Investments and GAP Accounting Blamed for Formula's Heavy Losses

Formula Systems closed the last quarter of 2001 with heavy losses of $27.7 million, according to the company's financial results published yesterday. In Q4 2000, the company lost only $5.8 million. The combined losses of Formula's subsidiaries in Q4 2001 was $45.5 million.

The main reasons for the big losses are $32.5 million investments, as well as the shift to GAP (general accounting procedures) reporting, instead of the system practiced in Israel, Formula Chairman Dan Goldstein explained. In order to accomplish this, Formula had to reevaluate all of its investments according to the GAP standards. The review was very conservative, Goldstein said, and some of the amounts written off may be put down as profit in the future.

In 2001, Formula lost $54.5 million, compared to a net profit of $37 million in 2000. In the last five quarters, Formula lost about $60 million after 29 consecutive quarters of profit. Over the years, the company collected a profit of about $160 million, so that after the losses of this last year, Formula still has $100 million. The company's equity is about $170 million; this reflects the $100 million balance, in addition to another $70 million that were raised on the markets in the last few years, mainly in the United States.

Another major change that the company implemented in 2001 was the transfer of 15 small subsidiaries to Formula Vision (formerly Mashov Computers). Formula Systems' holdings in Formula Vision were distributed as dividend, so that as of January 2002 the results of these companies will not be reflected in Formula Systems' reports.

This restructuring left Formula with eight large subsidiaries with an annual turnover of $10 million to $70 million each. Although in Q1 2002 this will lead to a $20 million reduction in the company's revenues, it will also cut its losses. Formula's revenues in Q1 2002 are expected to total $75 million.

Formula Systems' main holdings are: Magic Software Enterprises and New Applicom, with a $70 million turnover each, Sintec Advanced Technologies ($50 million), Crystal Systems Solutions ($40 million) and Sivan ($10 million).

In 2001, Formula also acquired Liraz Systems, which has annual revenues of $25 million. Formula's Matrix IT ($70 million annual turnover) was recently floated on the Tel Aviv Stock Exchange. Formula's only unlisted subsidiary is the U.S. based nextSource, which has $15 million in annual revenues.

Formula also has 25 percent in Sapiens International Corporation, and will likely exercise an option to double this holding.