Date: 05/14/2012 02:55 PM User: djohnson
Client: v313119_FORMULA SYSTEMS (1985) LTD_20-F
Vintage Filings
Project: v313119 Form Type: 20-F
Submission Data File
Form Type*
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Filer is Voluntary Filer*
Filer is Well Known Seasoned Issuer*
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Document Name 11*
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Document Name 12*
Document Type 12*
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Document Name 13*
Document Type 13*
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Document Name 14*
Document Type 14*
Document Description 14
Document Name 15*
Document Type 15*
Document Description 15
Document Name 16*
Document Type 16*
Document Description 16
Document Name 17*
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Document Name 19*
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General Information
20-F
Matthew Judge
866-683-5332
Accelerated Filer
0001045986
**********
N
N
N
No
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NASD
12-31-2011
(End General Information)
Document Information
20
v313119_20f.htm
20-F
FORM 20-F
v313119_ex8.htm
EX-8
EXHIBIT 8
v313119_ex12-1.htm
EX-12.1
EXHIBIT 12.1
v313119_ex12-2.htm
EX-12.2
EXHIBIT 12.2
v313119_ex13-1.htm
EX-13.1
EXHIBIT 13.1
v313119_ex13-2.htm
EX-13.2
EXHIBIT 13.2
v313119_ex15-1.htm
EX-15.1
EXHIBIT 15.1
v313119_ex15-2.htm
EX-15.2
EXHIBIT 15.2
v313119_ex15-3.htm
EX-15.3
EXHIBIT 15.3
v313119_ex15-4.htm
EX-15.4
EXHIBIT 15.4
v313119_ex15-5.htm
EX-15.5
EXHIBIT 15.5
v313119_ex15-6.htm
EX-15.6
EXHIBIT 15.6
v313119_ex15-7.htm
EX-15.7
EXHIBIT 15.7
(End Document Information)
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Date: 05/14/2012 02:55 PM User: djohnson
Client: v313119_FORMULA SYSTEMS (1985) LTD_20-F
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Project: v313119 Form Type: 20-F
File: v313119_20f.htm Type: 20-F Pg: 1 of 171
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 20-F
REGISTRATION STATEMENT PURSUANT TO SECTION 12(b) OR 12(g) OF THE SECURITIES EXCHANGE ACT OF 1934
OR
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2011
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from __________ to ___________
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 ______________
OR
Commission File Number: 000-29442
FORMULA SYSTEMS (1985) LTD.
(Exact Name of Registrant as Specified in Its Charter
and translation of Registrant’s name into English)
Israel
(Jurisdiction of Incorporation or Organization)
5 Haplada Street, Or Yehuda 60218, Israel
(Address of Principal Executive Offices)
Asaf Berenstin; 5 Haplada Street, Or Yehuda 60218, Israel
Tel: 972 3 5389487, Fax: 972 3 5389645
(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 Each Class
American Depositary Shares, each
representing one Ordinary Share, NIS 1 par value
Name of Each Exchange On Which Registered
NASDAQ Global Select 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, 2011, the registrant had 13,596,000 outstanding ordinary shares, NIS 1 par value, of which 768,559 were represented by American
Depositary Shares.
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.
Yes No
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
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for
the past 90 days.
Yes 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 No
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and
large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer
Accelerated filer
Non-accelerated filer
Indicate by check mark which basis of accounting the registrant has used to prepare the financial statements included in this filing:
U.S. GAAP
International Financial Reporting Standards
as issued by the International Accounting
Standards Board
Other
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.
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).
Item 17 Item 18
Yes No
Date: 05/14/2012 02:55 PM User: djohnson
Client: v313119_FORMULA SYSTEMS (1985) LTD_20-F
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Project: v313119 Form Type: 20-F
File: v313119_20f.htm Type: 20-F Pg: 2 of 171
TABLE OF CONTENTS
PART I
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 DISCLOSURES ABOUT MARKET RISK
ITEM 12. DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES
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 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. PURCHASES OF EQUITY SECURITIES BY THE ISSUER AND AFFILIATED PURCHASERS
ITEM 16F. CHANGE IN REGISTRANT’S CERTIFYING ACCOUNTANT
None
ITEM 16G. CORPORATE GOVERNANCE
ITEM 17. FINANCIAL STATEMENTS
ITEM 18. FINANCIAL STATEMENTS
ITEM 19. EXHIBITS
Name of Subsidiary
2
4
4
4
4
21
35
35
57
69
72
74
75
89
91
91
91
92
92
93
93
94
94
94
94
94
95
96
96
Date: 05/14/2012 02:55 PM User: djohnson
Client: v313119_FORMULA SYSTEMS (1985) LTD_20-F
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Project: v313119 Form Type: 20-F
File: v313119_20f.htm Type: 20-F Pg: 3 of 171
INTRODUCTION
This annual report on Form 20-F contains various "forward-looking statements" within the meaning of Section 27A of the Securities Act of 1933, as
amended, and Section 21E of the Securities Exchange Act of 1934, as amended, and the Private Securities Litigation Reform Act of 1995, as amended, with
respect to our business, financial condition and results of operations. Such forward-looking statements reflect our current view with respect to future events and
financial results. Statements which use the terms “anticipate,” “believe,” “expect,” “plan,” “intend,” “estimate” and similar expressions are intended to
identify forward looking statements. We remind readers that forward-looking statements are merely predictions and therefore inherently subject to uncertainties
and other factors and involve known and unknown risks that could cause the actual results, performance, levels of activity, or our achievements, or industry
results, to be materially different from any future results, performance, levels of activity, or our achievements expressed or implied by such forward-looking
statements. Readers are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date hereof. Except as required
by applicable law, including the securities laws of the United States, we undertake no obligation to publicly release any update or revision to any forward
looking statements to reflect new information, future events or circumstances, or otherwise after the date hereof. We have attempted to identify significant
uncertainties and other factors affecting forward-looking statements in the Risk Factors section that appears in Item 3D. “Key Information - Risk Factors.”
We prepare our consolidated financial statements in accordance with United States generally accepted accounting principles, commonly referred to as
U.S. GAAP. In accordance with U.S. GAAP, we use the United States dollar as our reporting currency. In accordance with Accounting Standards Codification,
or ASC, 360, “Property, Plant and Equipment” and following the sale of our entire shareholdings in nextSource Inc., or nextSource, in October 2009,
nextSource’s results of operations, assets and liabilities were classified as attributed to discontinued operations and as a result, we have reclassified certain
figures in our financial statements relating to prior periods.
As used in this annual report, references to dollar refer to the United States dollar and references to NIS refer to New Israeli Shekels. References to the
Israeli CPI refer to the Israeli consumer price index.
As used in this annual report, references to “we,” “our,” “ours” and “us” refer to Formula Systems (1985) Ltd. and its subsidiaries, unless otherwise
indicated. References to “Formula” refer to Formula Systems (1985) Ltd. alone. Our operations are currently conducted through our three subsidiaries –
Magic Software Enterprises Ltd., or Magic Software, Matrix IT Ltd., or Matrix, and Sapiens International Corporation N.V., or Sapiens. For the period of time
from our loss of control over Sapiens on August 21, 2011 until we regained a majority interest in Sapiens on January 27, 2012, we refer to Sapiens as an
affiliated company.
All trademarks appearing in this annual report are the property of their respective holders.
3
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Client: v313119_FORMULA SYSTEMS (1985) LTD_20-F
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Project: v313119 Form Type: 20-F
File: v313119_20f.htm Type: 20-F Pg: 4 of 171
ITEM 1. IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS
Not applicable.
ITEM 2. OFFER STATISTICS AND EXPECTED TIMETABLE
PART I
Not applicable.
ITEM 3. KEY INFORMATION
A.
Selected Financial Data
The following tables present our consolidated statement of operations and balance sheet data for the periods and as of the dates indicated. We derive
the consolidated statement of operations data for the years ended December 31, 2009, 2010 and 2011, and the consolidated balance sheet data as at December
31, 2010 and 2011, from our audited consolidated financial statements included elsewhere in this annual report. The consolidated statement of operations data
for the years ended December 31, 2007 and 2008 and the consolidated balance sheet data at December 31, 2007, 2008 and 2009 are derived from our audited
consolidated financial statements not included in this annual report. You should read the selected consolidated financial data together with our consolidated
financial statements included elsewhere in this annual report and with “Item 5. Operating and Financial Review and Prospects.”
Income Statement Data:
2007
Year ended December 31,
2009
(U.S. dollars in thousands, except share and per share data)
2010
2008
2011
Revenues
Cost of revenues
Gross profit
Research and development costs, net
Selling, general and administrative expenses
Other expenses (income), net
Operating income
Financial expenses, net
Gain (loss) on realization of investments, net
Income before taxes on income
Taxes on income
Gain derived from deconsolidation of subsidiary and
equity in gains (losses) of affiliated companies, net
Income from continuing operations
Net income from discontinued operations
Net income
Net income attributable to non-controlling interests
Net income attributable to Formula’s shareholders
$
$
414,724
298,410
116,314
$
503,243
373,775
129,468
469,390 $
352,283
117,107
$
549,694
412,463
137,231
640,617
492,886
147,731
6,547
84,503
750
24,514
(3,619)
2,039
22,934
6,564
90,451
580
31,873
(5,908)
(337)
25,628
4,430
77,322
(1,668)
37,023
(231)
-
36,792
5,503
84,510
231
46,987
(4,371)
-
42,616
(1,891)
(3,279)
(8,305)
(6,544)
(216)
22,133
555
22,688
10,819
11,869
(335)
28,152
4,878
33,030
13,954
19,076
(1,070)
35,002
-
35,002
16,623
18,379
(653)
20,390
32,333
52,723
15,464
37,259
4
5,148
93,340
(207)
49,450
(6,500)
-
42,950
(5,689)
25,870
63,131
-
63,131
20,169
42,962
Date: 05/14/2012 02:55 PM User: djohnson
Client: v313119_FORMULA SYSTEMS (1985) LTD_20-F
Vintage Filings
Project: v313119 Form Type: 20-F
File: v313119_20f.htm Type: 20-F Pg: 5 of 171
2007
Year ended December 31,
2009
(U.S. dollars in thousands, except share and per share data)
2008
2010
Earnings per share generated from continuing operations:
Basic
Diluted
Earnings per share generated from discontinued operations:
Basic
Diluted
Total earnings per share:
Basic earnings
Diluted earnings
Weighted average number of shares outstanding (in Thousands):
0.82
0.8
2
1.99
2.82
2.79
0.84
0.84
0.04
0.04
0.88
0.88
1.08
1.04
0.37
0.36
1.45
1.4
1.37
1.36
-
-
1.37
1.36
2011
3.17
3.11
-
-
3.17
3.11
Basic
Diluted
Balance Sheet Data:
Total assets
Total liabilities
Equity
Dividends
13,200
13,200
13,200
13,200
13,200
13,564
13,282
13,523
13,514
13,669
2007
2008
December 31,
2009
(U.S. dollars in thousands)
2010
2011
$
$
612,624
306,231
306,303
$
596,622
319,252
277,370
566,439 $
271,125
295,314
$
623,767
289,383
334,384
669,739
317,012
352,727
In June 2011, Formula distributed to its shareholders a cash dividend of $0.71 per share. The aggregate amount distributed by Formula was
approximately $10 million.
In April 2010, Formula distributed to its shareholders a cash dividend of $1.47 per share, previously announced in March 2010. The aggregate
amount distributed by Formula was approximately $20 million.
In January 2009, Formula distributed to its shareholders a cash dividend of $2.27 per share. The aggregate amount distributed by Formula was
approximately $30 million.
In April 2008, Formula distributed to its shareholders a cash dividend of approximately $0.76 per share. The aggregate amount distributed by
Formula was approximately $10 million.
5
Date: 05/14/2012 02:55 PM User: djohnson
Client: v313119_FORMULA SYSTEMS (1985) LTD_20-F
Vintage Filings
Project: v313119 Form Type: 20-F
File: v313119_20f.htm Type: 20-F Pg: 6 of 171
Under Formula’s dividend policy adopted by its board of directors, sums that are not planned to be used for investments in the near future may be
distributed to the shareholders as a cash dividend, to the extent that our performance allows for such distribution and subject to applicable Israeli law.
Cash dividends may be declared and paid in New Israeli Shekels or dollars. Dividends to the holders of Formula’s American Depositary Shares, or
ADSs, are paid by the depositary of the ADSs, for the benefit of owners of ADSs. If a dividend is declared and paid in NIS in Israel, the NIS amount is
converted into, and paid out in, dollars by the depositary of the ADSs.
B.
Capitalization and Indebtedness
Not applicable.
C.
Reasons for the Offer and Use of Proceeds
Not applicable.
D.
Risk Factors
Our business prospects, operating results and financial condition could be seriously harmed due to any of the following risks. Additional risks and
uncertainties that we are not aware of or that we currently believe are immaterial may also adversely affect our business prospects, financial condition, and
results of operations. The trading prices of our ordinary shares and ADSs could decline due to any of these risks, and you may lose all or part of your
investment.
Risks Related to Our Business and Our Industry
Unfavorable national and global economic conditions could have a material adverse effect on our business, operating results and financial condition.
Our business depends on the overall demand for information technology, or IT, from, and on the economic health of, our current and prospective
customers. In addition, the demand for our products and services is discretionary and may involve a significant commitment of capital and other resources. The
crisis in the financial and credit markets in the United States, Europe and Asia during 2008 and 2009 led to a global economic slowdown. Notwithstanding the
recent recovery in some of the financial markets there is still continuing economic weakness and uncertainty, as adverse credit conditions, increased energy
costs, renewed inflation, decreased consumer confidence, reduced capital spending, adverse business conditions, liquidity concerns and other factors have
mitigated the strength of economic recovery from the global recession. Even if overall economic conditions continue to improve, continued challenging
economic conditions in the markets in which we operate or a reduction in the level of IT, capital spending and investment in IT projects by our existing and
potential customers, could adversely impact our business, results of operations and financial condition in a number of ways, including by resulting in longer
sales cycles, slower adoption of new technologies and increased price competition for our products and services. We could also be exposed to credit risk and
payment delinquencies on our accounts receivable, which are not covered by collateral. Any of these events would likely harm our business, operating results
and financial condition. If global economic and market conditions, or economic conditions in the United States, Europe or Asia or other key markets remain
uncertain or weaken further, our business, operating results and financial condition may be materially adversely affected.
The loss of, or significant reduction or delay in, purchases by our customers or impairment of our relationships with our largest customers could
reduce our revenues and profitability.
The loss of any of our major customers or a decrease or delay in orders or anticipated spending by such customers could reduce our revenues and
profitability, due to our reliance on such customers. Our customers could also engage in business combinations, which could increase their size, reduce their
demand for our products and solutions as they recognize synergies or rationalize assets, and increase or decrease the portion of our total sales concentration with
respect to any single customer.
6
Date: 05/14/2012 02:55 PM User: djohnson
Client: v313119_FORMULA SYSTEMS (1985) LTD_20-F
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File: v313119_20f.htm Type: 20-F Pg: 7 of 171
For example, five customers of one of our three current significant subsidiaries— Sapiens— and its subsidiaries accounted for 33% of Sapiens’
consolidated revenues (or 4% of our consolidated revenues), in 2011. One significant customer of another significant subsidiary—Magic Software— accounted
for 25% of its consolidated revenues in 2011 (or 4% of our consolidated revenues). There can be no assurance that the existing customers of our significant
subsidiaries will enter into new project contracts with us or that they will continue using our enabling IT technologies.
If we are unable to effectively control our costs while maintaining our customer relationships, our business, results of operations and financial
condition could be adversely affected.
It is critical for us to appropriately align our cost structure with prevailing market conditions, to minimize the effect of economic downturns on our
operations, and in particular, to continue to maintain our customer relationships while protecting profitability and cash flow. If we are unable to align our cost
structure in response to economic downturns (such as the downturn that commenced in late 2008, and any subsequent downturn that may recur in the current,
uncertain global economic environment) on a timely basis, or if such implementation has an adverse impact on our business or prospects, then our financial
condition, results of operations and cash flows may be negatively affected.
Conversely, adjusting our cost structure to fit economic downturn conditions may have a negative effect on us during an economic upturn or periods of
increasing demand for our IT solutions. If we have too aggressively reduced our costs, we may not have sufficient resources to capture new IT projects and meet
customer demand. If, for example, during periods of escalating demand for our products, which we experienced during the 2010 and 2011 fiscal years, we are
unable to add engineering and technical staff capacity quickly enough to meet the needs of our customers, they may turn to our competitors making it more
difficult for us to retain their business. Similarly, if we are unable for any other reason to meet delivery schedules, particularly during a period of escalating
demand, our relationships with our customers could be adversely affected. If we are unable to effectively manage our resources and capacity to capitalize on
periods of economic upturn, there could be a material adverse effect on our business, financial condition, results of operations and cash flows.
The software solutions market that we address through our subsidiaries is expected to continue to evolve, and if we are not able to accurately predict
and rapidly respond to market developments or customer needs, our competitive position will be impaired.
The market for our solutions is characterized by changing business conditions and customer requirements. Nevertheless, estimates of the market's
expected growth resulting from the changing conditions and requirements are inherently uncertain and are subject to many risks and assumptions. We may need
to develop and introduce additional software and enhancements to our existing solutions to satisfy our current customers and maintain our competitive position
in the marketplace. We may also need to modify our software so that it can operate with new or enhanced software that may be introduced by other software
vendors. The failure to anticipate changes in technology, partner and customer requirements and successfully develop, enhance or modify our software
solutions, or the failure to do so on a timely basis, could limit our revenue growth and competitive position.
Our success depends upon the development and maintenance of our strategic alliances.
We have established relationships with strategic partners to provide an international marketing presence and name recognition, as well as the resources
necessary to implement many of our IT services. We are dependent upon our strategic partners for the marketing and sale of certain of our proprietary software
solutions. If we cannot maintain our existing relationships with these partners, if our partners encounter financial difficulties, if we fail to establish effective,
long-term relationships with additional partners, or if our partners enter into relationships with our competitors, our ability to market our proprietary software
solutions in international markets may be limited. If this happens, our growth, if any, might be delayed or slowed. As a result, our business, financial condition,
and results of operations could be seriously harmed.
7
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File: v313119_20f.htm Type: 20-F Pg: 8 of 171
If our products fail to compete successfully with those of our competitors, we may have to reduce the prices of our products, which, in turn, may
adversely affect our business.
We face competition, both in Israel and internationally, from a variety of companies, including companies with significantly greater resources than ours
who are likely to enjoy substantial competitive advantages, including:
•
•
•
•
•
•
•
•
longer operating histories;
closer proximity to future markets;
greater financial, technical, marketing and other resources;
cheaper costs, including labor cost;
political leverage;
greater name recognition;
well-established relationships with our current and potential clients; and
a broader range of products and services.
These competitors may be able to respond more quickly to new or emerging technologies or changes in customer requirements. They may also benefit
from greater purchasing economies, offer more aggressive product and service pricing or devote greater resources to the promotion of their products and
services. Current and potential competitors have established or may establish cooperative relationships among themselves or with third parties to increase such
competitors’ ability to successfully market their tools and services. We also expect that competition will increase as a result of consolidation within the industry.
Our further penetration of international markets may likewise cause us to face additional competition. As a result, we cannot assure you that the products and
solutions that we offer will compete successfully with those of our competitors.
We may be unable to differentiate our tools and services from those of our competitors or successfully develop and introduce new tools and services
that are less costly than, or superior to, those of our competitors. This could have a material adverse effect on our ability to compete.
Furthermore, several software development centers worldwide offer software development services at lower prices than we do. Due to the intense
competition in the markets in which we operate, software products prices may fluctuate significantly. As a result, we may have to reduce the prices of our
products, which in turn, may adversely affect our revenues and the gross margins for our products.
If we fail to locate, successfully compete for and consummate suitable acquisitions and investments, we may be unable to grow or maintain our market
share.
As part of our strategy, we intend to pursue acquisitions of, and investments in, other companies, particularly companies offering products,
technologies and services that are complementary to ours and are suitable for integration into our business. We cannot assure you that we will be able to locate
suitable potential acquisition or investment opportunities in Israel or internationally, or if we do identify suitable candidates, that at the conclusion of related
discussions and negotiations, we will be able to consummate the acquisitions or investments on terms which are favorable to us. If and when acquisition or
investment opportunities arise, we expect to compete for these opportunities with other established and well-capitalized entities, and we cannot guarantee that
we will succeed in such competition on terms which remain favorable to us. If we fail to consummate further acquisitions or investments in the future, our
ability to grow or to even maintain our market share may be harmed.
8
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Any future acquisitions of, or investments in, companies or technologies, especially those located outside of Israel, may distract our management,
disrupt our business and may be difficult to finance on favorable terms.
As described above, our strategy includes selective acquisitions of, and investments in, companies offering products, technologies and services. For
example, in February 2010, Magic Software (via a subsidiary) acquired a consulting and staffing services business of a U.S.-based IT services company
providing a comprehensive range of consulting and staffing services for telecom, network communications and the IT industry. As a further example, in August
2011, our current subsidiary Sapiens acquired IDIT I.D.I. Technologies Ltd., or IDIT, and FIS Software Ltd., or FIS, and in April 2010, it acquired Harcase
Software Limited, or Harcase (Canada). If and when we or any of our subsidiaries acquires or invests in another company, the acquiring or investing entity
could have difficulty assimilating the target company’s personnel, operations, technology or products and service offerings into its own. Prior acquisitions have
resulted in a wide range of outcomes, from successful introduction of new products and technologies to a failure to do so. Even when an acquired company has
already developed and marketed products, there can be no assurance that product enhancements will be made in a timely fashion or that pre-acquisition due
diligence will have identified all possible challenges that might arise with respect to such products. Furthermore, the key personnel of the acquired company
may decide not to work for the acquirer. These difficulties could disrupt our ongoing business, distract our management and employees, increase our expenses
and adversely affect our results of operations.
In the case of IDIT and FIS, Sapiens has commenced integrating them into its current business, including adding their solutions to Sapiens’ product line
and integrating their employees, including developers, technical support providers and sales and marketing personnel, into Sapiens’ business. We expect that
this process will continue into 2012, but there is no assurance that Sapiens will be successful and achieve anticipated synergies. In addition, while Sapiens has
made significant progress towards the integration of Harcase (Canada)'s operations, technology and employees into its business, there can be no assurance that it
will be able to successfully complete the integration and generate all anticipated synergies or operational improvements.
Any acquisition or investment in a company located outside of Israel poses additional risks, including risks related to the monitoring of a management
team from a great distance and the need to integrate a potentially different business culture. Our failure to successfully integrate such a newly acquired business
or such an investment could harm our business. In addition, the investigation of acquisition or investment candidates outside of Israel involves higher costs than
those associated with pursuing domestic acquisitions or investments, and we cannot assure you that these investigations will successfully lead to the
consummation of transactions.
We may furthermore need to raise capital in connection with any such acquisition or investment, which we would likely seek via public or private
equity or debt offerings. The issuance of equity securities pursuant to any such financing could be dilutive to our existing shareholders. If we raise funds
through debt offerings, we may be pressured in serving such debt. Our ability to raise capital in this manner also depends upon market and other conditions,
many of which are beyond our control. Due to unfavorable conditions, we could be required to seek alternative financing methods, such as bank financings,
which involve borrowing money on terms which are not favorable to us. Difficulties in raising equity capital or obtaining debt financing on favorable terms, or
the unavailability of financing, including bank borrowings, may hinder our ability to implement our strategy for selective acquisitions and investments.
Our future results could be adversely affected by an impairment of the value of certain intangible assets.
The assets listed in our consolidated balance sheets as of December 31, 2011 include, among other things, goodwill amounting to approximately $167
million, capitalized software development costs, net, amounting to approximately $12 million and other intangible assets (comprised mainly of customer related
intangible assets and acquired technology) amounting to approximately $19 million. The applicable accounting standards require that:
goodwill not be amortized, but rather be subject to an annual impairment test. We perform an annual goodwill impairment test with respect to our
reporting units at December 31 of each year, or more often if indicators of impairment are present. As of December 31, 2010 and 2011, the estimated fair
values of our reporting units ranged from 5% to 112% and from 10% to 28%, respectively, above their carrying values, thereby enabling us to avoid
having to record any impairment. During the years ended December 31, 2009, 2010 and 2011, no impairment was required for any of our reporting units.
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intangible assets that are not considered to have an indefinite useful life be amortized using the straight-line basis over their estimated useful lives. The
carrying amount of these assets is reviewed whenever events or changes in circumstances indicate that the carrying value of an asset may not be
recoverable. Recoverability of these assets is measured by comparison of the carrying amount of the asset to the future undiscounted cash flows the asset
is expected to generate. If the asset is considered to be impaired, the amount of any impairment is measured as the difference between the carrying value
and the fair value (usually discounted cash flow) of the impaired asset. During the years ended December 31, 2009, 2010 and 2011, no impairment losses
were identified for these intangible assets; and
acquired technology and development costs of software that is intended for sale that are incurred after the establishment of technological feasibility of the
relevant product be capitalized and tested for impairment on a regular basis by determining whether the amortization of the asset over its remaining
economic useful life can be recovered through undiscounted future operating cash flows from the specific software product sold and written down when
capitalized costs exceed the product’s net realizable value. During the years ended December 31, 2009, 2010 and 2011, no impairment losses were
identified for these software products.
If our goodwill or capitalized software development costs are deemed to be impaired in whole or in part due to adverse changes in the value that we
expect to realize from these assets, or if we fail to accurately predict the useful life of the capitalized software development costs, we could be required to reduce
or write off such assets, which would require us to recognize additional expense in our statements of operations, thereby adversely affecting our operating
results and causing a reduction in our shareholders’ equity.
Certain amounts have been allocated to goodwill on our balance sheet as a result of acquisitions made by us from time to time, and should it become
necessary to write-off a material part of this, our results of operations could be materially adversely affected.
We acquire businesses from time to time, and, as a result, certain amounts have been allocated to goodwill on our balance sheet. Goodwill and other
intangible assets that have indefinite useful lives are tested at least annually for impairment.
Under Accounting Standards Update, or ASU, 2011-08, “Testing Goodwill for Impairment,” codified in ASC 350 “Intangibles – Goodwill and Other,”
issued by the Financial Accounting Standards Board, or FASB, in September 2011, which is effective beginning January 1, 2012, we may first assess qualitative
factors to determine whether it is necessary to perform a two-step quantitative goodwill impairment test. We need nor calculate the fair value of a reporting unit
unless we determine, based on a qualitative assessment, that it is more likely than not that its fair value is less than its carrying amount.
Should a goodwill impairment test that we conduct disclose that there has been a permanent impairment of a material part of the value of goodwill, it
would be necessary to write-off such amount, and this could materially adversely affect our results of operations.
Our credit facility agreements contain a number of restrictive covenants which, if breached, could result in acceleration of our obligation to repay our
debt.
The loan agreements to which we (primarily one of our subsidiaries) are party contain a number of conditions and limitations on the manner in which
we can operate our business, including limitations on our ability to incur debt and sell or acquire assets. These loan agreements also contain various covenants
which require us to maintain certain financial ratios related to shareholders’ equity and operating results of one of our subsidiaries 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
which could have been financially advantageous to us and, by extension, to our shareholders. In addition, a breach of the restrictive covenants could result in the
acceleration of our obligations to repay our debt.
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Marketing our products and services in international markets may require increased expenses and greater exposure to risks that we may not be able
to successfully address.
We intend to continue to focus our efforts on selling proprietary software solutions in international markets and to devote significant resources to these
efforts. If we are unable to continue achieving market acceptance for our solutions or continue to successfully penetrate international markets, our business will
be harmed. In 2010 and 2011, we received approximately 25% and 24% of our consolidated revenues, respectively, from customers located outside of Israel.
The expansion of our existing operations and entry into additional international markets will require significant management attention and financial resources.
We are subject to a number of risks customary for international operations, including:
•
•
•
•
•
•
•
•
•
•
limitations and disruptions resulting from the imposition of government controls;
changing product and service requirements in response to the formation of economic and marketing unions, such as the European Union;
economic or political changes in international markets;
export license requirements and trade restrictions;
greater difficulty in accounts receivable collection and longer collection periods;
unexpected changes in regulatory requirements;
difficulties in managing overseas subsidiaries and international operations;
the uncertainty of protection for intellectual property rights in some countries, particularly in southeast Asia;
multiple and possibly overlapping tax structures and changes in tariffs; and
currency fluctuations.
If we fail to address the strain on our resources caused by changes in our company, we will be unable to effectively manage our business.
Corporate organizational changes, as well as growth of our business, if any, have placed and will continue to place a strain on our personnel and
resources. Our ability to manage any future changes or growth depends on our ability to continue to implement and improve our operational, financial and
management information control and reporting systems on a timely basis and to expand, train, motivate and manage our work force. One of the challenges
encountered by our subsidiaries is the need from time to time to, on the one hand, terminate the employment of certain employees, and, on the other hand, retain
new employees for new, unexpected projects, each of which requires operational flexibility. If we cannot respond effectively to changing business conditions,
our business, financial condition and results of operations could be materially adversely affected.
If we are unable to attract, train and retain qualified personnel, including senior management, we may not be able to achieve our objectives and our
business could be harmed.
Our future success depends on our ability to attract, motivate and retain highly qualified professional employees, including senior management. In
order to achieve our objectives, we may need to hire additional qualified software, administrative, operational, sales and technical support personnel. The
process of attracting, training and successfully integrating qualified personnel into our operations can be lengthy and expensive. We expect to recruit most of
our software and systems personnel in Israel, where the market for qualified personnel is quite competitive. We may not be able to compete effectively for the
personnel that we need. In addition, our operations are dependent on the efforts of certain key management. Any loss of members of senior management or key
technical personnel, or any failure to attract or retain highly qualified employees as needed, could materially adversely affect our business.
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Our business involves long-term, large projects, some of which are fixed-price projects that involve uncertainties, such as estimated project costs and
profit margins.
A significant portion of our business is characterized by relatively large projects or engagements that can have a significant impact on our total revenue
and cost of revenue from quarter to quarter, and we derive a significant portion of our revenues from engagements on a fixed-price basis with delivery
requirements spanning more than one year. In addition, we may agree to a price before design specifications are finalized, which could result in a fixed price
that is too low, resulting in lower margins or losses to us. As our projects can be highly complex, we may not be able to accurately estimate our actual costs of
completing a fixed-project. If our actual cost-to-completion of these projects differs significantly from the estimated costs, we could experience a loss on the
related contracts, which would have a material adverse effect on our results of operations, financial position and cash flow. Similarly, delays in executing client
contracts may affect our revenue and cause our operating results to vary widely.
If our tools or solutions do not function efficiently, we may incur additional expenses.
In the course of providing our software products, we continually conduct testing to detect the existence of failures, errors and defects. 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 software itself is increasingly complex. We have instituted a quality assurance procedure for correcting errors and defects in our tools. The amount
of failures, errors and defects detected to date, and the cost of correcting them, have not been significant. However, if our products fail to function efficiently or
if errors and defects are detected in our tools in the future, we might incur significant expenditures in an attempt to remedy the problem, and our reputation with
users of our products and services may also be harmed. In addition, errors or defects in our products could result in delayed or lost revenue, claims against us,
diversion of development resources and increased service, warranty and insurance costs. The adverse consequences of, and expenses related to, failures, errors
and defects could have a material adverse effect on our business, operating results, and financial condition.
Failure to meet customer expectations with respect to our solutions or damage caused by our solutions to our customers’ information systems may
cause the cancellation of our contracts and may subject us to liability claims.
We provide our customers with upfront estimates regarding the duration, budget and costs associated with the implementation of our products.
Implementation of some of our products is complex and meeting the anticipated duration, budget and costs often depends on factors beyond our control. We
may not meet the upfront estimates and expectations of our customers for the implementation of products as a result of our products’ capabilities or service
engagements by us, our system integrator partners or our customers' IT employees. Consequently, if we fail to meet upfront estimates and the expectations of
our customers for the implementation of our products, we could lose customers and be subject to negative publicity regarding us and our solutions, which could
adversely affect our ability to attract new customers and sell additional products and services to existing customers.
In addition, some of the products and services that we provide involve key aspects of customers’ information systems. These systems are frequently
critical to our customers’ operations. As a result, our customers have a greater sensitivity to failures in these systems than do customers of other software
products generally. If a customer’s system fails during or following the provision of products or services by us, or if we fail to provide customers with proper
support for our software products or do so in an untimely manner, we are exposed to the risks of cancellation of our contract with the customer and a legal claim
for substantial damages being filed against us, regardless of whether or not we are responsible for the failure. Any cancellation of a contract could cause us to
suffer damages, since we might not be paid for costs that we incurred in performing services prior to the date of cancellation.
As to a legal claim for damages by the customer, while, when possible, we limit our liability under our product and service contracts, we cannot
guarantee that such a limitation of liability, if any, would be sufficient to protect us. We maintain general liability and professional liability insurance coverage.
However, we cannot assure you that our insurance coverage will be sufficient to cover one or more large claims, or that the insurer will not disclaim coverage as
to any future claim. If we lose one or more large claims against us that exceed available insurance coverage, our business, operating results and financial
condition may be materially adversely affected. In addition, liability claims could also 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, incurrence of substantial expenses
and potential damage to our reputation might result.
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If we are unable to accurately predict and respond to market developments or demands, our business will be adversely affected.
The IT business, in large part, is characterized by rapidly evolving technology and methodologies. This makes it difficult to predict demand and market
acceptance for our services and products. In order to succeed, we need to adapt the products and services we offer to technological developments and changes in
customer needs. We cannot guarantee that we will succeed in enhancing our products and services or developing or acquiring new products and services that
adequately address changing technologies and customer requirements. Even if we succeed in adapting to new technologies by developing new products and
services and successfully bringing them to market, there is no assurance that the new products or services would have a positive impact on our financial
performance and could even result in lower revenues or be accompanied by lower margins and/or higher costs and therefore could negatively impact our
financial performance. Changes in technologies, industry standards, the regulatory environment, customer requirements and new product introductions by
existing or future competitors could render our existing products and services obsolete and unmarketable, or require us to enhance our current products or
develop new products. This may require us to expend significant amounts of money, time and other resources to meet the demand. There can be no assurance
that we will have sufficient resources to make such expenditures, especially in light of the worldwide financial and economic situation, or that these
expenditures will bring the full advantages or any advantage as planned. These expenditures could strain our personnel and financial resources.
If we are unable to retain control of our subsidiaries, we would cease to consolidate them and our operating results may fluctuate significantly.
We currently hold a controlling interest in our subsidiaries through our direct equity holdings. As a result of our controlling interests in the subsidiaries,
we consolidate their operating results with ours. If we are unable to maintain a controlling interest in our subsidiaries, as a result of equity issuances by
subsidiaries to third parties that are unaffiliated with us or otherwise, we would cease to consolidate the operating results of those subsidiaries, based on relevant
accounting guidelines. This, in turn, could result in significant fluctuations of our consolidated operating results.
On August 21, 2011, following Sapiens’ acquisition of all of the outstanding shares of FIS and IDIT which was mainly financed by the issuance of
Sapiens shares, we lost our controlling interest in Sapiens, resulting in the deconsolidation of Sapiens’ results from our financial statements. As a result of
Sapiens’ acquisition of FIS and IDIT, our interest in Sapiens was diluted from 75.6% to 42.2%. The gain recognized in relation of our loss of control in Sapiens
amounted to $ 25,833 and is presented in our income statement in the item “gain derived from deconsolidation of subsidiary and equity in gains (losses) of
affiliated companies, net.” From August 21, 2011 until December 31, 2011, Sapiens’ results of operations were reflected in our results using the equity method
of accounting. While we subsequently regained control of Sapiens, raising our equity interest to 52.1% on January 27, 2012, there can be no assurance that we
will retain our majority interest in Sapiens or in any of our other subsidiaries.
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Risks Related to our Intellectual Property
If third parties assert claims of intellectual property infringement against us, we may suffer substantial costs and diversion of management’s attention.
Substantial litigation over intellectual property rights exists in the software industry. We expect that software products will be increasingly subject to
third-party infringement claims as the functionality of products in different industry segments overlaps, and we cannot predict whether third parties will assert
claims of infringement against us based on our software products. Furthermore, our employees and contractors have access to software licensed by us from third
parties, and a breach of the non-disclosure undertakings by any of our employees or contractors may lead to a claim of infringement against us. From time to
time third parties have in the past, and may in the future, assert infringement claims against us or claim that we have violated a patent or infringed upon a
copyright, trademark or other proprietary right belonging to them. Any claim, with or without merit, could be expensive and time-consuming to defend, and
would probably divert our management’s attention and resources. In addition, such a claim may require us to enter into royalty or licensing agreements to obtain
the right to use a necessary product or component. Such royalty or licensing agreements, if required, may not be available to us on acceptable terms, if at all. A
successful claim of product infringement against us and our failure or inability to license the infringed or similar technology could have a material adverse effect
on our business, financial condition and results of operations.
In February 2010, a U.S. company filed a lawsuit against Magic and one of its subsidiaries, claiming an alleged breach by Magic and its subsidiary of
its intellectual property rights in connection with one of their products. In July 2011, the parties signed a settlement agreement under which Magic agreed to pay
a lump sum for future maintenance and support until 2018, subject to a complete release of all claims. Future such settlement agreements, if containing terms
that are adverse or burdensome to us, could have an adverse effect on our results of operations.
We may be unable to adequately protect our proprietary rights, which may limit our ability to compete effectively.
Our success and ability to compete are substantially dependent upon our ability to protect our proprietary developed technology. Substantially all of our
intellectual property consists of proprietary or confidential information that is not subject to patent or similar protection. In general, we have relied on a
combination of contractual provisions, technical leadership, trade secret, copyright and trademark law and nondisclosure agreements to protect our proprietary
know-how. We do not have any registered patents. 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, we attempt to protect trade secrets and other proprietary information through non-disclosure agreements with employees, consultants and distributors.
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.
We have placed, and in the future may place, certain of our software in escrow. The software may, under specified circumstances, be made available to our
customers. From time to time, we also provide our software directly to customers. This may increase the likelihood of misappropriation or other misuse of our
software.
Our information technology systems could be subject to security breaches, which could have adverse effects on our operations.
The safeguarding of our information technology, or IT, infrastructure is important to our business. A cyber-attack that bypasses our IT security systems
causing an IT security breach may lead to a material disruption of our IT business systems and/or the loss of business information, resulting in adverse business
impact. Adverse effects could include:
adversely affected future results of operations due to the theft, destruction, loss, misappropriation or release of our confidential data or our intellectual
property;
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operational or business delays resulting from the disruption of IT systems and subsequent clean-up and mitigation activities; and
negative publicity resulting in reputation or brand damage for us vis-à-vis our customers, partners or industry peers.
If our products experience data security breaches, and there is unauthorized access to our customers' data, we may lose current or future customers
and our reputation and business may be harmed.
Our products are used by our customers to manage and store proprietary information and sensitive or confidential data relating to their businesses.
Although we maintain security features in our products, our security measures may not detect or prevent hacker interceptions, break-ins, security breaches, the
introduction of viruses or malicious code, and other disruptions that may jeopardize the security of information stored in and transmitted by our products. A
party that is able to circumvent our security measures in our products could misappropriate our or our customers' proprietary or confidential information, cause
interruption in their operations, damage or misuse their computer systems, and misuse any information that they misappropriate. If any compromise of the
security of our products were to occur, we may lose customers and our reputation, business, financial condition and results of operations could be harmed.
Risks Related to our Traded Securities
The market price of our ordinary shares and American Depositary Shares may be volatile and you may not be able to resell your shares at or above
the price you paid, or at all.
The stock market in general has experienced during recent years extreme price and volume fluctuations, including a sharp decline due to the global
economic and financial crisis in late 2008 and in 2009, followed by an overall significant rebound in 2010 and early 2011, a decline in mid to late 2011 and a
comeback once again in 2012 to date. The market prices of securities of technology companies have been extremely volatile, and have experienced fluctuations
that have often been unrelated or disproportionate to the operating performance of those companies. These broad market fluctuations have affected and are
expected to continue to affect the market price of our ordinary shares and ADSs.
The high and low closing market price of our ordinary shares traded on the Tel Aviv Stock Exchange, or the TASE, under the symbol “FORT,” and the
high and low closing market price of our ADSs traded on the NASDAQ Global Select Market (for periods from January 3, 2011) or the NASDAQ Global
Market (for periods prior to January 3, 2011) under the symbol “FORTY,” during each of the last five years, are summarized in the table below:
Year
2011
2010
2009
2008
2007
NASDAQ
In US$
Tel Aviv Stock Exchange*
In NIS
In US$
High
Low
High
Low
High
Low
20.49
18.92
12.10
14.14
14.46
11.14
10.82
3.59
4.99
11.69
75.57
67.98
44.12
47.78
63.34
43.94
40.21
16.16
17.53
47.83
20.55
18.21
11.22
13.32
14.78
11.81
10.77
4.11
4.89
12.40
* The U.S. dollar price of our ordinary shares on the Tel Aviv Stock Exchange was determined by dividing the price of an ordinary share in NIS by the
representative exchange rate of the NIS against the U.S. dollar as reported by the Bank of Israel on the same date.
The market price of our ordinary shares and ADSs may fluctuate substantially due to a variety of factors, including:
•
any actual or anticipated fluctuations in our or our competitors’ quarterly revenues and operating results;
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•
•
•
•
•
•
•
•
•
•
•
•
•
industry trends and changes;
changes in expectations as to our future financial performance, including financial estimates by securities analysts and investors;
public announcements concerning us or our competitors;
results of integrating investments and acquisitions;
the introduction or market acceptance of new service offerings by us or our competitors;
changes in product pricing policies by us or our competitors;
public announcements concerning distribution of dividends and payment of dividends;
the public’s response to our press releases, our other public announcements and our filings with the Securities and Exchange Commission and the
Israeli Securities Authority;
changes in accounting principles;
sales of our shares by existing shareholders;
the loss of any of our key personnel;
other events or factors in any of the markets in which we operate, including those resulting from war, incidents of terrorism, natural disasters or
responses to such events; and
general trends of the stock markets.
In addition, global and local economic, political, market and industry conditions and military conflicts and in particular, those specifically related to the
State of Israel, may affect the market price of our shares and ADSs.
Significant fluctuations in our annual and quarterly results, which make it difficult for investors to make reliable period-to-period comparisons, may
also contribute to volatility in the market price of our ordinary shares and American Depositary Shares.
Our quarterly and annual revenues, gross profit, net income and results of operations have fluctuated significantly in the past, and we expect them to
continue to fluctuate significantly in the future. The following events may cause fluctuations:
•
•
•
•
•
•
•
•
•
•
•
global economic trends, like the recent global economic crisis, followed by the global economic slowdown and slow, uncertain global economic
recovery;
acquisitions and dispositions of, and consolidation of, our subsidiaries;
the size, time and recognition of revenue from significant contracts;
timing of product releases;
timing of contracts;
timing of completion of specified milestones and delays in implementation;
changes in the proportion of service and license revenues;
price and product competition;
increases in selling and marketing expenses, as well as other operating expenses;
currency fluctuations; and
consolidation of our customers.
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A substantial portion of our expenses, including most product development and selling and marketing expenses, must be incurred in advance of when
revenue is generated. If our projected revenue does not meet our expectations, we are likely to experience an even larger shortfall in our operating profit relative
to our expectations. The gross margins of our individual subsidiaries vary both among themselves and over time. As a result, changes in the revenue mix from
these subsidiaries may affect our quarterly operating results. In addition, we may derive a significant portion of our net income from the sale of our investments
or the sale of proprietary software technology. These events do not occur on a regular basis and their timing is difficult to predict. As a result, we believe that
period-to-period comparisons of our historical results of operations are not necessarily meaningful and that you should not rely on them as an indication for
future performance. Also, it is possible that our quarterly and annual results of operations may be below the expectations of public market analysts and
investors. If this happens, the prices of our ordinary shares and ADSs will likely decrease.
The market prices of our ordinary share and ADSs may be adversely affected if the market prices of our publicly traded subsidiaries decrease.
A significant portion of our assets is comprised of equity securities of publicly traded companies. Our publicly traded subsidiaries are, as of the current
time, Magic Software, Matrix and Sapiens. The stock prices of these publicly traded companies have been extremely volatile, and have been subject to
fluctuations due to market conditions and other factors which are often unrelated to operating results and which are beyond our control. Fluctuations in the
market price and valuations of our holdings in these companies may affect the market’s valuation of the price of our ordinary shares and ADSs and may also
thereby impact our results of operations. If the value of our assets decreases significantly as a result of a decrease in the value of our interest in our publicly
traded subsidiaries, our business, operating results and financial condition may be materially and adversely affected and the market price of our ordinary shares
and ADSs may also fall as a result.
Our securities are traded on more than one market and this may result in price variations.
Our ordinary shares are traded on the TASE and our ADSs are traded on the NASDAQ Global Market until January 3, 2011, at which date the listing
of our ADSs was transferred to the NASDAQ Global Select Market. Trading in our ordinary shares and ADSs on these markets takes place in different
currencies (dollars on the NASDAQ Global Select Market and NIS on the TASE), and at different times (resulting from different time zones, different weekly
trading days and different public holidays in the United States and Israel). The trading prices of our ordinary shares and ADSs on these two markets may differ
due to these and other factors (see the risk factor titled “The market price of our ordinary shares and American Depositary Shares may be volatile and you may
not be able to resell your shares at or above the price you paid, or at all” above for an example thereof). On the other hand, any decrease in the trading price of
our ordinary shares or ADSs, as applicable, on one of these markets could likely affect— and cause a decrease in— the trading price on the other market.
Our largest shareholder, Asseco Poland S.A., owns the majority of the voting rights and controls the outcome of matters that require shareholder
approval.
Asseco Poland S.A., or Asseco, owns approximately 50.2% of our outstanding ordinary shares (which excludes shares that we have repurchased that
lack voting rights). Therefore, Asseco has the power to control the outcome of those matters requiring shareholder approval, including the election of directors
and approval of significant corporate transactions. This voting power may have the effect of delaying or preventing a change in control which may otherwise be
favorable to our minority shareholders. In addition, potential conflicts of interest may arise in the event that we or any of our subsidiaries or other affiliates enter
into agreements or transactions with affiliates of Asseco. Although Israeli law imposes certain procedures (including shareholder approval) for approval of
certain related party transactions, we cannot assure you that these procedures will eliminate the possible detrimental effects of these conflicts of interest. If
certain transactions are not approved in accordance with required procedures under applicable Israeli law, these transactions may be void or voidable.
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Risks Relating to Operations in Israel
Political, economic, and military conditions in Israel could negatively impact our business.
We are incorporated under the laws of, and our headquarters and principal research and development facilities are located in, the State of Israel, and
approximately 75% and 76% of our consolidated revenues in 2010 and 2011, respectively were generated from the Israeli market. As a result, we are directly
influenced by the political, economic and military conditions affecting Israel. In addition, several countries still restrict business with Israel and with companies
doing business in Israel. These political, economic and military conditions in Israel, and business restrictions, could have a material adverse effect on our
business, financial condition, results of operations and future growth.
Despite the progress towards peace between Israel and its Arab neighbors, the future of these peace efforts is uncertain and although Israel has entered
into various agreements with Egypt, Jordan and the Palestinian Authority, there has been an increase in unrest and terrorist activity, which began in September
2000 and has continued with varying levels of severity into 2012. There was an escalation in violence among Israel, Hamas, the Palestinian Authority and other
groups, as well as extensive hostilities in December 2008 and January 2009 along Israel’s border with the Gaza Strip, which resulted from missiles being fired
from the Gaza Strip into southern Israel. There were also extensive hostilities along Israel’s northern border with Lebanon in the summer of 2006. During 2011,
riots and uprisings in several countries in the Middle East and neighboring regions have led to severe political instability in several neighboring states and to a
decline in the regional security situation. In addition, the current tension between the Western world and Israel, on the one hand, and the Islamic Republic of
Iran, on the other hand, over the latter’s nuclear weapons program carries with it the potential for armed conflict that may involve Israel. Such instability may
affect the local and global economy, could negatively affect business conditions and, therefore, could adversely affect our operations. To date, these matters
have not had any material effect on our business and results of operations; however, the regional security situation and worldwide perceptions of it are outside
of our control and there can be no assurance that these matters will not negatively affect us in the future.
Some of our employees in Israel are obligated to perform military reserve duty, currently consisting of approximately 30 days of service annually (or
more for reserves officers or citizens with certain occupations). Additionally, they are subject to being called to active duty at any time upon the outbreak of
hostilities. While we have operated effectively under these requirements, no assessment can be made as to the full impact of such requirements on our business
or work force and no prediction can be made as to the effect on us of any expansion of such obligations.
The tax benefits available to us from government programs may be discontinued or reduced at any time, which would likely increase our taxes.
Certain of our subsidiaries received grants in the past and receive tax benefits under Israeli government programs, particularly as a result of the
Approved Enterprise status of certain operations in Israel. Approved Enterprise status is granted by the Israeli Investment Center of the Ministry of Industry and
Trade and entitles the grantee to a variety of tax incentives. The incentives awarded to certain of our subsidiaries include reduced tax rates and a tax holiday.
Subject to compliance with applicable requirements, the portion of our subsidiary’s undistributed income derived from its Approved Enterprise programs is
exempt from income tax for a period of two to four years, followed by five to eight years in which the subsidiary benefits from a reduced tax rate of 25% on
income derived from its Approved Enterprise investment programs. In order to qualify for these incentives, an Approved Enterprise is required to comply with
the requirements of the Law for the Encouragement of Capital Investments, 1959, known as the Investment Law. As of May 14, 2012, our subsidiaries meet
those criteria and continue to receive tax benefits from their Approved Enterprise programs, as described in Note 16 to our financial statements and in “Item 5.
Operating and Financial Review and Prospects—Liquidity and Capital Resources— Effective Corporate Tax Rates in Israel” below. To maintain eligibility for
these programs and benefits, our subsidiaries must continue to meet the conditions set out in the Investment Law. We cannot assure you that these programs and
tax benefits will continue at the same level in the future. If these tax benefits and programs are terminated or reduced, we could pay increased taxes in the future,
which could decrease our profits.
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Fluctuations in foreign currency values may affect our business and results of operations.
Due to our extensive operations and sales in Israel, most of our revenues and expenses from our software services are denominated in NIS. For
financial reporting purposes, we translate all non-U.S. dollar denominated transactions into dollars in accordance with ASC 830. Therefore, we are exposed to
the risk that a devaluation of the NIS relative to the dollar will reduce our revenue growth rate in dollar terms. On the other hand, a significant portion of our
revenues from proprietary software products and related services is currently denominated in other currencies, particularly the Euro, Japanese Yen and British
Pound and South African, while a substantial portion of our expenses relating to the proprietary software products and related services, principally salaries and
related personnel expenses, is denominated in NIS. As a result, the depreciation of the Euro, Japanese Yen, British Pound or South African Rand relative to the
U.S. dollar reduces our dollar recorded revenues from sales of our proprietary software products and related services that are denominated in those currencies
and thereby harms our results of operations. In addition, the appreciation of the NIS relative to the dollar increases the dollar recorded value of expenses that we
incur in NIS in respect of such proprietary software products sales, and, therefore, could adversely affect our results of operations and harm our competitive
position in the markets. The depreciation (appreciation) of the dollar in relation to the NIS (based on the change in the exchange rate reported by the Bank of
Israel from the start to the conclusion of each year) amounted to 0.72%, 6.4% and (7.1)% for the years ended December 31, 2009, 2010 and 2011, respectively.
Rises in the inflationary rate in Israel further increase the dollar cost of our NIS-based operating expenses and adversely impact the profits that we realize from
our proprietary software products sales. The Israeli rate of inflation amounted to 3.9%, 2.7% and 2.2% for the years ended December 31, 2009, 2010 and 2011,
respectively. To date, we have not engaged in significant hedging transactions. In the future, we may enter into more or larger currency hedging transactions to
decrease the risk of financial exposure from fluctuations in the exchange rate of the NIS against the dollar, or the Euro, Japanese Yen British Pound and South
African Rand against the dollar, and from fluctuations in the Israeli inflation rate. However, we cannot assure you that these measures will adequately protect us
from the material adverse effects described above. For additional information relating to the exchange rates between different relevant currencies, see “Item 5.
Operating and Financial Review and Prospects—Overview—Our Functional and Reporting Currency.”
It may be difficult to serve process and enforce judgments against our directors and officers in the United States or in Israel.
We are organized under the laws of the State of Israel. All of our executive officers and directors are nonresidents of the United States, and a
substantial portion of our assets and the assets of these persons are located outside of the United States. Therefore, it may be difficult to:
effect service of process within the United States on us or any of our executive officers or directors;
enforce court judgments obtained in the United States including those predicated upon the civil liability provisions of the United States federal
securities laws, against us or against any of our executive officers or directors, in the United States or Israel; and
bring an original action in an Israeli court against us or against any of our executive officers or directors to enforce liabilities based upon the United
States federal securities laws.
Provisions of Israeli law may delay, prevent or make more difficult an acquisition of our company.
The Israeli Companies Law, 1999, referred to as the Companies Law, generally requires that a merger be approved by the board of directors and a
majority of the shares voting on the proposed merger, of each of the merging companies. For purposes of the shareholder vote, unless a court rules otherwise,
the merger will not be deemed approved if shares representing a majority of the voting power present at the shareholders meeting, and which are not held by the
other party to the merger (or by any person who holds 25% or more of the shares or the right to appoint 25% or more of the directors of the other party or its
general manager, or any of their relatives or corporations controlled by them) have voted against the merger. Upon the request of any creditor of a party to the
proposed merger, a court may delay or prevent the merger if it concludes that there is a reasonable concern that, as a result of the merger, the surviving company
will be unable to satisfy the obligations of the surviving company. In addition, the court may give instructions to secure creditors’ rights. Finally, a merger may
generally not be completed unless at least (i) 50 days have passed since the filing of a merger proposal signed by both parties with the Israeli Registrar of
Companies; and (ii) 30 days have passed since the merger was approved by the shareholders of each of the parties to the merger. Also, in certain circumstances
an acquisition of shares in a public company must be made by means of a tender offer. Lastly, Israeli tax law treats some acquisitions, such as stock-for-stock
exchanges between an Israeli company and a foreign company, less favorably than U.S. tax laws. These provisions of Israeli corporate and tax law may have the
effect of delaying, preventing or make more difficult an acquisition of or merger with us, which may adversely affect our ability to engage in a business
combination and may also depress the price of our ordinary shares and ADSs.
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Your rights and responsibilities as a shareholder will be governed by Israeli law and differ in some respects from the rights and responsibilities of
shareholders under U.S. law.
We are incorporated under Israeli law. The rights and responsibilities of holders of our ordinary shares are governed by our memorandum of
association, amended and restated articles of association, which we sometimes refer to as our articles, and Israeli law. These rights and responsibilities differ in
some respects from the rights and responsibilities of shareholders in typical U.S. corporations. In particular, a shareholder of an Israeli company has a duty to
act in good faith in exercising the rights thereof and fulfilling the obligations thereof toward the company and other shareholders and to refrain from abusing the
power thereof in the company, including, among other things, in voting at the general meeting of shareholders on certain matters. Israeli law provides that these
duties are applicable in shareholder votes at the general meeting with respect to, among other things, amendments to a company’s articles of association,
increases in a company’s authorized share capital, mergers and acquisitions and transactions involving interests of officers, directors or other interested parties
which require the shareholders’ approval. In addition, a controlling shareholder of an Israeli company or a shareholder who knows that he or she possesses the
power to determine the outcome of a vote at a meeting of our shareholders, or who has, by virtue of the company’s articles of association, the power to appoint
or prevent the appointment of an office holder in the company, or any other power with respect to the company, has a duty of fairness toward the company. The
Companies Law does not establish criteria for determining whether or not a shareholder has acted in good faith.
As a foreign private issuer whose ADSs are listed on the NASDAQ Global Select Market, we may follow certain home country corporate governance
practices instead of certain NASDAQ requirements.
As a foreign private issuer whose ADSs are listed on the NASDAQ Global Market, we are permitted to follow certain home country corporate
governance practices instead of certain requirements of the Listing Rules of the NASDAQ Stock Market. A foreign private issuer that elects to follow a home
country practice instead of such requirements must submit to NASDAQ in advance a written statement from independent counsel in such issuer’s home country
certifying that the issuer’s practices are not prohibited by the home country’s laws. In addition, a foreign private issuer must disclose in its annual reports filed
with the Securities and Exchange Commission, or the SEC, or on its website, each such requirement that it does not follow and describe the home country
practice followed by the issuer in lieu of any such requirement. In keeping with these leniencies, we have elected to follow home country practice with regard
to, among other things, composition of our board of directors, director nomination procedure, compensation of officers, quorum at shareholders’ meetings and
timing of our annual shareholders’ meetings. We have furthermore elected to follow our home country law, in lieu of those rules of the NASDAQ Stock Market
that require that we obtain shareholder approval for certain dilutive events, such as for 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 more
interest in the company and certain acquisitions of the stock or assets of another company. Accordingly, our shareholders and ADS holders may not be afforded
the same protection as provided under NASDAQ’s corporate governance rules.
Our United States investors could suffer adverse tax consequences if we are characterized as a passive foreign investment company.
Generally, if for any taxable year, after applying certain look-through rules, 75% or more of our gross income is passive income, or at least 50% of the
value of our assets are held for the production of, or produce, passive income, we may be characterized as a passive foreign investment company, or PFIC, for
U.S. federal income tax purposes. Passive income for these purposes generally includes, among other things, certain dividends, interest, royalties, rental and
gains from commodities and securities transactions and from the sale or exchange of property that gives rise to passive income. This characterization could
result in adverse U.S. tax consequences to our shareholders who are U.S. taxpayers, including having gain realized on the sale of our ordinary shares or ADSs
being treated as ordinary income rather than capital gain income, and could result in punitive interest charges being applied to such sales proceeds. Rules similar
to those applicable to dispositions apply to amounts treated as “excess distributions.”
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We believe that we were not a PFIC in 2011 and currently expect that we will not be a PFIC in 2012. However, PFIC status is determined as of the end
of the taxable year and is dependent on a number of factors. Therefore, there can be no assurance that we will not become a PFIC for the year ending December
31, 2012 or in a future taxable year. Rules similar to those applicable to gains derived from the disposition of our ordinary shares or ADSs also apply to certain
“excess distributions.” A decline in the value of our ordinary shares or ADSs could result in our company being classified as a PFIC. U.S .investors should
consult with their own tax advisors with respect to the U.S. tax consequences of investing in our ordinary shares or ADSs. For a discussion of how we might be
characterized as a PFIC and related tax consequences, see “Item 10. Additional Information—Taxation—United States Federal Income Tax Considerations.”
ITEM 4. INFORMATION ON THE COMPANY
A.
History and Development of the Company
Both our legal name and our commercial name is Formula Systems (1985) Ltd. We were incorporated in Israel on April 2, 1985. We maintain our
principal executive offices at 5 Haplada Street, Or Yehuda 60218, Israel and our telephone number is 011-972-3-5389487. Our agent in the United States is
Corporation Service Company and its address is 2711 Centerville Road, Suite 400, Wilmington, DE 19808. In 1991, we completed the initial public offering of
our ordinary shares on the TASE. In October 1997, we completed the listing of our ADSs on the NASDAQ Global Market. As of January 3, 2011 our ADSs are
listed on the NASDAQ Global Select Market.
Since our inception, we have acquired controlling interests, and have invested, in companies which are engaged in the IT solutions and services
business. We, together with our subsidiaries and affiliates, are known as the Formula Group.
In November 2010, Emblaze Ltd., our former controlling shareholder, sold its controlling stake in us to Asseco Poland SA, a Polish IT company listed
on the Warsaw Stock Exchange. In connection with such change of control, Messrs. Naftali Shani, Shlomo Ness, Tal Barnoach and Shimon Laor resigned from
our board of directors and Messrs. Marek Panek and Marcin Rulnicki were appointed to fill two of the vacancies on our board of directors that were created as a
result of the foregoing resignations.
We have adopted a strategy of seeking opportunities to realize gains through the selective sale of investments and interests in our subsidiaries and
affiliates to outside investors. We believe that this strategy provides us with capital to support the growth of our subsidiaries, as well as increases value for our
shareholders (and ADS holders). We expect to continue to develop and enhance the products, services and solutions of our subsidiaries, and to continue to
pursue additional acquisitions of, or investments in, companies that provide IT services and proprietary software solutions.
Capital Expenditures and Divestitures
Our principal investment and divestiture activities and related financing activities since the start of our 2009 fiscal year are described below. For
additional information relating to our investment, divestiture and financing activities during 2010 and 2011, see “Item 5. Operating and Financial Review and
Prospects— Liquidity and Capital Resources.”
Changes in our percentage ownership of Sapiens. As a result of our subsidiary Sapiens’ issuance of 17,500,000 of its ordinary shares as consideration
for its acquisition of FIS and IDIT on August 21, 2011, our percentage interest in Sapiens decreased from 75.6% to 42.3%. Both prior to, and subsequent to,
such acquisition, we have increased our investment in Sapiens, acquiring additional ordinary shares of Sapiens in private transactions that have raised our
beneficial ownership to 47.3% and 52.1% of Sapiens’ outstanding share capital as of December 31, 2011 and the current time, respectively. Pursuant to our
acquisitions of Sapiens ordinary shares, we have invested an aggregate of $0.1 million, $ 1.8 million and $11.6 million in 2009, 2010 and 2011, respectively, as
well as $7.8 million thus far in 2012. The source of such funds has been our working capital and a bank loan.
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Acquisition of US risk management company by Matrix. In January 2012, our subsidiary Matrix acquired 60% of the EXZAC Company, a U.S.
company in the field of risk management for financial institutions that deals in commerce, and which specializes in application services for enterprise fraud
management. Matrix paid $6.75 million in the acquisition, while up to an additional $2.5 million of consideration may be payable by Matrix if the acquired
company achieves certain targets over time.
Acquisition of application development infrastructure by Magic Software. In December 2011, Magic Software completed its acquisition of
BluePhoenix's AppBuilder activity for $13.5 million, $4 million of which was to be held in escrow pending fulfillment of certain obligations of BluePhoenix
under the sale agreement. AppBuilder is a comprehensive application development infrastructure used by many Fortune 1000 enterprises around the world. This
premier enterprise application development environment is a powerful, model-driven tool that enables development teams to build, deploy and maintain large-
scale, custom-built business applications.
Acquisition of software providers by Sapiens. On August 21, 2011, Sapiens completed the acquisition of all of the share capital of each of FIS and
IDIT, for a consideration that consisted of $6.75 million in cash, 10,016,875 of Sapiens’ ordinary shares and warrants to purchase 1,000,000 of Sapiens’
ordinary shares for FIS and 7,483,125 of Sapiens’ ordinary shares for IDIT. The aggregate shares issued upon completion of the foregoing transactions
constituted, immediately upon such completion, approximately 44.2% of Sapiens’ issued and outstanding share capital. In addition, options to purchase shares
of IDIT and FIS were replaced at the closing with options to purchase an aggregate of 1,938,844 of Sapiens’ ordinary shares. An aggregate of 1,750,000 of
Sapiens’ ordinary shares that were issued as consideration in these transactions were deposited in escrow for 12 months, in connection with certain
indemnification arrangements.
The acquisition of FIS, a provider of packaged-based insurance software solutions for Life and Pension, or L&P, that was founded in 1984, enables
Sapiens to offer an enhanced solution for the L&P market, grows Sapiens’ customer base in the insurance market world-wide and strengthens Sapiens’ position
in the market as a leading provider of L&P core software solutions, The acquisition of IDIT, a provider of insurance software solutions which focuses on the
Property & Casualty, or P&C, market allows Sapiens to offer its customers and partners a more extensive product portfolio in the industry and strengthens
Sapiens’ presence in the P&C insurance market by increasing its customer base and enabling Sapiens to meet the needs of insurers who operate in the P&C and
L&P markets.
Additional Acquisitions by Matrix and Magic Software. In 2011, Matrix and Magic Software completed the acquisition of additional activities for an
aggregate total consideration of up to $21.5 million, of which, as of December 31, 2011, the fair value of the contingent consideration was approximately $1.1
million, which was contingent upon the acquired activities achieving certain performance targets from 2011 through 2013.
Acquisition of consulting and staffing business by a subsidiary of Magic Software. In February 2010, a subsidiary of Magic Software completed the
acquisition of the consulting and staffing business of a US-based IT services company for a purchase price of approximately $13.7 million in cash, of which
$8.6 million was paid in 2010, $2.1 million was paid in 2011, $1.6 million was paid in January 2012, and the remaining $1.4 million will be paid in 2013.
Acquisition of insurance software provider by Sapiens. During 2010, Sapiens acquired Harcase (Canada), a Toronto-based provider of software
solutions to the North American insurance industry that developed and delivered RapidSure – an innovative policy administration solution for the P&C market.
We (via Sapiens) are now offering this product in North America, Israel and in the United Kingdom. The consideration for the acquisition was $3 million, of
which $2.2 million was paid in cash.
Sale of nextSource. In October 2009, we completed the sale of our 100% shareholding in our subsidiary nextSource, for an aggregate consideration of
approximately $12 million, of which $8 million was paid in cash and the remainder was paid through the release to us of $4 million of bank deposits that were
previously pledged in favor of banks to secure obligations of nextSource.
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Purchase of TACT. In 2009, Matrix completed its payment of the remaining $6.4 million of the purchase price for its acquisition of all of the shares of
TACT Computers and Systems Ltd., or TACT, for which the aggregate consideration was $12.5 million.
B.
Business Overview
General
We are a global IT solutions and services company based in Israel. We are principally engaged in providing software consulting services, developing
proprietary software products and providing computer-based business solutions. We deliver our solutions in over 50 countries worldwide to customers with
complex IT services needs, including a number of “Fortune 1000” companies. We operate through our three directly held subsidiaries: Matrix, Magic Software
and Sapiens. The following is a description of the areas of our business activity:
IT Services
We design and implement IT solutions which improve the productivity of our customers’ existing IT assets. In delivering our IT services, we at times
use proprietary software developed by members of the Formula Group. We provide our IT services across the full system development life cycle, including
definition of business requirements, system analysis, technical specifications, coding, testing, training, implementation and maintenance. We perform our
projects on-site or at our own facilities.
Proprietary Software Solutions
We design, develop and market proprietary software solutions for sale in selected niche markets worldwide. We regularly seek opportunities to invest
in or acquire companies with attractive proprietary software solutions under development which we believe to have market potential. The majority of our
investments and acquisitions in this area have been in companies with products beyond the prototype stage. In addition, from time to time, we selectively invest
in companies with proven technology where we believe we can leverage our experience to enhance product positioning and increase market penetration. We
provide our management and technical expertise, marketing experience and financial resources to help bring these products to market. We also assist the
members of our group to form teaming agreements with strategic partners to develop a presence in international markets.
The Formula Group
Formula is the parent company of subsidiaries and affiliates, which, as noted above, we refer to collectively (together with Formula) as the Formula
Group. We currently hold a controlling interest in our subsidiaries through our equity holdings. We appoint a majority of the boards of directors of our
subsidiaries through our equity holdings. We provide our subsidiaries with our management, technical expertise and marketing experience to help them to
penetrate their respective markets.
We direct the overall strategy of our subsidiaries. While our subsidiaries each have independent management, we monitor the growth of our
subsidiaries through our active involvement in the following matters:
·
strategic planning;
· marketing policies;
·
·
·
·
senior management recruitment;
investment and budget policy;
financing policies; and
overall ongoing monitoring of each subsidiary’s performance.
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We promote the synergy and cooperation among our subsidiaries by encouraging the following:
·
·
·
·
transfer of technology and expertise;
leveling of human resources demand;
combining skills for specific projects;
formation of critical mass for large projects; and
· marketing and selling the Formula Group’s products and services to its collective customer base.
We, through our subsidiaries, offer a wide range of integrated IT solutions and services, and design, develop and market proprietary software solutions
for sale in selected niche markets, both in Israel and worldwide.
Our Subsidiaries
Matrix
Matrix IT Ltd. is one of Israel’s leading integration and information technology services companies (based on Dun’s 100 “Israel’s Largest Enterprises
2009”). Matrix employs approximately 6,000 software, hardware, integration and training personnel, which provide advanced IT services to more than 500
customers in the Israeli market. Matrix also markets in Israel software and hardware products manufactured by a broad range of international manufacturers.
The solutions, services and products supplied by Matrix are designed to improve Matrix’s customers’ competitive capabilities, by providing a response
to their unique IT needs in all levels of their operations.
Areas of Operation
Matrix is active in four principal areas: software solutions and services; software distribution; infrastructure solutions and hardware products; and
training and assimilation.
Software solutions and services. Matrix provides software services, software development projects, outsourcing, integration of software systems and
services – all in accordance with its customers’ specific needs. Matrix also provides upgrading and expansion of existing software systems. Matrix software
solutions and services include the following components: (i) development of dedicated customer software systems; (ii) customization of software developed by
third parties to provide a response to customers’ requirements; (iii) systems assimilation; (iv) offshore and domestic services, mainly for software developments
and quality assurance and software testing; and (iv) integration of all or part of these components. The scope of work invested in each individual component
varies from one customer to the other, based on each customer’s specific requirements.
Software distribution. Matrix’s operations in this area include sales and support of software products of leading worldwide vendors in various
categories, such as:
customer relationship management (CRM);
master data management (MDM);
information technology systems management and business service management products (ITSM);
open-source software products for operating systems (Red-Hat Linux) and application servers (J-Boss);
virtualization software products, product for content management;
software products for business intelligence (BI);
data warehouses and extract/transform/load (ETL);
software products for integration;
database systems;
software products for knowledge management; and
software development and testing tools.
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Infrastructure solutions and hardware products. Matrix’s operations in this area include: (i) supply of infrastructure solutions for computer and
communication systems; (ii) sales and marketing of PCs, laptops, Intel servers, peripheral equipment, operating systems, servers and workstations operating on
Unix and Linux operating systems, and sales and marketing of storage and backup systems for computer systems such as HP and IBM; and (iii) maintenance for
computers and peripheral equipment, lab services and a help desk.
Training and assimilation. Matrix operates technological training and qualification centers providing advanced professional courses for hi-tech
personnel, training and assimilation of computer systems, applications courses, professional training, soft-skills training and training for capital market
operations.
Matrix provides solutions, services and products primarily to the following four market sectors (or verticals): banking and finance, telecommunications
and defense, commerce and manufacturing, and the public and security forces sector.
Matrix offers to each market sector a broad range of solutions and services, customized for the specific needs of that sector. Matrix operates dedicated
departments, each of which specializes in a particular sector. Each such department supplies customers in that sector with a product basket providing a response
to most of its IT requirements, based on an in-depth business understanding of the challenges which are typical to that sector. Matrix established a separate
division for each particular market sector, which manages the operations relating to that sector.
Specialization in the various sectors is reflected in the applications, professional and marketing aspects of each sector. Accordingly, the professional
and marketing infrastructure required to support each market sector is developed to address such sector’s specific needs.
In addition to the four sector-based areas of operations, Matrix operates three horizontal divisions providing specialist services for all of the different
sectors of operations as follows:
Expertise centers – Matrix operates about 21 “expertise centers”, in areas such as: service oriented architecture (SOA), Mobility (Mobile
Technology), CRM, enterprise resource planning (ERP), Cloud Computing, Open Source and E-Business. These expertise centers are based on market
concept, which is targeted to yield significant added value to the company’s customers, including: group of professionals that are focused and have
expertise in the related technologies, hands-on experience and expertise in the related technologies, methodologies, and best practices; and
A strategic consulting center that provides customers with diverse consultation services on topics such as organization, strategy, business
development and technological development.
Inspection and related professional services under an offshore/”nearshore” model- In the context of its offshore activities, Matrix conducts IT-
related activities, including content development, quality assurance, maintenance, indexing and related activities that are performed in a specific region
or country where such activities can be conducted most inexpensively. Matrix offers its customers these types of solutions, whether via its “nearshore”
Talpiot project and Babcom Centers Ltd. or via its offshore solutions that are based on its development centers in Bulgaria and Macedonia. Periods of
economic cautiousness (such as the present time) provide an added incentive for these types of inexpensive economic solutions. This trend is likely to
expand Matrix’s operations in these areas in the context of its “Matrix Global” activities.
Customers
Matrix’s customers include large and medium size enterprises in Israel, including commercial banks, loan and mortgage banks, telecommunications
services providers, cellular operators, credit card companies, leasing companies, insurance companies, security agencies, satellite operators, hi-tech companies,
the Israeli Defense Force and government ministries and public agencies and media and publishing entities.
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Magic Software
Magic Software Enterprises Ltd. develops, markets, sells and supports application platform and business and process integration solutions and offers IT
professional services,. Magic Software’s products and services are available through a global network of regional offices, independent software vendors, system
integrators, distributors and value-added resellers, as well as original equipment manufacturers and consulting partners in approximately 50 countries. In
addition to Magic Software’s proprietary technology, Magic Software also provides its customers with maintenance and technical support, as well as
professional services and training.
Magic Software Technology
With over 28 years of experience in assisting software and enterprise companies worldwide to produce and integrate their business applications and
thousands of customers and partners, Magic Software and its technology enable enterprises to accelerate the process of building and deploying business
software applications that can be rapidly customized to meet current and future needs. Magic Software’s development and deployment and integration products
empower customers to dramatically improve their business performance and return on investment by enabling the affordable and rapid delivery and integration
of business applications, systems and databases.
Magic Software’s technology gives partners and customers the ability to create any type of business applications, leverage existing information
technology resources, enhance business ability, and focus on core business priorities to gain maximum return on their existing and new IT investments. Magic
Software’s technology also provides the option to deploy Magic Software’s software capabilities in the cloud, hosted in web services cloud computing
environment.
Magic Software is known for its meta data driven, code-free approach, allowing users to focus on business logic rather than technological
requirements. This approach forms the driving principle of both the uniPaaS application platform and the iBOLT business and process integration platform.
Both uniPaaS and iBOLT enable enterprises to accelerate the process of building and deploying applications that can be rapidly customized and integrated with
existing systems:
uniPaas Application Platform is a comprehensive Rich Internet Application (RIA) platform that supports all deployment models including
client/server, RIA, mobile applications, cloud and Software-as-a-Service (SaaS). It uses a single development paradigm that handles all ends of the
application development and deployment process including client and server partitioning and the inter-communicating layers and offers customers
the power to choose how they deploy their applications, whether full client or web; on-premise or on-demand; in the cloud or behind the corporate
firewall; software or mobile or SaaS; global or local.
By offering technology transparency, uniPaaS allows customers to focus on their business requirements rather than technological means. The
uniPaaS’ single development paradigm significantly reduces the time and costs associated with the development and deployment of client/server as
well as cloud-based applications including RIA, mobile and SaaS. Application owners can leverage their initial investment when moving from full
client mode to cloud mode, and eventually modify these choices as the situation requires. Furthermore, enterprises can use cloud based uniPaaS
applications in a SaaS model and still have their databases in the privacy of their own data centers. It also supports most hardware and operating
system environments such as Windows, Unix, Linux and AS/400, as well as multiple databases. In addition, uniPaaS is interoperable with .NET and
Java technologies.
iBOLT Business and Process Integration platform is a graphical, wizard-based code-free solution delivering fast and simple integration and
orchestration of business processes and applications. iBOLT allows businesses to more easily view, access, and leverage their mission-critical
information, delivering true enterprise application integration, or EAI, business process management system, or BPM, and SOA infrastructure.
iBOLT allows integration and interoperability of diverse solutions, including cloud-based business applications integration with on-premise as well
as legacy applications, in a quick and efficient manner.
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Increasing the usability and life span of existing legacy and other IT systems, iBOLT allows fast enterprise application integration (EAI),
development and customization of diverse applications, systems and databases, assuring rapid return on invested capital and time-to-market,
increased profitability, and customer satisfaction. Magic Software offers special editions of iBOLT targeted at specific enterprise application vendor
ecosystems, such as SAP Business One, SAP R/3, SAP Business All-in-One, Oracle, JD Edwards, IBM i series, Salesforce.com, Lotus Notes and
Lotus Domino, HL7 and Microsoft Dynamics CRM. These special editions contain specific features and pricing tailored for these market segments.
Magic Software also offers its AppBuilder Application Platform, which assists businesses in the manner described below:
AppBuilder Application Platform is a development environment used for managing, maintaining and reusing the complicated applications needed by
large businesses. This platform, which was acquired by Magic Software in December 2011 from BluePhoenix, provides the infrastructure for
enterprises worldwide, across several industries, with applications running millions of transactions daily on legacy systems. Enterprises using
AppBuilder can build, deploy and maintain large-scale custom-built business applications for years without being dependent on any particular
technology. The deployment environments include IBM mainframe, Unix, Linux and Windows. AppBuilder is intended to increase productivity and
agility in the creation and deployment of enterprise class computing.
AppBuilder follows the 4GL development paradigm and implements a model driven architecture approach to application development. It provides
the ability to design an application at the business modeling level and generate forward to an application
Magic Software addresses the critical business needs of companies so that they are able to quickly respond to changing market forces and demands.
Robust business solutions are created, deployed and maintained with unrivaled productivity and time-to-market results. Magic Software’s metadata driven
application platform is aligned with modern application development theories and enables developers to create better solutions in less time and with fewer
resources.
Magic Software’s technology and solutions are especially in demand when time-to-market considerations are critical, budgets are tight, integration is
required with multiple platforms or applications, databases or existing systems and business processes, as well as for RIA, cloud computing and SaaS.
Magic Software’s technologies are used by a wide variety of developers, integrators and solution providers, which can generally be divided into two
sectors: in the first sector are those performing in-house development (corporate IT departments) and in the second sector are Magic Software providers (MSPs),
including large system integrators and smaller independent developers, and value added resellers that use Magic Software’s technology to develop or provide
solutions to their customers. MSPs who are packaged software publishers use Magic Software’s technology to write standard packaged software products that
are sold to multiple clients, typically within a vertical industry sector or a horizontal business function.
Services/ Professional Services. Magic Software provides a broad range of consulting and software development project management services to
customers developing, deploying and integrating distributed applications.
Magic Software offers fee-based consulting services in connection with installation assurance, application audits and performance enhancement,
application migration and application prototyping and design. Consulting services are aimed at both generating additional revenues and ensuring successful
implementation of uniPaaS and iBOLT projects through knowledge transfer.
Services are offered as separately purchased add-on packages or as part of an overall software development and deployment technology framework.
Over the last several years, Magic Software has built upon its established global presence to form business alliances with Magic Software providers who use
Magic Software technology to develop solutions for their customers, and with distributors to deliver successful solutions in focused market sectors.
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Maintenance. Magic Software offers its customers annual maintenance contracts providing for unspecified upgrades and new versions and
enhancements for its products on a when-and-if-available basis for an annual fee.
Technical Support. Magic Software’s in-house technical support group provides training and post-sale support. Magic Software offers an online
support system for the MSPs, providing them with the ability to instantaneously enter, confirm and track support requests via the Internet. This system supports
MSPs and end-users worldwide. As part of this online support, Magic Software offers a Support Knowledge Base tool providing the full range of technical
notes and other documentation including technical papers, product information, most answers to most common customer queries and known issues that have
already been reported.
Training. Magic Software conducts formal and organized training on its development tools. Magic Software develops courses, pertaining to its
principal products, uniPaaS and iBOLT, and provides trainer and student guidebooks. Course materials are available both in traditional, classroom courses and
as web-based training modules, which can be downloaded and studied at a student’s own pace and location. The courses and course materials are designed to
accelerate the learning process, using an intensive technical curriculum in an atmosphere conducive to productive training.
Vertical Solutions
Magic Software also develops, markets, and supports, through its subsidiaries and affiliates, vertical applications, including telecom infrastructure
technologies, cargo handling and installation service.
Coretech Consulting Group LLC and Fusion Solutions LLC and Coretech Consulting’s 88%-owned subsidiary Xsell Resources Inc. provide a broad
range of IT consulting and staffing services in the areas of infrastructure design and delivery, application development, technology planning and
implementation services, as well as supplemental staffing services to a wide variety of companies including Fortune 1000 companies. They have
extensive knowledgeable of and have worked with virtually all types of telecom infrastructure technologies in wireless and wireline as well as in the
areas of infrastructure design and delivery, application development, project management, technology planning and implementation services. Their
client list includes major global telecoms, OEM’s and engineering, furnish and installation service companies. The technical personnel that they
provide generally supplement the in-house capabilities of their clients. Their approach is to make available to their clients a broad range of technical
personnel to meet their requirements rather than focusing on specific specialized areas.
Hermes Logistics Technologies Ltd. develops and markets a comprehensive solution for air cargo handling, which is designed to increase
productivity, improve efficiency and reduce costs. Hermes provides physical cargo handling, and cargo documentation through customs, seamless
electronic data interchange (EDI) communications, special handling for dangerous goods, track and trace and security to billing. The Hermes system
provides a complete and integrated solution encompassing all physical handling, documentation and messaging requirements, including real-time
warehousing, service level profiling /monitoring, end-user guidance, tariff profiling, analysis, audits and reports. Hermes continued to develop the
Hermes software solution for air cargo handling. HERMES Release 4.5 which was released in the beginning of 2012, incorporates new and
advanced functionalities. During 2011 HERMES Release 4.0 was deployed by new and existing customers across the globe, and the deployment of
Release 4.5 to new and existing customers will continue throughout 2012. Development of HERMES Release 5.0, which will commence in the
second half of 2012, will focus on a technology platform migration.
Markets and Customers
Magic Software markets and sells its products and related services in more than 50 countries worldwide. Industries that are significantly represented in
the Magic Software’s community include finance, insurance, government, health care, logistics, manufacturing media, retail and telecommunications.
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Sapiens
Sapiens International Corporation N.V. is a global provider of innovative software solutions for the financial services industry, with a focus on
insurance. Within the insurance industry Sapiens offer solutions to two of the major lines of insurance business –L&P and P&C. Sapiens’ suite of insurance
solutions, are built to meet the core business needs of large and small insurance carriers, aligns IT with business demands for speed, flexibility and efficiency.
Sapiens’ solutions are supplemented by its methodology and consulting services, which address the complex issues related to the life-cycle of enterprise
business applications.
On August 21, 2011, Sapiens completed the acquisition of all of the share capital of each of FIS and IDIT. The acquisition of FIS enables Sapiens to
offer an enhanced solution for the L&P market, growing Sapiens’ customer base in the insurance market world-wide and strengthening Sapiens’ position in the
market as a leading provider of L&P core software solutions, The acquisition of IDIT, a provider of insurance software solutions which focuses on the P&C
market allows Sapiens to offer its customers and partners a more extensive product portfolio in the industry and strengthens Sapiens’ presence in the P&C
insurance market.
Sapiens offers a broad range of insurance software solutions intended to address all of the core systems IT needs of insurance companies. Its expanded
insurance solutions offer a broad range of advantages to the operational environment of its customers' organizations Sapiens solutions are based on a model-
driven architecture (they incorporate SOA) and are engineered to provide streamlined secure processing, while maintaining total platform independence and
system reliability. Sapiens solutions are component-based and scalable in order to help their customers implement Sapiens software into their environments to
better serve their clients and quickly respond to insurance regulatory changes that result in a rapid time to market. Sapiens component-based solutions allow its
customers to use Sapiens solutions and expand them across different markets and regulatory regimes as they expand their businesses using our components
customized for local requirements and integrated through the common base platform.
Sapiens markets its solutions globally through its direct sales force and through marketing alliances with global IT solutions providers to optimize their
offerings and extend market reach, where applicable. Sapiens has been working closely with IBM for over 20 years at what IBM refers to as a “Premier
Business Partner” level. This cooperation is executed through close technology and marketing cooperation. Sapiens is qualified as a Microsoft Gold certified
partner. These alliances enable Sapiens to reach a broader target market, enhance their delivery capabilities and leverage best technologies.
Sapiens’ Business Solutions for the Insurance Industry
Sapiens has focused its resources on delivering solutions to help the insurance industry become more agile in the face of the new and rapidly changing
business environment, while simultaneously reducing IT costs.
Sapiens RapidSure is a component-based software solution, designed specifically to meet the business requirements of P&C insurance providers,
mainly in North America. Utilizing leading edge technologies, RapidSure provides insurance carriers with a flexible, comprehensive and advanced software
solution. RapidSure supports a broad range of general, personal and commercial lines of business, including homeowners, fleet insurance, and specialty lines
insurance products, and is designed to handle complex policies and high volume transactions. Built on SOA, which facilitates ease of integration with existing
corporate and external systems such as ACORD and ISO, RapidSure offers a unique, modern user experience which allows insurance carriers to improve
efficiency through ease of operation.
RapidSure’s rules-based policy administration, along with its robust product configuration engine, are intended to enable market agility and rapid
deployment of insurance products. Its Point of Sale Portal was developed to assist insurers in offering their products through multiple distribution channels,
including directly through the internet and through insurance agents, to allow insurers to keep up with market trends.
IDIT is a component based software solution, addressing the specific needs of general insurance carriers for traditional insurance, direct insurance,
bank assurance and brokers markets, primarily in Europe and in the Asia-Pacific markets. IDIT integrates multiple front office and back office processes,
including insurance product design, policy administration, underwriting, call center, remote users and partners, backed by fully secured internet-based
capabilities. It supports a broad range of general, personal and commercial lines of business, including homeowners, fleet insurance, health insurance, medical
insurance and term-life insurance products.
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ALIS is a comprehensive L&P software solution for individual, group and worksite insurance products. ALIS incorporates all activities along the life,
pensions and annuities lifecycle - from marketing through underwriting, insurance billing and servicing, to claims workbench and exit processing. It is a
modular system and its functional components include all that is necessary for L&P insurers to manage their business.
Sapiens eMerge™, is a rules-based model-driven architecture, that enables the creation of mission critical core enterprise applications with little or no
coding using agile methodologies. Sapiens’ technology allows customers to achieve legacy modernization and enterprise application integration.
Sapiens DECISION is a business decision management solution developed for the financial services market, including mortgage banks, investment
banks and insurers. DECISION automatically structures business logic and then maps it directly to the organization’s rules engine data. DECISION can elicit,
organize and manage business logic including all related business decisions & business rules. It seamlessly integrates with any BPM or business rules engine
(BRE) and features a comprehensive graphical modeling component and robust enterprise grade software architecture.
In addition, DECISION enables business users to take full control of the entire process of decision management, including data quality management,
allowing them to easily develop and deploy new policies and methodologies for optimal decision making.
DECISION is powered by The Decision Model, which is a business logic framework developed by Knowledge Partners International, or KPI, that
connects business and technology and is rapidly becoming the standard for business decision management. Sapiens has a long term agreement with KPI that
allows Sapiens to embed The Decision Model in the DECISION solution in exchange for royalty payments to KPI.
Sapiens has formulated Sapiens INSIGHT™, a suite of modular business software solutions that helps insurance carriers adapt to the dynamic
insurance marketplace.
Sapiens collaborates with its customers to tailor Sapiens INSIGHT™ solutions to achieve the unique operational performance goals of each
organization. In addition, Sapiens has executed independent projects for the insurance market, providing enhanced information access and visibility to empower
the sales, agent and broker communities, thus accelerating transaction processing for improved customer service and business efficiency.. Sapiens INSIGHT™
is designed for the Property and Casualty insurance markets, and the Life and Pension insurance markets. For each of Sapiens’ geographic target markets –
namely the United States, Europe and Israel, Sapiens has invested in matching its solutions to the specific market needs, focusing on market standards and
regulations. These solutions can be further customized to match specific legacy systems and business requirements, while providing pre-configured
functionality.
Sapiens INSIGHT™ solutions include the following:
Sapiens INSIGHT™ Suite for Reinsurance enables P&C/general insurance carriers and brokers to handle all of their P&C/general reinsurance activities
on a single platform, with full financial control and auditing support. By incorporating in-depth, fully automated functions readily adaptable to each
company's business procedures, Insight for Reinsurance provides full financial control of the reinsurance practice, including support for all auditing
requirements and regulatory reporting. Insight for Reinsurance provides end-to-end processing, including: setup of and definition of the reinsurance
program; import of premium and claims transactions; automatic allocation of premiums and claims to reinsurance contracts; performing required
calculations; and production of statements & accounts to reinsurance participants.
Sapiens INSIGHT™ Suite for Property & Casualty is a comprehensive solution that meets the core business needs of a P&C carrier, in certain states in
the United States. Insight for P&C can be customized to meet the particular business demands at the insurer level and the regulatory needs at the state
level.
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Sapiens INSIGHT™ for Life & Pensions is a powerful and comprehensive framework-based life and pensions solution that serves companies
administering life insurance, pension funds, health insurance and saving plans. Sapiens INSIGHT™ for Life & Pensions is a dynamic, customizable
solution, and can be easily accommodated to administer changes in processes. It is fully web-enabled, prepared to utilize the advantages of the Internet
and intranets.
Due to the separation between business logic, data access logic and presentation logic, applications developed for a particular computing platform and
database are seamlessly portable to other supported computing platforms and databases. The platform-independent nature of Sapiens’ solutions allows them to
be scaled according to the needs of the organization. Sapiens eMerge™ has proven to be extremely scalable, allowing the daily execution of hundreds of
millions of business rules for tens of thousands of concurrent users.
Services
IT Services. Sapiens provides customers with specialized IT services in many areas, including project management, application
development/enhancements, application platform porting services and general technical assistance. Sapiens’ personnel, consisting of over 700 employees, work
with the customer for the duration of the entire project through proven methodologies on a fixed price and time basis. These IT services can be classified as: (a)
consulting services that are not deemed essential to the functionality of the license (such as migration of applications to various platforms and technical
assistance with project management); and (b) consulting services that involve significant implementation and customization of Sapiens’ software to customer
specific requirements.
Outsourcing of Application Maintenance. Sapiens’ outsourcing services performed on its customers’ applications were developed from Sapiens’ strong,
long-term relationships with its customers. Sapiens is currently servicing multi-year outsourcing contracts involving mission-critical systems. The outsourcing
engagements are typically performed with a combination of onsite and offsite services as required by Sapiens’ customers.
Sales and Marketing
Our subsidiaries conduct sales and marketing efforts primarily through division or product managers. In certain cases, the companies devote sales
managers who, aided by their staffs, are responsible for ongoing customer relationships, as well as sales to new customers. In addition, the IT services
companies participate in competitive bidding processes, primarily for turnkey and government projects, as well as large IT services contracts. Our subsidiaries
attend trade shows and exhibitions in the high technology markets, while further supplementing their sales efforts with space advertising and products and
services listing in appropriate directories. In addition, our subsidiaries organize user group meetings for their customers, where new products and services are
highlighted. We typically enter into strategic alliances and intend to pursue acquisitions in order to penetrate various international markets and promote sales of
our proprietary software solutions in international markets.
Revenues Distribution Among Operating Segments
The following table summarizes our revenues generated by each of our directly held subsidiaries. Sapiens revenues reflect only the period starting
January 1, 2011 until August 21, 2011, the date on which Formula lost its controlling interest in Sapiens.
2011
2010
2009
Matrix
(U.S. dollars in thousands)
Magic
Sapiens
Total
491,144
409,272
368,498
36,515
52,235
45,698
113,328
88,578
55,350
640,987
550,085
469,546
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Geographical Distribution of Revenues
The following table summarizes our revenues classified by geographic regions of our customers, for the periods indicated:
Israel
International:
United States
Other
Total
Competition
(U.S. dollars in thousands)
Year ended December 31,
2010
2009
2011
368,230
412,922
38,862
62,298
73,075
63,697
486,025
92,484
62,108
469,390
549,694
640,617
The markets for the IT products and services we offer are rapidly evolving, highly competitive and fragmented, and, in some cases, present only low
barriers to entry. Our ability to compete successfully in IT services markets depends on a number of factors, like breadth of service offerings, sales and
marketing efforts, service, pricing, and quality and reliability of services. The principal competitive factors affecting the market for the proprietary software
solutions include product performance and reliability, product functionality, availability of experienced personnel, price, ability to respond in a timely manner to
changing customer needs, ease of use, training and quality of support.
We face competition, both in Israel and internationally, from a variety of companies, including companies with significantly greater resources than us
who are likely to enjoy substantial competitive advantages, including:
•
•
•
•
•
longer operating histories;
greater financial, technical, marketing and other resources;
greater name recognition;
well-established relationships with our current and potential clients; and
a broader range of products and services.
As a result, our competitors may be able to respond more quickly to new or emerging technologies or changes in customer requirements. They may
also benefit from greater purchasing economies, offer more aggressive product and service pricing or devote greater resources to the promotion of their products
and services. In addition, in the future, we may face further competition from new market entrants and possible alliances between existing competitors. We also
face additional competition as we continue to penetrate international markets. As a result, we cannot assure you that the products and solutions we offer will
compete successfully with those of our competitors. Furthermore, several software development centers worldwide offer software development services at much
lower prices than we do. Due to the intense competition in the markets in which we operate, software products prices may fluctuate significantly. As a result, we
may have to reduce the prices of our products.
Matrix’s principal competitors in the domestic Israeli market are Israeli IT services companies and systems integrators, the largest of which are Ness
Technologies Inc., Team-Malam, Taldor, Aman, the Elad Group, Yael and One. Matrix’s international competitors in the Israeli marketplace include HP and
IBM. These international competitors often use local subcontractors to provide personnel for contracts performed in Israel. Most of these international entities
are also business partners of Matrix.
Magic Software’s principal competitors in the market for the uniPaaS technology are Cordys, IBM, Microsoft, Adobe, Oracle, Progress Software, SAP
Sybase and Antenna. The principal competitors in the market for Magic Software’s iBOLT Business and Process Integration Suite are Microsoft BizTalk,
Informatica, TIBCO, Talend, Pervasive and Software AG.
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Sapiens’ competitors in the market for insurance solutions differ based on the size, geography and line of business in which it operates. Some of its
competitors offer a full suite of services, while others only offer one module; some operate in specific (domestic) geographies, while others operate on a global
basis. The delivery models utilized by competitors vary, as some competitors keep delivery in house while others use IT outsourcing or business process
outsourcing methods.
Examples of Sapiens’ competitors are:
Global software providers, with their own IP, such as Accenture-Duck Creek, Oracle Admin Server or Guidewire
Local/domestic software vendors, such as CCS in the Netherlands, BSB in West Europe, OneShield in the US or TIA in the Nordics and
certain Central European Countries
In addition, Sapiens faces competition from internal IT departments, who often prefer to develop solutions in-house.
Seasonality
Even though not reflected in our financial results, traditionally, the first and third quarters of the fiscal year have tended to be slower quarters for some
of our subsidiaries and the industries in which they operate. The first quarter usually reflects a decline following an active fourth quarter during which
companies seek to complete transactions and projects and utilize budgets before the end of the fiscal year. The relatively slower third quarter reflects reduced
activities during the summer months in many of the regions where our customers are located. In addition, our quarterly results are also influenced by the number
of working days in each period. During the Jewish holidays period (typically at the end of the third quarter and beginning of the fourth quarter), when the
number of working days is lower, we tend to see a decrease in our revenues.
Raw Materials
We are not dependent on raw materials.
Software Development
The software industry is generally characterized by rapid technological developments, evolving industry standards and customer requirements, and
frequent innovations. In order to maintain technological leadership, we engage in ongoing software development activity through our subsidiaries, aimed both at
introducing new commercially viable products addressing the needs of our customers on a timely basis, as well as enhancing and customizing existing products
and services. This effort includes introducing new supported programming languages and database management systems; improving functionality and
flexibility; and enhancing ease of use. We work closely with current and potential end-users, our strategic partners and leaders in certain industry segments to
identify market needs and define appropriate product enhancements and specifications.
Intellectual Property Rights
We rely on a combination of trade secret, copyright and trademark laws and non-disclosure agreements, to protect our proprietary know-how. Our
proprietary technology incorporates processes, methods, algorithms and software that we believe are not easily copied. Despite these precautions, it may be
possible for unauthorized third parties to copy aspects of our products or to obtain and use information that we regard as proprietary. We believe that, because of
the rapid pace of technological change in the industry generally, patent and copyright protection are less significant to our competitive position than factors such
as the knowledge, ability and experience of our personnel, new product development and ongoing product maintenance and support.
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Regulatory Impact
Sapiens’ operations in the global insurance industry are heavily subject to government regulation, and are constantly changing as a result of regulatory
changes. Insurance companies must comply with regulations such as the Sarbanes-Oxley Act in the United States, Solvency II in Europe and other directives
regarding transparency. In addition, many individual countries have increased supervision over local insurance companies.
In Europe, regulators and insurers have been very active and creative, 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). Such increased activity would generally tend to have a positive impact on the demand for Sapiens’ 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 the past two years, many of them are now looking for innovative, modern replacements to meet the regulatory changes and
the demanding market trends.
Matrix’s IT business is positively impacted by regulatory reform and other regulatory changes with respect to banking, insurance and
telecommunications in Israel, as such reform and changes create demand for specific IT solutions, often in a set, short time frame. In particular, regulation on
large financial institutions operating in the Israeli financial market was increased in the aftermath of the economic crisis of late 2008 and 2009, as a means of
reducing the risk associated with the activities of such financial institutions. Israeli legislation passed in 2010 and 2011 increased the Israeli Securities
Authority’s regulatory supervision over the offering of investment services and the ongoing administration of investment portfolios. This increased the demand
for Matrix’s solutions for entities that became subject to such supervision. Banks’ entry into the sphere of offering advice with respect to pension, insurance and
other financial products has also generated demand for Matrix’s IT solutions, given the increased supervision of the Israeli Securities Authority that is triggered
by such activities, although the pace at which such demand has grown has been relatively slower. Enhanced disclosure requirements for banks and financial
institutions in the Israeli market have also been generating demand for new IT solutions that Matrix offers.
Magic Software’s business has not been impacted to a material extent by government regulations.
C.
Organizational Structure
Formula is the parent company of the Formula Group.
The following table presents certain information regarding the control and ownership of our significant subsidiaries, as of May 1, 2012.
Subsidiary
Matrix IT Ltd.
Magic Software Enterprises Ltd.
Sapiens International Corporation N.V.
Country of Incorporation
Israel
Israel
Curaçao
Percentage
of Ownership
50.0%
51.3%
52.2%
The ordinary shares of Magic Software and the ordinary shares of Sapiens are traded on the NASDAQ Global Select Market and on the NASDAQ
Global Market, respectively and on the TASE, and the ordinary shares of Matrix are traded on the TASE.
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D.
Property, Plants and Equipment
Our corporate headquarters, as well as the research and development and sales and marketing headquarters of Magic Software, are located in Or-
Yehuda, Israel, a suburb of Tel Aviv. In December 2009, Magic Software entered into a lease with respect to its and our office space, constituting
approximately 39,300 square feet, which expires in December 2014. Magic Software has an option to terminate the lease agreement upon six months prior
written notice.
In addition, Magic Software leases office space in the United States, Europe, Asia and South Africa.
Matrix leases approximately 100,000 square feet of office space in Herzlia, Israel pursuant to a lease which expires on October 31, 2015. Matrix’s
facility in Herzlia serves as Matrix’s corporate headquarters. In addition, Matrix leases an aggregate of approximately 427,000 square feet of office space in
several other locations in Israel and in the United States.
Sapiens leases approximately 80,000 square feet of office space in Israel, of which 45,000 square feet of office space is located in Rehovot, Israel,
which space serves as Sapiens’ corporate headquarters as well as its core research and development center. Sapiens’ lease of its corporate headquarters in Israel
expires in July 2015; Sapiens has an option to terminate the lease early, upon 180 days prior notice, on each of July 31, 2012, 2013 and 2014.
Sapiens also leases office space in the United States, Canada, the United Kingdom, Belgium and Japan.
Various subsidiaries of our three principal subsidiaries also lease office space in various locations worldwide.
We believe that our properties are adequate for our present use of them. If in the future we require additional space to accommodate our growth, we
believe that we will be able to obtain such additional space without difficulty and at commercially reasonable prices.
As described in “Subsidiary Commitments” in Item 5.B below, while some of our subsidiaries have incurred liens on leased vehicles, leased equipment
and other assets in favor of leasing companies, neither Formula nor any subsidiary has encumbered the real property that it uses in its operations.
We furthermore believe that there are no environmental issues that encumber our use of our facilities.
ITEM 4A. UNRESOLVED STAFF COMMENTS
Not applicable.
ITEM 5. OPERATING AND FINANCIAL REVIEW AND PROSPECTS
Overview
Formula is the parent company of subsidiaries and affiliates, referred to collectively as the Formula Group. We are principally engaged, via our three
publicly traded subsidiaries—Magic Software, Matrix and Sapiens—in which we hold a controlling interest (with respect to Sapiens, our controlling interest
was lost from August 21, 2011 (upon Sapiens’ acquisition of FIS and IDIT) until January 27, 2012), in providing software consulting services, developing
proprietary software products and providing computer-based business solutions. We consolidate the results of operations of our subsidiaries in which we hold a
controlling interest. We do not conduct independent operations at our parent company level. Our operating results are, and have been, directly influenced by the
consolidation and cessation of consolidation of our subsidiaries, which could cause significant fluctuations in our consolidated operating results. Consequently,
we believe that period-to-period comparisons of our results of operations are not necessarily meaningful and you should not rely on these comparisons as
indications of our future performance.
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In accordance with ASC 360 Property, Plant and Equipment and following the sale of our entire shareholdings in nextSource, in October 2009,
nextSource’s results of operations, assets and liabilities were classified as attributed to discontinued operations, and, as a result, we reclassified certain figures in
our financial statements relating to prior periods.
We recognize revenues in two categories: the delivery of software services and the delivery of proprietary software solutions and related services. All
of our subsidiaries, including IT services companies and proprietary software solutions companies, recognize revenues from the delivery of software services,
and most of them recognize revenues in both revenue categories. For ease of reference, we have separated our subsidiaries into these categories in accordance
with the category in which each subsidiary has earned most of its revenues (although each type of revenue is nevertheless recorded according to actual revenue
type, rather than based on strict, subsidiary-demarcated categories).
Our functional and reporting currency
Beginning in 2007, Formula changed its functional currency from NIS to the dollar, since most of its assets are denominated in dollars. This was done
based on indicators in accordance with ASC 830 Foreign Currency Matters. Prior to 2007, Formula operated primarily in the economic environment of the NIS
and its functional currency was the NIS. The functional currencies of Formula’s subsidiaries are the NIS and the dollar. Formula has elected to use the dollar as
its reporting currency for all years presented.
Formula translates the financial statements of its subsidiary whose functional currency is the local currency into dollars under the principles described
in ASC 830. Assets and liabilities have been translated at period-end exchange rates. Results of operations have been translated at the exchange rate at the dates
on which those transactions occurred or at an average rate. We present differences resulting from translation under shareholders’ equity in the item
“Accumulating Other Comprehensive Income (Loss)”. In the consolidation, Formula presents the financial statements of subsidiaries whose functional currency
is the dollar at the original amounts.
Critical Accounting Policies
In preparation of our financial statements, we are required to make certain estimates, judgments and assumptions that we believe are reasonable based
upon the information available. These estimates and assumptions affect the reported amounts of assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the periods presented. The significant accounting policies which we believe are the most critical to aid in
fully understanding and evaluating our reported financial results include the following:
Revenue Recognition
We derive our revenues primarily from the sale of IT services which also includes: software products including maintenance, integration and
infrastructure, training and deployment. In addition, we generate revenues from the sale of software licenses, related maintenance and technical support as well
as related IT professional services.
Revenues from IT services are generally recognized in accordance with ASC 605, “Revenue Recognition” and Staff Accounting Bulletin No. 104,
“Revenue Recognition in Financial Statements” when IT service is provided and the following criteria are met: persuasive evidence of an arrangement exists, no
significant obligations remain for us, collection of the resulting receivable is reasonably assured, and the fees are fixed or determinable.
Revenues derived from software license agreements are recognized in accordance with ASC 985-605 “Software – revenue recognition” when
persuasive evidence of an arrangement exists, delivery has occurred, the vendor’s fee is fixed or determinable, no further obligation exists and collectability is
probable.
Maintenance and support includes annual maintenance contracts providing for unspecified upgrades for new versions and enhancements on a when-
and-if-available basis for an annual fee. The right for an unspecified upgrade for new versions and enhancements on a when-and-if-available basis do not
specify the features, functionality and release date of future product enhancements for the customer to know what will be made available and the general
timeframe in which it will be delivered.
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As required by ASC 985-605, we allocate revenues to the software component of its multiple-element arrangements using the residual method when
vendor specific objective evidence, or VSOE, of fair value exists for the undelivered elements of the support and maintenance agreements. VSOE is based on
the price charged when an element is sold separately or renewed. Under the residual method, the fair value of the undelivered elements is deferred and the
remaining portion of the arrangement fee is allocated to the delivered elements and recognized as revenue.
Maintenance and support revenue included in multiple element arrangements is deferred and recognized on a straight-line basis over the term of the
maintenance and support agreement.
Revenues from professional services provided on an hourly basis are recognized as the services are rendered.
Certain of the software license sales may also include significant implementation and customization services with respect to such sales which are
deemed essential to the functionality of the license. In addition, we also provide consulting services that are not deemed essential to the functionality of the
license, as well as outsourcing IT services.
Revenues from license fees that involve significant implementation and customization of our software to customer specific requirements and which are
considered essential to the functionality of the product are generated by fixed-price or time-and-materials contracts. Revenues generated by fixed-price contracts
are recognized in accordance with ASC 605-35 “Revenue Recognition - Construction-Type and Production-Type Contracts” using the percentage-of-
completion method. The percentage-of-completion method is used when the required services are quantifiable, based on the estimated number of labor hours
necessary to complete the project, and under that method revenues are recognized using labor hours incurred as the measure of progress towards completion.
Estimates of total project requirements are based on prior experience of customization, delivery and acceptance of the same or similar technology, and
are reviewed and updated regularly by our management. After delivery, if uncertainty exists about customer acceptance of the software, license revenue is not
recognized until acceptance. Provisions for estimated losses on uncompleted contracts are made in the period in which such losses are first determined, in the
amount of the estimated loss on the entire contract. As of December 31, 2010 and 2011, no estimated losses were identified.
Revenues from time-and-materials contracts for which we are reimbursed for labor hours at fixed hourly billing rates are recognized as revenues as the
services are provided.
We generally do not grant a right of return to our customers. When a right of return exists, revenue is deferred until the right of return expires, at which
time revenue is recognized, provided that all other revenue recognition criteria are met.
Deferred revenue includes unearned amounts received under maintenance and support contracts and amounts received from customers but not yet
recognized as revenues.
Software Development Costs
Research and development costs incurred in the process of software development before establishment of technological feasibility are charged as
expenses as incurred. Costs incurred subsequent to the establishment of technological feasibility are capitalized according to the principles set forth in ASC 985-
20, “Costs of Software to be Sold, Leased or Marketed.” Our technological feasibility is established upon completion of a detailed program design or working
model.
Capitalized software development costs are amortized on a product by product basis. Amortization is performed by applying the greater of the amount
computed by using the: (i) ratio of current gross revenues from sales of the software to the total of current and anticipated future gross revenues from sales of
that software, or (ii) straight-line method over the estimated economic useful life of the product (three to five years).
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We assess the recoverability of our intangible assets on a regular basis by determining whether the amortization of the asset over its remaining
economic useful life can be recovered through undiscounted future operating cash flows from the specific software product sold. During the years ended
December 31, 2009, 2010 and 2011, no impairment losses were identified.
During the years ended December 31 2009, 2010 and 2011, capitalized software development costs of our consolidated subsidiaries aggregated to $ 6.8
million, $ 9.0 million and $ 8.3 million, respectively, and amortized capitalized software development costs of our consolidated subsidiaries aggregated to $ 8.4
million, $ 9.1 million and $ 6.3 million, respectively.
Goodwill
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.
We perform our annual goodwill impairment test with respect to our reporting units (we had seven and six reporting units as of December 31, 2010 and
2011, respectively) at December 31 of each year, or more often if indicators of impairment are present. As required by ASC 350, the impairment test is
accomplished using a two- step approach. The first step of the goodwill impairment test compares the fair value of each reporting unit with its carrying amount,
including goodwill. Upon applying this step (‘step 1’) to each reporting unit, if we determine that the fair value exceeds the carrying value of the reporting unit
net assets, goodwill is considered not impaired, and no further testing is required. If the carrying value exceeds the fair value of the reporting unit, then the
implied fair value of goodwill is determined by subtracting the fair value of all of the identifiable net assets from the fair value of the reporting unit. An
impairment loss is recorded for the excess, if any; of the carrying value of goodwill over its implied fair value (‘step 2’).
As of December 31, 2010 and 2011, the estimated fair values of our reporting units ranged from 5% to 112% and from 10% to 28%, respectively,
above their carrying values, thereby obviating the need to proceed to step 2 of the goodwill impairment test under ASC 350.
During the years ended December 31, 2009, 2010 and 2011, no impairment was required for any of our reporting units.
Impairment in Value of Long-Lived Assets and Intangible Assets Subject to Amortization
Our long-lived assets and identifiable intangibles are reviewed for impairment in accordance with ASC 360, “Property, Plant and Equipment”
whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of an asset to be held and
used is measured by a comparison of the carrying amount of the asset to the future undiscounted cash flows expected to be generated by the asset. If an asset is
considered to be impaired, the impairment to be recognized is measured by the amount by which the carrying amount of the asset exceeds the fair value of the
asset. During each of the years ended December 31, 2009, 2010 and 2011, no impairment was identified.
Share-Based Compensation
We account for share-based compensation in accordance with ASC 718, “Compensation - Stock Compensation.” ASC 718 requires a company to
estimate the fair value of equity-based payment awards on the date of grant using an option-pricing model. The value of the portion of the award that is
ultimately expected to vest is recognized as an expense over the requisite service periods in a company’s consolidated statements of income. We recognize
compensation expenses for the value of our awards, which have graded vesting based on the accelerated method over the requisite service period of each of the
awards, net of estimated forfeitures.
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Until 2009, certain of our subsidiaries used the Black-Scholes option-pricing model to measure the fair values of the awards at the date of grant, which
requires the application of a number of assumptions, of which the most significant are the expected stock price volatility, and the expected option term.
Commencing in 2010, all of our subsidiaries but one used the Binomial Lattice option-pricing model, or the Binomial model, to measure the fair value of
awards at the date of grant. Expected volatility was calculated based upon actual historical stock price movements over the most recent periods ending on the
grant date, for a period equal in duration to the expected option term. The expected option term represented the period that the subsidiary stock option was
expected to be outstanding and was determined based on historical experience with similar options, giving consideration to the contractual terms of the stock
option.
Stock based compensation expenses recorded on our subsidiaries’ level are presented in non-controlling interests.
Business Combinations
We account for business combinations in accordance with ASC 805, “Business Combinations.” ASC 805 requires recognition of assets acquired,
liabilities assumed, and non-controlling interest in the acquiree at the acquisition date, measured at their fair values as of that date. ASC 805 also requires the
fair value of acquired in-process research and development to be recorded as intangibles with indefinite lives (until their completion or abandonment),
contingent consideration to be recorded on the acquisition date, and restructuring and acquisition-related deal costs of the acquirer to be expensed as incurred.
Any excess of the fair value of net assets acquired over purchase price and any subsequent changes in estimated contingencies are to be recorded in earnings. In
addition, changes in valuation allowance related to acquired deferred tax assets and in acquired income tax position are to be recognized in earnings.
Fair Value Measurement
We account for certain assets and liabilities at fair value under ASC 820, “Fair Value Measurements and Disclosures.” Fair value is an exit price,
representing the amount that would be received upon the sale of an asset or paid for the transfer of a liability in an orderly transaction between market
participants. As such, fair value is a market-based measurement that should be determined based on assumptions that market participants would use in pricing
an asset or a liability. As a basis for considering such assumptions, ASC 820 establishes a three-tier value hierarchy, which prioritizes the inputs used in the
valuation methodologies in measuring fair value:
Level 1 - Observable inputs that reflect quoted prices (unadjusted) for identical assets or liabilities in active markets;
Level 2 - Significant other observable inputs based on market data obtained from sources independent of the reporting entity; and
Level 3 - Unobservable inputs which are supported by little or no market activity (for example, cash flow modeling inputs based on assumptions).
The fair value hierarchy also requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring
fair value. We categorized each of our fair value measurements in one of these three levels of hierarchy.
Assets and liabilities measured at fair value on a recurring basis are comprised of marketable securities, foreign currency forward contracts and
contingent consideration of acquisitions.
The carrying amounts reported in our balance sheet for cash and cash equivalents, short term bank deposits, trade receivables, other accounts
receivable, short-term bank credit, trade payables and other accounts payable approximate their fair values due to the short-term maturities of such instruments.
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Variable Interest Entities
ASC 810, “Consolidation” provides a framework for identifying Variable Interest Entities, or VIEs, and determining when a company should include
the assets, liabilities, non-controlling interests and results of activities of a VIE in its consolidated financial statements.
Our assessment of whether an entity is a VIE and the determination of the primary beneficiary is judgmental in nature and involves the use of
significant estimates and assumptions. These include, among others, forecasted cash flows, their respective probabilities and the economic value of certain
preference rights. In addition, such assessment also involves estimates of whether a group entity can finance its current activities, until it reaches profitability,
without additional subordinated financial support.
Effective as of January 1, 2010, we apply updated guidance for the consolidation of VIEs. This guidance provides for a qualitative approach, based on
which consolidation is appropriate if an enterprise has both (1) the power to direct the economically significant activities of the entity and (2) the obligation to
absorb losses of, or the right to receive benefits from, the entity that could potentially be significant to the VIE. Determination as to whether an enterprise should
consolidate a VIE is required to be performed continuously, due to changes to existing relationships or future transactions that may affect that determination.
The U.S. based consulting and staffing services business that was acquired by Magic Software through one of its wholly owned subsidiaries on January
17, 2010 is considered to be a VIE. Magic Software is the primary beneficiary of the VIE, as a result of the fact that it holds the power to direct the activities of
the acquired business, which significantly impacts its economic performance, and has the right to receive benefits accruing from the acquired business.
Income Taxes
We and our subsidiaries account for income taxes in accordance with ASC 740, “Income Taxes.” This codification prescribes the use of the “asset and
liability” method, whereby deferred tax assets and liability account balances are determined based on the differences between financial reporting and tax bases
of assets and liabilities and are measured using the enacted tax rates and laws that will be in effect when the differences are expected to reverse. We and our
subsidiaries provide a valuation allowance, if necessary, to reduce deferred tax assets to their estimated realizable value. Deferred tax assets and liabilities are
classified as current or non-current according to the expected reversal dates.
We and our subsidiaries utilize a two-step approach for recognizing and measuring uncertain tax positions accounted for in accordance with an
amendment of ASC 740 “Income Taxes.” Under the first step we and our subsidiaries evaluate a tax position taken or expected to be taken in a tax return by
determining whether the weight of available evidence indicates that it is more likely than not that, based on its technical merits, the tax position will be sustained
on audit, including resolution of any related appeals or litigation processes. The second step is to measure the tax benefit as the largest amount that is more than
50% likely to be realized upon ultimate settlement with the tax authorities.
Recently Issued Accounting Pronouncements
In September 2011, the FASB issued ASU 2011-08, “Testing Goodwill for Impairment,” codified in ASC 350, “Intangibles – Goodwill and Other.”
The accounting standard update is intended to simplify how a company tests goodwill for impairment. The amendment allows a company to first assess
qualitative factors to determine whether it is necessary to perform the two-step quantitative goodwill impairment test. A company is no longer required to
calculate the fair value of a reporting unit unless it determines, based on a qualitative assessment, that it is more likely than not that its fair value is less than its
carrying amount. This accounting standard update is effective beginning January 1, 2012. We do not expect the adoption of this new guidance to have a material
impact on our financial statements.
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In June 2011, the FASB issued ASU 2011-05, “Presentation of Comprehensive Income,” codified in ASC 220, “Comprehensive Income.” The
guidance requires a company to present the total of comprehensive income, the components of net income, and the components of other comprehensive income
either in a single continuous statement of comprehensive income or in two separate but consecutive statements. The guidance also eliminates the option to
present the components of other comprehensive income as part of the statement of equity. In December 2011, the FASB issued ASU 2011-12, deferring the
effective date for amendments outlined in ASU 2011-05. We are still evaluating whether to present other comprehensive income in a single continuous
statement of comprehensive income or in two separate but consecutive statements.
In May 2011, the FASB issued ASU 2011-04, “Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S.
GAAP and IFRS,” codified in ASC 820 “Fair Value Measurement.” The guidance requires an entity to provide a consistent definition of fair value to ensure
that the fair value measurement and disclosure requirements are similar between U.S. GAAP and International Financial Reporting Standards. The guidance
changes certain fair value measurement principles and enhances the disclosure requirements, particularly for Level 3 fair value measurements, and will become
effective for our company beginning January 1, 2012. We do not expect the adoption of this new guidance to have a material impact on our financial statements.
A.
Operating Results
Year Ended December 31, 2011 Compared to Year Ended December 31, 2010
Revenues. Revenues in 2011 increased by 16.5%, from $549.7 million in 2010 to $640.6 million in 2011. Revenues from the two categories of our
operations were as follows: revenues from the delivery of software services increased by 21.7%, from $451.2 million in 2010 to $549.3 million in 2011, and
revenues from the sale of our proprietary software products and related services decreased by 7.3%, from $98.5 million in 2010 to $91.3 million in 2011. The
increase in software services revenues was attributable to (i) the growth in Matrix's revenues, from $409.3 million in 2010 to $491.1 million in 2011, which was
mainly due to the increase in demand for Matrix’s professional services, and business combinations, and (ii) the increase in Magic Software’s software services
revenues from $42.3 million to $58.6 million, which was mainly due to the increase in demand for Magic’s professional services in the U.S, and was
furthermore partially attributable to the favorable impact of the appreciation of the NIS against the dollar (from a representative exchange rate of NIS 3.733 per
US$1 in 2010 to NIS 3.578 per US$1 in 2011) on translation into dollars of Magic’s revenues generated in NIS. The decrease in revenues from proprietary
software products and related services was primarily due to (x) the deconsolidation of Sapiens’ results from our consolidated results as of August 21, 2011,
upon Sapiens’ acquisition of IDIT and FIS, pursuant to which the shares issued by Sapiens resulted in Formula’s loss of its controlling interest in Sapiens,
which reduced our revenues from Sapiens from $52.2 million in 2010 to $36.5 million in 2011, which was partially offset by (y) an increase in Magic
Software’s revenues from software products and related services from $46.3 million in 2010 to $54.8 million in 2011, reflecting the increased demand for its
solutions mainly in Japan and Europe.
The following table presents our revenues by geographical market for the years ended December 31, 2010 and 2011:
Israel
International:
United States
Other
Total
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Year ended December 31,
2010
2011
412,922
486,025
73,075
63,697
92,484
62,108
549,694
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Cost of Revenues. Cost of revenues consists primarily of wages, personnel expenses, subcontracting and other related expenses, amortization of
capitalized software, and hardware and other materials costs. Cost of revenues increased by 19.5% from $412.5 million in 2010 to $492.9 million in 2011,
mainly due to the accompanying growth in revenues in 2011 and furthermore partially due to the increase in cost caused by the appreciation of the NIS against
the dollar (from a representative exchange rate of NIS 3.733 per US$1 in 2010 to NIS 3.578 per US$1 in 2011), which increased the U.S. dollar recorded
amount of cost of revenues that were incurred in NIS. As a percentage of revenues, costs of revenues in 2010 and 2011 were 75.0% and 77%, respectively. Our
software services sales are generally characterized by a lower gross margin than sales of proprietary software solutions and related services. The cost of
revenues for proprietary software solutions and related services decreased to $38.8 million in 2011 from $46.3 million in 2010, mainly due to the
deconsolidation of Sapiens’ results from our consolidated results as of August 21, 2011, upon Formula’s loss of its controlling interest in Sapiens. The cost of
revenues for software services increased from $366.2 million in 2010 to $454.1 million in 2011, mainly due to the increase in cost of revenues for software
services provided by Matrix and Magic Software. Cost of revenues for the years ended December 31, 2010 and 2011 include insignificant amounts of stock-
based compensation recorded under ASC 718.
Research and Development Costs, net. Research and development, or R&D, costs consist primarily of wages and related expenses and, to a lesser
degree, consulting fees that we pay to employees and independent contractors, respectively, engaged in research and development. Research and development
costs, net, consist of research and development costs, gross, less capitalized software costs. Research and development costs, gross, decreased to $13.4 million
in 2011 from $14.7 million in 2010, mainly due to the deconsolidation of Sapiens’ results from our consolidated results as of August 21, 2011, upon Formula’s
loss of its controlling interest in Sapiens, which reduced our research and development costs attributable to Sapiens from $8.7 million in 2010 to $6.1 million in
2011. This decrease was partially offset by increases in research and development costs that were (i) incurred by Magic Software, from $5.7 million in 2010 to
$7.3 million in 2011, which reflected Magic Software’s increased research and development activity in 2011, primarily related to its investment in its mobile
and cloud offerings, and (ii) attributable to the appreciation of the NIS against the dollar in 2011, which increased the dollar value of NIS denominated R&D
costs that were incurred. In 2011, we capitalized software costs of $8.3 million, compared to $9.0 million in 2010. Capitalization of software costs in 2011 was
attributable to our subsidiaries engaged in providing proprietary software solutions (i.e., Magic Software and Sapiens). Research and development costs, net,
decreased from $5.5 million in 2010 to $5.1 million in 2011, mainly due to the factors described above with respect to the corresponding decrease in gross
research and development costs in 2011. As a percentage of revenues, research and development costs, net, decreased from 1.0% in 2010 to 0.8% in 2011,
reflecting an insignificant change. Research and development costs, net, in 2011 were attributable primarily to Magic Software and Sapiens, which had research
and development costs, net of approximately $2.1 million and $3.0 million, respectively. Amortization of capitalized software costs was $6.3 million in 2011
and $9.1 million in 2010, which amounts were included in cost of revenues. Research and development costs for the years ended December 31, 2010 and 2011
include insignificant amounts of stock-based compensation recorded under ASC 718.
Selling, General and Administrative Expenses. Selling, general and administrative expenses consist primarily of salaries, severance and related
expenses, travel expenses, selling expenses, rent, utilities, depreciation, amortization and professional fees. Selling, general and administrative expenses
increased to $93.3 million in 2011 from $84.5 million in 2010. As a percentage of revenues, selling, general and administrative expenses were 14.6% in 2011
and 15.4% in 2010. The increase in the absolute amount of selling, general and administrative expenses was primarily attributable to the increase of
amortization of intangible assets associated with business combinations completed in 2010 and 2011, which accounted for $3.4 million and $1.1 million of
selling, general and administrative expenses in 2010 and 2011, respectively, an increase in selling and marketing activities in 2011and increased bonus and
commission fees paid in 2011 as compared to 2010 as a result of increased sales in 2011. Selling, general and administrative expenses for the years ended
December 31, 2010 and 2011 include $1.4 million and $4.6 million, respectively, of stock-based compensation recorded under ASC 718.
Other Income, net. We recorded other income of $0.2 million in 2011, as compared to other expenses of $0.2 million in 2010, each representing
insignificant amounts.
Operating Income. Our operating income increased from $47.0 million in 2010 to $49.5 million in 2011. The increase in operating income was
attributable to the increases in revenues of Magic Software and Matrix, which was offset in part by the impact of the deconsolidation of Sapiens’ results from
our consolidated results as of August 21, 2011, upon Formula’s loss of its controlling interest in Sapiens. These factors can be quantified as follows: Matrix had
operating income of $35.0 million in 2011 compared to $33.5 million in 2010; Magic Software had operating income of $14.7 million in 2011 compared to $9.3
million in 2010; and Sapiens had operating income of $4.4 million in 2011, reflecting results from January 1, 2011 through August 21, 2011, compared to $6.7
million in the entire year ended December 31, 2010.
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Financial Expenses, net. Financial expenses, net increased from $4.4 million in 2010 to $6.5 million in 2011. Financial expenses, net, is influenced by
various factors, including our cash balances, loan balances, outstanding debentures, changes in market value of trading marketable securities, changes in the
exchange rate of the NIS against the dollar, changes in the exchange rate of the dollar against the Euro and changes in the Israeli consumer price index, or CPI.
The increase in financial expenses, net in 2011 was mainly attributable to a decrease in the gains that we recognized from trading marketable securities in 2011
relative to 2010, and to the absence in 2011 of positive changes in the value of our trading marketable securities that had reduced our net financial expenses in
2010, and is furthermore attributable to our having incurred, in 2011, $0.7 million of impairment costs related to available for sale marketable securities.
Taxes on Income. Taxes on income decreased to $5.7 million in 2011 from $6.5 million in 2010. The decrease in taxes on income in 2011was mainly
attributable to an increase in deferred tax assets of Matrix in an amount of $1.4 million, which was caused by the cancelation of the previously scheduled
gradual reduction in the corporate tax rates in Israel, under which the rate had been scheduled to be gradually reduced to 18% by 2016, and its replacement with
an increase of the corporate tax rate to 25%, which was effective in 2012,.
Gain derived from deconsolidation of subsidiary and Equity in Gains (Losses) of Affiliate Companies, net. On August 21, 2011, following Sapiens’
acquisition of all of the outstanding shares of FIS and IDIT, which was mainly financed by the issuance of Sapiens shares, we lost our controlling interest in
Sapiens, resulting in the deconsolidation of Sapiens’ results from our financial statements. As a result of Sapiens’ acquisition of FIS and IDIT, our interest in
Sapiens was diluted from 75.6% to 42.2%. The gain recognized in respect of our loss of control of Sapiens amounted to $25.8 million. From August 21, 2011
until December 31, 2011, Sapiens’ results of operations were reflected in our results via the equity method of accounting.
Our equity in gains of affiliates, net was $37,000 in 2011, compared to equity in losses of $(1.1 million) in 2010. Our equity in gains of affiliates in
2011 was attributable primarily to our equity in gains of Sapiens, which was offset almost completely by our equity in losses of Matrix.
Net Income Attributable to Non-Controlling Interests. Net income attributable to non-controlling interests includes the non-controlling interests held by
other shareholders in our consolidated companies which are not wholly owned by Formula during each of the periods indicated. Net income attributable to non-
controlling interests was $20.2 million in 2011, compared to $16.6 million in 2010. This increase was primarily attributable to the improvement in the results of
all of our subsidiaries.
Year Ended December 31, 2010 Compared to Year Ended December 31, 2009
Revenues. Revenues in 2010 increased by 17.1%, from $469.4 million in 2009 to $549.7 million in 2010. Revenues from the two categories of our
operations were as follows: revenues from the delivery of software services increased by 27.9% from $380.6 million in 2009 to $451.2 million in 2010, and
revenues from the sale of proprietary software solutions increased from $88.8 million in 2009 to $98.5 million in 2010. The increase in software services
revenues was attributable to the growth in Matrix's revenues in 2010 from $368.5 million to $409.3 million, mainly from the increase in demand for
professional services, and to the increase in Magic Software’s revenues from $12.2 million to $42.3 million mainly due to the acquisition of a U.S.-based IT
professional services business by Magic Software’s subsidiary in January 2010, and furthermore partially due to the favorable impact of the appreciation of the
NIS against the dollar (from a representative exchange rate of NIS 3.9326 per US$1 in 2009 to NIS 3.7330 per US$1 in 2010) on the dollar- recorded value of
revenues generated in NIS. The increase in proprietary software solutions revenues was primarily due to the increase in Sapiens' revenues from $45.7 million to
$52.2 million, reflecting the increased demand for its solutions, partially in light of the improved world economic environment, which influenced such demand
43
Date: 05/14/2012 02:55 PM User: djohnson
Client: v313119_FORMULA SYSTEMS (1985) LTD_20-F
Vintage Filings
Project: v313119 Form Type: 20-F
File: v313119_20f.htm Type: 20-F Pg: 44 of 171
Cost of Revenues. Cost of revenues consists primarily of wages, personnel expenses, subcontracting and other related expenses, amortization of
capitalized software, and hardware and other materials costs. Cost of revenues increased by 17.1% from $352.3 million in 2009 to $412.5 million in 2010,
mainly due to the accompanying growth in revenues in 2010. As a percentage of revenues, costs of revenues in 2010 and 2009 were 75.0% and 75.0%,
respectively. Our software services sales are generally characterized by a lower gross margin than sales of proprietary software solutions. The cost of revenues
for proprietary software solutions increased to $46.3 million in 2010 from $43.1 million in 2009. The cost of revenues for software services increased from
$309.2 million in 2009 to $366.2 million in 2010, mainly due to the increase in cost of revenues of software services in Matrix and Magic.
Research and Development, costs, net. Research and development costs consist primarily of wages and related expenses and, to a lesser degree,
consulting fees we pay to independent contractors engaged in research and development. Research and development costs, net, consist of research and
development costs, gross, less capitalized software costs. Research and development costs, gross, increased to $14.7 million in 2010 from $11.2 million in
2009, mainly due to the increase in research and development activity in 2010, as partially offset by the devaluation of the NIS against the dollar in 2010, which
reduced the dollar value of NIS denominated R&D expenses. In 2010, we capitalized software costs of $9.0 million compared to $6.8 million in 2009.
Capitalization of software costs in 2009 was attributable to our subsidiaries engaged in providing proprietary software solutions (i.e., Magic Software and
Sapiens). Research and development costs, net, increased from $4.4 million in 2009 to $5.5 million in 2010, mainly due to the factors described with respect to
the corresponding increase in gross research and development costs in 2010. As a percentage of revenues, research and development costs, net, increased from
0.9% in 2009 to 1.0% in 2010, reflecting an insignificant change. Research and development costs, net, in 2010 were attributable primarily to Magic Software
and Sapiens which had research and development costs, net of approximately $2.1 million and $3.3 million, respectively. Amortization of capitalized software
costs was $9.1 million in 2010 and $8.4 million in 2009, which amounts were included in cost of revenues.
Selling, General and Administrative Expenses. Selling, general and administrative expenses consist primarily of salaries, severance and related
expenses, travel expenses, selling expenses, rent, utilities, depreciation, amortization and professional fees. Selling, general and administrative expenses in 2010
increased to $84.4 million compared to $77.3 million in 2009. As a percentage of revenues, selling, general and administrative expenses were 15.4% in 2010
and 16.5% in 2009. The increase in selling, general and administrative expenses was primarily attributable to the increase in selling and marketing activities and
bonus and commissions fees as a result of increased sales in 2010.
Other Income, net. We recorded other expenses of $0.2 million in 2010 and other income of $1.7 million in 2009. Our other income in 2009 was
mainly attributable to the sale of Magic Software’s office building in December 2009.
Operating Income. Our operating income increased from $37.0 million in 2009 to $47.0 million in 2010. The increase in operating income was
attributable to the revenues increase of all of our subsidiaries, as follows: Matrix had operating income of $33.5 million in 2010 compared to $28.1 million in
2009; Magic Software had operating income of $9.3 million in 2010 compared to $4.3 million in 2009; and Sapiens had operating income of $6.7 million in
2010 compared to $5.3 million in 2009.
Financial Expenses, net. Financial expenses, net increased from $0.3 million in 2009 to $4.4 million in 2010. Financial expenses, net, is influenced by
various factors, including our cash balances, loan balances, outstanding debentures, changes in market value of trading marketable securities, changes in the
exchange rate of the NIS against the dollar, changes in the exchange rate of the dollar against the Euro and changes in the Israeli CPI. The increase in financial
expenses, net in 2010 was mainly attributable to (i) gains from trading marketable securities related to the significant increase in value of our trading marketable
securities that we experienced in 2009, as well as (ii) gain from swap deals entered into by Matrix in 2009, each of which reduced our net financial expenses in
2009, but which were absent in 2010, thereby leading to increased net financial expenses in 2010.
Taxes on Income. Taxes on income decreased to $6.5 million in 2010 compared to $8.3 million in 2009. The decrease in taxes on income in 2010 was
mainly attributable to the decrease in deferred tax liability of Matrix.
Equity in Gains (Losses) of Affiliate Companies, net. Our equity in losses of affiliates, net was $1.1 million in 2010, compared to $335,000 in 2009.
Equity in losses of affiliates was attributable primarily to our equity in losses of Matrix.
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Date: 05/14/2012 02:55 PM User: djohnson
Client: v313119_FORMULA SYSTEMS (1985) LTD_20-F
Vintage Filings
Project: v313119 Form Type: 20-F
File: v313119_20f.htm Type: 20-F Pg: 45 of 171
Net Income Attributable to Non-Controlling Interests. Net income attributable to non-controlling interests includes the non-controlling interests held by
other shareholders in our consolidated companies which are not wholly owned by Formula during each of the periods indicated. Net income attributable to non-
controlling interests in 2010 was $16.6 million compared to $14.0 million in 2009. This increase was primarily attributable to the improvement in the results of
all of our subsidiaries.
Impact of Inflation and Currency Fluctuations on Results of Operations
Most of our revenues and expenses from our software services are denominated in NIS. For financial reporting purposes, we translate all non-U.S.
dollar denominated transactions into dollars using the average exchange rate over the period during which the transactions occur, in accordance with U.S.
GAAP. Therefore, we are exposed to the risk that the devaluation of the NIS relative to the U.S. dollar may reduce the revenue growth rate for our software
services in dollar terms. The representative average exchange rate of the NIS to the dollar in 2011, 2010 and 2009, as reported by the Bank of Israel, was NIS
3.5781 per US$1, NIS 3.7330 per US$1 and NIS 3.9326 per US$1, respectively. On the other hand, a significant portion of our revenues from proprietary
software products and related services is currently denominated in Euros, Japanese Yen and the British Pound, whereas a substantial portion of our expenses
relating to those products, principally salaries and related personnel expenses, are denominated in NIS. As a result, the devaluation of the Euro or those other
currencies relative to the dollar (as was the case in 2010 due to the financial crises in several European Union countries, during which the Euro depreciated by
approximately 4.7% relative to the U.S. dollar, based on the change in the average exchange rate from2009 to 2010) reduces the revenue growth rate for our
proprietary software products and related services in dollar terms, thereby adversely affecting our operating results. At the same time, the appreciation of the
NIS relative to the dollar, which occurred in 2010 and 2011 (based on the representative exchange rates in 2009, 2010 and 2011), increases the relative value of
the NIS-denominated operating costs related to our proprietary software product revenues, and, therefore, adversely affects our profitability and harms our
competitive position in the markets.
Since most of our expenses are incurred in NIS, the dollar cost of our operations also rises as a result of any increase in the rate of inflation in Israel, to
the extent that such inflation is not offset, or is only offset on a lagging basis, by the devaluation (if any) of the NIS against the dollar during a relevant period of
time. The Israeli rate of inflation amounted to 4.0%, 2.6% and 2.2% for the years ended December 31, 2009, 2010 and 2011, respectively, thereby compounding
the impact of the appreciation of the NIS relative to the dollar in 2010 and 2011, and partially offsetting the depreciation of the NIS relative to the dollar in
2009, and thereby adversely affecting our U.S. dollar measured results of operations in each such year.
An increase in the rate of inflation in Israel may also have a material adverse effect on our financial results by increasing our financial expenses, as
certain of our credit facilities are denominated in NIS and are generally linked to the Israeli CPI, so to the extent that the CPI rises so will our financial
expenses.
To date, we have not engaged in significant currency hedging transactions. In the future, we may enter into more or larger currency hedging
transactions to decrease the risk of financial exposure from fluctuations in the exchange rate of the NIS, Euro, Japanese Yen or British Pound against the dollar,
and from increases in the Israeli inflation rate. However, we cannot assure you that these measures will adequately protect us from the adverse effects of those
fluctuations.
Following is a summary of the most relevant monetary indicators for the reported periods:
For the year ended
December 31,
2009
2010
2011
Inflation rate in Israel
%
4.0
2.6
2.2
Devaluation
(appreciation) of NIS
against the US$*
%
Devaluation
(appreciation) of Euro
against the US$*
%
(0.7)
(6.0)
7.7
(3.3)
8.0
3.3
*Reflects the change in the exchange rate from January 1 to December 31 of the relevant year, rather than the difference in the average exchange rate over the
course of each year relative to the previous year.
45
Date: 05/14/2012 02:55 PM User: djohnson
Client: v313119_FORMULA SYSTEMS (1985) LTD_20-F
Vintage Filings
Project: v313119 Form Type: 20-F
File: v313119_20f.htm Type: 20-F Pg: 46 of 171
Effective Corporate Tax Rates in Israel
Corporate Tax
Following the tax reform enacted in 2003, an Israeli company is subject to tax on its worldwide income. An Israeli company that is subject to Israeli
taxes on the income of its non-Israeli subsidiaries will receive a credit for income taxes paid by the subsidiary in its country of residence, subject to certain
conditions. Israeli tax payers are also subject to tax on income from a controlled foreign corporation, according to which an Israeli company may become
subject to Israeli taxes on certain income of a non-Israeli subsidiary, if such subsidiary’s primary source of income is passive income (such as interest,
dividends, royalties, rental income, or capital gains).
On January 1, 2006, an additional tax reform took place relating primarily to profits from investments. The main goal of the reform was to unify the tax
rates applicable to profits from investments, such as interest, capital gains, and dividends. In addition, under the reform, the tax rate applicable to companies was
reduced to 26% in 2009, 25% in 2010 and 24% in 2011. Under an amendment to the Israeli Income Tax Ordinance, 1961, or the Tax Ordinance, enacted in July
2009, the corporate tax rate was scheduled to be further reduced to 23% in 2012, 22% in 2013, 21% in 2014, 20% in 2015 and 18% in 2016. On December 5,
2011, the Knesset (Israel’s parliament) passed the Law for Change in the Tax Burden (Legislative Amendments) (Taxes), 2011, or the Tax Burden Law, which,
among other changes, canceled the previously scheduled further gradual reduction in the corporate tax rate in Israel and increased such rate to 25% beginning in
2012. Accordingly, the real capital gains tax rate was increased to 25% as of the start of 2012.
While the regular rate of corporate tax to which Israeli companies are subject to in 2012 is 25%, the effective tax rate payable by a company that
derives income from an Approved Enterprise, a Benefited Enterprise or a Preferred Enterprise, as discussed further below, may be considerably less. Our
international operations are taxed at the local effective corporate tax rate in the countries of our subsidiaries’ residence. In the future we may derive an
increasing percentage of our income from operations outside of Israel. If that occurs, our effective tax rate may increase. However, we expect that this increase
will be offset by carried forward accumulated losses of consolidated companies.
Beginning as of 2010, Israeli companies are subject to the regular corporate tax rate on their capital gains. In 2009, Israeli companies were generally
subject to capital gains tax at a rate of 25% for such gains (other than capital gains from the sale of listed securities derived by companies with respect to which
the provisions of Section 6 of the Israeli Income Tax Law (Inflationary Adjustments) 5745-1985, or the Inflationary Adjustments Law, or the provisions of
Section 130A of the Tax Ordinance, applied immediately before the 2006 tax reform came into force, which were subject to the regular corporate tax rate).
Taxation of Non-Israeli Subsidiaries Held by an Israeli Parent Company
Non-Israeli subsidiaries of an Israeli parent company are generally subject to tax in their countries of residence under tax laws applicable to them in
such countries. Such subsidiaries could also be subject to Israeli corporate tax on their income if they were to be managed and controlled from Israel. In such
case, double taxation could ensue unless an applicable tax treaty provides applicable rules for relief from double taxation or such relief is available under
internal law.
An Israeli parent company may also be required to include in its income on a current basis, as a deemed dividend, certain income derived by its
subsidiaries under the Israeli Controlled Foreign Corporation rules, regardless of whether such income is distributed or not. Under these rules, a non-Israeli
subsidiary is considered to be a controlled foreign corporation, if, among other things, a majority of the subsidiary’s means of control are held by Israeli
residents, most of its revenues or income is passive (such as interest, dividends, royalties, rental income or income from capital gains) and such income is taxed
at a rate that does not exceed 20%. An Israeli parent company that is subject to Israeli taxes on such deemed dividend income, may generally receive a credit for
foreign taxes paid by its subsidiaries in their country of residence and for deemed foreign taxes to be withheld upon the actual distribution of such income.
46
Date: 05/14/2012 02:55 PM User: djohnson
Client: v313119_FORMULA SYSTEMS (1985) LTD_20-F
Vintage Filings
Project: v313119 Form Type: 20-F
File: v313119_20f.htm Type: 20-F Pg: 47 of 171
Law for the Encouragement of Capital Investments, 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 as an “Approved Enterprise”, is entitled to benefits. These benefits may include cash grants from the Israeli government and tax benefits, based upon,
among other things, the location of the facility in which the investment is made or the election of the grantee. Certain of the companies in the Formula Group
have been granted Approved Enterprise status under the Investment Law. Accordingly, subject to compliance with applicable requirements, the portion of our
subsidiaries’ undistributed income derived from our Approved Enterprise programs shall be exempt from corporate tax for a period of two to four years,
followed by five to eight years with reduced tax rate of 25% on income derived from Approved Enterprise investment programs. In order to qualify for these
incentives, an Approved Enterprise is required to comply with the requirements of the Investment Law. We cannot assure you that these companies will comply
with all of the applicable requirements, that these companies will obtain approval for additional Approved Enterprises, that the provisions of the Investment
Law will not change, or that the minimum requirement of foreign shareholding portion will be reached or maintained for each subsequent year. We furthermore
note that as described below, as of the current time, we have not yet reaped any tax benefits from our Approved Enterprise programs, as the benefit periods for
our subsidiaries under these programs have not yet commenced, and we cannot guarantee that such benefit periods will ever commence.
The Investment Law has been amended several times over the last years, with the two most significant changes effective as of April 1, 2005 (which we
refer to as the 2005 Amendment), and as of January 1, 2011 (which we refer to as the 2011 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, yet companies entitled to benefits under the Investment Law as in effect up to
January 1, 2011 may choose to continue to enjoy such benefits, provided that certain conditions are met, or elect instead to forego such benefits and elect the
benefits of the 2011 Amendment.
The following discussion is a summary of the Investment Law prior to its amendments as well as the relevant changes contained in the new legislation.
Tax benefits for Approved Enterprises approved before April 1, 2005
Under the Investment Law prior to its amendment, a company that wished to receive benefits had to receive an approval from the Investment Center of
the Israeli Ministry of Industry, Trade and Labor, which we refer to as the Investment Center. Each certificate of approval for an Approved Enterprise relates to
a specific investment program in the Approved Enterprise, delineated both by the financial scope of the investment and by the physical characteristics of the
facility or the asset.
An Approved Enterprise may elect to forego any entitlement to the grants otherwise available under the Investment Law and, instead, participate in an
alternative benefits program. Our significant Israeli subsidiary, Magic Software, as well as the Israeli subsidiary of another of our significant subsidiaries,
Sapiens, which all have Approved Enterprise programs in place, have chosen to receive the benefits through the alternative benefits track with respect to their
respective programs. Under the alternative benefits track, a company’s undistributed income derived from an Approved Enterprise will be exempt from
corporate tax for a period of between two and ten years from the first year of taxable income, depending upon the geographic location within Israel of the
Approved Enterprise. The benefits commence on the date in which that taxable income is first earned. Upon expiration of the exemption period, the Approved
Enterprise is eligible for the reduced tax rates otherwise applicable under the Investment Law for any remainder of the otherwise applicable benefits period. The
benefits period under Approved Enterprise status is limited to 12 years from commencement of production, or 14 years from the date of the approval, whichever
ends earlier. If a company has more than one Approved Enterprise 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 from any certificate of approval relate only to taxable profits attributable to the
specific Approved Enterprise. Income derived from activity that is not integral to the activity of the Approved Enterprise will not enjoy tax benefits. In our case,
subject to compliance with applicable requirements stipulated in the Investment Law and its regulations and in the specific certificate of approval, as described
above, the portion of our applicable Israeli subsidiaries’ undistributed income derived from their Approved Enterprise programs will be exempt from corporate
tax for a period of two to four years, followed by five to eight years with reduced tax rate of 25% on income derived from Approved Enterprise investment
programs. Because these subsidiaries have not yet generated any taxable income under any of their Approved Enterprise programs, however, the benefit periods
for those programs have not yet commenced, and, accordingly, we have not yet reaped any tax benefits from those programs.
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Date: 05/14/2012 02:55 PM User: djohnson
Client: v313119_FORMULA SYSTEMS (1985) LTD_20-F
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Project: v313119 Form Type: 20-F
File: v313119_20f.htm Type: 20-F Pg: 48 of 171
A company that has an Approved Enterprise 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 Approved Enterprise program will be eligible for an extension of the period during which it
is entitled to tax benefits under its Approved Enterprise status (so that the benefit periods may be up to ten years) and for further tax benefits if the level of
foreign investment exceeds 49%. If a company that has an Approved Enterprise 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 tax rates and related levels of foreign investments with respect to an FIC that has an Approved Enterprise program are set forth in the following
table:
Percentage of non-Israeli ownership
Over 25% but less than 49%
49% or more but less than 74%
74% or more but less than 90%
90% or more
Tax Rate
25%
20%
15%
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 Approved Enterprise status during the tax exemption period will be required to recapture the deferred corporate
tax applicable to the amount distributed (grossed up to reflect such tax) at the rate that would have been applicable had such income not been tax-exempted
under the alternative route. This rate generally ranges from 10% to 25%, depending on the extent to which non-Israeli shareholders hold such company’s shares.
Such company may also be required to record a deferred tax liability with respect to such tax-exempt income prior to its distribution.
In addition, dividends paid out of income generated by an Approved Enterprise (or out of dividends received from a company whose income is
generated by an Approved Enterprise) are generally subject to withholding tax at the rate of 15%, or at the lower rate provided under an applicable tax treaty.
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 the lower rate under an applicable tax treaty. 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 Approved Enterprise is entitled to accelerated depreciation on its property and equipment that are included in
an approved investment program. This benefit is an incentive granted by the Israeli government regardless of whether the alternative benefits program is
elected.
The benefits available to an Approved Enterprise 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 may be required to
refund the amount of tax benefits, together with consumer price index linkage adjustment and interest.
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Date: 05/14/2012 02:55 PM User: djohnson
Client: v313119_FORMULA SYSTEMS (1985) LTD_20-F
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Project: v313119 Form Type: 20-F
File: v313119_20f.htm Type: 20-F Pg: 49 of 171
Tax benefits under the 2005 Amendment that became effective on April 1, 2005.
On April 1, 2005, the Israeli Parliament passed an amendment to the Investment Law, in which it revised the criteria for investments qualified to
receive tax benefits. An eligible investment program under the 2005 Amendment will qualify for benefits as a Benefited Enterprise (rather than the previous
terminology of Approved Enterprise). Among other things, the 2005 Amendment provides tax benefits to both local and foreign investors and simplifies the
approval process. If the investment programs of the Formula Group companies comply with the requirements of the law, they will be entitled to certain tax
benefits. We cannot assure you that any additional investment program adopted by any of these companies in the future will comply with the requirements of
the law or that the tax benefits for investment programs will continue at current levels.
The 2005 Amendment applies to new investment programs and investment programs commencing after 2004, and does not apply to investment
programs approved prior to December 31, 2004. The 2005 Amendment provides that terms and benefits included in any certificate of approval that was granted
before the 2005 Amendment came into effect 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 Approved Enterprise status to qualifying investments. However, the 2005 Amendment limits
the scope of enterprises that may be approved by the Investment Center by setting criteria for the approval of a facility as an Approved Enterprise, such as
provisions generally requiring that at least 25% of the Approved Enterprise’s income be derived from export.
The 2005 Amendment provides that the approval of the Investment Center is required only for Approved Enterprises that receive cash grants. As a
result, a company is no longer required to obtain the advance approval of the Investment Center in order to receive tax benefits. 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 Benefited Enterprise may, at its discretion, approach the Israeli 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) that derive more than 25% of their business
income from export to specific markets with a population of at least 12 million. In order to receive the tax benefits, the 2005 Amendment states that a company
must make an investment which meets all the conditions that are set out in the amendment for tax benefits and which exceeds a minimum amount specified in
the Investment Law. Such investment entitles a company to a Benefited Enterprise status with respect to the investment, and may be made over a period of no
more than three years ending at the end of the year in which the company requested to have the tax benefits apply to the Benefited Enterprise. 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 Benefited Enterprise, 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
Benefited Enterprise 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 Benefited Enterprise are determined, among other things,
by the geographic location of the Benefited Enterprise. Such tax benefits include an exemption from corporate tax on undistributed income for a period of
between two to ten years, depending on the geographic location of the Benefited Enterprise within Israel, and a reduced corporate tax rate of between 10% to
25% for the remainder of the benefit period, depending on the level of foreign investment in the company in each year, as explained above.
Dividends paid out of income derived by a Benefited Enterprise (or out of dividends received from a company whose income is derived from a
Benefited Enterprise) are generally subject to withholding tax at the rate of 15% or such lower rate as may be provided in an applicable tax treaty. The reduced
rate of 15% is limited to dividends and distributions out of income derived from a Benefited Enterprise during the benefits period and actually paid at any time
up to 12 years thereafter, except with respect to a qualified FIC, in which case the 12-year limit does not apply. A company qualifying for tax benefits under the
2005 Amendment which pays a dividend out of income derived by its Benefited Enterprise during the tax exemption period will be subject to corporate tax at a
rate otherwise applicable to the company in the year the income was earned (i.e. 25%, or lower in the case of an FIC which is at least 49% owned by non-Israeli
residents) on an amount consisting of such divided amount, grossed up by the otherwise applicable corporate tax rate. Such company may also be required to
record a deferred tax liability with respect to such tax-exempt income prior to its distribution.
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Date: 05/14/2012 02:55 PM User: djohnson
Client: v313119_FORMULA SYSTEMS (1985) LTD_20-F
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Project: v313119 Form Type: 20-F
File: v313119_20f.htm Type: 20-F Pg: 50 of 171
The benefits available to a Benefited Enterprise are subject to the fulfillment of conditions stipulated in the Investment Law and its regulations. If a
company does not meet these conditions, it may be required to refund the amount of tax benefits, together with consumer price index linkage adjustment and
interest, or other monetary penalty.
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 Preferred Enterprise (as such term is defined in the Investment
Law) effective as of January 1, 2011 and onward. A Preferred Company is defined as either (i) a company incorporated in Israel and not fully owned by a
governmental entity or (ii) a limited partnership (a) that was registered under the Israeli Partnerships Ordinance and (b) all limited partners of which are
companies incorporated in Israel, but not all of them are governmental entities, which, in the case of the company and companies referenced in clauses (i) and
(ii)(b), have, among other things, Preferred Enterprise status and are 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 derived by its Preferred Enterprise in 2011-2012, unless the
Preferred Enterprise is located in a certain development zone, in which case the rate will be 10%. Such corporate tax rate will be reduced to 12.5% and 7%,
respectively, in 2013-2014 and to 12% and 6% in 2015 and thereafter, respectively. Income derived by a Preferred Company from a ‘Special Preferred
Enterprise’ (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 to 5%
if the Special Preferred Enterprise is located in a certain development zone.
Dividends paid out of income attributed to a Preferred Enterprise are generally subject to withholding tax at source at the rate of 15% or such lower
rate as may be provided in an applicable tax treaty. However, if such dividends are paid to an Israeli company, no tax will be withheld.
The 2011 Amendment also provided transitional provisions to address companies already enjoying current benefits. These transitional provisions
provide, among other things, that: (i) terms and benefits included in any certificate of approval that was granted to an Approved Enterprise, which chose to
receive grants, before the 2011 Amendment came into effect, will remain subject to the provisions of the Investment Law as in effect on the date of such
approval, while the 25% tax rate applied to income derived by an Approved Enterprise during the benefit period will be replaced with the regular corporate
income tax rate (24% in 2011 and 25% in 2012), unless a 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 (such request should have been made by way of an application to the Israeli Tax Authority by June 30, 2011 and
may not be withdrawn); and (ii) terms and benefits included in any certificate of approval that was granted to an Approved Enterprise, which had participated in
an alternative benefits program, before the 2011 Amendment came into effect 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. However, a company that has such an Approved Enterprise can file a request with the Israeli Tax
Authority, according to which its income derived as of January 1, 2011 will be subject to the provisions of the Investment Law, as amended in 2011; and (iii) a
Benefited Enterprise can elect to continue to benefit from the benefits provided to it before the 2011 Amendment came into effect, provided that certain
conditions are met, or file a request with the Israeli Tax Authority according to which its income derived as of January 1, 2011 will be subject to the provisions
of the Investment Law as amended in 2011. Our subsidiaries did not file a request to apply the new benefits under the 2011 Amendment.
B.
Liquidity and Capital Resources
Since inception, we have financed our growth and business primarily through cash provided by operations and through public debt and equity
offerings, as well as through private and public debt and equity offerings of our subsidiaries. In addition, we finance our business operations through short-term
and long-term loans and borrowings available under our credit facilities.
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Current Outlook
We had cash and cash equivalents and short-term investments of $107.7 million and $148.7 million at December 31, 2010 and December 31, 2011,
respectively. At December 31, 2010 and December 31, 2011, we had indebtedness to banks and others of $9.8 million and $51.1 million, respectively, of which
$6.7 million and $16.6 million were current liabilities and $3.1 million and $34.5 million were long-term liabilities as of those respective dates.
In November 2011, we received a long-term bank credit in the amount of $12.0 million which is secured by a pledge over a certain portion of our
investment in outstanding shares of Matrix and Sapiens. The loan is to be repaid in three equal installments on November 14, 2012, 2013 and 2014. We also
have an option to repay any portion, or all, of the outstanding principal amount every 6 months, subject to the foregoing minimum repayment of one-third of the
total principal amount during each of 2012, 2013 and 2014.
In January 2009, we received a short-term loan of approximately $3.0 million from the First International Bank of Israel Ltd., which is secured by a
pledge on a portion of our shareholdings in one of our subsidiaries. This loan matured and was repaid in December 2010.
From time to time, our subsidiaries also maintain credit facilities with banks and issue debt instruments such as debentures in accordance with their
cash requirements. These credit facilities and debentures include, inter alia, certain covenants related to our subsidiaries’ operations, such as the required
maintenance of a minimum level of shareholders’ equity and the achievement of certain operating results targets. Some of our subsidiaries’ assets are pledged to
the lender banks and debenture holders. If any of our subsidiaries does not meet the covenants specified in its credit agreement or indenture (or equivalent
agreement with the debenture holders), and a waiver with respect to the fulfillment of such covenant has not been received from the lender bank or
representative of the debenture holders, the lender bank or debenture holders (via the action of their representative) may foreclose on the pledged assets to
satisfy a debt.
Currently, of our three significant subsidiaries, only Matrix has such credit facilities and debentures (Series A) outstanding. The Series A debentures
were originally issued in August 2007 in an original principal amount of NIS 250 million (approximately $69.9 million, based on the representative exchange
rate of NIS 3.5781 per $1 reported by the Bank of Israel for the 2011 fiscal year). Matrix had aggregate short-term obligations of NIS 168.3 million
(approximately $44.0 million) and aggregate long-term obligations of NIS 159.3 million (approximately $41.7 million) outstanding as of December 31, 2011
under its credit facilities and debentures. These credit facilities expire over a period of time that ranges from 1 to 7 years, while the principal amount of the
debentures (following a partial redemption of approximately $12.8 million of the principal amount of the debentures in November 2008) has been, and will
continue to be, repaid in four annual installments, on December 31, 2010, 2011, 2012 and 2013. The first such payment (following the November 2008
redemption) in an approximate amount of $14.7 million was made on December 31, 2010. No payment was made on December 31, 2011, as the second
payment was instead made in January 2012, in an approximate amount of $16.4 million. The outstanding debentures bear interest at an annual rate of 5.15%, as
to be adjusted based on changes in the Israeli CPI. The effective interest rate on the debentures was 5.21% as of December 31, 2011. The long-term debt
obligations (including debentures) of Matrix bear interest at an average annual rate of 5%-6%.
We believe that our current cash reserves, together with cash that may be distributed to us from the ongoing operations of our subsidiaries and any
credit that we may choose to draw upon that is available under our (and our subsidiaries’) existing credit facilities should be sufficient for our present working
capital requirements for at least the next 12 months at our current level of operations. We will consider in the future additional equity issuances, debt issuances
or borrowings from banks if necessary to meet cash needs for our growth, including if needed to consummate one or more acquisitions for consideration
consisting of all or a substantial portion of our available cash. Should we require additional financing in the future, we cannot assure you that such financing
will be available on favorable terms or at all.
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Cash Provided by Operating Activities
Cash flow provided by our operating activities decreased from $51.0 million in 2010 to $25.8 million in 2011. Net cash provided by operations in 2011
consisted primarily of the cash generated by our subsidiaries’ ongoing operating activities and of net income stemming therefrom, as adjusted for non-cash
activity, including changes in operating assets and liabilities. The material upwards adjustments in cash flow reflecting non-cash activity included adjustments
due to (i) depreciation and amortization of capitalized research and development assets and other intangible assets (mainly customer relations) in an aggregate
amount of $14.4 million, (ii) a decrease in inventory, in an amount of $2.9 million, reflecting our subsidiaries’ strategy to maintain adequate, but not excessive,
levels of inventory based on their anticipation of future demand for proprietary software products and software services, (iii) stock-based compensation
expenses, in an amount of $4.6 million and (iv) an increase in other accounts payable and employees and payroll accrual, in an aggregate amount of $4.4
million. Material downwards adjustments in cash flow for non-cash activity, including changes in operating assets and liabilities, consisted of adjustments of (i)
$21.8 million due to an increase in trade receivables, which reflected increased sales activity by our subsidiaries in 2011, (ii) a decrease of $10.6 million in trade
payables, reflecting mainly obligations to suppliers carried over from 2010 and paid in 2011, and (iii) $9.9 million due to an increase in other current assets and
long-term prepaid expenses and other assets. Cash flow provided by operating activities in 2011 was primarily comprised of $9.7 million provided by Matrix,
$5.5 million by Sapiens and $ 15.2 million by Magic Software, reflecting the $23.0 million, $ 4.3 million and $15.0 million of net income generated by these
subsidiaries, respectively, in 2011 (in the case of Sapiens, until August 21, 2011), as adjusted for non-cash operating line items and changes in non-cash
operating assets and liabilities (as detailed above).
Cash flow provided by our operating activities in 2010 was $51.0 million, which compared to cash flow provided by operating activities of $55.6
million in 2009. Net cash provided by operations in 2010 consisted primarily of the cash generated by our subsidiaries’ ongoing operations activity and of net
income stemming therefrom, as adjusted for non cash activity, including changes in operating assets and liabilities. The material upwards adjustments in cash
flow reflecting non-cash activity included adjustments due to (i) depreciation and amortization of capitalized research and development assets and customer
relations in an aggregate amount of $15.5 million, (ii) an increase in trade payables of $5.7 million, reflecting enhanced software sales and services activity by
our subsidiaries, which was accompanied by an increase in obligations incurred to third parties, and (iii) an increase in customer advances of $5.4 million,
which reflected increased sales activity by our subsidiaries in 2010, which were accompanied by advances of cash by customers in connection with such sales.
Material downwards adjustments for non-cash activity, including changes in operating assets and liabilities, consisted of adjustments of (i) $9.5 million due to
an increase in trade receivables, which reflected increased sales activity by our subsidiaries in 2010, (ii) $3.4 million due to changes in deferred income taxes
assets, and (iii) $3.0 million due to an increase in inventory, reflecting our subsidiaries’ enhancement of inventories in 2010 in anticipation of further demand
for proprietary software products and software services. Cash flow provided by operating activities in 2010 was primarily comprised of $ 26.2 million provided
by Matrix, $12.1 million by Sapiens and $ 14.4 million by Magic Software, reflecting the $21.8 million, $ 6.2 million and $9.4 million of net income generated
by these subsidiaries, respectively, in 2010, as adjusted for non-cash operating line items and changes in non-cash operating assets and liabilities (as detailed
above).
Cash Provided by (Used in) Financing Activities
Cash flow provided by our financing activities was $20.3 million in the year ended December 31, 2011 compared with $40.3 million of cash flow used
in our financing activities in the year ended December 31, 2010, mainly reflecting the cumulative effect of the following financing-related transactions that
occurred over the course of those years:
Year Ended December 31, 2011:
In June 2011, Formula distributed to its shareholders a cash dividend of $0.71 per share. The aggregate amount distributed by Formula was
approximately $10 million.
In April 2011, Matrix distributed to its shareholders a cash dividend in an aggregate amount of approximately $4.8 million, of which $2.4 million was
paid to non-controlling interests in Matrix.
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In June 2011, Matrix distributed to its shareholders a cash dividend in an aggregate amount of approximately $4.8 million, of which $2.5 million was
paid to non-controlling interests in Matrix.
In September 2011, Matrix distributed to its shareholders a cash dividend in an aggregate amount of approximately $4.5 million, of which $2.3 million
was paid to non-controlling interests in Matrix.
In December 2011, Matrix distributed to its shareholders a cash dividend in an aggregate amount of approximately $4.4 million, of which $2.2 million
was paid to non-controlling interests in Matrix.
In 2011 we received long term loans from bank facilities in an aggregate amount of $45.4 million
Year Ended December 31, 2010:
In April 2010, Formula distributed to its shareholders a cash dividend of $1.47 per share. The aggregate amount distributed by Formula was
approximately $20.0 million.
In December 2010, Magic Software consummated a private placement of ordinary shares and warrants with several institutional and private investors
for aggregate gross proceeds of $21.4 million before costs ($20.3 million net of issuance expenses). If the warrants are exercised in full, Magic Software will
receive additional proceeds of approximately $9.4 million.
On December 31, 2010, Matrix made the first payment of the principal of the debentures (Series A) that it had issued in August 2007, in an amount of
NIS 50.6 million (approximately $15.9 million), together with interest on such principal amount.
In 2010, Matrix distributed to its shareholders cash dividends in the aggregate amount of approximately $14.7 million, of which $7.3 million was paid
to non controlling interest in Matrix.
In January 2010 Magic Software distributed to its shareholders cash dividend of $16 million, of which $ 6.6 million was paid to non controlling interest
in Magic
Cash Used in Investing Activities
Net cash used in our investing activities was $65.6 million in 2011 and $3.4 million in 2010, mainly reflecting the cumulative effect of the following
investment-related transactions that occurred over the course of those years:
Year Ended December 31, 2011
In January 2011, Sapiens paid to selling shareholders of Harcase (Canada) (from whom Sapiens acquired Harcase (Canada), currently a Sapiens
subsidiary) an amount of $952,000, which reflected additional consideration paid in respect of an earn-out obligation.
In May 2011, Magic Software acquired a software solution provider and a business partner of SAP for approximately $6.0 million.
In May 2011, Matrix acquired a 51% interest in Babcom Centers Ltd., an Israeli company providing professional services in the field of call centers,
application development and quality control. Matrix paid NIS 15 million in the acquisition (approximately $4.3 million). In addition, during 2011, Matrix
completed the acquisition of additional operations for an aggregate total consideration of $7.6 million.
In December 2011, Magic Software completed its acquisition of BluePhoenix's AppBuilder activity for cash consideration of $13.5 million, $4 million
of which was to be held in escrow pending fulfillment of certain obligations of BluePhoenix under the sale agreement.
In 2011, a subsidiary of Magic Software paid an aggregate amount of $2.1 million to the seller of its U.S based consulting and staffing business,
acquired in February 2010, reflecting a deferred payment obligation.
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In 2011, Magic Software paid and aggregate amount of $2.5 million for the acquisition of its South African distributer.
Year Ended December 31, 2010:
In February 2010, a subsidiary of Magic Software completed the acquisition of the consulting and staffing business of a US-based IT services company
for a purchase price of approximately $13.7 million, of which $8.6 million was paid in cash upon closing and the remainder was to be paid over the next three
years.
In October 2010, Magic Software purchased an 88% interest in a consulting and staffing services company for cash consideration of $ 1.6 million.
During 2010, Matrix (in certain cases, via its subsidiaries) acquired all of the outstanding shares of certain businesses, including a company that
provides technology solutions for tour operators, wholesalers and airlines, for an aggregate of $2 million in cash.
In 2010, Sapiens acquired Harcase (Canada), a Toronto-based provider of software solutions to the North American insurance industry for a total
consideration of $ 3.0 million of which $2.2 was paid in cash.
In 2010, our subsidiaries capitalized software development costs and other costs in an aggregate amount of $9.2 million.
In 2010, we sold marketable securities for aggregate consideration of $12.2 million and decreased our short term deposits by $13.4 million.
Company Commitments
We do not have material commitments for capital expenditures by Formula as of December 31, 2011 or as of the date of this annual report
We have entered into an undertaking to indemnify our office holders in specified limited categories of events and in specified amounts, subject to
certain limitations. For more information, see “Item 7. Major Shareholders and Related Party Transactions—Related Party Transactions—Indemnification of
Office Holders.”
Subsidiary Commitments
Our subsidiaries do not have any material commitments for capital expenditures as of December 31, 2011 or as of the date of this annual report.
Based on Sapiens’ understanding with Israel’s Office of the Chief Scientist, or the OCS, reached in January 2012, Sapiens has a commitment to the
OCS to pay royalties at a rate of 3%-3.5% of its total net consolidated license and maintenance revenue and 0.35% of its net consolidated consulting services
revenue related to the software developed by Sapiens with the assistance of the OCS. The amount of royalties is limited to 100%-150% of the amount funded by
the OCS. Sapiens is only obliged to repay the grants received from the OCS if revenue is generated from the sale of the said software products. Sapiens’
royalties expense amounted to approximately $577,000, $614,000 and $510,000 in 2009, 2010 and 2011, respectively, and are included in cost of revenues.
During 2011, Sapiens paid $1.2 million of royalties to the OCS.
As of December 31, 2011, Sapiens had a contingent liability to pay royalties to the OCS of approximately $6.3 million.
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As alluded to above (see “—Current Outlook”), the loan agreements and indentures (or equivalent agreements governing debentures) to which we are
party contain a number of conditions and limitations on the way in which we (mainly Matrix) can operate our businesses, including limitations on our ability to
raise debt and sell or acquire assets. For example, Matrix’s loan agreement includes a negative pledge with respect to Matrix’s assets, as well as limitations on
Matrix’s ability to provide guarantees to third parties and sell or transfer its assets. Matrix’s loan agreements and its agreement with its debenture holders also
contain various covenants which require it to maintain certain financial ratios related to shareholders’ equity and operating results that are customary for
companies of comparable size.
Our subsidiaries have provided bank guarantees aggregating to approximately $13.5 million (as of December 31, 2011) as security for the performance
of various contracts with customers. If our subsidiaries were to breach certain terms of such contracts, the customers could demand that the banks providing the
guarantees pay amounts claimed to be due.
Our subsidiaries have also provided additional bank guarantees aggregating to $4 million (as of December 31, 2011) as security for rent to be paid for
their offices. If our subsidiaries were to breach certain terms of their leases, the lessors could demand that the banks providing the guarantees pay amounts
claimed to be due.
Pursuant to a bank credit agreement, a lien has been incurred over a certain portion of our investment in outstanding shares of Matrix and Sapiens.
C.
Research and Development, Patents and Licenses, etc.
The net amounts that we spent on research and development activities in 2009, 2010 and 2011 totaled $4.4 million, $5.5 million and $5.1 million,
respectively. For more information about our research and development activities, see “Item 4. Information on the Company—Business Overview— Software
Development.”
For information concerning our intellectual property rights, see “Item 4. Information on the Company— Business Overview— Intellectual Property
Rights.”
D.
Trend Information
Demand for our software consulting services, proprietary software products and related services, and computer-based business solutions depends in
large part upon the level of IT capital spending and investment in IT projects by our customers. We experienced a continuation of the recovery in the markets
for our products and services, which had begun in 2010 and was sustained in 2011, reflected in improved levels of revenues and profitability realized by each of
our three significant subsidiaries. Increased revenues in 2011, a trend that is expected to continue in 2012, reflects, in part, strategic acquisitions that have
broadened the products and services offered by our subsidiaries, such as Magic Software’s recently completed acquisition of BluePhoenix's AppBuilder activity
and Sapiens’ acquisition of IDIT and FIS.
Some uncertainty remains, however, as to whether the current improvements can be sustained further. We are concerned that global economic and
financial uncertainty, which is reflected in, among other things, relatively tight credit markets, European sovereign debt crises, budgetary cuts and recovery
plans, lower levels of liquidity, renewed inflation, increased energy costs and reduced capital spending, may have a negative effect on our results of operations
prospectively. While the improvement in the global economy has lessened the impact of the global recession of late 2008 and 2009, continued uncertainty as to
the strength of the world economic recovery continues to assert negative pressures that may prospectively adversely impact spending by our customers on our
proprietary software products and IT services.
The economic conditions in preceding years had reduced the willingness or ability of our customers and prospective customers to commit funds to IT
projects, and may reduce their ability to pay for our products and services after purchase. That trend resulted in longer sales cycles and increased pressure on
pricing. If such a trend returns, it would adversely affect our results of operations. See “Item 3. Risk Factors—Risks Relating to Our Business—Unfavorable
national and global economic conditions could have a material adverse effect on our business, operating results and financial condition.”
As we continue to market new products and penetrate international markets, we expect that our selling, general and administrative expenses will
continue to be relatively high.
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E.
Off-Balance Sheet Arrangements
We do not have any off-balance sheet arrangements.
F.
Tabular Disclosure of Contractual Obligations
The following table summarizes our contractual obligations and commitments as of December 31, 2011.
Long-term debt obligations (2)
Lease obligations
Liability in respect of the acquisition of
operations
Other long-term liabilities reflected on our
balance sheet under U.S. GAAP
Total
92,866
39,586
Less
than 1
year
43,161
18,745
Payments due by period
1-3
years
3-5
Years
More
than
5 years
Other
(1)
$, in thousands
33,189
5,150
11,366
16,655
1,564
2,622
17,688
15,136
1,972
580
13,814
-
-
-
-
-
-
-
-
13,814
Total $
163,954 $
77,042 $
51,816 $
7,294 $
13,988 $
13,814
(1)
(2)
Other obligations include net severance pay which was not funded by us, the due date of which is unknown.
Does not include interest.
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ITEM 6. DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES
A.
Directors and Senior Management
The following table sets forth information about our directors and senior management as of May 1, 2012.
Name
Guy Bernstein
Age Position
44 Chief Executive Officer
Asaf Berenstin
Marcin Rulnicki
Marek Panek
Dafna Cohen (1)
Dr. Ronnie Vinkler(1)(2)
Ofer Lavie (1) (2)
34 Chief Financial Officer
36 Chairman of the Board of Directors
43 Director
42 Director
66 Director
67 Director
Expiration of Current Term of
Directorship/Office
December 2019 or upon 180 days advanced written notice of either
party
No formal arrangement regarding expiration of term of office
2012 annual shareholders meeting
2012 annual shareholders meeting
2012 annual shareholders meeting
March 2013
March 2013
(1) Serves on the audit committee of our board of directors.
(2) Serves as an external director under the Companies Law. See “Item 6. Directors, Senior Management and Employees—Board Practices—External
Directors Under the Companies Law; Audit Committee; Internal Auditor; Approval of Certain Transactions Under the Companies Law,” below.
Guy Bernstein was appointed our Chief Executive Officer in January 2008. Mr. Bernstein served as a member of our board of directors from
November 2006 to December 2008. Mr. Bernstein served as a director of Emblaze Ltd., or Emblaze, our former controlling shareholder and a publicly-traded
company listed on the London Stock Exchange, from April 2004 until February 2011. From December 2006 to November 2010, Mr. Bernstein also served as
chief executive officer of Emblaze, and, prior thereto, from April 2004 to December 2006, as the chief financial officer of Emblaze. Mr. Bernstein serves as the
chairman of the board of directors of each of Matrix and Sapiens and as chief executive officer and director of Magic Software, where he served as the chief
financial and operations officer from 1999 until 2004, when he joined Emblaze. He joined Magic Software from Kost Forer Gabbay & Kasierer, a member of
Ernst & Young Global, where he served as senior manager from 1994 to 1997. Mr. Bernstein holds a B.A. degree in accounting and economics from Tel Aviv
University and is a certified public accountant in Israel.
Asaf Berenstin was appointed our Chief Financial Officer in November 2011. Mr. Berenstin also serves as the Chief Financial Officer of our
subsidiary, Magic Software, since April 2010. Prior to such time, beginning in August 2008, Mr. Berenstin served as Magic Software’s corporate controller.
Prior to joining our company, Mr. Berenstin served as a controller at Gilat Satellite Networks Ltd. (NASDAQ: GILT), commencing in July 2007. From October
2003 to July 2008, Mr. Berenstin practiced as a certified public accountant at Kesselman & Kesselman, a member of PriceWaterhouseCooper. Mr. Berenstin
holds a B.A. degree in accounting and economics and an M.B.A. degree, both from Tel-Aviv University, and is a certified public accountant (CPA) in Israel.
Marcin Rulnicki has served as one of our directors since November 2010. Since September 2009, Mr. Rulnicki has been employed at Asseco as
Corporate Finance Manager, and is responsible for the financial aspects of international acquisitions and supervises foreign companies operating within the
Asseco Group. Mr. Rulnicki is a member of the Asseco Group Board of Directors and a member of the supervisory board of matrix42 A.G. Since July 2008, he
has also run an independent consulting business, which has participated in investment and restructuring projects. From August 2006 to July 2008, Mr. Rulnicki
served as Executive Officer of Zachodni Fundusz Inwestycyjny NFI S.A., an investment fund listed on the Warsaw Stock Exchange, where he was responsible
for strategic and operational management of the fund (including its restructuring group) and for communications with the capital markets. In such role, he also
managed the fund’s investment projects. Prior to such time, from 2002 to 2006, Mr. Rulnicki worked at Heitman Financial, a company specializing in the
management of investment funds for real estate, where he led the team responsible for financial SPVs investing in real estate in Central and Eastern Europe.
From 2000 to 2002, Mr. Rulnicki worked as an auditor in Arthur Andersen and then in Ernst & Young. Mr. Rulnicki is a graduate of Poznan University of
Economics (the faculty of Management), where he earned a Master of Economics degree, with a specialization in Capital Investment and Financial Strategies.
He is also a statutory auditor.
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Marek Panek has served as one of our directors since November 2010. Since January 2007, Mr. Panek has served as Vice President of the
Management Board and Director of the Sales Coordination and Partners Co-operation Department of Asseco, where he supervises the Marketing Department,
PR & IR Department and the Office of EU projects. Mr. Panek also holds several other positions at Asseco and its affiliates, including Chairman of the Board of
Asseco DACH (since August 2008), director of Sintagma UAB (since July 2008), Chairman of the Board of Asseco Resovia S.A. (since August 2010) and
member of the Supervisory Board of Asseco Central Europe, a.s .(since November 2009). During 2007-2008, Mr. Panek served as the Chairman of the
Management Board of Asseco SEE and President of the Board of Asseco Romania. Mr. Panek first joined Asseco in 1995, having served in the following
positions for the following periods of time: Marketing Specialist (from September 1995 to September 1996); Marketing Director (from October 1996 to March
2003); Sales and Marketing Director (from April 2003 to March 2004); and Member of the Board, Sales and Marketing Director (from March 2004 to January
2007). Prior to joining Asseco, Mr. Panek was employed at the Department of Electronics in Gantel Sp. z o.o. from 1993 to 1995. Mr. Panek graduated from
the Faculty of Mechanical Engineering and Aeronautics of the Rzeszów University of Technology in 1994, having earned a Master of Engineering degree
Dafna Cohen has served as one of our directors since October 2009 and a member of our audit committee since January 2011. Ms.Cohen also serves
as director of XTL Biopharmaceuticals Ltd, Inventech Central Ltd. and Europort Ltd. Ms Cohen served as Director of Global Treasury of MediaMind
Technologies from 2010 to 2011. Prior to that, Ms.Cohen served as Director of Investments and as a Treasurer of Emblaze from 2005 to 2009. Prior to that, Ms.
Cohen served as an Investment Manager for Leumi Partners and as a department manager at the derivatives sector and a foreign securities dealer of Bank
Leumi. Ms. Cohen holds an M.B.A.in finance and a B.A. degree in economics and political science, both from The Hebrew University of Jerusalem.
Dr. Ronnie Vinkler has served as one of our external directors and as a member of our audit committee since March 2007. Dr. Vinkler is an
independent business development and management analysis consultant. Since 2010 Dr. Vinkler serves as an external director of Jerusalem Capital Markets.
From 2003 until 2009, Dr. Vinkler also served as a director of Kaman Capital Ltd. In 2002 and 2003, Dr. Vinkler served as general manager of Icom Mobile
(Israel). From 2000 to 2002, he served as general manager of B.I.S. Advanced Software Solutions Ltd. Since 2003, Dr. Vinkler has overseen business
development for several companies including Tesnet and Aman Computers. Dr. Vinkler holds a B.Sc. degree in aeronautical engineering and industrial
engineering and management from the Technion, Israel Institute of Technology, and an M.Sc. and Ph.D in aeronautical engineering from Caltech, California
Institute of Technology.
Ofer Lavie has served as one of our external directors and as a member of our audit committee since March 2007. Mr. Lavie is an independent
financial business development consultant. From 1999 to 2005, Mr. Lavie served as the Chief Financial Officer of Metalink Ltd., a public company listed on
the NASDAQ Global Market and the TASE. Mr. Lavie also currently serves as a director of Migdal Holding and Management of Insurance Agencies Ltd. and
Yozma Pension Fund for Self Employed Ltd.- members of the Migdal Group companies. Mr. Lavie also serves as a director of Alpa Cosmetics Ltd. and as an
external director of each of Procognia (Israel) Ltd. and Shaniv Paper Industries Ltd., public companies listed on the TASE. In addition, Mr. Lavie serves as the
Chief Executive Officer of the CFO Forum Advanced Study Center in Israel. Mr. Lavie holds a B.Sc. degree in economics from Tel Aviv University.
Arrangements for the Election of Directors; Family Relationships
Asseco, our largest shareholder (holding approximately 50.2% of our outstanding share capital), has the ability to control the election of all members of
our board of directors (other than our external directors). Other than as described immediately above, there are no arrangements or understandings with major
shareholders, customers, suppliers or others pursuant to which any of our directors or members of senior management were selected as such.
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Mr. Guy Bernstein and Mr. Asaf Berenstin are first cousins. Other than such relationship, there are no family relationships among our executive
officers and directors.
B.
Compensation
Aggregate Compensation Paid to Directors and Executive Officers
In 2011, Formula paid to its directors and executive officers, consisting of the individuals listed above in the table under “—Directors and Senior
Management” (and including amounts paid to our former Chief Financial Officer until May 2011, when he ceased to serve in such capacity, and to our current
Chief Financial Officer commencing in November 2011, when he began to serve in such capacity), direct remuneration and provided related benefits of
approximately $4.4 million, in the aggregate. This aggregate compensation amount includes amounts set aside or accrued to provide pension, retirement or
similar post-employment benefits, which themselves totaled less than $5,000 in 2011.
The above aggregate compensation amount does not include the following:
expenses, including business travel, professional and business association dues and expenses, for which Formula reimburses its officers; and
other fringe benefits that companies in Israel commonly reimburse or pay to their officers,
as amounts incurred for such expenses and benefits in 2011 were paid in reimbursement of activities carried out by our directors and executive officers
for strict business purposes in carrying out their duties on behalf of Formula and were therefore not compensatory in nature.
The above aggregate compensation amount includes payment of director’s fees. Formula compensates its external directors and other directors in
accordance with the regulations promulgated under the Companies Law.
Under Israeli law, Formula is not required to disclose, and has not otherwise disclosed, the compensation of its senior management and directors on an
individual basis.
Option Grants to, and Service Agreement with, Chief Executive Officer
In January 2009, we granted to our Chief Executive Officer, Mr. Guy Bernstein, in connection with his service agreement with us, options to purchase
396,000 Formula ordinary shares, exercisable at an exercise price of NIS 0.01 per share. These options were to vest over a three-year period, commencing on
December 17, 2008, on a quarterly basis (except that they would accelerate immediately prior to the announcement of Formula’s 2010 dividend). In accordance
with the accelerated vesting provisions of the grant, Mr. Bernstein exercised all of the options in April 2010, prior to the distribution by Formula of its 2010
dividend. In accordance with the terms of the option grant, the shares issued upon exercise of the option were deposited with a trustee and Mr. Bernstein was not
permitted to vote or dispose of them until the shares were to be released from the trust, as described in the grant letter. In January 2011, in contemplation of our
amendment and extension of Mr. Bernstein’s service agreement with us, our board of directors determined that it was consistent with the intent of the original
grant to immediately release from the trust 135,960 shares that had been issued upon exercise, after the lapse of two years since the option grant date. As of
December 31, 2011 the remaining 260,040 shares were fully vested, although they remained in the trust.
In March 2011, concurrently with the amendment and extension of our Chief Executive Officer’s service agreement, we granted to him options that
were immediately exercisable for 543,840 redeemable ordinary shares of Formula. The options were to vest, i.e., our redemption right with respect to the
options and the underlying ordinary shares issuable upon exercise was to lapse, in equal quarterly installments over a four year period that commenced in
December 2011 and was to conclude in December 2015. The exercise price of the options was NIS 0.01 per share. Total fair value of the grant was calculated
based on the share price on the grant date and totaled $ 9.06 million ($ 16.65 per share). In May 2011, Mr. Bernstein exercised all of these options for
redeemable shares.
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In December 2011, at which time we were negotiating an amendment and extension of our Chief Executive Officer’s service agreement, we redeemed
all of the above-described 543,840 shares for no consideration. In March 2012, concurrently with the amendment and extension of our Chief Executive Officer’s
service agreement, we approved a grant of options to him, exercisable for 1,122,782 ordinary shares of Formula as long as the Chief Executive Officer is (i) a
director of Formula and/or (ii) a director of each of the directly held subsidiaries of Formula; provided that if he fails to meet the foregoing requirement (A) due
to the request of the board of directors of either Formula or any of its directly held subsidiaries (other than a request which is based on actions or omissions by
the Chief Executive Officer that would constitute "cause" under his service agreement with Formula), (B) because the Chief Executive Officer is prohibited
under the governing law or charter documents of the relevant company or the stock exchange rules and regulations applicable to such company from being a
director of such company (other than due to his actions or omissions) or (C) notwithstanding the Chief Executive Officer’s willingness to be so appointed (but
provided that neither (A) nor (B) applies); then, in each of (A), (B) and (C), the Chief Executive Officer will be deemed to have complied with clauses (i) or (ii)
above. The options vest, i.e., our redemption right with respect to the options and the underlying ordinary shares issuable upon exercise lapses, in equal
quarterly installments over an eight year period that commenced in March 2012 and concludes in December 2019. The exercise price of the options is NIS 0.01
per share. In accordance with the terms of the option grant, the shares issuable upon exercise of the option will be deposited with a trustee and our Chief
Executive Officer will not be permitted to vote or dispose of them until the shares are released from the trust, as described in the grant letter.
Under his service agreement with us, Mr. Guy Bernstein, as our Chief Executive Officer, is entitled to a monthly salary, as well as an annual bonus in
an amount equal to 3.3% of our net profit (including capital gains) after tax. An advance of 70% of the estimated bonus with respect to each year is paid over
the course of the year, divided into quarterly installments, which is estimated based on our quarterly financial statements and is subject to final adjustment at the
end of the year.
For a description of our 2008 Share Option Plan, 2011 Share Incentive Plan and 2012 Share Incentive Plan pursuant to which Mr. Bernstein’s options
have been granted and other options or share awards may be granted from time to time to our directors, executive officers, employees and consultants, see “Item
6.E. Share Ownership— Arrangements Involving the Issue or Grant of Options to Purchase Shares” below.
C.
Board Practices
Pursuant to our amended and restated articles of association, or our articles, directors are generally elected at the annual general meeting of
shareholders by a vote of the holders of a majority of the voting power represented at the meeting. Our existing board of directors may also appoint a new
director to the board, assuming that the then-authorized size of the board, as last approved by our shareholders, exceeds the number of directors then serving on
the board, whether due to a resignation or otherwise, in which case the newly appointed director holds office until the next annual general meeting of
shareholders immediately following such appointment. Our board is currently comprised of 5 persons, of which each of Dr. Ronnie Vinkler and Ofer Lavie has
been determined by the board to be independent within the meaning of the Listing Rules of the NASDAQ Stock Market (or the NASDAQ listing rules), on
which our ADSs are listed for trading. These same two directors serve as our external directors, as mandated under Israeli law, and are therefore subject to
additional criteria to help ensure their independence. See “External Directors Under the Companies Law” below. In addition, as described below under “—
Audit Committee”, while due to her past affiliation with our former controlling shareholder, Emblaze, she is not currently considered “independent” under the
NASDAQ listing rules, Ms. Dafna Cohen has been determined by our board of directors to nevertheless be “independent” within the meaning of Rule 10A-3
under the Securities Exchange Act of 1934, as amended, or the Exchange Act, and therefore serves on the audit committee of our board of directors. Each of our
directors, except for the external directors, holds office until the next annual general meeting of shareholders and may then be re-elected. Our officers are
appointed by our board of directors.
Under the Companies Law, a person who lacks the necessary qualifications and the ability to devote an appropriate amount of time to the performance
of his or her duties as a director shall not be appointed director of a publicly traded company. While determining a person’s compliance with such provisions,
the company’s special requirements and its scope of business shall be taken into consideration. Where the agenda of a shareholders meeting of a publicly traded
company includes the appointment of directors, each director nominee should submit a declaration to the company confirming that he or she has the necessary
qualifications and that he or she is able to devote an appropriate amount of time to performance of his or her duties as a director. In the declaration, the director
nominee should specify his or her qualifications and confirm that the restrictions set out in the Companies Law do not apply.
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Under the Companies Law, if a director ceases to comply with any of the requirements provided in the Companies Law, such director must
immediately notify the company, and his or her term of service shall terminate on the date of the notice.
External Directors Under the Companies Law
Under the Companies Law, companies incorporated under the laws of Israel whose shares have been offered to the public in or outside of Israel, are
required to appoint at least two external directors. This law provides that a person may not be appointed as an external director if the person is a relative of the
controlling shareholder of the company or if that person or his or her relative, partner, employer, another person to whom he or she was directly or indirectly
subject, or any entity under the person’s control, has, as of the date of the person’s appointment to serve as external director, or had, during the two years
preceding that date, any affiliation or one of certain other prohibited relationships with the company or any person or entity controlling (or relative of such
controlling person), controlled by or under common control with the company (or, in the case of a company with no controlling shareholder, any affiliation or
one of certain other prohibited relationships with a person serving as chairman of the board, chief executive officer, a substantial shareholder or the most senior
office holder in the company’s finance department). The term “affiliation” and the similar types of prohibited relationships include:
an employment relationship;
a business or professional relationship, even if not maintained on a regular basis (but excluding a de minimis level relationship);
control; and
service as an office holder (as defined in the Companies Law and described under “—Exculpation, Insurance and Indemnification of Directors
and Officers” below).
No person may serve as an external director if the person’s position or other business activities create, or may create, a conflict of interest with the
person’s responsibilities as an external director or may otherwise interfere with the person’s ability to serve as an external director or if the person is an
employee of the Israel Securities Authority or of an Israeli stock exchange. A person may furthermore not continue to serve as an external director if he or she
accepts, during his or her tenure as an external director, direct or indirect compensation from the company for his or her role as a director, other than amounts
prescribed under the Companies Law regulations (as described below) or indemnification, the company's undertaking to indemnify such person, exemption and
insurance coverage. If, at the time of election of an external director, all other directors who are not the company's controlling persons or their relatives are of
the same gender, the external director to be elected must be of the other gender. External directors are elected by a majority vote at a shareholders’ meeting,
provided that either:
the majority voted in favor of election includes a majority of the shares held by non-controlling shareholders who do not have a personal interest in the
election of the external director (other than a personal interest not deriving from a relationship with a controlling shareholder) that are voted at the
meeting (abstentions are disregarded in this calculation), or
the total number of shares held by non-controlling, disinterested shareholders (as described in the previous bullet-point) voted against the election of
the director does not exceed two percent (2%) of the aggregate voting rights in the company.
Pursuant to the Companies Law, all external directors must have accounting and financial expertise or professional qualifications, and at least one
external director must have accounting and financial expertise. A director with “accounting and financial expertise” is a director that due to his or her education,
experience and skills has a high expertise and understanding in financial and accounting matters and financial statements, in such a manner which allows him to
deeply understand the financial statements of the company and initiate a discussion about the presentation of financial data. A director is deemed to have
“professional qualifications” if he or she either (i) has an academic degree in economics, business management, accounting, law or public service, (ii) has an
academic or other degree or has completed other higher education, all in the field of business of the company or relevant for his/her position, or (iii) has at least
five years experience as either a senior managing officer in the company’s line of business with a significant volume of business, a public office, or a senior
position in the company’s main line of business. Our board of directors has determined that Mr. Ofer Lavie has the requisite accounting and financial expertise
while Dr. Ronnie Vinkler has professional expertise as required of our external directors under the Companies Law.
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An external director may be removed from office only: (i) by a court, upon determination that the external director to be so removed ceased to meet the
statutory qualifications for his or her appointment or if he or she violated his or her duty of loyalty to the company; (ii) by the same percentage of shareholders,
acting through a shareholders meeting, as is required for his or her election, if the board of directors has determined that the external director to be so removed
has ceased to meet the statutory qualifications for his or her appointment or violated his or her duty of loyalty to the company and has proposed the removal to
the shareholders. Such determination by the board of directors is to be made in the first meeting of the board of directors to be convened following learning of
the said cessation or violation. An external director who ceases to meet the conditions for his or her service as such must notify the company immediately and
such service shall cease immediately upon such notification.
The initial term of an external director is three years and may be extended by the general meeting of shareholders, for up to two additional three year
terms, provided that his or her service for each such additional term is recommended by one or more shareholders holding at least one percent (1%) of the
company’s voting rights and is approved by a majority at a shareholders meeting, which majority must include both criteria described above with respect to his
or her initial election. In October 2009, Dr. Vinkler and Mr. Lavie were reappointed as our external directors, each to hold office until March 2013 (as the
effective date of their reappointment was March 2010). In accordance with the regulations under the Companies Law (Relieves for Public Companies Whose
Shares are Listed on a Stock Exchange Outside of Israel, 2000), dual listed companies, like us, whose securities are listed on the NASDAQ Global Market or
one of a number of other non-Israeli stock exchanges, may re-appoint an external director for additional three-year terms, in excess of the nine years as
described above, if the audit committee and the board of directors confirm that, due to the expertise and special contribution of the external director to the work
of the board and its committees, his or her re-appointment is in the best interests of the company. The same special majority is required for election of the
external director for each additional three-year term.
Each committee of a company’s board of directors is required to include at least one external director and the audit committee must include all of the
external directors.
An external director is entitled to compensation as provided in regulations promulgated under the Companies Law and is otherwise prohibited from
receiving any compensation, directly or indirectly, in connection with services provided as an external director or otherwise to the company.
Following the termination of an external director’s service on a board of directors, such former external director and his or her spouse and children may
not be provided a direct or indirect benefit by the company, its controlling shareholder or any entity under its controlling shareholder’s control, including
engagement to serve as an executive officer or director of the company or a company controlled by its controlling shareholder or employment by, or providing
services to, any such company for consideration, either directly or indirectly, including through a corporation controlled by the former external director, for a
period of two years (which prohibition also applies to other relatives of the former external director for a period of one year).
Qualifications of Directors Generally Under the Companies Law
Under the Companies Law, the board of directors of a publicly traded company is required to make a determination as to the minimum number of
directors (not merely external directors) who must have accounting and financial expertise (according to the same criteria described above with respect to
external directors under “—External Directors Under the Companies Law”). In accordance with the Companies Law, the determination of the board should be
based on, among other things, the type of the company, its size, the volume and complexity of its activities and the number of directors. Based on the foregoing
considerations, our board determined that the number of directors with financial and accounting expertise in our company shall not be less than one. As
described above under “—External Directors Under the Companies Law,” currently Mr. Ofer Lavie has been determined by the board to possess such
accounting and financial expertise.
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Unaffiliated Directors Under the Companies Law
Under a recent amendment to the Companies Law, the audit committee of a publicly traded company must consist of a majority of unaffiliated
directors. An “unaffiliated director” is defined as an external director or a director who meets the following criteria:
he or she meets the qualifications for being appointed as an external director, except for (i) the requirement that the director be an Israeli
resident (which does not apply to companies whose securities have been offered outside of Israel or are listed outside of Israel) and (ii) the
requirement for accounting and financial expertise or professional qualifications; and
he or she has not served as a director of the company for a period exceeding nine consecutive years. For this purpose, a break of less than
two years in the service shall not be deemed to interrupt the continuation of the service.
The foregoing amendment to the Companies Law further provides that a company may also elect to impose, via the adoption of a propose set of
corporate governance rules, certain independence requirements with respect to the composition of the board of directors as a whole. Those requirements, if
undertaken by a company, mandate that (i) if the company has no controlling shareholder or no shareholder that holds at least 25% of the company’s voting
rights, most of the members of the board must be unaffiliated directors, whereas (ii) if the company has a controlling shareholder or a shareholder that holds at
least 25% of the voting rights, then at least one-third of the directors need to be unaffiliated directors.
As of the date of this annual report, we have not elected to adopt these corporate governance rules.
Audit Committee
In addition to the foregoing requirement with respect to the majority of its members being unaffiliated directors, the Companies Law requires public
companies such as ours to appoint an audit committee, comprised of at least three directors, including all of the external directors, one of whom must serve as
chairman of the committee. The chairman of the board of directors, or any director employed by or otherwise providing services to the company or to a
controlling shareholder or any entity controlled by a controlling shareholder, may not be a member of the audit committee. Under the Companies Law (under an
amendment adopted in 2011), our audit committee is responsible for (i) determining whether there are delinquencies in the business management practices of
the company, including in consultation with the company’s internal auditor or the independent auditor, and making recommendations to the board to improve
such practices, (ii) determining whether to approve certain related party transactions (including compensation of office holders (as defined under “—
Exculpation, Insurance and Indemnification of Directors and Officers” below)) or transactions in which an office holder has a personal interest and whether
such transaction is material, (iii) where the board of directors approves the working plan of the internal auditor, to examine such working plan before its
submission to the board and propose amendments thereto, (iv) examine the company's internal controls and internal auditor's performance, including whether
the internal auditor has sufficient resources and tools to dispose of his responsibilities (taking into consideration the company's special needs and size), (v)
examine the scope of the company's auditor's work and compensation and submit its recommendation with respect thereto to the corporate organ considering the
appointment thereof (either the board or the general meeting of shareholders) and (vi) determine procedures with respect to the treatment of company
employees' complaints as to the management of the company's business and the protection to be provided to such employees. In compliance with recently
adopted regulations under the Companies Law, our audit committee also approves our financial statements, thereby fulfilling the requirement that a board
committee provide such approval. An audit committee may not approve an action or a transaction with a controlling shareholder, or with an office holder, or
take any other action required under the Companies Law, unless at the time of approval a majority of the committee’s members are present, of whom a majority
consist of unaffiliated directors and at least one of them is an external director.
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The NASDAQ listing rules and U.S. securities laws likewise require that we maintain an audit committee, all of whose members are independent of
management. In accordance with the Sarbanes-Oxley Act of 2002 and the NASDAQ requirements, our audit committee’s direct responsibilities include the
appointment, compensation, retention and oversight of our independent auditors (which itself also requires shareholder ratification under Israeli law). The
committee’s U.S. and NASDAQ mandated responsibilities also include assisting the board in monitoring our financial statements and the effectiveness of our
internal controls. We have adopted a formal audit committee charter that we have implemented, embodying these responsibilities.
Our audit committee consists of our two external directors, Dr. Ronnie Vinkler and Mr. Ofer Lavie, as well as Ms. Dafna Cohen. Each of Dr. Vinkler
and Mr. Lavie qualifies as an independent director under both the NASDAQ listing rules and Rule 10A-3 of the Exchange Act. Ms. Cohen, due to her past
affiliation with our former controlling shareholder, Emblaze, is not currently independent under the NASDAQ listing rules but is nevertheless independent
under Exchange Act Rule 10A-3. As described under “—NASDAQ Exemptions for a Foreign Private Issuer” below in this Item 6.C and in “Item 16G.
Corporate Governance,” we have elected to follow home country practice in lieu of the NASDAQ listing requirement that all audit committee members meet
the NASDAQ independence criteria. Therefore, in order for Ms. Cohen to serve on the audit committee, she need not be independent under the NASDAQ
independence definition, provided that she at least meets the SEC’s Exchange Act independence definition (the board has determined that she does). The board
has furthermore determined that Ms. Cohen is an “audit committee financial expert” as defined by applicable SEC regulations. See “Item 16A. Audit Committee
Financial Expert.”
Internal Auditor
Under the Companies Law, the board of directors should appoint an internal auditor, nominated by the audit committee. The role of the internal auditor
is to examine, among other matters, whether the company’s actions comply with the law and orderly business procedure. Under the Companies Law, the
internal auditor may be an employee of the company but not an office holder, or an interested party (i.e., a holder of 5% or more of the voting rights in the
company or of the issued share capital, the chief executive officer of the company or any of its directors, or a person who has the authority to appoint the
company’s chief executive officer or any of its directors), or a relative of an office holder or of an interested party. In addition, the company’s independent
auditor or its representative may not serve as the company’s internal auditor.
NASDAQ Exemptions for a Controlled Company
We are a controlled company within the meaning of NASDAQ listing rule 5615(c)(1) since Asseco holds more than 50% of our voting power.
Therefore, under NASDAQ listing rule 5615(c)(2), we are exempt from the following requirements of NASDAQ listing rules 5605(b), (d) and (e) (we rely upon
such exemption with respect to each of the requirements described below):
The majority of the company’s board of directors must qualify as independent directors, as defined under NASDAQ listing rule 5605(a)(2).
The compensation of the chief executive officer and all other executive officers must be determined, or recommended to the board of directors for
determination, either by (i) a majority of the independent directors or (ii) a compensation committee comprised solely of independent directors (subject to
limited exceptions).
Director nominees must either be selected or recommended for the board of directors’ selection, either by (a) a majority of independent directors or
(b) a nominations committee comprised solely of independent directors (subject to limited exceptions).
The company must certify that it has adopted a formal written charter or board resolution, as applicable, addressing the nominations process and such
related matters as may be required under U.S. federal securities laws.
NASDAQ Exemptions for a Foreign Private Issuer
We are also a foreign private issuer within the meaning of NASDAQ listing rule 5005(a)(18), since we are incorporated in Israel and we meet the other
criteria set forth for a “foreign private issuer” under Rule 3b-4(c) under the Exchange Act. Therefore, pursuant to NASDAQ listing rule 5615(a)(3), we may
follow home country practice in lieu of certain provisions of the NASDAQ listing rule 5600 series and certain other NASDAQ listing rules. Pursuant to this
allowance, we have opted out from complying with the majority independence requirement for our board of directors as a whole under NASDAQ listing rule
5605(b), given the fact that Israeli law (i.e., the Companies Law) does not impose such a requirement, and we have furthermore opted out from compliance with
several 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 complying with certain NASDAQ listing rules.
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Exculpation, Insurance and Indemnification of Directors and Officers
The Companies Law codifies certain requirements and optional provisions that apply in our relationship with our “office holders.” An office holder is
defined in the Companies Law as a (i) director, (ii) general manager, (iii) chief business manager, (iv) deputy general manager, (v) vice general manager, (vi)
another manager directly subordinate to the managing director or (vii) any other person assuming the responsibilities of any of the forgoing positions without
regard to such person’s title. Our office holders consist of the individuals listed in the table under “Directors and Senior Management,” which is displayed under
“Item 6. Directors, Senior Management and Employees”. Under the Companies Law, an Israeli company may not exempt an office holder from liability with
respect to a breach of his or her duty of loyalty, but may exempt in advance an office holder from his or her liability to the company, in whole or in part, with
respect to a breach of his duty of care, provided, however, that such a breach is not related to a distribution of a dividend or any other distribution by the
company.
Office Holders’ Insurance. Our articles provide that, subject to the provisions of the Companies Law, we may enter into a contract for the insurance of
the liability of any of our office holders imposed on the office holder in respect of an act performed in his or her capacity as an office holder, with respect to:
• a breach of his duty of care to us or to another person;
• a breach of his duty of loyalty to us, provided that the office holder acted in good faith and had reasonable cause to assume that his act would not
prejudice our interests; or
• a financial liability imposed upon him in favor of another person.
We have obtained an insurance policy covering the Formula Group’s directors’ and officers’ liability. Our subsidiaries participate in the premium
payments of the insurance, on a proportional basis. The total premium we paid during 2011 was approximately $150,000.
Indemnification of Office Holders. Our articles provide that we may indemnify an office holder in respect of an obligation or expense imposed on or
expended by an office holder in respect of an act performed in his capacity as an office holder as specified below:
(i)
(ii)
(iii)
(iv)
(v)
a financial liability imposed on him in favor of another person by any judgment, including a settlement or an arbitrator’s award approved by a
court;
reasonable litigation expenses, including attorney’s fees, expended by the office holder as a result of an investigation or proceeding instituted
against him by a competent authority, provided that such investigation or proceeding concluded without the filing of an indictment against him,
and either (i) concluded without the imposition of any financial liability in lieu of criminal proceedings; or (ii) concluded with the imposition of a
financial liability in lieu of criminal proceedings but relates to a criminal offense that does not require proof of criminal intent;
reasonable litigation expenses, including attorneys’ fees, expended by the office holder or charged to him by a court, in proceedings instituted
against him by another person, or in a criminal charge from which he was acquitted or in any criminal proceedings of a crime which does not
require proof of criminal intent in which he was convicted;
expenses, including reasonable litigation expenses and legal fees, incurred by an Office Holder as a result of a proceeding instituted against such
office holder in relation to (1) infringements that may impose financial sanction pursuant to the provisions of Chapter H’3 under the Israeli
Securities Law, which we refer to as the Securities Law, or (2) administrative infringements pursuant to the provisions of Chapter H’4 under the
Securities Law or (3) infringements pursuant to the provisions of Chapter I’1 under the Securities Law; and
payments made by the office holder to an injured party for damages suffered under Section 52(54)(a)(1)(a) of the Securities Law
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We may undertake to indemnify an office holder as aforesaid, (a) prospectively, provided that in respect of (i) above, the undertaking is limited to
categories of events that in the opinion of our board of directors are foreseeable in light of our operations at the time that the undertaking to indemnify is given,
and for an amount or criteria that our board has determined as reasonable under the circumstances, and further provided that such events and amount or criteria
are indicated in the indemnification undertaking, but in any event no more than 25% of Formula’s shareholders equity according to its most recent financial
statements as of the date of the actual payment of indemnification; and (b) retroactively.
Limitations on Exemption, Insurance and Indemnification. The Companies Law provides that a company may not indemnify an office holder, enter into
an insurance contract which would provide coverage for any monetary liability, or exempt an office holder from liability, with respect to any of the following:
•
•
•
•
•
a breach by the office holder of his duty of loyalty unless the office holder acted in good faith and had a reasonable basis to believe that the act
would not prejudice the company;
a breach by the office holder of his duty of care if the breach was done intentionally or recklessly, except for a breach that was made in
negligence;
any act or omission done with the intent to derive an illegal personal benefit;
any fine levied against the office holder; or
a counterclaim made by the company or in its name in connection with a claim against the company filed by the office holder.
In addition, under the Companies Law, indemnification of, and procurement of insurance coverage for, our office holders must be approved by our
audit committee and our board of directors and, in specified circumstances, by our shareholders.
We have entered into a revised undertaking (which was approved by our shareholders at our annual meeting of shareholders that occurred in January
2012) to indemnify our office holders in specified limited categories of events and in specified amounts, subject to the limitations set by the Companies Law
and our articles, as described above. For more information, see “Item 7.B. Related Party Transactions – Indemnification of Office Holders.”
Directors’ Severance Benefits Upon Termination of Employment
We have not entered into any service contracts with any members of our board of directors that provide for specific benefits upon termination of
employment, as none of our directors is employed by us or otherwise subject to a consulting or similar contract with us that provides benefits upon termination
of employment or service. The only severance pay benefits that we provide are provided to employees as required under Israeli law and are described below in
the section titled “Employees”.
D.
Employees
The table below sets forth the average number of employees employed by us, as allocated (i) among our three significant subsidiaries and (ii) by
geographical area of employment, during each of the last three fiscal years:
Matrix
Magic Software
Sapiens
Total
2011
6,000
978
688
2010
4,300
678
361
2009
4,200
397
295
7,666
5,339
4,892
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In Israel
In Europe
In the United States and Canada
South Africa
In Asia
Total
2011
6,278
319
894
41
134
7,666
2010
4,421
228
569
2009
4,525
114
118
121
4,892
135
4,892
With respect to our employees in Israel, we are subject to various Israeli labor laws and labor practices, and to administrative orders extending certain
provisions of collective bargaining agreements between the Histadrut (Israel’s General Federation of Labor) and the Coordinating Bureau of Economic
Organizations (the Israeli federation of employers’ organizations) to all private sector employees. For example, mandatory cost of living adjustments, which
compensate Israeli employees for a portion of the increase in the Israeli consumer price index, are determined, from time to time, on a nationwide basis. Israeli
law also requires the payment of severance benefits upon the termination, retirement (in some instances) or death of an employee. We meet this requirement by
(i) contributing on an ongoing basis towards “managers’ insurance” funds that combine pension, insurance and, if applicable, severance pay benefits and (ii)
payment of differences, if applicable. In addition, Israeli employers and employees are required to pay specified percentages of wages to the National Insurance
Institute. Other provisions of Israeli law or regulation govern matters such as the length of the workday, minimum wages, other terms of employment and
restrictions on discrimination.
We are also subject to the labor laws and regulations of other jurisdictions in the world where we have employees.
E.
Share Ownership
As of May 1, 2012, none of our directors or officers owned any shares of our company (whether actual ordinary shares or shares issuable upon exercise
of options), except for Mr. Guy Bernstein, our Chief Executive Officer, as described below. None of the ordinary shares beneficially owned by Mr. Bernstein
has voting rights different from those possessed by other holders of Formula’s ordinary shares.
At the current time, to our best knowledge, Mr. Guy Bernstein owns 206,040 of Formula’s ordinary shares, and furthermore holds the above-described
option to purchase an additional 1,122,782 shares, which was granted to him in March 2012 (as described above under “Item 6. Directors, Senior Management
and Employees— B. Compensation— Option Grants to, and Service Agreement with, Chief Executive Officer”) which is exercisable currently or within 60
days with respect to all 1,122,782 underlying shares.
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Arrangements Involving the Issue or Grant of Options to Purchase Shares
Formula’s 2008 Share Option Plan
In March 2008, our shareholders approved the adoption of Formula’s 2008 Employee and Office Holders Share Option Plan, which we refer to as the
2008 Plan. Pursuant to the 2008 Plan, we may grant from time to time to our and our subsidiaries’ employees and office holders (which are not Formula’s
controlling shareholders) options to purchase up to 400,000 ordinary shares of Formula. The 2008 Plan is administered by our board of directors. The 2008 Plan
provides that options may be granted, from time to time, to such grantees to be determined by our board of directors, at such exercise prices and under such
terms as shall be determined by the board at its sole and absolute discretion. Options may be granted under the 2008 Plan through January 2018.
Of the options available for grant under the 2008 Plan, we granted, in January 2009, options to purchase 396,000 ordinary shares to our Chief
Executive Officer, each exercisable at an exercise price of NIS 0.01. (Please see “Item 6. Directors, Senior Management and Employees— B. Compensation—
Option Grants to, and Service Agreement with, Chief Executive Officer” for a description of that grant.) As of May 1, 2012, options to purchase 4,000 shares
remain available for future grants under the 2008 Plan.
Formula’s 2011 Share Incentive Plan
In March 2011, our board of directors adopted Formula’s 2011 Share Incentive Plan, which we refer to as the 2011 Plan. Pursuant to the 2011 Plan, we
may grant from time to time to our and our subsidiaries’ employees, office holders (which are not Formula’s controlling shareholders) and consultants options
to purchase, stock based awards or restricted shares with respect to, up to an aggregate of 545,000 ordinary shares of Formula. The 2011 Plan is administered by
our board of directors. The 2011 Plan provides that options, restricted shares or other stock-based awards may be granted, from time to time, to such grantees to
be determined by our board of directors, at such exercise prices and with such vesting or other terms as shall be determined by the board at its sole and absolute
discretion. Options may be granted under the 2011 Plan through March 2021.
Of the options available for grant under the 2011 Plan, we approved the grant, in March 2011, of options to purchase 543,840 ordinary shares to our
Chief Executive Officer, each to be exercisable for no consideration. (Please see “Item 6. Directors, Senior Management and Employees— B. Compensation—
Option Grants to, and Service Agreement with, Chief Executive Officer” for a description of that grant.) Options to purchase 1,160 shares remain available for
future grants under the 2011 Plan.
Formula’s 2012 Share Incentive Plan
In March 2012, our board of directors adopted Formula’s 2012 Share Incentive Plan, which we refer to as the 2012 Plan. Pursuant to the 2012 Plan, we
may grant from time to time to our and our subsidiaries’ employees, office holders (which are not Formula’s controlling shareholders) and consultants options
to purchase, stock based awards or restricted shares with respect to, up to an aggregate of 1,200, 000 ordinary shares of Formula. The 2012 Plan is administered
by our board of directors. The 2012 Plan provides that options, restricted shares or other stock-based awards may be granted, from time to time, to such grantees
to be determined by our board of directors, at such exercise prices and with such vesting or other terms as shall be determined by the board at its sole and
absolute discretion. Options may be granted under the 2012 Plan through March 2022.
Of the options available for grant under the 2012 Plan, we approved the grant, in March 2012, of options to purchase 1,122,782 ordinary shares to our
Chief Executive Officer, each to be exercisable for NIS 0.1. (Please see “Item 6. Directors, Senior Management and Employees— B. Compensation— Option
Grants to, and Service Agreement with, Chief Executive Officer” for a description of that grant.) Options to purchase 77,218 shares remain available for future
grants under the 2012 Plan.
Option Plans of Our Subsidiaries
Our subsidiaries generally have share option plans pursuant to which qualified directors, employees and consultants may be granted options for the
purchase of securities of the subsidiaries.
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ITEM 7. MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS
A. Major Shareholders
The following table presents information regarding the beneficial ownership (as defined in Form 20-F promulgated by the SEC) of Formula’s ordinary
shares as of May 1, 2012 by each person known to us to be the beneficial owner of 5% or more of Formula’s ordinary shares based on information provided to
us by our shareholders or disclosed in public filings with the SEC. Percentages expressed in the below table are based on 13,596,000 ordinary shares
outstanding as of May 1, 2012. Ordinary shares represented by ADSs are included both in the number of our outstanding ordinary shares and in determining the
beneficial ownership of any particular shareholder or group of shareholders. None of the holders of the ordinary shares listed in the below table has voting rights
different from other holders of Formula’s ordinary shares. Except where indicated otherwise, we believe, based on information furnished by these owners, that
each of the beneficial owners of Formula’s shares listed below has sole investment and voting power with respect to such shares.
Name and Address
Asseco (2)
Clal Insurance Enterprises Holdings Ltd. (3)
Menora Mivtachim Holdings Ltd.(5)
Harel Insurance Investments & Financial Services Ltd. (7)
Shares
Beneficially
Owned
Percent of
Class (1)
6,823,602
50.2%
1,123,726(4)
853,488(6)
754,375(8)
8.3%
6.3%
5.5%
(1)
(2)
(3)
(4)
Ordinary shares deemed beneficially owned by virtue of the right of any person or group to acquire such ordinary shares within 60 days of May 1, 2012,
are treated as outstanding only for the purposes of determining the percent owned by such person or group.
In November 2010, Asseco purchased from Emblaze all of its shareholdings in Formula, i.e. 6,697,642 ordinary shares and concurrently purchased from
Mr. Guy Bernstein (pursuant to an option agreement) an additional 135,960 ordinary shares, which, in the aggregate, constitute 6,823,602 ordinary
shares, representing approximately 50.2% of our outstanding share capital (excluding shares repurchased by us that lack voting rights). Asseco is a Polish
joint stock company whose shares are publicly traded on the Warsaw Stock Exchange. The address of Asseco is Olchowa 14, 35-322 Rzeszow, Poland.
Based on the Schedule 13D filed by Asseco with the SEC on December 6, 2010, and due to the public ownership of its shares, Asseco is not controlled
by any other corporation or any one individual or group of shareholders.
Clal Insurance Enterprises Holdings Ltd., referred to as Clal Insurance, is publicly traded on the TASE. Based on publicly available information, the
controlling shareholder of Clal Insurance is IDB Development Corporation Ltd. (which owns 56% of Clal Insurance), while Bank Hapoalim Ltd. holds a
10% interest in Clal Insurance. Clal Insurance’s principal business address is 48 Menachem Begin Street, Tel-Aviv 66180, Israel.
Pursuant to Amendment No. 6 to Schedule 13G filed on February 14, 2012, of the 1,123,726 ordinary shares reported as beneficially owned by Clal
Insurance (i) 1,121,676 shares are held for members of the public through, among others, provident funds, mutual funds, pension funds, index-linked
securities and insurance policies, which are managed by subsidiaries of Clal Insurance, each of which subsidiaries operates under independent
management and makes independent voting and investment decisions; (ii) 2,000 shares are beneficially held for its own account; and (iii) 50 shares are
held by third-party client accounts managed by Clal Finance Batucha Investment Management Ltd., a wholly owned subsidiary of Clal Finance Ltd., as
portfolio managers, which operates under independent management and makes investment decisions independent of Clal Insurance, and Clal Finance
Ltd. and has no voting power in the securities held by such client accounts.
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(5) Menora Mivtachim Holdings Ltd., or Menora Holdings, is a holding company publicly-traded on the TASE. 61.9% of Menora Holdings’ outstanding
(6)
(7)
(8)
shares are held, directly and indirectly, by Menachem Gurevitch, and 38.1% are publicly held. The address of Menora Holdings’ principal office is
Menora House, 115 Allenby Street, Tel Aviv 61008, Israel.
Pursuant to Amendment No. 4 to Schedule 13D filed with the SEC on September 16, 2010, the shares reported as beneficially owned by Menora
Holdings are held for members of the public through, among others, provident funds, mutual funds, pension funds and insurance policies, which are
managed by wholly-owned subsidiaries of Menora Holdings, each of which operates under independent management and makes independent voting and
investment decisions. .
Harel Insurance Investments & Financial Services Ltd., or Harel, is an Israeli public company whose shares are traded on the TASE, with principal
business address at Harel House; 3 Abba Hillel Street; Ramat Gan 52118, Israel. Based on publicly available information, its principal shareholders are
members of the Hamburger family (who own, collectively, approximately 49.61% of its outstanding shares).
Pursuant to the Schedule 13G that Harel filed with the SEC on February 14, 2011, of the 754,375 ordinary shares reported as beneficially owned by
Harel (i) 633,196 ordinary shares are held for members of the public through, among others, provident funds and/or mutual funds and/or pension funds
and/or insurance policies, which are managed by subsidiaries of Harel, each of which subsidiaries operates under independent management and makes
independent voting and investment decisions, and (ii) 121,179 ordinary shares are beneficially held for its own account.
As of May 1, 2012, 13,596,000 ordinary shares were issued and outstanding, which excludes 24,780 ordinary shares that we purchased during 2002.
On May 1, 2012, we had one shareholder of record, which was not a United States record holder. The number of record holders is not representative of the
number of beneficial holders of our ordinary shares, as the shares of all shareholders (including shares represented by ADSs) are recorded in the name of our
Israeli share registrar, Israel Discount Bank Limited’s registrar company. All of our ordinary shares (including shares represented by ADSs) have equal voting
rights. However, under applicable Israeli law, the shares that we have repurchased and currently hold have no voting rights and, therefore, are excluded from the
number of our outstanding shares.
As of May 1, 2012, 775,238 ADSs were issued and outstanding pursuant to a depositary agreement with The Bank of New York Mellon, representing
approximately 5.7% of our ordinary shares. As of that date, there were approximately 24 registered holders of our ADSs, of whom 21 record holders were
United States residents. Such number of record holders is not representative of the actual number of beneficial holders of our ADSs in the United States.
We are unaware of any arrangements which may at a subsequent date result in a change in control of Formula.
B.
Related Party Transactions
Indemnification of Office Holders
We have undertaken to indemnify each of our office holders. Our office holders’ indemnification letters provide, among other things, that we will
indemnify each of our office holders to the maximum extent permitted by our articles. Advance payments for coverage of legal expenses in criminal
proceedings will be required to be repaid by an office holder to the company if such office holder is found guilty of a crime which requires proof of criminal
intent, or if it is determined that the office holder is not lawfully entitled to such indemnification.
All of the indemnification letters granted to our office holders are identical, including indemnification letters granted to office holders who are or may
be considered “controlling persons” under the Companies Law.
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The indemnification is limited to the expenses and matters detailed in the indemnification letters insofar as they result from an office holder’s actions in
connection with, among other things, the following matters: the offering of securities by us to the public or to private investors; the offer by us to purchase
securities from the public, private investors or other holders, whether pursuant to a prospectus, agreement, notice, report, tender or any other proceeding; our
labor relations and/or employment matters and our trade relations; the development or testing of products developed by us, or the distribution, sale, license or
use of such products; and occurrences in connection with investments made by us.
Our undertaking for indemnification is limited to up to 25% of our shareholders’ equity as it appears in our latest financial statements known at the date
of indemnification, calculated with respect to each director and officer of Formula.
Our undertaking for indemnification shall not apply to a liability incurred as a result of any of the following:
(i)
(ii)
(iii)
(iv)
(v)
(vi)
a breach by an office holder of his or her fiduciary duty, except, to the extent permitted by law, for a breach while acting in good faith and
having reasonable cause to assume that the action was in our best interest ;
a grossly negligent or intentional violation of the office holder’s duty of care;
an intentional action in which the office holder intended to reap a personal gain illegally;
a fine, civil fine or financial sanction levied against and/or imposed upon the office holder;
a proceeding instituted against the office holder pursuant to the provisions of Chapter H’3, H’4 or I’1 under the Securities Law, except as
otherwise permitted in the undertaking; or
a counterclaim brought by us or in our name in connection with a claim against us filed by the office holder, other than by way of defense
or by way of third party notice in connection with a claim brought against the office holder by us, or in specific cases in which our board of
directors has approved the initiation or bringing of such suit by the office holder, which approval shall not be unreasonably withheld.
We shall not be required to indemnify an office holder, if the office holder, or anyone on his or her behalf, already received payment in respect of a
liability subject to indemnification, under an effective insurance coverage or an effective indemnification arrangement with a third party, provided, however,
that if such payment made to the office holder does not cover the entire liability subject to the indemnification, we shall indemnify the office holder in respect of
the difference between the amount paid to the office holder and the liability subject to the indemnification.
Office Holders’ Insurance
We have obtained an insurance policy covering the Formula Group’s directors’ and officers’ liability. Our subsidiaries participate in the premium
payments of the insurance, on a proportional basis. The total premium Formula paid during 2011 was approximately $150,000.
Service Agreement with our Chief Executive Officer
We are party to a written service agreement with our Chief Executive Officer, Mr. Guy Bernstein, which was entered into in December 2008 and was
amended in March 2011 and in March 2012 and has a term of eighty- four (84) months from the date of such last amendment. This agreement provides for early
termination by either side upon 180 days advanced written notice, during which time the Chief Executive Officer will continue to receive service fees. This
agreement furthermore contains customary provisions regarding nondisclosure, confidentiality of information and assignment of inventions.
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Other Transactions
From time to time, in our ordinary course of business, we engage in non-material transactions with our subsidiaries and affiliates where the amount
involved in, and the nature of, the transactions are not material to any party to the transaction. We believe that these transactions are made on an arms’ length
basis upon terms and conditions no less favorable to us, our subsidiaries and affiliates, as we could obtain from unaffiliated third parties. If we engage with our
subsidiaries and affiliates in transactions which are not in the ordinary course of business, we receive the approvals required under the Companies Law. These
approvals include audit committee approval, board approval and, in certain circumstances, shareholder approval. See “Item 6.C. Board Practices.”
C.
Interests of Experts and Counsel
Not applicable.
ITEM 8. FINANCIAL INFORMATION
A.
Consolidated Statements and Other Financial Information
Financial Statements
Our consolidated financial statements and other financial information are incorporated herein by reference to “Item 18. Financial Statements” below.
Export Sales
In 2011, 24% of our revenues originated from customers located outside of Israel. For information on our revenues breakdown by geographic market
for the past three years, see “Item 4.—Information on the Company— Business Overview— Geographical Distribution of Revenues.”
Legal Proceedings
We are not involved in any proceedings in which any of our directors, members of our senior management or any of our affiliates is either a party
adverse to us or to our subsidiaries or has a material interest adverse to us or to our subsidiaries. We are also not involved in any proceedings which may have,
or have had in the recent past, significant effects on our financial position or profitability, except as described below.
In February 2010, a U.S. based company filed a lawsuit against Magic Software and one of its subsidiaries claiming an alleged breach by Magic
Software and the subsidiary of its intellectual property rights in connection with one of Magic Software’s products. In July 2011, Magic Software entered into a
settlement agreement with the plaintiff according to which Magic Software paid a lump sum to the plaintiff for future maintenance and support until 2018,
subject to a complete release of all claims.
In August 2009, a software company and one of its owners filed an arbitration proceeding against Magic Software and one of its subsidiaries, claiming
an alleged breach of a non-disclosure agreement between the parties. The plaintiffs are seeking damages in the amount of approximately $13.6 million. The
arbitrator determined that both Magic Software and the subsidiary breached the non-disclosure agreement, but closing summaries regarding damages have not
yet been submitted. At this time, given the multiple uncertainties involved and due in large part to the highly speculative nature of the damages sought by the
plaintiff, which leaves a wide discretion to the arbitrator in quantifying and awarding the damages, Magic Software is unable to estimate the amount of the
probable loss, if any, to be recognized.
In 2010, a former customer of Sapiens filed a claim in the arbitration court in Warsaw, Poland against Sapiens, for alleged damages caused by Sapiens
with respect to a license and services contract with such former customer that had been entered into a few years prior to such time. The claim was in an amount
of approximately Euro 3.4 million (approximately $4.4 million). A settlement was reached in October 2011 under which Sapiens paid Euro 1.1 million
(approximately $1.5 million) and recovered an amount of $1.2 million from the insurance company.
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In June 2004, an Israeli company filed a lawsuit against Magic Software in the District Court of Tel Aviv - Jaffa seeking damages of NIS 8.0 million
(approximately $ 2.2 million), with an option to increase the amount sought to approximately NIS 17.0 million (approximately $4.8 million), for recovery of
alleged damages caused by Magic Software’s alleged failure to integrate a software system. In March 2011, Magic Software entered into a settlement agreement
with the plaintiff pursuant to which Magic Software did not incur any additional loss exceeding amounts already recognized.
In addition to the above-described legal proceedings, from time to time, we are subject to legal, administrative and regulatory proceedings, claims,
demands and investigations in the ordinary course of business, including claims with respect to intellectual property, contracts, employment and other matters.
We apply ASC 450, “Contingencies,” and accrue a liability when it is both probable that a liability has been incurred and the amount of the loss can be
reasonably estimated. Significant judgment is required in the determination of both the probability and as to whether a loss is reasonably estimable. These
accruals are reviewed at least quarterly and adjusted to reflect the impact of negotiations, settlements, rulings, advice of legal counsel and other information and
events pertaining to a particular matter. We intend to vigorously defend ourselves against the above claims, and we generally intend to vigorously defend any
other legal claims to which we are subject. While for most litigation, the outcome is difficult to determine, to the extent that there is a reasonable possibility that
the losses to which we may be subject could exceed the amounts (if any) that it has already accrued, we attempt to estimate such additional loss, if reasonably
possible, and disclose it (or, if it is an immaterial amount, indicate accordingly). The aggregate provision that we have recorded for all other legal proceedings
(other than the particular material proceedings described above) is not material. Furthermore, in respect of our ordinary course legal, administrative and
regulatory proceedings (i.e., other than the particular material proceedings described above), we estimate, in accordance with the procedures described above,
that as of the current time there is no reasonable possibility that we will incur material losses exceeding the non-material amounts already recognized.
Dividend Policy
Under Formula’s dividend policy adopted by its board of directors, sums that are not planned to be used for investments in the near future may be
distributed to its shareholders as a cash dividend, to the extent that our performance allows such distribution. In the three most recent fiscal years, Formula has
made the following distributions:
In June 2011, Formula distributed to its shareholders a cash dividend of $0.71 per share. The aggregate amount distributed by Formula was
approximately $10 million.
In April 2010, Formula distributed to its shareholders a cash dividend of $1.47 per share. The aggregate amount distributed by Formula was
approximately $20 million.
In January 2009, Formula distributed to its shareholders a cash dividend of $2.27 per share. The aggregate amount distributed by Formula was
approximately $30 million.
Under Israeli law, dividends may be paid by an Israeli company only out of profits and other surplus as calculated under Israeli law, as of the end date
of the most recent financial statements or as accrued over a period of two years, whichever amount is greater, and provided that there is no reasonable concern
that payment of a dividend will prevent the company from satisfying its existing and foreseeable obligations as they become due. See “Item 10. Additional
Information—Memorandum and Articles of Association—Dividend and Liquidation Rights” below for more information.
B.
Significant Changes
Since the date of our consolidated financial statements included in this annual report, there has not been a significant change in our company.
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ITEM 9. THE OFFER AND LISTING
A.
Offer and Listing Details
Price Range of Ordinary Shares
The following table sets forth, for the periods indicated, the reported high and low closing sale prices of our ordinary shares on the TASE in NIS and
U.S. dollars. U.S. dollar per ordinary share amounts are calculated using the U.S. dollar representative rate of exchange of $1 U.S.= NIS 3.82 on December 30,
2011 (the final business day of 2011 in Israel), as reported by the Bank of Israel.
Annual:
2012 (through May 1, 2012)
2011
2010
2009
2008
2007
Quarterly:
Second Quarter 2012 (through May 1, 2012)
First Quarter 2012
Fourth Quarter 2011
Third Quarter 2011
Second Quarter 2011
First Quarter 2011
Fourth Quarter 2010
Third Quarter 2010
Second Quarter 2010
First Quarter 2010
Most Recent Six Months:
April 2012
March 2012
February 2012
January 2012
December 2011
November 2011
Price Range of American Depositary Shares
NIS
Price Per
Ordinary Share
U.S.$
Price Per
Ordinary Share
High
Low
High
Low
64.14
75.57
68.45
44.12
47.78
60.59
64.10
62.10
62.44
63.40
69.33
75.57
68.45
53.43
58.48
59.30
64.10
64.14
62.10
60.63
62.40
62.44
56.99
65.61
40.21
15.78
17.53
44.97
57.56
57.50
46.07
43.94
55.18
60.00
50.34
43.25
42.42
40.21
57.56
56.99
57.51
57.50
55.81
55.12
17.23
19.78
17.92
11.56
12.51
15.86
17.18
16.23
16.34
16.60
18.14
19.78
17.92
13.99
15.39
15.52
17.18
17.23
16.26
15.87
16.33
16.35
14.77
17.17
10.53
4.13
4.59
11.77
15.28
15.05
12.06
11.50
14.44
15.71
13.18
11.32
11.10
10.53
15.28
14.87
15.05
15.05
14.61
14.43
The following table sets forth, for the periods indicated, the reported high and low closing sale prices of our ADSs on the NASDAQ Global Select
Market in U.S. dollars.
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Annual:
2012 (through May 1, 2012)
2011
2010
2009
2008
2007
Quarterly:
Second Quarter 2012 (through May 1, 2012)
First Quarter 2012
Fourth Quarter 2011
Third Quarter 2011
Second Quarter 2011
First Quarter 2011
Fourth Quarter 2010
Third Quarter 2010
Second Quarter 2010
Most Recent Six Months:
April 2012
March 2012
February 2012
January 2012
December 2011
November 2011
B.
Plan of Distribution
Not applicable.
C.
Markets
U.S.$
Price Per
ADS
High
Low
17.23
20.49
18.92
12.10
14.14
15.42
17.18
16.78
16.78
18.25
19.95
20.49
18.92
15.06
15.35
17.18
17.23
16.50
16.22
16.60
16.78
14.87
11.14
10.82
3.59
4.99
9.02
15.28
12.29
12.29
11.14
16.06
17.76
14.02
11.38
11.01
15.28
14.87
15.48
14.90
14.40
15.20
Since our initial public offering in 1991, our ordinary shares have been traded in Israel on the TASE under the symbol “FORT.” No U.S. trading
market exists for the ordinary shares. Since October 1997, our ADSs have been traded on the NASDAQ Global Select Market, under the symbol “FORTY.”
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.
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B.
Memorandum and Articles of Association
We are registered with the Israeli Companies Register under the number 52-003669-0. Our objects are specified in our memorandum of association.
These objects include:
•
•
•
•
operating within the field of informational and computer systems;
providing management, consulting and sale services for computers, computer equipment, software for computers and for information systems;
operating a business of systems analysis, systems programming and computer programming; and
establishing facilities for instruction and training for computers and digital systems.
Description of Our Share Capital
Our company’s authorized share capital consists solely of ordinary shares. No preferred shares are currently authorized. Our articles do not restrict in
any way the ownership of our ordinary shares by non-residents of Israel, except that these restrictions may exist with respect to citizens of countries which are in
a state of war with Israel.
Dividend and Liquidation Rights
Our board of directors is authorized to declare dividends, subject to the provisions of the Companies Law. Dividends on our ordinary shares may be
paid only out of profits and other surplus, as defined in the Companies Law, as of the end date of the most recent financial statements or as accrued over a
period of two years, whichever amount is greater. Alternatively, if we do not have sufficient profits or other surplus, we may seek permission to effect a
distribution by order of an Israeli court. In any event, our board of directors is authorized to declare dividends, provided there is no reasonable concern that a
dividend will prevent us from satisfying our existing and foreseeable obligations as they become due. Dividends may be paid in cash or in kind. We may invest
or use for our own benefit all unclaimed dividends. If a dividend remains unclaimed for seven years from the date on which we declared it, it lapses and reverts
back to us. Our board of directors can nevertheless cause us to pay the dividend to a holder who would have been entitled had the dividend not reverted back to
us. In case of the liquidation of our company, after satisfying liabilities to creditors, our assets will be distributed to the holders of ordinary shares in proportion
to their holdings. This right may be affected by the grant of a preferential dividend or distribution rights to the holders of a class of shares with preferential
rights that may be authorized in the future. Under the Companies Law, the declaration of a dividend does not require the approval of the shareholders of the
company, unless the company’s articles of association require otherwise. Our articles provide that our board of directors may declare and pay dividends without
any action required by our shareholders.
Redemption Provisions
In accordance with our articles, we may issue redeemable shares and accordingly redeem those shares.
Voting, Shareholder Meetings and Resolutions
Holders of our ordinary shares are entitled to one vote for each ordinary share held on all matters submitted to the vote of shareholders. These voting
rights may be affected by the grant of any special voting rights to the holders of a class of shares with preferential rights that may be authorized in the future.
Under the Companies Law, shares held by our company are not entitled to any rights so long as they are held by the company.
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Under the Companies Law and our articles, we must hold an annual general meeting of our shareholders once a year with a maximum period of fifteen
months between the meetings, while under NASDAQ listing rule 5620(a), we must hold the meeting within one year after our fiscal year-end (which is
December 31st). All meetings of shareholders other than annual general meetings are considered special general meetings. Our board of directors may call a
special general meeting whenever it decides it is appropriate. In addition, shareholders representing 5% of the outstanding share capital may require the board of
directors to call a special general meeting. Under our articles, the quorum required for a general meeting of shareholders consists of two or more holders present
in person or by proxy who hold or represent at least 25% of the voting power. We have opted out from the NASDAQ listing rule 5620(c) requirement that a
quorum must constitute at least 33.33% of our outstanding share capital (see “Item 16G. Corporate Governance” below). A meeting adjourned for a lack of a
quorum generally is adjourned to the same day in the following week at the same time and place or any time and place as the chairman of the meeting may
decide with the consent of the holders of a majority of the voting power represented at the meeting in person or by proxy and voting on the question of
adjournment. At the reconvened meeting, if a quorum is not present within one-half hour from the time designated for holding the meeting, the required quorum
will consist of two shareholders present in person or by proxy, regardless of the percentage of our outstanding ordinary shares or voting power held by them.
Under the Companies Law, unless otherwise provided in the articles of association or applicable law (including the Companies Law), all resolutions of
the shareholders require a simple majority. Those matters that constitute exceptions to the simple majority approval rule under the Companies Law are described
below in this Item 10.B under “—Approval of Certain Transactions Under the Companies Law.”
Approval of Certain Transactions Under the Companies Law
The Companies Law codifies the fiduciary duties that office holders, including directors and executive officers, owe to a company. An office holder’s
fiduciary duties consist of a duty of care and a duty of loyalty. The duty of loyalty includes (i) avoiding any conflict of interest between the office holder’s
position in the company and his or her personal affairs, (ii) avoiding any competition with the company, (iii) avoiding exploiting any business opportunity of the
company in order to receive personal advantage for himself or others, and (iv) revealing to the company any information or documents relating to the
company’s affairs which the office holder has received due to his or her position as an office holder. Under a recent amendment to the Companies Law, all
arrangements as to compensation of office holders who are not directors require approval of the audit committee (or, should we wish to establish such a
committee in the future, a compensation committee of our board of directors that meets all of the requirements applicable to an audit committee) and the board
of directors. The amendment of existing compensation terms of our office holders who are not directors merely requires the approval of our audit committee, if
such committee determines that the amendment is not substantial in relation to the existing terms. Arrangements regarding the compensation of directors require
the approval of the audit committee, the board of directors and the shareholders, except in certain circumstances prescribed in regulations promulgated under the
Companies Law.
The Companies Law requires that an office holder of a company promptly disclose any personal interest that he or she may have and all related
material information known to him or her, in connection with any existing or proposed transaction by the company. The disclosure must be made to our board
of directors and/or shareholders a reasonable period of time prior to the meeting at which the transaction is to be discussed. A personal interest, as defined under
the Companies Law, includes any personal interest held by the office holder’s spouse, siblings, parents, grandparents or descendants; spouse’s descendants,
siblings or parents; and the spouses of any of the foregoing, and also includes any interest held by any corporation in which the office holder owns 5% or more
of the share capital, is a director or general manager or in which he or she has the right to appoint at least one director or the general manager. A personal
interest furthermore includes the personal interest of a person for whom the office holder holds a voting proxy or the interest of the office holder with respect to
his or her vote on behalf of the shareholder for whom he or she holds a proxy even if such shareholder itself has no personal interest in the approval of the
matter.
In the case of a transaction which is not an extraordinary transaction (as defined below) and does not involve the compensation of the office holder,
after the office holder complies with the above disclosure requirement, only approval by the board of directors is required unless the articles of association of
the company provide otherwise (ours do not provide otherwise). If the transaction is an extraordinary transaction, then, in addition to any approval required by
the articles of association, the transaction must be approved by both the audit committee and the board of directors. An office holder who has a personal interest
in a matter that is considered at a meeting of the board of directors or the audit committee may not be present at the meeting or vote on the matter, subject to
certain exceptions, including an allowance for him or her to be present in order to present the transaction, if the chairman of the audit committee or board of
directors (as applicable) determines that such presentation by him or her is necessary. If the majority of the board members or members of the audit committee,
as applicable, have a personal interest in a transaction, they may all be present for the presentation of, and voting upon, the transaction, but it must also then be
approved by the shareholders of the company. Notwithstanding having been approved in compliance with the foregoing processes, any transaction in which an
office holder has a personal interest must, in addition, not be adverse to the company’s interest in order for it to be properly approved.
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An extraordinary transaction is defined as a transaction not in the ordinary course of business, not on market terms, or that is likely to have a material
impact on the company’s profitability, assets or liabilities.
The Companies Law applies the same disclosure requirements to a controlling shareholder of a public company, which includes a shareholder that
holds 25% or more of the voting rights in the company if no other shareholder owns more than 50% of the voting rights in the company. Extraordinary
transactions with a controlling shareholder or in which a controlling shareholder has a personal interest, or a transaction with a controlling shareholder or his or
her relative, directly or indirectly, including for receipt of services from an entity controlled by him or her (or his or her relative), and the terms of engagement
and compensation of a controlling shareholder who is an office holder or an employee of the company, require the approval of the audit committee, the board of
directors and the shareholders of the company. The shareholder approval must include the holders of a majority of the shares held by all shareholders who have
no personal interest in the transaction and are voting on the subject matter (with abstentions being disregarded) or, alternatively, the total shares of shareholders
who have no personal interest in the transaction and who vote against the transaction must not represent more than two percent (2%) of the voting rights in the
company. To the extent that any such transaction with a controlling shareholder is for a period extending beyond three years, approval is required once every
three years, unless the audit committee determines that the duration of the transaction is reasonable given the circumstances related thereto. In certain cases
provided in regulations promulgated under the Companies Law, shareholder approval is not required.
The approvals of the board of directors and shareholders are required for a private placement of securities (or a series of related private placements
during a 12-month period or that are part of one continuous transaction or transactions conditioned upon each other) in which:
•
•
the securities issued represent at least 20% of the company’s actual voting power prior to the issuance of such securities, and such issuance increases
the relative holdings of a 5% shareholder or causes any person to become a 5% shareholder, and the consideration in the transaction (or a portion
thereof) is not in cash or in securities listed on a recognized stock exchange, or is not at a fair market value; or
a person would become, as a result of such transaction, a controlling shareholder of the company.
Further, under the Companies Law (as described under “Item 6. Directors, Senior Management and Employees— Board Practices— External Directors
Under the Companies Law”), the appointment of external directors requires, in addition to a majority of the ordinary shares voting and approving the
appointment, that either (a) the approving majority must include a majority of the shares of shareholders that are not controlling shareholders of the company
and who do not have a personal interest in the election of the external director (other than a personal interest not deriving from a relationship with a controlling
shareholder) and who are present and voting (with abstentions being disregarded), or (b) the shares of such non-controlling, non-interested shareholders that
vote against the appointment may not constitute more than two percent (2%) of our total voting rights. In addition, as described below (see “—Modification of
Class Rights” in this Item 10.B), under our articles, the alteration of the rights, privileges, preferences or obligations of any class of our share capital requires a
simple majority of the class so affected), in addition to the ordinary majority of all classes of shares voting together as a single class at a shareholder meeting.
A further exception to the simple majority shareholder vote requirement is a resolution for the voluntary winding up, or other reorganization of, the
company pursuant to Section 350 of the Companies Law, which requires the approval of holders of 75% of the voting rights represented at the meeting, in
person, by proxy or by voting deed and voting on the resolution, provided that such shareholders constitute more than 50% of the shareholders voting on such
matter.
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Shareholder Duties
Under the Companies Law, a shareholder has a duty to act in good faith towards the company in which he holds shares and towards other shareholders
and to refrain from abusing his power in the company including voting in the general meeting of shareholders on:
• any amendment to the articles of association;
• an increase of the company’s authorized share capital;
• a merger; or
• approval of actions of office holders in breach of their duty of loyalty and of interested party transactions.
A shareholder has the general duty to refrain from depriving rights of other shareholders. Any controlling shareholder, any shareholder who knows that
it possesses the power to determine the outcome of a shareholder vote and any shareholder that, under the provisions of the articles of association, has the power
to appoint an office holder in the company, is under a duty to act in fairness towards the company. The rules pertaining to a breach of contract apply to a breach
of the duty to act in fairness, mutatis mutandis, bringing into account the shareholder’s position in the company. The Companies Law does not describe the
substance of this duty.
Transfer of Shares
Fully paid ordinary shares are issued in registered form and may be freely transferred under our articles unless the transfer is restricted or prohibited by
another instrument.
Modification of Class Rights
Under our articles, the rights attached to any class unless otherwise provided by the terms of the class including voting, rights to dividends and the like,
may be varied by adoption of the necessary amendment to the articles, provided that the affected shareholders approve the change by a class meeting in which a
simple majority of the voting power of the class represented at the meeting and voting on the matter approves the change.
Election of Directors
Our ordinary shares do not have cumulative voting rights in the election of directors. As a result, the holders of ordinary shares that represent more than
50% of the voting power represented at a shareholders meeting and voting on the matter (disregarding abstentions), have the power to elect all of our directors,
other than the external directors who are appointed by a special majority of shareholders. For a summary of the provisions of our articles that govern our
directors, see “Item 6. Directors, Senior Management and Employees.”
Anti-Takeover Provisions; Mergers and Acquisitions Under Israeli Law
Mergers
The Companies Law permits merger transactions if approved by each party’s board of directors and shareholders. In order for shareholder approval to
be obtained for a merger, a majority of the shares present and voting, excluding shares held by the other party to the merger, or by any person holding at least
25% of the means of control of the other party to the merger, or anyone acting on behalf of either of them, including any of their affiliates, must be voted in
favor of the merger. If, however, the merger involves a merger with a company’s own controlling shareholder or if the controlling shareholder has a personal
interest in the merger, then the merger is instead subject to the same special majority approval that governs all extraordinary transactions with controlling
shareholders (as described above in this Item 10 under “—Approval of Certain Transactions Under the Companies Law”). In the event that the merger
transaction has not been approved by either of the above-described special majorities (as applicable), the holders of at least 25% of the voting rights of the
company may apply to a court for approval of the merger. The court may approve the merger if it is found that the merger is fair and reasonable, taking into
account the value of the parties to the merger and the consideration offered to the shareholders. Upon the request of a creditor of either party to the proposed
merger, the court may delay or prevent the merger. A merger may not be consummated unless at least 50 days have passed from the time that a proposal for
approval of the merger has been filed with the Israeli Registrar of Companies and 30 days have passed from the date of the approval of the shareholders of the
merging companies.
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The Companies Law further provides that the foregoing approval requirements will not apply to shareholders of a wholly-owned subsidiary in a rollup
merger transaction, or to the shareholders of the acquirer in a merger or acquisition transaction if:
• the transaction does not involve an amendment to the acquirer’s memorandum or articles of association;
• the transaction does not contemplate the issuance of more than 20% of the voting rights of the acquirer which would result in any shareholder
becoming a controlling shareholder; and
• there is no “cross ownership” of shares of the merging companies, as described above.
Tender Offers
The Companies Law provides that an acquisition of shares of a public company must be made by means of a tender offer if as a result of the
acquisition, the purchaser would become a holder of 25% or more of the voting rights in the company. This rule does not apply if there is already another holder
of 25% or more of the voting rights in the company. Similarly, the Companies Law provides that an acquisition of shares in a public company must be made by
means of a tender offer if as a result of the acquisition the purchaser would become a holder of more than 45% of the voting rights of the company, if there is no
other holder of more than 45% of the voting rights of the company.
The foregoing provisions do not apply to:
•
•
a private placement in which the company’s shareholders approved such holder owning 25% or more of the voting rights in the company (if there is no
other shareholder that holds 25% or more of the voting rights in the company); or more than 45% of the voting rights in the company (if there is no other
shareholder that holds more than 45% of the voting rights in the company); or
a purchase from an existing holder of 25% or more of the voting rights in the company that results in another person becoming a holder of 25% or more
of the voting rights in the company or a purchase from an existing holder of more than 45% of the voting rights in the company that results in another
person becoming a holder of more than 45% of the voting rights in the company.
Regulations adopted under the Companies Law provide that these tender offer requirements do not apply to companies whose shares are listed for
trading only outside of Israel or have been publicly offered only outside of Israel if, according to the law in the country in which the shares are traded, including
the rules and regulations of the stock exchange on which the shares are traded, there is either a limitation on acquisition of any level of control of the company,
or the acquisition of any level of control requires the purchaser to do so by means of a tender offer to the public.
The Companies Law also provides that if following any acquisition of shares, the acquirer holds 90% or more of the company’s shares or of a class of
shares, the acquisition must be made by means of a tender offer for all of the target company’s shares or all of the shares of the class, as applicable, not held by
the acquirer. An acquirer who wishes to eliminate all minority shareholders must do so by way of a tender offer and hold, following consummation of the tender
offer, more than 95% of all of the company’s outstanding shares (and provided that a majority of the offerees that do not have a personal interest in such tender
offer shall have approved it, which condition shall not apply if, following consummation of the tender offer, the acquirer holds at least 98% of all of the
company’s outstanding shares). If, however, following consummation of the tender offer the acquirer would hold 95% or less of the company’s outstanding
shares, the acquirer may not acquire shares tendered if by doing so the acquirer would own more than 90% of the shares of the target company. Appraisal rights
are available with respect to a successfully completed full tender offer for a period of six months after such completion, although the acquirer may provide in the
tender offer documents that a shareholder that accepts the offer may not seek appraisal rights.
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C.
Material Contracts
Please see “Item 6. Directors, Senior Management and Employees— B. Compensation— Option Grants to, and Service Agreement with, Chief
Executive Officer” for a description of our service agreement with our Chief Executive Officer, Mr. Guy Bernstein. Beyond that agreement, Formula is not
party to, and has not been party to in the last two years, any material contract entered into outside of the ordinary course of business. In addition, while our
subsidiaries are party and have been party in the last two years to numerous contracts with customers, resellers and distributors, such contracts are entered into
in the ordinary course of business. Furthermore, we do not deem any other individual contract entered into by any of our subsidiaries outside of the ordinary
course of business (such as investment or acquisition agreements) during the last two years to be material to us.
D.
Exchange Controls
Under current Israeli regulations, we may pay dividends or other distributions in respect of our ordinary shares either in Israeli or non-Israeli
currencies. If we make these payments in Israeli currency, they will be freely converted, transferred and paid in non-Israeli currencies at the rate of exchange
prevailing at the time of conversion. We expect, therefore, that dividends, if any, that we pay to holders of ADSs, will be paid in dollars, net of conversion
expenses, expenses of the depositary for our ADSs, the Bank of New York Mellon, and Israeli income taxes (if applicable). Because exchange rates between the
NIS and the dollar fluctuate continuously, a U.S. shareholder will be subject to the risk of currency fluctuations between the date when we declare NIS-
denominated dividends and the date when we pay them in NIS. See “Item 3. Key Information—Risk Factors.”
Non-residents of Israel may freely hold and trade our ADSs or ordinary shares pursuant to the general permit issued under the Israeli Currency Control
Law, 1978. Neither our articles nor the laws of the State of Israel restrict in any way the ownership of our ordinary shares by non-residents, except that these
restrictions may exist with respect to citizens of countries that are in a state of war with Israel.
E.
Taxation
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.
The summary does not address all of the tax consequences that may be relevant to all purchasers of our ordinary shares and ADSs 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 ordinary shares and ADSs should consult
their own tax adviser as to the United States, Israeli or other tax consequences of the purchase, ownership and disposition of ordinary shares and ADSs. 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.
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Israeli Taxation Considerations for Our Shareholders
Tax Consequences Regarding Disposition of Our ADSs or Ordinary Shares
Israeli law generally imposes a capital gains tax on the sale of any 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 shareholder’s country of residence provides otherwise. The Tax 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.
Israeli Resident Shareholders
Israeli Resident Individuals. Beginning 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%. However, if such a shareholder is considered a
substantial shareholder (i.e., a person who holds, directly or indirectly, alone or together with another, 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 with securities in Israel are taxed at the tax rates applicable to business income (up to 45% in 2011, and up to 48% in 2012).
Notwithstanding the foregoing, pursuant to the Tax Burden Law, 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). 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 gains 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%).
Israeli Resident Corporations. Under present 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, recent changes in the law abolished the scheduled
progressive reduction of the corporate tax rate and set the corporate tax rate at 25% from 2012 and onwards..
Non-Israeli Residents Shareholders
Israeli capital gains 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 derived by a company is generally subject to tax at the corporate tax
rate (24% in 2011 and 25% as of 2012) or, if derived by an individual, at the rate of 20% (25% as of 2012), or 25% (30% as of 2012), if generated from 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 45% for an individual in 2011).
Notwithstanding the foregoing, shareholders who are non-Israeli residents (individuals and corporations) are generally exempt from Israeli capital
gains 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 Inflationary Adjustments Law. However, non-Israeli corporations will not be entitled to the
foregoing exemptions if an Israeli resident (a) has a controlling interest of 25% or more in such non-Israeli corporation, or (b) is the beneficiary of or is 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.
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In addition, a sale of securities may be exempt from Israeli capital gains tax under the provisions of an applicable tax treaty. For example, under the
U.S.-Israel Tax Treaty, which we refer to as 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 gains tax unless either (i) the shareholder
holds, directly or indirectly, shares representing 10% or more of the voting capital during any part of the 12-month period preceding such sale, exchange or
disposition; (ii) the shareholder, being 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 gains arising from such sale are attributable to a permanent establishment of the shareholder which is maintained in Israel. In
either 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.
Payors of consideration for traded securities, like our ordinary shares and ADSs, including the purchaser, the Israeli stockbroker effectuating the
transaction, or the financial institution through which the sold securities are held, are required, subject to any of the foregoing exemptions and the demonstration
of a shareholder regarding his, her or its foreign residency, to withhold tax upon the sale of publicly traded securities from the consideration or from the Real
Capital Gain derived from such sale, as applicable, at the rate of 25%.
Taxes Applicable to Dividends
Israeli Resident Shareholders
Israeli Resident Individuals. Israeli residents who are individuals are generally subject to Israeli income tax for dividends paid on our ordinary shares
and ADSs (other than bonus shares or share dividends) at 20%, or 25% 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. Pursuant to the Tax Burden Law, as of 2012 such tax rate is 25%, or 30% if the dividend recipient 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 period of benefit of an Approved Enterprise, Benefited Enterprise or Preferred Enterprise are subject to withholding tax at the rate of 15%, if
the dividend is distributed during the tax benefit period under the Investment Law or within 12 years after that period. An average rate will be set in case the
dividend is distributed from mixed types of income (regular and Approved/ Benefited/ Preferred income).
Israeli Resident Corporations. Israeli resident corporations are generally exempt from Israeli corporate tax for dividends paid on our ordinary shares
and ADSs.
Non-Israeli Residents Shareholders
Non-Israeli residents (whether individuals or corporations) are generally subject to Israeli withholding tax on the receipt of dividends paid for publicly
traded shares, like our ordinary shares and ADSs, at the rate of 20% (25% as of 2012, so long as the shares are registered with a Nominee Company) or 15% if
the dividend is distributed from income attributed to our Approved Enterprises, unless a reduced rate is provided under an applicable tax treaty. For example,
under the U.S-Israel Treaty, the maximum rate of tax withheld in Israel on dividends paid to a holder of our ordinary shares and ADSs who is a U.S. resident
(for purposes of the U.S.-Israel Treaty) is 25%. However, generally, the maximum rate of withholding tax on dividends that are paid to a U.S. corporation
holding at least 10% or more of our outstanding voting capital from the start of the tax year preceding the distribution of the dividend through (and including)
the distribution of the dividend, is 12.5%, provided that no more than 25% of our gross income for such preceding year consists of certain types of dividends
and interest. Notwithstanding the foregoing, dividends distributed from income attributed to an Approved Enterprise, a Benefited Enterprise or a Preferred
Enterprise are subject to a withholding tax rate of 15% for such a U.S. corporation shareholder, provided that the condition related to our gross income for the
previous year (as set forth in the previous sentence) is met. If the dividend is attributable partly to income derived from an Approved Enterprise, a Benefitted
Enterprise or a Preferred Enterprise, and partly to other sources of income, the withholding rate will be a blended rate reflecting the relative portions of the two
types of income. U.S residents who are subject to Israeli withholding tax on a dividend may be entitled to a credit or deduction for U.S. federal income tax
purposes in the amount of the taxes withheld, subject to detailed rules contained in United States tax legislation.
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A non-Israeli resident who receives dividends from which tax was withheld is generally exempt from the obligation to file tax returns in Israel with
respect to such income, provided that (i) such income was not generated from business conducted in Israel by the taxpayer, and (ii) the taxpayer has no other
taxable sources of income in Israel with respect to which a tax return is required to be filed.
Payors of dividend on our ordinary shares and ADSs, including the Israeli stockbroker effectuating the transaction, or the financial institution through
which the securities are held, are required, subject to any of the foregoing exemptions and the demonstration of a shareholder regarding his, her or its foreign
residency, to withhold tax upon the distribution of dividend at the rate of 25%, so long as the shares are registered with a Nominee Company (for corporations
and individuals).
United States Federal Income Tax Considerations
The following is a discussion of the material U.S. federal income tax consequences relating to the purchase, ownership and disposition of the ordinary
shares or ADSs by U.S. Holders (as defined below) that hold such ordinary shares or ADSs as capital assets. This discussion is based on the Internal Revenue
Code, or the Code, the regulations of the U.S. Department of the Treasury issued pursuant to the Code, or the Treasury Regulations, and administrative and
judicial interpretations thereof, all as in effect on the date hereof and all of which are subject to change, possibly with retroactive effect, or to different
interpretation. It is also based in part on representations by the depositary and assumes that each obligation under the deposit agreement and any related
agreement will be performed in accordance with its terms.
This discussion does not address all of the tax consequences that may be relevant to specific U.S. Holders in light of their particular circumstances or to
U.S. Holders subject to special treatment under U.S. federal income tax law (such as banks, insurance companies, tax-exempt entities, retirement plans,
regulated investment companies, partnerships, dealers in securities, brokers, real estate investment trusts, certain former citizens or residents of the United
States, persons who acquire ordinary shares or ADSs as part of a straddle, hedge, conversion transaction or other integrated investment, persons that have a
“functional currency” other than the U.S. dollar, persons that own (or are deemed to own, indirectly or by attribution) 10% or more of our outstanding voting
shares or persons that generally mark their securities to market for U.S. federal income tax purposes). This discussion does not address any U.S. state or local or
non-U.S. tax consequences or any U.S. federal estate, gift or alternative minimum tax consequences.
As used in this discussion, the term “U.S. Holder” means a beneficial owner of ordinary shares or ADSs that is, for U.S. federal income tax purposes,
(i) a citizen or resident of the United States, (ii) a corporation, or other entity taxable as a corporation for U.S. federal income tax purposes, created or organized
in or under the laws of the United States, any state thereof, or the District of Columbia, (iii) an estate the income of which is subject to U.S. federal income tax
regardless of its source or (iv) a trust with respect to which a court within the United States is able to exercise primary supervision over its administration and
one or more U.S. persons have the authority to control all of its substantial decisions, or (v) an electing trust that was in existence on August 19, 1996 and was
treated as a domestic trust on that date.
If an entity treated as a partnership for U.S. federal income tax purposes holds ordinary shares or ADSs, the tax treatment of such partnership and each
partner thereof will generally depend upon the status and activities of the partnership and such partner. A holder that is treated as a partnership for U.S. federal
income tax purposes should consult its own tax advisor regarding the U.S. federal income tax considerations applicable to it and its partners of the purchase,
ownership and disposition of ordinary shares or ADSs.
U.S. Holders of ADSs will be treated as owners of the ordinary shares underlying their ADSs. Accordingly, deposits and withdrawals of ordinary
shares in exchange for ADSs will not be taxable events for U.S. federal income tax purposes.
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The U.S. Treasury has expressed concerns that parties to whom ADSs are released may be taking actions that are inconsistent with the claiming of
foreign tax credits for U.S. Holders of ADSs. Such actions would also be inconsistent with the claiming of the reduced rate of tax, described below, applicable
to dividends received by certain non-corporate U.S. Holders. Accordingly, the analysis of the availability of foreign tax credits and the reduced tax rate for
dividends received by certain non-corporate U.S. Holders, described below, could be affected by actions taken by parties to whom the ADSs are released.
Prospective investors should be aware that this discussion does not address the tax consequences to investors who are not U.S. Holders.
Prospective investors should consult their own tax advisors as to the particular tax considerations applicable to them relating to the purchase,
ownership and disposition of ordinary shares or ADSs, including the applicability of U.S. federal, state and local tax laws and non-U.S. tax laws.
Taxation of Distributions on our Ordinary Shares or ADSs
Subject to the discussion below under “Passive Foreign Investment Company” (which we refer to as the PFIC discussion), a distribution paid by us
with respect to the ordinary shares or ADSs to a U.S. Holder will be treated as dividend income to the extent that the distribution does not exceed our current
and accumulated earnings and profits, as determined for United States federal income tax purposes. The amount of the distribution with respect to the ordinary
shares or ADSs will equal the amount of cash and the fair market value of any property distributed and will also include the amount of any non-U.S. taxes
withheld from such distribution.
Dividends paid on our ordinary shares or ADSs will not be eligible for the “dividends-received” deduction generally allowed to corporate U.S. Holders
with respect to dividends received from U.S. corporations.
For the taxable years of 2011 and 2012, distributions treated as dividends that are received by an individual U.S. Holder from “qualified foreign
corporations” generally qualify for a 15% reduced maximum tax rate so long as certain holding periods and other requirements are met. Dividends paid by us in
a taxable year in which we are not a PFIC are expected to be eligible for the 15% reduced maximum tax rate. However, any dividend paid by us in a taxable
year in which we are a PFIC will be subject to tax at regular ordinary income rates. Unless the reduced rate provision is extended or made permanent or other
changes are made by subsequent legislation, for tax years beginning on or after January 1, 2013, dividends will be taxed at regular ordinary income rates.
Dividends that are received by U.S. Holders that are individuals, estates or trusts will be taxed at the rate applicable to long-term capital gains
(currently a maximum rate of 15% for taxable years beginning on or before December 31, 2012), provided that such dividends meet the requirements of
“qualified dividend income.” Dividends that fail to meet such requirements, and dividends received by corporate U.S. Holders, are taxed at ordinary income
rates. Unless the reduced rate provision is extended or made permanent or other changes are made by subsequent legislation, for tax years beginning on or after
January 1, 2013, dividends will be taxed at regular ordinary income rates
In order for our dividends to qualify as “qualified dividend income,” we need to be considered a “qualified foreign corporation,” which requires that we
be eligible for the benefits of a comprehensive income tax treaty with the United States which includes an information exchange program that the United States
Internal Revenue Service, or IRS, determines is satisfactory. Furthermore, no dividend received by a U.S. Holder will be a qualified dividend if (1) the U.S.
Holder held our ordinary shares or ADSs with respect to which the dividend was paid for less than 61 days during the 121-day period beginning on the date that
is 60 days before the ex-dividend date with respect to such dividend, excluding for this purpose, under the rules of Code Section 246(c), any period during
which the U.S. Holder has an option to sell, is under a contractual obligation to sell, has made and not closed a short sale of, is the grantor of a deep-in-the-
money or otherwise nonqualified option to buy, or has otherwise diminished its risk of loss by holding other positions with respect to, such ordinary shares or
ADSs (or substantially identical securities) or (2) the U.S. Holder is under an obligation (pursuant to a short sale or otherwise) to make related payments with
respect to positions in property substantially similar or related to the ordinary shares or ADSs with respect to which the dividend is paid. If we were to be a
“passive foreign investment company” (as such term is defined in the Code) for any taxable year, dividends paid on our ordinary shares or ADSs in such year or
in the following taxable year would not be qualified dividends. See the PFIC discussion below regarding our passive foreign investment company status. In
addition, a non-corporate U.S. Holder will be able to take a qualified dividend into account in determining its deductible investment interest (which is generally
limited to its net investment income) only if it elects to do so; in such case the dividend will be taxed at ordinary income rates.
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The amount of any distribution which exceeds the amount treated as a dividend will be treated first as a non-taxable return of capital, reducing the U.S.
Holder’s tax basis in its ordinary shares or ADSs to the extent thereof, and then as capital gain from the deemed disposition of the ordinary shares or ADSs
Dividends paid by us in NIS generally will be included in the income of U.S. Holders at the dollar amount of the dividend (including any non-U.S.
taxes withheld therefrom), based upon the spot rate of exchange in effect on the date the distribution is received. U.S. Holders will have a tax basis in NIS for
United States federal income tax purposes equal to that dollar value. A U.S. Holder that converts a dividend paid in NIS into United States dollars subsequent to
receipt may have foreign exchange gain or loss arising from exchange rate fluctuations, which will generally be taxable as United States source ordinary income
or loss.
Subject to certain significant conditions and limitations, including potential limitations under the U.S-Israel Treaty, any Israeli taxes paid on or
withheld from distributions from us and not refundable to a U.S. Holder may be credited against the investor’s U.S. federal income tax liability or, alternatively,
may be deducted from the investor’s taxable income. This election is made on a year-by-year basis and applies to all foreign taxes paid by a U.S. Holder or
withheld from a U.S. Holder that year. Dividends paid on the ordinary shares or ADSs generally will constitute income from sources outside the United States
and be categorized as “passive category income” or, in the case of some U.S. Holders, as “general category income” for U.S. foreign tax credit purposes. Since
the rules governing foreign tax credits are complex, U.S. Holders should consult their own tax advisors regarding the availability of foreign tax credits in their
particular circumstances.
Taxation of the Disposition of the Ordinary Shares or ADSs
Subject to the PFIC discussion below, a U.S. Holder generally will recognize capital gain or loss upon the sale, exchange or other disposition of
ordinary shares or ADSs in an amount equal to the difference between the amount realized on the sale, exchange or other disposition and the U.S. Holder’s
adjusted tax basis in such ordinary shares or ADSs. This capital gain or loss will be long-term capital gain or loss if the U.S. Holder’s holding period in the
ordinary shares or ADSs exceeds one year. Preferential tax rates for long-term capital gain (currently, with a maximum rate of 15% for a holding period ending
in taxable years beginning before January 1, 2013 and a maximum rate of 20% thereafter) will apply to individual U.S. Holders. The deductibility of capital
losses recognized on the sale, exchange or other disposition of ordinary shares or ADSs may be subject to limitations. The gain or loss will generally be income
or loss from sources within the United States for U.S. foreign tax credit purposes.
A U.S. Holder that uses the cash method of accounting calculates the dollar value of the proceeds received on the sale as of the date that the sale settles.
However, a U.S. Holder that uses the accrual method of accounting is required to calculate the value of the proceeds of the sale as of the trade date and may
therefore realize foreign currency gain or loss. A U.S. Holder may avoid realizing foreign currency gain or loss by electing to use the settlement date to
determine the proceeds of sale for purposes of calculating the foreign currency gain or loss. In addition, a U.S. Holder that receives foreign currency upon
disposition of ordinary shares and converts the foreign currency into dollars after the settlement date or trade date (whichever date the U.S. Holder is required to
use to calculate the value of the proceeds of sale) may have foreign exchange gain or loss based on any appreciation or depreciation in the value of the foreign
currency against the dollar, which will generally be U.S. source ordinary income or loss.
Passive Foreign Investment Company
We will be a passive foreign investment company, or PFIC, for a taxable year if either (1) 75% or more of our gross income in the taxable year is
passive income; or (2) the average percentage (by value determined on a quarterly basis) in a taxable year of our assets that produce, or are held for the
production of, passive income is at least 50%. Passive income for this purpose generally includes, among other things, certain dividends, interest, royalties, rents
and gains from commodities and securities transactions and from the sale or exchange of property that gives rise to passive income. If we own (directly or
indirectly) at least 25% by value of the stock of another corporation, we will be treated for purposes of the foregoing tests as owning our proportionate share of
the other corporation’s assets and as directly earning our proportionate share of the other corporation’s income.
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We believe that we were not a PFIC in 2011 and currently expect that we will not be a PFIC in 2012. However, PFIC status is determined as of the end
of the taxable year and is dependent on a number of factors. Therefore, there can be no assurance that we will not become a PFIC for the year ending December
31, 2012 or in a future taxable year. Rules similar to those applicable to gains derived from the disposition of our ordinary shares or ADSs also apply to certain
“excess distributions.” A decline in the value of our ordinary shares or ADSs could result in our company being classified as a PFIC. U.S .investors should
consult their own tax advisors with respect to the U.S. tax consequences of investing in our ordinary shares or ADSs.
If we are a PFIC, a U.S. Holder must determine under which of three alternative taxing regimes it wishes to be taxed:
•
•
The “QEF” regime applies if the U.S. Holder elects to treat us as a “qualified electing fund,” or QEF, for the first taxable year in which the U.S. Holder
owns our ordinary shares or ADSs or in which we are a PFIC, whichever is later, and if we comply with certain reporting requirements. If the QEF
regime applies, then each year that we are a PFIC, such U.S. Holder will include in its gross income a proportionate share of our ordinary earnings
(which is taxed to the U.S. Holder as ordinary income) and net capital gain (which is taxed to the U.S. Holder as long-term capital gain), subject to a
separate election to defer payment of taxes, which deferral is subject to an interest charge. These amounts would be included in income by an electing
U.S. Holder for its taxable year in which our taxable year ends, whether or not such amounts are actually distributed to the U.S. Holder. A U.S.
Holder’s basis in our ordinary shares or ADSs for which a QEF election has been made would be increased to reflect the amount of any taxed but
undistributed income. Generally, a QEF election allows an electing U.S. Holder to treat any gain realized on the disposition of his ordinary shares or
ADSs as capital gain.
Once made, the QEF election applies to all subsequent taxable years of the U.S. Holder in which it holds our ordinary shares or ADSs and for which
we are a PFIC, and can be revoked only with the consent of the IRS. The QEF election is made by attaching a completed IRS Form 8621, including the
PFIC annual information statement, to a timely filed United States federal income tax return. Even if a QEF election is not made, a U.S. person who is
a shareholder in a PFIC must file a completed IRS Form 8621 every year.
If a QEF election is made after the first taxable year in which a U.S. Holder holds our ordinary shares or ADSs and we are a PFIC, then special rules
would apply.
A second regime, the “mark-to-market” regime, may be elected so long as our ordinary shares or ADSs are “marketable stock” (e.g., “regularly traded”
on the NASDAQ Global Market). Pursuant to this regime, an electing U.S. Holder’s ordinary shares or ADSs are marked-to-market for each taxable
year that we are a PFIC and the U.S. Holder recognizes as ordinary income or loss an amount equal to the difference as of the close of the taxable year
between the fair market value of our ordinary shares or ADSs and the U.S. Holder’s adjusted tax basis therein. Losses are allowed only to the extent of
net mark-to-market gain previously included by the U.S. Holder under the election for prior taxable years. An electing U.S. Holder’s adjusted basis in
our ordinary shares or ADSs is increased by income recognized under the mark-to-market election and decreased by the deductions allowed under the
election.
Under the mark-to-market election, in a taxable year that we are a PFIC, gain on the sale of our ordinary shares or ADSs is treated as ordinary income,
and loss on the sale of our ordinary shares or ADSs, to the extent the amount of loss does not exceed the net mark-to-market gain previously included,
is treated as ordinary loss (losses in excess of net mark-to-market gain previously included are generally capital losses). The mark-to-market election
applies to the taxable year for which the election is made and all later taxable years, unless the ordinary shares or ADSs cease to be marketable or the
IRS consents to the revocation of the election.
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If the mark-to-market election is made after the first taxable year in which a U.S. Holder holds our ordinary shares or ADSs and we are a PFIC, then
special rules would apply.
•
A U.S. Holder making neither the QEF election nor the mark-to-market election is subject to the “excess distribution” regime. Under this regime,
“excess distributions” are subject to special tax rules. An excess distribution is either (1) a distribution with respect to ordinary shares or ADSs that is
greater than 125% of the average distributions received by the U.S. Holder from us over the shorter of either the preceding three years or such U.S.
Holder’s holding period for our ordinary shares or ADSs, or (2) gain from the disposition of our ordinary shares or ADSs (including gain deemed
recognized if the ordinary shares or ADSs are used as security for a loan).
Excess distributions must be allocated ratably to each day that a U.S. Holder has held our ordinary shares or ADSs. A U.S. Holder must include
amounts allocated to the current taxable year and to any period prior to the first day of the first taxable year for which we are a PFIC in its gross income
as ordinary income for the current taxable year. All amounts allocated to other years of the U.S. Holder would be taxed at the highest tax rate for each
such prior year applicable to ordinary income. The U.S. Holder also would be liable for interest on the deferred tax liability for each such other year
calculated as if such liability had been due with respect to each such other year. A United States person who inherits shares or ADSs in a non-U.S.
corporation that was a PFIC in the hands of the decedent is generally denied the otherwise available step-up in the tax basis of such shares or ADSs.
Instead, such U.S. Holder’s basis would be equal to the lesser of the decedent’s basis or the fair market value of the ordinary shares or ADSs.
U.S. Holders are urged to consult their tax advisors regarding the application of the PFIC rules, including eligibility for and the manner and
advisability of making, the QEF election or the mark-to-market election.
Information Reporting and Backup Withholding
A U.S. Holder generally is subject to information reporting and may be subject to backup withholding (currently at rate of up to 28%) with respect to
dividend payments on, or receipt of the proceeds from the disposition of, the ordinary shares or ADSs. Backup withholding will not apply with respect to
payments made to exempt recipients, including corporations, or if a U.S. Holder provides a correct taxpayer identification number, certifies that such holder is
not subject to backup withholding or otherwise establishes an exemption. Backup withholding is not an additional tax and may be claimed as a credit against the
United States federal income tax liability of a U.S. Holder, or alternatively, the U.S. Holder may be eligible for a refund of any excess amounts withheld under
the backup withholding rules, in either case, provided that the required information is furnished to the IRS.
Non-U.S. Holders of Ordinary Shares or ADSs
Except as provided below, a non-U.S. Holder of ordinary shares or ADSs will not be subject to United States federal income or withholding tax on the
receipt of dividends on, and the proceeds from the disposition of, an ordinary share or ADS, unless, in the case of United States federal income taxes, that item
is effectively connected with the conduct by the non-U.S. Holder of a trade or business in the United States and, in the case of a resident of a country which has
an income tax treaty with the United States, that item is attributable to a permanent establishment in the United States or, in the case of an individual, a fixed
place of business in the United States. In addition, gain recognized by an individual non-U.S. Holder upon the disposition of our ordinary shares or ADSs will
be subject to tax in the United States if the non-U.S. Holder is present in the United States for 183 days or more in the taxable year of the sale and certain other
conditions are met.
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Non-U.S. Holders generally will not be subject to information reporting or backup withholding with respect to the payment of dividends on, or the
proceeds from the disposition of, ordinary shares or ADSs, provided that the non-U.S. Holder provides its taxpayer identification number, certifies to its foreign
status, or otherwise establishes an exemption.
F.
Dividends and Paying Agents
Not applicable.
G.
Statement by Experts
Not applicable.
H.
Documents on Display
Formula is subject to the reporting requirements of the Exchange Act that are applicable to a foreign private issuer. In accordance with the Exchange
Act, we file reports with the SEC, including annual reports on Form 20-F by April 30 each year (as of 2012). In the case of our annual report for the 2011 fiscal
year, we have availed ourselves of a 15 day extension to such April 30 deadline in accordance with Rule 12b-25 under the Exchange Act. In addition, we
furnish interim financial information on Form 6-K on a quarterly basis. We also furnish to the SEC under cover of Form 6-K certain other material information
required to be made public in Israel, filed with and made public by any stock exchange or distributed by us to our shareholders. You may inspect without charge
and copy at prescribed rates such material at the public reference facilities maintained by the SEC, at 100 F Street, N.E., Washington, D.C. 20549. You may also
obtain copies of such material from the SEC at prescribed rates by writing to the Public Reference Section of the SEC, 100 F Street, N.E., Washington, D.C.
20549. Please call the SEC at 1-800-SEC-0330 for further information on the public reference room.
The SEC maintains an Internet site at http://www.sec.gov that contains reports and other material that are filed through the SEC’s Electronic Data
Gathering, Analysis and Retrieval (EDGAR) system. Formula began filing through the EDGAR system beginning in October 2002. The Exchange Act file
number for our SEC filings is 000-29442.
Formula’s ADSs are quoted on the NASDAQ Global Market. You may inspect reports and other information concerning Formula at the offices of the
Financial Industry Regulatory Authority, Inc., or FINRA, 9509 Key West Avenue, Rockville, Maryland 20850. Copies of our SEC filings and submissions are
also submitted to the Israel Securities Authority, or ISA, and the TASE. Such copies can be retrieved electronically through the MAGNA distribution site of the
ISA (www.magna.isa.gov.il) and the TASE website (maya.tase.co.il).
A copy of each report that we submit in accordance with applicable United States law is available for public review at our principal executive offices,
at 5 Haplada Street, Or Yehuda 60218, Israel. Information about us is also available on our website at http://www.formulasystems.com. Such information is not
part of this annual report.
I.
Subsidiary Information
Not applicable.
ITEM 11. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Interest Rate and Currency Exchange Rate Fluctuations; Impact of Inflation
In light of the nature of our activities, we invest our cash and cash equivalents primarily in short-term and long-term deposits. As of December 31,
2011, substantially all of the cash that we held was invested in dollar accounts bearing interest based on LIBOR, Euro accounts and NIS accounts bearing
interest based on the Israeli prime rate. Given the current low interest rates in the financial markets, assuming a 10% interest rate decrease, the net decrease in
our earnings from our financial assets would be negligible, holding other variables constant.
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As described above in this annual report (under “Item 3.D Risk Factors—Risks Relating to Operations in Israel—Fluctuations in foreign currency
values may affect our business and results of operations” and “Item 5. Operating and Financial Review and Prospects—Operating Results— Impact of Inflation
and Currency Fluctuations on Results of Operations”), because most of our software services revenues are received in NIS, a decrease in value of the NIS
against the dollar adversely impacts the operating results for our software services operating segment, by reducing the dollar-recorded revenue growth rate for
those services. Accordingly, an increase in the value of the NIS relative to the dollar positively impacts our dollar-recorded software services revenues and
operating profit.
At the same time, a significant portion of our revenues from proprietary software products is currently denominated in dollars and other currencies,
particularly Euro, Japanese Yen and British pound, while a substantial portion of our expenses relating to the proprietary software products, principally salaries
and related personnel expenses, is denominated in NIS. As a result, the depreciation of the dollar or these other currencies relative to the NIS increases our
operating costs as a percentage of the revenues that we derive from those dollar and other currency-denominated sales, and, therefore, adversely affects the
operational profitability of our proprietary software product reporting segment. A rise in the rate of Israeli inflation compounds this negative impact by further
increasing our NIS (and ultimately dollar-recorded) operating expenses, and, consequently, reducing our operational profitability in that segment. Also, the
depreciation of these other currencies—particularly Euro, Japanese Yen and British pound—relative to the U.S. dollar reduces our dollar recorded revenues
from sales of our proprietary software products and thereby harms our results of operations.
The net effect of these risks stemming from currency exchange rate fluctuations on our operating results can be quantified as follows:
An increase of 10% in the value of the NIS relative to the dollar in the year ended December 31, 2011 would have resulted in a net increase in the
dollar reporting value of our operating income of $1.9 million for 2011 and an increase in the dollar reporting value of our total revenues of $54.0 million for
that year, due primarily to the increase in dollar value of software services revenues earned in NIS, which would outweigh the adverse impact to the profitability
of our proprietary software products segment resulting from such an increase. On the other hand, a 10% decrease in value of the NIS relative to the dollar in the
year ended December 31, 2011 would have caused a net decrease in the dollar reporting value of our operating income of less than $1.6 million for 2011 and a
decrease in the dollar reporting value of our total revenues of $44.2 million for that year, due to the reduction in dollar value of services revenues earned in NIS,
which would outweigh the favorable effect on the profitability of our proprietary software products segment that would result from the devaluation of the NIS
relative to the dollar.
Depending upon the circumstances, we will consider entering into currency hedging transactions to decrease the risk of financial exposure from
fluctuations in the exchange rate of the dollar, Euro, Japanese yen and/or British Pound against the NIS, or the Euro, Japanese yen and/or British Pound against
the dollar. There can be no assurance that these activities, or others that we may use from time to time, will eliminate the negative financial impact of currency
fluctuations and inflation. We do not—nor do we intend to in the future—engage in currency speculation.
Fluctuations in Market Price of Securities We Hold
We hold the securities of our three significant subsidiaries— Magic Software, Matrix and Sapiens— which are companies whose securities are listed
for trading on the NASDAQ Global Market and/or the TASE. We consider these holdings as long-term holdings. We are exposed to the risk of fluctuation of
the price of these companies’ securities. All of these publicly traded companies have experienced significant historical volatility in their stock prices.
Fluctuations in the market price of our holdings in these companies may result in the fluctuation of the value of our assets. We typically do not attempt to reduce
or eliminate our market exposure on these securities.
Generally, we do not hold nor have we issued, to any material extent, any derivatives or other financial instruments for trading purposes.
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ITEM 12. DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES
A.
Debt Securities
Not applicable.
B. Warrants and Rights
Not applicable.
C.
Other Securities
Not applicable.
D.
American Depositary Shares
Fees and charges payable by our ADS holders
The Bank of New York Mellon, which we refer to as the Depositary, serves as the depositary for our ADS program. Pursuant to the deposit agreement
by and among our Company, the Depositary and owners and holders of our ADSs, which we refer to as the Deposit Agreement, ADS holders may be required
to pay various fees to the Depositary. In particular, the Depositary may charge the following fees to any party depositing or withdrawing ADSs, or to any party
surrendering American Depositary Receipts (which we refer to as ADRs) that represent the ADSs, or to whom ADRs are issued (including, without limitation,
issuance pursuant to a stock dividend or stock split declared by us or an exchange of stock involving the ADRs or any deposited ADSs underlying the ADRs or
a distribution of ADRs pursuant to a distribution of underlying shares), as applicable: (a) taxes and governmental charges, (b) such registration fees as may from
time to time be in effect for the registration of transfers of shares generally on our share register and applicable to transfers of shares to the name of the
Depositary or its nominee or agent in connection with making deposits or withdrawals under the Deposit Agreement, (c) such cable, telex and facsimile
transmission expenses as are expressly provided for in the Deposit Agreement, (d) such expenses as are incurred by the Depositary in the conversion of foreign
currency, (e) a fee of $5.00 or less per 100 ADSs (or portion thereof) for the execution and delivery of ADRs (including in connection with distributions of
shares or rights by us) and in connection with the surrender of receipts and withdrawal of the underlying shares, (f) a fee of $.02 or less per ADS (or portion
thereof) for any cash distribution made pursuant to the Deposit Agreement, including in connection with distributions of shares or rights, (g) a fee for the
distribution of securities in connection with certain distributions, such fee being in an amount equal to the fee for the execution and delivery of ADSs which
would have been charged as a result of the deposit of such securities but which securities are instead distributed by the Depositary to ADR holders, and (h) any
other charges payable by the Depositary or any of its agents in connection with the servicing of ADSs or other deposited securities underlying the ADRs.
Amounts received from the Depositary
We do not receive any fees directly or indirectly from the Depositary.
PART II
ITEM 13. DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES
None.
ITEM 14. MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USE OF PROCEEDS
None.
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ITEM 15. CONTROLS AND PROCEDURES
(a) Disclosure Controls and Procedures. Our management, with the participation of our Chief Executive Officer and Chief Financial Officer, evaluated
the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) as of December 31, 2011.
Based on their evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective as of
December 31, 2011.
(b) Management’s Annual Report on Internal Control over Financial Reporting. Our management is responsible for establishing and maintaining
adequate internal control over financial reporting, as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act. Our internal control system
is designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in
accordance with generally accepted accounting principles.
Our management, with the participation of our Chief Executive Officer and Chief Financial Officer, assessed the effectiveness of our internal control
over financial reporting as of December 31, 2011. In making this assessment, our management utilized the criteria established in Internal Control – Integrated
Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on this assessment, our management concluded that, as
of December 31, 2011, our internal control over financial reporting was effective.
Notwithstanding the foregoing, all internal control systems no matter how well designed have inherent limitations. Therefore, even those systems
determined to be effective may not prevent or detect misstatements and can provide only reasonable assurance with respect to financial statement preparation
and presentation. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of
changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Kost Forer Gabbay & Kasierer, a member of Ernst & Young Global, an independent registered public accounting firm in Israel, which has audited our
financial statements for the year ended December 31, 2011 that are included in this annual report, has issued an attestation report on our management's
assessment of our internal control over financial reporting as of December 31, 2011.
(c) Attestation Report of the Registered Public Accounting Firm. The attestation report of Kost Forer Gabbay & Kasierer, a member of Ernst & Young
Global, an independent registered public accounting firm in Israel, on our management's assessment of our internal control over financial reporting as of
December 31, 2011 is provided on page F-3, as included under Item 18 of this annual report.
(d) Changes in Internal Control Over Financial Reporting. Based on the evaluation conducted by it, with the participation of our Chief Executive
Officer and Chief Financial Officer, pursuant to Rules 13a-15(d) and 15d-15(d) promulgated under the Exchange Act, our management (including such officers)
has concluded that there has been no change in our internal control over financial reporting that occurred during 2010, that has materially affected, or is
reasonably likely to materially affect, our internal control over financial reporting.
ITEM 16A. AUDIT COMMITTEE FINANCIAL EXPERT
Our board of directors has determined that Ms. Dafna Cohen, who serves on the audit committee of our board of directors, qualifies as our “audit
committee financial expert,” as defined under the rules and regulations of the SEC. Ms. Cohen is not currently independent under the NASDAQ listing rules,
due to her past affiliation with our former controlling shareholder, Emblaze. Nevertheless, Ms. Cohen has been determined by our board of directors to be
independent within the meaning of Rule 10A-3 under the Exchange Act, and, pursuant to NASDAQ listing rule 5615(a)(3), we have notified NASDAQ that we
follow home country practice in lieu of compliance with NASDAQ listing rule 5605(c)(2)(A)(i), which enables Ms. Cohen to serve on our audit committee
despite the fact that this causes our audit committee to not consist entirely of independent directors within the meaning of NASDAQ listing rule 5605(a)(2).
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ITEM 16B. CODE OF ETHICS
We have adopted a code of business conduct and ethics, or code of ethics, applicable to Formula’s Chief Executive Officer and Chief Financial Officer
(who also serves as its principal accounting officer) and any person performing similar functions, as well as to its directors and other employees. A copy of the
code of ethics is available to all of Formula’s employees, investors and others without charge, upon request to the following address: Formula Systems (1985)
Ltd., 35 Haplada St., Or Yehuda 60218, Israel, Attn: Chief Executive Officer.
The chairman of our audit committee may approve a request by our Chief Executive Officer, Chief Financial Officer (who also serves as our principal
accounting officer) or any person performing similar functions for a waiver from the requirements of our code of ethics pertaining to (i) honest and ethical
conduct, including the ethical handling of actual or apparent conflicts of interest between personal and professional relationship; (ii) full, fair, accurate, timely
and understandable disclosure in reports and documents that we must file with, or submit to, the SEC and in other public communications made by us; (iii)
compliance with applicable governmental laws, rules and regulations; (iv) the prompt internal reporting of violation of the code of ethics to the chairman of our
audit committee; and (v) accountability for adherence to the code of ethics; provided in each case that the person requesting such waiver provides to our audit
committee a full disclosure of the particular circumstances relating to such request. The chairman of our audit committee will first determine whether a waiver
of the relevant requirements of the code of ethics is required and, if such waiver is required, whether a waiver will be granted. The person requesting such
waiver may be required to agree to certain conditions before a waiver or a continuing waiver is granted.
Any amendments to the code of ethics and all waivers from compliance with the code of ethics granted to our Chief Executive Officer, Chief Financial
Officer (who also serves as our principal accounting officer) or any person performing similar functions with respect to its requirements described in the above
paragraph will be publicly disclosed by us via a report on Form 6-K in accordance with the regulations of the SEC. No such amendment has been adopted, nor
waiver provided, by us during the fiscal year ended December 31, 2011. The
ITEM 16C. PRINCIPAL ACCOUNTANT FEES AND SERVICES
Principal Accountant Fees and Services
We paid the following fees for professional services rendered by Kost Forer Gabbay & Kasierer, Certified Public Accountant, a member firm of Ernst
& Young Global, independent registered public accounting firm (which we refer to as Kost Forer), for the years ended December 31, 2011 and December 31,
2010, respectively:
Audit Fees(1)
Audit-Related Fees(2)
Tax Fees(3)
All Other Fees
Total
2011
2010
($, in thousands)
983
12
269
106
1,358
600
-
88
-
688
(1) The audit fees for the years ended December 31, 2011 and 2010 were for professional services rendered for: the audits of our annual consolidated
financial statements; agreed-upon procedures related to the review of our consolidated quarterly information; statutory audits of Formula and certain
subsidiaries; issuance of comfort letters and consents; and assistance with review of documents filed with the SEC.
(2) Audit-related fees for the year ended December 31, 2011 relate to due diligence services performed in connection with our acquisitions, stock options
and value added tax (VAT) related matters.
(3) Tax fees for the years ended December 31, 2011 and 2010 were for services related to tax compliance, including the preparation of tax returns and
claims for refund, and tax advice.
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Policy on Pre-Approval of Audit and Non-Audit Services of Independent Auditors
Our audit committee is responsible for the oversight of our (and our subsidiaries’) independent auditor’s work. The audit committee’s policy is to pre-
approve all audit and non-audit services provided by our and our subsidiaries’ independent auditor (Kost Forer). These services may include audit services,
audit-related services, tax services and other services. The audit committee sets forth the basis for its pre-approval in detail, listing the particular services or
categories of services which are pre-approved, and setting forth a specific budget for such services. Additional services may be pre-approved by the audit
committee on an individual basis. Once services have been pre-approved, our independent auditor and our management then report to the audit committee on a
periodic basis regarding the extent of services actually provided in accordance with the applicable pre-approval, and regarding the fees for the services
performed.
During 2010 and 2011, all audit and non-audit services were pre-approved by our audit committee in accordance with the foregoing pre-approval
procedures.
ITEM 16D. EXEMPTIONS FROM THE LISTING STANDARDS FOR AUDIT COMMITTEES
Not applicable.
ITEM 16E. PURCHASES OF EQUITY SECURITIES BY THE ISSUER AND AFFILIATED PURCHASERS
None.
ITEM 16F. CHANGE IN REGISTRANT’S CERTIFYING ACCOUNTANT
None.
ITEM 16G. CORPORATE GOVERNANCE
The NASDAQ Global Select Market requires companies with securities listed thereon to comply with its corporate governance standards. As a foreign
private issuer, we are not required to comply with all of the rules that apply to listed domestic U.S. companies. Pursuant to NASDAQ listing rule 5615(a)(3), we
have notified NASDAQ that with respect to the corporate governance practices described below, we instead follow Israeli law and practice and accordingly do
not follow the NASDAQ listing rules. Except for the differences described below, we do not believe there are any significant differences between our corporate
governance practices and those that apply to a U.S. domestic issuer under the NASDAQ Global Market corporate governance rules.
Majority Board Independence and Executive Sessions of Independent Directors: Under the Companies Law, we do not need to have a majority of
independent directors (as defined under the NASDAQ listing rules) serving on our board of directors, nor do our independent directors need to meet regularly in
sessions at which only they are present, as is required of U.S. domestic issuers under NASDAQ listing rules 5605(b)(1)-(b)(2).
Audit Committee Composition: While our directors who are members of the audit committee all satisfy the criteria for independence referenced in
Rule 10A-3(b)(1) under the Exchange Act, they are not all “independent directors” as defined in NASDAQ listing rule 5605(a)(2), which is generally required
for a U.S. domestic issuer under NASDAQ listing rule 5605(c)(2)(A)(i). Ms. Dafna Cohen, who serves on our audit committee, served as director of
investments and treasurer of our former controlling shareholder Emblaze within the past three years and is therefore not independent under the NASDAQ
independent director definition. Israeli law requires us, as a public company, to appoint an audit committee comprised of at least three directors, including all of
our external directors. The chairman of the board of directors, any director employed by or otherwise providing services to our company, and a controlling
shareholder or any relative of a controlling shareholder, may not be a member of the audit committee, but these criteria do not mimic the NASDAQ independent
director requirement for audit committee membership.
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Independent Director Oversight of Executive Officer Compensation: Under Israeli law, the compensation of executive officers is determined by
both the audit committee (or, should we wish to establish such a committee in the future, a compensation committee of our board of directors that meets all of
the requirements applicable to an audit committee) and the full board of directors, and there is no requirement for a recommendation or determination of such
compensation solely by independent directors or by a compensation committee of the board, as NASDAQ listing rule 5605(d) requires. Furthermore, under the
Companies Law, the amendment of existing compensation terms of our executive officers who are not directors merely requires the approval of our audit
committee, if such committee determines that the amendment is not substantial in relation to the existing terms. If an executive officer is also a director, then the
Companies Law requires that the terms of his or her compensation must be approved by the audit committee, the board of directors and shareholders of a
company, and that officer may not be present when the audit committee or board of directors discusses or acts upon the terms of his or her compensation.
Independent Director Oversight of Nominations: Under Israeli law, there is no requirement to have an independent nominating committee or the
independent directors of a company select (or recommend for selection) director nominees, as is required under NASDAQ listing rule 5605(e) for a U.S.
domestic issuer. Our board of directors handles this process, as is permitted by our articles and the Companies Law. We also need not adopt a formal board
resolution or charter addressing the director nominations process and such related matters as may be required under the U.S. federal securities laws, as
NASDAQ requires for a U.S. issuer.
Review of Related Party Transactions: Under Israeli law, related party transactions involving our company require the approval of the board of
directors and, if involving an extraordinary transaction with an office holder, our audit committee as well, and if involving a controlling shareholder or a third
party where the controlling shareholder has a personal interest, require shareholder approval, including a special majority, rather than approval by the audit
committee or other independent body of our board of directors as required under NASDAQ listing rule 5630.
Shareholder Approval: Pursuant to Israeli law, we seek shareholder approval for all corporate actions requiring such approval under the
requirements of the Companies Law, which are different from, or in addition to, the requirements for seeking shareholder approval under NASDAQ listing rule
5635. See “Item 10. Additional Information— Memorandum and Articles of Association— Approval of Certain Transactions Under the Companies Law” in
this annual report for a description of the transactions requiring shareholder approval under the Companies Law.
Quorums for Shareholders Meetings. The quorum for a shareholders meeting, as stipulated in our articles, complies with the provisions of Israeli
law, and requires the presence, in person or by proxy of holders of 25% of our outstanding ordinary shares, in lieu of the requirement specified in NASDAQ
listing rule 5620(c) under which the quorum for any shareholders meeting shall not be less than 33⅓% of the outstanding voting shares of a listed company.
Required Timing for Annual Shareholders Meetings. Under the Companies Law, we are required to hold an annual shareholders meeting each
calendar year and within 15 months of the last annual shareholders meeting, which differs from the corresponding requirement under NASDAQ listing rule
5620(a), which mandates that a listed company hold its annual shareholders meeting within one year of the company’s fiscal year-end.
ITEM 17. FINANCIAL STATEMENTS
We have elected to provide financial statements and related information pursuant to Item 18.
PART III
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ITEM 18. FINANCIAL STATEMENTS
Our consolidated financial statements and the report of our independent registered public accounting firm in connection therewith are filed as part of
this annual report, as noted on the pages below:
Report of Independent Registered Public Accounting Firm
Consolidated Balance Sheets at December 31, 2011 and 2010
Consolidated Statements of Income for the Years Ended December 31, 2011, 2010 and 2009
Consolidated Statements of Changes in Equity for the Years Ended December 31, 2011, 2010 and 2009
Consolidated Statements of Cash Flows for the Years Ended December 31, 2011, 2010 and 2009
Notes to Consolidated Financial Statements
F-2
F-5
F-7
F-8
F-10
F-14
ITEM 19. EXHIBITS
Exhibit No.
1.1
1.2
2.1
4.1
4.2
8
12.1
12.2
13.1
13.2
15.1
15.2
15.3
15.4
15.5
15.6
15.7
Memorandum of Association (1)
Amended and Restated Articles of Association, as adopted by Formula Systems (1985) Ltd. on January 8, 2012 (2)
Depositary Agreement by and among Formula Systems (1985) Ltd., Bank of New York Mellon and the holders of the
American Depositary Shares of Formula Systems (1985) Ltd. (1)
Form of Letter of Indemnification for officers and directors, adopted by Formula Systems (1985) Ltd. on January 8, 2012 (3)
English translation of Formula Systems (1985) Ltd. Employees and Office Holders Share Option Plan (2008)(4)
List of Subsidiaries*
Certification of the Chief Executive Officer pursuant to Rule 13a-14(a)/Rule 15d-14(a) under the Exchange Act *
Certification of the Chief Financial Officer pursuant to Rule 13a-14(a)/Rule 15d-14(a) under the Exchange Act *
Certification of the Chief Executive Officer pursuant to Rule 13a-14(b)/Rule 15d-14(b) under the Exchange Act and 18 U.S.C.
Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002*
Certification of the Chief Financial Officer pursuant to Rule 13a-14(b)/Rule 15d-14(b) under the Exchange Act and 18 U.S.C.
Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002*
Consent of Kost, Forer, Gabbay & Kaiserer, a member of Ernst & Young Global *
Consent of Levy Cohen and Co. *
Consent of Levy Cohen and Co. *
Consent of Verstegen accountants en adviseurs*
Consent of KDA Audit Corporation*
Consent of Maria Negyessy*
Consent of Ziv Haft, registered certified public accountants (Isr.) BDO member firm*
* Filed herewith.
(1) Incorporated by reference to the registration statement on Form F-1 (File No. 333-8858) filed with respect to the registrant’s American Depositary
Shares.
(2) Incorporated by reference to Exhibit 99.1 to the report on Form 6-K filed by the registrant with the Securities and Exchange Commission on January
18, 2012.
(3) Incorporated by reference to Exhibit 99.2 to the report on Form 6-K filed by the registrant with the Securities and Exchange Commission on January
18, 2012.
(4) Incorporated by reference to the annual report on Form 20-F for the 2008 fiscal year filed by the registrant with the Securities and Exchange
Commission on April 27, 2009.
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FORMULA SYSTEMS (1985) LTD. AND ITS SUBSIDIARIES
CONSOLIDATED FINANCIAL STATEMENTS
AS OF DECEMBER 31, 2011
IN U.S. DOLLARS IN THOUSANDS
INDEX
Reports of Independent Registered Public Accounting Firm
Consolidated Balance Sheets
Consolidated Statements of Income
Statements of Changes in Equity
Consolidated Statements of Cash Flows
Notes to Consolidated Financial Statements
- - - - - - - - - - - - - - - - - - -
Page
F2 - F4
F-5 - F-6
F-7
F-8 - F-9
F-10 - F-13
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Kost Forer Gabbay & Kasierer
3 Aminadav St.
Tel-Aviv 67067, Israel
Tel: 972 (3)6232525
Fax: 972 (3)5622555
www.ey.com
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and the Shareholders of
FORMULA SYSTEMS (1985) LTD.
We have audited the accompanying consolidated balance sheets of Formula Systems (1985) Ltd. and its subsidiaries (the "Company") as of December
31, 2010 and 2011 and the related consolidated statements of income, changes in equity and cash flows for each of the two years in the period ended December
31, 2011. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial
statements based on our audits. We did not audit the financial statements of certain subsidiaries, which statements reflect total assets of 2% and 1% as of
December 31, 2010 and 2011, respectively, and total revenues of 4% and 3%, for each of the years ended December 31, 2010 and 2011, respectively, of the
related consolidated totals. Those statements were audited by other auditors whose reports have been furnished to us, and our opinion, insofar as it relates to the
amounts included for those subsidiaries, is based solely on the reports of the other auditors.
The financial statements of the Company for the year ended December 31, 2009, were audited by another auditor who expressed an unqualified opinion
on those financial statements in his report dated April 29, 2010.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require
that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits and
the reports of other auditors provide a reasonable basis for our opinion.
In our opinion, based on our audits and the reports of the other auditors, the consolidated financial statements referred to above present fairly, in all
material respects, the consolidated financial position of the Company at December 31, 2010 and 2011 and the related consolidated results of their operations and
their cash flows for each of the three years in the period ended December 31, 2011, in conformity with U.S generally accepted accounting principles.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the Company’s internal
control over financial reporting as of December 31, 2011, based on criteria established in Internal Control-Integrated Framework issued by the Committee of
Sponsoring Organizations of the Treadway Commission and our report dated May 15, 2012 expressed an unqualified opinion thereon.
Tel-Aviv, Israel
May 15, 2012
/s/ Kost Forer Gabbay & Kasierer
KOST FORER GABBAY & KASIERER
A Member of Ernst & Young Global
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Kost Forer Gabbay & Kasierer
3 Aminadav St.
Tel-Aviv 67067, Israel
Tel: 972 (3)6232525
Fax: 972 (3)5622555
www.ey.com
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Shareholders of
FORMULA SYSTEMS (1985) LTD.
We have audited Formula Systems (1985) Ltd’s ("Formula" or the "Company") internal control over financial reporting as of December 31, 2011,
based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (the
COSO criteria). The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the
effectiveness of internal control over financial reporting, included in the accompanying Management’s Report on Internal Control Over Financial Reporting.
Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require
that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material
respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing
and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered
necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
A Company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial
reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A Company’s internal
control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and
fairly reflect the transactions and dispositions of the assets of the Company; (2) provide reasonable assurance that transactions are recorded as necessary to
permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the Company are
being made only in accordance with authorizations of management and directors of the Company; and (3) provide reasonable assurance regarding prevention or
timely detection of unauthorized acquisition, use, or disposition of the Company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation
of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance
with the policies or procedures may deteriorate.
F-3
Date: 05/14/2012 02:55 PM User: djohnson
Client: v313119_FORMULA SYSTEMS (1985) LTD_20-F
Vintage Filings
Project: v313119 Form Type: 20-F
File: v313119_20f.htm Type: 20-F Pg: 100 of 171
Kost Forer Gabbay & Kasierer
3 Aminadav St.
Tel-Aviv 67067, Israel
Tel: 972 (3)6232525
Fax: 972 (3)5622555
www.ey.com
In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2011, based on
COSO criteria.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance
sheets of the Company and its subsidiaries as of December 31, 2010 and 2011, and the related consolidated statements of operations, changes in equity and cash
flows for each of the two years in the period ended December 31, 2011 and our report dated May 15, 2012 expressed an unqualified opinion thereon.
Tel-Aviv, Israel
May 15, 2012
/s/ Kost Forer Gabbay & Kasierer
KOST FORER GABBAY & KASIERER
A Member of Ernst & Young Global
F-4
Date: 05/14/2012 02:55 PM User: djohnson
Client: v313119_FORMULA SYSTEMS (1985) LTD_20-F
Vintage Filings
Project: v313119 Form Type: 20-F
File: v313119_20f.htm Type: 20-F Pg: 101 of 171
CONSOLIDATED BALANCE SHEETS
U.S. dollars in thousands
ASSETS
CURRENT ASSETS:
Cash and cash equivalents
Marketable securities (Note 4)
Short-term deposits
Trade receivables (net of allowances for doubtful debts of $ 3,781 and $ 3,320 as of December 31,
$
2010 and 2011, respectively)
Other accounts receivable (Note 17a)
Inventories
LONG-TERM INVESTMENTS:
Marketable Securities (Note 4)
Deferred taxes (Note 16e)
Investments in affiliated companies (Note 6)
Prepaid expenses and other accounts receivable
SEVERANCE PAY FUND
PROPERTY, PLANTS AND EQUIPMENT, NET (Note 7)
NET INTANGIBLE ASSETS (Note 9)
GOODWILL (Note 8)
TOTAL ASSETS
The accompanying notes are an integral part of the financial statements.
FORMULA SYSTEMS (1985) LTD.
AND ITS SUBSIDIARIES
December 31,
2010
2011
110,508 $
38,170
24
154,366
23,140
5,601
331,809
2,828
13,135
3,209
5,493
24,665
55,286
12,411
33,101
166,495
88,172
14,347
5,170
163,219
33,635
2,450
306,993
2,746
11,630
77,107
3,885
95,368
49,507
19,165
31,544
166,644
669,221
$
623,767 $
F-5
Date: 05/14/2012 02:55 PM User: djohnson
Client: v313119_FORMULA SYSTEMS (1985) LTD_20-F
Vintage Filings
Project: v313119 Form Type: 20-F
File: v313119_20f.htm Type: 20-F Pg: 102 of 171
CONSOLIDATED BALANCE SHEETS
U.S. dollars in thousands (except share and per share data)
LIABILITIES AND SHAREHOLDERS’ EQUITY
CURRENT LIABILITIES:
Liabilities to banks (Note 17b)
Debentures (Note 11)
Trade payables
Deferred revenue
Employees and payroll accrual
Other accounts payable (Note 17c)
Liability in respect of business combinations
Total current liabilities
LONG-TERM LIABILITIES:
Liabilities to banks and others (Note 10)
Debentures (Note 11)
Deferred taxes (Note 16e)
Deferred revenue
Liability in respect of business combinations
Liability in respect of capital lease
Accrued severance pay
Total long-term liabilities
TOTAL LIABILITIES
COMMITMENTS AND CONTINGENCIES (Note 14)
REDEEMABLE NON-CONTROLLING INTEREST
EQUITY (Note 15):
Formula systems shareholders’ equity:
Share capital:
Ordinary shares of NIS 1 par value -
Authorized: 25,000,000 shares at December 31,2010 and 2011;
Issued and outstanding: 13,596,000 at December 31, 2010 and 2011
Additional paid-in capital
Retained earnings
Other accumulated comprehensive loss
Treasury shares (24,780 shares as of December 31, 2010 and 2011)
Total Formula shareholders’ equity
Non-controlling interests
TOTAL EQUITY
FORMULA SYSTEMS (1985) LTD.
AND ITS SUBSIDIARIES
December 31,
2010
2011
6,684
15,927
53,177
26,845
40,704
30,693
3,963
16,642
31,472
40,344
22,653
41,005
25,332
3,717
177,993
181,165
3,154
31,854
2,654
3,520
4,758
-
65,450
111,390
289,383
34,459
15,246
4,836
2,094
2,502
1,920
63,321
124,378
305,543
-
11,469
3,807
136,222
58,441
(596)
(259)
197,615
136,769
334,384
3,876
135,674
91,672
(12,295)
(259)
218,668
133,541
352,209
TOTAL LIABILITIES, REDEEMABLE NON-CONTROLLING INTEREST AND
EQUITY
623,767
669,221
The accompanying notes are an integral part of the financial statements.
May 15, 2012
Date of approval of the
Financial statements
/s/ Marcin Rulnicki
Marcin Rulnicki
Chairman of the Board of
Directors
/s/ Guy Bernstein
Guy Bernstein
Chief Executive Officer
/s/ Asaf Berenstin
Asaf Berenstin
Chief Financial Officer
F-6
Date: 05/14/2012 02:55 PM User: djohnson
Client: v313119_FORMULA SYSTEMS (1985) LTD_20-F
Vintage Filings
Project: v313119 Form Type: 20-F
File: v313119_20f.htm Type: 20-F Pg: 103 of 171
CONSOLIDATED STATEMENTS OF INCOME
U.S. dollars in thousands (except share and per share data)
Revenues (Note 17g):
Proprietary software products and related services
Software services
Total revenues
Cost of revenues:
Proprietary software products and related services
Software services
Total cost of revenues
Gross profit
Research and development costs, net
Selling, general and administrative expenses
Other expenses (income), net (Note 17e)
Operating income
Financial expenses, net (Note 17d)
Income before taxes on income
Taxes on income (Note 16)
Gain derived from deconsolidation of subsidiary and
equity in gains (losses) of affiliated companies, net (Note 6)
Income from continuing operation
Net income from discontinued operations (Note 18b)
Net income
Net income attributable to non-controlling interests
Net income attributable to Formula’s shareholders
Amount attributable to Formula’s shareholders
Income from continuing operations
Income from discontinued operations
Earnings per share generated from continuing operation:
Basic
Diluted
Earnings per share generated from discontinued operations:
Basic
Diluted
Total earnings per share:
Basic
Diluted
Shares used in computing earnings per share (Note 17h):
Basic
Diluted
The accompanying notes are an integral part of the financial statements.
FORMULA SYSTEMS (1985) LTD.
AND ITS SUBSIDIARIES
2009
Year ended December 31,
2010
2011
88,815
380,575
469,390
43,057
309,226
352,283
117,107
4,430
77,322
(1,668)
37,023
(231)
36,792
(8,305)
28,487
(335)
28,152
4,878
33,030
13,954
19,076
14,198
4,878
19,076
1.08
1.04
0.37
0.36
1.44
1.40
98,498
451,196
549,694
46,297
366,166
412,463
137,231
5,503
84,510
231
46,987
(4,371)
42,616
(6,544)
36,072
(1,070)
35,002
-
35,002
16,623
18,379
18,379
-
18,379
1.37
1.36
-
-
1.37
1.36
91,288
549,329
640,617
38,805
454,081
492,886
147,731
5,148
93,340
(207)
49,450
(6,500)
42,950
(5,689)
37,261
25,870
63,131
-
63,131
20,169
42,962
42,962
-
42,962
3.17
3.11
-
-
3.17
3.11
13,200
13,564
13,382
13,523
13,514
13,669
F-7
Date: 05/14/2012 02:55 PM User: djohnson
Client: v313119_FORMULA SYSTEMS (1985) LTD_20-F
Vintage Filings
Project: v313119 Form Type: 20-F
File: v313119_20f.htm Type: 20-F Pg: 104 of 171
CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY
U.S. dollars in thousands (except share and per share data)
Share Capital
Number
Amount
Additional
paid-in
capital
Retained
earnings
Accumulated
other
comprehensive
loss
Cost of
Treasury
shares
Non-
controlling
interests
Total
Equity
FORMULA SYSTEMS (1985) LTD.
AND ITS SUBSIDIARIES
Balance as of January 1, 2009
Changes during 2009:
Net Income
Unrealized gain from derivative instruments, net
Unrealized gain (loss) from available - for-sale securities, net
Other temporary impairment
Foreign Currency translation adjustments
Total comprehensive income (loss)
Stock Based Compensation expenses
Non-controlling interests changes due to holding changes
including exercise of employees stock options
Dividend to non-controlling interests in subsidiaries
Balance as of December 31, 2009
Changes during 2010:
Net Income
Unrealized gain from derivative instruments, net
Unrealized gain (loss) from available - for-sale
securities, net
Realized gain from available-for-sale securities
Foreign Currency translation adjustments
Total comprehensive income
Stock Based Compensation expenses
Exercise of employees stock options
Non-controlling interests changes due to holding changes
including exercise of employees stock options
Acquisition of non-controlling interests
Dividend to Formula’s shareholders and to non-
controlling interests in subsidiaries
13,200,000
3,736
132,588
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
308
(1,265)
-
13,200,000
3,736
131,631
-
-
-
-
-
-
396,000
-
-
-
-
-
-
-
-
-
71
-
-
-
-
-
-
-
-
458
(71)
6,258
(2,054)
40,972
19,076
-
-
-
-
-
-
-
60,048
18,379
-
-
-
-
-
-
-
-
(7,100)
(259)
107,433
277,370
-
3
(66)
(250)
298
(15)
-
-
-
-
-
-
-
-
-
-
-
13,954
2
74
-
413
489
1,333
(842)
(15,094)
(7,115)
(259)
107,273
-
4
180
250
6,085
6,519
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
16,623
3
(21)
-
4,793
4,775
1,006
-
16,068
(1,711)
33,030
5
8
(250)
711
474
1,641
(2,107)
(15,094)
295,314
35,002
7
159
250
10,878
11,294
1,464
-
22,326
(3,765)
Balance as of December 31, 2010
13,596,000
3,807
136,222
58,441
(596)
(259)
136,769
334,384
F-8
-
(19,986)
(7,265)
(27,251)
Date: 05/14/2012 02:55 PM User: djohnson
Client: v313119_FORMULA SYSTEMS (1985) LTD_20-F
Vintage Filings
Project: v313119 Form Type: 20-F
File: v313119_20f.htm Type: 20-F Pg: 105 of 171
CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY
U.S. dollars in thousands (except share and per share data)
Share Capital
Number
Amount
Additional
paid-in
capital
Retained
earnings
Accumulated
other
comprehensive
Loss
Cost of
treasury
shares
Non-
controlling
interests
Total
Equity
FORMULA SYSTEMS (1985) LTD.
AND ITS SUBSIDIARIES
Changes during 2011:
Net Income
Unrealized loss from derivative instruments, net
Unrealized loss from available-for-sale securities, net
Other than temporary impairment on marketable securities
Foreign Currency translation adjustments
Total comprehensive loss
Stock based Compensation expenses (Note 12a)
Exercise of employees stock options (Note 12a)
Redemption of shares (Note 12a)
Non-controlling interests changes due to holding changes,
including exercise of employees stock options
Acquisition of non-controlling interests
Dividend to Formula’s shareholders
Dividend to non- controlling interests in subsidiaries
-
-
-
-
-
-
543,840
(543,840)
-
-
-
-
-
-
-
-
-
-
226
(157)
-
-
-
-
-
-
-
-
-
2,120
(226)
157
(537)
(2,062)
-
-
Balance as of December 31, 2011
13,596,000
3,876
135,674
42,962
-
-
-
-
-
-
-
-
-
-
(9,731)
-
91,672
(11)
(156)
714
(12,246)
(11,699)
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
20,169
(12)
(36)
-
(5,702)
(5,750)
2,503
-
-
(7,607)
(3,125)
-
(9,418)
63,131
(23)
(192)
714
(17,948)
(17,449)
4,623
-
-
(8,144)
(5,187)
(9,731)
(9,418)
(12,295)
(259)
133,541
352,209
Accumulated unrealized loss from available-for-sale securities
Accumulated currency translation adjustments
Accumulated unrealized gain from derivative instruments
Accumulated other comprehensive income (loss)
2009
Year ended December 31,
2010
2011
(1,384)
(5,734)
3
(7,115)
(954)
351
7
(596)
(396)
(11,895)
(4)
(12,295)
The accompanying notes are an integral part of the financial statements.
F-9
Date: 05/14/2012 02:55 PM User: djohnson
Client: v313119_FORMULA SYSTEMS (1985) LTD_20-F
Vintage Filings
Project: v313119 Form Type: 20-F
File: v313119_20f.htm Type: 20-F Pg: 106 of 171
CONSOLIDATED STATEMENTS OF CASH FLOWS
U.S. dollars in thousands
Cash flows from operating activities:
Net income
Adjustments to reconcile net income to net cash provided by operating activities:
Impairment and write down of other investments and fixed assets
Impairment of available for sale marketable securities
Gain derived from deconsolidation of subsidiary and equity in losses )gains) of
affiliated companies
Depreciation and amortization
Changes in value of debentures
Increase (decrease) in accrued severance pay, net
Gain from sale of operation and subsidiaries
Loss (gain) from sale of property, plants and equipment
Stock-based compensation expenses
Changes in financial liabilities, net
Loss from repurchase of convertible debt, net
Changes in value of long term loans and deposits, net
Changes in deferred taxes, net
Change in liability in respect of business combinations
Loss (gain) from sale and decrease (increase) in value of marketable securities
classified as trading
Changes in operating assets and liabilities:
Decrease (increase) in inventories
Decrease (increase) in trade receivables
Decrease (increase) in other current and long-term accounts receivable
Increase (decrease) in trade payables
Increase (decrease) in other accounts payable and employees and payroll accrual
Increase (decrease) in deferred revenues
FORMULA SYSTEMS (1985) LTD.
AND ITS SUBSIDIARIES
2009
Year ended December 31,
2010
2011
33,030
59
143
335
14,605
-
(1,618)
(4,389)
(2,219)
1,641
(202)
2
(210)
665
458
(2,609)
340
13,057
12,478
1,604
(12,875)
1,345
35,002
-
292
1,070
15,451
1,728
(148)
(146)
1
1,464
325
-
64
(3,355)
265
630
(3,007)
(9,500)
(1,129)
5,666
925
5,351
63,131
-
714
(25,870)
14,363
2,496
3,025
(630)
(2)
4,623
-
-
133
(3,798)
1,292
1,421
2,938
(21,795)
(9,924)
(10,584)
4,386
(86)
25,833
Net cash provided by operating activities
55,640
50,949
The accompanying notes are an integral part of the financial statements.
F-10
Date: 05/14/2012 02:55 PM User: djohnson
Client: v313119_FORMULA SYSTEMS (1985) LTD_20-F
Vintage Filings
Project: v313119 Form Type: 20-F
File: v313119_20f.htm Type: 20-F Pg: 107 of 171
CONSOLIDATED STATEMENTS OF CASH FLOWS
U.S. dollars in thousands
FORMULA SYSTEMS (1985) LTD.
AND ITS SUBSIDIARIES
2009
Year ended December 31,
2010
2011
Cash flows from investing activities:
Acquisition of newly-consolidated subsidiaries and activities (Appendix C)
Changes due to deconsolidation and realization of investments in previously-consolidated
(1,262)
(14,378)
subsidiaries (Appendix D)
Proceeds from sale of activity in a consolidated company
Changes in restrictions on short term deposit
Purchase of property and equipment
Proceeds from sale of marketable securities, net
Proceeds from sale of property, plants and equipment
Investment in and loans to affiliates and other companies
Payments to former shareholders of consolidated company
Changes in short term deposits, net
Proceeds from long term bank deposits
Capitalization of software development and other costs
3,482
105
4,040
(2,713)
3,064
5,666
-
(6,455)
(11,945)
139
(6,960)
-
146
400
(5,348)
12,246
446
(1,160)
-
13,445
-
(9,186)
(40,188)
(16,599)
-
-
(8,907)
21,500
43
(8,765)
-
(5,179)
-
(9,744)
Net cash used in investing activities
(12,839)
(3,389)
(67,839)
The accompanying notes are an integral part of the financial statements.
F-11
Date: 05/14/2012 02:55 PM User: djohnson
Client: v313119_FORMULA SYSTEMS (1985) LTD_20-F
Vintage Filings
Project: v313119 Form Type: 20-F
File: v313119_20f.htm Type: 20-F Pg: 108 of 171
CONSOLIDATED STATEMENTS OF CASH FLOWS
U.S. dollars in thousands
Cash flows from financing activities:
Exercise of employees stock options in subsidiaries
Dividend paid to non-controlling interests in subsidiaries
Dividend to Formula’s shareholders
Short-term bank credit, net
Repayment of long-term loans from banks and others
Proceeds from long term loans
Proceeds from (repayment) of short-term loans
Issuance in a subsidiary to non-controlling interest
Purchase of non-controlling interests
Proceeds from SWAP transactions
Repayment of capital lease
Repayment and repurchase of debenture
Net cash provided by (used in) financing activities
Effect of exchange rate changes on cash and cash equivalents
Net increase (decrease) in cash and cash equivalents
Cash and cash equivalents at beginning of year
Cash and cash equivalents at end of year
The accompanying notes are an integral part of the financial statements.
F-12
FORMULA SYSTEMS (1985) LTD.
AND ITS SUBSIDIARIES
2009
Year ended December 31,
2010
2011
1,224
(8,400)
(29,964)
(247)
(8,616)
-
1,580
-
(3,774)
1,061
-
(5,824)
1,850
(13,959)
(19,986)
(229)
(7,574)
-
(3,381)
20,290
(3,768)
2,423
-
(15,927)
(52,960)
(40,261)
(238)
3,004
890
(9,418)
(9,731)
5,043
(6,461)
45,420
-
-
(5,187)
-
(213)
-
20,343
(673)
(10,397)
110,602
10,303
100,205
(22,336)
110,508
100,205
110,508
88,172
Date: 05/14/2012 02:55 PM User: djohnson
Client: v313119_FORMULA SYSTEMS (1985) LTD_20-F
Vintage Filings
Project: v313119 Form Type: 20-F
File: v313119_20f.htm Type: 20-F Pg: 109 of 171
CONSOLIDATED STATEMENTS OF CASH FLOWS
U.S. dollars in thousands
a.
Supplemental cash flow information:
Cash paid in respect of:
Interest
Income tax
b.
Non-cash activities:
Dividend payable to Formula’s shareholders and to non-controlling
interests in subsidiaries
Assets retirement obligation
Purchase of property and equipment
Receivables from sale of property
c.
Acquisition of newly-consolidated subsidiaries and activities:
Assets and liabilities of subsidiaries consolidated as of acquisition
date:
Working capital (other than cash and cash equivalents)
Property and equipment
Goodwill and intangible assets
Long-term liabilities
Other long term assets
Long term deferred tax liability
Liability to formerly shareholders
Cash designated to distribution to former shareholders
Cash paid in conjunction with acquisitions of activities
Non-controlling interests at acquisition date
Total
d.
Changes due to deconsolidation and realization of investments in
previously-consolidated subsidiaries:
Working capital (other than cash and cash equivalents)
Property and equipment
Other assets, deferred expenses and long term payables
Goodwill and intangible assets
Adjustment to other comprehensive loss
Non-controlling interests at loss of control date
Investment in affiliated company presentation due to loss of
control
Gain from realization of investments in subsidiaries
Total
The accompanying notes form an integral part of the financial statements.
F-13
FORMULA SYSTEMS (1985) LTD.
AND ITS SUBSIDIARIES
2009
Year ended December 31,
2010
2011
4,064
4,444
6,694
275
-
450
-
-
(1,262)
-
-
-
-
-
-
-
(1,262)
(2,259)
144
1,337
206
(230)
-
-
4,284
3,482
3,847
7,356
-
-
-
-
(3,341)
(304)
(18,443)
5,199
717
(173)
-
-
-
1,967
(14,378)
-
-
-
-
-
-
-
-
-
1,628
13,843
-
-
2,696
-
(2,823)
(1,534)
(49,382)
13,385
-
1,742
7,483
(4,821)
(6,020)
1,782
(40,188)
(7,796)
1,220
3,527
42,269
-
(10,916)
(71,366)
26,463
(16,599)
Date: 05/14/2012 02:55 PM User: djohnson
Client: v313119_FORMULA SYSTEMS (1985) LTD_20-F
Vintage Filings
Project: v313119 Form Type: 20-F
File: v313119_20f.htm Type: 20-F Pg: 110 of 171
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands, except share and per share data
NOTE 1:- GENERAL
FORMULA SYSTEMS (1985) LTD.
AND ITS SUBSIDIARIES
a.
Formula Systems (1985) Ltd. ("Formula") was incorporated in Israel in 1985. Since 1991, Formula’s ordinary shares, par value NIS 1.0 per
share, have been traded on the Tel Aviv Stock Exchange ("TASE"), and, in 1997, began trading through American Depositary Shares
("ADSs") under the symbol "FORTY" on the NASDAQ Global Market in the United States until January 3, 2011, at which date the listing of
Formula’s ADSs was transferred to the NASDAQ Global Select Market ("NASDAQ"). Each ADS represents one ordinary share of Formula.
Formula, through its subsidiaries (collectively, the "Company" or the "Group") is engaged in the development, production and marketing of
information technology (or "IT") solutions and services. The Group operates through three directly held subsidiaries: Matrix IT Ltd.
("Matrix"); Magic Software Enterprises Ltd. ("Magic") and Sapiens International Corporation N.V ("Sapiens").
On August 21, 2011, following the acquisition by Sapiens of all of the outstanding shares of FIS Software Ltd. and its subsidiaries ("FIS")
and IDIT I.D.I. Technologies Ltd. ("IDIT") (see Note 3 for further information), which was mainly financed by the issuance of Sapiens
ordinary shares, Formula's interest in Sapiens was diluted from 75.6% to 42.2%. Formula’s investment in Sapiens following the dilution is
measured under the equity method of accounting. For a description of the Company’s operations, see Note 17(f).
b.
The following table presents certain information regarding the control and ownership of Formula’s significant subsidiaries and affiliates, as of
the dates indicated:
Name of subsidiary (affiliate)
Matrix
Magic
Sapiens
The above list consists only of active companies that are held directly by Formula.
F-14
Percentage of ownership
and control
December 31,
2010
2011
50.1
51.7
71.6
50.0
51.1
47.3
Date: 05/14/2012 02:55 PM User: djohnson
Client: v313119_FORMULA SYSTEMS (1985) LTD_20-F
Vintage Filings
Project: v313119 Form Type: 20-F
File: v313119_20f.htm Type: 20-F Pg: 111 of 171
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands, except share and per share data
NOTE 2 – SIGNIFICANT ACCOUNTING POLICIES
FORMULA SYSTEMS (1985) LTD.
AND ITS SUBSIDIARIES
a.
b.
The consolidated financial statements have been prepared in accordance with United States generally accepted accounting principles ("U.S.
GAAP"), applied on a consistent basis, as follows:
Use of estimates
The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect
the amounts reported and disclosed in the financial statements and accompanying notes. The Company’s management believes that the
estimates, judgments and assumptions used are reasonable based upon information available at the time they are made. These estimates,
judgments and assumptions can affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the
dates of the financial statements, and the reported amounts of revenue and expenses during the reporting period. Actual results could differ
from those estimates.
c.
Financial statements in United States dollars
The currency of the primary economic environment in which the operations of Formula and certain subsidiaries are conducted is the U.S.
dollar ("dollar"); thus, the dollar is the functional currency of Formula and certain subsidiaries.
Formula’s and certain subsidiaries' transactions and balances denominated in dollars are presented at their original amounts. Non-dollar
transactions and balances have been remeasured to dollars in accordance with ASC 830, "Foreign Currency Matters." All transaction gains
and losses from remeasurement of monetary balance sheet items denominated in non-dollar currencies are reflected in the statements of
income as financial income or expenses, as appropriate.
For those subsidiaries whose functional currency has been determined to be their local currency, assets and liabilities are translated at year-
end exchange rates and statement of income items are translated at average exchange rates prevailing during the year. Such translation
adjustments are recorded as a separate component of accumulated other comprehensive income (loss) in shareholders' equity.
d.
Principles of consolidation
The consolidated financial statements include the accounts of Formula as well as those of its subsidiaries in which it has controlling interests.
Intercompany balances and transactions, including profit from intercompany sales not yet realized outside the Group, have been eliminated
upon consolidation.
Changes in the parent’s ownership interest in a subsidiary with no change of control are treated as equity transactions, with any difference
between the amount of consideration paid and the change in the carrying amount of the non-controlling interest, recognized in equity.
F-15
Date: 05/14/2012 02:55 PM User: djohnson
Client: v313119_FORMULA SYSTEMS (1985) LTD_20-F
Vintage Filings
Project: v313119 Form Type: 20-F
File: v313119_20f.htm Type: 20-F Pg: 112 of 171
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands, except share and per share data
NOTE 2:- SIGNIFICANT ACCOUNTING POLICIES (Cont.)
FORMULA SYSTEMS (1985) LTD.
AND ITS SUBSIDIARIES
A change in the parent’s ownership interest in a subsidiary with a loss of control is resulted in a deconsolidation of the subsidiary. Gain or
loss is recognized upon the deconsolidation of a subsidiary, as the difference between 1) the sum of the fair value of any consideration
received, the fair value of any retained non-controlling investment in the former subsidiary at the date the subsidiary is deconsolidated, and
the carrying amount of any non-controlling interest in the former subsidiary (including any accumulated other comprehensive income
attributable to the non-controlling interest) at the date the subsidiary is deconsolidated, and 2) the carrying amount of the former subsidiary’s
assets and liabilities.
Non-controlling interests of subsidiaries represent the non-controlling shareholders’ share of the total comprehensive income (loss) of the
subsidiaries and fair value of the net assets upon the acquisition of the subsidiaries. The non-controlling interests are presented in equity
separately from the equity attributable to the equity holders of the Company. Redeemable non-controlling interests are classified as
mezzanine equity, separate from permanent equity, on the consolidated balance sheets.
The amounts of consolidated net earnings attributable to Formula's shareholders and to the non-controlling interests are presented on the
consolidated statement of income.
The following table provides a reconciliation of the redeemable non-controlling interests:
January 1, 2011
Redeemable non-controlling interests
Net income attributable to redeemable non-controlling interests
December 31, 2011
e.
Cash equivalents
-
11,116
353
11,469
Cash and cash equivalents include short-term highly liquid investments that are readily convertible to cash with original maturities of three
months or less, at the date acquired.
f.
Short-term deposits
Short-term deposits include deposits with original maturities of more than three months and less than one year. Such deposits are presented at
cost (including accrued interest) which approximates their fair value.
g.
Marketable securities
The Company accounts for investments in marketable securities in accordance with ASC 320, "Investments - Debt and Equity Securities."
Management determines the appropriate classification of its investments in marketable debt and equity securities at the time of purchase and
reevaluates such determinations at each balance sheet date. Debt and equity securities are classified as available-for- sale or as trading and
reported at fair value.
F-16
Date: 05/14/2012 02:55 PM User: djohnson
Client: v313119_FORMULA SYSTEMS (1985) LTD_20-F
Vintage Filings
Project: v313119 Form Type: 20-F
File: v313119_20f.htm Type: 20-F Pg: 113 of 171
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands, except share and per share data
NOTE 2:- SIGNIFICANT ACCOUNTING POLICIES (Cont.)
FORMULA SYSTEMS (1985) LTD.
AND ITS SUBSIDIARIES
Unrealized gains and losses from marketable securities classified as "available for sale" are excluded from earnings and are reported as a
component in equity under "accumulated other comprehensive income (loss)." Realized gains and losses on sales of investments, as
determined on a specific identification basis, are included in financial income, net, together with accretion (amortization) of discount
(premium), and interest or dividends.
Declines in fair value of available-for-sale equity securities that are considered other-than-temporary, based on criteria described in Staff
Accounting Bulletin ("SAB") Topic 5M, "Other Than Temporary Impairment of Certain Investments in Equity Securities," are charged to
earnings (based on the entire difference between fair value and amortized cost). Factors considered in making such a determination include
the duration and severity of the impairment, the financial condition and near-term prospects of the issuer of the securities, and the intent and
ability of the Company to retain its investment for a period of time that is sufficient to allow for any anticipated recovery in market value.
During 2011, $ 514 of other-than-temporary impairment on equity marketable securities was recorded. See further details in Note 4.
For declines in value of debt securities, the Company applies an amendment to ASC 320. Under the amended impairment model, an-other-
than-temporary impairment loss is deemed to exist and is recognized in earnings if the Company intends to sell or if it is more likely than not
that it will be required to sell, a debt security, before recovery of its amortized cost basis. If the criteria mentioned above do not exist, the
Company evaluates the collectability of the security in order to determine if the security is other than temporarily impaired.
For debt securities that are deemed other-than-temporarily impaired, the amount of impairment recognized in the statements of income is
limited to the amount related to "credit losses" (the difference between the amortized cost of the security and the present value of the cash
flows expected to be collected), while impairment related to other factors is recognized in other comprehensive income.
During 2011, $ 200 of other-than-temporary impairment on debt marketable securities was recorded. See further details in Note 4.
Unrealized gains and losses from marketable securities classified as "trading" are reported in the statements of income.
F-17
Date: 05/14/2012 02:55 PM User: djohnson
Client: v313119_FORMULA SYSTEMS (1985) LTD_20-F
Vintage Filings
Project: v313119 Form Type: 20-F
File: v313119_20f.htm Type: 20-F Pg: 114 of 171
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands, except share and per share data
NOTE 2:- SIGNIFICANT ACCOUNTING POLICIES (Cont.)
h.
Inventories
FORMULA SYSTEMS (1985) LTD.
AND ITS SUBSIDIARIES
Inventories are mainly comprised of hardware. Inventories are valued at the lower of cost or market value. Cost is determined on the "first in
- first out" basis. The Group periodically evaluates the condition and age of inventories and makes provisions for impairment of inventories
accordingly. No such impairments have been recognized in any period presented.
i.
j.
Investments in affiliates
Affiliates are companies over which significant influence is exercised, but which are not consolidated subsidiaries, and are accounted for by
the equity method, net of write-down for decrease in value that is not of a temporary nature.
Property, plant and equipment, net
Property, plant and equipment are stated at cost, net of accumulated depreciation. Depreciation is calculated via the straight-line method over
the estimated useful life. The following are the annual depreciation rates for various types of property, plant and equipment:
Computers and equipment
Motor vehicles
Buildings
Leasehold improvements
k.
Intangible assets
%
7-33 (mainly 33%)
15
2-4
Over the shorter of the lease term or useful
economic life
Intangible assets are comprised of capitalized software development costs and other intangible assets:
1.
Research and development costs:
Research and development costs incurred in the process of software development before establishment of technological feasibility are
charged as expenses as incurred. Costs incurred subsequent to the establishment of technological feasibility are capitalized according to
the principles set forth in ASC 985-20, "Costs of Software to be Sold, Leased or Marketed." The Group’s technological feasibility is
established upon completion of a detailed program design or working model.
F-18
Date: 05/14/2012 02:55 PM User: djohnson
Client: v313119_FORMULA SYSTEMS (1985) LTD_20-F
Vintage Filings
Project: v313119 Form Type: 20-F
File: v313119_20f.htm Type: 20-F Pg: 115 of 171
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands, except share and per share data
NOTE 2:- SIGNIFICANT ACCOUNTING POLICIES (Cont.)
FORMULA SYSTEMS (1985) LTD.
AND ITS SUBSIDIARIES
Capitalized software development costs are amortized on a product by product basis. Amortization is performed by applying the
greater of the amount computed by using the: (i) ratio of current gross revenues from sales of the software to the total of current and
anticipated future gross revenues from sales of that software, or (ii) the straight-line method over the estimated economic useful life of
the product (three to five years).
The Group assesses the recoverability of these intangible assets on a regular basis by determining whether the amortization of the asset
over its remaining economic useful life can be recovered through undiscounted future operating cash flows from the specific software
product sold. During the years ended December 31, 2009, 2010 and 2011, no impairment losses were identified.
During the years ended December 31 2009, 2010 and 2011, capitalized software development costs of consolidated subsidiaries
aggregated to $ 6,800, $ 9,000 and $ 8,300, respectively, and amortized capitalized software development costs of consolidated
subsidiaries aggregated to $ 8,400, $ 9,100 and $ 6,300, respectively.
2.
Other intangible assets:
Other intangible assets are comprised mainly of customer related intangible assets and acquired technology, and are amortized over
their economic useful lives using a method of amortization that reflects the pattern in which the economic benefits of the intangible
assets are consumed or otherwise used up.
Customer relationship and acquired technology
Other intangibles
l.
Impairment of long-lived assets and intangible assets subject to amortization
Period
3-15 years
3-10
The Company’s long-lived assets and identifiable intangibles are reviewed for impairment in accordance with ASC 360, "Property, Plant and
Equipment" whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable.
Recoverability of an asset to be held and used is measured by a comparison of the carrying amount of the asset to the future undiscounted
cash flows expected to be generated by the asset. If an asset is considered to be impaired, the impairment to be recognized is measured by the
amount by which the carrying amount of the asset exceeds the fair value of the asset. During each of the years ended December 31, 2009,
2010 and 2011, no impairment was identified.
F-19
Date: 05/14/2012 02:55 PM User: djohnson
Client: v313119_FORMULA SYSTEMS (1985) LTD_20-F
Vintage Filings
Project: v313119 Form Type: 20-F
File: v313119_20f.htm Type: 20-F Pg: 116 of 171
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands, except share and per share data
NOTE 2:- SIGNIFICANT ACCOUNTING POLICIES (Cont.)
m.
Goodwill
FORMULA SYSTEMS (1985) LTD.
AND ITS SUBSIDIARIES
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 performed its annual goodwill impairment test with respect to its reporting units (7 and 6 reporting units as of December 31,
2010 and 2011, respectively) at December 31 of each year, or more often if indicators of impairment were present. As required by ASC 350,
the impairment test was accomplished using a two- step approach. The first step of the goodwill impairment test compared the fair value of
each reporting unit with its carrying amount, including goodwill. Upon applying this step (‘step 1’) to each reporting unit, if the Company
determined that the fair value exceeded the carrying value of the reporting unit net assets, goodwill was considered not impaired, and no
further testing was required. If the carrying value exceeded the fair value of the reporting unit, then the implied fair value of goodwill was
determined by subtracting the fair value of all of the identifiable net assets from the fair value of the reporting unit. An impairment loss was
recorded for the excess, if any; of the carrying value of goodwill over its implied fair value (‘step 2’).
As of December 31, 2010 and 2011, the estimated fair values of the Company’s reporting units ranged from 5% to 112% and from 10% to
28%, respectively, above their carrying values, thereby obviating the need to proceed to step 2 of the goodwill impairment test under ASC
350.
During the years ended December 31, 2009, 2010 and 2011, no impairment was required for any of the Company’s reporting units.
n.
Business combinations
The Company accounts for business combinations under ASC 805, "Business Combinations." ASC 805 requires recognition of assets
acquired, liabilities assumed, and non-controlling interest in the acquiree at the acquisition date, measured at their fair values as of that date.
ASC 805 also requires the fair value of acquired in-process research and development to be recorded as intangibles with indefinite lives (until
their completion or abandonment), contingent consideration to be recorded on the acquisition date, and restructuring and acquisition-related
deal costs of the acquirer to be expensed as incurred. Any excess of the fair value of net assets acquired over purchase price and any
subsequent changes in estimated contingencies are to be recorded in earnings. In addition, changes in valuation allowance related to acquired
deferred tax assets and in acquired income tax position are to be recognized in earnings.
F-20
Date: 05/14/2012 02:55 PM User: djohnson
Client: v313119_FORMULA SYSTEMS (1985) LTD_20-F
Vintage Filings
Project: v313119 Form Type: 20-F
File: v313119_20f.htm Type: 20-F Pg: 117 of 171
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands, except share and per share data
NOTE 2:- SIGNIFICANT ACCOUNTING POLICIES (Cont.)
o.
Variable interest entities
FORMULA SYSTEMS (1985) LTD.
AND ITS SUBSIDIARIES
ASC 810, "Consolidation" provides a framework for identifying Variable Interest Entities ("VIEs") and determining when a company should
include the assets, liabilities, non-controlling interests and results of activities of a VIE in its consolidated financial statements.
The Company’s assessment of whether an entity is a VIE and the determination of the primary beneficiary is judgmental in nature and
involves the use of significant estimates and assumptions. These include, among others, forecasted cash flows, their respective probabilities
and the economic value of certain preference rights. In addition, such assessment also involves estimates of whether a group entity can
finance its current activities, until it reaches profitability, without additional subordinated financial support.
Effective as of January 1, 2010, the Company applies updated guidance for the consolidation of VIEs. This guidance provides for a
qualitative approach, based on which consolidation is appropriate if an enterprise has both (1) the power to direct the economically significant
activities of the entity and (2) the obligation to absorb losses of, or the right to receive benefits from, the entity that could potentially be
significant to the variable interest entity. Determination as to whether an enterprise should consolidate a VIE is required to be performed
continuously, due to changes to existing relationships or future transactions that may affect that determination.
The U.S. based consulting and staffing services business that was acquired by Magic through one of its wholly owned subsidiaries on January
17, 2010 is considered to be a VIE. Magic is the primary beneficiary of the VIE, as a result of the fact that it holds the power to direct the
activities of the acquired business, which significantly impacts its economic performance, and has the right to receive benefits accruing from
the acquired business.
p.
Severance pay
Formula’s and its subsidiaries’ obligations for severance pay with respect to their Israeli employees (for the period for which the employees
were not included under Section 14 of Israel’s Severance Pay Law, 1963 (the "Severance Pay Law")) is calculated pursuant to the Severance
Pay Law and employee agreements based on the most recent salary of the employees multiplied by the number of years of employment, and
are presented on an undiscounted basis. Employees are entitled to one month’s salary for each year of employment or a portion thereof. The
severance pay liability to the Company’s Israeli employees pursuant to Israeli law and employment agreements is covered in part by
managers’ insurance policies, for which Formula and its Israeli subsidiaries make monthly payments. These funds are recorded as assets on
the Company’s balance sheet. The Company can only make withdrawals from these funds for payments of severance pay.
F-21
Date: 05/14/2012 02:55 PM User: djohnson
Client: v313119_FORMULA SYSTEMS (1985) LTD_20-F
Vintage Filings
Project: v313119 Form Type: 20-F
File: v313119_20f.htm Type: 20-F Pg: 118 of 171
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands, except share and per share data
NOTE 2:- SIGNIFICANT ACCOUNTING POLICIES (Cont.)
FORMULA SYSTEMS (1985) LTD.
AND ITS SUBSIDIARIES
Formula’s and its Israeli subsidiaries’ agreements with certain of their Israeli employees are entered into in accordance with Section 14 of the
Severance Pay Law. Payments in accordance with Section 14 release the Company from any future severance payment obligations in respect
of those employees. Deposits under Section 14 are not recorded as an asset on the Company’s balance sheet.
Total expenses (gain) in respect of severance pay for the years 2009, 2010 and 2011 were ($ 1,100), $ 1,300 and $ 1,391, respectively.
q.
Revenue Recognition
The Company, through Formula’s subsidiaries, derives its revenues primarily from the sale of IT services which also includes: software
products including maintenance, integration and infrastructure, training and deployment. In addition, the Company generates revenues from
the sale of software licenses, related maintenance and technical support as well as related IT professional services.
Revenues from IT services are generally recognized in accordance with ASC 605, "Revenue Recognition" and Staff Accounting Bulletin No.
104, "Revenue Recognition in Financial Statements" when IT service is provided and the following criteria are met: persuasive evidence of
an arrangement exists, no significant Company obligations remain, collection of the resulting receivable is reasonably assured, and the fees
are fixed or determinable.
Revenues derived from software license agreements are recognized in accordance with ASC 985-605 "Software - revenue recognition" when
persuasive evidence of an arrangement exists, delivery has occurred, the vendor’s fee is fixed or determinable, no further obligation exists
and collectability is probable.
Maintenance and support includes annual maintenance contracts providing for unspecified upgrades for new versions and enhancements on a
when-and-if-available basis for an annual fee. The right for an unspecified upgrade for new versions and enhancements on a when-and-if-
available basis do not specify the features, functionality and release date of future product enhancements for the customer to know what will
be made available and the general timeframe in which it will be delivered.
As required by ASC 985-605, the Company allocates revenues to the software component of its multiple-element arrangements using the
residual method when vendor specific objective evidence ("VSOE") of fair value exists for the undelivered elements of the support and
maintenance agreements. VSOE is based on the price charged when an element is sold separately or renewed. Under the residual method, the
fair value of the undelivered elements is deferred and the remaining portion of the arrangement fee is allocated to the delivered elements and
recognized as revenue.
F-22
Date: 05/14/2012 02:55 PM User: djohnson
Client: v313119_FORMULA SYSTEMS (1985) LTD_20-F
Vintage Filings
Project: v313119 Form Type: 20-F
File: v313119_20f.htm Type: 20-F Pg: 119 of 171
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands, except share and per share data
NOTE 2:- SIGNIFICANT ACCOUNTING POLICIES (Cont.)
FORMULA SYSTEMS (1985) LTD.
AND ITS SUBSIDIARIES
Maintenance and support revenue included in multiple element arrangements is deferred and recognized on a straight-line basis over the
term of the maintenance and support agreement.
Revenues from professional services provided on an hourly basis are recognized as the services are rendered.
Certain of the software license sales may also include significant implementation and customization services with respect to such sales
which are deemed essential to the functionality of the license. In addition, the Company also provides consulting services that are not
deemed essential to the functionality of the license, as well as outsourcing IT services.
Revenues from license fees that involve significant implementation and customization of the Company’s software to customer specific
requirements and which are considered essential to the functionality of the product are generated by fixed-price or time-and-materials
contracts. Revenues generated by fixed-price contracts are recognized in accordance with ASC 605-35 "Revenue Recognition -
Construction-Type and Production-Type Contracts" using the percentage-of-completion method. The percentage-of-completion method is
used when the required services are quantifiable, based on the estimated number of labor hours necessary to complete the project, and
under that method revenues are recognized using labor hours incurred as the measure of progress towards completion.
Estimates of total project requirements are based on prior experience of customization, delivery and acceptance of the same or similar
technology, and are reviewed and updated regularly by management. After delivery, if uncertainty exists about customer acceptance of the
software, license revenue is not recognized until acceptance. Provisions for estimated losses on uncompleted contracts are made in the
period in which such losses are first determined, in the amount of the estimated loss on the entire contract. As of December 31, 2010 and
2011, no estimated losses were identified.
Revenues from time-and-materials contracts for which the Company is reimbursed for labor hours at fixed hourly billing rates are
recognized as revenues as the services are provided.
The Company generally does not grant a right of return to its customers. When a right of return exists, revenue is deferred until the right of
return expires, at which time revenue is recognized, provided that all other revenue recognition criteria are met.
Deferred revenue includes unearned amounts received under maintenance and support contracts and amounts received from customers but
not yet recognized as revenues.
F-23
Date: 05/14/2012 02:55 PM User: djohnson
Client: v313119_FORMULA SYSTEMS (1985) LTD_20-F
Vintage Filings
Project: v313119 Form Type: 20-F
File: v313119_20f.htm Type: 20-F Pg: 120 of 171
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands, except share and per share data
NOTE 2:- SIGNIFICANT ACCOUNTING POLICIES (Cont.)
FORMULA SYSTEMS (1985) LTD.
AND ITS SUBSIDIARIES
r.
s.
Provision for warranty
The Company records provision for warranty in respect to products and service based on past experience.
Advertising costs
The Company records advertising expenses as incurred. Advertising costs amounting to $ 2,400, $ 2,400 and $ 2,500 were recorded in the
years 2009, 2010 and 2011, respectively.
t.
Income taxes
Formula and its subsidiaries account for income taxes in accordance with ASC 740, "Income Taxes." This codification prescribes the use
of the "asset and liability" method, whereby deferred tax assets and liability account balances are determined based on the differences
between financial reporting and tax bases of assets and liabilities and are measured using the enacted tax rates and laws that will be in
effect when the differences are expected to reverse. Formula and its subsidiaries provide a valuation allowance, if necessary, to reduce
deferred tax assets to their estimated realizable value. Deferred tax assets and liabilities are classified as current or non-current according to
the expected reversal dates.
Formula and its subsidiaries utilize a two-step approach for recognizing and measuring uncertain tax positions accounted for in accordance
with an amendment of ASC 740 "Income Taxes." Under the first step Formula and its subsidiaries evaluate a tax position taken or expected
to be taken in a tax return by determining if the weight of available evidence indicates that it is more likely than not that, based on its
technical merits, the tax position will be sustained on audit, including resolution of any related appeals or litigation processes. The second
step is to measure the tax benefit as the largest amount that is more than 50% likely to be realized upon ultimate settlement with the tax
authorities.
u.
Basic and diluted net earnings per share
Earnings per share ("EPS") are computed in accordance with the provisions of ASC 260 "Earnings per Share." ASC 260 requires the
presentation of both basic and diluted EPS. Basic net earnings per share are computed based on the weighted average number of Formula’s
ordinary shares outstanding during each year. Diluted net earnings per share are computed based on the weighted average number of
ordinary shares outstanding during each year, plus the dilutive potential ordinary shares considered outstanding during the year.
v.
Treasury shares
In prior years, Formula repurchased its ordinary shares and holds them as treasury shares. These shares are presented as a reduction of
equity, at their cost.
F-24
Date: 05/14/2012 02:55 PM User: djohnson
Client: v313119_FORMULA SYSTEMS (1985) LTD_20-F
Vintage Filings
Project: v313119 Form Type: 20-F
File: v313119_20f.htm Type: 20-F Pg: 121 of 171
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands, except share and per share data
NOTE 2:- SIGNIFICANT ACCOUNTING POLICIES (Cont.)
w.
Concentration of credit risks
FORMULA SYSTEMS (1985) LTD.
AND ITS SUBSIDIARIES
Financial instruments that potentially subject the Group to concentrations of credit risk consist principally of cash and cash equivalents,
short-term bank deposits, trade receivables, marketable securities and foreign currency derivative contracts. The majority of the Group’s
cash and cash equivalents, bank deposits and marketable securities are invested with major banks in Israel, the United States and Europe.
Such cash and cash equivalents and short-term deposits in the United States may be in excess of insured limits and are not insured in other
jurisdictions. Management believes that these financial instruments are held in financial institutions with high credit standing, and
accordingly, minimal credit risk exists with respect to these investments.
The Group’s trade receivables are derived from sales to large organizations located mainly in Israel, North America and Europe. The
Group performs ongoing credit evaluations of its customers and has established an allowance for doubtful accounts based upon factors
relating to the credit risk of specific customers and other information. In certain circumstances, Formula and its subsidiaries may require
letters of credit, other collateral or additional guarantees. From time to time, the Group sells certain of its accounts receivable to financial
institutions, within the normal course of business.
The Group maintains an allowance for doubtful accounts receivable based upon management’s experience and estimate of collectability of
each outstanding invoice. The allowance for doubtful accounts is determined with respect to specific debts that are doubtful of collection.
The doubtful accounts expense for the years ended December 31, 2009, 2010 and 2011 was $ 468, $ 487 and $ 658, respectively. To date,
the Company has not experienced any material losses on its accounts receivable. The risk of collection associated with accounts receivable
is mitigated by the diversity and number of customers.
The Company transfers financial assets from time to time. The transfer of financial assets is typically performed by the sale of receivables
to a financial institution. ASC 860, "Transfers and Servicing," establishes a standard for determining when a transfer of financial assets
should be accounted for as a sale. Certain underlying conditions must be met for the transfer of financial assets to qualify for accounting as
a sale. There are no outstanding sales of receivables as of December 31, 2009, 2010 and 2011.
The agreements pursuant to which the Company sells its trade receivables are structured such that the Company (i) transfers the proprietary
rights in the receivable from the Company to the financial institution; (ii) legally isolates the receivable from the Company’s other assets,
and presumptively puts the receivable beyond the legal reach of the Company and its creditors, even in bankruptcy or other receivership;
(iii) confers on the financial institution the right to pledge or exchange the receivable; and (iv) eliminates the Company’s effective control
over the receivable, in the sense that the Company is not entitled and shall not be obligated to repurchase the receivable other than in case
of failure by the Company to fulfill its commercial obligation.
F-25
Date: 05/14/2012 02:55 PM User: djohnson
Client: v313119_FORMULA SYSTEMS (1985) LTD_20-F
Vintage Filings
Project: v313119 Form Type: 20-F
File: v313119_20f.htm Type: 20-F Pg: 122 of 171
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands, except share and per share data
NOTE 2:- SIGNIFICANT ACCOUNTING POLICIES (Cont.)
FORMULA SYSTEMS (1985) LTD.
AND ITS SUBSIDIARIES
The Company has entered into foreign exchange forward and option contracts intended to protect against the changes in value of forecasted
non-dollar currency cash flows. These derivative instruments are designed to offset a portion of the Company’s non-dollar currency
exposure (see Note 2(y) below).
x.
Stock-based compensation
The Company accounts for share-based compensation in accordance with ASC 718, "Compensation - Stock Compensation." ASC 718
requires companies to estimate the fair value of equity-based payment awards on the date of grant using an option-pricing model. The
value of the portion of the award that is ultimately expected to vest is recognized as an expense over the requisite service periods in the
Company’s consolidated statements of income. The Company recognizes compensation expenses for the value of its awards, which have
graded vesting based on the accelerated method over the requisite service period of each of the awards, net of estimated forfeitures.
Until the end of 2009, certain of Formula’s subsidiaries used the Black-Scholes option-pricing model to measure the fair values of the
awards at the date of grant, which requires a number of assumptions, of which the most significant are the expected stock price volatility,
and the expected option term. Commencing in 2010, all subsidiaries but one used the Binomial Lattice option-pricing model (the
"Binomial model") to measure the fair values of awards at the date of grant. Expected volatility was calculated based upon actual historical
stock price movements over the most recent periods ending on the grant date, equal to the expected option term. The expected option term
represents the period that the Company’s stock options are expected to be outstanding and was determined based on historical experience
of similar options, giving consideration to the contractual terms of the stock options.
Stock based compensation expenses recorded on the subsidiaries’ level are presented in non-controlling interests.
The fair value for the Company’s subsidiaries’ share options granted to employees and directors was estimated using the following
weighted-average assumptions:
F-26
Date: 05/14/2012 02:55 PM User: djohnson
Client: v313119_FORMULA SYSTEMS (1985) LTD_20-F
Vintage Filings
Project: v313119 Form Type: 20-F
File: v313119_20f.htm Type: 20-F Pg: 123 of 171
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands, except share and per share data
NOTE 2:- SIGNIFICANT ACCOUNTING POLICIES (Cont.)
Magic (the Binomial model):
Dividend yield
Expected volatility
Risk-free interest rate
Expected forfeiture (employees)
Expected forfeiture (executives)
Contractual term of up to
Suboptimal exercise multiple (employees)
Suboptimal exercise multiple (executives)
Sapiens (Black-Scholes model for grants during 2009):
Expected term
Dividend yield
Expected volatility
Risk-free interest rate
2009
4.25 years
0%
90%
1.8% - 2.5%
FORMULA SYSTEMS (1985) LTD.
AND ITS SUBSIDIARIES
2009
0%
63%
2010
0%
2011
0%
61.2% - 62.8% 63.3% - 65.3%
2.73%-3.7% 2.53%-3.71%
9.8%
7.5%
10 years
2.35
3
9.7%
7.1%
10 years
2.3
3
2.1%
8.4%
5.2%
10 years
2.7
3.2
For grants of Sapiens’ employees commencing January 1, 2010 (the Binomial model):
Contractual life of
Expected exercise factor
Dividend yield
Expected volatility
Risk-free interest rate
2010
6 years
2.5
0%
66%
2011
6 years
2.5
0%
70%
2.3%-2.8%
0.1%-1.2%
There were no grants by Matrix during 2009 and 2010. During 2011, Matrix granted 2,250,000 options using the following assumptions in
the Black-Scholes model.
Expected term
Dividend yield
Expected volatility
Risk-free interest rate
For grants to Formula’s employees - see Note 12
F-27
2011
4.6 years
0%
36.5%
4.3%
Date: 05/14/2012 02:55 PM User: djohnson
Client: v313119_FORMULA SYSTEMS (1985) LTD_20-F
Vintage Filings
Project: v313119 Form Type: 20-F
File: v313119_20f.htm Type: 20-F Pg: 124 of 171
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands, except share and per share data
NOTE 2:- SIGNIFICANT ACCOUNTING POLICIES (Cont.)
y.
Derivatives instruments
FORMULA SYSTEMS (1985) LTD.
AND ITS SUBSIDIARIES
A portion of the Company’s revenues and expenses is exposed to changes in foreign exchange rates. Depending on market conditions,
foreign exchange risk also is managed through the use of derivative financial instruments. These financial instruments serve to protect net
income against the impact of the translation into U.S. dollars of certain foreign exchange-denominated transactions. The derivative
instruments primarily hedge or offset exposures in Euro, Japanese Yen and NIS exchange rate fluctuations.
ASC 815, "Derivatives and Hedging," requires companies to recognize all of their derivative instruments as either assets or liabilities in the
statement of financial position at fair value. Derivative instruments that are designated and qualify as hedges of forecasted transactions
(i.e., cash flow hedges) are carried at fair value with the effective portion of a derivative’s gain or loss recorded in other comprehensive
income and subsequently recognized in earnings in the same period or periods in which the hedged forecasted transaction affects earnings.
For derivative instruments that are not designated and qualified as hedging instruments, the gains or losses on the derivative instruments
are recognized in current earnings during the period of the change in fair values.
The derivative instruments used by the Company and its subsidiaries are designed to reduce the market risk associated with the exposure of
its underlying transactions to fluctuations in currency exchange rates.
Magic has instituted a foreign currency cash flow hedging program, using forward contracts and put and call options, in order to hedge
against the risk of overall changes in future cash flows, hedging portions of their forecasted expenses denominated in NIS with currency
forward contracts and put and call options. These forward and option contracts are designated as cash flow hedges.
For derivative instruments that are designated and qualify as a cash flow hedge (i.e., hedging the exposure to variability in expected future
cash flows that is attributable to a particular risk), the effective portion of the gain or loss on the derivative instrument is reported as a
component of other comprehensive income and reclassified into earnings in the same period or periods during which the hedged
transaction affects earnings. The remaining gain or loss on the derivative instrument in excess of the cumulative change in the present
value of future cash flows of the hedged item, if any, is recognized in current earnings during the period of change. For derivative
instruments not designated as hedging instruments, the gain or loss is recognized in current earnings during the period of change.
The notional principal of foreign exchange contracts entered into by the Company to purchase NIS with U.S dollars was $845 and $2,591
at December 31, 2010 and 2011, respectively. The notional principal of foreign exchange contracts to purchase U.S. dollars with Euros was
$ 1,007 and $506 at December 31, 2010 and 2011, respectively. The notional principal of foreign exchange contracts to purchase U.S.
dollars with Japanese Yen was $ 1,067 and $ 0 at December 31, 2010 and 2011.
F-28
Date: 05/14/2012 02:55 PM User: djohnson
Client: v313119_FORMULA SYSTEMS (1985) LTD_20-F
Vintage Filings
Project: v313119 Form Type: 20-F
File: v313119_20f.htm Type: 20-F Pg: 125 of 171
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands, except share and per share data
NOTE 2:- SIGNIFICANT ACCOUNTING POLICIES (Cont.)
FORMULA SYSTEMS (1985) LTD.
AND ITS SUBSIDIARIES
At December 31, 2011, the effective portion of the Company’s cash flow hedges before tax effect was $ (12), all of which is expected to be
reclassified from accumulated other comprehensive income to revenues within the next 12 months.
Matrix’s and Sapiens’ transactions did not qualify as hedging instruments under ASC 815, resulting in recognition of gains or losses
related to the transactions in current earnings during the period.
z.
Comprehensive income (loss)
The Company accounts for comprehensive income (loss) in accordance with ASC 220 "Comprehensive Income." This statement
establishes standards for the reporting and display of comprehensive income and its components in a full set of general purpose financial
statements. Comprehensive income (loss) generally represents all changes in equity during the period except those resulting from
investments by, or distributions to, shareholders. The Company determined that its items of other comprehensive income (loss) relate to
gain and loss on foreign currency translation adjustments, unrealized gain and loss on derivatives instruments designated as hedge,
unrealized gain and loss on available-for-sale marketable securities and adjustments to redeemable non-controlling interest.
aa.
Fair value measurement
The Company accounts for certain assets and liabilities at fair value under ASC 820, "Fair Value Measurements and Disclosures". Fair
value is an exit price, representing the amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction
between market participants. As such, fair value is a market-based measurement that should be determined based on assumptions that
market participants would use in pricing an asset or a liability. As a basis for considering such assumptions, ASC 820 establishes a three-
tier value hierarchy, which prioritizes the inputs used in the valuation methodologies in measuring fair value:
Level 1 - Observable inputs that reflect quoted prices (unadjusted) for identical assets or liabilities in active markets;
Level 2 - Significant other observable inputs based on market data obtained from sources independent of the reporting entity;
Level 3 - Unobservable inputs which are supported by little or no market activity (for example, cash flow modeling inputs based on
assumptions).
The fair value hierarchy also requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when
measuring fair value. The Company categorized each of its fair value measurements in one of these three levels of hierarchy.
F-29
Date: 05/14/2012 02:55 PM User: djohnson
Client: v313119_FORMULA SYSTEMS (1985) LTD_20-F
Vintage Filings
Project: v313119 Form Type: 20-F
File: v313119_20f.htm Type: 20-F Pg: 126 of 171
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands, except share and per share data
NOTE 2:- SIGNIFICANT ACCOUNTING POLICIES (Cont.)
FORMULA SYSTEMS (1985) LTD.
AND ITS SUBSIDIARIES
Assets and liabilities measured at fair value on a recurring basis are comprised of marketable securities and foreign currency forward
contracts and contingent consideration of acquisitions (see Note 5).
The carrying amounts reported in the balance sheet for cash and cash equivalents, short term bank deposits, trade receivables, other
accounts receivable, short-term bank credit, trade payables and other accounts payable approximate their fair values due to the short-term
maturities of such instruments.
ab.
Discontinued operations:
Under ASC 205 "Presentation of Financial statements – Discontinued Operation," when a component of an entity, as defined in ASC 205,
has been disposed of or is classified as held for sale, the results of its operations, including the gain or loss on the disposed component,
should be classified as discontinued operations and the assets and liabilities of such component should be classified as assets and liabilities
attributed to discontinued operations; that is, provided that the operations, assets and liabilities of the component have been eliminated
from the Company’s consolidated operations and the Company will no longer have any significant continuing involvement in the
operations of the component.
ac.
Reclassifications:
Certain comparative figures have been reclassified to conform to the current year presentation.
ad.
Capital lease:
The Group has accounted for its assets which are under a capital lease arrangement in accordance with ASC 840 "Leases." Accordingly,
assets under a capital lease are stated as assets of the Group on the basis of ordinary purchase prices (without the financing component),
and depreciated according to the usual depreciation rates applicable to such assets. The lease payments payable in forthcoming years, net of
the interest component included in them, are included in liabilities. The interest in respect of such amounts is accrued on a current basis
and is charged to earnings.
ae.
Recently issued accounting pronouncements:
In September 2011, FASB issued ASU 2011-08, Testing Goodwill for Impairment, codified in ASC 350 "Intangibles – Goodwill and
Other." The revised accounting standard update is intended to simplify how an entity tests goodwill for impairment. The amendment
allows an entity to first assess qualitative factors to determine whether it is necessary to perform the two-step quantitative goodwill
impairment test. An entity is no longer required to calculate the fair value of a reporting unit unless the entity determines, based on a
qualitative assessment, that it is more likely than not that its fair value is less than its carrying amount.
F-30
Date: 05/14/2012 02:55 PM User: djohnson
Client: v313119_FORMULA SYSTEMS (1985) LTD_20-F
Vintage Filings
Project: v313119 Form Type: 20-F
File: v313119_20f.htm Type: 20-F Pg: 127 of 171
FORMULA SYSTEMS (1985) LTD.
AND ITS SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands, except share and per share data
NOTE 2:- SIGNIFICANT ACCOUNTING POLICIES (Cont.)
This accounting standard update is effective for the Company beginning January 1, 2012. The Company does not expect the adoption of
this new guidance to have a material impact on its financial statements.
In June 2011, the FASB issued ASU 2011-05 Presentation of Comprehensive Income, codified in ASC 220 "Comprehensive Income." The
guidance requires an entity to present the total of comprehensive income, the components of net income, and the components of other
comprehensive income either in a single continuous statement of comprehensive income or in two separate but consecutive statements. The
guidance also eliminates the option to present the components of other comprehensive income as part of the statement of equity. In
December 2011, the FASB issued ASU 2011-12, deferring the effective date for amendments outlined in ASU 2011-05. The Company is
still evaluating whether to present other comprehensive income in a single continuous statement of comprehensive income or in two
separate but consecutive statements.
In May 2011, the FASB issued ASU 2011-04 Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in
U.S. GAAP and IFRS, codified in ASC 820 "Fair Value Measurement". The guidance requires an entity to provide a consistent definition
of fair value to ensure that the fair value measurement and disclosure requirements are similar between U.S. GAAP and International
Financial Reporting Standards. The guidance changes certain fair value measurement principles and enhances the disclosure requirements
particularly for Level 3 fair value measurements, and will become effective for the Company beginning January 1, 2012.
NOTE 3:- BUSINESS COMBINATION, SIGNIFICANT TRANSACTION AND SALE OF BUSINESS
a.
b.
In October 2009, the Company completed the sale of 100% of its shares in its directly held subsidiary, NextSource, for an aggregate
consideration of approximately $ 12,000, of which $ 8,000 was paid in cash and the remainder through the release of $ 4,000 of bank
deposits that were previously pledged in favor of banks to secure obligations of NextSource. The gain in the amount of approximately
$ 4,300 was presented in the income statement as income from discontinued operation.
On January 17, 2010, Magic, through one of its U.S subsidiaries, completed the acquisition of a consulting and staffing services business
of a U.S-based IT services company, for a total consideration of $ 13,684, of which $ 8,625 was paid upon closing and the remaining
$ 5,059 is to be paid over a three year period, of which $ 414 is contingent upon the acquired business meeting revenue goals, and $ 4,645
is to be paid via deferred payments. The Company believes that it is sufficiently probable that these goals will be met. As of December 31,
2010 and 2011, remaining contingent consideration amounted to $ 480 and $ 296, respectively, upon the acquired business’ meeting
revenue goals, and $ 4,761 and $ 2,629, respectively is to be paid via deferred payments.
F-31
Date: 05/14/2012 02:55 PM User: djohnson
Client: v313119_FORMULA SYSTEMS (1985) LTD_20-F
Vintage Filings
Project: v313119 Form Type: 20-F
File: v313119_20f.htm Type: 20-F Pg: 128 of 171
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands, except share and per share data
NOTE 3:- BUSINESS COMBINATION, SIGNIFICANT TRANSACTION AND SALE OF BUSINESS (Cont.)
FORMULA SYSTEMS (1985) LTD.
AND ITS SUBSIDIARIES
The Company classified both the deferred payment and contingent consideration as a liability as of the date of the transaction.
In accordance with ASC 805-30-35-1 the Company re-measures the contingent consideration based on the fair value at each reporting date
until the contingency is resolved or the payment is made, while the changes in fair value are recognized in earnings in the financial
expenses using the interest method over the period. The deferred payment was recorded at present value and is amortized using the interest
method during the relevant period into financial expenses.
The acquired business provides a comprehensive range of consulting and staffing services for the telecom, network communications and
the information technology industry. The cash consideration of $ 8,625 was financed with Magic’s own resources. The Company believes
that the acquisition of this business activity will enable it to expand its presence in the U.S. market and leverage its relationships with top
tier customers as well as take advantage of the synergies between its existing IT services and the acquired operation.
The acquisition was accounted for via the purchase method. The results of operations were included in the consolidated financial
statements of the Company commencing January 17, 2010. The consideration for the acquisition was attributed to net assets on the basis of
fair value of assets acquired and liabilities assumed, based on an appraisal performed by the management of Magic, which was based upon
a number of factors, including the assistance of independent appraisers.
The following table summarizes the estimated fair values of the assets acquired and liabilities assumed, with reference to the acquisition as
of January 17, 2010:
Working capital, including deferred tax liability
Fixed assets
Goodwill
Customer relationships
Total assets acquired
Liabilities due to acquisition activities
Net assets acquired
$
$
3,926
54
4,831
4,873
13,684
5,059
8,625
Identifiable intangible assets, including customer relationships, were valued using a variation of the income approach known as the "Multi-
Period Excess Earnings Approach". This method utilized a forecast of expected cash inflows, cash outflows and contributory charges for
economic returns on tangible and intangible assets employed.
F-32
Date: 05/14/2012 02:55 PM User: djohnson
Client: v313119_FORMULA SYSTEMS (1985) LTD_20-F
Vintage Filings
Project: v313119 Form Type: 20-F
File: v313119_20f.htm Type: 20-F Pg: 129 of 171
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands, except share and per share data
NOTE 3:- BUSINESS COMBINATION, SIGNIFICANT TRANSACTION AND SALE OF BUSINESS (Cont.)
FORMULA SYSTEMS (1985) LTD.
AND ITS SUBSIDIARIES
An amount of $ 4,873 of the purchase price was allocated to customer relationships, as described above. The Company amortizes its
intangible assets over periods ranging from 4 to 15 years, based on two types of customer relationships identified.
c.
d.
In 2010, Formula’s subsidiaries, Matrix, Magic and Sapiens, completed the acquisition of additional activities for an aggregate total
consideration of up to $ 8,080, of which as of December 31, 2010 and 2011 approximately $ 1,800 and $ 472, respectively, was contingent
upon the acquired activities achieving certain performance targets. During 2011 Formula and its subsidiaries paid approximately $ 1,846 of
the aforementioned contingent consideration.
On December 27, 2011, Magic completed the acquisition of the AppBuilder activity of BluePhoenix Solutions ("AppBuilder"), a leading
provider of value-driven legacy IT modernization solutions, for $13,500. AppBuilder is a comprehensive application development
infrastructure used by many enterprises around the world. This premier enterprise application development environment is a powerful,
model-driven tool that enables development teams to build, deploy, and maintain large-scale, custom-built business applications. The
Company believes the acquisition will broaden its product portfolio and strengthen its presence in numerous global markets. Acquisition
related costs were immaterial.
The acquisition was accounted for via the purchase method. The results of operations will be included in the consolidated financial
statements of the Company commencing January 1, 2012.
The following table summarizes the estimated fair values of the assets acquired and liabilities assumed, with reference to the acquisition as
of December 27, 2011:
Net assets
Intangible assets *)
Goodwill *)
Net assets acquired
$
1,130
5,786
8,679
$
15,595
*)
The estimated fair values of the tangible and intangible assets are provisional and are based on information that was available as of
the acquisition date to estimate the fair value of these amounts. The Company believes the information provides a reasonable basis
for estimating the fair values of these amounts, but is waiting for additional information necessary to finalize those fair values.
Therefore, provisional measurements of fair value reflected are subject to change. The Company expects to finalize the tangible and
intangible assets valuation and complete the acquisition accounting as soon as practicable but, in any case, no later than the
contractual period.
F-33
Date: 05/14/2012 02:55 PM User: djohnson
Client: v313119_FORMULA SYSTEMS (1985) LTD_20-F
Vintage Filings
Project: v313119 Form Type: 20-F
File: v313119_20f.htm Type: 20-F Pg: 130 of 171
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands, except share and per share data
NOTE 3:- BUSINESS COMBINATION, SIGNIFICANT TRANSACTION AND SALE OF BUSINESS (Cont.)
FORMULA SYSTEMS (1985) LTD.
AND ITS SUBSIDIARIES
Below are certain unaudited pro forma combined statements of income data for the years ended December 31, 2010 and 2011, respectively,
as if the acquisition of AppBuilder detailed above had occurred at January 1, 2010, after giving effect to (a) purchase accounting
adjustments, including amortization of intangible assets. This pro forma financial information is not necessarily indicative of the combined
results that would have been attained had the acquisition taken place at the beginning of 2010, nor is it necessarily indicative of future
results.
Total Revenues
Net Income
Net Income attributable to Formula’s shareholder
Total Earnings per share:
Basic
Diluted
Year ended December 31,
2010
2011
Unaudited
561,118
36,713
19,344
1.44
1.43
646,505
63,612
43,208
3.19
3.13
e.
On August 21, 2011 Sapiens acquired all of the outstanding shares of FIS, a provider of packaged-based insurance software solutions for
Life and Pension ("L&P"), and IDIT, a provider of insurance software solutions which focuses on the Property & Casualty ("P&C")
market. Sapiens financed the acquisition mainly via the issuance of Sapiens shares, resulting in a dilution of the Company's interest in
Sapiens from 75.6% to 42.2% and the Company’s loss of control of Sapiens, which, in turn, required the deconsolidation of Sapiens’
results from the Company’s financial statements. Following the loss of control, the Company remained with significant influence over
Sapiens, and, as a result, Sapiens’ results are reported using the equity method of accounting from that day on. For subsequent events
related to this investment, see Note 19.
The acquisition of FIS allows Sapiens to offer an enhanced solution for the L&P market. In addition, the acquisition of FIS has grown
Sapiens’ customer base in the insurance market world-wide and strengthened Sapiens’ position in the market as a leading provider of L&P
core software solutions. The acquisition of IDIT allows Sapiens to offer its customers and partners a more extensive product portfolio in
the industry. Acquiring IDIT will strengthen Sapiens’ presence in the P&C insurance market by increasing its customer base and enable
Sapiens to meet the needs of insurers who operate in the P&C and L&P markets.
Upon the loss of control, the Company recognized a gain in an amount of $ 25,833, which is presented in the income statement as equity in
gains of affiliated companies, net. This gain is related to the remeasurement of the retained investment in Sapiens to its fair value. The fair
value of retained investment in Sapiens was measured according to Sapiens' share price on August 21, 2011 of $4.1 per share.
F-34
Date: 05/14/2012 02:55 PM User: djohnson
Client: v313119_FORMULA SYSTEMS (1985) LTD_20-F
Vintage Filings
Project: v313119 Form Type: 20-F
File: v313119_20f.htm Type: 20-F Pg: 131 of 171
FORMULA SYSTEMS (1985) LTD.
AND ITS SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands, except share and per share data
NOTE 3:- BUSINESS COMBINATION, SIGNIFICANT TRANSACTION AND SALE OF BUSINESS (Cont.)
The aggregate fair value of the retained investment in Sapiens as of December 31, 2011 is $ 73,447.
f.
In 2011, the Company’s subsidiaries, Matrix and Magic, completed the acquisition of additional activities for an aggregate total
consideration of up to $ 21,463, of which as of December 31, 2011 the fair value of the contingent consideration is approximately $ 1,100,
which is contingent upon the acquired activities achieving certain performance targets from 2011 through 2013.
NOTE 4:- MARKETABLE SECURITIES
The Group invests in marketable debt and equity securities, which are classified as trading securities and as available-for-sale securities. The
following is a summary of marketable securities:
a.
Composition:
Short-term:
Trading securities (1)
Available-for-sale securities
Total short-term securities
Long-term:
Available-for-sale security (2)
Total long-term securities
December 31,
2010
2011
35,313
2,857
38,170
2,828
2,828
13,106
1,241
14,347
2,746
2,746
(1)
(2)
The Company recognized trading gains (losses) in the amounts of $ 2,276 and $ (197) during the years ended December 31, 2010
and 2011, respectively.
The balance as of December 31, 2010 and 2011 includes auction rate securities in amounts of $2,373 and 2,233, respectively. The
auction rate security’s interest rates are reset through a "Dutch" auction each month. The monthly auctions historically have
provided a liquid market for these securities. With the liquidity issues experienced in global credit and capital markets, the available
for sale securities have experienced multiple failed auctions as the amount of securities submitted for sale has exceeded the amount
of purchase orders. During 2011, other than temporary impairment loss of $ 200 on auction rate securities was recorded.
F-35
Date: 05/14/2012 02:55 PM User: djohnson
Client: v313119_FORMULA SYSTEMS (1985) LTD_20-F
Vintage Filings
Project: v313119 Form Type: 20-F
File: v313119_20f.htm Type: 20-F Pg: 132 of 171
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands, except share and per share data
NOTE 4:- MARKETABLE SECURITIES (Cont.)
FORMULA SYSTEMS (1985) LTD.
AND ITS SUBSIDIARIES
b.
The following is a summary of marketable securities which are classified as available-for-sale:
2010
2011
December 31,
Amortized
cost
Unrealized
losses
Unrealized
Gains
Market
value
Amortized
cost
Unrealized
losses
Unrealized
gains
Market
value
Available-for-sale:
Government bonds
Commercial bonds
Equity securities
407
4,614
1,618
-
127
1,045
37
90
91
444
4,577
664
407
2,871
1,105
-
67
474
28
67
50
435
2,871
681
Total available-for-sale marketable securities
6,639
1,172
218
5,685
4,383
541
145
3,987
Out of the unrealized losses as of December 31, 2010 and 2011, $ 1,370 and $518, respectively, of losses are outstanding over a twelve
month period. The fair value of the marketable securities that bear losses over a twelve month period as of December 31, 2010 and 2011 is
$ 2,828 and $ 513, respectively.
During the years ended December 31, 2010 and 2011, the Company recorded an impairment loss for its investment in equity securities in
an amount of $ 155 and $ 514, respectively.
In 2010 and 2011, the Company received proceeds from sale and maturity of available for-sale marketable securities of $ 5,079 and
$ 1,507, respectively, and recorded related net gains (losses) of $ (77) and $ 20 in financial income, respectively.
c.
The amortized costs of available-for-sale debt securities at December 31, 2011, by contractual maturities, are shown below:
Amortized Unrealized gains (losses)
Losses
Gains
cost
Due in one year or less
Due between one year to five years
399
2,879
3,278
1
94
95
F-36
Estimated
fair value
-
67
67
400
2,906
3,306
Date: 05/14/2012 02:55 PM User: djohnson
Client: v313119_FORMULA SYSTEMS (1985) LTD_20-F
Vintage Filings
Project: v313119 Form Type: 20-F
File: v313119_20f.htm Type: 20-F Pg: 133 of 171
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands, except share and per share data
NOTE 4:- MARKETABLE SECURITIES (Cont.)
d.
The following is the change in the other comprehensive income of available-for-sale securities during 2011:
FORMULA SYSTEMS (1985) LTD.
AND ITS SUBSIDIARIES
Other comprehensive loss from available-for-sale securities as of January 1, 2011
Other than temporary impairment on marketable securities
Reclassification of earnings of realized gain from available-for-sale securities
Unrealized loss from available-for-sale securities
Other comprehensive loss from available-for-sale securities as of December 31, 2011
The following is the change in the other comprehensive income of available-for-sale securities during 2010:
Other comprehensive loss from available-for-sale securities as of January 1, 2010
Other than temporary impairment on marketable securities
Reclassification of losses of realized loss from available-for-sale securities, net
Unrealized gain from available-for-sale securities, net
Other comprehensive loss from available-for-sale securities as of December 31, 2010
Other
comprehensive
income
(954)
714
(20)
(136)
(396)
Other
comprehensive
income
1,354
(155)
(188)
(57)
954
NOTE 5: - FAIR VALUE MEASUREMENT
In determining fair value, the Company utilizes valuation techniques that maximize the use of observable inputs and minimize the use of
unobservable inputs to the extent possible and considers counterparty credit risk in its assessment of fair value.
The fair value of the liabilities is approximately the presented value.
F-37
Date: 05/14/2012 02:55 PM User: djohnson
Client: v313119_FORMULA SYSTEMS (1985) LTD_20-F
Vintage Filings
Project: v313119 Form Type: 20-F
File: v313119_20f.htm Type: 20-F Pg: 134 of 171
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands, except share and per share data
NOTE 5: - FAIR VALUE MEASUREMENT (Cont.)
The Company’s financial assets and liabilities measured at fair value on a recurring basis, excluding accrued interest components; consisted of the
following types of instruments as of December 31, 2011 and 2010:
FORMULA SYSTEMS (1985) LTD.
AND ITS SUBSIDIARIES
Assets:
Shares
Government and corporate debentures
Equity securities
Auction rate securities (*)
Foreign currency derivative contracts
Total financial assets
Liabilities:
Put option contracts on non-controlling interests (**)
Contingent consideration (**)
Total financial liabilities
Assets:
Shares
Government and corporate debentures
Equity securities
Auction rate securities (*)
Total financials assets
Liabilities:
Foreign currency derivative contracts
Put option contracts on non-controlling interests (**)
Contingent consideration (**)
Total financials liabilities
Fair value measurements using input type
December 31, 2011
Level 1
Level 2
Level 3
Total
1,734
11,807
681
-
-
14,222
-
-
-
-
638
-
-
42
680
-
-
-
-
-
-
2,233
-
2,233
11,469
3,590
1,734
12,445
681
2,233
42
17,135
11,469
3,590
15,059
15,059
Fair value measurements using input type
December 31, 2010
Level 1
Level 2
Level 3
Total
3,305
32,638
664
-
36,607
-
-
-
-
-
2,018
-
-
2,018
40
-
-
40
-
-
-
2,373
2,373
-
434
5,481
5,915
3,305
34,656
664
2,373
40,998
40
434
5,481
5,955
(*)
The fair value of auction rate securities with unquoted prices was determined using valuations, observable inputs based on limited market
activity and other data obtained from independent sources.
(**) The fair value of put option contracts on non-controlling interests and contingent consideration is determined based on the present value of
the future expected cash flow.
F-38
Date: 05/14/2012 02:55 PM User: djohnson
Client: v313119_FORMULA SYSTEMS (1985) LTD_20-F
Vintage Filings
Project: v313119 Form Type: 20-F
File: v313119_20f.htm Type: 20-F Pg: 135 of 171
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands, except share and per share data
NOTE 5: - FAIR VALUE MEASUREMENT (Cont.)
The following table summarizes the activity for those financial assets where fair value measurements are estimated utilizing Level 3 inputs.
FORMULA SYSTEMS (1985) LTD.
AND ITS SUBSIDIARIES
Carrying value as of January 1
Sale of financial assets *)
Net changes in fair value
Impairment:
Impairment due to credit loss
Carrying value as of December 31
December 31,
2010
2011
4,480
(2,107)
-
-
2,373
2,373
-
60
(200)
2,233
*)
The proceeds from the sales of the financial assets in 2010 were $ 2,268.
The following table summarizes the activity for those financial liabilities where fair value measurements are estimated utilizing Level 3 inputs.
December 31,
2010
2011
Carrying value as of January 1
Acquisition of new subsidiary
Repayment of contingent consideration
Exchange differences
Net changes in fair value
Carrying value as of December 31
NOTE 6:- INVESTMENTS IN AFFILIATED COMPANIES
The following table summarizes the activity for the investment in affiliates:
January 1, 2011
Deconsolidation of Sapiens and accounting for the remaining investment under equity method (see Note
3(e))
Purchase of additional shares
Equity loss
Exchange differences
December 31, 2011
F-39
5,915
12,583
(2,030)
(1,361)
(48)
15,059
3,180
2,214
(150)
218
453
5,915
2011
2,394
68,431
8,239
(206)
(2,862)
75,996
Date: 05/14/2012 02:55 PM User: djohnson
Client: v313119_FORMULA SYSTEMS (1985) LTD_20-F
Vintage Filings
Project: v313119 Form Type: 20-F
File: v313119_20f.htm Type: 20-F Pg: 136 of 171
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands, except share and per share data
NOTE 6:- INVESTMENTS IN AFFILIATED COMPANIES (Cont.)
Following are details relating to the financial position and results of operations of affiliates in the aggregate:
a.
Group’s share of the associates’ statement of financial position based on the interests therein at reporting date:
FORMULA SYSTEMS (1985) LTD.
AND ITS SUBSIDIARIES
Current assets
Noncurrent assets *)
Current liabilities
Noncurrent liabilities
Other investments
December 31,
2010
2011
2,360
1,026
981
11
2,394
815
3,209
20,977
80,166
15,842
9,305
75,996
1,111
77,107
*)
Includes balance of goodwill in an amount of $ 419 as of December 31, 2010 and includes balances of other intangibles and
goodwill in amounts of $ 2,764 and $ 23,521 as of December 31, 2010 and 2011, respectively. The aforementioned other
intangibles are amortized over an average period of 7 years.
b.
Group’s share of the associates’ statement of operation based on the interests therein during the year (with respect to the Group’s interest
in Sapiens, for the period from August 21, 2011 until December 31, 2011):
Revenues
Loss
F-40
Year ended
December 31,
2010
2011
2009
7,996
335
6,592
1,070
18,016
206
Date: 05/14/2012 02:55 PM User: djohnson
Client: v313119_FORMULA SYSTEMS (1985) LTD_20-F
Vintage Filings
Project: v313119 Form Type: 20-F
File: v313119_20f.htm Type: 20-F Pg: 137 of 171
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands, except share and per share data
NOTE 7:- PROPERTY, PLANTS AND EQUIPMENT, NET
Composition:
Cost:
Computers and equipment
Motor vehicles
Buildings
Leasehold improvements
Accumulated depreciation:
Computers and equipment
Motor vehicles
Buildings
Leasehold improvements
Depreciated cost
FORMULA SYSTEMS (1985) LTD.
AND ITS SUBSIDIARIES
December 31,
2010
2011
48,615
732
3,552
8,045
60,944
41,382
573
1,749
4,829
48,533
12,411
16,972
578
3,453
11,582
32,585
9,209
243
1,770
2,198
13,420
19,165
Depreciation expenses totaled $ 4,000, $ 4,051 and $ 4,260 for the years ended December 31, 2009, 2010 and 2011, respectively.
In 2009, Magic sold its office building in Hungary and its Israel-based headquarters’ office building for $ 535 and $ 5,200, respectively. As a
result of the sales, Magic recorded net gains of approximately $ 289 and $ 1,960, respectively.
NOTE 8:- GOODWILL
The changes in the carrying amount of goodwill for the years ended December 31, 2010 and 2011 are as follows:
Balance as of January 1, 2010
Acquisition of newly-consolidated subsidiaries
Additions due to past contingent consideration related to past acquisitions *)
Foreign currency translation adjustments
Balance as of December 31, 2010
Acquisition of newly-consolidated subsidiaries
Adjustments due to purchase price allocation
Realization as a result of loss of control
Foreign currency translation adjustments
Balance as of December 31, 2011
147,407
12,622
669
5,797
166,495
34,903
(230)
(26,519)
(8,005)
166,644
*)
Acquisitions occurring prior to January 1, 2009 were accounted for using the purchase method of accounting in accordance with prior
GAAP (SFAS 141 "Business Combination").
F-41
Date: 05/14/2012 02:55 PM User: djohnson
Client: v313119_FORMULA SYSTEMS (1985) LTD_20-F
Vintage Filings
Project: v313119 Form Type: 20-F
File: v313119_20f.htm Type: 20-F Pg: 138 of 171
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands, except share and per share data
NOTE 9:- INTANGIBLE ASSETS, NET
Composition:
a. Original amounts:
Capitalized software development costs
Customer relationship and acquired technology
Other intangibles
Accumulated amortization:
Capitalized software development costs
Customer relationship and acquired technology
Other intangibles
FORMULA SYSTEMS (1985) LTD.
AND ITS SUBSIDIARIES
December 31,
2010
2011
100,243
11,222
2,884
114,349
75,831
4,594
823
81,248
57,739
24,978
3,208
85,925
45,352
7,664
1,365
54,381
Total
33,101
31,544
Amortized expenses totaled $ 9,800, $ 11,400 and $ 10,103 for the years ended December 31, 2009, 2010 and 2011, respectively. As for
impairment of software development cost, see Note 2(l).
Estimated intangible assets amortization for the years ended:
a.
c.
December 31,
2012
2013
2014
2015
2016
2017 and thereafter
Total
8,290
7,172
5,229
3,615
3,790
3,448
31,544
F-42
Date: 05/14/2012 02:55 PM User: djohnson
Client: v313119_FORMULA SYSTEMS (1985) LTD_20-F
Vintage Filings
Project: v313119 Form Type: 20-F
File: v313119_20f.htm Type: 20-F Pg: 139 of 171
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands, except share and per share data
NOTE 10:- LIABILITIES TO BANKS AND OTHERS
a.
Composition:
FORMULA SYSTEMS (1985) LTD.
AND ITS SUBSIDIARIES
December 31,
2011
Interest rate
%
5-6
Libor+ 4.05
Total
b.
Maturity dates:
First year (current maturities)
Second year
Third year
Fourth year
Fifth year and thereafter
Total
Linkage
Basis
Long-term
liabilities
Current
maturities
Total long-
term liabilities
net of current
maturities
December 31, 2011
Total long-
term liabilities
net of current
maturities
December 31,
2010
Unlinked
Unlinked
Other
34,064
12,075
9
7,614
4,075
-
26,450
8,000
9
46,148
11,689
34,459
3,004
-
150
3,154
December 31,
2010
2011
6,157
3,006
148
-
-
9,311
11,689
8,918
9,025
5,150
11,366
46,148
c.
For details of liens, guarantees and credit facilities, see Note 14.
NOTE 11:- DEBENTURES
a.
Comprised as follows:
Non-convertible debentures (b)
Less - current maturities of debentures
Total
F-43
Linkage
CPI
Interest
rate
December 31,
2010
2011
5.15%
47,781
46,718
(15,927)
(31,472)
31,854
15,246
Date: 05/14/2012 02:55 PM User: djohnson
Client: v313119_FORMULA SYSTEMS (1985) LTD_20-F
Vintage Filings
Project: v313119 Form Type: 20-F
File: v313119_20f.htm Type: 20-F Pg: 140 of 171
FORMULA SYSTEMS (1985) LTD.
AND ITS SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands, except share and per share data
NOTE 11:- DEBENTURES (Cont.)
b.
Non-convertible debentures:
The non-convertible debentures were issued by Matrix in August 2007 for an aggregate amount of NIS 250,000 (approximately $ 62,000).
The debentures bear interest at an annual rate of 5.15%. The principal will be paid in four equal annual installments on December 31 of
each of the years 2010 through 2013. The principal and interest are linked to the Israeli consumer price index ("CPI"). On February 21,
2008, Matrix listed the debentures for trading on the TASE. The fair value of the debentures as of December 31, 2010 and 2011 was
$ 51,604 and $ 47,701, respectively. See Note 14 for information regarding covenants related to the non-convertible debentures.
In 2008, Matrix repurchased debentures with a value amounting to $ 12,600 of the outstanding debentures. As a result, an amount of $ 500
was recorded as a gain on repurchase of debentures.
NOTE 12:- EMPLOYEE OPTION PLANS
a.
In March 2008, Formula’s shareholders approved the adoption of Formula’s 2008 Employee and Officer Share Option Plan (the "plan").
Pursuant to the plan, the Company may grant from time to time to the Company’s and its subsidiaries’ employees and officers (which are
not Formula’s controlling shareholders) options to purchase up to 400,000 ordinary shares of Formula. The plan is administered by
Formula’s board of directors or by an option committee to be appointed by the board. The plan provides that options may be granted, from
time to time, to such grantees to be determined by the board or the option committee, at an exercise price and under such terms to be
determined at their sole and absolute discretion. Options may be granted under the plan through January 2018.
In January 2009, Formula granted to its chief executive officer, in connection with his new service agreement, options to purchase 396,000
ordinary shares. These options vest over a three-year period, commencing on December 17, 2008, on a quarterly basis. The exercise price
of the options is NIS 0.01 per share. The options shall expire six years after the date of grant. These options are amortized in accordance
with the Group’s option amortization methodology. In April 2010, the chief executive officer exercised all of the options. Total fair value
of the grant was calculated based on the share price on the grant date and equaled $ 926 ($ 2.34 per share).
F-44
Date: 05/14/2012 02:55 PM User: djohnson
Client: v313119_FORMULA SYSTEMS (1985) LTD_20-F
Vintage Filings
Project: v313119 Form Type: 20-F
File: v313119_20f.htm Type: 20-F Pg: 141 of 171
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands, except share and per share data
NOTE 12:- EMPLOYEE OPTION PLANS (Cont.)
FORMULA SYSTEMS (1985) LTD.
AND ITS SUBSIDIARIES
In March 2011, concurrently with the amendment and extension of Formula chief executive officer’s service agreement, the Company
approved the grant to him of options exercisable for an additional 543,840 ordinary shares. The options vest in equal quarterly installments
over a four year period that commenced in December 2011 and concludes in December 2015. The exercise price of the options was NIS
0.01 per share. These options were to be amortized in accordance with the Group’s option amortization methodology. In May 2011, the
chief executive officer exercised all of these options for redeemable shares, for which the Company’s redemption right was to lapse in
accordance with the remaining vesting schedule for the unvested options from which they arose. Total fair value of the grant was
calculated based on the share price on the grant date and totaled $ 9,055 thousand ($ 16.65 per share).
In December 2011, at which time Formula was negotiating an amendment and to extension of its chief executive officer’s service
agreement, it redeemed all of the above-described 543,840 shares for no consideration. In March 2012, concurrently with the amendment
and extension of its chief executive officer’s service agreement, Formula approved a grant of options to the chief executive officer,
exercisable for 1,122,782 ordinary shares as long as the chief executive officer is a director of Formula and/or (ii) a director of each of the
directly held subsidiaries of Formula; provided that if he fails to meet the foregoing requirement (A) due to the request of the board of
directors of either Formula or any of its directly held subsidiaries (other than a request which is based on actions or omissions by the chief
executive officer that would constitute "cause" under his service agreement with Formula), (B) because the chief executive officer is
prohibited under the governing law or charter documents of the relevant company or the stock exchange rules and regulations applicable to
such company from being a director of such company (other than due to his actions or omissions) or (C) notwithstanding the chief
executive officer’s willingness to be so appointed (but provided that neither (A) nor (B) applies); then, in each of (A), (B) and (C), the
chief executive officer will be deemed to have complied with clauses (i) or (ii) above. The options vest in equal quarterly installments over
an eight year period that commences in March 2012 and concludes in December 2019. The exercise price of the options is NIS 0.01 per
share. These options are amortized in accordance with the Group’s option amortization methodology. The new grant is accounted for as a
modification to the March 2011 grant to the chief executive officer. Notwithstanding the foregoing, the options granted can be exercised by
our chief executive officer, at any time, whether vested or not, provided that any shares that will be issued upon the exercise of the options
that are unvested at the time of such exercise shall be redeemable shares, which shall vest according to the vesting periods provided for the
options.
b.
Formula’s subsidiaries granted options to their employees to purchase shares in the respective companies. The options were mainly granted
during the years 1999-2011. In general, the options expire 7-10 years after grant. For further information with respect to expenses relating
to the benefit to the employees, an additional disclosure required by ASC 718, see Note 2(x).
F-45
Date: 05/14/2012 02:55 PM User: djohnson
Client: v313119_FORMULA SYSTEMS (1985) LTD_20-F
Vintage Filings
Project: v313119 Form Type: 20-F
File: v313119_20f.htm Type: 20-F Pg: 142 of 171
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands, except share and per share data
NOTE 12:- EMPLOYEE OPTION PLANS (Cont.)
c.
The following table sets forth the breakdown of stock-based compensation expense resulting from stock options grants, as included in the
consolidated statements of income:
FORMULA SYSTEMS (1985) LTD.
AND ITS SUBSIDIARIES
Year ended December 31,
2010
2011
2009
Cost of revenues
Research and development expenses
Selling and marketing expenses
General and administrative expenses
Total stock-based compensation expense
Magic:
2
26
32
1,581
2
61
75
1,326
1,641
1,464
4
54
92
4,473
4,623
The following table is a summary of employee option activity as of December 31, 2011, and changes during the year ended December 31,
2011, in Magic:
Outstanding at January 1, 2011
Granted
Exercised
Forfeited
Weighted
average
remaining
contractual
term
(in years)
Aggregate
intrinsic
value
Weighted
average
exercise
price
6.49
$
6,928
2.02
4.00
1.56
1.15
Number
of options
$
1,664,188
300,000
(580,414)
(27,895)
Outstanding at December 31, 2011
1,355,879 $
2.31
6.46 $
3,416
Exercisable at December 31, 2011
694,913 $
2.55
4.33 $
1,680
Vested and expected to vest at December 31, 2011
1,286,149 $
2.63
6.32 $
3,280
The weighted-average grant-date fair value of options granted during the years ended December 31, 2009, 2010 and 2011 was $ 0.87,
$ 1.88 and $ 4, respectively. The aggregate intrinsic value in the table above represents the total intrinsic value that would have been
received by the option holders had all option holders exercised their options on December 31, 2011. This amount is changed based on the
market value of Magic’s ordinary shares.
Total intrinsic value of options exercised for the years ended December 31, 2009, 2010 and 2011 was $ 26, $ 1,895 and $ 2,197,
respectively. As of December 31, 2011, there was $ 882 of total unrecognized compensation cost related to non-vested share-based
compensation arrangements granted under Magic option plans. This cost is expected to be recognized over a weighted-average period of
approximately four years.
F-46
Date: 05/14/2012 02:55 PM User: djohnson
Client: v313119_FORMULA SYSTEMS (1985) LTD_20-F
Vintage Filings
Project: v313119 Form Type: 20-F
File: v313119_20f.htm Type: 20-F Pg: 143 of 171
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands, except share and per share data
NOTE 12:- EMPLOYEE OPTION PLANS (Cont.)
Matrix:
FORMULA SYSTEMS (1985) LTD.
AND ITS SUBSIDIARIES
The following table is a summary of employee option activity as of December 31, 2011, and changes during the year ended December 31,
2011, in Matrix:
Outstanding at January 1, 2011
Granted
Exercised
Forfeited
Number of
options
Weighted
average
exercise
price
$
Weighted
average
remaining
contractual
term
Years
Aggregate
intrinsic
value
$
143,665
2,250,000
202,000
-
3.23
4.44
3.86
-
0.916
381
Outstanding at December 31,2011
2,191,665
3.73
4.57
1,162
Exercisable at December 31, 2011
16,665
1.83
1
52
Vested and expected to vest at December 31, 2011
2,191,665
3.73
4.57
1,162
The weighted-average grant-date fair value of options granted during the year ended December 31, 2011 was $ 1.9. The aggregate intrinsic
value in the table above represents the total intrinsic value that would have been received by the option holders had all option holders
exercised their options on December 31, 2011. This amount changes based on the fair value of Matrix’ ordinary shares. As of December
31, 2011, there was approximately $ 2,427 of total unrecognized compensation costs related to non-vested share-based compensation
arrangements granted under Matrix equity incentive plan. Those costs are expected to be recognized over a weighted-average period of
four years. The total intrinsic value of options exercised during the years ended December 31, 2009, 2010, and 2011 was $ 3,280, $ 3,110
and $ 738, respectively.
F-47
Date: 05/14/2012 02:55 PM User: djohnson
Client: v313119_FORMULA SYSTEMS (1985) LTD_20-F
Vintage Filings
Project: v313119 Form Type: 20-F
File: v313119_20f.htm Type: 20-F Pg: 144 of 171
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands, except share and per share data
NOTE 13: - LIABILITY IN RESPECT OF CAPITAL LEASE
The following are details of the future minimum lease commitments in respect of capital lease as of December 31, 2011:
FORMULA SYSTEMS (1985) LTD.
AND ITS SUBSIDIARIES
First year
Second year until fifth year
Total
NOTE 14:- COMMITMENTS AND CONTINGENCIES
a.
Liens:
Minimum
lease
payments
Interest
Present value
of minimum
lease payment
554
2,247
2,801
148
327
475
406
1,920
2,326
Pursuant to a bank credit agreement, a lien has been incurred by the Company over a certain portion of its investment in outstanding shares
of Matrix and Sapiens.
b.
Guarantees:
1.
2.
The Group has provided bank guarantees in an aggregate of approximately $ 13,500 as security for the performance of various
contracts with customers. If the subsidiaries were to breach certain terms of such contracts, the customers could demand that the
banks providing the guarantees distribute the amounts claimed to be due.
Subsidiaries have provided bank guarantees aggregating to $ 4,000 as security for rent to be paid for their offices. If the subsidiaries
were to breach certain terms of their leases, the lessors could demand that the banks providing the guarantees distribute the amounts
claimed to be due.
c.
Covenants:
In connection with the Group’s credit facility agreements, primarily Matrix, with various financial institutions and in connection with non-
convertible debentures, the Group committed to the following:
1.
2.
To maintain certain financial ratios. The Group has met the financial ratios as of December 31, 2010 and 2011.
Matrix committed not to grant a security interest in all or substantially all of its assets.
F-48
Date: 05/14/2012 02:55 PM User: djohnson
Client: v313119_FORMULA SYSTEMS (1985) LTD_20-F
Vintage Filings
Project: v313119 Form Type: 20-F
File: v313119_20f.htm Type: 20-F Pg: 145 of 171
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands, except share and per share data
NOTE 14:- COMMITMENTS AND CONTINGENCIES (Cont.)
FORMULA SYSTEMS (1985) LTD.
AND ITS SUBSIDIARIES
3.
Matrix committed not to distribute dividends that will cause its equity (when measured based on International Financial Reporting
Standards ("IFRS") to be less than NIS 275,000 (approximately $ 72,000). As of December 31, 2011, Matrix’s equity was
approximately NIS 588,236 (approximately $ 154,000) (as measured based on IFRS).
d.
Legal proceedings:
1.
2.
3.
4.
In 2010, a former customer of Sapiens filed a claim in the arbitration court in Warsaw, Poland against Sapiens, for damages caused
by Sapiens with respect to a license and services contract with such former customer provided few years ago. The claim was in an
amount of approximately €3,400 (approximately $ 2,600). A settlement was reached in October 2011 under which Sapiens paid
1,100 Euro ($1,509) and recovered an amount of $ 1,200 from the insurance company.
In February 2010, a U.S. based company filed a lawsuit against Magic and one of its subsidiaries claiming an alleged breach by
Magic and the subsidiary of its intellectual property rights in connection with one of Magic’s products. In July 2011, Magic entered
into a settlement agreement with the plaintiff according to which Magic paid a lump sum to the plaintiff for future maintenance and
support until 2018, subject to a complete release of all claims.
In August 2009, a software company and one of its owners filed an arbitration proceeding against Magic and one of its subsidiaries,
claiming an alleged breach of a non-disclosure agreement between the parties. The plaintiffs are seeking damages in the amount of
approximately $13,600. The arbitrator determined that both Magic and the subsidiary breached the non-disclosure agreement, but
closing summaries regarding damages have not yet been submitted. At this time, given the multiple uncertainties involved and due
to large part to the highly speculative nature of the damages sought by the plaintiff, which leaves a wide discretion to the arbitrator
in quantifying and awarding the damages, Magic is unable to estimate the amount of the probable loss, if any, to be recognized.
In June 2004, an Israeli company filed a lawsuit against Magic in the District Court of Tel Aviv - Jaffa seeking damages of NIS
8,000 (approximately $ 2,200), with an option to increase the amount sought to approximately NIS 17,000 (approximately $4,800),
for recovery of alleged damages caused by Magic’s alleged failure to integrate a software system. In March 2011, Magic entered
into a settlement agreement with the plaintiff pursuant to which Magic did not incur any additional loss exceeding amounts already
recognized.
F-49
Date: 05/14/2012 02:55 PM User: djohnson
Client: v313119_FORMULA SYSTEMS (1985) LTD_20-F
Vintage Filings
Project: v313119 Form Type: 20-F
File: v313119_20f.htm Type: 20-F Pg: 146 of 171
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands, except share and per share data
NOTE 14:- COMMITMENTS AND CONTINGENCIES (Cont.)
FORMULA SYSTEMS (1985) LTD.
AND ITS SUBSIDIARIES
5.
In addition to the above mentioned legal proceedings, from time to time, Formula and/or its subsidiaries are subject to legal,
administrative and regulatory proceedings, claims, demands and investigations in the ordinary course of business, including claims
with respect to intellectual property, contracts, employment and other matters. The Company applies ASC 450, "Contingencies,"
and accrues a liability when it is both probable that a liability has been incurred and the amount of the loss can be reasonably
estimated. Significant judgment is required in the determination of both the probability and as to whether a loss is reasonably
estimable. These accruals are reviewed at least quarterly and adjusted to reflect the impact of negotiations, settlements, rulings,
advice of legal counsel and other information and events pertaining to a particular matter. The Company intends to defend itself
vigorously against the above claims, and it generally intends to vigorously defend any other legal claims to which it is subject.
While for most litigation, the outcome is difficult to determine, to the extent that there is a reasonable possibility that the losses to
which the Company may be subject could exceed the amounts (if any) that it has already accrued, the Company attempts to estimate
such additional loss, if reasonably possible, and disclose it (or, if it is an immaterial amount, indicate accordingly). The aggregate
provision that the Company has recorded for all other legal proceedings (other than the particular material proceedings described
above) is not material. Furthermore, in respect of its ordinary course legal, administrative and regulatory proceedings (i.e., other
than the particular material proceedings described above), the Company estimates, in accordance with the procedures described
above, that as of the current time there is no reasonable possibility that it will incur material losses exceeding the non-material
amounts already recognized.
e.
Operating lease commitments:
The following are details of the future minimum lease commitments for office equipment, office space and motor vehicles under non-
cancelable operating leases as of December 31, 2011:
2012
2013
2014
2015
2016 and Thereafter
18,745
12,646
3,859
1,589
2,747
39,586
Rent expenses for the years 2009, 2010 and 2011, were approximately $ 14,000 $ 15,000 and $ 13,000, respectively.
F-50
Date: 05/14/2012 02:55 PM User: djohnson
Client: v313119_FORMULA SYSTEMS (1985) LTD_20-F
Vintage Filings
Project: v313119 Form Type: 20-F
File: v313119_20f.htm Type: 20-F Pg: 147 of 171
FORMULA SYSTEMS (1985) LTD.
AND ITS SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands, except share and per share data
NOTE 15:- EQUITY
The composition of share capital is as follows:
Ordinary shares, NIS 1 par value each
25,000,000 13,620,780 13,596,000 25,000,000 13,620,780 13,596,000
December 31, 2011
December 31, 2010
Authorized
Issued Outstanding Authorized
Issued Outstanding
a.
b.
c.
d.
e.
e.
f.
Formula’s ordinary shares, par value NIS 1 per share, are traded on the TASE and Formula’s ADSs, each representing one ordinary share,
are traded on the NASDAQ.
Formula holds 24,780 of its ordinary shares.
In January 2009, Formula distributed a cash dividend of approximately $ 30,000 which had been declared in December 2008.
In April 2010, Formula distributed a cash dividend of approximately $20,000.
In May 2011, Formula distributed a cash dividend of approximately $10,000.
For information concerning the Company’s employee and officer share option plan, see Note 12.
In December 2010, Magic consummated a private placement of its ordinary shares and warrants with several institutional and private
investors, issuing 3,287,616 ordinary shares at a price of $ 6.5 per share and in a total amount of $ 20,290 net of issuance expenses. In
addition, certain of the purchasers received warrants to purchase up to an aggregate of 1,134,231 Magic ordinary shares at an exercise
price of $ 8.26 per share. The warrants are exercisable as of six months from the date of issuance, have a term of three years, and the
exercise price is subject to future adjustment for various events, such as stock splits or dividend distributions.
NOTE 16:- INCOME TAXES
a.
Israeli taxation:
1.
Taxable income in Israel was subject to corporate tax at the following rates: 2010 - 25%, and 2011 - 24%. On December 5, 2011,
the Knesset (Israel’s parliament) passed a law seeking to alter the tax burden (the "Tax Burden Law"), which cancels, among others,
the previously scheduled further gradual reduction in the corporate tax rates in Israel. Under the Tax Burden Law, the corporate tax
rate in Israel will be increased to 25% starting in 2012. Accordingly, the real capital gains tax rate will increase to 25%. The effect
of these changes increased the Company’s deferred tax assets by approximately $ 1,606 thousand. The adjustment of the deferred
tax balances resulted in a tax benefit in 2011, which was recorded in tax benefits.
F-51
Date: 05/14/2012 02:55 PM User: djohnson
Client: v313119_FORMULA SYSTEMS (1985) LTD_20-F
Vintage Filings
Project: v313119 Form Type: 20-F
File: v313119_20f.htm Type: 20-F Pg: 148 of 171
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands, except share and per share data
NOTE 16:- INCOME TAXES (Cont.)
FORMULA SYSTEMS (1985) LTD.
AND ITS SUBSIDIARIES
2.
Tax benefits under the Israeli Law for the Encouragement of Capital Investments, 1959 (the "Investment Law"):
Some operations of certain of Formula’s Israeli subsidiaries and affiliated companies have been granted "Approved Enterprise" and
"Privileged Enterprise" status pursuant to the Investment Law, which provides certain tax benefits to certain investment programs.
For these programs, the subsidiaries and affiliated companies have elected the alternative benefits track, waiving grants in return for
tax exemptions. Pursuant to the alternative benefits track, the income derived from the Approved Enterprise programs is tax-exempt
for periods of two to four years and will be eligible for reduced tax rates for additional periods of five to eight years (such reduced
tax rates are dependent on the level of foreign investment in the subsidiaries and affiliated companies). Income not eligible for
Approved Enterprise and Privileged Enterprise benefits is taxed at regular rates.
In the event of distribution of dividends from the said tax-exempt income, the amount distributed will be subject to corporate tax at
the rate ordinarily applicable to the Approved Enterprise’s income. The tax-exempt income attributable to the Approved Enterprise
programs mentioned above can be distributed to shareholders without subjecting the Company to taxes, only upon the complete
liquidation of the applicable Israeli subsidiary. Tax-exempt income generated under the Privileged Enterprise program will be
subject to taxes upon dividend distribution (which includes the repurchase of an entity’s shares) or liquidation.
The tax benefit periods provided end at the earlier of 12 years from the commencement of production or 14 years from receipt of the
approval for the Approved Enterprise. As of December 31, 2011, the Company’s subsidiaries and affiliated company have not
generated any taxable income under any of its Approved Enterprises programs and thus the benefit periods for these benefits have
not yet commenced. Therefore, these benefit programs have had no effect upon the calculation of earnings per share for any of the
periods presented in the Company’s statements of income for the 3 years ended December 31, 2011.
The entitlement to the above benefits is conditional upon the fulfillment of the conditions stipulated by the Investment Law and
related regulations (see below). Should any of Formula’s Israeli subsidiaries and affiliated companies fail to meet such requirements
in the future, income attributable to the relevant entity’s Approved Enterprise or Privileged Enterprise programs could be subject to
the statutory Israeli corporate tax rate, and the entity could be required to refund a portion of the tax benefits already received with
respect to such programs. As of December 31, 2011, management believes that Formula’s Israeli subsidiaries and affiliated
companies are in compliance with all of the conditions required by the Investment Law.
F-52
Date: 05/14/2012 02:55 PM User: djohnson
Client: v313119_FORMULA SYSTEMS (1985) LTD_20-F
Vintage Filings
Project: v313119 Form Type: 20-F
File: v313119_20f.htm Type: 20-F Pg: 149 of 171
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands, except share and per share data
NOTE 16:- INCOME TAXES (Cont.)
FORMULA SYSTEMS (1985) LTD.
AND ITS SUBSIDIARIES
The Company does not intend to distribute any of its undistributed tax-exempt income via dividends, as it intends to reinvest such
income in the Company. Accordingly, no deferred income taxes have been provided on income attributable to the Company’s
Approved or Privileged Enterprise programs, as the undistributed tax-exempt income is essentially permanent in duration.
On April 1, 2005, an amendment to the Investment Law came into effect (the "2005 Amendment") that has significantly changed
the provisions of the Investment Law.
The 2005 Amendment enacted major changes in the manner in which tax benefits are awarded under the Investment Law so that
companies are no longer required to obtain the Israeli Investment Center’s prior approval to qualify for tax benefits. An enterprise
eligible for benefits under the 2005 Amendment is a "Benefited Enterprise," rather than the previous terminology of Approved
Enterprise. The period of tax benefits for a new Benefited Enterprise commences in the "Year of Commencement", which is the
later of: (1) the year of election, or (2) the year in which taxable income is first generated by the relevant enterprise after the election
year.
The 2005 Amendment limits the scope of enterprises that may be approved by the Israeli Investment Center by setting criteria for
the approval of a facility as a Benefited Enterprise, such as a provision that generally requires that at least 25% of the Benefited
Enterprise’s income will be derived from export.
During December 2010, the Law for Economic Policy for 2011 and 2012 (Amended Legislation) was passed, and among other
things, amended the Investment Law effective January 1, 2011 (the "2011 Amendment"). Under the 2011 Amendment, upon an
irrevocable election made by a company, a uniform corporate tax rate will apply to all qualifying income of its industrial
enterprises, as opposed to the previous law’s incentives, which are limited to income from Approved Enterprises during their
benefits periods. Under the 2011 Amendment, when the election is made, the uniform tax rate will be 10% in areas in Israel
designated as Development Zone A and 15% elsewhere in Israel during 2011-2012, 7% and 12.5%, respectively, in 2013-2014, and
6% and 12%, respectively, thereafter. Certain "Special Industrial Companies" that meet certain criteria (somewhat equivalent to the
criteria for the strategic investment track noted above) will enjoy further reduced tax rates of 5% in Development Zone A and 8%
elsewhere. The profits of these Industrial Companies will be freely distributable as dividends, subject to a 15% withholding tax (or
lower, under an applicable tax treaty).
F-53
Date: 05/14/2012 02:55 PM User: djohnson
Client: v313119_FORMULA SYSTEMS (1985) LTD_20-F
Vintage Filings
Project: v313119 Form Type: 20-F
File: v313119_20f.htm Type: 20-F Pg: 150 of 171
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands, except share and per share data
NOTE 16:- INCOME TAXES (Cont.)
FORMULA SYSTEMS (1985) LTD.
AND ITS SUBSIDIARIES
3.
Tax benefits under the Law for the Encouragement of Industry (Taxation), 1969:
Some of Formula’s subsidiaries currently qualify as an "Industrial Company," as defined by the Law for the Encouragement of
Industry (Taxation), 1969, and, as such, are entitled to certain tax benefits including, inter alia, accelerated depreciation, deduction
of public offering expenses in three equal annual installments and amortization of other intangible property rights for tax purposes.
b.
Subsidiaries and affiliated companies outside Israel:
Non-Israeli subsidiaries are taxed according to the tax laws in their respective domiciles of residence. Neither Israeli income taxes, foreign
withholding taxes nor deferred income taxes have been provided in relation to undistributed earnings of the non-Israelis subsidiaries. This
is because the Company intends to reinvest undistributed earnings in the foreign subsidiaries in which those earnings arose. If these
earnings were distributed in the form of dividends or otherwise, the Company would be subject to additional Israeli income taxes (subject
to an adjustment for foreign tax credits) and non-Israeli withholding taxes.
c.
Net operating loss carryforwards:
Formula and its subsidiaries had cumulative losses for tax purposes as of December 31, 2011 totaling approximately $ 148,400 (as of
December 31, 2010, the amount was $ 177,400), of which $ 138,600 was in respect of companies in Israel which can be carried forward
and offset against taxable income in the future for an indefinite period, and approximately $ 9,800 of which was in respect of companies
abroad (as of December 31, 2010, that amount was $ 8,200). In assessing the realization of deferred tax assets, management considers
whether it is more likely than not that all or some portion of the deferred tax assets will not be realized. The ultimate realization of the
deferred tax assets is dependent upon the generation of future taxable income during the periods in which temporary differences are
deductible and net operating losses are utilized. Based on a consideration of these factors, the Company recorded a valuation allowance as
detailed in Note 16(e) below.
d.
Income tax assessments:
Formula and its subsidiaries are routinely examined by various taxing authorities. Below is a summary of the income tax assessments of
Formula and its subsidiaries:
Formula
Formula’s tax years 2008 through 2011 remain subject to examination by the Israeli Tax Authorities.
Matrix
Matrix group entities have final tax assessments through the year 2007-2008.
F-54
Date: 05/14/2012 02:55 PM User: djohnson
Client: v313119_FORMULA SYSTEMS (1985) LTD_20-F
Vintage Filings
Project: v313119 Form Type: 20-F
File: v313119_20f.htm Type: 20-F Pg: 151 of 171
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands, except share and per share data
NOTE 16:- INCOME TAXES (Cont.)
Magic
FORMULA SYSTEMS (1985) LTD.
AND ITS SUBSIDIARIES
Magic (the Israeli entity) has received final tax assessments through the year 2006. Non-Israeli subsidiaries of Magic are taxed according
to the tax laws in their respective domiciles of residence. If earnings are distributed to Israel in the form of dividends or otherwise, the
Company may be subject to additional Israeli income taxes (subject to adjustment for foreign tax credits) and foreign withholding taxes.
The Company’s management has determined that Formula’s subsidiaries will not distribute any of their undistributed tax income as a
dividend. The Company intends to reinvest the amount of such tax income. Accordingly, no deferred income taxes have been provided.
e.
Deferred taxes:
1.
Composition:
Net operating losses carried forward
Allowances and reserves
Differences in measurement basis (cash basis for tax purposes)
Valuation allowance
Total
2.
Presentation in balance sheets:
Other current assets
Other non-current assets
Other current liabilities
Long-term liabilities
F-55
December 31,
2010
2011
43,120
3,219
(4,377)
41,962
(29,173)
33,753
3,665
(6,745)
30,673
(19,984)
12,789
10,689
December 31,
2010
2011
4,526
13,135
(2,218)
(2,654)
6,254
11,630
(2,359)
(4,836)
12,789
10,689
Date: 05/14/2012 02:55 PM User: djohnson
Client: v313119_FORMULA SYSTEMS (1985) LTD_20-F
Vintage Filings
Project: v313119 Form Type: 20-F
File: v313119_20f.htm Type: 20-F Pg: 152 of 171
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands, except share and per share data
NOTE 16:- INCOME TAXES (Cont.)
f.
Income before taxes on income:
Domestic
Foreign
Total
g.
Income taxes included in the statements of operations:
FORMULA SYSTEMS (1985) LTD.
AND ITS SUBSIDIARIES
Year ended December 31,
2010
2011
2009
24,762
12,030
31,153
11,463
36,792
42,616
32,692
10,258
42,950
Year ended December 31,
2010
2009
2011
Current taxes:
Domestic
Foreign
Deferred taxes:
Domestic
Foreign
Deferred taxes, net
Taxes on income
7,002
819
8,149
1,750
7,821
9,899
8,351
1,136
9,487
1,359
(875)
(4,004)
649
(3,948)
150
484
(3,355)
(3,798)
8,305
6,544
5,689
F-56
Date: 05/14/2012 02:55 PM User: djohnson
Client: v313119_FORMULA SYSTEMS (1985) LTD_20-F
Vintage Filings
Project: v313119 Form Type: 20-F
File: v313119_20f.htm Type: 20-F Pg: 153 of 171
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands, except share and per share data
NOTE 16:- INCOME TAXES (Cont.)
h.
Theoretical tax:
The following table presents a reconciliation between the theoretical tax expense, assuming that all income was taxed at statutory tax rates,
and the actual income tax expense, as recorded in the Company’s statement of operations:
FORMULA SYSTEMS (1985) LTD.
AND ITS SUBSIDIARIES
Year ended December 31,
2010
2011
2009
Income before income taxes, as per the statement of operations
36,792
42,616
42,950
Statutory tax rate in Israel
Theoretical tax expense
Reconciliation:
Non-deductible expenses
Tax-exempt income change in tax rate and reduced tax rates in companies which
have Approved Enterprises
Deferred taxes on losses (utilization of losses) and temporary differences for which a
valuation allowance was provided, net
Effect of change in Israel tax rates
Prior year losses and temporary differences for which deferred taxes were recorded,
net
Taxes in respect of prior years
Other
Income taxes as per the statement of operations
Effective tax rate - in %
i.
Uncertain tax positions:
26%
25%
24%
9,566
10,654
10,308
441
425
627
-
(2,979)
118
107
8,305
238
631
(3,438)
-
(3,231)
735
955
6,544
1,539
922
883
(1,606)
(6,692)
(707)
1,042
5,689
22.6%
15.4%
13.2%
During the years ended December 31, 2009, 2010 and 2011, Formula and its subsidiaries recorded $ (77), $ 1,636 and $ 297 of tax
expenses (income), respectively, as a result of this codification.
F-57
Date: 05/14/2012 02:55 PM User: djohnson
Client: v313119_FORMULA SYSTEMS (1985) LTD_20-F
Vintage Filings
Project: v313119 Form Type: 20-F
File: v313119_20f.htm Type: 20-F Pg: 154 of 171
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands, except share and per share data
NOTE 16:- INCOME TAXES (Cont.)
A reconciliation of the beginning and ending amount of total unrecognized tax benefits in Formula’s subsidiaries is as follows:
FORMULA SYSTEMS (1985) LTD.
AND ITS SUBSIDIARIES
Balance as of January 1, 2010
Increase related to current year tax positions
Increase related to prior years’ tax positions
Balance as of December 31, 2010
Increase related to current year tax positions
Decrease related to prior years’ tax positions
Decrease due to deconsolidation of Sapiens
Balance as of December 31, 2011
679
915
512
2,106
1,363
(512)
(400)
2,557
The Group recognizes accrued interest and penalties related to unrecognized tax benefits as a component of income tax expense. For the
years ended December 31, 2009, 2010 and 2011, the amounts recognized, on a consolidated basis, for interest and penalties expenses
related to uncertain tax positions were $ 10, $209 and $ (154), respectively. In addition, the Group’s consolidated liability for unrecognized
tax benefits including accrued interest and penalties related to uncertain tax positions was $ 230 and $ 76 at December 31, 2010 and 2011,
respectively, which is included within income tax accrual in the Group’s consolidated balance sheets.
As of December 31, 2010 and 2011, there were no uncertain tax positions for which it was reasonably possible that the total amount of the
Group’s unrecognized tax benefits would significantly increase or decrease within 12 months.
As of December 31, 2011, the entire amount of unrecognized tax benefit (i.e., $2,557) could affect the Group’s income tax provision and
the effective tax rate.
F-58
Date: 05/14/2012 02:55 PM User: djohnson
Client: v313119_FORMULA SYSTEMS (1985) LTD_20-F
Vintage Filings
Project: v313119 Form Type: 20-F
File: v313119_20f.htm Type: 20-F Pg: 155 of 171
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands, except share and per share data
NOTE 17:- SUPPLEMENTARY FINANCIAL STATEMENT INFORMATION
Balance Sheets:
a.
Other accounts receivable:
Composition:
Government departments
Employees (1)
Prepaid expenses and advances to suppliers
Deferred taxes
Advanced payments due to M&A activities
Derivatives
Other
Total
FORMULA SYSTEMS (1985) LTD.
AND ITS SUBSIDIARIES
December 31,
2010
2011
6,424
356
9,495
4,526
1,160
-
1,179
16,043
274
10,026
6,254
-
54
984
23,140
33,635
(1)
Some of these balances are linked to the CPI, and bear interest at an annual rate of 4%.
b.
Liabilities to Banks:
Composition:
December 31,
2011
Interest rate Linkage
%
basis
December 31,
2010
2011
Bank credit
Short-term bank loans
Current maturities of long-term loans from banks (see Note 10)
Prime+2%
Prime+0.1%
Unlinked
Total
c.
Other accounts payable:
Composition:
Government institutions
Customer advances
Deferred taxes
Accrued expenses and other current liabilities
Total
F-59
527
-
6,157
1,431
3,522
11,689
6,684
16,642
December 31,
2010
2011
20,260
280
2,218
7,935
19,478
1,028
2,359
2,467
30,693
25,332
Date: 05/14/2012 02:55 PM User: djohnson
Client: v313119_FORMULA SYSTEMS (1985) LTD_20-F
Vintage Filings
Project: v313119 Form Type: 20-F
File: v313119_20f.htm Type: 20-F Pg: 156 of 171
FORMULA SYSTEMS (1985) LTD.
AND ITS SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands, except share and per share data
NOTE 17: - SUPPLEMENTARY FINANCIAL STATEMENT INFORMATION (Cont.)
d.
Financial expenses, net:
Composition:
Financial income
Financial costs related to long-term debt
Financial costs related to short-term credit and others
Gain (loss) from marketable securities, net (1) (2)
Year ended December 31,
2010
2011
2009
4,160
(5,982)
(2,590)
4,181
1,062
(5,029)
(2,527)
2,123
1,030
(5,020)
(1,599)
(911)
(231)
(4,371)
(6,500)
Total
(1)
Includes gains (losses) from trading securities still held by the Company for the years 2009, 2010 and 2011 in the amounts of
$ 1,362, $ 2,276 and $ (197) respectively (see Note 4).
(2)
Includes impairment of available-for-sale marketable securities for 2010 and 2011 of $ 153 and $ 714, respectively (see Note 4).
e.
Other expenses (income), net:
Composition:
Gain on sale of fixed assets, net
Impairment in value of cost-based investment
Other
Total
f.
Operating segments:
Year ended December 31,
2010
2011
2009
(247)
59
(1,480)
(1,668)
-
-
231
231
-
-
(207)
(207)
The Company operates in the software services and proprietary software products and related services through its two directly held
subsidiaries and affiliated company: Matrix, Magic and Sapiens, respectively.
F-60
Date: 05/14/2012 02:55 PM User: djohnson
Client: v313119_FORMULA SYSTEMS (1985) LTD_20-F
Vintage Filings
Project: v313119 Form Type: 20-F
File: v313119_20f.htm Type: 20-F Pg: 157 of 171
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands, except share and per share data
NOTE 17: - SUPPLEMENTARY FINANCIAL STATEMENT INFORMATION (Cont.)
Matrix
FORMULA SYSTEMS (1985) LTD.
AND ITS SUBSIDIARIES
Matrix provides software services, software development projects, outsourcing, integration of software systems and services – all in
accordance with its customers’ specific needs. Matrix also provides upgrading and expansion of existing software systems. Matrix software
solutions and services include the following components: (i) development of dedicated customer software systems; (ii) customization of
software developed by third parties to provide a response to customers’ requirements;
(iii) systems assimilation; (iv) offshore and domestic services, mainly for software developments and quality assurance and software
testing; and (v) integration of all or part of these components. Matrix operates in sales and support of software products of leading
worldwide vendors. Matrix supplies infrastructure solutions for computer and communication systems and hardware products. Matrix
operates technological training and qualification centers providing advanced professional courses for hi-tech personnel, training and
assimilation of computer systems, applications courses, professional training, soft-skills training and training for capital market operations.
Magic
Magic develops market and support software development and deployment technology (the "Magic technology") and applications
developed using the Magic technology. Magic technology enables enterprises to accelerate the process of building and deploying business
software applications that can be rapidly customized and integrated with existing systems meeting enterprises current needs.
Magic’s offering provide software houses and enterprises the ability to create any type of business applications, leverage existing
information technology resources, enhance business ability, and focus on core business priorities to gain maximum return on their existing
and new IT investments. Magic technology also provides the option to deploy its software capabilities in the cloud, hosted in web services
cloud computing environment.
Magic is known for its metadata driven, code-free approach, allowing users to focus on business logic rather than technological
requirements. This approach forms the driving principle of both the uniPaaS application platform and the iBOLT business and process
integration platform. Both uniPaaS and iBOLT enable enterprises to accelerate the process of building and deploying applications that can
be rapidly customized and integrated with existing systems.
Magic also offers a broad range of flexible fee-based consulting services in the areas of infrastructure design and delivery, application
development, technology planning and implementation services, as well as supplemental staffing services.
F-61
Date: 05/14/2012 02:55 PM User: djohnson
Client: v313119_FORMULA SYSTEMS (1985) LTD_20-F
Vintage Filings
Project: v313119 Form Type: 20-F
File: v313119_20f.htm Type: 20-F Pg: 158 of 171
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands, except share and per share data
NOTE 17: - SUPPLEMENTARY FINANCIAL STATEMENT INFORMATION (Cont.)
Sapiens
FORMULA SYSTEMS (1985) LTD.
AND ITS SUBSIDIARIES
Sapiens is a provider of software solutions for the insurance industry. Sapiens’ suite of insurance solutions, built to meet the core business
needs of large and small insurance carriers, aligns IT with business demands for speed, flexibility and efficiency. Sapiens’ solutions are
supplemented by Sapiens’ methodology and consulting services, which address the complex issues related to the life-cycle of enterprise
business applications. Sapiens offers its solutions to two of the major lines of insurance business – Life & Pension ("L&P") and Property &
Casualty ("P&C").
Sapiens’ insurance solutions are deployed at leading insurance carriers globally. Sapiens’ service offerings include a standard consulting
offering that helps customers make better use of IT in order to achieve their business objectives.
Sapiens eMerge™, is a rules-based model-driven architecture, that is used to develop most of Sapiens’ software products. It enables the
creation of mission critical core enterprise applications with little or no coding using agile methodologies. Sapiens’ technology allows
customers to achieve legacy modernization and enterprise application integration.
On August 21, 2011, following Sapiens’ acquisition of all of the outstanding shares of FIS, a provider of packaged-based insurance
software solutions for L&P, and IDIT, a provider of insurance software solutions which focuses on the P&C market (see Note 6 for further
information), which was mainly financed by the issuance of Sapiens shares, the Company lost its controlling interest in Sapiens, resulting
in the deconsolidation of Sapiens’ results from the Company’s financial statements. As a result of Sapiens’ acquisition of FIS and IDIT, the
Company’s interest in Sapiens diluted from 75.6% to 42.2%. The gain recognized in relation of the Company’s loss of control in Sapiens
amounted to $ 25,833 and is presented in the income statement as equity in gains of affiliated companies, net. From August 21, 2011 until
December 31, 2011, Sapiens’ results of operations were reflected in the Company’s results via the equity method of accounting.
F-62
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NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands, except share and per share data
NOTE 17: - SUPPLEMENTARY FINANCIAL STATEMENT INFORMATION (Cont.)
The Company evaluates the performances of each of its directly held subsidiaries based on operating income/loss. Headquarters and
finance expenses are allocated proportionally among the subsidiaries:
FORMULA SYSTEMS (1985) LTD.
AND ITS SUBSIDIARIES
Revenues:
2011
2010
2009
Inter-segment sales:
2011
2010
2009
Operating income:
2011
2010
2009
Identifiable assets:
2011
2010
Goodwill:
2011
2010
Identifiable liabilities:
2011
2010
Depreciation and amortization:
2011
2010
2009
Investments in segment assets:
2011
2010
2009
Matrix
Sapiens
Magic
Total
491,144
409,272
368,498
370
391
153
30,974
31,412
26,014
36,515
52,235
45,698
-
-
3
4,487
6,476
5,087
113,328
88,578
55,350
-
-
-
13,989
9,099
5,922
640,987
550,085
469,546
370
391
156
49,450
46,987
37,023
Matrix
Sapiens
Magic
Total
-
51,904
-
16,490
-
22,130
3,430
6,647
5,369
362
662
326
129,125
111,950
6,868
6,868
28,104
22,386
5,040
4,569
4,600
497
583
580
540,409
553,220
20,622
38,167
213,148
227,858
14,363
15,451
13,537
17,146
5,348
2,705
411,284
389,366
13,754
14,809
185,044
183,342
5,893
4,235
3,568
8,048
4,103
1,799
F-63
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Project: v313119 Form Type: 20-F
File: v313119_20f.htm Type: 20-F Pg: 160 of 171
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands, except share and per share data
NOTE 17: - SUPPLEMENTARY FINANCIAL STATEMENT INFORMATION (Cont.)
The following table presents a reconciliation, between the data concerning revenues, assets and liabilities appearing in the individual
operating segments’ financial statements and the corresponding data appearing in the Company’s consolidated financial statements:
FORMULA SYSTEMS (1985) LTD.
AND ITS SUBSIDIARIES
Year ended December 31,
2010
2011
2009
Revenues:
Revenues as above
Less inter-segment transactions
469,546
(156)
550,085
(391)
640,987
(370)
Revenues as per statements of operations
469,390
549,694
640,617
Identifiable assets:
Total assets of operating segments
Assets not identifiable to a particular segment
Elimination of inter-segment assets and other
December 31,
2010
2011
591,387
32,615
(235)
561,031
108,190
-
Total assets from continuing operations as per consolidated balance sheets
623,767
669,221
Identifiable liabilities:
Total liabilities of operating segments
Liabilities not identifiable to a particular segment
Elimination of inter-segment liabilities and other
227,858
61,829
(304)
213,148
103,864
-
Total liabilities from continuing operations as per consolidated balance sheets
289,383
317,012
g.
Geographical information:
1.
The Company’s long-lived assets are located as follows:
Israel
United States
Europe
Japan
Other
Total
F-64
December 31,
2010
2011
8,100
3,229
347
523
212
15,632
2,656
431
374
72
12,411
19,165
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Client: v313119_FORMULA SYSTEMS (1985) LTD_20-F
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Project: v313119 Form Type: 20-F
File: v313119_20f.htm Type: 20-F Pg: 161 of 171
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands, except share and per share data
NOTE 17: - SUPPLEMENTARY FINANCIAL STATEMENT INFORMATION (Cont.)
2.
Revenues:
Revenues classified by geographic area (based on the location of customers):
FORMULA SYSTEMS (1985) LTD.
AND ITS SUBSIDIARIES
Israel
International:
United States
Other
Total
h.
Earnings per share:
Year ended December 31,
2010
2011
2009
368,230
412,922
486,025
38,862
62,298
73,075
63,697
92,484
62,108
469,390
549,694
640,617
The following table presents the computation of basic and diluted net earnings per share from continuing operations:
Year ended December 31,
2010
2011
2009
Numerator:
Net income basic earnings per share - income available to shareholders
Effect of dilutive securities of subsidiaries
14,198
-
18,379
-
42,962
-
Amount for diluted earnings per share - income available to shareholders
14,198
18,379
42,962
Weighted average shares outstanding
Denominator for basic net earnings per share
Effect of dilutive securities
Denominator for diluted net earnings per share
Basic net earnings per share from continuing operations
Diluted net earnings per share from continuing operations
F-65
13,200
364
13,382
141
13,514
155
13,564
13,523
13,669
1.08
1.37
1.04
1.36
3.17
3.11
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Client: v313119_FORMULA SYSTEMS (1985) LTD_20-F
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File: v313119_20f.htm Type: 20-F Pg: 162 of 171
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands, except share and per share data
NOTE 18: - DISCONTINUED OPERATIONS
FORMULA SYSTEMS (1985) LTD.
AND ITS SUBSIDIARIES
a.
On October 22, 2009, the Company completed the sale of its entire shareholdings in NextSource. The results of operations of NextSource
have been classified as discontinued operations in the statement of income, and prior periods’ results have been reclassified accordingly. In
addition, comparative data of the assets and liabilities attributed to the discontinued operations have been reclassified in the Company’s
balance sheet.
b.
The following is the composition of discontinued operations (including capital gains):
Year ended December 31,
2010
2011
2009
Revenues
Cost of revenues
Gross profit
Research and development costs, net
Selling, general and administrative expenses
Operating income
Financial expenses, net
Capital gains on sale of shareholdings, net
Income before income taxes
Taxes on income
Equity in losses of affiliates, net
Net income
64,328
57,996
6,332
-
5,647
685
(55)
4,284
4,914
36
4,878
-
4,878
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
NOTE 19: - SUBSEQUENT EVENTS
On January 27, 2012, the Company consummated the purchase of Sapiens common shares from 2 former shareholders of FIS and IDIT (Sapiens'
recently acquired companies) and others, resulting in the Company’s interest in Sapiens’ outstanding common shares increasing from 47.3% to
52.1%, regaining Company’s controlling interest in Sapiens and recording gain in an amount of $ 3,400.
- - - - - - - - - - - - - - - - - - -
F-66
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Project: v313119 Form Type: 20-F
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Project: v313119 Form Type: 20-F
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Client: v313119_FORMULA SYSTEMS (1985) LTD_20-F
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Project: v313119 Form Type: 20-F
File: v313119_20f.htm Type: 20-F Pg: 166 of 171
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Client: v313119_FORMULA SYSTEMS (1985) LTD_20-F
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Project: v313119 Form Type: 20-F
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Client: v313119_FORMULA SYSTEMS (1985) LTD_20-F
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File: v313119_20f.htm Type: 20-F Pg: 169 of 171
Report of Independent Registered Public Accounting Firm
To the Shareholders and Board of Directors of
FORMULA SYSTEMS (1985) LTD.
We have audited the accompanying consolidated statements of operations, changes in equity and cash flows for the year ended December 31, 2009 of Formula
Systems (1985) Ltd. and its subsidiaries (the “Company”). These financial statements are the responsibility of the Company’s management. Our responsibility
is to express an opinion on these financial statements based on our audits.
We did not audit the financial statements of certain subsidiaries, whose consolidated revenues constitute approximately 19% of total consolidated revenues for
the year ended December 31, 2009. The financial statements of those subsidiaries were audited by other auditors, whose reports have been furnished to us, and
our opinion, insofar as it relates to the amounts included in respect of those subsidiaries is based solely on the reports of the other auditors.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we
plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Company is not required
to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audits included consideration of internal control over
financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the
effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test
basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
As discussed in Note 1, effective January 1, 2009, the Company adopted new guidance on accounting for business combinations, consolidation, transactions
with non controlling interests. During 2009 the Company also adopted new guidance regarding impairment of securities.
In our opinion, based on our audits and the reports of other auditors, the consolidated financial statements referred to above present fairly, in all material
respects, the consolidated results of their operations and cash flows for the year ended December 31, 2009, in conformity with accounting principles generally
accepted in the United States of America.
Tel Aviv, Israel
April 29, 2010
/s/ Ziv Haft
Ziv Haft
Certified Public Accountants (Isr.)
BDO Member Firm
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The registrant hereby certifies that it meets all of the requirements for filing on Form 20-F and that it has duly caused and authorized the undersigned to
SIGNATURES
sign this annual report on its behalf.
FORMULA SYSTEMS (1985) LTD.
By:
/s/Guy Bernstein
Guy Bernstein
Chief Executive Officer
May 15, 2012
Date
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File: v313119_20f.htm Type: 20-F Pg: 171 of 171
EXHIBIT INDEX
Exhibit No.
1.1
1.2
2.1
4.1
4.2
8
12.1
12.2
13.1
13.2
15.1
15.2
15.3
15.4
15.5
15.6
15.7
* Filed herewith.
Memorandum of Association (1)
Amended and Restated Articles of Association, as adopted by Formula Systems (1985) Ltd. on January 8, 2012 (2)
Depositary Agreement by and among Formula Systems (1985) Ltd., Bank of New York Mellon and the holders of the American
Depositary Shares of Formula Systems (1985) Ltd. (1)
Form of Letter of Indemnification for officers and directors, adopted by Formula Systems (1985) Ltd. on January 8, 2012 (3)
English translation of Formula Systems (1985) Ltd. Employees and Office Holders Share Option Plan (2008)(4)
List of Subsidiaries*
Certification of the Chief Executive Officer pursuant to Rule 13a-14(a)/Rule 15d-14(a) under the Exchange Act *
Certification of the Chief Financial Officer pursuant to Rule 13a-14(a)/Rule 15d-14(a) under the Exchange Act *
Certification of the Chief Executive Officer pursuant to Rule 13a-14(b)/Rule 15d-14(b) under the Exchange Act and 18 U.S.C. Section
1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002*
Certification of the Chief Financial Officer pursuant to Rule 13a-14(b)/Rule 15d-14(b) under the Exchange Act and 18 U.S.C. Section
1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002*
Consent of Kost, Forer, Gabbay & Kasierer, A Member of Ernst & Young Global*
Consent of Levy Cohen and Co. *
Consent of Levy Cohen and Co. *
Consent of Verstegen accountants en adviseurs*
Consent of KDA Audit Corporation*
Consent of Maria Negyessy*
Consent of Ziv Haft, registered certified public accountants (Isr.) BDO member firm*
(1) Incorporated by reference to the registration statement on Form F-1 (File No. 333-8858) filed with respect to the registrant’s American Depositary Shares.
(2) Incorporated by reference to Exhibit 99.1 to the report on Form 6-K filed by the registrant with the Securities and Exchange Commission on January 18,
2012.
(3) Incorporated by reference to Exhibit 99.2 to the report on Form 6-K filed by the registrant with the Securities and Exchange Commission on January 18,
2012.
(4) Incorporated by reference to the annual report on Form 20-F for the 2008 fiscal year filed by the registrant with the Securities and Exchange Commission on
April 27, 2009.
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File: v313119_ex8.htm Type: EX-8 Pg: 1 of 1
List of Subsidiaries
Exhibit 8
Name of Subsidiary
Matrix IT Ltd.
Magic Software Enterprises Ltd.
Sapiens International Corporation N.V.*
Jurisdiction of Incorporation
Israel
Israel
Curaçao
*While this entity was not a subsidiary of the registrant as of December 31, 2011, the registrant subsequently regained a majority interest in this entity on
January 27, 2012 and it is a subsidiary of the registrant as of the filing of this annual report on Form 20-F.
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Client: v313119_FORMULA SYSTEMS (1985) LTD_20-F
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File: v313119_ex12-1.htm Type: EX-12.1 Pg: 1 of 1
Exhibit 12.1
I, Guy Bernstein, certify that:
CERTIFICATION OF THE CHIEF EXECUTIVE OFFICER
PURSUANT TO RULE 13a-14(a)/RULE 15d-14(a) UNDER
THE EXCHANGE ACT
1.
2.
3.
4.
I have reviewed this annual report on Form 20-F for the year ended December 31, 2011 of Formula Systems (1985) Ltd. (the “Registrant”);
Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the
statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial
condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
The Registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for
the Registrant and have:
(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to
ensure that material information relating to the Registrant, including its consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this report is being prepared;
(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our
supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external
purposes in accordance with generally accepted accounting principles;
(c) Evaluated the effectiveness of the Registrant’s disclosure controls and procedures and presented in this report our conclusions about the
effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
(d) Disclosed in this report any change in the Registrant’s internal control over financial reporting that occurred during the period covered by the
annual report that has materially affected, or is reasonably likely to materially affect, the Registrant’s internal control over financial reporting; and
5.
The Registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the
Registrant’s auditors and the audit committee of the Registrant’s board of directors (or persons performing the equivalent functions):
(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably
likely to adversely affect the Registrant’s ability to record, process, summarize and report financial information; and
(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the Registrant’s internal control
over financial reporting.
Date: May 15, 2012
/s/ Guy Bernstein
Guy Bernstein
Chief Executive Officer
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Client: v313119_FORMULA SYSTEMS (1985) LTD_20-F
Vintage Filings
Project: v313119 Form Type: 20-F
File: v313119_ex12-2.htm Type: EX-12.2 Pg: 1 of 1
CERTIFICATION OF THE CHIEF FINANCIAL OFFICER
PURSUANT TO RULE 13a-14(a)/RULE 15d-14(a) UNDER
THE EXCHANGE ACT
Exhibit 12.2
I, Asaf Berenstin, certify that:
1.
I have reviewed this annual report on Form 20-F for the year ended December 31, 2011 of Formula Systems (1985) Ltd. (the “Registrant”);
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the
statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial
condition, results of operations and cash flows of the Registrant as of, and for, the periods presented in this report;
4. The Registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for
the Registrant and have:
(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to
ensure that material information relating to the Registrant, including its consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this report is being prepared;
(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our
supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external
purposes in accordance with generally accepted accounting principles;
(c) Evaluated the effectiveness of the Registrant’s disclosure controls and procedures and presented in this report our conclusions about the
effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
(d) Disclosed in this report any change in the Registrant’s internal control over financial reporting that occurred during the period covered by the
annual report that has materially affected, or is reasonably likely to materially affect, the Registrant’s internal control over financial reporting; and
5.
The Registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the
Registrant’s auditors and the audit committee of the Registrant’s board of directors (or persons performing the equivalent functions):
(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably
likely to adversely affect the Registrant’s ability to record, process, summarize and report financial information; and
(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the Registrant’s internal control
over financial reporting.
Date: May 15, 2012
/s/ Asaf Berenstin
Asaf Berenstin
Chief Financial Officer
(Principal Financial Officer)
Date: 05/14/2012 02:55 PM User: djohnson
Client: v313119_FORMULA SYSTEMS (1985) LTD_20-F
Vintage Filings
Project: v313119 Form Type: 20-F
File: v313119_ex13-1.htm Type: EX-13.1 Pg: 1 of 1
CERTIFICATION OF THE CHIEF EXECUTIVE OFFICER
PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT
TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
Exhibit 13.1
In connection with the annual report of Formula Systems (1985) Ltd. (the “Company”) on Form 20-F for the period ending December 31, 2011, as
filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Guy Bernstein, Chief Executive Officer of the Company, certify,
pursuant to 18 U.S.C. § 1350, as adopted pursuant to § 906 of the Sarbanes-Oxley Act of 2002, that to my knowledge:
(1)
(2)
The Report fully complies with the requirements of Section 13(a) or 15(d), as applicable, of the Securities Exchange Act of 1934, and
The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.
Date: May 15, 2012
/s/ Guy Bernstein
Guy Bernstein
Chief Executive Officer
Date: 05/14/2012 02:55 PM User: djohnson
Client: v313119_FORMULA SYSTEMS (1985) LTD_20-F
Vintage Filings
Project: v313119 Form Type: 20-F
File: v313119_ex13-2.htm Type: EX-13.2 Pg: 1 of 1
CERTIFICATION OF THE CHIEF FINANCIAL OFFICER
PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT
TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
Exhibit 13.2
In connection with the annual report of Formula Systems (1985) Ltd. (the “Company”) on Form 20-F for the period ending December 31, 2011, as
filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Asaf Berenstin, Chief Financial Officer of the Company, certify,
pursuant to 18 U.S.C. § 1350, as adopted pursuant to § 906 of the Sarbanes-Oxley Act of 2002, that, that to my knowledge:
(1)
(2)
The Report fully complies with the requirements of Section 13(a) or 15(d), as applicable, of the Securities Exchange Act of 1934, and
The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.
Date: May 15, 2012
/s/ Asaf Berenstin
Asaf Berenstin
Chief Financial Officer
(Principal Financial Officer)
Date: 05/14/2012 02:55 PM User: djohnson
Client: v313119_FORMULA SYSTEMS (1985) LTD_20-F
Vintage Filings
Project: v313119 Form Type: 20-F
File: v313119_ex15-1.htm Type: EX-15.1 Pg: 1 of 1
CONSENT OF INDEPENDENT REGISTRERED PUBLIC ACCOUNTING FIRM
We hereby consent to the incorporation by reference in the Registration Statement on Form S-8 (No. 333-156686) of our report dated May 15, 2012, with
respect to the consolidated financial statements of Formula Systems (1985) Ltd. and the effectiveness of internal control over financial reporting of Formula
Systems (1985) Ltd. included in this annual report on Form 20-F for the year ended December 31, 2011.
Tel- Aviv, Israel
May 15, 2012
/s/ Kost, Forer, Gabbay & Kasierer
KOST, FORER, GABBAY & KASIERER
A Member of Ernst & Young Global
Exhibit 15.1
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Project: v313119 Form Type: 20-F
File: v313119_ex15-2.htm Type: EX-15.2 Pg: 1 of 1
Exhibit 15.2
[Levy Cohen and Co. Letterhead]
CONSENT OF INDEPENDENT AUDITORS
OF
Hermes Logistics Technologies Limited
We hereby consent to the incorporation by reference in the Registration Statement on Form S-8 (No. 333-156686) of our report dated January 25, 2012,
included in this annual report on Form 20-F of Formula Systems (1985) Ltd. for the year ended December 31, 2011.
/s/ Levy Cohen and Co.
LEVY COHEN AND CO.
Registered Auditors
May 11, 2012
London, United Kingdom
Date: 05/14/2012 02:55 PM User: djohnson
Client: v313119_FORMULA SYSTEMS (1985) LTD_20-F
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Project: v313119 Form Type: 20-F
File: v313119_ex15-3.htm Type: EX-15.3 Pg: 1 of 1
Exhibit 15.3
[Levy Cohen and Co. Letterhead]
CONSENT OF INDEPENDENT AUDITORS
OF
Magic Software Enterprises (UK) Limited
We hereby consent to the incorporation by reference in the Registration Statement on Form S-8 (No. 333-156686) of our report dated January 23, 2012, with
respect to the consolidated financial statements of Magic Software Enterprises (UK) Limited included in this annual report on Form 20-F of Formula Systems
(1985) Ltd. for the year ended December 31, 2011.
/s/ Levy Cohen and Co.
LEVY COHEN AND CO.
Registered Auditors
May 11, 2012
London, United Kingdom
Date: 05/14/2012 02:55 PM User: djohnson
Client: v313119_FORMULA SYSTEMS (1985) LTD_20-F
Vintage Filings
Project: v313119 Form Type: 20-F
File: v313119_ex15-4.htm Type: EX-15.4 Pg: 1 of 1
[Verstegen accountants en adviseurs Letterhead]
Exhibit 15.4
To the board of directors and shareholders of
Magic Benelux B.V.
Pelmolen 17
3994 XX HOUTEN
Dordrecht, May 11, 2012
Ref.: KH/VK/347100.10/JV
Dear Sirs,
We hereby consent to the incorporation by reference in the Registration Statement on Form S-8 (No. 333-156686) of our report dated January 28, 2011 with
respect to the financial statements of Magic Benelux B.V. as of December 31, 2010, included in this annual report of Formula Systems (1985) Ltd. on Form 20-
F for the year ended December 31, 2011.
On behalf of Verstegen accountants en adviseurs,
/s/ Drs. L.K. Hoogendoorn RA MGA
Drs. L.K. Hoogendoorn RA MGA.
Date: 05/14/2012 02:55 PM User: djohnson
Client: v313119_FORMULA SYSTEMS (1985) LTD_20-F
Vintage Filings
Project: v313119 Form Type: 20-F
File: v313119_ex15-5.htm Type: EX-15.5 Pg: 1 of 1
CONSENT OF
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Exhibit 15.5
We hereby consent to the incorporation by reference in the Registration Statement on Form S-8 (No. 333-156686) of our report dated January 30, 2012, with
respect to the financial statements of Magic Software Japan K.K. included in this annual report on Form 20-F of Formula Systems (1985) Ltd. for the year
ended December 31, 2011.
/s/ KDA Audit Corporation
KDA Audit Corporation
Registered Auditors
Tokyo, Japan
May 11, 2012
Date: 05/14/2012 02:55 PM User: djohnson
Client: v313119_FORMULA SYSTEMS (1985) LTD_20-F
Vintage Filings
Project: v313119 Form Type: 20-F
File: v313119_ex15-6.htm Type: EX-15.6 Pg: 1 of 1
We hereby consent to the incorporation by reference in the Registration Statement on Form S-8 (No. 333-156686) of our report dated January 28, 2011, with
respect to the financial statements of Magic (Onyx) Magyarorszag Szoftverhaz Kft., included in this annual report on Form 20-F of Formula Systems (1985)
Ltd. for the year ended December 31, 2011.
Exhibit 15.6
Budapest, Hungary
May 11, 2012
/s/ Maria Negyessy
Maria Negyessy
Registered Auditors
Date: 05/14/2012 02:55 PM User: djohnson
Client: v313119_FORMULA SYSTEMS (1985) LTD_20-F
Vintage Filings
Project: v313119 Form Type: 20-F
File: v313119_ex15-7.htm Type: EX-15.7 Pg: 1 of 1
CONSENT OF INDEPENDENT REGISTRERED PUBLIC ACCOUNTING FIRM
We hereby consent to the incorporation by reference in the Registration Statement on Form S-8 (No. 333-156686) of our report dated April 29, 2010 with
respect to the consolidated financial statements of Formula Systems (1985) Ltd. included in this annual report on Form 20-F for the year ended December 31,
2011.
Exhibit 15.7
/s/ Ziv Haft
Ziv Haft
Certified Public Accountants (Isr.)
BDO Member Firm
May 14, 2012