this annual report.

 

Selected Financial Data:  Year Ended December 31, 
   (In thousands, except per share data) 
Statement of Income Data:  2013   2014   2015 (1)   2016   2017 
                     
Revenues  $135,377   $157,450   $185,636   $216,190   $269,194 
Cost of revenues   84,971    99,095    111,192    130,402    175,678 
Gross profit   50,406    58,355    74,444    85,788    93,516 
Operating Expenses:                         
Research and development   11,846    11,352    10,235    16,488    31,955 
Selling, marketing, general and administrative   26,677    32,097    39,859    44,460    60,559 
Total operating expenses   38,523    43,449    50,094    60,948    92,514 
Operating income   11,883    14,906    24,350    24,840    1,002 

Financial income (expenses), net

   520    124    163    533    (3,010)

Income before tax benefit (taxes on income)

   12,403    15,030    24,513    25,373    (2,008)

Tax benefit (taxes on income)

   (811)   (454)   (4,213)   (5,772)   2,564 
                          
Net income   11,592    14,576    20,300    19,601    556 
                          
Attributed to non-controlling interest   (12)   131    59    (43)   (189)
Attributed to redeemable non-controlling interest   -    (18)   1    (135)   43 
Adjustment to redeemable non-controlling interest   -    -    224    443    350 
                          
Net income attributable to Sapiens   11,604    14,463    20,016    19,336    352 
                          
Basic net earnings per share attributable to Sapiens’ shareholders (2)  $0.29   $0.31   $0.42   $0.40   $0.01 
Diluted net earnings per share attributable to Sapiens’ shareholders  $0.27   $0.30   $0.41   $0.40   $0.01 
Weighted average number of shares used in computing basic net earnings per share   40,024    47,210(3)   48,121    48,947    49,170 
Weighted average number of shares used in computing diluted net earnings per share   42,316    48,637    49,327    49,780    49,926 

 

2 

 

 

   At December 31, 
Balance Sheet Data:  2013   2014 (1)   2015   2016   2017 
   (In thousands)     
         
Cash and cash equivalents  $70,313   $47,400   $54,351   $60,908   $71,467 
Marketable securities   -    33,098    39,651    35,448    - 
Working capital   63,516    43,663    51,342    72,453    60,804 
Total assets   222,428    233,210    242,271    257,851    373,619
Series B Debentures (4)   -    -    -    -    78,281 
Capital stock   245,205    249,938    234,658    227,463    221,864 
Total equity  $170,408   $178,293   $181,809   $194,391   $200,874 

  

(1)As indicated above, the balance sheet data as of December 31, 2014 and the statement of income data for the year ended December 31, 2015 reflect the carrying amounts combination between Sapiens and Sapiens Poland as of December 31, 2014 and as of January 1, 2015, respectively, consistent with the pooling of interest accounting method in respect of our acquisition of Sapiens Poland.

 

(2)On January 15, 2013, April 22, 2015, March 31, 2016 and October 18, 2017, our Board of Directors determined, subject to shareholder approval, to declare and pay one-time cash interim dividends of $0.15, $0.15, $0.20 and $0.20 per Common Share (or $5.8 million, $7.2 million, $10.0 million and $9.8 million, in the aggregate, respectively), which were paid on February 22, 2013, June 1, 2015, June 1, 2016 and December 14, 2017, respectively.

 

(3)On November 19, 2013, we consummated an underwritten follow-on public offering of 5,650,000 of our Common Shares, plus an additional 847,400 Common Shares to cover over-allotments, pursuant to an underwriting agreement with Barclays Capital Inc., as representative of certain underwriters.

 

  (4) In September 2017 we issued NIS 280 million (approximately $78.2 million, net of $0.96 million of debt discount and issuance costs) principal amount of Series B unsecured, non-convertible debentures, in a public offering and private placement in Israel. For more information concerning the Series B debentures, please see Item 5.B “Liquidity and Capital Resources”—“Israeli Public Offering and Private Placement of Debentures”.

 

B.Capitalization and Indebtedness.

 

Not applicable.

 

C.Reasons for the Offer and Use of Proceeds.

 

Not applicable.

 

3 

 

 

D.Risk Factors.

 

We operate globally in a dynamic and rapidly changing environment that involves numerous risks and uncertainties. The following section lists some, but not all, of those risks and uncertainties that may have a material adverse effect on our business, financial position, results of operations or cash flows.

 

Risks Relating to Our Business, Our Industry and our Financing Activities

 

The implementation of our M&A growth strategy, which requires the integration of our multiple acquired companies, including, most recently, Adaptik, KnowledgePrice, StoneRiver, MaxPro, 4Sight, and their respective businesses, operations and employees with our own, involves significant risks, and the failure to integrate successfully may adversely affect our future results.

 

In the past eight years we have completed eleven acquisitions. Most recently, in the first quarter of 2018, we have acquired Adaptik, after having acquired KnowledgePrice.com and StoneRiver in 2017, Maximum Processing Inc, or MaxPro, and 4Sight Business Intelligence, or 4Sight, in 2016. These acquisitions are part of our integrated M&A growth strategy, which is centered on three key factors: growing our customer base, expanding geographically and adding complementary solutions to our portfolio— all while we seek to ensure our continued high quality of services and product delivery. Any failure to successfully integrate the business, operations and employees of our acquired companies, or to otherwise realize the anticipated benefits of these acquisitions, could harm our results of operations. Our ability to realize these benefits will depend on the timely integration and consolidation of organizations, operations, facilities, procedures, policies and technologies, and the harmonization of differences in the business cultures between these companies and their personnel. Integration of these businesses will be complex and time-consuming, will involve additional expense and could disrupt our business and divert management’s attention from ongoing business concerns. The challenges involved in integrating Adaptik, Knowledgeprice.com, StoneRiver MaxPro, 4Sight and other former acquisitions include:

 

·preserving customer, supplier and other important relationships;

 

·integrating financial forecasting and controls, procedures and reporting cycles;

 

·combining and integrating information technology, or IT, systems; and

 

·integrating employees and related HR systems and benefits, maintaining employee morale and retaining key employees.

 

The benefits we expect to realize from these acquisitions are, necessarily, based on projections and assumptions about the combined businesses of our company, Adaptik, KnowledgePrice.com, MaxPro, 4Sight and StoneRiver, and assume, among other things, the successful integration of these acquired entities into our business and operations. The acquisition of StoneRiver, in particular, has significantly expanded our presence and scale in the North American insurance industry, and is expected to help us further accelerate our growing market footprint in the U.S. P&C space. The StoneRiver acquisition is the largest acquisition that we have ever effected, and failure to successfully integrate the business, operation and employees of StonerRiver could, in and of itself, significantly harm our results of operations. Our projections and assumptions concerning our acquisitions may be inaccurate, however, and we may not successfully integrate the acquired companies and our operations in a timely manner, or at all. We may also be exposed to unexpected contingencies or liabilities of the acquired companies. If we do not realize the anticipated benefits of these transactions, our growth strategy and future profitability could be adversely affected.

 

4 

 

 

Our development cycles are lengthy, we may not have the resources available to complete development of new, enhanced or modified solutions and we may incur significant expenses before we generate revenues, if any, from our solutions.

 

Because our solutions are complex and require rigorous testing, development cycles can be lengthy, taking us up to two years to develop and introduce new, enhanced or modified solutions. Moreover, development projects can be technically challenging and expensive. The nature of these development cycles may cause us to experience delays between the time we incur expenses associated with research and development and the time we generate revenues, if any, from such expenses. We may also not have sufficient funds or other resources to make the required investments in product development. Furthermore, we may invest substantial resources in the development of solutions that do not achieve market acceptance or commercial success. Even where we succeed in our sales efforts and obtain new orders from customers, the complexity involved in delivering our solutions to such customers makes it more difficult for us to consummate delivery in a timely manner and to recognize revenue and maximize profitability. Failure to deliver our solutions in a timely manner could result in order cancellations, damage our reputations and require us to indemnify our customers. Any of these risks relating to our lengthy and expensive development cycle could have a material adverse effect on our business, financial conditions and results of operations.

 

Our sales cycle is variable and often lengthy, depends upon many factors outside our control, and requires us to expend significant time and resources prior to generating associated revenues.

 

The typical sales cycle for our solutions and services is lengthy and unpredictable, requires pre-purchase evaluation by a significant number of persons in our customers’ organizations, and often involves a significant operational decision by our customers. Our sales efforts involve educating our customers and industry analysts and consultants about the use and benefits of our solutions, including the technical capabilities of our solutions and the efficiencies achievable by organizations deploying our solutions. Customers typically undertake a significant evaluation process, which frequently involves not only our solutions, but also those of our competitors and can result in a lengthy sales cycle. Our sales cycle for new customers is typically one year to two years and can extend even longer in some cases. We spend substantial time, effort and money in our sales efforts without any assurance that such efforts will produce any sales.

 

Investment in highly skilled research and development and customer support personnel is critical to our ability to develop and enhance our solutions and support our customers, but an increase in such investment may reduce our profitability.

 

As a provider of software solutions that rely upon technological advancements, we rely heavily on our research and development activities to remain competitive. We consequently depend in large part on the ability to attract, train, motivate and retain highly skilled information technology professionals for our research and development team, particularly individuals with knowledge and experience in the insurance industry. Because our software solutions are highly complex and are generally used by our customers to perform critical business functions, we also depend heavily on other skilled technology professionals to provide ongoing support to our customers. Skilled technology professionals are often in high demand and short supply. If we are unable to hire or retain qualified research and development personnel and other technology professionals to develop, implement and modify our solutions, we may be unable to meet the needs of our customers. Even if we succeed in retaining the necessary skilled personnel in our research and development and customer support efforts, our investments in our personnel and product development efforts increase our costs of operations and thereby reduce our profitability, unless accompanied by increased revenues. Given the highly competitive industry in which we operate, we may not succeed in increasing our revenues in line with our increasing investments in our personnel and research and development efforts.

 

Furthermore, as we seek to expand the marketing and offering of our products into new territories, it requires the retention of new, additional skilled personnel with knowledge of the particular market and applicable regulatory regime. Such skilled personnel may not be available at a reasonable cost relative to the additional revenues that we expect to generate in those territories, or may not be available at all. In particular, wage costs in lower-cost markets where we have recently added personnel, such as India, are increasing and we may need to increase the levels of our employee compensation more rapidly than in the past to remain competitive. The transition of projects to new locations may also lead to business disruptions due to differing levels of employee knowledge and organizational and leadership skills. Although we have never experienced an organized labor dispute, strike or work stoppage, any such occurrence, including in connection with unionization efforts, could disrupt our business and operations and harm our financial condition.

 

5 

 

 

Failure to manage our rapid growth— both organic and non-organic—could effectively harm our business.

 

We have recently experienced, and expect to continue to experience, rapid growth in our number of employees and in our international operations that has placed, and will continue to place, a significant strain on our operational and financial resources and our personnel. To manage our anticipated future growth effectively, we must continue to maintain and may need to enhance our information technology infrastructure, financial and accounting systems and controls and manage expanded operations and employees in geographically distributed locations. We also must attract, train and retain a significant number of additional qualified sales and marketing personnel, professional services personnel, software engineers, technical personnel and management personnel. Our failure to manage our rapid growth effectively could have a material adverse effect on our business, results of operations and financial condition. Our growth could require significant capital expenditures and may divert financial resources from other projects, such as the development of new services or product enhancements. For example, since it may take as long as six months to hire and train a new member of our professional services staff, we make decisions regarding the size of our professional services staff based upon our expectations with respect to customer demand for our products and services. If these expectations are incorrect, and we increase the size of our professional services organization without experiencing an increase in sales of our products and services, we will experience reductions in our gross and operating margins and net income. If we are unable to effectively manage our growth, our expenses may increase more than expected, our revenues could decline or grow more slowly than expected and we may be unable to implement our business strategy. Our rapid growth may also be accompanied by greater exposure to litigation, including suits by clients, vendors, employees or former employees, as the sizes of our workforce and our overall international operations increase. Restructuring strategies that we have been implementing as part of our management of the effectiveness of our growth require the termination of employees, which also increases our potential exposure to suits by former employees. All such litigation carries with it related costs and could divert our management’s attention from ongoing business concerns. We also intend to continue to expand into additional international markets which, if not technologically or commercially successful, could harm our financial condition and prospects.

 

The skilled and highly qualified workforce that we need to develop, implement and modify our solutions may be difficult to hire, train and retain, and we could face increased costs to attract and retain our skilled workforce.

 

Our business operations depend in large part on our ability to attract, train, motivate and retain highly skilled information technology professionals, software programmers and communications engineers on a worldwide basis. In addition, our competitive success will depend on our ability to attract and retain other outstanding, highly qualified employees, consultants and other professionals. Because our software products are highly complex and are generally used by our customers to perform critical business functions, we depend heavily on skilled technology professionals. Skilled technology professionals are often in high demand and short supply. If we are unable to hire or retain qualified technology professionals to develop, implement and modify our solutions, we may be unable to meet the needs of our customers. In addition, serving several new customers or implementing several new large-scale projects in a short period of time may require us to attract and train additional IT professionals at a rapid rate.

 

If existing customers are not satisfied with our solutions and services and either do not make subsequent purchases from us or do not continue using such solutions and services, or if our relationships with our largest customers are impaired, our revenue could be negatively affected.

 

We depend heavily on repeat product and service revenues from our base of existing customers. Five of our customers accounted for, in the aggregate, 34% and 22% of our revenues in the years ended December 31, 2016 and 2017, respectively. If our existing customers are not satisfied with our solutions and services, they may not enter into new project contracts with us or continue using our technologies. A significant decline in our revenue stream from existing customers would have a material adverse effect on our business, results of operations and financial condition.

 

Our business often involves long-term, large, complex projects across the globe, some of which are fixed-price projects that involve uncertainties, such as estimated project costs and profit margins. Changes in the scope of a project or in the implementation schedule mid-stream can adversely impact our expected future revenues, profitability and/or, in some cases, our relationship with the relevant client.

 

Our business is characterized by relatively large, complex projects or engagements that can have a significant impact on our total revenue and cost of revenue from quarter to quarter. A high percentage of our expenses, particularly employee compensation, are relatively fixed. Therefore, variations in the timing of the initiation, estimate of scope of work, progress or completion of projects or engagements can cause significant variations in operating results from quarter to quarter.

 

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This is particularly the case for fixed-price contracts, where our delivery requirements sometimes span more than one year. For a highly complex, fixed-price project that requires customization, we may not be able to accurately estimate our actual costs of completing the project. We are often dependent on the assistance of third-parties (such as our customers’ vendors or IT employees, or our system integrator partners) in implementing such a project, which may not be provided in a timely manner. If our actual cost-to-completion of such a project significantly exceeds the estimated costs, we could experience a loss on the related contract, which (when multiplied by multiple projects) could have a material adverse effect on our results of operations, financial position and cash flow.

 

Similarly, delays in executing client contracts (whether fixed price or not) may affect our revenue and cause our operating results to vary widely. Our solutions are delivered over periods of time ranging from several months to a few years. Payment terms are generally based on periodic payments or on the achievement of milestones. Any delays in payment or in the achievement of milestones may have a material adverse effect on our results of operations, financial position or cash flows.

 

For non-fixed price contracts, we generally provide our customers with upfront estimates regarding the duration, budget and costs associated with the implementation of our products. Due to the complexities described above, however, we may not meet those upfront estimates and/or the expectations of our customers, which could lead to a dispute with a client.

 

As an example, in 2017 we were involved in a dispute with a significant customer under a software development project agreement, which agreement provided for the customizing, enhancement and implementation of a new product. The customer alleged that we had materially breached our agreement with the customer. After carefully examining the customer’s allegations, we informed the customer that we had not materially breached any of our obligations under the agreement and that the customer had itself materially breached the agreement. Work on the project was canceled due to the dispute. While we eventually entered into a settlement agreement with the customer, that settlement resulted in the termination of the software development project agreement, which resulted in a reduction in our revenues and operating profit relative to our prior estimates for 2017. Similar such disputes with other significant customers in the future, whether due to failure on our part to meet upfront estimates or customer expectations, or even absent such failures on our part, could harm our reputation, thereby adversely affecting our ability to attract new customers and to sell additional solutions and services to existing customers.

 

We may be liable to our clients for damages caused by a violation of intellectual property rights, the disclosure of other confidential information, including personally identifiable information, system failures, errors or unsatisfactory performance of services, and our insurance policies may not be sufficient to cover these damages.

 

We often have access to, and are required to collect and store, sensitive or confidential client information, including personally identifiable information. Some of our client agreements do not limit our potential liability for breaches of confidentiality, infringement indemnity and certain other matters. Furthermore, breaches of confidentiality may entitle the aggrieved party to equitable remedies, including injunctive relief. If any person, including any of our employees and subcontractors, penetrates our network security or misappropriates sensitive or confidential client information, including personally identifiable information, we could be subject to significant liability from our clients or from our clients’ customers for breaching contractual confidentiality provisions or privacy laws. Despite measures we take to protect the intellectual property and other confidential information or personally identifiable information of our clients, unauthorized parties, including our employees and subcontractors, may attempt to misappropriate certain intellectual property rights that are proprietary to our clients or otherwise breach our clients’ confidences. Unauthorized disclosure of sensitive or confidential client information, including personally identifiable information, or a violation of intellectual property rights, whether through employee misconduct, breach of our computer systems, systems failure or otherwise, may subject us to liabilities, damage our reputation and cause us to lose clients.

 

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Many of our contracts involve projects that are critical to the operations of our clients’ businesses and provide benefits to our clients that may be difficult to quantify. Any failure in a client’s system or any breach of security could result in a claim for substantial damages against us, regardless of our responsibility for such failure. Furthermore, any errors by our employees in the performance of services for a client, or poor execution of such services, could result in a client terminating our engagement and seeking damages from us.

 

In addition, while we have taken steps to protect the confidential information that we have access to, including confidential information we may obtain through usage of our cloud-based services, our security measures may be breached. If a cyber-attack or other security incident were to result in unauthorized access to or modification of our customers’ data or our own data or our IT systems or in disruption of the services we provide to our customers, or if our products or services are perceived as having security vulnerabilities, we could suffer significant damage to our business and reputation.

 

Although we attempt to limit our contractual liability for consequential damages in rendering our services, these limitations on liability may not apply in all circumstances, may be unenforceable in some cases, or may be insufficient to protect us from liability for damages. There may be instances when liabilities for damages are greater than the insurance coverage we hold and we will have to internalize those losses, damages and liabilities not covered by our insurance.

 

Changes in privacy regulations may impose additional costs and liabilities on us, limit our use of information, and adversely affect our business.

 

Personal privacy has become a significant issue in the United States, Europe, and many other countries where we operate. Many government agencies and industry regulators continue to impose new restrictions and modify existing requirements about the collection, use, and disclosure of personal information. Changes to laws or regulations affecting privacy and security may impose additional liability and costs on us and may limit our use of such information in providing our services to customers. If we were required to change our business activities, revise or eliminate services or products, or implement burdensome compliance measures, our business and results of operations may be harmed. Additionally, we may be subject to regulatory enforcement actions resulting in fines, penalties, and potential litigation if we fail to comply with applicable privacy laws and regulations.

 

In particular, our European activities will be subject to the new European Union General Data Protection Regulation, or GDPR, which will create additional compliance requirements for us. GDPR broadens the scope of personal privacy laws to protect the rights of European Union citizens and requires organizations to report on data breaches within 72 hours and be bound by more stringent rules for obtaining the consent of individuals on how their data can be used. GDPR will become enforceable on May 25, 2018 and non-compliance may expose entities such as our company to significant fines or other regulatory claims. While we have invested in, and intend to continue to invest in, reasonably necessary resources to comply with these new standards, to the extent that we fail to adequately comply, that failure could have an adverse effect on our business, financial conditions, results of operations and cash flows.

 

Errors or defects in our software solutions could inevitably arise and would harm our profitability and our reputation with customers, and could even give rise to liability claims against us.

 

The quality of our solutions, including new, modified or enhanced versions thereof, is critical to our success. Since our software solutions are complex, they may contain errors that cannot be detected at any point in their testing phase. While we continually test our solutions for errors or defects and work with customers to identify and correct them, errors in our technology may be found in the future. Testing for errors or defects is complicated because it is difficult to simulate the breadth of operating systems, user applications and computing environments that our customers use and our solutions themselves are increasingly complex. Errors or defects in our technology have resulted in terminated work orders and could result in delayed or lost revenue, diversion of development resources and increased services, termination of work orders, damage to our brand and warranty and insurance costs in the future. In addition, time-consuming implementations may also increase the number of services personnel we must allocate to each customer, thereby increasing our costs and adversely affecting our business, results of operations and financial condition.

 

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In addition, since our customers rely on our solutions to operate, monitor and improve the performance of their business processes, they are sensitive to potential disruptions that may be caused by the use of, or any defects in, our software. As a result, we may be subject to claims for damages related to software errors in the future. Liability claims could require us to spend significant time and money in litigation or to pay significant damages. Regardless of whether we prevail, diversion of key employees’ time and attention from our business, the incurrence of substantial expenses and potential damage to our reputation might result. While the terms of our sales contracts typically limit our exposure to potential liability claims and we carry errors and omissions insurance against such claims, there can be no assurance that such insurance will continue to be available on acceptable terms, if at all, or that such insurance will provide us with adequate protection against any such claims. A significant liability claim against us could have a material adverse effect on our business, results of operations and financial position.

 

The market for software solutions and related services is highly competitive.

 

The market for software solutions and related services and for business solutions for the insurance and financial services industry in particular, is highly competitive. Many of our smaller competitors have been acquired by larger competitors, which provides such smaller competitors with greater resources and potentially a larger client base for which they can develop solutions. Our customers or potential customers may prefer suppliers that are larger than us, are better known in the market or that have a greater global reach. In addition, we and some of our competitors have developed systems to allow customers to outsource their core systems to external providers (known as BPO). We are seeking to partner with BPO providers, but there can be no assurance that such BPO providers will adopt our solutions rather than those of our competitors. Determinations by current and potential customers to use BPO providers that do not use our solutions may result in the loss of such customers and limit our ability to gain new customers.

 

Consolidation in the insurance industry in which some of our clients operate also increases competitiveness for us by reducing the number of potential clients for whose business we and our competitors compete. The high level of continuity with which insurance and other financial services clients remain with their providers of software-related services also increases general competitiveness by tying clients to their service providers and thereby shrinking the market of potential clients.

 

Incorrect or improper use of our products or our failure to properly train customers on how to implement or utilize our products could result in customer dissatisfaction and negatively affect our business, results of operations, financial condition and growth prospects.

 

Our products are complex and are deployed in a wide variety of network environments. The proper use of our solutions requires training of the customer. If our solutions are not used correctly or as intended, inadequate performance may result. Additionally, our customers or third-party partners may incorrectly implement or use our solutions. Our solutions may also be intentionally misused or abused by customers or their employees or third parties who are able to access or use our solutions. Similarly, our solutions are sometimes installed or maintained by customers or third parties with smaller or less qualified IT departments, potentially resulting in sub-optimal installation and, consequently, performance that is less than the level anticipated by the customer. Because our customers rely on our software, services and maintenance support to manage a wide range of operations, the incorrect or improper use of our solutions, our failure to properly train customers on how to efficiently and effectively use our solutions, or our failure to properly provide implementation or maintenance services to our customers has resulted in terminated work orders and may result in termination of work orders, negative publicity or legal claims against us in the future. Also, as we continue to expand our customer base, any failure by us to properly provide these services will likely result in lost opportunities for follow-on sales of our software and services.

 

In addition, if there is substantial turnover of customer personnel responsible for implementation and use of our products, or if customer personnel are not well trained in the use of our products, customers may defer the deployment of our products, may deploy them in a more limited manner than originally anticipated or may not deploy them at all. Further, if there is substantial turnover of the customer personnel responsible for implementation and use of our products, our ability to make additional sales may be substantially limited.

 

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Assertions by third parties of infringement or other violation by us of their intellectual property rights could result in significant costs and substantially harm our business and results of operations.

 

The software industry is characterized by the existence of a large number of patents and frequent claims and related litigation regarding patents and other intellectual property rights. In particular, leading companies in the software industry own large numbers of patents, copyrights, trademarks and trade secrets, which they may use to assert claims against us. From time to time, third parties, including certain of these leading companies, may assert patent, copyright, trademark or other intellectual property claims against us, our customers and partners, and those from whom we license technology and intellectual property.

 

Although we believe that our products and services do not infringe upon the intellectual property rights of third parties, we cannot assure you that third parties will not assert infringement or misappropriation claims against us with respect to current or future products or services, or that any such assertions will not require us to enter into royalty arrangements or result in costly litigation, or result in us being unable to use certain intellectual property. We cannot assure you that we are not infringing or otherwise violating any third party intellectual property rights. Infringement assertions from third parties may involve patent holding companies or other patent owners who have no relevant product revenues, and therefore our own issued and pending patents may provide little or no deterrence to these patent owners in bringing intellectual property rights claims against us.

 

Any intellectual property infringement or misappropriation claim or assertion against us, our customers or partners, and those from whom we license technology and intellectual property could have a material adverse effect on our business, financial condition, reputation and competitive position regardless of the validity or outcome. If we are forced to defend against any infringement or misappropriation claims, whether they are with or without merit, are settled out of court, or are determined in our favor, we may be required to expend significant time and financial resources on the defense of such claims. Furthermore, an adverse outcome of a dispute may require us to pay damages, potentially including treble damages and attorneys’ fees, if we are found to have willfully infringed on a party’s intellectual property; cease making, licensing or using our products or services that are alleged to infringe or misappropriate the intellectual property of others; expend additional development resources to redesign our products or services; enter into potentially unfavorable royalty or license agreements in order to obtain the right to use necessary technologies or works; and to indemnify our partners, customers, and other third parties. Royalty or licensing agreements, if required or desirable, may be unavailable on terms acceptable to us, or at all, and may require significant royalty payments and other expenditures. Any of these events could seriously harm our business, results of operations and financial condition. In addition, any lawsuits regarding intellectual property rights, regardless of their success, could be expensive to resolve and divert the time and attention of our management and technical personnel.

 

Although we apply measures to protect our intellectual property rights and our source code, there can be no assurance that the measures that we employ to do so will be successful.

 

In accordance with industry practice, since we have no registered patents on our software solution technologies, we rely on a combination of contractual provisions and intellectual property law to protect our proprietary technology. We believe that due to the dynamic nature of the computer and software industries, copyright protection is less significant than factors such as the knowledge and experience of our management and personnel, the frequency of product enhancements and the timeliness and quality of our support services. We seek to protect the source code of our products as trade secret information and as unpublished copyright works. We also rely on security and copy protection features in our proprietary software. We distribute our products under software license agreements that grant customers a personal, non-transferable license to use our products and contain terms and conditions prohibiting the unauthorized reproduction or transfer of our products. In addition, while we attempt to protect trade secrets and other proprietary information through non-disclosure agreements with employees, consultants and distributors, not all of our employees have signed invention assignment agreements. Although we intend to protect our rights vigorously, there can be no assurance that these measures will be successful. Our failure to protect our rights, or the improper use of our products by others without licensing them from us could have a material adverse effect on our results of operations and financial condition.

 

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We and our customers rely on technology and intellectual property of third parties, the loss of which could limit the functionality of our products and disrupt our business.

 

We use technology and intellectual property licensed from unaffiliated third parties in certain of our products, and we may license additional third-party technology and intellectual property in the future. Any errors or defects in this third-party technology and intellectual property could result in errors that could harm our brand and business. In addition, licensed technology and intellectual property may not continue to be available on commercially reasonable terms, or at all. The loss of the right to license and distribute this third party technology could limit the functionality of our products and might require us to redesign our products.

 

Further, although we believe that there are currently adequate replacements for the third-party technology and intellectual property we presently use and distribute, the loss of our right to use any of this technology and intellectual property could result in delays in producing or delivering affected products until equivalent technology or intellectual property is identified, licensed or otherwise procured, and integrated. Our business would be disrupted if any technology and intellectual property we license from others or functional equivalents of this software were either no longer available to us or no longer offered to us on commercially reasonable terms. In either case, we would be required either to attempt to redesign our products to function with technology and intellectual property available from other parties or to develop these components ourselves, which would result in increased costs and could result in delays in product sales and the release of new product offerings. Alternatively, we might be forced to limit the features available in affected products. Any of these results could harm our business and impact our results of operations.

 

We could be required to provide the source code of our products to our customers.

 

Some of our customers have the right to require the source code of our products to be deposited into a source code escrow. Under certain circumstances, our source code could be released to our customers. The conditions triggering the release of our source code vary by customer. A release of our source code would give our customers access to our trade secrets and other proprietary and confidential information which could harm our business, results of operations and financial condition. A few of our customers have the right to use the source code of some of our products based on the license agreements signed with such clients (mostly with respect to older versions of our solutions), although such use is limited for specific matters and cases, these clients are exposed to some of our trade secrets and other proprietary and confidential information which could harm us.

 

Significant disruptions of our information technology systems or breaches of our data security could adversely affect our business.

 

A significant invasion, interruption, destruction or breakdown of our information technology, or IT, systems and/or infrastructure by persons with authorized or unauthorized access could negatively impact our business and operations. We could also experience business interruption, information theft and/or reputational damage from cyber attacks, which may compromise our systems and lead to data leakage internally. Both data that has been inputted into our main IT platform, which covers records of transactions, financial data and other data reflected in our results of operations, as well as data related to our proprietary rights (such as research and development, and other intellectual property- related data), are subject to material cyber security risks. Our IT systems have been, and are expected to continue to be, the target of malware and other cyber attacks. To date, we are not aware that we have experienced any loss of, or disruption to, material information as a result of any such malware or cyber attack.

 

We have invested in advanced detection, prevention and proactive systems to reduce these risks. Based on independent audits, we believe that our level of protection is in keeping with the industry standards of peer technology companies. We also maintain a disaster recovery solution, as a means of assuring that a breach or cyber attack does not necessarily cause the loss of our information. We furthermore review our protections and remedial measures periodically in order to ensure that they are adequate.

 

Despite these protective systems and remedial measures, techniques used to obtain unauthorized access are constantly changing, are becoming increasingly more sophisticated and often are not recognized until after an exploitation of information has occurred. We may be unable to anticipate these techniques or implement sufficient preventative measures, and we therefore cannot assure you that our preventative measures will be successful in preventing compromise and/or disruption of our information technology systems and related data. We furthermore cannot be certain that our remedial measures will fully mitigate the adverse financial consequences of any cyber attack or incident.

 

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Catastrophes may adversely impact the P&C insurance industry, preventing us from expanding or maintaining our existing customer base and increasing our revenues.

 

Our customers include P&C insurance carriers that have experienced, and will likely experience in the future, catastrophe losses that adversely impact their businesses. Catastrophes can be caused by various events, including, amongst others, hurricanes, tsunamis, floods, windstorms, earthquakes, hail, tornados, explosions, severe weather and fires. Moreover, acts of terrorism or war could cause disruptions in our or our customers’ businesses or the economy as a whole. The risks associated with natural disasters and catastrophes are inherently unpredictable, and it is difficult to predict the timing of such events or estimate the amount of loss they will generate. In the event a future catastrophe adversely impacts our current or potential customers, we may be prevented from maintaining and expanding our customer base and from increasing our revenues because such events may cause customers to postpone purchases of new products and professional service engagements or discontinue projects.

 

There may be consolidation in the P&C insurance industry, which could reduce the use of our products and services and adversely affect our revenues.

 

Mergers or consolidations among our customers could reduce the number of our customers and potential customers. This could adversely affect our revenues even if these events do not reduce the aggregate number of customers or the activities of the consolidated entities. If our customers merge with or are acquired by other entities that are not our customers, or that use fewer of our products and services, they may discontinue or reduce their use of our products and services. Any of these developments could materially and adversely affect our results of operations and cash flows.

 

Some of our services and technologies may use “open source” software, which may restrict how we use or distribute our services or require that we release the source code of certain products subject to those licenses.

 

Some of our services and technologies may incorporate software licensed under so-called “open source” licenses, including, but not limited to, the GNU General Public License and the GNU Lesser General Public License. In addition to risks related to license requirements, usage of open source software can lead to greater risks than use of third-party commercial software, as open source licensors generally do not provide warranties or controls on origin of the software. Additionally, open source licenses typically require that source code subject to the license be made available to the public and that any modifications or derivative works to open source software continue to be licensed under open source licenses. These open source licenses typically mandate that proprietary software, when combined in specific ways with open source software, become subject to the open source license. If we combine our proprietary software with open source software, we could be required to release the source code of our proprietary software.

 

We take steps to ensure that our proprietary software is not combined with, and does not incorporate, open source software in ways that would require our proprietary software to be subject to an open source license. However, few courts have interpreted open source licenses, and the manner in which these licenses may be interpreted and enforced is therefore subject to some uncertainty. Additionally, we rely on multiple software programmers to design our proprietary technologies, and although we take steps to prevent our programmers from including open source software in the technologies and software code that they design, write and modify, we do not exercise complete control over the development efforts of our programmers and we cannot be certain that our programmers have not incorporated open source software into our proprietary products and technologies or that they will not do so in the future. In the event that portions of our proprietary technology are determined to be subject to an open source license, we could be required to publicly release the affected portions of our source code, re-engineer all or a portion of our technologies, or otherwise be limited in the licensing of our technologies, each of which could reduce or eliminate the value of our services and technologies and materially and adversely affect our business, results of operations and prospects.

 

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Our deed of trust related to our Series B Debentures contains certain affirmative covenants and restrictive provisions that, if breached, could result in an increase in the interest rate and, potentially, an acceleration of our obligation to repay those debentures, which we may be unable to effect.

 

In the deed of trust that we have entered into with the trustee for the holders of our Series B Debentures, or the debentures, which we offered and sold in an Israeli public offering and Israeli private placement in September 2017, we have undertaken to maintain a number of conditions and limitations on the manner in which we can operate our business, including limitations on our ability to undergo a change of control, distribute dividends, incur a floating charge on our assets, or undergo an asset sale or other change that results in a fundamental change in our operations. The deed of trust also requires us to comply with certain financial covenants, including maintenance of a minimum shareholders’ equity level and a maximum ratio of financial indebtedness to shareholders’ equity, at levels that are customary for companies of comparable size. These limitations and covenants may force us to pursue less than optimal business strategies or forego business arrangements that could otherwise be financially advantageous to us and, by extension, our debenture holders. The deed of trust furthermore provides for an upwards adjustment in the interest rate payable under the debentures in the event that our debentures’ rating is downgraded below a certain level. A breach of the financial covenants for more than two successive quarters or a substantial downgrade in the rating of the debentures (below BBB-) would constitute an event of default that could result in the acceleration of our obligation to repay the debentures, of which there is NIS 280 million (approximately US $79.2 million) principal amount outstanding, which accelerated repayment may be difficult for us to effect.

 

Risks Relating to Our International Operations

 

Our international sales and operations subject us to additional risks that can adversely affect our business, results of operations and financial condition.

 

We are continuing to expand our international operations as part of our growth strategy. In fiscal years 2016 and 2017, 66% and 59%, respectively, of our revenues were derived from outside of North America. Our current international operations and our plans to further expand our international operations subject us to a variety of risks, including:

 

  · increased exposure to fluctuations in foreign currency exchange rates;
     
  · complexity in our tax planning, and increased exposure to changes in tax regulations in various jurisdictions in which we operate, which could adversely affect our operating results and frustrate our ability to conduct effective tax planning;
     
  · increased management, travel, infrastructure and legal compliance costs associated with having multiple international operations;
     
  · longer payment cycles and difficulties in enforcing contracts and collecting accounts receivable;
     
  · the need to localize our products and licensing programs for international customers;
     
  · lack of familiarity with and unexpected changes in foreign regulatory requirements;
     
  · the burdens of complying with a wide variety of foreign laws and legal standards;
     
  · compliance with the U.S. Foreign Corrupt Practices Act of 1977, as amended, or FCPA, particularly in emerging market countries;
     
  · import and export license requirements, tariffs, taxes and other trade barriers;
     
  · increased financial accounting and reporting burdens and complexities;
     
  · weaker protection of intellectual property rights in some countries;
     
  · multiple and possibly overlapping tax regimes; and
     
  · political, social and economic instability abroad, terrorist attacks and security concerns in general.

 

As we continue to expand our business globally, our success will depend, in large part, on our ability to anticipate and effectively manage these and other risks associated with our international operations. Any of these risks could harm our international operations and reduce our international sales, adversely affecting our business, results of operations, financial condition and growth prospects.

 

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International operations in the insurance industry, in which a significant portion of our business is concentrated, is accompanied by additional costs related to adaptation to regulations in specific territories.

 

As we seek to expand the marketing and offering of our products into new territories, because insurance regulations vary by legal jurisdiction, the investment required to adapt our solutions to the legal and language requirements of such territories may prevent or delay us from effectively expanding into such territories. Such adaptation process requires the retention of new, additional skilled personnel with knowledge of the particular market and applicable regulatory regime. Such skilled personnel may not be available at a reasonable cost relative to the additional revenues that we expect to recognize in those territories, or may not be available at all.

 

Our international operations expose us to risks associated with fluctuations in foreign currency exchange rates that could adversely affect our business.

 

Most of our revenues are derived from international operations that are conducted in local currencies, including US dollars, GBP, EURO, New Israeli Shekels, or NIS, Indian rupee, or INR and Polish zloty, or PLN. In 2016 and 2017, our revenues were approximately 37% and 53%, respectively, in US dollars, with the remainder in the other currencies.

 

Because exchange rates between the NIS, GBP, Euro, JPY, INR and the PLN against the US dollar fluctuate continuously, exchange rate fluctuations and especially larger periodic devaluations could negatively affect our revenue and profitability.

 

In certain locations, we engage in currency-hedging transactions intended to reduce the effect of fluctuations in foreign currency exchange rates on our financial position and results of operations. However, there can be no assurance that any such hedging transactions will materially reduce the effect of fluctuation in foreign currency exchange rates on such results. In addition, if for any reason exchange or price controls or other restrictions on the conversion of foreign currencies were imposed, our financial position and results of operations could be adversely affected.

 

Our business may be materially affected by changes to fiscal and tax policies. Potentially negative or unexpected tax consequences of these policies, or the uncertainty surrounding their potential effects, could adversely affect our results of operations and share price.

 

As a multinational corporation, we are subject to income taxes, withholding taxes and indirect taxes in numerous jurisdictions worldwide. Significant judgment and management attention and resources are required in evaluating our tax positions and our worldwide provision for taxes. In the ordinary course of business, there are many activities and transactions for which the ultimate tax determination is uncertain. In addition, our tax obligations and effective tax rates could be adversely affected by changes in the relevant tax, accounting, and other laws, regulations, principles and interpretations. This may include recognizing tax losses or lower than anticipated earnings in jurisdictions where we have lower statutory rates and higher than anticipated earnings in jurisdictions where we have higher statutory rates, changes in foreign currency exchange rates, or changes in the valuation of our deferred tax assets and liabilities.

 

We may be audited in various jurisdictions, and such jurisdictions may assess additional taxes against us. If we experience unfavourable results from one or more such tax audits, there could be an adverse effect on our tax rate and therefore on our net income. Although we believe our tax estimates are reasonable, the final determination of any tax audits or litigation could be materially different from our historical tax provisions and accruals, which could have a material adverse effect on our operating results or cash flows in the period or periods for which a determination is made. Additionally, we are subject to transfer pricing rules and regulations, including those relating to the flow of funds between us and our affiliates, which are designed to ensure that appropriate levels of income are reported in each jurisdiction in which we operate.

 

The U.S. Tax Cuts and Jobs Act of 2017, or the Act, enacted in December 2017, introduced significant changes to the U.S. Internal Revenue Code.

 

At December 31, 2017, we have not completed our accounting for the tax effects of enactment of the Act; however, we have made reasonable estimates of the effects on the existing deferred tax balances for which provisional amounts have been recorded.

 

The Act requires complex computations to be performed that were not previously required in U.S. tax law, significant judgments to be made in interpretation of the provisions of the 2017 Tax Act and significant estimates in calculations, and the preparation and analysis of information not previously relevant or regularly produced. The U.S. Treasury Department, the IRS, and other standard-setting bodies could interpret or issue guidance on how provisions of the 2017 Tax Act will be applied or otherwise administered that is different from our interpretation. As we complete our analysis of the 2017 Tax Act, collect and prepare necessary data, and interpret any additional guidance, we may make adjustments to provisional amounts that we have recorded that may impact our provision for income taxes in the period in which the adjustments are made.

 

The base erosion and profit shifting (“BEPS”) project undertaken by the Organization for Economic Cooperation and Development (“OECD”) may have adverse consequences to our tax liabilities. The BEPS project contemplates changes to numerous international tax principles, as well as national tax incentives, and these changes, when adopted by individual countries, could adversely affect our provision for income taxes. Countries have only recently begun to translate the BEPS recommendations into specific national tax laws, and it remains difficult to predict the magnitude of the effect of such new rules on our financial results.

 

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Risks Related to an Investment in our Common Shares

 

There is limited trading volume for our common shares, which reduces liquidity for our shareholders, and may furthermore cause the share price to be volatile, all of which may lead to losses by investors.

 

There has historically been limited trading volume in our common shares, both on the NASDAQ Capital Market and the TASE. While recently there has been improvement, the trading volume is still limited, which results in reduced liquidity for our shareholders. As a further result of the limited volume, our common shares have experienced significant market price volatility in the past and may experience significant market price and volume fluctuations in the future, in response to factors such as announcements of developments related to our business, announcements by competitors, quarterly fluctuations in our financial results and general conditions in the industry in which we compete.

 

We are a foreign private issuer under the rules and regulations of the SEC and are therefore exempt from a number of rules under the Exchange Act and are permitted to file less information with the SEC than a domestic U.S. reporting company, which reduces the level and amount of disclosure that you receive.

 

As a foreign private issuer under the Exchange Act, we are exempt from certain rules under the Exchange Act, including the proxy rules, which impose certain disclosure and procedural requirements for proxy solicitations. Moreover, we are not required to file periodic reports and financial statements with the SEC as frequently or as promptly as domestic U.S. companies with securities registered under the Exchange Act; and are not required to comply with Regulation FD, which imposes certain restrictions on the selective disclosure of material information. In addition, our officers, directors and principal shareholders are exempt from the reporting and “short-swing” profit recovery provisions of Section 16 of the Exchange Act and the rules under the Exchange Act with respect to their purchases and sales of our common shares. Accordingly, you receive less information about our company than you would receive about a domestic U.S. company, and are afforded less protection under the U.S. federal securities laws than you would be afforded in holding securities of a domestic U.S. company.

 

As a foreign private issuer, we are also permitted, and have begun, to follow certain home country corporate governance practices instead of those otherwise required under the Listing Rules of the NASDAQ Stock Market for domestic U.S. issuers. We have informed NASDAQ that we follow home country practice—presently in Curaçao and prospectively, following the completion of our planned migration, in the Cayman Islands— with regard to, among other things, composition of our Board of Directors (whereby a majority of the members of our Board of Directors need not be “independent directors,” as is generally required for domestic U.S. issuers), director nomination procedure and approval of compensation of officers. In addition, we have opted to follow home country law instead of the Listing Rules of the NASDAQ Stock Market that require that a listed company obtain shareholder approval for certain dilutive events, such as the establishment or amendment of certain equity-based compensation plans, an issuance that will result in a change of control of the Company, certain transactions other than a public offering involving issuances of a 20% or greater interest in the Company, and certain acquisitions of the stock or assets of another company. Following our home country governance practices as opposed to the requirements that would otherwise apply to a United States company listed on the NASDAQ Capital Market may provide our shareholders with less protection than they would have as stockholders of a domestic U.S. company.

 

Our controlling shareholder, Formula Systems (1985) Ltd., beneficially owns approximately 48.9% of our outstanding Common Shares and therefore asserts a controlling influence over matters requiring shareholder approval, which could delay or prevent a change of control that may benefit our public shareholders.

 

Formula Systems (1985) Ltd. beneficially owns approximately 48.9% of our outstanding Common Shares. As a result, it exercises a controlling influence over our operations and business strategy and has sufficient voting power to control the outcome of various matters requiring shareholder approval. These matters may include:

 

  · the composition of our board of directors, which has the authority to direct our business and to appoint and remove our officers;

 

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  · approving or rejecting a merger, consolidation or other business combination;

 

  · raising future capital; and

 

  · amending our Articles, which govern the rights attached to our Common Shares.

 

This concentration of ownership of our Common Shares could delay or prevent proxy contests, mergers, tender offers, open-market purchase programs or other purchases of our Common Shares that might otherwise give you the opportunity to realize a premium over the then-prevailing market price of our Common Shares. This concentration of ownership may also adversely affect our share price.

 

Our U.S. shareholders may suffer adverse tax consequences if we are classified as a passive foreign investment company or as a “controlled foreign corporation”.

 

Generally, if for any taxable year 75% or more of our gross income is passive income, or at least 50% of the average quarterly value of our assets (which may be measured in part by the market value of our Common Shares, which is subject to change) are held for the production of, or produce, passive income, we would be characterized as a passive foreign investment company, or PFIC, for U.S. federal income tax purposes under the Internal Revenue Code of 1986, as amended, or the Code. Based on our gross income and gross assets, and the nature of our business, we believe that we were not classified as a PFIC for the taxable year ended December 31, 2017. Because PFIC status is determined annually based on our income, assets and activities for the entire taxable year, it is not possible to determine whether we will be characterized as a PFIC for the taxable year ending December 31, 2018, or for any subsequent year, until we finalize our financial statements for that year. Furthermore, because the value of our gross assets is likely to be determined in large part by reference to our market capitalization, a decline in the value of our Common Shares may result in our becoming a PFIC. Accordingly, there can be no assurance that we will not be considered a PFIC for any taxable year. Our characterization as a PFIC could result in material adverse tax consequences for you if you are a U.S. investor, including having gains realized on the sale of our Common Shares treated as ordinary income, rather than a capital gain, the loss of the preferential rate applicable to dividends received on our Common Shares by individuals who are U.S. holders, and having interest charges apply to distributions by us and the proceeds of share sales. Certain elections exist that may alleviate some of the adverse consequences of PFIC status and would result in an alternative treatment (such as mark-to-market treatment) of our Common Shares. Prospective U.S. investors should consult their own tax advisers regarding the potential application of the PFIC rules to them. Prospective U.S. investors should refer to “Item 10.E. Taxation—U.S. Federal Income Tax Considerations” for discussion of additional U.S. income tax considerations applicable to them based on our treatment as a PFIC.

 

Certain U.S. holders of our Common Shares may suffer adverse tax consequences if we or any of our non-U.S. subsidiaries are characterized as a “controlled foreign corporation”, or a CFC, under Section 957(a) of the Code. Certain changes to the CFC constructive ownership rules under Section 958(b) of the Code introduced by the TCJA may cause one or more of our non-U.S. subsidiaries to be treated as CFCs, may also impact our CFC status, and may affect holders of our Common Shares that are United States shareholders. Generally, for U.S. shareholders that own 10% or more of the combined vote or combined value of our Common Shares, this may result in negative U.S. federal income tax consequences and these shareholders may be subject to certain reporting requirements with the U.S. Internal Revenue Service. Any such 10% U.S. shareholder should consult its own tax advisors regarding the U.S. tax consequences of acquiring, owning, or disposing our Common Shares and the impact of the TCJA, especially the changes to the rules relating to CFCs.

 

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Risks Related to Our Israeli Operations and Our Status as a Curacao Company

 

The tax benefits that are available to us require us to continue to meet various conditions and may be terminated or reduced in the future, which could increase our costs and taxes. 

 

Certain of our Israeli subsidiaries were granted Approved Enterprise, or AE, status under the Israeli Law for the Encouragement of Capital Investments, 5719-1959, or the Investment Law. These subsidiaries elected the alternative benefits program, pursuant to which income derived from the AE program is tax-exempt for two years and enjoys a reduced tax rate of 10.0% to 25.0% for up to a total of eight years, subject to an adjustment based on the percentage of foreign investors’ ownership. We were also eligible for certain tax benefits provided to Benefited Enterprises, or BEs, under the Investment Law. In May 2015, we notified the Israel Tax Authority that we apply the new tax Preferred Enterprise, or PFE, regime under the Investment Law instead of our AE and BE. Accordingly, we are eligible for certain tax benefits provided to PFEs under the Investment Law. Beginning in 2017, part of the Company taxable income in Israel is eligible for benefits under Amendment 73 of the Investment Law. If we do not meet the conditions stipulated in the Investment Law and the regulations promulgated thereunder, as amended, for the PTE, any of the associated tax benefits may be cancelled and we would be required to repay the amount of such benefits, in whole or in part, including interest and CPI linkage (or other monetary penalties). Further, in the future these tax benefits may be reduced or discontinued. If these tax benefits are reduced, cancelled or discontinued, our Israeli taxable income would be subject to regular Israeli corporate tax rates (25% in 2016, 24% in 2017 and 23% in 2018 and thereafter), which would harm our financial condition and results of operation. Additionally, if we increase our activities outside of Israel through acquisitions, for example, our expanded activities might not be eligible for inclusion in future Israeli tax benefit programs. See “Item 5. Operating and Financial Review and Prospects—Operating Results—Impact of Tax Policies and Programs on our Operating Results —Israeli Tax Considerations and Government Programs.” 

 

In the event of distribution of dividends from said tax-exempt income, the amount distributed will be subject to corporate tax at the rate that would have otherwise been applicable on the AE/BE’s income.

 

The Israeli government grants that our Israeli subsidiary has received require us to meet several conditions and restrict our ability to manufacture products and transfer know-how developed using such grants outside of Israel and require us to satisfy specified conditions.

 

One of our Israeli subsidiaries received grants in the past from the government of Israel through the National Technological Innovation Authority, or the Innovation Authority (formerly operating as Office of the Chief Scientist of the Ministry of Economy of the State of Israel, or the OCS), for the financing of a portion of its research and development expenditures in Israel with respect to our legacy technology. In consideration for receiving grants from the OCS, we are obligated to pay the Innovation Authority royalties from the revenues generated from the sale of products (and related services) developed (in whole or in part) using the OCS funds, in an amount that is up to 100% to 150% of the aggregate amount of the total grants that we received from the OCS, plus annual interest for grants received after January 1, 1999. We must fully and originally own any intellectual property developed using the OCS grants and any right derived therefrom unless transfer thereof is approved in accordance with the provisions of the Israeli Encouragement of Research, Development and Technological Innovation Law, 5744-1984, or the Innovation Law (formerly known as the Encouragement of Industrial Research and Development Law, 5744-1984, or the Research Law), and related regulations.

 

When a company develops know-how, technology or products using grants provided by the Innovation Authority, the terms of these grants and the Innovation Law restrict the transfer of such know-how, and the transfer of manufacturing or manufacturing rights of such products, technologies or know-how outside of Israel. Even after the repayment of such grants in full, we will remain subject to the restrictions set forth under the Innovation Law, including:

 

·Transfer of know-how outside of Israel. Any transfer of the know-how that was developed with the funding of the Innovation Authority, outside of Israel, requires prior approval of the Innovation Authority, and the payment of a redemption fee.

 

·Local manufacturing obligation. The terms of the grants under the Innovation Law require that the manufacturing of products resulting from Innovation Authority-funded programs be carried out in Israel, unless a prior written approval of the Innovation Authority is obtained (except for a transfer of up to 10% of the production rights, for which a notification to the Innovation Authority is sufficient).

 

·Certain reporting obligations. We, as any recipient of a grant or a benefit under the Innovation Law, are required to file reports on the progress of activities for which the grant was provided as well as on our revenues from know-how and products funded by the Innovation Authority. In addition, we are required to notify the Innovation Authority of certain events detailed in the Innovation Law.

 

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Therefore, if aspects of our technologies are deemed to have been developed with OCS funding, the discretionary approval of an OCS committee would be required for any transfer to third parties outside of Israel of know-how or manufacturing or manufacturing rights related to those aspects of such technologies. We may not receive those approvals. Furthermore, the OCS may impose certain conditions on any arrangement under which it permits us to transfer technology or development out of Israel.

 

The transfer of OCS-supported technology or know-how outside of Israel may involve the payment of significant amounts, depending upon the value of the transferred technology or know-how, the amount of OCS support, the time of completion of the OCS-supported research project and other factors. Furthermore, the consideration available to our shareholders in a transaction involving the transfer outside of Israel of technology or know-how developed with OCS funding (such as a merger or similar transaction) may be reduced by any amounts that we are required to pay to the OCS.

 

We received grants from the OCS prior to an extensive amendment to the Research Law that came into effect as of January 1, 2016, or the Amendment, which may also affect the terms of existing grants. The Amendment provides for an interim transition period (which has not yet expired), after which time our grants will be subject to terms of the Amendment. Under the Research Law, as amended by the Amendment, the Authority is provided with a power to modify the terms of existing grants. Such changes, if introduced by the Authority in the future, may impact the terms governing our grants.

 

We are not subject to the supervision of the Central Bank of Curaçao and Sint Maarten, so our shareholders are not protected by any regulatory inspections in Curaçao.

 

We are not subject to any regulatory supervision in Curaçao by the Central Bank of Curaçao and Sint Maarten. As a result, shareholders are not protected by any regulatory supervision or inspections by any regulatory agency in Curaçao, and we are not required to observe any restrictions in respect of its conduct, except to the extent disclosed in our annual report or our Articles.

 

We have been granted an exemption under the Foreign Exchange Regulations Curaçao and Sint Maarten enacted by the Central Bank of Curaçao and Sint Maarten (referred to as the FX Regulations). As a result of this exemption, we are exempted from certain conditions, regulations and provisions stemming from the FX Regulations relating to, among other things, capital transactions with non-residents of Curaçao (including dividend payments) and license fees on payments to non-residents of Curaçao. The exemption has been granted subject to our compliance with certain conditions, and the Central Bank of Curaçao and Sint Maarten can revoke the exemption should we no longer comply with one or more of those conditions. Those conditions include that none of our activities may take place in Curaçao or Sint Maarten, that we may not offer goods and services to residents of Curaçao or Sint Maarten, that we may not participate in Curaçao and Sint Maarten resident companies and that we may not extend loans to residents of Curaçao or Sint Maarten. Furthermore, residents of Curaçao or Sint Maarten may not be holders of our Common Shares.

 

The rights of shareholders under Curaçao law differ from those under U.S. law, and you may have fewer protections as a shareholder.

 

Our corporate affairs are governed by our Articles, the Civil Code of Curaçao and the civil law of Curaçao. The rights of shareholders to take legal action against our directors, actions by minority shareholders and the fiduciary responsibilities of our directors under Curaçao law are to a large extent governed by the Civil Code of Curaçao, the civil law of Curaçao and applicable case law. The rights of shareholders and the fiduciary responsibilities of our directors under Curaçao law are not as clearly established as they would be under statutes or judicial precedents in some jurisdictions in the U.S. In particular, Curaçao has a less developed body of securities laws as compared to the U.S., and some states (such as Delaware) have more fully developed and judicially interpreted bodies of corporate law. In addition, Curaçao law does not generally distinguish between public and private companies, and some of the protections and safeguards (such as statutory pre-emption rights, except to the extent that they are expressly provided for in the Articles) that investors may expect to find in relation to a public company are not provided for under Curaçao law, subject to the duty of directors and shareholders to generally act towards one another in accordance with the principles of reasonableness and fairness. As a result of all of the above, holders of our Common Shares may have more difficulty in protecting their interests in the face of actions taken by our management, directors or major shareholders than they would as shareholders of a U.S. company.

 

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Shareholders in Curaçao companies may not be able to initiate shareholder derivative actions, thereby depriving a shareholder of the ability to protect its interests.

 

Derivative actions are not permitted in Curaçao. Under Curaçao law, only the Company may bring a civil action against a person who is liable to a Curaçao public limited liability company. Shareholders in Curaçao companies may not have standing to initiate a shareholder derivative action in a federal court of the U.S. The circumstances in which any such action may be brought, and the procedures and defenses that may be available in respect to any such action, may result in the rights of shareholders of a Curaçao company being more limited than those of shareholders of a company organized in the U.S. Accordingly, shareholders may have fewer alternatives available to them if they believe that corporate wrongdoing has occurred. The Curaçao courts are also unlikely to: (i) recognize or enforce against us judgments of courts in the U.S. based on certain civil liability provisions of U.S. securities law; or (ii) to impose liabilities against us, in original actions brought in Curaçao, based on certain civil liability provisions of U.S. securities laws that are penal in nature. There is no statutory recognition in Curaçao of judgments obtained in the U.S., although the courts of Curaçao will in certain circumstances recognize and enforce the non-penal judgment of a foreign court of competent jurisdiction without retrial on the merits.

 

The laws of Curaçao provide little protection for minority shareholders, so minority shareholders will have little or no recourse if the shareholders are dissatisfied with the conduct of our affairs.

 

Under the laws of Curaçao, there is little statutory protection for minority shareholders other than the provisions of the Civil Code of Curaçao, which provides for shareholder remedies. Minority shareholders of a Curaçao company may commence legal proceedings against the company in which they hold shares on the following grounds:

 

  · tort (onrechtmatige daad)- a tortious act may arise if a company makes certain promises to the shareholders, the shareholders could expect a certain attitude from the company according to rules of “reasonableness and fairness,” and the company does not comply therewith;
     
  · breach of contract- assuming there is any specific contract between the minority shareholders and the company; and
     
  · nullification of resolutions- if a resolution is approved in violation of the provisions of Curacao law or the articles of association as to how the decision needs to be taken, or in violation of rules, or in case a resolution to amend the articles adversely affects the legal position of a person involved in the company (such as a minority shareholder), provided such person has a serious interest, the resolution can be nullified.

 

Under Curaçao law, shareholders who satisfy certain threshold requirements can initiate inquiry proceedings with the joint Court of Justice of Aruba, Curaçao, Sint Maarten, Bonaire, Sint Eustatius and Saba. Such inquiry proceedings can relate to the policy of the company and its business as well as to the (deficient) functioning of the company as such. The Court of Justice will only order an inquiry if it finds that well-founded reasons exist to doubt the soundness of the policies of the company or the conduct of its business. This is not restricted to the policies of the governing bodies of the company (for example, the board) but can also pertain to acts or omissions of the general meeting of shareholders. During the proceedings, the Court of Justice may impose immediate provisional measures, such as a temporary amendment to the articles of association of the company and the appointment of interim board members.

 

In addition to the above, there are alternative claims under Curaçao law available for minority shareholders who seek relief for alleged wrongful acts by a company, its directors or the majority shareholders, such as contesting the corporate resolutions of a company and requesting the majority shareholders to purchase the stake of the minority shareholders (uittreding). However, these alternative possibilities are very cumbersome and time-consuming and may not be instituted in respect of shares which are traded at a stock exchange.

 

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Curacao law makes it more difficult for us to enter into a change of control transaction in which we are acquired and you are paid a premium on the shares that you hold in our company.

 

Our status as a Curacao company makes it more challenging (compared to Israel and various US states) to consummate a change of control transaction in which our company is acquired and our shareholders benefit economically via the payment of a premium on their shares relative to the then-current market price. Under Curacao law, there is no legal basis for a reverse triangular merger, a commonly-utilized transaction structure for the acquisition of publicly traded companies such as ours, in which shareholders receive cash. Curacao law allows for the acquisition of a publicly traded company such as ours for cash through a tender offer, provided that the offeror acquires at least 95% of the company's issued and outstanding share capital (which 95% threshold may be reduced under certain circumstances to 90% or 80% in case of a pre-wired asset sale), following which the offeror can purchase the remaining shares subject to court approval and possibly the exercise of certain dissenters' rights. Since Curacao law does not permit a cash merger and due to the challenges in obtaining such level of acceptance of the tender offer, a potential buyer might need to use different structures to acquire our company, e.g. migrating the company to another jurisdiction that allows for a cash merger as a means to acquire publicly traded companies; however, such process may be very time-consuming and could therefore prevent such a transaction from occurring. An additional option under Curacao law is a sale of assets, which is likely to be generally less efficient to our shareholders from a tax perspective.  Each of the foregoing limitations or disadvantages of effecting an acquisition of our company or its assets in which shareholders realize a premium could furthermore adversely impact the market price of our shares in an ongoing manner. 

 

Item 4.Information on the Company

 

A.History and Development of the Company.

 

Corporate Details

 

Our legal and commercial name is Sapiens International Corporation N.V., and we were incorporated and registered in Curaçao on April 6, 1990. In November 2017, our shareholders approved the migration of our legal domicile to the Cayman Islands. Such migration is subject to certain rulings and approvals of the tax authorities in Israel and Curacao, which have not yet been received as of the date of this annual report. We are registered as an Israeli company for tax purposes only. Our principal place of business is located at Azrieli Center, 26 Harokmim Street, Holon, 5885800, Israel, and our telephone number there is +972-3-790-2000. Sapiens Americas Corporation is our agent in the United States. Our World Wide Web address is www.sapiens.com. The information contained on that web site is not a part of this annual report. Except as described elsewhere in this annual report, we have not had any important events in the development of our business since January 1, 2017.

 

Capital Expenditures and Divestitures since January 1, 2015

 

In the second quarter of 2015, we acquired IBEXI Solutions Private Limited, or IBEXI, an India-based provider of insurance solutions and services, which services 18 insurers in both the P&C and L&A markets throughout Southeast Asia. The total purchase price in this acquisition was approximately $4.8 million, which we paid in cash at the closing, and which is subject to adjustment based on certain future criteria. For further information, please see Note 1(e) to our consolidated financial statements included in Item 18 of this annual report.

 

In the third quarter of 2015, we acquired Sapiens Poland (formerly Insseco), a Poland-based software and services provider for the insurance market, from Asseco Poland S.A., or Asseco, the indirect controlling shareholder of our company, which helped us to establish a strong presence in the Polish insurance market. We paid approximately $9.1 million in cash for Sapiens Poland (formerly Insseco), subject to upwards adjustment based on its achieving future revenue goals. For further information, please see Note 1(e) to our consolidated financial statements included in Item 18 of this annual report.

 

In the third quarter of 2016, we acquired Maximum Processing Inc., or MaxPro, a privately-held company headquartered in Bradenton, Florida, with offices in Garner, North Carolina. MaxPro is the provider of the Stingray System, a P&C insurance administration suite targeted towards the tier 4-5 U.S. market, as well as managing general agents, or MGAs, third-party administrators, or TPAs, and insurance brokers. We paid $4.3 million in cash for this acquisition (including $1.5 million that we placed in escrow at the closing). The seller also has the right to receive performance based payments of up to $2.6 million relating to achievements of revenue and profitability goals over three years (2016, 2017, 2018). For further information, please see Note 1(e) to our consolidated financial statements included in Item 18 of this annual report.

 

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In the third quarter of 2016, we acquired 4Sight Business Intelligence Inc., or 4Sight, a provider of business intelligence reports that is based in Austin, Texas. 4Sight offers insurance-specific business intelligence, or BI, solutions, including 4SightBI, a P&C-specific, off-the-shelf business intelligence (BI) product. We paid $330,000 in cash for this acquisition. In addition, the seller of 4Sight may receive additional performance-based payments of up to $2.6 million relating to achievements of revenue and profitability goals over three years (2016, 2017, 2018). For further information, please see Note 1(e) to our consolidated financial statements included in Item 18 of this annual report.

 

In the first quarter of 2017, we acquired StoneRiver, a US-based provider of a wide range of technology solutions and services to insurance carriers, agents, and broker-dealers, whose product groups encompass P&C solutions, Life solutions, workers compensation, and reinsurance solutions for all major business lines. The acquisition will enable us to expand the range of solutions and services that we offer in North America. We paid approximately $100 million in cash, subject to certain adjustments based on working capital, transaction expenses, unpaid debt and certain litigation matters. For further information, please see Note 1(b) to our consolidated financial statements included in Item 18 of this annual report.

 

In the fourth quarter of 2017, we acquired KnowledgePrice.com, a Latvian company that specializes in digital insurance services and consulting. This acquired entity will ill join our Digital Division, which focuses on digital and business intelligence services and solutions, including portal and digital distribution offerings to customers worldwide. The total purchase price was approximately €5,840,500, out of which €3,100,000 was paid at closing and the remainder is subject to earn-outs based on the revenues of KnowledgePrice.com following the closing. For further information, please see Note 1(d) to our consolidated financial statements included in Item 18 of this annual report.

 

In the first quarter of 2018, we acquired Adaptik, a New Jersey company engaged in the development of software solutions for P&C insurers, including policy administration, rating, billing, customer management, task management and product design. The total purchase price was approximately $19.5 million in cash, subject to adjustment and about $3.5 million is subject to earn out-based specific criteria. For further information, please see Note 18 to our consolidated financial statements included in Item 18 of this annual report.

 

Our principal capital expenditures during the last three years related mainly to the purchase of computer equipment and software for use by our subsidiaries. Our capital expenditures totaled approximately $2.8 million in 2015, $4.7 million in 2016 and $2.6 million in 2017.

 

B.Business Overview.

 

Sapiens is a leading global provider of software solutions for the insurance industry. Our extensive expertise is reflected in our innovative software platforms, solutions and services for providers of property and casualty/general insurance (P&C), and life, pension and annuity (L&A) insurance, as well as our full digital suite, which facilitates an innovative, holistic and seamless digital experience for agents, customers and assorted insurance personnel, across multiple devices and technologies Our offerings enable our customers to effectively manage their core business functions, including policy administration, claims management and billing, and support them during their journey to becoming a digital insurer.

 

Sapiens also supplies a complete offering for reinsurance providers and a decision management platform for a variety of financial services providers that enables our customers to quickly deploy business logic and comply with policies and regulations across their organizations.

 

Our platforms possess modern, modular architecture and are digital-driven. They empower customers to respond to the rapidly changing insurance market and increasing regulatory changes, while improving the efficiency of their core operations. These enhancements increase revenue and reduce costs.

 

2017 was a year of organizational growth for Sapiens, a trend that has shown no sign of abating in early 2018. The company announced its acquisition of StoneRiver in February of 2017. StoneRiver’s product portfolio is comprised of claims, billing, rating, underwriting, illustrations, reinsurance and finance & compliance solutions for all major insurance business lines, across both P&C and L&A. StoneRiver’s rich set of solutions complements Sapiens’ existing offerings and has helped Sapiens accelerate its growth in the U.S. market specifically, and globally as well.

 

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In late December 2017/early January 2018, Sapiens expanded our digital division’s capabilities through the acquisition of KnowledgePrice.com (or KnowledgePrice), a technology specialist with expertise in digital insurance services and consulting. Privately-held KnowledgePrice employed about 50 digital insurance technology experts and is a provider of services to leading insurance providers in the UK and Europe. KnowledgePrice serves as a center for excellence for digital engagement services. Its experts joined Sapiens’ Digital Division, which focuses on digital and business intelligence (BI) services and solutions, including portal and digital distribution offerings to customers worldwide. The expanded Digital Division will create innovative offerings and provide full support during customers’ digital journeys.

 

In early 2018, we announced the acquisition of Adaptik, a North American P&C solution provider. This acquisition is expected to enable Sapiens to provide North American P&C carriers with an enhanced platform, which will improve Sapiens’ competitive position and enable it to increase its market share in the North American insurance market. Going forward, Sapiens will offer an innovative P&C digital insurance platform. This platform will be formed by combining three powerful core components: Adaptik Policy, Adaptik Billing and StoneRiver Stream® Claims, accompanied by Sapiens’ existing solutions for data and analytics, digital engagement and distribution, and cloud operation.

 

Software Solutions

 

Our software portfolio is comprised of:

 

·Life, Pension and Annuities Platforms/Solutions – comprehensive software platform and solutions for the management of a diversified range of products for life, pension and annuities. Our portfolio includes Sapiens ALIS, LifeSuite, Life Portraits, LifeApply, Sapiens INSIGHT and Sapiens Closed Books.

 

·Property and Casualty/General Insurance Platforms/Solutions – comprehensive software platforms and solutions supporting a broad range of business lines, including personal, commercial and specialty lines, and workers’ compensation. Our portfolio includes Sapiens IDIT, Adaptik Policy, Adaptik Billing, Stream Claim, Sapiens Stingray, PowerSuite and CompSuite.

 

·Digital Engagement – a digital insurance suite that provides an enablement platform that digitalizes insurance carriers’ business and helps them transform. It is comprised of a set of integrative offerings, including: advanced analytics, a customer-centric portal for consumers and agents, an API layer for seamless integration with the insurtech ecosystem, accompanied by a strong cloud proposition.

 

We also offer consulting process analysis, business process automation, project management, performance optimization, etc. and services, such as information system development and various implementation methodologies. In sum, we provide an end-to-end, holistic and seamless digital experience for agents, customers and assorted insurance personnel.

 

·Reinsurance – complete reinsurance software solutions for full financial control and auditing support. Our portfolio includes Sapiens Reinsurance, Freedom Reinsurance System (FRS) and Universal Reinsurance System (URS®).

 

·Financial and Compliance – financial and compliance solutions comprised of both annual statement and insurance accounting software. This software includes eFreedom® Annual Statement, PRO Financial General Ledger and Accounts Payable, PTE Financial applications, Insurance Financial reporting and Power2Play.

 

·Decision Management – we offer Sapiens DECISION, an enterprise-scale platform that enables institutions to centrally author, store and manage all organizational business logic. Organizations of all types – including banks, mortgage institutions and insurers – use it to track, verify and ensure that every decision is based on the most up-to-date rules and policies. 

 

·Technology-Based Solutions – tailor-made solutions (unrelated to the insurance or financial services market) based on our eMerge platform, which provides end-to-end, modular business solutions, ensuring rapid time to market.

 

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Services

 

Our services modernize and automate processes for insurance providers and financial institutions around the globe, helping to create greater organizational efficiencies, reduce costs and provide a better end user experience.

 

The Sapiens Service Suite is comprised of three main pillars: program delivery, business services and managed services, as well as our various methodologies (which are applied across the first three pillars).

 

Program delivery includes:

 

·Project and program management
·Core development and implementation
·Integration
·Deployment
·Testing

 

Business transformation services are comprised of:

 

·Business transformation – planning and strategy, business process evaluation,
·training and change management
·Digital transformation – business model and processes transformation and data management consolidation, and data migration
·UAT testing
·System integration

 

Managed services include:

 

·Hosting services
·Application and system management
·Ongoing production support

 

Sapiens has partnered with Microsoft Azure to offer its policy administration systems and accompanying services over private and public clouds. Sapiens’ cloud deployment includes full infrastructure for operations, plus the option of choosing cloud-related managed services delivered by Sapiens’ experienced professional services team.

 

Methodologies:

 

Sapiens offers various methodologies, including Agile. We also provide Sapiens Delivery Tools and Sapiens Delivery Performance Indicators.

 

Built on a solid foundation of insurance domain expertise, proven technology and a history of successful deployments, our organization assists clients in identifying and eliminating IT barriers to achieve business objectives.

 

Our Marketplace and its Needs

 

Our Target Markets

 

We operate in a large market undergoing significant transformation. According to “IT Spending in Insurance: a Global Perspective, 2017” (a research report by Celent, a research and consulting firm, written by Jamie Macgregor, Juan Mazzini, Karen Monks and KyongSun Kong, and published on April 5, 2017), global IT spending by insurance companies is expected to grow from $184.8 billion in 2017 to $193.7 billion in 2018, and $202 billion in 2019. IT spending on external software and IT services, which was predicted to total approximately $83 billion in 2017, is expected to increase to $89 billion by 2018, reflecting a 7.6% growth rate. It is thought that IT spending in the life vertical will grow from $101.5 billion in 2017, to $106.1 billion in 2018, reflecting a 4.6% growth rate. IT spending in the property and casualty vertical is expected to grow from $83.8 billion in 2017 to $87.6 billion in 2018, reflecting a 5.1% growth rate.

 

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We believe that our current total addressable market for core insurance software solutions is approximately $40 billion, which we expect to grow as a result of insurance carriers’ and financial institutions’ need to spend on modern software solutions from external providers to address the operational challenges presented by the inefficiency of their legacy core systems. Legacy systems possess technical and functional limitations that adversely impact carriers’ ability to swiftly launch new, innovative products that satisfy their customers’ changing needs and preferences. By slowing down carriers’ business and geographic expansion, legacy systems create operational inefficiencies that are translated into increased business risk and financial costs. They are also a barrier for the adoption of digital capabilities, due to their inability to communicate and interact with innovative digital solutions. Today’s insurance providers, accordingly, are looking for more than just the traditional “core” capabilities. They seek insurance platforms with a wider range of capabilities, including full digitalization,

 

Our customers are operating in a dynamic and changing regulatory environment. Often their legacy systems simply do not support new regulatory requirements and put carriers at risk of non-compliance. We believe these challenges will accelerate the shift from spending on legacy systems to new vendor software solutions, and the shift from reliance on in-house development to external vendors.

 

There is also a strong trend of shifting attention to the end-customer experience and activities, with a focus on digital operations. Many insurers are currently unable to provide the type of quality digital experience that their customers are already enjoying across most other verticals and customer satisfaction is only one of the many recognized benefits of going digital. This can only be supported via increased usage of data for decision-making, risk analysis, customer evaluation and rating, which requires a streamlined data flow and easy access to information from multiple sources.

 

Life, Pension and Annuity Markets

 

Life, pension and annuity providers offer their customers a wide range of products for long-term savings, protection, pension and insurance. They assist policyholders with financial planning through life insurance, medical and investment products. Their products can be classified into several areas, primarily investment and savings, risk and protection, pension, and health-related products. These products can be targeted to individuals, as well as group- and employee benefit types of products.

 

Because the products in this field are long-term in nature, when insurance providers order new platforms from us, the decision to acquire such systems is typically slower and involves multiple decision makers in the organization.

 

Property & Casualty/General Insurance Market

 

Property and casualty insurance (P&C) – also known as non-life insurance, or general insurance (GI) – protects policyholders against a range of losses on items of value. P&C insurance includes the personal segment, which is insurance coverage for individuals, with products such as motor, home, personal property and travel; the commercial segment, covering aspects of commercial activity, such as commercial property, car fleets and professional liability; and specialty lines, covering unique domains, such as marine, art and credit insurance. This market also includes workers’ compensation for market carriers, administrators and state funds.

 

In the past few years, the P&C market is characterized by a fast rate of digital adoption. New business and technology models are adopted rapidly, to launch innovative business offerings. This requires advanced software solutions, both on the “core” layer, which needs to be flexible and open, to the variety of digital tools addressing customer experience needs.

 

Reinsurance Market

 

Reinsurance is insurance that is purchased by an insurance company (“ceded reinsurance”) from another insurance company (“assumed reinsurance”) as a means of risk management. The reinsurer and the insurer enter into a reinsurance agreement (referred to as “contract” or “treaty”), which details the conditions upon which the reinsurer would pay the insurer’s losses. The reinsurer is paid a reinsurance premium by the insurer and the insurer issues insurance policies to its own policyholders. The insurer must maintain an accurate system of records to track its reinsurance contracts and treaties, to avoid claims leakage.

 

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Financial Services Market for Decision Management

 

Increasing competition, regulatory burden, customer experience expectations, the proliferation of digital and product innovation requirements have necessitated a shift in thinking and approach across the financial services market. By replacing conventional policy and process management with the discipline known as “decision management,” financial institutions are bridging the gap between business and IT, by enabling business users to rapidly frame requirements in formal business models that can be easily understood by all stakeholders.

 

The decision management processes in financial services affects overall corporate performance, including its impact on customers and competitors. Decision management systems are a key performance component of every financial services organization, as they help the organization define, avoid and hedge financial risk.

 

Needs of our Target Markets

 

Large financial organizations must constantly invest in their IT systems to respond to key market drivers.

 

They require the ability to:

 

·Satisfy today’s sophisticated, tech-savvy and demanding customers – who expect the type of instant, personalized service they enjoy via Facebook or Amazon – via digitalization and innovative initiatives, providing a stronger customer experience and engagement
·Use advanced technologies, such as artificial intelligence and machine learning, to facilitate, improve and automate traditional insurance processes
·Provide innovative business models, based on technology capabilities and digital operation (such as a portal, a web-based acquisition process, advanced analytics, customer engagement platforms and the usage of data sources such as wearables, the Internet of Things (IoT) and robo-advice.
·Respond to complex and evolving regulatory standards, such as Solvency II, IFRS 17, Dodd-Frank legislation, GDPR, etc.
·Support internal customers’ growth and operations. This includes reducing the time to market of new products, expanding into new geographies, reducing costs and streamlining operations.
·Rapidly launch new products and propositions to the market, within a short timeframe and using existing, pre-defined capabilities.

 

Specific Needs of the Insurance Markets

 

The insurance market is a large, complex and highly regulated environment. Insurance carriers operate in a super-competitive and quickly evolving market, which necessitates differentiating their value propositions. Additionally, carriers operate under a rigid regulatory regime that demands fast compliance. The insurance market is going through a rapid evolution process, driven by new technologies, digital capabilities and new business models, all enabled by new technologies.

 

To efficiently manage their operations, insurance carriers require IT platforms that enable rapid introduction of changes via configurable, user-driven activities, integration with internal and external systems, control and auditing of internal employees’ work, support for omni-channel distribution and clear visibility into the carrier’s business operations, through streamlining and intelligent usage of data.

 

To compete in the rapidly-changing environment, and win the competition for end-customers, insurance carriers require a coherent digital proposition, allowing them to better interact with their customers in a digital and omni-channel manner, and use robotics, predictive analytics, AI and machine learning to automate processes and get stronger business insights. The cloud can also be utilized for improved operations and scale.

 

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Insurance carriers are experiencing substantial operational challenges due to the inefficiency of their legacy policy administration systems and their lack of digitalization. These legacy systems, which include both technical and functional limitations, acutely impact carriers’ ability to cope with growing challenges, such as the need for innovation, the shift of power to the consumer, and the dynamic and constantly changing regulatory environment.

 

We believe the following are key considerations for insurance carriers when they think about upgrading their legacy systems:

 

·             Dynamic business environment with constantly changing regulations Many insurance carriers still use outdated legacy systems that are costly and time-consuming to modify or upgrade. This has prevented insurance carriers from innovating and growing. Carriers who use legacy systems may find that it is difficult for them to modify existing products, introduce new products and reach untapped market segments. Varied and frequently changing global regulatory requirements require specialized data and business rules, which makes change implementation particularly challenging.

 

·             Change in end-consumers’ behavior and the shift of power to consumers Insurance carriers must adapt rapidly to the shifting needs and behaviors of consumers, including the types and terms of insurance products offered, and how consumers access information. Insurance carriers require systems with integration capability and support for multi-channel distribution, so they can reach their clients’ customers and partners using multiple methods, including social media, across devices.

 

·             A need to improve operational efficiency and reduce total cost of ownership We believe that a majority of insurance carriers are still using inefficient and outdated processes that do not automate operations and workflows, and thus don’t offer efficient process management. Many of these processes may have high error rates. Additionally, the ongoing maintenance of legacy systems is expensive and technically difficult. A specialized IT staff with the requisite skills and experience needed to maintain these systems is difficult to find or replace. Insurers seek systems that are modern, digital, automated, efficient and easy to maintain, and can lower costs over the long term.

 

·             Increasing global and multi-national operation – A rising number of insurers are accelerating their growth initiatives through global acquisitions. These insurers seek sole providers who can deliver solutions that will be used across markets, combining the support of local regulatory requirements and specific customer needs, while driving a generic corporate business approach and strategy across the globe, reducing costs and overhead.

 

·             Going digital Digitalization holds significant potential for financial services institutions and insurers, but only if they manage to efficiently digitalize their operations, support multi-channel distribution and ensure that agents and customers are able to access real-time, accurate data at any time and from anywhere – including tablets and other mobile devices.

 

Business Decision Management Market Needs

 

Many large organizations, particularly in the financial services market, must comply with complex regulations. They operate in highly competitive markets that require quick responses. Business logic drives most of the financial services transactions and is the backbone of an organization’s policies and strategies, and its ability to successfully operate.

 

To operate efficiently, business owners must assume ownership of the business logic and possess the ability to define and modify it; standardize it; and reuse it across the organization. Today, business logic is defined by business owners and compliance officers, but IT departments translate the requirements into code. This process raises several key challenges: the result does not always accurately reflect the business requirements; the new requirements might conflict with, or override, previous requirements; and the entire process is not fully audited. These gaps often create an inefficient and risk-exposed organization.

 

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Sapiens’ Software Solutions

 

Overview

 

Sapiens is a leading global provider of software solutions for the insurance industry. By enabling our insurance and financial services customers to digitize their business and be more agile in the face of changing business environments, we help them take advantage of powerful current trends – such as the Internet of Things, artificial intelligence, machine learning, customer engagement, chat bots, etc. – while simultaneously reducing IT costs.

 

We offer our insurance customers a range of packaged software solutions that are:

 

·Digital– revealing their history and anticipating their future needs, while facilitating easy engagement across preferred interaction channels and multiple devices.
·Data-driven – based on set of data analysis tools, from analytics to predictive, to provide a data-driven operation.
·Highly automated – by using various technologies, from decision to robotics, we improve efficiency and offer agile customer engagement.
·Comprehensive and function-rich – supporting insurance standards, regulations and processes, by providing field-proven functionality and best practices.
·Customizable – easily matches our customers’ specific business requirements. Our flexible architecture and configurable structure allows quick functionality augmentation that permits our platform to be used across different markets, unique business requirements and regulatory regimes, utilizing our knowledge and extensive insurance best practices.
·Open architecture and insurtech ecosystem – provides easy integration to any external application under any technology, allowing streamlined connectivity to all satellite applications. This enhances the digital experience and omni-channel distribution, while maintaining total platform independence and system reliability. Easy interaction with various insurtech companies providing point-solutions that can be consumed by our platforms is enabled.
·Component-based and scalable – allows our customers to deploy platforms and solutions in a phased and modular approach, reducing risk and harm to the business, while supporting the growth plans and cost efficiency of the organization.

 

Our packaged software solutions enable:

 

·Rapid deployment of new insurance products – via configurable software, which creates a competitive advantage in all of the insurance markets we serve.
·Improvement of operational efficiency and reduction of risk – full insurance process automation, with configurable workflows, audit and control, streamlined insurance practices, and simple integration and maintenance.
·Reduction of overhead for IT maintenance – easy-to-integrate solutions with flexible and modern architecture, resulting in lower costs for ongoing maintenance, modifications, additions and integration.
·Enhanced omni-channel distribution and focus on the customers – event-driven architecture, a proactive client management approach, rapid access to all levels of data, and a holistic view of clients and distributors.
·Cloud-first as a preferred deployment model with the flexibility to also provide an on-premises deployment approach.
·Support of digitalization – massive potential for insurers and financial services institutions, if they manage to efficiently digitalize their operations, support omni-channel distribution and ensure that agents and customers are able to access real-time, accurate data at any time and from anywhere – including tablets and mobile devices.

 

Sapiens Life, Pension & Annuity Solutions

 

Sapiens ALIS for Life, Pension and Annuities

 

Sapiens ALIS is a comprehensive, single software platform for individual, employee and group business. It provides comprehensive support for the complete policy lifecycle of all life insurance products, from quotation and illustrations; to underwriting, billing and servicing; through claims management and exit processing.

 

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Sapiens ALIS supports a wide range of insurance product lines across multiple territories, including:

 

·Individual and group life, investment and savings
·Individual and group protection, and risk products
·Individual and group pension
·Annuity products
·Hybrid products

 

Sapiens ALIS is a modular system that includes all the functional components necessary for insurers to manage their business. Insurance carriers can manage their entire core business on a single platform and integrate Sapiens ALIS with other systems for the completion of a specific activity, or domain.

 

Sapiens ALIS integrates all of the following functions into one solution:

 

·Sales, quotation and illustration
·New business
·Underwriting
·Policy servicing
·Billing, collection and payment management
·Claims processing
·Agency and commission
·CRM and customer management
·Workflow and diary
·Compliance and calculation engine
·Insurance product manufacturing

 

Group insurance arrangements can be complex for insurers, with multiple and complex enrollment and eligibility rules, coverages, hierarchies and rules. Sapiens ALIS simplifies the complex management processes via an intuitive user experience, made simple with graphical, user-friendly, intuitive, business tools. This will create and empower self-sufficient business users to manage their business.

 

On top of the functional modules, Sapiens ALIS provides a set of digital capabilities to its customers, including an advanced analytics solution, a consumer and agent portal, personalized video capabilities and a customer engagement platform These capabilities increase customer touch-points and generate actionable insights. Sapiens has partnered with Microsoft Azure to offer its Sapiens ALIS policy administration system and accompanying services over private and public clouds. 

 

LifeSuite

 

LifeSuite is a web-based solution from StoneRiver, a Sapiens company, for automated underwriting and new business case management. LifeSuite streamlines underwriting case flow, speeding up and improving the entire new business process for carriers and their distribution channels. The solution delivers an impressive user impressive. While it provides the most efficient and consistent solution, carrier staff can customize system features and underwriting rules to fit business needs and make informed underwriting decisions.

 

Life Portraits

 

Life Portraits is an offering from StoneRiver, a Sapiens company. It is a point-of-sale solution, providing access anywhere: from the field, home or office in an electronic environment. The life insurance illustrations software is one of the most widely used new business insurance illustrations systems for life, health and annuities (including term, whole life, universal life, variable and equity-indexed annuities) that can strengthen relationships and speed your sales process. Life Portraits’ Home Office Maintenance tools enable the home office to edit plans for faster changes.

 

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LifeApply

 

LifeApply is web-based insurance application software from StoneRiver, a Sapiens company. It provides carriers with the choice of a standalone e-app system, or a more comprehensive solution that seamlessly integrates with the Life Portraits Illustrations and LifeSuite Automated Underwriting Systems. LifeApply combines the best features and functionality of previous offerings with a completely redesigned look-and-feel.

 

Sapiens Closed Books

 

Sapiens Closed Books is a solution for life and pension insurance companies that enables them to efficiently and more effectively administer policies and claims relating to their legacy portfolio and closed books business (products that are no longer open to new business, but must still be administered).

 

An industry leading and proven system, Sapiens Closed Books was designed to deliver solutions to legacy portfolio challenges, while significantly cutting the costs that are commonly associated with legacy platforms. Sapiens Closed Books provides a full, end-to-end legacy portfolio-focused system that is capable of dealing with missing data, old legislation and a wide range of product types.

 

The Sapiens Closed Books model ensures that benefits are realized in a controlled and low risk manner, via best practices and proven industry experience.

 

Sapiens Property & Casualty/General Insurance Solutions

 

Sapiens IDIT

 

Sapiens IDIT is a component-based software solution, addressing the specific needs of general insurance carriers for traditional insurance, direct insurance, bancassurance and brokers markets, primarily in EMEA and Asia-Pacific.

 

It supports a broad range of general, personal and commercial lines of business, including:

 

·Personal lines – motor, personal property and homeowner, yacht, travel, medical insurance, liability, professional indemnity, etc.
·Commercial lines – fleet insurance, marine, cargo, engineering, real estate and commercial building, small and large commercial risks, etc.
·Specialty lines – agriculture, credit insurance, art insurance, etc.

 

Sapiens IDIT integrates multiple front office and back office processes, including insurance product design, the quote and buy process, policy administration, underwriting, call center, and remote users and partners, backed by fully secured internet-based capabilities.

 

By providing a full set of components, Sapiens IDIT supports insurance carriers’ core operations lifecycle from inception to renewal, and claims. This includes:

 

·Policy administration
·Claims management
·Billing and collection

 

Sapiens IDIT includes modular software components that can be customized to match specific insurance business requirements, while providing pre-configured functionality, including:

 

·Product factory
·Policy administration
·Billing and collection
·Claims management
·Customer Relationship Management (CRM)
·Intermediary management
·Workflow management
·Technical accounting
·Document management

 

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On top of the functional modules, Sapiens IDIT provides a set of digital solutions and services to its customers, including an advanced analytics solution, a consumer and agent portal, personalized video capabilities and cloud offerings and services. These capabilities accelerate and automate responses, and reduce costs.

 

Sapiens North American P&C Platform

 

The recent acquisition of Adaptik will enable Sapiens to offer a truly modern, comprehensive property and casualty digital insurance platform to the North American region. This platform will be formed by combining three powerful core components: Adaptik Policy, Adaptik Billing and Stream® Claims, accompanied by Sapiens’ existing solutions for data and analytics, digital engagement and distribution, and cloud operation.  

 

·Adaptik Policy is used by agents, underwriters and customers to quote, issue and administer policies, including integration with third-party systems.
·Adaptik Billing is an enterprise billing platform from the leaders in configurable, scalable P&C insurance software solutions.
·Stream Claims streamlines end-to-end claims processing for all personal and commercial lines, and prepares you to adapt to new business requirements with the underlying platform.

 

Sapiens Stingray

 

Sapiens Stingray is a modular browser-based, property and casualty policy administration solution for Policy (quoting, rating, issuance), Billing, Claims and Reinsurance administration. Sapiens Stingray includes complete customer and agent portals as well as an imaging system. Additionally, Stingray has statistical bureau reporting, DMV, Credit Card, General Ledger, Comparative Raters, CLUE, Business Intelligence, reporting and many other third party insurance related interfaces.

 

PowerSuite and CompSuite

 

PowerSuite and CompSuite handle comprehensive workers’ compensation policy administration and claims needs. CompSuite can deliver a turnkey solution in just 120 days. PowerSuite helps upper market carriers, administrators and state funds improve customer satisfaction, optimize operational efficiency and increase profitability.

 

Sapiens Reinsurance

 

Sapiens Reinsurance is a comprehensive business and accounting solution designed to support the entire range of reinsurance contracts and activities, both ceded and assumed, for all lines of business. This software product provides both insurers and reinsurers superior handling of all reinsurance activities and in-depth accounting functionality on a single platform. By incorporating fully automated functions adapted conveniently for its customers’ business procedures, Sapiens Reinsurance provides flexible and full financial control of its customers’ reinsurance processes, including full support for all auditing requirements and statutory compliance.

 

Sapiens Reinsurance offers end-to-end processing, including:

 

·Set-up and definition of the reinsurance program and comprehensive transaction processing for both cession and assumed contracts
·Automated production of all periodic statements, billings, bordereaux and accounts for all parties – reinsurers, brokers and ceding companies
·All-inclusive financial accounting module for current accounts management, P&L and balance sheet figures, and comprehensive support for general ledger accounts
·Complete audit trail and tracking capability of all activities, transactions and business processes

 

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Freedom Reinsurance System (FRS)

 

Freedom Reinsurance System (FRS) is designed to meet the ceded reinsurance processing needs of property and casualty/general insurance, from calculating premium and claim cessions, to producing the data required for Schedule F.

 

Universal Reinsurance System (URS)

 

Universal Reinsurance System (URS) supports both ceded and assumed property and casualty reinsurance processing, and produces the data required for Schedule F. The ease of configuration, as well as the price point, makes URS a very attractive offering to the insurance market.

 

Sapiens Digital Suite

 

Sapiens INTELLIGENCE

 

Sapiens INTELLIGENCE is a modular, highly innovative business intelligence solution specifically designed for the insurance market. Based on the advanced technology of SAP’s analytics platform, Sapiens INTELLIGENCE is an important component of the industry-leading Sapiens’ portfolio and is comprised of two integral elements: SmartStore and InfoMaster.

 

SmartStore is a centralized data hub for all insurance reporting and analytics. It gathers data from Sapiens’ operational repository and intelligently transforms it into an insurance-domain set of business logical models, specifically designed for complex and in-depth analytics.

 

InfoMaster is Sapiens’ set of analytical applications, offering a wide range of data visualization and analysis capabilities through reporting, dashboards and data discovery. Incorporating Sapiens’ best practices and three decades of leading experience, Sapiens InfoMaster helps insurers achieve greater efficiency and begin reaping the benefits of analytics immediately.

 

Sapiens PORTAL

 

The Sapiens PORTAL is pre-integrated with Sapiens core solutions. In addition to enjoying the myriad benefits provided by Sapiens’ core, insurers can benefit from a portal that will transform their online sales, customer and agent experience. Insurers can choose a flexible deployment option that best fits their needs from the following approaches:

 

·Portal deployed over Sapiens’ core policy admin. system
·Portal as a standalone digital solution, for a rapid launch of digitally-enabled business
·Portal over multiple systems, serving as a single point of engagement with the agents and customers

 

The Sapiens PORTAL was specifically designed to address insurers’ needs, guided by Sapiens’ three decades of industry experience. Two key segments are addressed by the Sapiens PORTAL:

 

The PORTAL for Consumers is a direct-to-consumer digital application providing a customer-centric view that enables customers to buy policies, view the status of their policies and accounts, issue claims and conduct many other transactions that save insurers time and reduce costs. Insurers can leverage their investment by offering customers a unique, real-time customer experience tailored to today’s digital natives.

 

The PORTAL for Agents empowers the agent with full lifecycle enablement, including the ability to manage their pipeline, sell policies to their consumers and provide top-level customer service in real time. They can also obtain a holistic view of their business performance overall and benefit from full access to all their remunerations, payments, commission transactions and statements. Equipping agents with self-service tools that make their lives easier and help them better serve their customers will increase agent efficiency and satisfaction.

 

Sapiens’ acquisition of KnowledgePrice meant the addition of 50 digital insurance technology experts, including innovative portal services. KnowledgePrice has extensive expertise and long-term experience with open technologies, agile methodologies and best practices surrounding digital insurance and the deployment of portals.

 

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Sapiens Business Decision Management Solutions

 

Sapiens DECISION

 

Sapiens DECISION is a business decision management solution that consistently enforces business logic across all enterprise applications. Organizations use it to track, verify and ensure that every decision is based on the most up-to-date rules and policies. The solution is powered by The Decision Model®, a widely adopted decision management methodology, for which we own a number of patents.

 

Organizations are undergoing a paradigm shift in the way they approach change, by replacing conventional policy and process management with a growing discipline called “decision management.” Decision management bridges the gap between business and IT, by enabling business users to rapidly frame requirements in formal business models that can be easily understood by all stakeholders. This ensures that the business logic is complete, internally consistent and accurate, and does not replicate existing logic.

Sapiens DECISION allows the reusability and governance of business logic across all business divisions and software applications, using any rules engine or business process management system, and integrating seamlessly with the BRM or BPM system that the organization has in place.

 

Some of the key benefits for organizations that use Sapiens DECISION are:

 

·Reduced risk, by assessing the impact of any change (competitive, strategy, regulatory, etc.) and allowing users to simply and quickly design new and sustainable models to meet evolving business requirements.
·Limited costs and complexity, by centralizing the development and dissemination of institutional business logic, which improves efficiency.
·Improved visibility and true governance, by putting business users in full control of institutional business logic and enabling them to trace every policy and rule back to its motivation and documentation.
·Establishment of a “single point of truth,” by providing business and IT users a centralized business logic repository.

 

We are currently focusing on the development and marketing of Sapiens DECISION in the financial services market in North America and Western Europe, and we are building best practices to be used primarily by mortgage, retail and investment banking where the scale and complexity of operations requires enterprise-grade technology that can easily be adapted as policies and business strategies rapidly evolve. We also intend to develop and market Sapiens DECISION for the insurance industry and leverage our industry knowledge and close relationships with our existing customers and partners.

 

Technology-Based Solutions

 

Sapiens eMerge

 

Sapiens eMerge is a rules-based, model-driven architecture that enables the creation of tailor-made, mission-critical core enterprise applications with little or no coding. Our technology is intended to allow customers to meet complex and unique requirements using a robust development platform. For example, we perform proxy porting for our customers in an efficient, cost effective manner with Sapiens eMerge.

 

Sapiens’ Global Services

 

As noted previously, the Sapiens Service Suite is comprised of three main pillars: program delivery, business services and managed services, as well as our various methodologies (which are applied across the first three pillars).

 

·Program delivery includes:
·Project and program management
·Core development and implementation
·Integration
·Deployment
·Testing

 

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Business transformation services are comprised of:

 

·Business transformation – planning and strategy, business process evaluation,
·training and change management
·Digital transformation – business model and processes transformation and data management consolidation, data migration
·UAT testing
·System integration

 

Managed services include:

 

·Hosting services
·Application and system management
·Ongoing production support

 

Our services modernize and automate processes for insurance providers and financial institutions around the globe, helping to create greater organizational efficiencies, reduce costs and provide a better end-user experience. Built on a solid foundation of insurance domain expertise, proven technology and a heritage of successful deployments, we assist clients in identifying and eliminating IT barriers to achieve business objectives.

 

Benefits include:

 

·Project delivery experience – more than 30 years of field-proven project delivery of core system solutions, based on best practices and accumulated experience.
·System integration – we help our customers deploy modern solutions, while expertly integrating these solutions with their legacy environments that must be supported.
·Global presence – insurance and technology domain experts are available worldwide to provide professional services.

 

Our implementation teams assist customers in building implementation plans, integrating our software solutions with their existing systems, and deploying specific requirements unique to each customer and installation. Sapiens’ business services include API integration management and business intelligence (BI) and advanced analytics consolidation. Our managed services offer ongoing production support and a 24/7 help desk.

 

Sapiens’ service teams possess strong technology skills and industry expertise. The level of service and business understanding they provide contributes to the long-term success of our customers. This helps us develop strategic relationships with our customers, enhances information exchange and deepens our understanding of the needs of companies within the industry.

 

Through our service teams, we provide a wide scope of services and consultancy around our core solutions, both in the initial project implementation stage, as well as ongoing additional services. Many of our customers also use our services and expertise to assist them with various aspects of daily maintenance, ongoing system administration and the addition of new solution enhancements.

 

Such services include:

 

·Adding new lines of business and functional coverage to existing solutions running in production
·Ongoing support services for managing and administering the solutions
·Creating new functionalities per specific requirements of our customers
·Assisting with compliance for new regulations and legal requirements

 

In addition, most of our clients elect to enter into an ongoing maintenance and support contract with us. The terms of such a contract are usually twelve months and are renewed every year. A maintenance contract entitles the customer to technology upgrades (when made generally available) and technical support. We also offer introductory and advanced classes and training programs available at our offices and customer sites.

 

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We partner with several system integration and consulting firms to achieve scalable, cost-effective implementations for our customers. We have developed an efficient, repeatable methodology that is closely aligned with the unique capabilities of our solutions.

 

Our Strengths

 

Comprehensive digital platform of high-end, crucial business-solutions for insurance. We offer end-to-end solutions for both the P&C and L&A markets, supporting most sub-segments of these markets and the complete lifecycle of product lines. Our software supports and enables our customers’ core insurance business processes throughout the full lifecycle of administration within an organization, including policy administration, billing and claims. These are accompanied by the Sapiens Digital suite, which offers strong analytics, data management and customer engagement capabilities we believe this is a unique offering among software providers. Built for global and multi-national operations, our solutions are used in a variety of international regulatory, language and currency environments. Our digital suite is pre-integrated with our Sapiens core products.

 

Innovative solutions with leading functionality and technology. Our solutions are based on advanced, modern architectures that are specifically designed to satisfy our customers’ needs. These solutions are integrated, modular and component-based, and include scalable product suites supporting various lines of business. By using our solutions, carriers can support new sales channels, including mobile and social, reduce time to market for new product launches, and lower total cost of ownership. Additionally, we significantly invest in research and development to ensure that our products employ new technology, are compatible with the needs of our clients and are easy to use. As a result, our products maintain a leadership position, as recognized by top industry analysts, such as Celent, Gartner and Novarica, for their levels of both technology and functionality.

 

One-stop-shop across products and services. In addition to our market-leading products across P&C and L&A, we possess consulting and implementation capabilities, which we use to customize our products and design the solution that best meets our customers’ requirements. We believe that our customers do business with us not only because of our leading products, but also due to our complementary service offerings, which enhance our products and enable clients to maximize the value derived from our solutions. We believe that this approach lowers the risks for our clients, as they transition to a new system, and at the same time provides them with the functionality they desire. For example, we consult with each of our customers to determine their specific needs and then enhance our core solution and customize the appropriate interfaces. Through these interactions and experiences, we foster long-term relationships with our customers, which provide opportunities to deliver a wide range of our products and services as requirements change over time.

 

Strong, diverse and stable customer base. We currently serve more than 400 customers globally, including some of the world’s largest global insurance carriers and financial institutions. Our customer base is diversified across insurance providers, including life, pensions and annuities; property and casualty insurers. We have been able to successfully maintain these customers due to our broad product portfolio geared toward addressing the needs of these industries. In addition, our business decision management platform is applicable across the financial services industry, including a wide range of financial institutions, and offers an opportunity for further diversification in other markets. Geographically, we derived 40.7%, 44.9%, 7.7%, and 6.7% of our revenue from North America, Europe, South Africa and the Asia-Pacific regions, respectively, in the year ended December 31, 2017, and 34.4%, 49.6%, 2.0% and 14.0%, respectively, in the year ended December 31, 2016.

 

Long-term relationships with customers. Our products are at the core of our customers’ businesses, which ensures that our customers continue to use and co-invest in our products, providing us with long-term relationships that result in revenue stability. Installing a new core system is a major undertaking for insurance carriers that involves extended pre-production work and entails a comprehensive integration and implementation effort that is offered as part of our services. Many of our customer relationships have been in place for more than 10 years and we have benefited from recurring revenues as customers request support, upgrades and enhancements for our systems. In addition, we benefit from these relationships, due to our ability to market complementary solutions to our loyal customer base.

 

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Proven management team. Our management team has extensive experience in the insurance and financial services industries and we have been able to achieve our business and development objectives to date. Management has also been successful in retaining key personnel from the companies we acquired, enabling us to benefit from their experience and knowledge of the acquired products and technology. Our management team possesses a variety of skills in product development, business development, sales, marketing, technology and finance, as well as a unique knowledge of the financial services industry. We have maximized contributions from our hard working, talented and innovative employees.

 

Our Strategy

 

Leveraging our offerings, geographic presence and experienced management team, our goal is to further expand our presence in the markets in which we operate and further enhance our leadership in the global market. Our growth strategy is solidly based on both existing and new customers, and will include mergers and acquisitions, when applicable, to accelerate our growth. We plan to achieve our goals by focusing on the following principles:

 

Continue to innovate and extend the leadership of our product offerings. Due to past investments, we have become a leader in providing software offerings to the insurance industry. We plan to continue to invest in research and development to enhance our software platform solutions and to ensure they remain leading products, in terms of functionality and technology. We believe our focus on innovation, combined with our industry expertise, will enable us to improve our existing offerings and allow us to produce new solutions for the benefit of our customers and partners.

 

Leverage our global footprint to offer our complete platform/solutions. We intend to broaden our existing offering of solutions to enhance our presence in the geographies in which we currently operate. In particular, we believe that there is considerable opportunity to commence and grow sales of our P&C product suite in the United States and Canada, and also to expand the market reach of our business decision management platform into Europe and the Asia Pacific region. Additionally, we plan to market our current suite of solutions to other countries in Europe in order to continue to generate revenue on existing products in new geographies.

 

Mergers and Acquisitions. Our M&A approach facilitates our growth strategy. We seek to identify new growth markets to penetrate via acquisition of local offices and customer bases. In addition, we aim to enhance our product portfolio with complementary solutions that will help our customers excel. We believe that our acquisition of local customer bases and expertise will accelerate our market penetration in growth geographies. We plan to take advantage of our recent acquisition of StoneRiver to strengthen our presence in North America, expand our product portfolio and accelerate our footprint in the U.S. Property & Casualty market.

 

Capture adjacencies and new opportunities. In order to maximize the value of our current offerings and leverage our long-term relationships with customers, we plan to feature and promote our digital suite to enhance our presence in the insurance market. To date, our core insurance software solutions account for approximately 80% of our business, while our technology platforms account for approximately 20% of our business. We believe our plan to remain vertically focused, while concentrating on our customers’ ancillary needs, will strengthen our customer relationships. Additionally, we plan to focus on penetrating the financial services market with our business decision management platform to aid financial services organizations in the management, design and simulation of the business logic behind operations. Our business decision management platform can be geared toward compliance in a wide variety of organizations to facilitate streamlined and efficient regulatory compliance.

 

Invest in sales and marketing. We plan to strengthen our sales and marketing teams by working with and training sales professionals with experience in the insurance industry, or with connections to new or existing customers, enhancing market-awareness of our brand and solutions. We believe that the strength of our core solutions, the experience of our sales and marketing team, and our established and growing customer base create a significant opportunity to provide new and complementary solutions that address the ongoing needs of our customers.

 

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Competitive Landscape

 

Sapiens is focused on serving insurers. The market for core software solutions for the insurance industry is highly competitive and characterized by rapidly changing technologies, evolving industry standards and customer requirements, and frequent innovation. In addition, we offer a business decision management platform, mainly to financial services organizations.

 

Competitive Landscape for our Insurance Software Solutions

 

Our competitors in the insurance software solutions market differ from us based on size, geography and lines of business. Some of our competitors offer a full suite, while others offer only one module; some operate in specific (domestic) geographies, while others operate on a global basis. And delivery models vary, with some competitors keeping delivery in-house, using IT outsourcing (ITO) or business process outsourcing (BPO).

 

The insurance software solutions market is highly competitive and demanding. Maintaining a leading position is challenging, because it requires:

 

·Development of new core insurance solutions, which necessitates a heavy R&D investment and an in-depth knowledge of complex insurance environments
·Technology innovation, to attract new customers, with rapid, technology-driven changes in the insurance business model and new propositions coming
·A global presence and the ability to support global insurance operations
·Ability to manage multiple partnerships, due to the changing landscape of the insurance ecosystem
·Satisfaction of regulatory requirements, which can be burdensome and require specific IT solutions
·Continued support and development of the solutions entails a critical mass of customers that support an ongoing R&D investment
·Know-how of insurance system requirements and an ability to bridge between new systems and legacy technologies
·Mission-critical operation that requires experience, domain expertise and proven delivery capabilities to ensure success

 

The complex requirements of this market create a high barrier to entry for new players. As for existing players, these requirements have led to a marked increase in M&A transactions in the insurance software solutions sector, since small, local vendors have not been able to sustain growth without continuing to fund their R&D departments and follow the globalization trend of their customers.

 

We believe we are well-positioned to leverage our modern solutions, customer base and global presence to compete in this market and meet its challenges. In addition, our accumulated experience and expert teams allow us to provide a comprehensive response to the IT challenges of this market.

 

Different types of competitors include:

 

·Global software providers with their own IP.
·Local/domestic software vendors with their own IP, operating in a designated geographic market and/or within a designated segment of the insurance industry.
·BPO providers who offer end-to-end outsourcing of insurance carriers business, including core software administration (although BPO providers want to buy comprehensive software platforms to serve as part of the BPO proposition from vendors and may seek to purchase our solutions for this purpose).
·Internal IT departments, who often prefer to develop solutions in-house.
·New insurtech companies with niche solutions

 

We differentiate ourselves from our competitors via the following key factors:

 

·We offer innovative and modern software solutions, with rich functionality and advanced, intuitive user interfaces.
·We use model-driven architecture that allows rapid deployment of the system, while reducing total cost of ownership.

 

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·Our solutions are built using an architecture that allows customers to implement the full solution or components, and readily integrate the solution or individual components into their existing IT landscape.
·Strong and global partnership program, with both established IT players, as well as new insurtech companies, to ensure linkage to innovative technologies, new business models, and ongoing work to embed such innovations into Sapiens platforms
·We recognize technology trends and invest in adjusting our solutions to meet this rapid pace.
·We are able to fund R&D investment and maintain the competitive advantage of our products due to our large and growing customer base and financial stability.
·Our delivery methodology is based on extensive insurance industry experience and cooperation with large insurance companies globally. Our track record over the past few years in developing a strong off-shore development center is also a significant parameter in differentiating our abilities in the services space
·We leverage our proven track record of successful delivery to help our customers deploy our modern solutions, while integrating with their legacy environment (that must remain supported).

 

Competitive Landscape for Business Decision Management Solutions

 

Sapiens DECISION is a pioneer in this disruptive market landscape. Since the introduction of our innovative approach to enterprise architecture to the market, we have identified only a small number of potential competitors.

 

We differentiate ourselves from our potential competitors through the following key factors:

 

·We believe that Sapiens DECISION is the only solution that offers a true separation of the business logic in a decision management system for large enterprises – and that is currently generally available and already in production.
·Sapiens DECISION is unique in its proven ability to support complex environments, with full audit trail and governance that is crucial for large financial services organizations.
·We understand complex environments where DECISION is deployed due to our experience delivering complex, mission-critical solutions

 

Geographical Scope of Our Operations

 

For a breakdown of the geographical regions in which our revenues are generated and the relative amounts of such revenues over the course of the last three fiscal years, please see “Item 5—Operating and Financial Review and Prospects—A. Operating Results—Revenue by geographical region” below in this annual report.

 

Sales and Marketing

 

Our main sales channel is direct sales, with a small portion of partner sales. Our sales team is dispersed across our regional offices in North America, the United Kingdom, Belgium, France, Israel, Australia, India, Poland and the Nordics. The direct sales force is geared to large organizations within the insurance and financial services industry.

 

In 2017, we continued to significantly invest in our target regions North America, UK, Europe and South Africa and our sales, presales, domain experts and marketing personnel. We anticipate that our sales team will leverage their proximity to customers and prospective clients to drive more business, and offer our services across our target markets.

 

Our account managers were focused on building ongoing relationships with existing customers during the past year, to maintain a high level of customer satisfaction and identify up-selling opportunities within these organizations. We believe that a high level of post-contract customer support is important to our continued success.

 

As part of our sales process, we typically sell a package that includes license, implementation, customization and integration services, and training services. All of our clients for whom we have deployed our solutions elect to enter into an ongoing maintenance and support contract with us. We aim to expand our distribution model to include more channel partners and system integrators, but we intend to maintain the direct sales model as our prime distribution channel.

 

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We attend major industry trade shows to improve our visibility and our market recognition. Additionally, we host client conferences such as our annual Sapiens Client Conference, which took place in Gouvieux, France in October 2015, in North Atlanta, U.S. in September 2016 and in Lisbon, Portugal in October 2017. In addition, StoneRiver hosts an annual customer summit in the U.S., which took place in Amelia Island, FL in 2015 and Tucson, AZ in 2016that are intended to strengthen our relationships with our existing customer base. We continue investing in our web presence and digital marketing activities to generate leads and enhance our brand recognition. We maintain a blog channel (“Sapiens Spotlight”). We also invest in our working relationships and advisory services within the global industry-analyst community.

 

We work together with standards providers such as ACORD and MISMO to further enrich our offerings and provide our customers with comprehensive and innovative solutions that address the entire breadth of their business needs.

 

Intellectual Property

 

We rely on a combination of contractual provisions and intellectual property law to protect our proprietary technology. We believe that due to the dynamic nature of the computer and software industries, factors such as the knowledge and experience of our management and personnel, the frequency of product enhancements and the timeliness and quality of our support services build upon the protection offered by copyrights.

 

We seek to protect the source code of our products as trade secret information and as unpublished copyright work, although in some cases, we agree to place our source code into escrow. We also rely on security and copy protection features in our proprietary software. We distribute our products under software license agreements that grant customers a personal, non-transferable license to use our products and contain terms and conditions prohibiting the unauthorized reproduction or transfer of our products. In addition, we attempt to protect trade secrets and other proprietary information through agreements with employees, consultants and distributors.

 

Our trademark rights include rights associated with our use of our trademarks, and rights obtained by registration of our trademarks. Our use and registration of our trademarks do not ensure that we have superior rights to others that may have registered or used identical or related marks on related goods or services. We have registrations for the mark “Sapiens” in USA, Benelux, Germany, France, Italy Switzerland and Israel, the name “RapidSure” in the U.S. and Canada, and the names ALIS, E-ALIS, CORE-ALIS and certain other related marks, as well as the ALIS design in the USA and Israel, as applicable. The initial terms of protection for our registered trademarks range from 10 to 20 years and are renewable thereafter.

 

In the third quarter of 2014, we acquired Knowledge Partners International LLC, or KPI, and the assets of The Decision Model, or TDM, which included certain intellectual property rights, including a patent held by TDM and a patent application for The Event Model, or TEM. Both TDM and TEM relate to decision management methodology that was invented by Larry Goldberg and Barbara Von Halle (in the case of TEM, IBM was a co-inventor as well). See “Item 4.B. Business Overview— Sapiens Business Decision Management Solutions” for further information.

 

In the first quarter of 2017, we acquired StoneRiver. The acquisition of StoneRiver included the acquisition of 25 registered trademarks, one issued patent and one patent application.

 

In the first quarter of 2018 we acquired Adaptik. Adaptik owns two registered patents.

 

Regulatory Impact

 

The global financial services industry is subject to significant government regulation, which is constantly changing. Financial services companies must comply with regulations, such as the Sarbanes-Oxley Act, Solvency II, Retail Distribution Review (known as RDR) in the United Kingdom, the Dodd-Frank Act, the GDPR (enforceable as of May 25, 2018) and other directives regarding transparency. In addition, many individual countries have increased supervision over financial services operating in their market.

 

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For example, regulators in Europe have been very active, motivated by past financial crises and the need for pension restructuring. Distribution of policies is being optimized with the increasing use of Bank Assurance (selling of insurance through a bank’s established distribution channels), supermarkets and kiosks (insurance stands). Increased activity such as that occurring in Europe would generally tend to have a positive impact on the demand for our software solutions and services. Nevertheless, insurers are cautiously approaching spending increases, and while many companies have not taken proactive steps to replace their software solutions in recent years, many of them are now looking for innovative, modern replacements to meet the regulatory changes.

 

For further information, please see Item 5.D below, “Trend Information.”

 

C.           Organizational Structure.

 

Sapiens International Corporation N.V., or Sapiens N.V., is the parent company of the Sapiens group of companies. Our significant subsidiaries are as follows:

 

Sapiens International Corporation B.V., or Sapiens B.V.: incorporated in the Netherlands and 100% owned by Sapiens N.V.

 

Unless otherwise indicated, the other subsidiaries of Sapiens listed below are 100% owned by Sapiens B.V.:

 

Sapiens Israel Software Systems Ltd.: incorporated in Israel
Sapiens North America Inc.: incorporated in Ontario, Canada

Sapiens (UK) Limited: incorporated in England
Sapiens France S.A.S.: incorporated in France
Sapiens Japan Co.: incorporated in Japan and 90% owned by Sapiens B.V.

 

Sapiens Americas Corporation: incorporated in New York, U.S.

Maximum Processing Inc., incorporated in Florida (owned 100% by Sapiens Americas Corporation)

4Sight Business Intelligence Inc.: incorporated in Texas (owned 100% by Sapiens Americas Corporation)

StoneRiver, Inc.: incorporated in Delaware (owned 100% by Sapiens Americas Corporation)

Adaptik Corporation: incorporated in New Jersey (owned 100% by Sapiens Americas Corporation)

 

Sapiens Technologies (1982) Ltd.: incorporated in Israel

Sapiens Deutschland GmbH: incorporated in Germany (owned 100% by Sapiens Technologies (1982) Ltd.)

Sapiens Deutschland Consulting GmbH & Co. KG: incorporated in Germany (owned 100% by Sapiens Deutschland GmbH and Sapiens B.V.)

 

Sapiens Software Solutions (IDIT) Ltd., or Sapiens IDIT: incorporated in Israel (owned 100% by Sapiens Technologies (1982) Ltd.)

IDIT Europe: incorporated in Belgium (owned 100% by Sapiens IDIT)

Sapiens (Singapore) Insurance Solution Pte Ltd..: incorporated in Singapore (owned 100% by Sapiens IDIT)

 

Sapiens Software Solutions (Life and Pension) Ltd., or Sapiens L&P: incorporated in Israel (owned 100% by Sapiens Technologies (1982) Ltd.)

Neuralmatic Ltd.: incorporated in Israel (owned 66% by Sapiens L&P)

Sapiens NA Insurance Solutions Inc.: incorporated in Delaware, US (owned 100% by Sapiens L&P)

Sapiens (UK) Insurance Software Solutions Limited: incorporated in the UK (owned 100% by Sapiens L&P))

Formula Insurance Solutions France (F.I.S France): incorporated in France (owned 100% by Sapiens (UK) Insurance Software Solutions Limited)

 

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FIS- AU Pty Limited: incorporated in Australia (owned 100% by Sapiens (UK) Insurance Software Solutions Limited)

Sapiens Software Solutions Denmark ApS: incorporated in Denmark (owned 100% by Sapiens (UK) Insurance Software Solutions Limited)

Sapiens SA (PTY) Ltd.: incorporated in South Africa (owned 100% by Sapiens (UK) Insurance Software Solutions Limited)

 

Sapiens Software Solutions (Decision) Ltd., or Sapiens Decision (owned 92.89%by Sapiens Technologies (1982) Ltd.)

Sapiens (UK) Decision Limited (owned 100% by Sapiens Decision)

Sapiens Decision NA Inc. (owned 100% by Sapiens Decision)

Knowledge Partners International LLC, or KPI (owned 100% by Sapiens Decision NA Inc.)

 

Sapiens Technologies (1982) India Private Limited (formerly Ibexi Solutions Private Limited): incorporated in India (owned 98.12% by Sapiens Technologies (1982) Ltd.)

Ibexi Solutions Pte Limited: incorporated in Singapore (owned 100% by Sapiens Software Solutions (India) Private Limited)

 

Sapiens Software Solutions (Poland) Sp. z o.o. (formerly Insseco Sp. z o.o.): incorporated in Poland (owned 100% by Sapiens Technologies (1982) Ltd.)

 

Sapiens Software Solutions Istanbul YAZILIM HİZMETLERİ İÇ VE DIŞ TİCARET ANONİM ŞİRKETİ: incorporated in Turkey (owned 100% by Sapiens Technologies (1982) Ltd.)

 

KnowledgePrice.com: incorporated in Latvia (owned 100% by Sapiens Technologies (1982) Ltd.)

 

We are a member of the Formula Systems (1985) Ltd., or Formula, Group (NASDAQ: FORTY and TASE: FORT). Formula is a holding and managing company of (currently) three publicly traded companies that provide IT solutions worldwide, developing and implementing innovative, proprietary software, services and solutions, turnkey projects and outsourcing services, as well as software distribution and support. In addition, Formula holds interests in several private companies, including a software solution company and an IT staffing company.

 

Based on information provided to the Company by Formula, Formula held 23,954,094 of our Common Shares, or approximately 48.1% of our outstanding Common Shares as of March 1, 2018. As of March 1, 2018, Asseco beneficially owned 26.3% of the outstanding share capital of Formula. In addition, on October 4, 2017 Asseco entered into a shareholders agreement with our Chairman of the Board, under which agreement Asseco has been granted an irrecoverable proxy to vote an additional 1,971,973 ordinary shares of Formula, thereby effectively giving Asseco beneficial ownership (voting power) over an aggregate of 39.7% of Formula’s outstanding ordinary shares.

 

Based on the foregoing beneficial ownership by each of Formula and Asseco, each of Formula and Asseco may be deemed to directly or indirectly (as appropriate) control us.

 

D.            Property, Plants and Equipment.

 

We lease office space, constituting our primary office locations, in the following countries: Israel, the United States, India, Poland, South Africa, the United Kingdom, Latvia, China, Canada and Denmark. The lease terms for the spaces that we currently occupy are generally five to eleven years. Based on our current occupancy, we lease (except for owned real property indicated below) the following amount of office space in the following locations, which constitute our primary locations:

 

·Israel – approximately 135,140 square feet;
·United States – approximately 93,574 square feet*;
·India – approximately 53,400 square feet;
·Poland – approximately 48,132 square feet;

 

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·South Africa – approximately 42,269 square feet;
·United Kingdom – approximately 21,326 square feet;
·Latvia – approximately 8,548 square feet;
·China – approximately 2,860 square feet;
·Canada – approximately 1,407 square feet; and
·Denmark – approximately 237 square feet.

 

* 10,243 square feet of such office space in the United States constitutes owned real property.

 

Our Israeli offices house our corporate headquarters, as well as our core research and development activities. As of December 31, 2017, the lease at our Israeli facility is for a term of in excess of six remaining years and we have an option to extend the term for an additional five years. In 2017, our rent costs totaled $7.4 million, in the aggregate, for all of our leased offices (which does not include office space leased by KnowledgePrice.com in Latvia, since it was acquired on December 27, 2017, or Adaptik, since it was acquired after December 27, 2017). We believe that our existing facilities are adequate for our current needs.

 

Item 4A.UNRESOLVED STAFF COMMENTS

 

Not applicable.

 

ITEM 5.OPERATING AND FINANCIAL REVIEW AND PROSPECTS

 

The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our consolidated financial statements and the notes thereto included elsewhere herein. Our financial statements have been prepared in accordance with U.S. GAAP. This discussion contains forward-looking statements that are subject to known and unknown risks and uncertainties. As a result of many factors, such as those set forth under Item 3.D “Risk Factors” and “Cautionary Note Regarding Forward-Looking Statements” in the Introduction to this annual report, our actual results may differ materially from those anticipated in these forward-looking statements.

 

Overview

 

We are a leading global provider of software solutions for the insurance industry, with an emerging focus on the broader financial services sector. We offer core software solutions for Life, Pension & Annuities (L&A) and Property & Casualty/General Insurance (P&C) providers, allowing them to manage policy administration, claims management and billing functions. In addition, we offer a variety of other technology-based solutions that enable organizations to deploy business logic and comply with policies and regulations across their organizations. Our solutions enable customers to respond to evolving market needs and regulatory changes, while improving the efficiency of their core operations, thereby increasing revenues and reducing costs.

 

We derive our revenues principally from the sale, implementation, maintenance and support of our solutions and from providing consulting and other services related to our products. Revenues are comprised primarily of revenues from services, including systems integration and implementation and product maintenance and support, and from licenses of our products.

 

We also generate revenues from other customers unrelated to the financial services industry, which use our legacy solution based on e-Merge software. For these customers, except for the difference in the target industry, revenues are recognized from the sale of package-based software solutions that include the grant of a license to use our product, implementation and customization services related to the product sold and maintenance and support services and follow similar methods of project delivery. See “Critical Accounting Policies and Estimates” below for a discussion of how we account for our revenues and their associated costs.

 

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Key Business Metrics

 

We use certain key financial metrics to evaluate and manage our business and that we believe are useful for investors, including select GAAP and non-GAAP metrics. These metrics include, most prominently, our operating cash flow.

 

Operating Cash Flows

 

We monitor our cash flows from operating activities, or operating cash flows, as a key measure of our overall business performance, enabling us to analyze our financial performance without the effects of certain non-cash items such as depreciation and amortization and stock-based compensation expenses. Additionally, operating cash flows take into account the impact of changes in deferred revenue, which reflects the receipt of cash payment for products and services before they are recognized as revenue. Our operating cash flows are impacted by changes in deferred revenue and collections of accounts receivable. As a result, our operating cash flows may fluctuate significantly on a quarterly basis.

 

Our operating cash flows were $40.4 million, $26.0 million and $8.5 million for the years ended December 31, 2015, 2016 and 2017 respectively. For a further discussion of our operating cash flows, see “Item 5.B. Liquidity and Capital ResourcesCash Flows from Operating Activities” below in this annual report.

 

A.Operating Results.

 

GAAP Results of Operations

 

The following tables set forth certain data from our results of operations for the years ended December 31, 2015, 2016 and 2017, as well as such data as a percentage of our revenues for those years. The data has been derived from our audited consolidated financial statements included in this annual report. The operating results for the below years should not be considered indicative of results for any future period. This information should be read in conjunction with the audited consolidated financial statements and notes thereto included in this annual report.

 

Statement of Income Data
(U.S. dollars, in thousands, except share and per share data)
 
   For the year ended
December 31,
 
   2015   2016   2017 
             
Revenues   185,636    216,190    269,194 
Cost of revenues   111,192    130,402    175,678 
Gross profit   74,444    85,788    93,516 
Operating expenses:               
Research and development   10,235    16,488    31,955 
Selling, marketing, general and administrative   39,859    44,460    60,559 
Total operating expenses   50,094    60,948    92,514 
Operating income   24,350    24,840    1,002 
Financial income (expense), net   163    533    (3,010)

Income (loss) before tax benefit (taxes on income)

   24,513    25,373    (2,008)

Tax benefit (taxes on income)

   (4,213)   (5,772)   2,564 
Net income   20,300    19,601    556 
Attributed to non-controlling interests   59    (43)   (189)
Attributed to redeemable non-controlling interest   1    (135)   43 
Adjustment to redeemable non-controlling interest   224    443    350 
Net income attributable to Sapiens’ shareholders  $20,016   $19,336   $352 

 

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Statement of Income Data
(as a Percentage of Revenues)
 
   For the year ended
December 31,
 
   2015   2016   2017 
             
Revenues   100%   100%   100%
Cost of revenues   59.9%   60.3%   65.3%
Gross profit   40.1%   39.7%   34.7%
Operating expenses:               
Research and development   5.5%   7.6%   11.9%
Selling, marketing, general and administrative   21.5%   20.6%   22.5%
Total operating expenses   27.0%   28.2%   34.4%
Operating income   13.1%   11.5%   0.4%
Financial income (expense), net   0.1%   0.2%   1.1%

Income before tax benefit (taxes on income)

   13.2%   11.7%   0.7%

Tax benefit (taxes on income)

   2.3%   2.7%   1.0%
Net income   10.9%   9.0%   0.2%
Attributed to non-controlling interests   0.0%   0.0%   0.1%
Attributed to redeemable non-controlling interest   0.0%   0.0%   0.0%
Adjustment to redeemable non-controlling interest   0.1%   0.1%   0.1%
Net income attributable to Sapiens’ shareholders   10.8%   8.9%   0.1%

 

Comparison of the years ended December 31, 2016 and 2017

 

Revenues

 

Please refer to “Critical Accounting Policies and Estimates” below in this Item 5.A for a description of our accounting policies related to revenue recognition.

 

Our overall revenues increased by $53.0 million, or 24.5%, to $269.2 million for the year ended December 31, 2017 from $216.2 million for the year ended December 31, 2016, as shown in the table below:

 

   Year ended
December 31, 2016
   Year-over-year
change
   Year ended
December 31, 2017
 
($ in thousands)  $216,190    24.5%  $269,194 

 

Revenues are derived primarily from implementation of our solutions and post-implementation services such as ongoing support and maintenance and professional services as part of an overall solution that we offer to our customers. The net increase in revenues of approximately $53 million for the year ended December 31, 2017 was attributable to additional revenues from acquired entities, which contributed $64.3 million towards that increase, primarily from the StoneRiver, which we acquired in 2017. Organic growth in our revenues (excluding the impact of the specific factors described in the following sentence, which negatively impacted, and caused an overall decrease in our revenues from existing customers) contributed approximately $27.7 million towards the revenue growth in 2017, primarily due to implementation and professional services generated from existing and new customers. The foregoing factors were offset, in part, by decreases in revenues in amounts of $26.5 million due to cancelation of a development project with a significant customer in 2017, and $12.5 million attributable to our downsizing of our non-insurance and financial services activities in Japan in 2017 as described below.

 

In October 2017, we signed an agreement with a 10% shareholder of Sapiens Japan Co., our 90%-owned Japanese subsidiary, under which such shareholder’ independent company will separately provide all professional services requested by our customers in Japan. As a result of this arrangement, our revenues from non-insurance and financial professional services in Japan have begun to, and are expected to continue to, decrease significantly. In connection with this arrangement, we terminated all employment agreements of our Japanese subsidiary’s employees (most of whom were then hired by the shareholder’s new company). Despite the new arrangement, we will continue to provide maintenance only to existing Japanese customers who had purchased licenses for our eMerge product.

 

Revenues by geographical region

 

The dollar amount and percentage of our revenues attributable to each of the geographical regions in which we conduct our operations for the years ended December 31, 2016 and 2017, respectively, as well as the percentage change between such periods, were as follows:

 

43 

 

 

   Year ended
December 31, 2016
   Year-over-
   Year ended
December 31, 2017
 
($ in thousands)  Revenues   Percentage   year change   Revenues   Percentage 
Geographical region                         
North America*  $74,455    34.4%   47.1%  $109,560    40.7%
Europe**   107,134    49.6%   12.9%   120,926    44.9%
Asia Pacific   30,223    14.0%   40.2%   18,059    6.7%
South Africa   4,378    2.0%   371.7%   20,649    7.7%
Total  $216,190    100%   24.5%  $269,194    100%

 

 

*Revenue amounts for North America that are shown in the above table consist of revenues from the United States, except for approximately $0.9 million and $1.1 million of revenues generated in Canada in the years ended December 31, 2016 and 2017, respectively.

**Revenue amounts for Europe that are shown in the above table include revenues from the UK, the rest of Europe and Israel.

  

Our revenues in North America increased by $35.1 million, or 47%, to $109.6 million for the year ended December 31, 2017 from $74.5 million for the year ended December 31, 2016. That increase was comprised primarily of an increase of $64.3 million in revenues from newly-acquired entities, offset, in part, by a decrease of $26.5 million due to the cancelation of a software development project agreement with a significant client.

 

Our revenues in Europe increased by $13.7 million, or 13%, to $120.9 million in the year ended December 31, 2017 from $107.1 million in the year ended December 31, 2016. The increase was attributable to an increase in revenues from our existing and new customers.

 

Our revenues in Asia Pacific, or APAC, decreased by $12.2 million, or 40 %, to $18.1 million in the year ended December 31, 2017 from $30.2 million in the year ended December 31, 2016. The decrease was primarily attributable to our downsizing of non-insurance and financial services activities in Japan in 2017.

 

Our revenues in South Africa increased by $16.3 million, or 372%, to $20.6 million in the year ended December 31, 2017 from $4.4 million in the year ended December 31, 2016. That increase was primarily attributable to our implementation of our products for a new customer.

 

Cost of Revenues

 

Our cost of revenues for the years ended December 31, 2016 and 2017, respectively (both in absolute terms and as a percentage of our overall revenues), as well as the percentage change between those years, are provided in the below table:

 

($ in thousands)  Year ended
December 31,
2016
   Year-over-
year
change
  

Year ended

December 31,
2017

 
Cost of revenues  $130,402    34.7%  $175,678 
Cost of revenues as a percentage of revenues   60.3%        65.3%

 

44 

 

 

Cost of revenue consists primarily of costs associated with providing services to customers, including compensation expense to employees and subcontractors, travel expenses, as well as amortization of acquired technologies and depreciation. Our cost of revenues increased by $45.3 million, or 34.7%, to $175.7 million for the year ended December 31, 2017, as compared to $130.4 million for the year ended December 31, 2016. Cost of revenues increased as a percentage of our revenues during the year ended December 31, 2017, to 65.3% as compared to 60.3% during the year ended December 31, 2016. The increase in absolute cost of revenues of $45.3 million was primarily attributable to increase of cost of revenues of acquired companies totaling $39.1 million. The 5.0% increase in the cost of revenues as a percentage of our revenues was primarily due to the cancelation of a project development with a high degree of profitability in 2016 that did not continue in 2017, which caused an increase of 4.1% in our cost of revenues as a percentage of our revenues, as well as from the appreciation of the New Israeli Shekel relative to the U.S. dollar, which resulted in an increase of our cost of revenues as a percentage of our revenues as recorded in U.S. dollars for the year ended December 31, 2017.

 

Gross profit

 

Our gross profit for the years ended December 31, 2016 and 2017, respectively (both in absolute terms and as a percentage of our overall revenues), as well as the percentage change between those periods, are provided in the below table:

 

($ in thousands)  Year ended
December 31,
2016
   Year over-
year
change
  

Year ended

December 31,
2017

 
Gross profit  $85,788    9.0%  $93,516 
Gross profit as a percentage of revenues   39.7%        34.7%

 

Our gross profit increased by $7.7 million, or 9.0%, to $93.5 million for the year ended December 31, 2017, as compared to $85.8 million for the year ended December 31, 2016. This increase was primarily attributable to the absolute increase in our revenues by $53.0 million for the year ended December 31, 2017 compared to the year ended December 31, 2016. The decrease in gross profit as a percentage of revenues for the year ended December 31, 2017 was due to the factors described above with respect to the increase in our cost of revenues as a percentage of revenues.

 

Operating expenses

 

The amount of each category of operating expense for the years ended December 31, 2016 and 2017, respectively, as well as the percentage change in each such expense category between such periods, and the percentage of our revenues constituted by our total operating expenses in each such period, is provided in the below table:

 

($ in thousands) 

Year ended

December 31,

2016

  

Year-over-
year

change

   Year ended
December 31,
2017
 
Research and development, net  $16,488    93.8%  $31,955 
Selling, marketing, general and administrative   44,460    36.2%   60,559 
Total operating expenses  $60,948    51.8%  $92,514 
Percentage of total revenues   28.2%        34.4%

 

45 

 

 

Research and development expense is primarily comprised of compensation expense to employees and subcontractors. Research and development expenses, net increased by 93.8% or $15.5 million for the year ended December 31, 2017 compared to the year ended December 31, 2016. This increase was primarily attributable to the R&D investments in our newly acquired entities, which totaled $11.5 million, as well as to an increased degree of investment in research and development activities in support of the expansion of our offering of solutions in the year ended December 31, 2017. Our gross research and development expenses (before capitalization of eligible software development costs) for the year ended December 31, 2017 totaled $37.5 million compared to $22.0 million in the year ended December 31, 2016. Such increase of 70.3% was attributable to the same factors related to the increase in our net research and development expenses. Capitalization of software development costs accounted for $5.6 million of our research and development expenses, net for the year ended December 31, 2017, compared to $5.5 million in the year ended December 31, 2016, constituting an insignificant change from 2016 to 2017.

 

Selling, marketing, general and administrative, or SMG&A, expenses, which are primarily comprised of compensation expense to employees and subcontractors, were $60.6 million for the year ended December 31, 2017 compared to $44.5 million in the year ended December 31, 2016, representing an increase of $16.1 million. The increase in 2017 was mainly attributable to SMG&A expenses of our newly acquired entities, which totaled $9.2 million, as well as expenses of $8.1 million associated with our cost reduction and reorganization program, which primarily relates to costs of employee terminations and reduction in leasing facilities globally, including the downsizing of our non-insurance and financial services activities in Japan in 2017. As a percentage of total revenues, our SMG&A increased from 20.6% in the year ended December 31, 2016, to 22.5% for the year ended December 31, 2017, primarily due to the cost reduction and reorganization program detailed above.

 

Operating income

 

Operating income and operating income as a percentage of total revenues for the years ended December 31, 2016 and 2017, respectively, as well as the percentage change in operating income between such periods, were as follows:

 

($ in thousands)  Year ended
December 31, 2016
   Year-over-
year change
   Year ended
December 31, 2017
 
Operating income   $24,840    (96.0)%  $1,002 
Percentage of total revenues   11.5%        0.4%

 

The decrease in our operating income during the year ended December 31, 2017 relative to the year ended December 31, 2016 as an absolute amount, and the decrease in operating income as a percentage of our revenues, as reflected in the above table, were attributable to the various gross profit and operating expenses trends described above.

 

Financial income (expense), net

 

The amount of our financial income, net, for the years ended December 31, 2016 and 2017, respectively, and the percentage of our revenues for those respective periods constituted by such amounts, as well as the percentage change in such amounts between such periods, were as follows:

 

($ in thousands)  Year ended
December 31, 2016
   Year-over-
year change
   Year ended
December 31, 2017
 
Financial income (expense), net  $533    664.7%  $(3,010)
Percentage of total revenues   0.2%        1.1%

 

Financial expense, net, was $3.0 million for the year ended December 31, 2017 compared to financial income of $0.5 million in the year ended December 31, 2016.

 

The increase in financial expenses in 2017 was primarily attributable to an aggregate of $1.6 million of interest expenses in connection with (a) the long-term loan that we borrowed and repaid in its entirety six months later during 2017, as well as (b) interest on our newly-issued debentures in 2017. Interest expense was also attributable to the impact of foreign exchange rates during 2017.

 

46 

 

 

Taxes on income (tax benefit)

 

Taxes on income, both as a dollar value and as a percentage of income before taxes on income, for the years ended December 31, 2016 and 2017, respectively, as well as the percentage change in the amount of taxes on income between such periods, were as follows:

 

($ in thousands)  Year ended
December 31,  
2016
  

Year-over-
year

change

   Year ended
December 31,
2017
 

Taxes on income (tax benefit)

  $5,772    144.4%  $(2,564)
As a percentage of income before taxes on income   22.7%        127.7%

 

In 2017, we recognized a net tax benefit of $2.6 million. In 2016, income taxes amounted to $5.8 million, or 23% of our pre-tax income. The shift to a tax benefit in 2017 compared to tax expense in the previous year was mainly attributable to the one-time effect of $3.8 million tax benefit resulting from the remeasurement of our deferred tax liability in respect of our US subsidiaries due to a decrease in the federal corporate income tax rate following the enactment of the Tax Cuts and Jobs Act in the United States in December 2017, as well as an increase in deferred tax assets recorded in 2017 in respect of the one-time cost reduction and reorganization program that we believe will more likely than not be utilized in the near future.

 

Our effective income tax rate varies from period to period as a result of the various jurisdictions in which we operate, as each jurisdiction has its own system of taxation (not only with respect to the nominal rate, but also with respect to the allowance of deductions, credits and other benefits). We record a valuation allowance if we believe that it is more likely than not that the deferred income taxes regarding the loss carry forwards and other temporary differences, on which a valuation allowance has been provided, will not be realized in the foreseeable future. We do not recognize certain of the deferred tax assets relating to the net operating losses of certain of our subsidiaries worldwide due to the uncertainty of the realization of such tax benefits in the foreseeable future.

 

Net income attributable to Sapiens shareholders

 

The amount of net income attributable to Sapiens shareholders and such amount as a percentage of revenues for the years ended December 31, 2016 and 2017, respectively, as well as the percentage change in net income attributable to Sapiens shareholders between such periods, were as follows:

 

($ in thousands)  Year ended
December 31,
2016
  

Year-over-
year

change

   Year ended
December
31, 2017
 
Net income attributable to Sapiens shareholders  $19,336    98.2%  $352 
Percentage of total revenues   8.9%        0.1%

 

As a percentage of total revenues, our net income attributable to Sapiens shareholders decreased from 8.9% in the year ended December 31, 2016 to 0.1% for the year ended December 31, 2017, reflecting the cumulative effect of all of the above-described line items from our statements of income.

 

Cost reduction and reorganization program implemented in 2017

 

Following the acquisition of StoneRiver, the cancellation of the project development process with a significant customer and downsizing of our non-insurance and financial services activities in Japan in 2017, we executed a cost reduction and reorganization program in 2017. The plan was intended to significantly reduce our cost base, restructure and realign our organization for better agility and productivity in utilization of our global workforce and improve our business performance, profitability and cash flow generation, We incurred $8.1 million of cost reduction and reorganization program expenses in 2017 primarily related to costs of employee terminations and reduction in leasing facilities globally.

 

Comparison of the years ended December 31, 2015 and 2016

 

Revenues

 

Please refer to “Critical Accounting Policies and Estimates” below in this Item 5.A for a description of our accounting policies related to revenue recognition.

 

Our overall revenues increased by $30.6 million, or 16.5%, to $216.2 million for the year ended December 31, 2016 from $185.6 million for the year ended December 31, 2015, as shown in the table below:

 

   Year ended
December 31, 2015
   Year-over-year
change
   Year ended
December 31, 2016
 
($ in thousands)  $185,636    16.5%  $216,190 

 

47 

 

 

Revenues are derived primarily from implementation of our solutions and post-implementation services such as ongoing support and maintenance and professional services as part of an overall solution that we offer to our customers. The increase in revenues for the year ended December 31, 2016 is primarily attributed to organic growth due to implementation and professional services generated from existing and new customers, which were offset in part, in an amount of $4.6 million, due to the devaluation of foreign currencies (in which revenues were received) relative to the U.S. dollar..

 

Revenues by geographical region

 

The dollar amount and percentage share of our revenues attributable to each of the geographical regions in which we conduct our operations for the year ended December 31, 2015 and 2016, respectively, as well as the percentage change between such periods, were as follows:

 

   Year ended
December 31, 2015
       Year ended
December 31, 2016
 
($ in thousands)  Revenues   Percentage       Revenues   Percentage 
Geographical region                    
North America*  $61,332    33.0%   21.4%  $74,455    34.4%
Europe**   98,405    53.0%   8.9%   107,134    49.6%
Asia Pacific   20,512    11.1%   47.3%   30,223    14.0%
South Africa   5,387    2.9%   18.7%   4,378    2.0%
Total  $185,636    100%   16.5%  $216,190    100%

 

*Revenue amounts for North America that are shown in the above table consist of revenues from the United States, except for approximately $0.5 million and $0.9 million of revenues generated in Canada in the years ended December 31, 2015 and 2016, respectively.

**Revenue amounts for Europe that are shown in the above table include revenues from the UK, the rest of Europe and Israel.

 

Our revenues in North America increased by $13.1 million, or 21.4%, to $74.5 million for the year ended December 31, 2016 from $61.3 million for the year ended December 31, 2015, reflecting an increase of $9.6 million in revenues from existing and new customers, as well as an increase of $3.5 million of revenues attributable to newly-acquired entities.

 

Our revenues in the Europe increased by $8.7 million, or 8.9%, to $107.1 million in the year ended December 31, 2016 from $98.4 million in the year ended December 31, 2015. The increase was primarily attributable to an increase of $15.0 million in revenues from our existing and new customers, offset by $6.4 million due to devaluation of the GBP and Euro relative to the U.S. dollar resulting primarily from the decision of United Kingdom to exit the European Union.

 

Our revenues in Asia Pacific, or APAC, increased by $9.7 million, or 47.3%, to $30.2 million in the year ended December 31, 2016 from $20.5 million in the year ended December 31, 2015. The increase was primarily attributable to an increase of $7.7 million in revenues from our existing and new customers in Japan, as well as an increase of $2.0 million due to the appreciation of foreign currencies (primarily the Japanese yen) relative to the U.S. dollar.

 

Our revenues in South Africa decreased by $1.0 million, or 18.7%, to $4.4 million in the year ended December 31, 2016 from $5.4 million in the year ended December 31, 2015.

 

48 

 

 

Cost of Revenues

 

Our cost of revenues for the years ended December 31, 2015 and 2016, respectively (both in absolute terms and as a percentage of our overall revenues), as well as the percentage change between those years, are provided in the below table:

 

($ in thousands)  Year ended
December 31,
2015
   Year-over-
year
change
  

Year ended

December 31,
2016

 
Cost of revenues  $111,192    17.3%  $130,402 
Cost of revenues as a percentage of revenues   59.9%        60.3%

 

Our cost of revenues increased by $19.2 million, or 17.3%, to $130.4 million for the year ended December 31, 2016, as compared to $111.2 million for the year ended December 31, 2015. Cost of revenues increased as a percentage of our revenues during the year ended December 31, 2016, to 60.3% as compared to 59.9% during the year ended December 31, 2015. The increase in absolute cost of revenues was related to the increase in revenues during the year ended December 31, 2016 relative to the year ended December 31, 2015, including due to the inclusion of newly-acquired entities in our consolidated results for the first time for the year ended December 31, 2016. The level of our cost of revenues as a percentage of our revenues remained relatively stable in 2016. Certain projects in certain non-central locations that are not part of our core insurance business had a lower degree of profitability, which contributed to the slight increase in our cost of revenues as a percentage of our revenues. In addition, the appreciation of the New Israeli Shekel relative to the U.S. dollar also increased our cost of revenues as a percentage of our revenues as recorded in U.S. dollars for the year ended December 31, 2016.

 

Gross profit

 

Our gross profit for the years ended December 31, 2015 and 2016, respectively (both in absolute terms and as a percentage of our overall revenues), as well as the percentage change between those periods, are provided in the below table:

 

($ in thousands)  Year ended
December 31,
2015
   Year over-
year
change
  

Year ended

December 31,
2016

 
Gross profit  $74,444    15.2%  $85,788 
Gross profit as a percentage of revenues   40.1%        39.7%

 

Our gross profit increased by $11.4 million, or 15.2%, to $85.8 million for the year ended December 31, 2016, as compared to $74.4 million for the year ended December 31, 2015. This increase was primarily attributable to the absolute increase in our revenues by $30.6 million for the year ended December 31, 2016 compared to the year ended December 31, 2015. The decrease in gross profit as a percentage of revenues for the year ended December 31, 2016 was due to the factors described above with respect to the increase in our cost of revenues as a percentage of revenues.

 

Operating expenses

 

The amount of each category of operating expense for the years ended December 31, 2015 and 2016, respectively, as well as the percentage change in each such expense category between such periods, and the percentage of our revenues constituted by our total operating expenses in each such period, is provided in the below table:

 

($ in thousands) 

Year ended

December 31,

2015

  

Year-over-
year

change

   Year ended
December 31,
2016
 
Research and development, net  $10,235    61.1%  $16,488 
Selling, marketing, general and administrative   39,859    11.5%   44,460 
Total operating expenses  $50,094    21.7%  $60,948 
Percentage of total revenues   27.0%        28.2%

 

49 

 

 

Research and development expenses, net increased by 61.1% for the year ended December 31, 2016 compared to the year ended December 31, 2015. This increase was attributable to our greater level of investment in research and development activities in support of the expansion of our offering of solutions in the year ended December 31, 2016, including due to the inclusion of newly-acquired entities in our consolidated results for the first time for the year ended December 31, 2016. Our gross research and development expenses (before capitalization of eligible software development costs) for the year ended December 31, 2016 totaled $22.0 million compared to $16.2 million in the year ended December 31, 2015. Such increase of 35.8% was attributable to the same factor related to the increase in our net research and development expenses. Capitalization of software development costs accounted for $5.5 million of our research and development expenses, net for the year ended December 31, 2016 compared to $6.0 million in the year ended December 31, 2015, constituting a non-material change from one such year to the other.

 

Selling, marketing, general and administrative, or SMG&A, expenses were $44.5 million for the year ended December 31, 2016 compared to $39.9 million in the year ended December 31, 2015. The increase was attributable to a greater investment in our sales and marketing organizations team and our increased marketing expenses to support our brands and expand sales opportunities, including due to the inclusion of newly-acquired entities in our consolidated results for the first time for the year ended December 31, 2016, which was evidenced by the 16.5% increase in our revenues in the year ended December 31, 2016. As a percentage of total revenues, our SMG&A decreased from 21.5% in the year ended December 31, 2015 to 20.6% for the year ended December 31, 2016, constituting a non-material change from one such period to the other.

 

Operating income

 

Operating income and operating income as a percentage of total revenues for the years ended December 31, 2015 and 2016, respectively, as well as the percentage change in operating income between such periods, were as follows:

 

($ in thousands)  Year ended
December 31,
2015
  

Year-over-
year

change

   Year ended
December
31, 2016
 
Operating income  $24,350    2.0%  $24,840 
Percentage of total revenues   13.1%        11.5%

 

The increase in our operating income during the year ended December 31, 2016 relative to the year ended December 31, 2015 as an absolute amount, and the decrease in operating income as a percentage of our revenues, as reflected in the above table, were attributable to the various gross profit and operating expenses trends described above.

 

Financial income, net

 

The amount of our financial income, net, for the years ended December 31, 2015 and 2016, respectively, and the percentage of our revenues for those respective periods constituted by such amounts, as well as the percentage change in such amounts between such periods, were as follows:

 

($ in thousands)  Year ended
December 31,
2015
  

Year-over-
year

change

   Year ended
December
31, 2016
 
Financial income, net  $163    227.0%  $533 
Percentage of total revenues   0.1%        0.2%

 

50 

 

 

Financial income, net, was $0.5 million for the year ended December 31, 2016 compared to financial income of $0.2 million in the year ended December 31, 2015.

 

We engage in economic hedging in order to help protect against fluctuation in foreign currency exchange rates. Instruments that we use to manage currency exchange risks may include foreign currency forward contracts. The purpose of our foreign currency hedging activities is to reduce our exposure, from the perspective of our profitability, to the risks that arise from the adverse impact that exchange rates bear on our revenues and expenses that are denominated in non-U.S. currencies. These instruments are used selectively to manage risks, but there can be no assurance that we will be fully protected against material foreign currency fluctuations. We do not use these instruments for speculative or trading purposes.

 

Taxes on income

 

Taxes on income, both as a dollar value and as a percentage of income before taxes on income, for the years ended December 31, 2015 and 2016, respectively, as well as the percentage change in the amount of taxes on income between such periods, were as follows:

 

($ in thousands)  Year ended
December 31,
2015
  

Year-over-
year

change

   Year ended
December 31,
2016
 
Taxes on income  $4,213    37.0%  $5,772 
As a percentage of income before taxes on income   17.2%        22.7%

 

The increase in our expense from taxes on income was primarily attributable to an increase in our taxable income in Israel, the United States, APAC and other jurisdictions in which we operate. In addition, during the year ended December 31, 2016, certain of our subsidiaries in Israel and the UK became subject to tax liability following the utilization of tax benefits in previous years.

 

Our effective income tax rate varies from period to period as a result of the various jurisdictions in which we operate, as each jurisdiction has its own system of taxation (not only with respect to the nominal rate, but also with respect to the allowance of deductions, credits and other benefits). We record a valuation allowance if we believe that it is more likely than not that the deferred income taxes regarding the loss carry forwards and other temporary differences, on which a valuation allowance has been provided, will not be realized in the foreseeable future. We do not recognize certain of the deferred tax assets relating to the net operating losses of certain of our subsidiaries worldwide due to the uncertainty of the realization of such tax benefits in the foreseeable future.

 

Net income attributable to Sapiens shareholders

 

The amount of net income attributable to Sapiens shareholders and such amount as a percentage of revenues for the years ended December 31, 2015 and 2016, respectively, as well as the percentage change in net income attributable to Sapiens shareholders between such periods, were as follows:

 

($ in thousands)  Year ended
December 31,
2015
  

Year-over-
year

change

   Year ended
December
31, 2016
 
Net income attributable to Sapiens shareholders  $20,016    (3.4)%  $19,336 
Percentage of total revenues   10.8%        8.9%

 

As a percentage of total revenues, our net income attributable to Sapiens shareholders decreased from 10.8% in the year ended December 31, 2015 to 8.9% for the year ended December 31, 2016, reflecting the cumulative effect of all of the above-described line items from our statements of income.

 

51 

 

 

Critical Accounting Policies and Estimates

 

Our discussion and analysis of our financial condition and results of operations are based upon our consolidated financial statements, which have been prepared in accordance with U.S. GAAP. The preparation of our financial statements required us to make estimations and judgments that affect the reporting amounts of assets, liabilities, revenues and expenses and related disclosure of contingent assets and liabilities within the reporting period. We have based our estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis of making judgments about the values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions. More detailed descriptions of these policies are provided in Note 2 to our consolidated financial statements included under Item 18 of this annual report.

 

We believe that the following critical accounting policies affect the estimates and judgments that we made in preparing our consolidated financial statements:

 

·Revenue Recognition

 

·Marketable Securities

 

·Business Combinations

 

·Goodwill, long lived assets and other identifiable intangible assets

 

·Taxes on Income

 

Revenue Recognition

 

We generate revenues from sales of software licenses which normally include significant implementation services that are considered essential to the functionality of the software license. In addition, we generate revenues from post implementation consulting services and maintenance services.

 

Sales of software licenses are recognized when persuasive evidence of an agreement exists, delivery of the product has occurred, the fee is fixed or determinable, and collectability is probable. We consider all arrangements with payment terms extending beyond six months from the delivery of the elements, 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.

 

We usually sell our software licenses as part of an overall solution offered to a customer that combines the sale of software licenses which normally include significant implementation and that is considered essential to the functionality of the license. We account for the services (either fixed price or T&M -Time and Materials) together with the software under contract accounting using the percentage-of-completion method in accordance with Accounting Standards Codification, or ASC, 605-35, “Construction-Type and Production-Type Contracts”. The percentage of completion method is used when the required services are quantifiable, based on the estimated direct costs necessary to complete the project, and under that method revenues are recognized using actual project direct costs incurred as the measure of progress towards completion. The revenues recognized are limited to revenues derived from our enforceable right to receive payment for services that we provide in accordance with our contract with our customer.

 

The use of the percentage-of-completion method for revenue recognition requires the use of various estimates, including among others, the extent of progress towards completion, contract completion costs and contract revenue. Profit to be recognized is dependent upon the accuracy of estimated progress, achievement of milestones and other incentives and other cost estimates. Such estimates are dependent upon various judgments we make with respect to those factors, and some are difficult to accurately determine until the project is significantly underway. Progress is evaluated each reporting period. We recognize adjustments to profitability on contracts utilizing the percentage-of-completion method on a cumulative basis, when such adjustments are identified. We have a history of making reasonably dependable estimates of the extent of progress towards completion, contract revenue and contract completion costs on our long-term contracts. However, due to uncertainties inherent in the estimation process, it is possible that actual completion costs may vary from estimates.

 

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If our actual results turn out to be materially different than our estimates, or we do not manage the project properly within the projected periods of time or satisfy our obligations under the contract, project margins may be significantly and negatively affected, which may result in losses on existing contracts. Any such reductions in margins or contract losses in a large, fixed-price contract may have a material adverse impact on our results of operations.

 

In accordance with Accounting Standards Codification, or ASC, 985-605, the Company establishes Vendor Specific Objective Evidence, or VSOE, of fair value of maintenance services (PCS) based on the Bell-Shaped approach and determined VSOE for PCS, based on the price charged when the element is sold separately (that is, the actual renewal rate).

 

Provisions for estimated losses on contracts in progress are made in the period in which they are first determined, in the amount of the estimated loss on the entire contact.

 

In addition, we derive a significant portion of our revenues from post implementation consulting services provided on a T&M, basis, which are recognized as services are performed.

 

Maintenance revenue is recognized ratably over the term of the related maintenance agreement.

 

Deferred revenues and customer advances include unearned amounts received under maintenance and support agreements and amounts received from customers, for which revenues have not yet been recognized.

 

We perform ongoing credit evaluations on our customers. Under certain circumstances, we may require prepayment. An allowance for doubtful accounts is determined with respect to those amounts that we determine to be doubtful of collection. Provisions for doubtful accounts were recorded in general and administrative expenses.

 

Marketable Securities

 

We account for all our investments in debt securities in accordance with ASC 320, “Investments - Debt and Equity Securities”. We classify all debt securities as “available-for-sale”. All of our investments in available-for-sale securities are reported at fair value. Unrealized gains and losses are comprised of the difference between fair value and the amortized cost of such securities and are recognized, net of tax, in accumulated other comprehensive income (loss).

 

The amortized cost of debt securities is adjusted for amortization of premiums and accretion of discounts to maturity. Such amortization together with interest on securities is included in “financial income, net”.

 

We recognize an impairment charge when a decline in the fair value of our investments in debt securities below the cost basis of such securities is judged to be other-than-temporary. Factors considered in making such a determination include the duration and severity of the impairment, the reason for the decline in value, the potential recovery period and our intent to sell, including whether it is more likely than not that we will be required to sell the investment before recovery of cost basis. For securities that are deemed other-than-temporarily impaired, the amount of impairment is recognized in “net gain on sale of marketable securities previously impaired” in the statements of income and is limited to the amount related to credit losses, while impairment related to other factors is recognized in other comprehensive income.

 

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Business Combinations

 

According to ASC 805 “Business Combination” we are required to allocate the purchase price of acquired companies to the tangible and intangible assets acquired and liabilities assumed based on their estimated fair values. In allocating the purchase price of acquired companies to the tangible and intangible assets acquired and liabilities assumed, we developed the required assumptions underlying the valuation work. Critical estimates in developing such assumptions underlying the valuing of certain of the intangible assets include but are not limited to: future expected cash flows from customer contracts, acquired developed technologies and discount rates. Management’s estimates of fair value are based upon assumptions believed to be reasonable, utilizing a market participant approach, but which are inherently uncertain and unpredictable. Assumptions may be incomplete or inaccurate, and unanticipated events and circumstances may occur. We were assisted by third party valuators in applying the required economic models (such as income approach), in order to estimate the fair value of assets acquired and liabilities assumed in our business combination transactions.

 

For the year ended December 31, 2015, we implemented the pooling of interest accounting method with respect to our acquisition of Sapiens Poland (formerly Insseco). We applied the pooling of interest accounting method with respect to this acquisition because we and Sapiens Poland were under common control. Thus, our balance sheet as of December 31, 2014 was adjusted to reflect the carrying amounts combination between our company and Sapiens Poland.

 

Goodwill, long lived assets and other identifiable intangible assets

 

Goodwill represents the excess of the purchase price in a business combination over the fair value of the net tangible and intangible assets acquired. Under ASC 350,” Intangibles - Goodwill and Other”, goodwill is subject to an annual impairment test or more frequently if impairment indicators are present. Goodwill impairment is deemed to exist if the net book value of a reporting unit exceeds its estimated fair value. The company operates in a total of four reporting units: Emerge, L&A, Decision and P&C.

 

We applied the provisions of ASC 350 for our annual impairment test. Under the provisions, an entity has the option to first assess qualitative factors to determine whether the existence of events or circumstances leads to a determination that it is more likely than not that the fair value of a reporting unit is less than its carrying amount. If the qualitative assessment does not result in a more likely than not indication of impairment, no further impairment testing is required.

 

Based on our annual impairment test during the fourth quarter of each of 2015, 2016 and 2017 , no impairment to our goodwill was required.

 

Nevertheless, it is possible that our determination that goodwill for a reporting unit is not impaired could change in the future if current economic conditions deteriorate or remain difficult for an extended period of time. We continue to monitor the relationship between our market capitalization and book value, as well as the ability of our reporting units to deliver current and income and cash flows sufficient to support the book values of the net assets of their respective businesses.

 

As of December 31, 2017, we had a total of $223.7 million of goodwill and intangible assets, of which $23.8 million were attributable to capitalized software development costs, and the remainder of which were acquired as part of our prior acquisitions.

 

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In accordance with ASC 360, “Property, Plant and Equipment”, or ASC 360, our long-lived assets are reviewed for impairment annually and 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 the assets to the future undiscounted cash flows expected to be generated by the assets. If such assets are considered to be impaired, the impairment to be recognized is measured by the amount by which the carrying amount of the assets exceeds the fair value of the assets. In measuring the recoverability of assets, we are required to make estimates and judgments in assessing our forecast and cash flows and compare that with the carrying amount of the assets. Additional significant estimates used by management in the methodologies used to assess the recoverability of our long-lived assets include estimates of future cash-flows, future short-term and long-term growth rates, market acceptance of products and services, and other judgmental assumptions, which are also affected by factors detailed in our Risk Factors section in this annual report (see “Item 3.D. Key Information – Risk Factors”). If these estimates or the related assumptions change in the future, we may be required to record impairment charges for our long-lived assets.

 

We evaluate our intangible assets for impairment whenever events or changes in circumstances indicate that the carrying amount of such assets may not be recoverable, in accordance with ASC 360 (as described above). In evaluating potential impairment of these assets, we specifically consider whether any indicators of impairment are present, including, but not limited to whether there:

 

·has been a significant adverse change in the business climate that affects the value of an asset;

 

·has been a significant change in the extent or manner in which an asset is used; and/or

 

·is an expectation that the asset will be sold or disposed of before the end of its originally estimated useful life.

 

If indicators of impairment are present, we compare the estimated undiscounted cash flows that the specific asset is expected to generate to its carrying value. These estimates involve significant subjectivity. If such assets are considered to be impaired, the impairment to be recognized is measured by the amount by which the carrying amount of the asset exceeds its fair value.

 

Our policy for capitalized software costs determines the timing of our recognition of certain development costs. Software development costs incurred from the point of reaching technological feasibility until the time of general product release are capitalized. We define technological feasibility as the completion of a detailed program design. The determination of technological feasibility requires the exercise of judgment by our management. Since we sell our products in a market that is subject to rapid technological changes, new product development and changing customer needs, changes in circumstances and estimations may significantly affect the timing and the amounts of software development costs capitalized and thus our financial condition and results of operations.

 

Capitalized software development costs are amortized commencing with general product release by the straight-line method over the estimated useful life of the software product (between five to seven years). We assess the recoverability of this intangible asset on a regular basis by determining whether the amortization of the asset over its remaining life can be recovered through undiscounted future operating cash flows from the specific software product sold.

 

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Taxes on Income

 

We account for income taxes in accordance with ASC 740 “Income Taxes”, or ASC 740. ASC 740 prescribes the use of the asset and liability method, whereby deferred tax assets and liability account balances are determined based on the differences between the 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. Future realization of our deferred tax assets ultimately depends on the existence of sufficient taxable income within the available carryback or carryforward periods. Sources of taxable income include future reversals of existing taxable temporary differences, future taxable income, taxable income in prior carryback years and tax planning strategies. We record a valuation allowance to reduce our deferred tax assets to an amount we believe is more likely than not to be realized. Changes in our valuation allowance impact income tax expense in the period of adjustment. Our deferred tax valuation allowances require significant judgment and uncertainties, including assumptions about future taxable income that are based on historical and projected information.

 

ASC 740 addresses the determination of whether tax benefits claimed or expected to be claimed on a tax return should be recorded in the financial statements. Under ASC 740, a company may recognize the tax benefit from an uncertain tax position only if it is more likely than not that the tax position will be sustained on examination by the taxing authorities, based on the technical merits of the position. We assess our income tax positions and record tax benefits based upon management’s evaluation of the facts, circumstances, and information available at the reporting date. For those tax positions where it is more-likely-than-not that a tax benefit will be sustained, we record the largest amount of tax benefit with a greater than 50 percent likelihood of being realized upon ultimate settlement with a taxing authority having full knowledge of all relevant information. For those income tax positions where it is not more-likely-than-not that a tax benefit will be sustained, no tax benefit is recognized in the financial statements. We classify liabilities for uncertain tax positions as non-current liabilities unless the uncertainty is expected to be resolved within one year. We classify interest as financial expenses and penalties as selling, marketing, general and administration expenses.

 

As a global company, we use significant judgment to calculate and provide for income taxes in each of the tax jurisdictions in which we operate. In the ordinary course of our business, there are transactions and calculations undertaken whose ultimate tax outcome cannot be certain. Some of these uncertainties arise as a consequence of transfer pricing for transactions with our subsidiaries and tax credit estimates. In addition, the calculation of acquired tax attributes and the associated limitations are complex and although our income tax reserves are based on our best knowledge, we may be subject to unexpected audits by tax authorities in the various countries where we have subsidiaries, which may result in material adjustments to the reserves established in our consolidated financial statements and have a material adverse effect on our results of operations. We estimate our exposure to unfavorable outcomes related to these uncertainties and estimate the probability for such outcomes.

 

Although we believe our estimates are reasonable, no assurance can be given that the final tax outcome will not be different from what is reflected in our historical income tax provisions, returns, and accruals. Such differences, or changes in estimates relating to potential differences, could have a material impact on our income tax provision and operating results in the period in which such a determination is made.

 

Recently Issued Accounting Pronouncements

 

For a description of our recently issued accounting pronouncements, see Note 2(w) to our consolidated financial statements appearing elsewhere in this annual report.

 

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Impact of Tax Policies and Programs on our Operating Results

 

Israeli Tax Considerations and Government Programs

 

Tax regulations have a material impact on our business, particularly in Israel where we have our headquarters and due to our election to be treated as an Israeli resident corporation for tax purposes. The following summary describes the current tax structure applicable to companies in Israel, with special reference to its effect on us.

 

General Corporate Tax Structure

 

Generally, Israeli companies are subject to corporate tax on their taxable income. In 2017 the corporate tax rate was 24% and as of 2018 the corporate tax rate is 23%. However, the effective tax rate payable by a company that derives income from an AE, BE, PFE or a PTE, in each case, as defined and further discussed below, may be considerably lower. See “Law for the Encouragement of Capital Investments” in this Item 5.A below. In addition, Israeli companies are currently subject to regular corporate tax rate on their capital gains.

 

Besides being subject to the general corporate tax rules in Israel, certain of our Israeli subsidiaries have also, from time to time, applied for and received certain grants and tax benefits from, and participate in, programs sponsored by the Government of Israel, as described below.

 

Law for the Encouragement of Industry (Taxes), 1969

 

The Law for the Encouragement of Industry (Taxes), 5729-1969, or the Industry Encouragement Law, provides several tax benefits for an “Industrial Company”. Pursuant to the Industry Encouragement Law, a company qualifies as an Industrial Company if it is an Israeli resident company which was incorporated in Israel and at least 90% of its income in any tax year (other than income from certain government loans) is generated from an “Industrial Enterprise” that it owns and located in Israel. An “Industrial Enterprise” is defined as an enterprise whose major activity, in a given tax year, is industrial production.

 

An Industrial Company is entitled to certain tax benefits, including:

 

·Deduction of the cost of the purchases of patents, or the right to use a patent or know-how used for the development or promotion of the Industrial Enterprise, over an eight year period commencing on the year in which such rights were first exercised;

 

·The right to elect, under certain conditions, to file a consolidated tax return together with Israeli Industrial Companies controlled by it; and

 

·Expenses related to a public offering are deductible in equal amounts over three years.

 

Eligibility for benefits under the Industry Encouragement Law is not subject to receipt of prior approval from any governmental authority.

 

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We believe that certain of our Israeli subsidiaries currently qualify as Industrial Companies within the definition under the Industry Encouragement Law. We cannot assure you that we will continue to qualify as Industrial Companies or that the benefits described above will be available in the future.

 

Law for the Encouragement of Capital Investments, 5719-1959

 

The Law for the Encouragement of Capital Investments, 5719-1959, or the Investment Law, provides certain incentives for capital investments in a production facility (or other eligible assets). Generally, an investment program that is implemented in accordance with the provisions of the Investment Law, referred to an Approved Enterprise, or AE, a Benefited Enterprise, or BE, a Preferred Enterprise, or PFE, or a Preferred Technological Enterprise, or PTE, is entitled to benefits as discussed below. These benefits may include cash grants from the Israeli government and tax benefits, based upon, among other things, the geographic location in Israel of the facility in which the investment is made. In order to qualify for these incentives, an AE, BE, PFE or PTE is required to comply with the requirements of the Investment Law.

 

The Investment Law has been amended several times over the recent years, with the three most significant changes effective as of April 1, 2005 (referred to as the 2005 Amendment), as of January 1, 2011 (referred to as the 2011 Amendment) and as of January 1, 2017 (referred to as the 2017 Amendment). Pursuant to the 2005 Amendment, tax benefits granted in accordance with the provisions of the Investment Law prior to its revision by the 2005 Amendment remain in force but any benefits granted subsequently are subject to the provisions of the amended Investment Law. Similarly, the 2011 Amendment introduced new benefits instead of the benefits granted in accordance with the provisions of the Investment Law prior to the 2011 Amendment. However, companies entitled to benefits under the Investment Law as in effect up to January 1, 2011 were entitled to choose to continue to enjoy such benefits, provided that certain conditions are met, or elect instead, irrevocably, to forego such benefits and elect the benefits of the 2011 Amendment. The 2017 Amendment introduced new benefits for Technological Enterprises, alongside the existing tax benefits.

 

Tax benefits for AEs approved before April 1, 2005

 

Under the Investment Law prior to the 2005 Amendment, a company that wished to receive benefits on its investment program that is implemented in accordance with the provisions of the Investment Law (referred to as an AE), had to receive an approval from the Israeli Authority for Investments and Development of the Industry and Economy (referred to as the Investment Center). Each certificate of approval for an AE relates to a specific investment program, delineated both by the financial scope of the investment, including sources of funds, and by the physical characteristics of the facility or other assets.

 

An AE may elect to forego any entitlement to the cash grants otherwise available under the Investment Law and, instead, participate in an alternative benefits program. Under the alternative benefits program, a company’s undistributed income derived from an AE will be exempt from corporate tax for a period of between two and ten years from the first year of taxable income, depending on the geographic location within Israel of the AE, and a reduced corporate tax rate of between 10% to 25% for the remainder of the benefits period, depending on the level of foreign investment in the company in each year, as detailed below. The benefits period under AE status is limited to 12 years from the year in which the production commenced (as determined by the Investment Center), or 14 years from the year of receipt of the approval as an AE, whichever ends earlier. If a company has more than one AE program or if only a portion of its capital investments are approved, its effective tax rate is the result of a weighted combination of the applicable rates. The tax benefits available under any certificate of approval relate only to taxable income attributable to the specific program and are contingent upon meeting the criteria set out in the certificate of approval. Income derived from activity that is not integral to the activity of the AE will not enjoy tax benefits.

 

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A company that has an AE program is eligible for further tax benefits, if it qualifies as a Foreign Investors’ Company, or FIC. An FIC eligible for benefits is essentially a company with a level of foreign investment, as defined in the Investment Law, of more than 25%. The level of foreign investment is measured as the percentage of rights in the company (in terms of shares, rights to profits, voting and appointment of directors), and of combined share and loan capital, that are owned, directly or indirectly, by persons who are not residents of Israel. The determination as to whether or not a company qualifies as an FIC is made on an annual basis. An FIC that has an AE program will be eligible for an extension of the period during which it is entitled to tax benefits under its AE status (so that the benefits period may be up to ten years) and for further tax benefits if the level of foreign investment is 49% or more. If a company that has an AE program is a wholly owned subsidiary of another company, then the percentage of foreign investment is determined based on the percentage of foreign investment in the parent company.

 

The corporate tax rates and related levels of foreign investments with respect to an FIC that has an AE program are set forth in the following table:

 

Percentage of non-Israeli ownership  Corporate Tax Rate 
     
Over 25% but less than 49%   25%
49% or more but less than 74%   20%
74% or more but less than 90%   15%
90% or more   10%

 

A company that has elected to participate in the alternative benefits program and that subsequently pays a dividend out of the income derived from the portion of its facilities that have been granted AE status during the tax exemption period will be subject to tax in respect of the amount of dividend distributed (grossed up to reflect such pre-tax income that it would have had to earn in order to distribute the dividend) at the corporate tax rate that would have been otherwise applicable if such income had not been tax-exempted under the alternative benefits program. This rate generally ranges from 10% to 25%, depending on the level of foreign investment in the company in each year as explained above.

 

In addition, dividends paid out of income attributed to an AE (or out of dividends received from a company whose income is attributed to an AE) are generally subject to withholding tax at the rate of 15%, or at a lower rate provided under an applicable tax treaty (subject to the receipt in advance of a valid certificate from the Israel Tax Authority allowing for a reduced tax rate). The 15% tax rate is limited to dividends and distributions out of income derived during the benefits period and actually paid at any time up to 12 years thereafter. After this period, the withholding tax is applied at a rate of up to 30%, or at a lower rate under an applicable tax treaty (subject to the receipt in advance of a valid certificate from the Israel Tax Authority allowing for a reduced tax rate). In the case of an FIC, the 12-year limitation on reduced withholding tax on dividends does not apply.

 

The Investment Law also provides that an AE is entitled to accelerated depreciation on its property and equipment that are included in an approved investment program in the first five years of using the equipment. This benefit is an incentive granted by the Israeli government regardless of whether the alternative benefits program is elected.

 

The benefits available to an AE are subject to the fulfillment of conditions stipulated in the Investment Law and its regulations and the criteria in the specific certificate of approval with respect thereto, as described above. If a company does not meet these conditions, it would be required to refund the amount of tax benefits, adjusted to the Israeli consumer price index and interest, or other monetary penalty.

 

Under the terms of the AE program, income that is attributable to one of our Israeli subsidiaries has been exempted from income tax for a period of two years commencing in 2014.

 

Tax Benefits Subsequent to the 2005 Amendment

 

The 2005 Amendment applies to new investment programs commencing after 2004, but does not apply to investment programs approved prior to April 1, 2005. The 2005 Amendment provides that terms and benefits included in any certificate of approval that was granted before the 2005 Amendment became effective (April 1, 2005) will remain subject to the provisions of the Investment Law as in effect on the date of such approval. Pursuant to the 2005 Amendment, the Investment Center will continue to grant AE status to qualifying investments. The 2005 Amendment, however, limits the scope of enterprises that may be approved by the Investment Center by setting criteria for the approval of a facility as an AE.

 

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An enterprise that qualifies under the new provisions is referred to as a BE, rather than AE. The 2005 Amendment provides that a certificate of approval from the Investment Center will only be necessary for receiving cash grants. As a result, it was no longer necessary for a company to obtain the advance approval of the Investment Center in order to receive the tax benefits previously available under the alternative benefits track. Rather, a company may claim the tax benefits offered by the Investment Law directly in its tax returns, provided that its facilities meet the criteria for tax benefits set forth in the 2005 Amendment. A company that has a BE may, at its discretion, approach the Israel Tax Authority for a pre-ruling confirming that it is in compliance with the provisions of the Investment Law.

 

Tax benefits are available under the 2005 Amendment to production facilities (or other eligible facilities) which are generally required to derive more than 25% of their business income from export to specific markets with a population of at least 14 million in 2012 (such export criteria will further be increased in the future by 1.4% per annum). In order to receive the tax benefits, the 2005 Amendment states that a company must make an investment which meets certain conditions set forth in the amendment for tax benefits, including exceeding a minimum investment amount specified in the Investment Law. Such investment entitles a company to receive a BE status with respect to the investment, and may be made over a period of no more than three years ending in the end of the year in which the company chose to have the tax benefits apply to its BE. Where a company requests to have the tax benefits apply to an expansion of existing facilities, only the expansion will be considered to be a BE and the company’s effective tax rate will be the weighted average of the applicable rates. In such case, the minimum investment required in order to qualify as a BE must exceed a certain percentage of the value of the company’s production assets before the expansion.

 

The extent of the tax benefits available under the 2005 Amendment to qualifying income of a BE depends on, among other things, the geographic location in Israel of the BE. The location will also determine the period for which tax benefits are available. Such tax benefits include an exemption from corporate tax on undistributed income generated by the BE for a period of between two to ten years, depending on the geographic location of the BE in Israel, and a reduced corporate tax rate of between 10% to 25% for the remainder of the benefits period, depending on the level of foreign investment in the company in each year, as explained above. The benefits period is limited to 12 or 14 years from the year the company first chose to have the tax benefits apply, depending on the location of the company.

 

A company qualifying for tax benefits under the 2005 Amendment which pays a dividend out of income derived by its BE during the tax exemption period will be subject to corporate tax in respect of the amount of the dividend distributed (grossed-up to reflect the pre-tax income that it would have had to earn in order to distribute the dividend) at the corporate tax rate which would have otherwise been applicable. Dividends paid out of income attributed to a BE (or out of dividends received from a company whose income is attributed to a BE) are generally subject to withholding tax at source at the rate of 15% or at a lower rate as may be provided in an applicable tax treaty (subject to the receipt in advance of a valid certificate from the Israel Tax Authority allowing for a reduced tax rate). The reduced rate of 15% is limited to dividends and distributions out of income attributed to a Beneficiary Enterprise during the benefits period and actually paid at any time up to 12 years thereafter except with respect to an FIC, in which case the 12-year limit does not apply.

 

The benefits available to a BE are subject to the continued fulfilment of conditions stipulated in the Investment Law and its regulations. If a company does not meet these conditions, it would be required to refund the amount of tax benefits, adjusted to the Israeli consumer price index, and interest, or other monetary penalties.

 

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Tax benefits under the 2011 Amendment that became effective on January 1, 2011

 

The 2011 Amendment canceled the availability of the benefits granted in accordance with the provisions of the Investment Law prior to 2011 and, instead, introduced new benefits for income generated by a “Preferred Company” through its PFE (as such terms are defined in the Investment Law) as of January 1, 2011. A Preferred Company is defined as either (i) a company incorporated in Israel which is not wholly owned by a governmental entity or (ii) a limited partnership that (a) was registered under the Israeli Partnerships Ordinance and (b) all of its limited partners are companies incorporated in Israel, but not all of them are governmental entities; which has, among other things, PFE status and is controlled and managed from Israel. Pursuant to the 2011 Amendment, a Preferred Company is entitled to a reduced corporate tax rate of 15% with respect to its preferred income (“PFI”) attributed to its PFE in 2011 and 2012, unless the PFE is located in a certain development zone, in which case the rate will be 10%. Such corporate tax rate was reduced to 12.5% and 7%, respectively, in 2013 and was increased to 16% and 9%, respectively, in 2014 until 2016. Pursuant to the 2017 Amendment, in 2017 and thereafter, the corporate tax rate for a PFE that is located in a specified development zone was decreased to 7.5%, while the reduced corporate tax rate for other development zones remains 16%. Income derived by a Preferred Company from a Special PFE (as such term is defined in the Investment Law) would be entitled, during a benefits period of 10 years, to further reduced tax rates of 8%, or 5% if the Special PFE is located in a certain development zone. As of January 1, 2017, the definition for Special PFE includes less stringent conditions.

 

Dividends paid out of PFI attributed to a PFE or to a Special PFE are generally subject to withholding tax at source at the rate of 20% or such lower rate as may be provided in an applicable tax treaty (subject to the receipt in advance of a valid certificate from the Israel Tax Authority allowing for a reduced tax rate). However, if such dividends are paid to an Israeli company, no tax is required to be withheld (although, if such dividends are subsequently distributed from such Israeli company to individuals or a non-Israeli company, withholding tax at a rate of 20% or such lower rate as may be provided in an applicable tax treaty will apply).

 

The 2011 Amendment also provided transitional provisions to address companies already enjoying current benefits under the Investment Law. These transitional provisions provide, among other things, that unless an irrevocable request is made to apply the provisions of the Investment Law as amended in 2011 with respect to income to be derived as of January 1, 2011: (i) the terms and benefits included in any certificate of approval that was granted to an AE, which chose to receive grants, before the 2011 Amendment became effective, will remain subject to the provisions of the Investment Law as in effect on the date of such approval, and subject to certain conditions; and (ii) the terms and benefits included in any certificate of approval that was granted to an AE, that had participated in an alternative benefits program, before the 2011 Amendment became effective, will remain subject to the provisions of the Investment Law as in effect on the date of such approval, provided that certain conditions are met. As of December 31, 2015, some of our Israeli subsidiaries had filed a request to apply the new benefits under the 2011 Amendment.

 

New Tax benefits under the 2017 Amendment that became effective on January 1, 2017

 

The 2017 Amendment was enacted as part of the Economic Efficiency Law that was published on December 29, 2016, and is effective as of January 1, 2017. The 2017 Amendment provides new tax benefits for two types of Technology Enterprises, as described below, and is in addition to the other existing tax beneficial programs under the Investment Law.

 

The 2017 Amendment provides that a technology company satisfying certain conditions will qualify as a PTE and will thereby enjoy a reduced corporate tax rate of 12% on income that qualifies as Preferred Technology Income, or PTI, as defined in the Investment Law. The tax rate is further reduced to 7.5% for a PTE located in development zone A. In addition, a Preferred Technology Company will enjoy a reduced corporate tax rate of 12% on capital gain derived from the sale of certain Benefited Intangible Assets (as defined in the Investment Law) to a related foreign company if the Benefited Intangible Assets were acquired from a foreign company on or after January 1, 2017 for at least NIS 200 million, and the sale receives prior approval from the National Authority for Technological Innovation (referred to as NATI).

 

The 2017 Amendment further provides that a technology company satisfying certain conditions will qualify as a Special PTE (an enterprise for which total consolidated revenues of its parent company and all subsidiaries exceed NIS 10 billion) and will thereby enjoy a reduced corporate tax rate of 6% on PTI regardless of the company’s geographic location within Israel. In addition, a Special PTE will enjoy a reduced corporate tax rate of 6% on capital gain derived from the sale of certain “Benefited Intangible Assets” to a related foreign company if the Benefited Intangible Assets were either developed by an Israeli company or acquired from a foreign company on or after January 1, 2017, and the sale received prior approval from NATI. A Special PTE that acquires Benefited Intangible Assets from a foreign company for more than NIS 500 million will be eligible for these benefits for at least ten years, subject to certain approvals as specified in the Investment Law.

 

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Dividends distributed by a PTE or a Special PTE, paid out of PTI, are generally subject to withholding tax at source at the rate of 20% or such lower rate as may be provided in an applicable tax treaty (subject to the receipt in advance of a valid certificate from the Israel Tax Authority allowing for a reduced tax rate). However, if such dividends are paid to an Israeli company, no tax is required to be withheld (although, if such dividends are subsequently distributed from such Israeli company to individuals or a non-Israeli company, withholding tax at a rate of 20% or such lower rate as may be provided in an applicable tax treaty will apply). If such dividends are distributed to a foreign company and other conditions are met, the withholding tax rate will be 4%.

 

We examined the impact of the 2017 Amendment and the degree to which we will qualify as a PTE or Special PTE, and the amount of PTI that we may have, or other benefits that we may receive, from the 2017 Amendment. Beginning in 2017, part of the Company taxable income in Israel is entitled to a preferred 12% tax rate under Amendment 73 to the Investment Law.

 

Tax Benefits for Research and Development

 

Israeli tax law allows, under certain conditions, a tax deduction for research and development expenditures, including capital expenditures, for the year in which they are incurred.  Such expenditures must relate to scientific research and development projects, and must be approved by the relevant Israeli government ministry, determined by the field of research.  Furthermore, the research and development must be for the promotion of the company’s business and carried out by or on behalf of the company seeking such tax deduction.  However, the amount of such deductible expenses is reduced by the sum of any funds received through government grants for the finance of such scientific research and development projects.  Expenditures not so approved by the relevant Israeli government ministry, but otherwise qualifying for deduction, are deductible over a three-year period.

 

B.Liquidity and Capital Resources

 

To date, we have substantially satisfied our capital and liquidity needs through cash flows from operations and sales of our equity and debt securities.

 

Cash flows provided from operations were $26.0 million and $8.5 million during the years ended December 31, 2016 and 2017, respectively. We used $8.3 million and $73.2 million of cash in investing activities during the years ended December 31, 2016 and 2017, respectively. We used $11.2 million of cash for our financing activities in the year ended December 31, 2016, while in the year ended December 31, 2017, our financing activities provided us with $70.8 million of cash. As of December 31, 2016, and 2017, we had $96.4 million and $71.5 million, respectively, of cash, cash equivalents and investments in marketable securities, and $72.5 million and $60.8 million, respectively, of working capital.

 

We expect that we will continue to generate positive cash flows from operations on an annual basis, although this may fluctuate significantly on a quarterly basis. We believe that based on our current operating forecast, the combination of existing working capital and expected cash flows from operations will be sufficient to finance our ongoing operations for the next twelve months.

 

Our future capital requirements will depend on many factors, including the rate of growth of our revenues, the expansion of our sales and marketing activities and the timing and extent of our spending to support our research and development efforts and expansion into other markets. We may determine to distribute dividends to our shareholders. See “Item 8. Financial Information - Dividend Policy”. We may also seek to invest in, or acquire complementary businesses, applications or technologies. To the extent that existing cash and cash equivalents, investments in marketable securities and cash from operations are insufficient to fund our future activities, we may need to raise additional funds through public or private equity or debt financing. Additional funds may not be available on terms favorable to us or at all.

 

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Israeli Public Offering and Private Placement of Debentures

 

In September 2017, we published with the Israeli Securities Authority, or the ISA, and the Tel Aviv Stock Exchange, or the TASE, a shelf offering report for an offering of a new series of debentures—Series B, unsecured, non-convertible debentures, or the Series B Debentures— in Israel, which offering included institutional and public bid processes. Pursuant to the offering, we offered, issued and sold a total of 234,144 units of Series B Debentures of principal amount of NIS 1,000 each for aggregate gross proceeds of approximately NIS 234.14 million (approximately $66.2 million).

 

Immediately following the public offering, we entered into agreements with Israeli accredited investors for the private placement to those investors, in Israel, of an additional NIS 45.86 million (approximately $12.96 million) principal amount of Series B Debentures. The Series B Debentures were sold in the private placement at a price of NIS 995.5 for each NIS 1,000 principal amount, thereby generating approximately NIS 45.65 million ($12.9 million) of additional proceeds for our company.

 

Upon the completion of the public offering and private placement of Series B Debentures, we had issued and sold the full NIS 280 million (approximately $79.2 million) principal amount of Series B Debentures that we had offered in the Israeli public offering.

 

The Series B Debentures were offered as, and trade on the TASE as, 280,000 units of NIS 1,000 principal amount each. In the case of the privately placed Series B Debentures, resale by the purchasers was restricted for an initial period, in accordance with the Israeli Securities Law, 5728-1968, and the regulations thereunder.

 

The outstanding principal amount of the Series B Debentures is link to the US$ and bears interest at an annual rate of 3.37%, to be paid on a semi-annual basis (on January 1 and July 1 of 2018 through 2025, with one final interest payment on January 1, 2026). The principal of the Series B Debentures is payable in eight equal annual payments beginning on January 1, 2019, with the final payment due on January 1, 2026.

 

We have been using, and expect to continue to use, the net proceeds of the offering for general corporate purposes, including repayment of outstanding debt (as described immediately below), financing our operating and investment activities, and financing future acquisitions.

 

Secured Term Loan Under Credit Agreement—Repayment

 

In connection with our acquisition of StoneRiver, in the first quarter of 2017, we (via our wholly-owned subsidiary, Sapiens Americas Corporation) obtained $40 million of secured debt financing from HSBC Bank USA, National Association pursuant to a credit agreement. Upon our consummation of the public offering and private placement of Series B Debentures in September 2017, we utilized the proceeds received from the sale of the debentures for repayment of the entire outstanding term loan amount (including accrued interest) under the credit agreement with HSBC.

 

Cash Flows

 

Comparison of the years ended December 31, 2016 and 2017

 

The following tables summarize the sources and uses of our cash in the years ended December 31, 2016 and 2017:

 

   Year ended December 31, 
   2016   2017 
   (in thousands US$) 
Net cash provided from operating activities  $26,039   $8,482 
Net cash used in investing activities   (8,317)   (73,201)

Net cash provided from (used in) financing activities

   (11,233)   70,775 

 

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Operating Activities

 

We derived positive cash flows from operating activities of $26.0 million and $8.5 million during the years ended December 31, 2016 and 2017, respectively. This decrease in cash flows provided from operating activities for the year ended December 31, 2017, relative to the year ended December 31, 2016 resulted primarily from a decrease in net income of $19.0 million, from $19.6 million to $0.6 million, which was due to the factors described above.

 

Investing Activities

 

Net cash used in investing activities increased to $73.2 million for the year ended December 31, 2017, compared to $8.3 million in the year ended December 31, 2016, primarily due to an increase in use of cash, for the acquisition of businesses during 2017, which increased to $100.4 million, compared to $4.4 million in 2016. The increase in cash used for investing activities in the year ended December 31, 2017, was offset, in part, by an increase in sales of marketable securities in the year ended December 31, 2017, relative to the previous year. In 2017, we received $35.4 million of cash, net, from sales (net of purchases) of marketable securities, compared to $4.9 million received from sales of marketable securities (net of sales) in the year ended December 31, 2016, constituting an overall difference of $30.5 million between the two years. An additional offsetting factor to the increase in cash used for investing activities was a decrease in use of cash, to an amount of $2.6 million, for the purchase of property and equipment during the year ended December 31, 2017, compared to $4.7 million in 2016.

 

Financing Activities

 

Our financing activities generated $70.8 million of cash during the year ended December 31, 2017, as compared to using $11.2 million of cash in the year ended December 31, 2016. Cash provided from financing activities in the year ended December 31, 2017, was primarily attributable to our Series B Debentures offering, which generated $78.2 million, which was offset in part by cash used for payment of a cash dividend in a total amount of approximately $9.8 million. In the year ended December 31, 2016, cash used in financing activities was primarily attributable to payment of a cash dividend in a total amount of approximately $9.9 million. Cash provided from financing activities during the year ended December 31, 2017, and cash used in financing activities during the year ended December 31, 2016 included $2.5 million and $0.9 million, respectively, of cash provided by stock option exercises during those respective years.

 

Comparison of the years ended December 31, 2015 and 2016

 

The following tables summarize the sources and uses of our cash in the years ended December 31, 2015 and 2016:

 

   Year ended December 31, 
   2015   2016 
   (in thousands US$) 
Net cash provided from operating activities  $40,440   $26,039 
Net cash used in investing activities   (18,853)   (8,317)
Net cash used in financing activities   (14,177)   (11,233)

 

Operating Activities

 

We derived positive cash flows from operating activities of $40.4 million and $26.0 million during the years ended December 31, 2015 and 2016, respectively. This decrease in cash flows provided from operating activities for the year ended December 31, 2016 relative to the year ended December 31, 2015 resulted primarily from a decrease in net income of $0.7 million, from $20.3 million to $19.6 million, which was due to the factors described above. The decrease in cash flows was furthermore attributable to an increase of $5.4 million in accounts receivable during the year ended December 31, 2016, as compared to a decrease of $1.9 million in accounts receivable during the prior year, which year-over-year difference contributed $7.3 million, in the aggregate, to the decrease in operating cash flow during 2016. Another contributing factor was an increase in other operating assets during 2016 relative to the prior year, from an increase of $1.2 million to an increase of $3.3 million, thereby contributing an aggregate of $2.1 million towards the decrease of operating cash flows in the year ended December 31, 2016.

 

Investing Activities

 

Net cash used in investing activities decreased to $8.3 million for the year ended December 31, 2016 compared to $18.9 million in the year ended December 31, 2015, primarily due to a decrease in purchases of marketable securities and increase in sales of marketable securities in the year ended December 31, 2016 relative to the previous year. In 2016, we received $4.9 million of cash, net, from sales (net of purchases) of marketable securities, compared to $6.2 million used in the purchases of marketable securities (net of sales) in the year ended December 31, 2015, constituting an overall difference of $11.1 million between the two years. The decrease in cash used for investing activities in the year ended December 31, 2016 was offset, in part, by an increase in use of cash, for the acquisition of businesses during 2016, which increased to $4.4 million, compared to $2.9 million in 2015. An additional offsetting factor to the decrease in cash used for investing activities was an increase in use of cash, to an amount of $4.7 million, for the purchase of property and equipment during the year ended December 31, 2016, compared to $2.8 million in 2015.

 

Financing Activities

 

Our financing activities used $11.2 million of cash during the year ended December 31, 2016, as compared to using $14.2 million of cash in the year ended December 31, 2015. Cash use in the year ended December 31, 2016 was primarily attributable to a cash dividend in a total amount of approximately $9.8 million, as compared to a cash dividend in a total amount of approximately $7.2 million and the distribution of $8.5 million to our ultimate parent company for a business acquisition under common control (that is, for the acquisition of Insseco, as described in Item 3.A, “Selected Financial Data”, above) in the year ended December 31, 2015. Cash used for financing activities during each of the years ended December 31, 2015 and December 31, 2016 was partially offset by $1.6 million and $0.9 million, respectively, of cash provided by stock option exercises during each reported period.

 

C.Research and Development, Patents and Licenses, etc.

 

See the caption titled “Research and Development” in part A. “Operating Results” of this Item 5 above for a description of our R&D policies and amounts expended thereon during the last two fiscal years.

 

D.Trend Information

 

There are various sales and marketing trends that influence our business. According to a research report published by Celent, a research and consulting firm, (IT Spending in Insurance, a Global Perspective, 2017, by Jamie Macregor, Juan Mazzini, Karen Monks and KyongSun Kong, published on April 5, 2017), global IT spending by insurance companies is expected to grow from $184.8 billion in 2017, to $193.7 billion in 2018, and $202 billion in 2019. IT spending on external software and IT services, which was predicted to total approximately $83 billion in 2017, is expected to increase to $89 billion by 2018, reflecting a 7.6% growth rate. IT Spending in the life vertical is expected to grow from $101.5 billion in 2017, to $106.1 billion in 2018, reflecting 4.6% growth rate. IT spending in the property and casualty vertical is expected to grow from $83.8 billion in 2017 to $87.6 billion in 2018, reflecting 5.1% growth rate.

 

Celent also projected that IT spending in North America would rise to $77.6 billion in 2018, annual growth of 6.4% from 2017. By 2019, North American insurers are expected to account for approximately 40.9% of global IT spending; this is up 1.4% from 2017. IT spending in Europe would grow to $70.8 billion in 2018, at a rate of 2.9% from 2017. Asia-Pacific was expected to grow to $34.3 billion in 2018, at a 2.8% annual growth rate.

 

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According to Celent, IT spending in external software and services, which is the market we address, is expected to grow from an estimated $83 billion in 2017, to $89 billion by 2018, a 7.6% growth rate. Celent reports that the expected significant increase in external software and services will be driven by pure growth in IT spending, and also from the shift in IT spending from internal efforts to external vendors (such as our company). This move from in-house, home-grown solutions to packaged solutions is happening as IT departments recognize that internal solutions are often difficult to maintain and do not have the advantage of significant R&D investment. Celent’s three overarching trends in the market digitalization, data analytics and legacy and ecosystem transformation are still dominating IT spending for insurers.

 

The global insurance industry is evolving in a number of areas, and insurance carriers require support from their software and IT service providers to keep up. The primary areas of evolution include:

 

·Tighter competition

 

·Tougher regulation

 

·Customer sophistication

 

·Globalization and consolidation

 

With the growing need for insurance, as people accumulate more property and live longer, the insurance industry has become more competitive. The competition for the customers’ business requires insurers to improve customer experience, be faster to market with new products and offer innovative channels, such as social media and mobile. Innovative technology infrastructure is necessary to support these business initiatives.

 

In addition, insurers are faced with the increasing significance of regulatory changes to protect the policyholder in many markets, particularly large insurers that are considered important to the stability of the world economic system. Many insurers are integrating enterprise risk management as standard operating procedure, while spreading ownership of risk throughout the strategic decision-making process.

 

As customers become more sophisticated, the support of innovative products and distribution channels is mandatory. Insurers are identifying growth opportunities by attracting new customers and retaining current customers by seeking to reinvent the customer experience and provide quote and policy information to their customers upon request.

 

With today’s strong trend of shifting attention to the end-customer experience and activities, there is an increasing focus on digital operations to support the increasing usage of the Internet for sales, recommendations and general communication. This affects the carriers’ needs to innovate their product proposition through a flexible and modern solution. Another substantial trend is the increasing usage of data for decision-making, risk analysis, customers’ evaluation and rating, which requires streamlined data flow and easy access to information from multiple sources.

 

Increased global competition, the need to improve distribution channels and provide an enhanced customer experience, and efforts to expand into new countries and markets have required heavy investments from insurers, resulting in a trend towards consolidation. This has mainly included consolidation of applications, databases, development tools, hardware and data centers.

 

E.Off-Balance Sheet Arrangements

 

We have not engaged in nor been a party to any off-balance sheet transactions.

 

F.Contractual Obligations

 

The following table sets forth information on our short-term and long-term contractual obligations as at December 31, 2017.

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   Payments due by period 
   Total   Less than 1 year   1 to 3
Years
   3 to 5 years   Over 5 years 
   (in thousands) 
Accrued severance pay, net (1)  $953    -    -    -   $953 
                          
Operating leases   13,621    5,823    7,271    527    - 
Liability to the OCS (2)   254    254    -    -    - 
Series B Debentures (3)   79,186    -    29,695    29,695    19,796 
Contingent payment obligations – acquisitions (4)   3,774    1,959    1,815    -    - 
Total Contractual Cash Obligations  $97,788   $8,036   $38,781   $30,222   $20,749 

 

(1)Accrued severance pay relates to accrued severance obligations mainly to our Israeli employees as required under Israeli labor law. We are legally required to pay severance upon certain circumstances, primarily upon termination of employment by our company, retirement or death of the respective employee. Our liability for all of our Israeli employees is fully provided for by monthly deposits with insurance policies and by an accrual.

 

(2)Does not include contingent liabilities to the Innovation Authority of approximately $6.6 million as described in Note 11(a) to our consolidated financial statements contained elsewhere in this annual report.

 

(3)Future principal payments for the Series B Debentures without interest.

 

(4)Contingent payment obligations for our acquisitions do not include contingent payments in an amount of up to $4.6 million, in the aggregate, that are subject to continued employment by the potential recipients thereof.

 

The total amount of unrecognized tax benefits for uncertain tax positions was $2.3 million as of December 31, 2017. Payment of these obligations would result from settlements with taxing authorities. Due to the uncertainties related to those tax matters, we are currently unable to make a reasonably reliable estimate of when cash settlement with a relevant tax authority will occur. See Note 12(i) to our consolidated financial statements contained elsewhere in this annual report, as of December 31, 2017.

 

ITEM 6.Directors, Senior Management and Employees

 

A.Directors and Senior Management

 

The following table and below biographies set forth certain information regarding the current executive officers and directors of the Company as of March 1, 2018.

 

Name (1)   Age   Position
Guy Bernstein   50   Chairman of the Board of Directors
Roni Al Dor   57   President, Chief Executive Officer and Director
Naamit Salomon   54   Director
Yacov Elinav (2)   73   Director
Uzi Netanel (2)   82   Director
Eyal Ben Chlouche (2)   56   Director
Roni Giladi   47   Chief Financial Officer

 

(1)In addition to the executive officers and directors listed above, United International Trust N.V., a former director of the Company, serves as the Company’s local representative in Curaçao until (and subject to) the completion of the migration of the legal domicile of the Company to the Cayman Islands.

 

(2)Member of Audit Committee

 

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Guy Bernstein has served as a director of the Company since January 1, 2007 and was appointed Chairman of the Board of Directors on November 12, 2009. Mr. Bernstein has served as the chief executive officer of Formula, our parent company, since January 2008.  From December 2006 to November 2010, Mr. Bernstein served as a director and the chief executive officer of Emblaze Ltd. or Emblaze, our former controlling shareholder. From April 2004 to December 2006, Mr. Bernstein served as the chief financial officer of Emblaze. He also served as a director of Emblaze from April 2004 until November 2010. Prior to joining Emblaze, Mr. Bernstein served as Chief Financial and Operations Officer of Magic Software, a position he held since 1999. Mr. Bernstein joined Magic Software from Kost Forer Gabbay & Kasierer, a member of EY Global, where he acted as senior manager from 1994 to 1997. Mr. Bernstein also serves as Chief Executive Officer of Magic Software and Chairman of the Board of Matrix IT Ltd. Mr. Bernstein is a Certified Licensed Public Accountant and holds a BA in Accounting and Economics from Tel Aviv University.

 

Roni Al Dor joined the Company as President and Chief Executive Officer in November 2005 and has served as a director of the Company since November 2005. Prior to joining the Company, Mr. Al Dor was one of the two founders of TTI Team Telecom International Ltd., or TTI, a global supplier of operations support systems to communications service providers and from August 1996 until 2004, Mr. Al Dor served as President of TTI. Prior to that, Mr. Al Dor served as TTI’s Co-President from November 1995 until August 1996 and its Vice President from September 1992 to November 1995. During his service in the Israeli Air Force, Mr. Al Dor worked on projects relating to computerization in aircrafts. Mr. Al Dor is a graduate of the military computer college of the Israeli Air Force, studied computer science and management at Bar Ilan University and attended the Israel Management Center for Business Administration.

 

Eyal Ben-Chlouche has served as a director of the Company since August 15, 2008, Mr. Ben-Chlouche served as the Commissioner of Capital Market Insurance and Savings at the Israeli Ministry of Finance from 2002 through 2005, where he was responsible for implementation of fundamental reforms in pension savings. Prior to that, he served as a Deputy Commissioner of Capital Market Insurance and Savings and as a Senior Foreign Exchange and Investment Manager in the Foreign Exchange Department of the Bank of Israel.  He also served as an Investment Officer in the Foreign Exchange Department of the Bank of England, in London. Mr. Ben-Chlouche served as Chairman of the Board of Directors of the Shahar Group, Chairman of the Advisory Board of Directors of the Shekel Group until the end of 2007 and serves as a director of Matrix IT Ltd. and Migdal Holding Ltd. Mr. Ben-Chlouche also serves on the Board of Directors of several other private companies. Mr. Ben-Chlouche also serves as Chairman of the Advisory Board of the Caesarea Center for Capital Markets and Risk Management. In 2005, Mr. Ben-Chlouche served as a member of the Bachar Committee on Capital Market Reform in Israel. Mr. Ben-Chlouche is an independent director.

 

Naamit Salomon has served as a director of the Company since September 2003. She held the position of Chief Financial Officer of Formula from August 1997 until December 2009. Since January 2010 Ms. Salomon has served as a partner in an investment company. Ms. Salomon also serves as a director of Magic. From 1990 through August 1997, Ms. Salomon was a controller of two large, privately held companies in the Formula Group. Ms. Salomon holds a BA in economics and business administration from Ben Gurion University and an LL.M. from the Bar-Ilan University.

 

Yacov Elinav has served as a director of the Company since March 2005. For over 30 years, Mr. Elinav served in various positions at Bank Hapoalim B.M., which is listed on the London and Tel Aviv Stock Exchanges, including over 10 years as a member of the Board of Management, responsible for subsidiary and related companies.  From 1992 through 2006, Mr. Elinav served as Chairman of the Board of Directors of Diur B.P. Ltd., the real estate subsidiary of Bank Hapoalim. From August 2004 until 2009, Mr. Elinav served as Chairman of the Board of Directors of DS Securities and Investments, Ltd. From August 2004 through 2008, Mr. Elinav served as Chairman of the Board of Directors of DS Provident Funds Ltd., and from 2010 until August 2015, served as Chairman of the Board of Directors of Golden Pages Ltd.. Mr. Elinav also serves on the Board of Directors of several other public and private companies. Mr. Elinav is an independent director.

 

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Uzi Netanel has served has a director of the Company since March 2005. He has served as chairman of the Board of Directors of Maccabi Enterprise Development & Management Ltd., and as Chairman of Maccabi Group Holdings Ltd. from 2005 through 2011. From 2004 through 2007, Mr. Netanel served as Chairman of Board of Directors of M.L.L Software & Computers, and from 2000 through 2011 served as a director of Bazan and Carmel Olephine. From 2001 through 2003, Mr. Netanel served as partner in the FIMI Opportunity Fund. From 1993 through 2001, he served as Active Chairman of Israel Discount Capital Markets and Investments Ltd. From 1997 to 1999, Mr. Netanel served as Chairman of Poliziv Plastics Company (1998) Ltd. From 2005 through 2014, he served as director of Maman Group and from 2012 through 2014, he served as director of Gadot Biochemicals. Mr. Netanel also serves on the Board of Directors of Acme Trading, Scope Metals Ltd. (external director), Assuta Health Centers, and Maccabi Health Services. Mr. Netanel is an independent director.

 

Roni Giladi joined the Company as Chief Financial Officer in July 2007. Prior to joining the Company, Mr. Giladi served as the Director of Finance at Emblaze from January 2007. Prior to joining Emblaze, Mr. Giladi served as Chief Financial Officer of RichFX, from August 2003 until November 2006, after serving as Corporate Controller from June 2002. Prior to RichFX, Mr. Giladi worked at EY Israel, from 1997-2002, as a manager in the high-tech practice group. Mr. Giladi is Certified Licensed Public Accountant and holds a BA in Business Management and Accounting from the College of Management in Israel.

 

Under our Memorandum and Articles, the Board of Directors must have a minimum of three, and may have a maximum of 24, directors. Directors of the Company are appointed by our General Meeting of Shareholders and hold office until the expiration of the term of their appointment by our General Meeting of Shareholders, or until they resign or are suspended or dismissed by the General Meeting of Shareholders. The Board of Directors may appoint up to four directors in addition to the directors elected by the General Meeting of Shareholders, subject to the maximum number of directors permitted, and any such appointment shall be effective until the next General Meeting of Shareholders. The Board of Directors may fill any vacancies on the Board of Directors, whether as a result of the resignation or dismissal of a director, or as a result of a decision of the Board of Directors to expand the Board of Directors.

 

Our executive officers are appointed by, and serve at the discretion of, our Board of Directors.

 

Our Chairman, Guy Bernstein, serves as the Chief Executive Officer of Formula and as a director of Asseco. In addition, Ms. Salomon, another Board member of ours, who served as an executive officer of Formula until December 2009, is a member of the Board of Directors of our affiliate Magic Software Enterprises Ltd. Formula directly owns (as of March 1, 2018) approximately 48.1% of our currently outstanding Common Shares, and Asseco beneficially owns 26.3% of the outstanding share capital of Formula, as well as the power to vote an additional 1,971,973 ordinary shares of Formula, thereby effectively giving Asseco beneficial ownership (voting power) over an aggregate of 39.7% of Formula’s outstanding ordinary shares.

 

B.Compensation of Directors and Officers

 

The aggregate amount of compensation paid by us, or accrued by us, for all directors and executive officers as a group for services in all capacities with respect to the fiscal year ended December 31, 2017 was $1.5 million. In addition to the foregoing amount, we also set aside or accrued for our directors and executive officers with respect to the fiscal year ended December 31, 2017 $0.3 for pension, retirement severance, vacation accrual and similar benefits of the Company. These compensation amounts do not include amounts expended by us for automobiles made available to our officers or expenses (including business travel and professional and business association dues) reimbursed to such officers. The foregoing amounts also exclude the value of stock option grants to our directors and officers pursuant to our 2011 Share Incentive Plan, which is described below.

 

We have employment agreements with our officers.  We also enter into confidentiality agreements with our personnel and have entered into non-competition and confidentiality agreements with our officers and high-level technical personnel, in each case in the ordinary course of business.  We do not maintain key person life insurance on any of our executive officers.

 

Board Fees and Expenses

 

We reimburse all members of our Board of Directors for reasonable out-of-pocket expenses incurred in connection with their attendance at meetings of the Board of Directors or its committees.

 

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We pay a fee of approximately $31,800 to our independent directors (except to Formula, to which we pay approximately $28,600 in respect of the service of its Chief Executive Officer, Guy Bernstein, as our Chairman of the Board), for attending or participating in meetings of the Board of Directors and its committees, and for participating in Board action taken via unanimous written consent. Such fees are set in accordance with the rates paid to “external directors” under the Israeli Companies Law 5759-1999. Although we are not an Israeli company and are not subject to the Israeli Companies Law, we deem certain standards of that body of law (including compensation to Board members) relevant to a company such as ours that has a substantial percentage of Israeli operations and Israeli employees. United International Trust N.V., which also qualified as an independent director when it was serving as such (until our November 2017 annual general shareholder meeting), instead received a fee of $1,200 for director services when it was serving as a director in 2017 (until November 2017), and continues to receive an additional annual amount for consulting and related services that it provides to us (until the completion of the migration of our legal domicile to the Cayman Islands).

 

Stock Option and Incentive Plans

 

Prior Incentive Plans

 

In 1992, 2003 and 2005, our Board of Directors adopted (and our shareholders subsequently approved) our 1992 Stock Option and Incentive Plan, 2003 Share Option Plan, and Incentive Stock Option Plan, respectively, collectively referred to as our Prior Incentive Plans. These plans were administered by our Compensation Committee. Upon the approval of our 2011 Share Incentive Plan (as described below), our Board of Directors determined that no further awards would be granted under the Prior Incentive Plans. Furthermore, the exercise period for all remaining outstanding options under the Prior Incentive Plans terminated in September 2015. Consequently, there are no remaining awards outstanding under any of the Prior Incentive Plans.

 

2011 Share Incentive Plan

 

In 2011, in connection with our acquisition of IDIT and FIS, our Board of Directors adopted our 2011 Share Incentive Plan, or the 2011 Plan, pursuant to which our employees, directors, officers, consultants, advisors, suppliers, business partners, customers and any other person or entity whose services are considered valuable are eligible to receive options, restricted shares, restricted share units and other share-based awards. The number of Common Shares available under the 2011 Plan was set at 4,000,000.

 

Options granted under the 2011 Plan may be ISOs or NQSOs within the meaning of Section 422 of the Code. In the case of Israeli grantees, we intend that options granted comply with, and benefit from, applicable tax laws and regulations in Israel. We are also eligible to grant restricted stock, restricted share units and other share-based compensation in addition to or in lieu of any other award under the 2011 Plan.

 

The 2011 Plan is administered by the Compensation Committee. Subject to the provisions of the 2011 Plan, the Compensation Committee determines the type of award, when and to whom awards will be granted and the number of shares covered by each award. The Compensation Committee also determines the terms, provisions, and kind of consideration payable (if any), with respect to awards. The Compensation Committee has discretionary authority to interpret the 2011 Plan and to adopt practices related thereto. In determining the persons to whom awards shall be granted and the number of shares covered by each award, the Compensation Committee takes into account their present and potential contributions to the success of the Company and such other factors as the Compensation Committee shall deem relevant in connection with accomplishing the purpose of the 2011 Plan.

 

Under the 2011 Plan, an option may be granted on such terms and conditions as the Compensation Committee may approve, and generally may be exercised for a period of up to 6 years from the date of grant. Options granted under the 2011 Plan become exercisable in four equal, annual installments, beginning with the first anniversary of the date of the grant, or pursuant to such other schedule as the Compensation Committee may provide in the option agreement. The exercise price of such options generally will be not less than 100% of the fair market value per share of the Common Shares at the date of the grant. In the case of ISOs, certain limitations apply with respect to the aggregate value of option shares which can become exercisable for the first time during any one calendar year, and certain additional limitations apply to “Ten Percent Shareholders” (as defined in the 2011 Plan). The Compensation Committee may provide for the payment of the exercise price in cash, by delivery of other Common Shares having a fair market value equal to such option exercise price, by a combination thereof or by any method in accordance with the terms of the option agreements. The exercise price for each outstanding option to purchase one Common Share granted under the 2011 Plan is subject to reduction by the per share amount of any dividend that we declare from time to time while the option is outstanding. The 2011 Plan contains special rules governing the period during which options may be exercised in the case of death, disability, or other termination of employment. Options are not transferable except by will or pursuant to applicable laws of descent and distribution upon death of an employee, unless otherwise approved by our Board of Directors.

 

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The 2011 Plan also provides for the granting of restricted share awards, which are awards of Common Shares that may not be disposed of, except by will or the laws of descent and distribution, for such period as the Compensation Committee determines (which we refer to as the restricted period). The Compensation Committee may also impose such other conditions and restrictions on the shares as it deems appropriate, including the satisfaction of performance criteria. The Compensation Committee may provide that such restrictions will lapse with respect to specified percentages of the awarded shares on successive anniversaries of the date of the award. During the restricted period, the grantee is entitled to receive dividends with respect to, and to vote the shares awarded to him or her. If, during the restricted period, the grantee’s continuous employment with the Company terminates for any reason, any shares remaining subject to restrictions will be forfeited. The Compensation Committee has the authority to cancel any or all outstanding restrictions prior to the end of the restricted period, including cancellation of restrictions in connection with certain types of termination of employment.

 

The 2011 Plan furthermore provides for the granting of restricted share units, which are awards that are settled by the issuance of a number of Common Shares. The grantee has no rights with respect to such Common Shares until they are actually issued to the grantee. The Compensation Committee may also grant other share-based awards under the 2011 Plan, such as share appreciation rights.

 

In February 2016, our Board of Directors approved the reservation of an additional 4,000,000 Common Shares for issuance under the 2011 Plan. As of December 31, 2017, 2,148,323 Common Shares were issuable upon the exercise of outstanding options under the 2011 Plan, at a weighted average exercise price of $9.49 per share, of which options to purchase 783,663 Common Shares had vested. 1,180,000 of such Common Shares were issuable upon the exercise of outstanding options held by our directors and executive officers. As of December 31, 2017, 3,167,261 Common Shares were available for future grant under the 2011 Plan.

 

Restricted Share and Option Grants Outside of Our Stock Option and Incentive Plans

 

During 2017, the remaining 29,500 of the 88,500 restricted shares of Sapiens Decision, the Company's majority-owned subsidiary that were granted to one of the former shareholders of KPI in 2014, vested (in addition to the 59,000 of such 88,500 restricted shares that had vested in 2015 and 2016), thereby reducing the Company’s percentage ownership of Sapiens Decision from 94.25% to 92.89%. In addition, during 2017, Sapiens Decision issued options to certain of its employees to purchase shares of Sapiens Decision.

 

C.Board Practices

 

Members of our Board of Directors are elected by a vote at the annual general meeting of shareholders and serve for a term of one year, until the following year’s annual meeting. Directors may serve multiple terms and are elected by a majority of the votes cast at the meeting. The Chief Executive Officer serves until his removal by the Board of Directors or resignation from office. Our non-employee directors do not have agreements with the Company for benefits upon termination of their service as directors.

 

Audit Committee

 

The Audit Committee of our Board of Directors is comprised of three independent directors (such independence determination having been made by our Board of Directors, in accordance with the NASDAQ Listing Rules), who were nominated by the Board of Directors: Yacov Elinav, Uzi Netanel and Eyal Ben Chlouche. Mr. Elinav serves as the chairman of the committee. The Board of Directors has determined that Mr. Elinav meets the definition of an audit committee financial expert (as defined in paragraph (b) of Item 16A of Form 20-F promulgated by the SEC). The primary function of the Audit Committee is to assist the Board of Directors in fulfilling its oversight responsibilities by reviewing financial information, internal controls and the audit process. In addition, the Committee is responsible for oversight of the work of our independent auditors. The Committee meets at regularly scheduled quarterly meetings.

 

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Compensation Committee

 

The Compensation Committee of our Board of Directors is comprised of three directors, nominated by the Board of Directors: Uzi Netanel, Naamit Salomon and Guy Bernstein. Mr. Bernstein serves as the chairman of the committee. The Compensation Committee is responsible for the review and approval of grants of options to our employees and other compensation matters as requested by the Board of Directors from time to time.

 

NASDAQ Opt-Outs for a Foreign Private Issuer

 

We are a foreign private issuer within the meaning of NASDAQ Listing Rule 5005(a)(18), since we are governed by the laws of Curacao and we meet the other criteria set forth for a “foreign private issuer” under Rule 3b-4(c) under the Exchange Act.

 

Pursuant to NASDAQ Listing Rule 5615(a)(3), a foreign private issuer may follow home country practice in lieu of certain provisions of the NASDAQ Listing Rule 5600 series and certain other NASDAQ Listing Rules. Please see “Item 16G. Corporate Governance” below for a description of the manner in which we rely upon home country practice in lieu of certain of the NASDAQ Listing Rules.

 

D.Employees

 

As of December 31, 2017, we had a total of 2,376 employees, a 23.2% increase relative to the end of 2016.

 

The following table sets forth the number of our employees as of the end of each of the past three fiscal years, according to their geographic regions:

 

Geographic Region  Total Number of Employees as of December 31, 
   2015   2016   2017 
Israel   790    862    864 
UK and Europe   367    445    407 
North America   113    175    511 
Asia Pacific   303    446    594 
Total Employees   1,573    1,928    2,376 

 

E.Share Ownership

 

The number of our Common Shares beneficially owned by our directors and executive officers individually, and by our directors and executive officers as a group, as of March 1, 2018, is as follows:

 

   Shares Beneficially Owned 
   Number   Percent (1) 
     
Roni Al Dor        1,224,781(2)   2.4%

All directors and executive officers

as a group (7 persons, including Roni Al-Dor) (3)

   1,680,846 (4)   3.3%

 

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(1)Unless otherwise indicated below, the persons in the above table have sole voting and investment power with respect to all shares shown as beneficially owned by them. The percentages shown are based on 49,779,055 Common Shares outstanding (which excludes 2,328,296 Common Shares held in treasury) as of March 1, 2018, plus such number of Common Shares as the relevant person or group had the right to receive upon exercise of options that are exercisable within 60 days of March 1, 2018.

 

(2)Includes options to purchase 300,000 Common Shares under the 2011 Plan at an exercise price of $8.02 per share expiring no later than May 2021, which are vested or will become vested within 60 days of March 1, 2018. See Item 6 - “Directors, Senior Management and Employees - Compensation of Directors and Officers”.

 

(3)Each of our directors and executive officers who is not separately identified in the above table beneficially owns less than 1% of our outstanding Common Shares (including options to purchase Common Shares held by each such party that are vested or will vest within 60 days of March 1, 2018) and has therefore not been separately identified.

 

(4)Includes options to purchase 580,000 Common Shares at exercise prices ranging from $3.14 to $9.53 per share, which are vested or will become vested within 60 days of March 1, 2018.

 

Item 7.Major Shareholders and Related Party Transactions

 

A.Major Shareholders.

 

The following table sets forth, as of March 15, 2018, certain information with respect to the beneficial ownership of the Company’s Common Shares by each person known by the Company to own beneficially more than 5% of the outstanding Common Shares, based on information provided to us by the holders or disclosed in public filings of the shareholders with the Securities and Exchange Commission.

 

We determine beneficial ownership of shares under the rules of Form 20-F promulgated by the SEC and include any Common Shares over which a person possesses sole or shared voting or investment power, or the right to receive the economic benefit of ownership, or for which a person has the right to acquire any such beneficial ownership at any time within 60 days.

 

   Shares Beneficially Owned 
Name and Address  Number   Percent(1) 
Formula Systems (1985) Ltd.
5 HaPlada Street
Or Yehuda 60218, Israel
   23,954,094(2)   48.1%

 

(1)The percentages shown are based on 49,779,055 Common Shares outstanding (which excludes 2,328,296 Common Shares held in treasury) as of March 15, 2018.

 

(2)The number of Common Shares shown as owned by Formula is based on information provided to the Company by Formula as of March 15, 2018. Also based on information provided to the Company, as of March 15, 2018, Asseco beneficially owned 26.3% of the outstanding share capital of Formula. In addition, on October 4, 2017, Asseco entered into a shareholders agreement with our Chairman of the Board, under which agreement Asseco has been granted an irrecoverable proxy to vote an additional 1,971,973 ordinary shares of Formula, thereby effectively giving Asseco beneficial ownership (voting power) over an aggregate of 39.7% of Formula’s outstanding ordinary shares. The address of Asseco is Olchowa 14 35-322 Rzeszow, Poland.

 

(3)Based on a Statement of Beneficial Ownership on Schedule 13G filed with the SEC on February 26, 2018. Of the 2,491,391 Common Shares reported as beneficially owned by Migdal Insurance & Financial Holdings Ltd., or Migdal, all 2,491,391 Common Shares are held for members of the public through, among others, provident funds, mutual funds, pension funds and insurance policies, which are managed by subsidiaries of Migdal, according to the following segmentation: (a) 1,315,800 Common Shares are held by Profit participating life assurance accounts, (b) 979,865 Common Shares are held by Provident funds and companies that manage provident funds, and (c) 195,726 Common Shares are held by companies for the management of funds for joint investments in trusteeship, each of which subsidiaries operates under independent management and makes independent voting and investment decisions. Migdal does not admit beneficial ownership of those 2,491,391 Common Shares.

 

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(4)Based on Amendment No.1 to a Statement of Beneficial Ownership on Schedule 13G, filed with the SEC on January 31, 2018. The Common Shares reported as beneficially owned are held by provident funds managed by Yelin Lapidot Provident Funds Management Ltd. and/or mutual funds managed by Yelin Lapidot Mutual Funds Management Ltd., collectively referred to as the Subsidiaries, each of which is a wholly-owned subsidiary of Yelin Lapidot Holdings Management Ltd., or Yelin Holdings. Each of Messrs. Dov Yelin and Yair Lapidot owns 24.38% of the share capital and 25% of the voting rights of Yelin Holdings, and together they are responsible for the day-to-day management of Yelin Holdings. Each of Messrs. Yelin and Lapidot, Yelin Holdings, and each of the Subsidiaries disclaims beneficial ownership of the subject Common Shares.

 

To the best of our knowledge, each of the entities listed in the above table has sole voting and investment power with respect to all shares shown as beneficially owned by it, except to the extent described above.

 

Significant changes in holdings of major shareholders

 

From time to time, Formula has increased its beneficial shareholding in our Company through market purchases of additional Common Shares.

 

Formula’s beneficial ownership of our Common Shares constituted 50.2% of our outstanding share capital as of December 2014. That beneficial ownership has been diluted down to 48.1% as of March 15, 2018, primarily as a result of various minor issuances of Common Shares that we have made.

 

Yelin Holdings and its affiliates held 2,625,007 Common Shares (above 5% of our Common Shares) as of the end of 2015. They subsequently sold shares and reduced their holdings to 2,381,426 Common Shares as of December 31, 2016, thereby reducing their ownership of our Common Shares below 5% (based on Amendment No. 4 to the Schedule 13G filed by Yelin Lapidot Provident Funds Management Ltd., Yelin Lapidot Mutual Funds Management Ltd., Yair Lapidot and Dov Yelin on February 8, 2017). Their beneficial ownership increased once again above 5%, to 2,765,424 Common Shares, or 5.6%, as of December 31, 2017 (based on Amendment No. 1 to Schedule 13G filed by Yelin Holdings, Yair Lapidot and Dov Yelin on January 31, 2018). Subsequently, however, we have been informed by Yelin Holdings that its beneficial ownership has decreased once again below 5% as of March 15, 2018.

 

Migdal acquired 2,468,836 Common Shares, or 5.0%, as of July 12, 2017, based on its Schedule 13G filed on August 28, 2017, thereby becoming a major shareholder of our company. Since that time, its ownership fell slightly below 5%, then rose again above 5% and has now fallen again below 5% and stands at 2,471,184 Common Shares, or 4.97%, as of March 12, 2018, based on a Statement of Beneficial Ownership on Schedule 13G filed by Migdal with the SEC on March 15, 2018.

 

Voting rights of major shareholders

 

The major shareholders disclosed above do not have different voting rights than other shareholders with respect to the Common Shares that they hold.

 

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Holders of record

 

As of March 1,2018 there were 61 holders of record of our Common Shares, including 41 holders of record with addresses in the United States who held a total of 42,115,636 Common Shares (out of which 42,106,702 Common Shares are held of record by CEDE & Co), representing approximately 84.6% of our issued and outstanding Common Shares. The number of record holders in the United States is not representative of the number of beneficial holders, nor is it representative of where such beneficial holders are resident, because many of these Common Shares were held of record by nominees (including CEDE & Co., as nominee for a large number of banks, brokers, institutions and underlying beneficial holders of our Common Shares). In particular, Formula, which held (as of March 1, 2018 (in part as a record holder and in part as an underlying beneficial holder) 23,954,094 Common Shares, representing 48.1% of our issued and outstanding shares, is not a United States company.

 

Control of the Company

 

Based on Formula’s beneficial ownership of 48.1% of the outstanding Common Shares of the Company (as of March 1, 2018), and based on Asseco’s beneficial ownership of 39.7% of the outstanding share capital of Formula (also as of that date), both Formula and Asseco may be deemed to control the Company. We are unaware of any arrangements the operation of which may at a subsequent date result in a change of control of the Company.

 

B.Related Party Transactions

 

Registration Rights Agreement with Major Shareholders

 

The description of the Registration Rights Agreement set forth in Item 10.C “Material Contracts” is incorporated by reference herein.

 

Fees Paid to Major Shareholder for Board Service of its Affiliate

 

We paid to our major shareholder, Formula, approximately $28,600 in respect of our share of the director fees of Guy Bernstein, our Chairman, for the year ended December 31, 2017. Mr. Bernstein serves as the Chief Executive Officer of Formula and a director of Asseco. Formula directly owns (as of March 1, 2018) approximately 48.1% of our currently outstanding Common Shares.

 

Additional Agreements and Transactions with Affiliated Companies of Formula

 

During the year ended December 31, 2017, we paid to affiliated companies of Formula approximately $5.1 million, in the aggregate, pursuant to services agreements that we have in place with those companies under which we receive services. In 2017, we also purchased from those affiliated companies an aggregate of approximately $0.9 million of hardware and software. Please see Note 14 to our audited consolidated financial statements included in Item 18 of this annual report for further information.

 

Further, the Company paid to Formula approximately $0.1 million in respect of its share of the D&O insurance for the period starting June 18, 2017 through December 17, 2018.

 

Transactions Involving Asseco and Sapiens Poland

 

During 2017, Asseco provided back-office services, professional services and fixed assets to our wholly-owned subsidiary, Sapiens Poland, in an amount totaling approximately $1.6 million. Please see Note 14 to our audited consolidated financial statements included in Item 18 of this annual report for further information.

 

In addition, during 2017, Sapiens Poland performed services as a sub-contractor on behalf of Asseco for clients of Asseco in a total amount of approximately $8.25 million. For historic reasons, Asseco issues invoices to those clients and then Sapiens in turn invoices Asseco on a back-to-back basis.

 

Trade Payables and Receivables

 

As of December 31, 2017, we had trade payables balances due to, and trade receivables balances due from, our related parties in amounts of approximately $0.8 million and $1.5 million, respectively.

 

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C.Interests of Experts and Counsel.

 

Not applicable.

 

Item 8.Financial Information

 

A.Consolidated Statements and Other Financial Information.

 

Financial Statements

 

See the Consolidated Financial Statements and related notes in Item 18.

 

Export Sales

 

In 2017, 89.4% of our revenues originated from customers located outside of Israel. For information on our revenues breakdown by geographic region for the past three years, see Item 5.A, “Operating and Financial Review and Prospects— Operating Results— Comparison of the years ended December 31, 2016 and 2017, and Comparison of the years ended December 31, 2015 and 2016— Revenues by geographical region”.

 

Legal Proceedings

 

Dispute with Significant Client

 

As disclosed previously, in 2017, we were involved in a dispute with a significant customer under a software development project agreement, which agreement provided for the customizing, enhancement and implementation of a new product. The customer alleged that we had materially breached our agreement with the customer. After carefully examining the customer’s allegations, we informed the customer that we had not materially breached any of our obligations under the agreement and that the customer had itself materially breached the agreement. Work on the project was canceled due to the dispute.

 

Following discussions between the parties, in the second quarter of 2017, we entered into a settlement agreement with the customer, under which the software development project agreement was terminated. Pursuant to the settlement agreement, the customer paid to us a settlement amount and the customer retained a nonexclusive, perpetual, royalty-free license to use the software product in certain territories, subject to payment to us of an agreed-upon maintenance fee. The agreement furthermore confirmed the respective ownership rights of the parties in the intellectual property related to the product that had been jointly developed, including our ownership of the subject software. As agreed, we have the right to commercialize and sell licenses to certain components of the developed product, without limitation, subject to our payment of royalties to the customer on certain initial sales of licenses to those components. The settlement agreement furthermore called for us and the customer to endeavor to meet once every 12 months to discuss the relationship between the parties and the current status of certain development and marketing efforts by us.

 

Dispute with Former Client

 

In November 2017, our wholly-owned subsidiary settled a dispute with a customer, related to a claim filed by such customer in an Amsterdam court, pursuant to which the action was dismissed and our subsidiary paid approximately $0.9 million, constituting the deductible for our insurance policy coverage for the customer’s claim.

 

In addition to the foregoing, from time to time, we are a party to various non-material legal proceedings and claims that arise in the ordinary course of business.

 

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Dividend Policy

 

Upon review of our consolidated results of operations, financial condition, cash requirements, future prospects and other factors, on January 15, 2013, April 20, 2015, March 31, 2016 and October 18, 2017, our Board of Directors determined, subject to shareholder approval, to declare and pay one-time cash interim dividends of $0.15, $0.15, $0.20 and $0.20 per Common Share (or $5.8 million, $7.2 million, $10 million and $9.8 million, in the aggregate, respectively), which were paid on February 22, 2013, June 1, 2015, June 1, 2016 and December 14, 2017, respectively.

 

We do not have a dividend policy. However, our Board of Directors will determine, on an annual basis, as to whether we will pay a dividend in the upcoming year. Such determination will be dependent upon our financial condition, recent and prospective results of operations, and cash requirements, among other relevant factors, and will be subject to the requirements of Curacao law and the Articles (or, following the planned migration of our legal domicile, our Memorandum and Articles and Cayman Islands law). If our company continues to be profitable, our Board of Directors may decide to distribute additional dividends in the future as well. For more information about distribution of dividends, the related requirements of Curacao law and various tax implications, see Item 10, “Additional Information— Memorandum and Articles of Association;” Item 10, “Additional InformationExchange Controls,” and Item 10, “Additional Information— Taxation.”

 

B.Significant Changes

 

No significant change, other than as otherwise described in this annual report, has occurred in our operations since the date of our consolidated financial statements included in this annual report.

 

ITEM 9.THE OFFER AND LISTING

 

A.Offer and Listing Details

 

The Company’s Common Shares are listed on the NASDAQ Capital Market and on the TASE under the symbol “SPNS”.

 

NASDAQ:

 

The table below sets forth the high and low daily closing prices (in US dollars) for our Common Shares on the NASDAQ Capital Market (i) on an annual basis for the years 2013 through 2017, and the year 2018 (through March 14, 2018), and (ii) on a quarterly basis for 2016, 2017 and the first quarter of 2018 (through March 14, 2018):

 

   HIGH   LOW 
2018 (through March 14, 2018)   12.49    9.16 
2017 (Annual)   15.45    10.62 
2016 (Annual)   15.64    9.47 
2015 (Annual)   12.64    6.42 
2014 (Annual)   8.46    6.73 
2013 (Annual)   7.77    3.99 
           
2018          
First Quarter (through March 14, 2018)   12.49    9.16 
           
2017          
First Quarter   15.45    12.88 
Second Quarter   13.73    11.09 
Third Quarter   13.29    10.62 
Fourth Quarter   14.10    11.24 
           
2016          
First Quarter   12.12    9.47 
Second Quarter   12.65    10.99 
Third Quarter   14.12    11.74 
Fourth Quarter   15.64    12.58 

 

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The table below sets forth the high and low daily closing prices (in US dollars) for our Common Shares on the NASDAQ Capital Market on a monthly basis during the most recent six-month period.

 

   HIGH   LOW 
March 2018 (through March 14, 2018)   9.89    9.23 
February 2018   12.33    9.16 
January 2018   12.49    11.45 
December 2017   12.00    11.24 
November 2017   13.99    11.96 
October 2017   14.10    13.20 
September 2017   13.29    11.18 

 

The daily closing price of our Common Shares on the NASDAQ Capital Market on March 14, 2018, being the last practicable date prior to publication of this annual report, was $9.23.

 

TASE:

 

Our Common Shares began trading on the TASE effective March 6, 2003. Under current Israeli law, the Company satisfies its reporting obligations in Israel by furnishing to the applicable Israeli regulators those reports that the Company is required to file or submit in the United States.

 

The table below sets forth the high and low closing prices, in US dollars, for our Common Shares on the TASE on an annual basis for the years 2013 through 2017 and the year 2018 (through March 14, 2018), and on a quarterly basis for the years 2016 and 2017, and for the first quarter of 2018 (through March 14, 2018). The conversion from NIS into US dollars for the following two tables is based on the average monthly, quarterly or yearly representative rate of exchange published by the Bank of Israel for the month, quarter or year (as appropriate) in which such high or low closing price per share was recorded.

 

   HIGH   LOW 
2018 (through March 14, 2018)   12.63    9.15 
2017 (Annual)   15.01    10.52 
2016 (Annual)   15.34    9.20 
2015 (Annual)   12.70    6.48 
2014 (Annual)   8.37    6.66 
2013 (Annual)   7.90    4.10 
           
2018          
First Quarter (through March 14, 2018)   12.63    9.15 
           
2017          
First Quarter   15.01    12.53 
Second Quarter   13.59    11.14 
Third Quarter   13.21    10.52 
Fourth Quarter   13.93    11.35 
           
2016          
First Quarter   11.77    9.20 
Second Quarter   12.50    11.18 
Third Quarter   13.87    11.78 
Fourth Quarter   15.34    12.78 

 

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The table below sets forth the high and low daily closing prices, in US dollars, for our Common Shares on the TASE during the most recent six-month period:

 

   HIGH   LOW 
March 2018 (through March 14, 2018)   9.80    9.30 
February 2018   12.28    9.15 
January 2018   12.63    11.48 
December 2017   12.02    11.35 
November 2017   13.81    11.73 
October 2017   13.93    13.01 
September 2017   13.21    11.06 

 

The closing price of our Common Shares on the TASE on March 14, 2018, being the last practicable date prior to publication of this annual report, was $9.35 (as converted from NIS based on the closing representative exchange rate as of March 14, 2018).

 

B.Plan of Distribution.

 

Not applicable.

 

C.Markets.

 

Our Common Shares are listed on the NASDAQ Capital Market and on the TASE under the symbol “SPNS”.

 

D.Selling Shareholders.

 

Not applicable.

 

E.Dilution.

 

Not applicable.

 

F.Expenses of the Issue.

 

Not applicable.

 

Item 10.Additional Information

 

A.Share Capital.

 

Not applicable.

 

B.Memorandum and Articles of Association.

 

Migration of Legal Domicile from Curaçao to Cayman Islands

 

We are currently in the process of migrating the legal domicile of our company from Curaçao to the Cayman Islands. Such migration and the accompanying adoption of charter documents suitable for a Cayman Islands exempted company (which charter documents will be effective immediately prior to the completion of the migration of the legal domicile) required shareholder approval under Curaçao law, which approval was obtained at our annual general meeting of shareholders that was held on November 29, 2017. Completion of the migration requires compliance with certain additional steps under Curaçao law and Cayman Islands law and is conditioned on receipt by our company of (i) a ruling that the migration will not constitute a taxable event for our shareholders under Israeli tax law (being the jurisdiction of our residency for tax purposes) and (ii) approval that the migration will not constitute a taxable event for our shareholders under Curacao tax law. We currently expect to complete the migration in the second quarter of 2018, subject, however, to (i) the completion within that time frame of the necessary logistical steps for migration under Curaçao and Cayman Islands law and (ii) receipt of the aforementioned ruling and approval from the Israeli Tax Authority.

 

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We have provided herein descriptions related to our current status as a Curacao company.

 

1.            Registration and Purposes. The Company is organized and existing under the laws of Curaçao. Its registered number is 53368.

 

The objects and purposes of the Company, which are itemized in Article II of our Amended Articles of Association, may be summarized as follows:

 

·to establish, participate in or have any other interest in business enterprises concerned with the development and commercial operation of software;

 

·to finance directly or indirectly the activities of the Company, its subsidiaries and affiliates;

 

·to borrow and to lend moneys;

 

·to engage in the purchase and sale of securities, futures, real estate, business debts, commodities and intellectual property;

 

·to undertake, conduct and promote research and development;

 

·to guarantee, pledge, mortgage or otherwise encumber assets as security for the obligations of the Company or third parties; and

 

·to do all that may be useful or necessary for the attainment of the above purposes.

 

2.             Board of Directors. In case of a conflict of interest between the Company and one or more directors, acting either in private or ex officio, the Company shall be represented by a person appointed thereto by the General Meeting of Shareholders or the Board of Directors. A director who knows or ought to understand that in a certain instance there is mention of a conflicting interest between the Company and him acting privately or ex officio, will timely inform the General Meeting of Shareholders or Board of Directors of such conflict of interest. No conflict of interest will be deemed to exist between the Company and one or more of its directors in case of a contract or transaction between the Company and any other corporation, partnership, association, or other organization in which one or more directors are directors or officers, or have a financial interest, solely for that reason, or solely because the director is present or participates in the meeting of the Board of Directors or Committee thereof which authorizes the contract or transaction, or solely because his or their votes are counted for such purpose if : (a) the material facts are disclosed or are known to the Board of Directors, (b) the material facts are disclosed or are known to the shareholders entitled to vote thereon, (c) the contract or transaction is fair as to the Company as of the time it is authorized, approved or ratified by the Board of Directors, a Committee thereof or the shareholders. Interested directors may be counted in determining the presence of a quorum at a meeting of the Board of Directors or of a Committee that authorizes the contract or transaction. The Articles provide that the directors shall receive such compensation as the Board of Directors may from time to time prescribe. Members of the Board of Directors have the power to vote compensation to themselves, even if they lack an independent quorum, subject to prior approval of the range of their compensation by the Company’s General Meeting of Shareholders.

 

The Articles do not grant borrowing powers to directors; nor do they require directors to resign at a certain age or to purchase a certain number of Common Shares.

 

3.            Rights and Preferences. The Company has only one class of shares of common stock, the Common Shares, currently outstanding. All previous issuances of preferred shares have been converted into Common Shares. The rights and preferences of the holders of Common Shares are summarized below. The Articles authorize a class of undefined preferred shares (which we refer to as the Blank Preferred Shares). There are no rights associated with the Blank Preferred Shares and none have been issued. The Board of Directors shall specify the rights that shall be associated with the Blank Preferred Shares prior to their issuance, including dividend rights and voting rights.

 

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(a)Common Shares

 

Holders of the Common Shares are entitled to one vote for each whole share on all matters to be voted upon by shareholders, including the election of directors. Holders of the Common Shares do not have cumulative voting rights in the election of directors. All Common Shares are equal to each other with respect to liquidation and dividend rights. Holders of the Common Shares are entitled to receive dividends, subject to shareholder approval, out of funds legally available under Curaçao law. See “Dividend Policy” below. In the event of the liquidation of the Company, all assets available for distribution to the holders of the Common Shares are distributable among them according to their respective holdings, subject to the preferences of any shares having a preference upon liquidation that may be then outstanding. Holders of the Common Shares have no preemptive rights to purchase any additional, unissued Common Shares. The foregoing summary of the Common Shares does not purport to be complete and is subject to, and qualified in its entirety by, the provisions of the Articles.

 

(b)Dividend Policy

 

We do not have a dividend policy. However, our Board of Directors will determine, on an annual basis, as to whether we will pay a dividend in the upcoming year. Such determination will be dependent upon various financial criteria, among other relevant factors. If our company continues to be profitable, our Board of Directors may decide to distribute a dividend, as it has done in the recent past. Please see “Item 8. Financial Information—A. Consolidated Statements and Other Financial Information—Dividend Policy” above for further information concerning the factors that help to determine whether and under what circumstances we may distribute dividends.

 

Our ability to pay dividends is subject to the limitations of the Curaçao Civil Code and the Articles. In direct connection with the approval of our annual accounts, the general meeting of our shareholders shall decide on the distribution of the profits. Profits can either be reserved or distributed to the shareholders in accordance with the Articles. Our Board of Directors has the right to reserve the profits at its discretion. If such reservation has been made by our Board of Directors, the general meeting of shareholders is not authorized to make a distribution out of the reserved part of the profits, unless the Board of Directors has first recommended in writing to the general meeting that such distribution out of the reserved profits can be made and the general meeting has adopted a resolution to that effect. Our Board of Directors may at any time resolve to make any interim distributions, if justified by the anticipated profits of our company as an advanced payment of the dividend expected to be declared by the general meeting. The Curaçao Civil Code and the Articles further provide that a (interim) distribution of dividends can only occur if, at the moment of distribution, the equity of our company equals at least the nominal capital of our company and, as a result of the distribution, it will not fall below the nominal capital.  Nominal capital is the sum of the par values of all of the issued shares of our company’s capital stock at any moment in time.

 

(c)The Blank Preferred Shares

 

There are no preferences or any rights whatsoever associated with the Blank Preferred Shares. These shares are unissued and are not owned by any of the current shareholders of the Company. Any issuance of these preferred shares is solely within the discretion of the Company’s Board of Directors. The Company has undertaken toward the TASE that so long as its Common Shares are listed for trading on the TASE, the Company shall not issue or grant any shares of a different class of shares than those that are listed for trading on the TASE. This undertaking does not apply to Preferred Shares as defined in Section 46B(b) of the Israel Securities Law, on the condition that such Preferred Shares are issued in accordance with the conditions set forth in Section 46A(1) therein.

 

4.            Changing the Rights of the Shareholders. The general meeting of shareholders decides upon any change in the Articles. Provided that no Blank Preferred Shares have been issued, a resolution to amend the Articles requires the approval of the absolute majority of all shares outstanding and entitled to vote.

 

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5.            General Meetings. At least one general meeting of shareholders must be held each year. Pursuant to the Articles, general meetings must be held in Curaçao. Special general meetings of shareholders may be called at any time by the Chairman of the Board or by the Board of Directors upon no less than 12 nor more than 60 days’ written notice to the Company’s shareholders. Every shareholder has the right to attend any meeting of shareholders in person or by proxy and to address the meeting. No action may be taken at any meeting of shareholders unless a quorum consisting of holders of at least one-half of the shares outstanding and entitled to vote are present at the meeting in person or by proxy. If a quorum is not present at the originally-called shareholder meeting, a second shareholder meeting, is held within two months. At that second meeting, valid resolutions may be adopted with respect to any matter stated in the notice of the original meeting and also in the notice of such second meeting or which by law is required to be brought before the shareholders (subject to certain exceptions), despite the absence of a quorum.

 

6.            Limitations to Own Securities. The Articles contain no limits on the right to own securities.

 

7.           Change of Control. The Articles contain no provisions that would prevent or delay a change of control of the Company.

 

8.            Disclosure of Ownership. The Articles contain no provisions requiring a shareholder to disclose his or her interest at a certain time; however, holders of our shares are subject to the reporting provisions of the SEC.

 

C.           Material Contracts

 

We are not party to any material contract within the two years prior to the date of this annual report, other than contracts entered into in the ordinary course of business, or as otherwise described below:

 

Share Purchase Agreement for Acquisition of StoneRiver

 

In the first quarter of 2017, we entered into a share purchase agreement with StoneRiver Group L.P., or the StoneRiver Seller, and StoneRiver, Inc., or StoneRiver, for the acquisition of all of the issued and outstanding share capital of StoneRiver. We consummated the acquisition later in the first quarter of 2017. StoneRiver is a Denver, Colorado- based provider of technology solutions and services to the insurance industry.

 

The acquisition consideration was approximately $100 million in cash, subject to certain adjustments based on working capital, transaction expenses, unpaid debt and certain litigation matters.

 

Immediately prior to closing, we purchased a representations and warranties insurance policy covering certain indemnifiable damages under the agreement, which we refer to as the StoneRiver Insurance. The StoneRiver Insurance provides for coverage of $12,500,000 in the aggregate and its term is in general three years (except with respect to certain fundamental representations and warranties, as to which the term of the StoneRiver Insurance is six years). In addition, two escrow funds were established by StoneRiver, for the purpose of enabling the indemnification of our company for certain damages that are not fully recovered under the StoneRiver Insurance: (i) an escrow fund in the amount of $500,000 for a period of one year and (ii) an escrow fund in the amount of $2,000,000 for a period of 18 months.

 

Deed of Trust in Favor of Series B Debentures Holders

 

In connection with our Israeli public offering and private placement of NIS 280 million (approximately US $79.2 million) principal amount of our Series B Debentures, in the aggregate, in September 2017 (which debentures are traded on the TASE), we entered into a deed of trust with a trustee in favor of the debenture holders. In the deed of trust, we have agreed to repay the principal amount of the debentures in eight equal payments that will be paid once a year on January 1 of each of the years 2019 through 2026 (included). The outstanding principal amount bears interest at an annual rate of 3.37%, to be paid in half-yearly payments on January 1 and July 1 of each of the years 2018 through 2026 (included). The principal and interest are payable in NIS, subject to adjustment in accordance with fluctuations in the exchange rate between the U.S. dollar and the NIS.

 

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Under the deed of trust, we have undertaken to maintain a number of conditions and limitations on the manner in which we can operate our business, including limitations on our ability to undergo a change of control, distribute dividends, incur a floating charge on our assets, or undergo an asset sale or other change that results in a fundamental change in our operations. The deed of trust also requires us to comply with certain financial covenants, as described below. The deed of trust furthermore provides for an upwards adjustment in the interest rate payable under the debentures in the event that our debentures’ rating is downgraded below a certain level. A breach of the financial covenants for more than two successive quarters or a substantial downgrade in the rating of the debentures (below BBB-) could result in the acceleration of our obligation to repay the debentures.

 

The deed of trust includes the following provisions:

 

·       a negative pledge, subject to certain exceptions;

 

·      a covenant not to distribute dividends unless (i) our shareholders’ equity (not including minority interests) shall not be less than $160 million, (ii) our net financial indebtedness (financial indebtedness net of cash, marketable securities, deposits and other liquid financial instruments) does not exceed 65% of net CAP (which is defined as financial indebtedness, net, plus shareholders equity, including minority interest), (iii) the amount of the dividend does not exceed our profits for the year ended December 31, 2016 and the first three quarters of the year ended December 31, 2017, plus 75% of our profits as of September 1, 2017 and up to the date of distribution, and (iv) no event of default shall have occurred; and

 

·      financial covenants, including (i) the equity attributable to the shareholders of Sapiens (not including minority interests), as reported in our annual or quarterly financial statements, will not be less than $120 million, and (ii) Sapiens’ net financial indebtedness (financial indebtedness net of cash, marketable securities, deposits and other liquid financial instruments) shall not exceed 65% of net CAP (which is defined as financial indebtedness, net, plus shareholders equity, including minority interest).

 

As of December 31, 2017, we were in compliance with the foregoing financial covenants.

 

We also agreed to standard events of default under the deed of trust, together with the following specific events of default (among others):

 

  · cross default, including following an immediate repayment initiated in relation to other indebtedness (other than non-recourse debt) in an amount that exceeds 5% of our total balance sheet;

 

  · suspension of trading of the debentures on the TASE over a period of 60 days, or the delisting of the debentures from the TASE;

 

  · failure to have the debentures rated over a period of 60 days;

 

  · if the rating of the debentures is less than BBB- by Standard and Poors Maalot or less than Baa3 by Midroog Ltd or drops below an equivalent rating of another rating agency;

 

  · if there is a change in control without consent of the rating agency (a change of control is deemed to occur if Formula ceases the be the controlling shareholder of our company, whether directly or indirectly. Formula will be considered a controlling shareholder for so long as it continues to hold at least 25% of the means of control of our company (within the meaning of the Israeli Securities Law) and there is no other person or entity holding a higher percentage. To the extent that Formula holds such controlling interest jointly with others, it will be deemed to remain our controlling shareholder if it maintains the highest percentage ownership among such other shareholders);

 

  · the existence and continuation of a bankruptcy event involving our company, or the liquidation of our company or writing off of our assets;
     
  · our failure to comply with the above-described financial covenants for two consecutive quarters;

 

  · there has been a material adverse change in the business of our company compared to the position of our company shortly before the issuance of the debentures and there is a material concern that we will not be able to pay our obligations under the debentures on time;

 

  · if we distribute a dividend contrary to the above-described limitations on dividends;

 

  · breach of our undertakings regarding the issuance of additional Series B Debentures;

 

  · the sale of 25% or more of our assets, or a change in the main sphere of our activity as a company; and

 

  · failure to comply with the negative pledge covenant.

 

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HSBC Term Loan Credit Agreement (Loan Repaid)

 

In the first quarter of 2017, we (via our wholly-owned subsidiary, Sapiens Americas Corporation, or the Borrower) entered into a secured credit agreement, or the Credit Agreement, with HSBC Bank USA, National Association, or the Lender, in connection with, and as financing for, our acquisition of StoneRiver. Pursuant to the Credit Agreement, we borrowed $40 million, or the Bank Loan, for a prospective five-year term. The Bank Loan was to mature in March 2022 and was to be payable in equal consecutive quarterly principal installments of principal and accrued interest.

 

The repayment of the Bank Loan was secured by first priority liens over (i) substantially all assets of the Borrower and its US subsidiaries and (ii) the shares of the Borrower held by Sapiens International Corporation B.V. (our company). Certain affiliated entities of the Borrower guaranteed the repayment of the Bank Loan. The Credit Agreement contained customary representations and warranties, affirmative covenants and negative covenants, which included, without limitation, restrictions on indebtedness, liens, investments, and certain dispositions with respect to the property secured by the lien. The Credit Agreement also contained customary events of default that entitled the Lender to cause any or all of the Borrower’s indebtedness to become immediately due and payable and to foreclose on the lien, and included customary grace periods before certain events were deemed events of default.

 

Pursuant to our prepayment right under the Credit Agreement, following consummation of our Israeli public offering and private placement of Series B Debentures in September 2017, we used the proceeds therefrom for prepayment of the entire outstanding Bank Loan amount (plus accrued interest), which resulted in the termination of the Credit Agreement.

 

Registration Rights Agreement

 

In connection with our acquisitions of each of IDIT and FIS, which were consummated in the third quarter of 2011, we granted the shareholders of IDIT (or the IDIT Selling Shareholders), the shareholders of FIS (or the FIS Selling Shareholders, to which we refer, together with the IDIT Selling Shareholders, as the Holders) and Formula certain registration rights under a Registration Rights Agreement. Under the Registration Rights Agreement, the Holders and Formula are entitled to piggyback registration rights in connection with any registration statement that we file (subject to customary exceptions). The Holders also agreed to execute a lock-up agreement if requested by the representative of the underwriters in any underwritten offering. Based on information that we have received from our transfer agent, we do not believe that the IDIT Selling Shareholders and the FIS Selling Shareholders still hold a significant number of Common Shares that are entitled to the foregoing registration rights under the Registration Rights Agreement as of the current time.

 

D.Exchange Controls

 

There are no exchange control or currency regulations in the Cayman Islands that would affect the payment of dividends, interest or other payments to non-resident holders of the Company’s securities, including the Common Shares. Other jurisdictions in which the Company conducts operations may have various currency or exchange controls. In addition, the Company is subject to the risk of changes in political conditions or economic policies which could result in new or additional currency or exchange controls or other restrictions being imposed on the operations of the Company. As to the Company’s securities, Cayman Islands law and the Memorandum and Articles impose no limitations on the right of non-resident or foreign owners to hold or vote such securities.

 

E.Taxation

 

Israeli Taxation Considerations for Our Shareholders

 

The following is a short summary of the material provisions of the tax environment to which shareholders may be subject. This summary is based on the current provisions of tax law. To the extent that the discussion is based on new tax legislation that has not been subject to judicial or administrative interpretation, we cannot assure you that the views expressed in the discussion will be accepted by the appropriate tax authorities or the courts.

 

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The summary does not address all of the tax consequences that may be relevant to all purchasers of our Common Shares in light of each purchaser’s particular circumstances and specific tax treatment. For example, the summary below does not address the tax treatment of residents of Israel and traders in securities who are subject to specific tax regimes. As individual circumstances may differ, holders of our Common Shares should consult their own tax adviser as to the United States, Israeli or other tax consequences of the purchase, ownership and disposition of Common Shares. The following is not intended, and should not be construed, as legal or professional tax advice and is not exhaustive of all possible tax considerations. Each individual should consult his or her own tax or legal adviser.

 

Tax Consequences Regarding Disposition of Our Common Shares

 

Overview

 

Israeli law generally imposes a capital gain tax on the sale of capital assets by residents of Israel, as defined for Israeli tax purposes, and on the sale of assets located in Israel, including shares of Israeli companies, by both residents and non-residents of Israel, unless a specific exemption is available or unless a tax treaty between Israel and the seller’s country of residence provides otherwise. The Ordinance distinguishes between “Real Capital Gain” and “Inflationary Surplus”. The Inflationary Surplus is a portion of the total capital gain which is equivalent to the increase of the relevant asset’s purchase price which is attributable to the increase in the Israeli consumer price index or, in certain circumstances, a foreign currency exchange rate, between the date of purchase and the date of sale. The Real Capital Gain is the excess of the total capital gain over the Inflationary Surplus.

 

Capital gain

 

Israeli Resident Shareholders

 

As of January 1, 2006, the tax rate applicable to Real Capital Gain derived by Israeli individuals from the sale of shares which had been purchased on or after January 1, 2003, whether or not listed on a stock exchange, is 20%, unless such shareholder claims a deduction for interest and linkage differences expenses in connection with the purchase and holding of such shares, in which case the gain will generally be taxed at a rate of 25%. Additionally, if such shareholder is considered a Substantial Shareholder (i.e., a person who holds, directly or indirectly, alone or together with another person who collaborates with such person on a permanent basis, 10% or more of any of the company’s “means of control” (including, among other things, the right to receive profits of the company, voting rights, the right to receive the company’s liquidation proceeds and the right to appoint a director)) at the time of sale or at any time during the preceding 12-month period, such gain will be taxed at the rate of 25%. Individual shareholders dealing in securities in Israel are taxed at their marginal tax rates applicable to business income (up to 50% in 2017).

 

Notwithstanding the foregoing, pursuant to the Law for Change in the Tax Burden (Legislative Amendments) (Taxes), 2011, the capital gain tax rate applicable to individuals was raised from 20% to 25% from 2012 and onwards (or from 25% to 30% if the selling individual shareholder is a Substantial Shareholder at any time during the 12-month period preceding the sale and/or claims a deduction for interest and linkage differences expenses in connection with the purchase and holding of such shares). With respect to assets (not shares that are listed on a stock exchange) purchased on or after January 1, 2003, the portion of the gain generated from the date of acquisition until December 31, 2011 will be subject to the previous capital gain tax rates (20% or 25)% and the portion of the gain generated from January 1, 2012 until the date of sale will be subject to the new tax rates (25% or 30)%.

 

Under current Israeli tax legislation, the tax rate applicable to Real Capital Gain derived by Israeli resident corporations from the sale of shares of an Israeli company is the general corporate tax rate. As described above, the corporate tax rate was 24% in 2017, and as of 2018 the corporate tax rate is 23%.

 

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Non-Israeli Residents Shareholders

 

Israeli capital gain tax is imposed on the disposal of capital assets by a non-Israeli resident if such assets are either (i) located in Israel; (ii) shares or rights to shares in an Israeli resident company; or (iii) represent, directly or indirectly, rights to assets located in Israel, unless a tax treaty between Israel and the seller’s country of residence provides otherwise. As mentioned above, Real Capital Gain is generally subject to tax at the corporate tax rate (24% in 2017 and 23% in 2018 and thereafter) if generated by a company, or at the rate of 25% (for assets other than shares that are listed on stock exchange – 20% for the portion of the gain generated up to December 31, 2011) or 30% (for any asset other than shares that are listed on stock exchange – 25% with respect to the portion of the gain generated up to December 31, 2011), if generated by an individual from the sale of an asset purchased on or after January 1, 2003. Individual and corporate shareholders dealing in securities in Israel are taxed at the tax rates applicable to business income (a corporate tax rate for a corporation and a marginal tax rate of up to 50% for an individual in 2017).

 

Notwithstanding the foregoing, shareholders who are non-Israeli residents (individuals and corporations) are generally exempt from Israeli capital gain tax on any gains derived from the sale, exchange or disposition of shares publicly traded on the Tel Aviv Stock Exchange or on a recognized stock exchange outside of Israel, provided, among other things, that (i) such gains are not generated through a permanent establishment that the non-Israeli resident maintains in Israel, (ii) the shares were purchased after being listed on a recognized stock exchange, and (iii) with respect to shares listed on a recognized stock exchange outside of Israel, such shareholders are not subject to the Israeli Income Tax Law (Inflationary Adjustments) 5745-1985. However, non-Israeli corporations will not be entitled to the foregoing exemptions if Israeli residents (a) have a controlling interest of more than 25% in such non-Israeli corporation, or (b) are the beneficiaries of or are entitled to 25% or more of the revenues or profits of such non-Israeli corporation, whether directly or indirectly. Such exemption is not applicable to a person whose gains from selling or otherwise disposing of the shares are deemed to be business income.

 

In addition, a sale of shares may be exempt from Israeli capital gain tax under the provisions of an applicable tax treaty. For example, under the U.S.-Israel Tax Treaty, or the U.S-Israel Treaty, the sale, exchange or disposition of shares of an Israeli company by a shareholder who is a U.S. resident (for purposes of the U.S.-Israel Treaty) holding the shares as a capital asset is exempt from Israeli capital gain tax unless either (i) the shareholder holds, directly or indirectly, shares representing 10% or more of the voting rights during any part of the 12-month period preceding such sale, exchange or disposition; (ii) the shareholder, if an individual, has been present in Israel for a period or periods of 183 days or more in the aggregate during the applicable taxable year; or (iii) the capital gain arising from such sale are attributable to a permanent establishment of the shareholder which is maintained in Israel. In each case, the sale, exchange or disposition of such shares would be subject to Israeli tax, to the extent applicable; however, under the U.S.-Israel Treaty, a U.S. resident would be permitted to claim a credit for the Israeli tax against the U.S. federal income tax imposed with respect to the sale, exchange or disposition, subject to the limitations in U.S. laws applicable to foreign tax credits. The U.S-Israel Treaty does not provide such credit against any U.S. state or local taxes.

 

In some instances where our shareholders may be liable for Israeli tax on the sale of their ordinary shares, the payment of the consideration may be subject to the withholding of Israeli tax at source. Shareholders may be required to demonstrate that they are exempt from tax on their capital gains in order to avoid withholding at source at the time of sale. Specifically, in transactions involving a sale of all of the shares of an Israeli resident company, in the form of a merger or otherwise, the Israel Tax Authority may require from shareholders who are not liable for Israeli tax to sign declarations in forms specified by this authority or obtain a specific exemption from the Israel Tax Authority to confirm their status as non-Israeli resident, and, in the absence of such declarations or exemptions, may require the purchaser of the shares to withhold taxes at source.

 

Taxes Applicable to Dividends

 

Israeli Resident Shareholders

 

Israeli residents who are individuals are generally subject to Israeli income tax for dividends paid on our common shares (other than bonus shares or share dividends) at 25%, or 30% if the recipient of such dividend is a Substantial Shareholder at the time of distribution or at any time during the preceding 12-month period. However, dividends distributed from taxable income accrued during the benefits period of an AE are subject to withholding tax at the rate of 15% (if the dividend is distributed during the tax benefits period under the Investment Law or within 12 years after such period) or 20% with respect to PFE. An average rate will be set in case the dividend is distributed from mixed types of income (regular and Approved/ Preferred income).

 

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Israeli resident corporations are generally exempt from Israeli corporate tax for dividends paid on shares of Israeli resident corporations (like our common shares). However, dividends distributed from taxable income accrued during the benefits period of an AE are subject to withholding tax at the rate of 15%, if the dividend is distributed during the tax benefits period under the Investment Law or within 12 years after such period.