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, 2014
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, 2014, the registrant had 14,719,782 outstanding ordinary shares, NIS 1 par value, of which 303,879 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
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
27
46
47
77
91
95
97
99
114
115
116
116
116
117
117
117
118
118
118
118
119
119
119
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.”
Our consolidated financial statements appearing in this annual report are prepared in U.S. dollars and in accordance with Untied States generally
accepted accounting principles, or U.S. GAAP. All references in this annual report to “dollars” or “$” are to U.S. dollars and all references in this annual
report to “NIS” are to New Israeli Shekels. References to the Israeli CPI refer to the Israeli consumer price index.
Statements made in this annual report concerning the contents of any contract, agreement or other document are summaries of such contracts,
agreements or documents and are not complete descriptions of all of their terms. If we filed any of these documents as an exhibit to this annual report or to any
previous filling with the Securities and Exchange Commission, or the SEC, you may read the document itself for a complete recitation of its terms.
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 subsidiaries –, Matrix IT
Ltd., or Matrix, Sapiens International Corporation N.V., or Sapiens, InSync Staffing Solutions, Inc., or InSync, and our affiliated company Magic Software
Enterprises Ltd., or Magic Software. Through March 5, 2014, when we lost control of Magic Software, Magic Software was our subsidiary. From August 21,
2011 to January 27, 2012 and from November 19, 2013 to December 23, 2014, during which periods we did not hold a majority interest in Sapiens. Sapiens
was an affiliated company and not a subsidiary.
All trademarks appearing in this annual report are the property of their respective holders.
3
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 selected consolidated financial data as of the dates and for each of the periods indicated. The selected consolidated financial data
set forth below should be read in conjunction with and are qualified entirely by reference to Item 5. “Operating and Financial Review and Prospects” and our
consolidated financial statements and notes thereto included elsewhere in this annual report.
We have derived the following consolidated income statement data for the years ended December 31, 2012, 2013 and 2014 and the consolidated balance sheet
data as of December 31, 2013 and 2014 from our audited consolidated financial statements and notes included elsewhere in this annual report. We have derived
the consolidated income statement data for the years ended December 31, 2010 and 2011 and the consolidated balance sheet data as of December 31, 2010,
2011 and 2012 from our audited consolidated financial statements that are not included in this annual report. Our historical consolidated financial statements are
prepared in accordance with U.S. generally accepted accounting principles (“U.S. GAAP”) and presented in U.S. dollars. During 2014, certain insignificant
irregularities were discovered which affected certain income statement line items for the years 2009 through-2013. These irregularities were corrected
retroactively and such corrections are reflected in the Income Statement Data presented below. 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:
2010
Year ended December 31,
2012
(U.S. dollars in thousands, except share and per share data
2013
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
Income before taxes on income
Taxes on income
Equity in gains (losses) of affiliated companies, net
Net income
Change in redeemable non-controlling interests
Net income attributable to non-controlling interests
Net income attributable to Formula’s shareholders
$
$
$
638,899
492,886
146,013
5,148
93,340
(207)
47,732
(6,500)
41,232
5,276
25,870
61,826
-
19,517
42,309
$
742,981 $
564,803
178,178
12,349
110,758
(174)
55,245
(6,672)
48,573
6,145
3,744
46,172
(967)
23,766
23,373 $
795,881
603,080
192,801
14,168
117,877
14
60,742
(6,236)
54,506
8,728
60,683
106,461
1,735
24,039
80,687
$
$
$
547,474
412,463
135,011
5,503
84,510
231
44,767
(4,371)
40,396
5,989
(1,070)
33,337
-
15,792
17,545
$
4
2014
636,417
530,083
106,334
787
70,517
(5)
35,035
(4,866)
30,169
10,074
74,590
94,685
154
13,698
80,833
Net earnings per share
Basic
Diluted
Weighted average number of shares outstanding (in
Thousands):
Basic
Diluted
Balance Sheet Data:
Total assets
Total liabilities
Equity
Dividends
2010
Year ended December 31,
2013
2012
(U.S. dollars in thousands, except share and per share data)
2011
2014
1.31
1.30
13,282
13,523
3.12
3.06
13,514
13,669
1.73
1.67
13,596
13,790
5.88
5.68
13,725
14,123
5.80
5.59
13,929
14,408
2010
2011
December 31,
2013
2012
(U.S. dollars in thousands)
2014
$
$
621,557
289,383
332,174
$
667,861
318,949
348,912
876,928 $
412,974
463,954
$
871,795
395,640
476,155
1,120,739
466,172
654,567
In December 2014, Formula declared a cash dividend to its shareholders, to be paid in February 2015, of $0.535 per share. The aggregate amount
distributed by Formula was approximately $7.9 million.
In July 2014, Formula distributed to its shareholders a cash dividend of $0.48 per share. The aggregate amount distributed by Formula was
approximately $7.1 million.
In December 2013, Formula declared a cash dividend to its shareholders, to be paid on February 2014, of $0.31 per share. The aggregate amount
distributed by Formula was approximately $4.6 million.
In July 2013, Formula distributed to its shareholders a cash dividend of $0.37 per share. The aggregate amount distributed by Formula was
approximately $5.4 million.
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.
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 NIS 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.
5
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
Rapid technological changes may adversely affect the market acceptance of our products and services, and our business, results of operations and
financial condition could be adversely affected; adapting to evolving technologies can require substantial financial investments, distract management
and adversely affect the demand for our existing products or services.
We compete in markets that are characterized by rapid technological changes. Other companies are also seeking to offer software solutions and other
products and services in our markets, including enterprise mobility solutions, internet-related solutions, such as cloud computing and business solutions for the
insurance and financial services industry, all to generate growth. These companies may develop technological or business model innovations in the markets that
we seek to address that are, or are perceived to be, equivalent or superior to our products. Furthermore, many of our smaller competitors have been acquired by
larger competitors, which provides such smaller competitors with greater resources and potentially a larger client base for which they can develop solutions. Our
customers or potential customers may prefer suppliers that are larger than us, are better known in the market or that have a greater global reach.
In addition, our customers’ business models may change in ways that we do not anticipate and these changes could reduce or eliminate our customers’
needs for our products and services. Our operating results depend on our ability to adapt to market changes and develop and introduce new products and
services into existing and emerging markets.
The introduction of new technologies and devices could render existing products and services obsolete and unmarketable and could exert price
pressures on our products and services. Our future success will depend upon our ability to address the increasingly sophisticated needs of our customers by:
· Supporting existing and emerging hardware, software, databases and networking platforms; and
· Developing and introducing new and enhanced software development technology and applications that keep pace with such technological
developments, emerging new product markets and changing customer requirements.
6
Adapting to evolving technologies can require substantial financial investments, distract management and adversely affect the demand for our existing
products and services. In addition, if release dates of any future products or enhancements are delayed or if they fail to achieve market acceptance
when released, our business, financial condition and results of operations could be adversely affected.
Adapting to evolving technologies may require us to invest a significant amount of resources into the development, integration, support and marketing
of products and services that work with or utilize those technologies. For example, the acceptance and growth of cloud computing, enterprise mobility, security
and cyber and digital are examples of rapid technological changes for which we have adapted our products and software services offerings. Developing and
implementing cloud computing, enterprise mobility, security and cyber and digital into certain of our software solution models and software services offerings
required us to make a substantial financial investment and required significant attention from our management to refine our business strategies to include the
delivery of these solutions. As the market continues to adopt new technologies, we expect to continue to make substantial investments in our service solutions
and system integrations related to these changing technologies. Even if we succeed in adapting to a new technology by developing attractive products and
services and successfully bringing them to market, there is no assurance that the new product or service will have a positive impact on our financial performance
and could even result in lower revenue, lower margins and higher costs and therefore could negatively impact our financial performance.
If our products and software services 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 continued 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.
7
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 and services 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.
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, and which can therefore adversely affect our results of operations.
Our business is characterized by certain relatively large projects or engagements that can have a significant impact on our total revenue and cost of
revenue from quarter to quarter. A high percentage of our expenses, particularly employee compensation, are relatively fixed. Therefore, a variation in the
timing of the initiation, progress or completion of projects or engagements can cause significant variations in operating results from quarter to quarter.
This is particularly the case on fixed-price contracts. Some of our solutions and services are sold as fixed-price projects with delivery requirements
spanning more than one year. As certain of our projects can be highly complex, we may not be able to accurately estimate our actual costs of completing a
fixed-price project. If our actual cost-to-completion of these projects exceeds significantly 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 (whether fixed price or not) may affect our revenue and cause our operating results to vary widely.
Certain of our solutions are delivered over periods of time ranging from several months to a few years. Payment terms are generally based on periodic payments
or on the achievement of milestones. Any delays in payment or in the achievement of milestones may have a material adverse effect on our results of operations,
financial position or cash flows.
Our development cycles are lengthy, we may not have the resources available to complete development of new, enhanced or modified, solutions and we
may incur significant expenses before we generate revenues, if any, from our solutions.
Because development of a significant portion of our solutions is complex and requires rigorous testing, development cycles can be lengthy, taking us up
to two years to develop and introduce new, enhanced or modified solutions. Moreover, development projects can be technically challenging and expensive. The
nature of these development cycles may cause us to experience delays between the time we incur expenses associated with research and development and the
time we generate revenues, if any, from such expenses. Furthermore, we may invest substantial resources in the development of solutions that do not achieve
market acceptance or commercial success. We may also not have sufficient funds or other resources to make the required investments in product development.
Even where we succeed in our sales efforts and obtain new orders from customers, the complexity involved in delivering certain of our solutions to such
customers makes it more difficult for us to consummate delivery in a timely manner and to recognize revenue and maximize profitability. Failure to deliver our
solutions in a timely manner could result in order cancellations, damage our reputation and require us to indemnify our customers. Any of these risks relating to
our lengthy and expensive development cycle could have a material adverse effect on our business, financial conditions and results of operations.
8
Our sales cycle is variable, depends upon many factors outside our control, and could cause us to expend significant time and resources prior to
earning associated revenues.
The typical sales cycle for certain of our solutions and services is lengthy and unpredictable, requires pre-purchase evaluation by a significant number
of persons in our customers’ organizations, and often involves a significant operational decision by our customers. Our sales efforts involve educating our
customers and industry analysts about the use and benefits of our products and services, including the technical capabilities of our products and the potential
cost savings achievable by organizations deploying our solutions or utilize our services. Customers typically undertake a significant evaluation process, which
frequently involves not only our products, but also those of our competitors and can result in a lengthy sales cycle with little or no control over any delays
encountered by us. We spend substantial time, effort and money in our sales efforts without any assurance that such efforts will produce any sales.
We may be liable to our clients for damages caused by a violation of intellectual property rights, the disclosure of other confidential information,
including personally identifiable information, system failures, errors or unsatisfactory performance of services, and our insurance policies may not be
sufficient to cover these damages.
We often have access to, and are required to collect and store, sensitive or confidential client information, including personally identifiable information.
Some of our client agreements do not limit our potential liability for breaches of confidentiality, infringement indemnity and certain other matters. Furthermore,
breaches of confidentiality may entitle the aggrieved party to equitable remedies, including injunctive relief. If any person, including any of our employees and
subcontractors, penetrates our network security or misappropriates sensitive or confidential client information, including personally identifiable information, we
could be subject to significant liability from our clients or from our clients’ customers for breaching contractual confidentiality provisions or privacy laws.
Despite measures we take to protect the intellectual property and other confidential information or personally identifiable information of our clients,
unauthorized parties, including our employees and subcontractors, may attempt to misappropriate certain intellectual property rights that are proprietary to our
clients or otherwise breach our clients’ confidences. Unauthorized disclosure of sensitive or confidential client information, including personally identifiable
information, or a violation of intellectual property rights, whether through employee misconduct, breach of our computer systems, systems failure or otherwise,
may subject us to liabilities, damage our reputation and cause us to lose clients.
Many of our contracts involve projects that are critical to the operations of our clients’ businesses and provide benefits to our clients that may be
difficult to quantify. Any failure in a client’s system or any breach of security could result in a claim for substantial damages against us, regardless of our
responsibility for such failure. Furthermore, any errors by our employees in the performance of services for a client, or poor execution of such services, could
result in a client terminating our engagement and seeking damages from us.
Although we attempt to limit our contractual liability for consequential damages in rendering our services, these limitations on liability may not apply
in all circumstances, may be unenforceable in some cases, or may be insufficient to protect us from liability for damages. There may be instances when
liabilities for damages are greater than the insurance coverage we hold and we will have to internalize those losses, damages and liabilities not covered by our
insurance.
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 businesses, particularly businesses 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.
9
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, it is part of our strategy to pursue acquisitions of, and investments in, companies offering products, technologies and services in
order to expand our product offerings or services or otherwise enhance our market position and strategic strengths. In the past three years we made a number of
acquisitions, including:
In April 2014, Formula acquired InSync Staffing Solutions, Inc,, a U.S. based full-service provider of consulting and staffing solutions for IT,
engineering and other professional staff (i.e. accounting and finance, administrative, customer service, healthcare, human resources, manufacturing,
marketing/sales, and operations). The total consideration paid by Formula was $4.0 million.
In January 2012, our subsidiary Matrix acquired a 60% interest in Exzac Inc., a U.S. based company in the field of risk management for financial
institutions that deals in commerce, and which specializes in application services for enterprise fraud management. In consideration for the shares, Matrix paid
the sellers an amount of $6.8 million with the addition of approximately $0.2 million for Exzac Inc. equity (Moreover, the sellers were entitled to an additional
consideration that is contingent on meeting certain targets based on the excess of operating income results over predetermined amount, but in any event not
more than $2.5 million). As part of the acquisition both Matrix and the sellers received mutual options for the purchase of the sellers' remaining shares in Exzac
Inc. On December 19, 2012, the option was partially exercised and Matrix purchased from one of the sellers its shares in Exzac (20% of the Exzac Inc. shares,
in consideration of $5.0 million and with additional consideration that was to be calculated according to a formula based on the Exzac results in 2014), while the
option for purchasing the remaining 20% in Exzac Inc., was exercised on January 5, 2014 (in consideration of $5.0 million and with additional consideration
that was to be calculated according to a predetermined formula based on the Exzac results in 2014). At the request of the sellers, in November 2014, Matrix
agreed to an early settlement of the remaining contingent amount based on an estimated calculation of Exzac results in 2014. As of December 31, 2014 Matrix
holds 100% in Exzac without any liability to any of the sellers.
In August 2014, our subsidiary Sapiens acquired Knowledge Partners International LLC, or KPI and the assets of The Decision Model Licensing LLC, or
TDML. KPI is a leader in decision management consultancy, services and training and through TDML owns certain patents used as part of Sapiens’ Decision
solution. The total consideration was $2.1 million in cash and 57,000 ordinary shares of Sapiens Software Solutions (Decision) Ltd., or Sapiens Decision, the
subsidiary of Sapiens which holds all of the interests in KPI. In addition, one of the shareholders of KPI received 88,500 restricted shares of Sapiens Decision
plus $450,000 in cash, subject to certain performance criteria.
In February 2015, Magic Software entered into a definitive agreement to acquire a 70% stake, with an option to increase the holding to 100%, in a
profitable Israeli-based company that specializes in software professional services for mainframes and complex large-scale environments.
In November 2013, Magic Software acquired the operations of Allstates Technical Services, LLC, a U.S. based full-service provider of consulting and
staffing solutions for IT, Engineering and Telecom personnel, for a total consideration of $11.0 million.
During the year ended December 31, 2014, Matrix completed three acquisitions for a total cash consideration of up to approximately $4.7 million, of
which $ 3.1 million was attributed to goodwill and $ 1.3 million to other identifiable intangible assets. These acquisitions generally enhance our group's
technologies, product and services offerings.
Mergers and acquisitions of companies are inherently risky and subject to many factors outside of our control and no assurance can be given that our
future acquisitions will be successful and will not adversely affect our business, operating results, or financial condition. Failure to manage and successfully
integrate acquisitions could materially harm our business and operating results. 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 previously developed and marketed products, there can
be no assurance that new product enhancements will be made in a timely manner or that pre-acquisition due diligence will have identified all possible issues that
might arise with respect to such products. If we acquire other businesses, we may face difficulties, including:
10
• Difficulties in integrating the operations, systems, technologies, products, and personnel of the acquired businesses or enterprises;
• Diversion of management’s attention from normal daily operations of the business and the challenges of managing larger and more widespread
operations resulting from acquisitions;
Potential difficulties in completing projects associated with in-process research and development;
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• Difficulties in entering markets in which we have no or limited direct prior experience and where competitors in such markets have stronger
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market positions;
Insufficient revenue to offset increased expenses associated with acquisitions; and
The potential loss of key employees, customers, distributors, vendors and other business partners of the companies we acquire following and
continuing after announcement of acquisition plans.
Furthermore, we may not be able to retain the key employees that may be necessary to operate the businesses we acquired and may acquire and we may
not be able to timely attract new skilled employees and management to replace them. An acquisition may also involve accounting charges and/or amortization of
significant amounts of intangible assets, which would adversely affect our ability to achieve and maintain profitability. These difficulties could disrupt our
ongoing business, distract our management and employees, increase our expenses and adversely affect our results of operations.
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.
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. The issuance of equity
securities by our any of our significant subsidiaries pursuant to any such financing could be dilutive to our existing interest in these subsidiaries. If we raise
funds through debt offerings, we may be pressured in serving such debt. If we use cash or debt financing, our financial liquidity will be reduced, the holders of
our debt may have claims on our assets ahead of holders of our ordinary shares and our business operations may be restricted by the terms of any 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 that 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.
If we fail to manage our growth, our business could be disrupted and our profitability will likely decline.
We have experienced rapid growth during the last five years, through both acquisitions and organic growth. The number of our employees increased
from approximately 5,339 as of December 31, 2010 to approximately 10,108 as of December 31, 2014 (including our affiliate Magic Software) and may
increase further as we aim to enhance our businesses. This increase may significantly strain our management and other operational and financial resources. In
particular, continued headcount growth increases the integration challenges involved in:
recruiting, training and retaining skilled technical, marketing and management personnel;
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• maintaining high quality standards;
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preserving our corporate culture, values and entrepreneurial environment;
developing and improving our internal administrative infrastructure, particularly our financial, operational, communications and other internal
controls; and
• maintaining high levels of client satisfaction.
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The rapid execution necessary to exploit the market for our business model requires an effective planning and management process. Our systems,
procedures or controls may not be adequate to support the growth in our operations, and our management may not be able to achieve the rapid execution
necessary to exploit the market for our business model. Our future operating results will also depend on our ability to expand our development, sales and
marketing organizations. If we are unable to manage growth effectively, our profitability will likely decline.
The increasing amount of intangible assets and goodwill recorded on our balance sheet may lead to significant impairment charges in the future.
We regularly review our long-lived assets, including identifiable intangible assets and goodwill, for impairment. Goodwill and indefinite life intangible
assets are subject to impairment review at least annually. Other long-lived assets are reviewed when there is an indication that impairment may have occurred.
The amount of goodwill and identifiable intangible assets on our consolidated balance sheet has increased significantly from $199.6 million as of December 31,
2010 to $267.1 million and $449.3 million as of December 31, 2013 and 2014, respectively, as a result of our acquisitions, and may increase further following
future acquisitions. Impairment testing under U.S. GAAP may lead to further impairment charges in the future. Any significant impairment charges could have
a material adverse effect on our results of operations.
During the years ended December 31, 2012, 2013 and 2014, no impairment was required for any of our reporting units and no impairment losses were
identified for these intangible assets and software products.
Our credit facility agreements with banks and other financial institutions contain a number of restrictive covenants which, if breached, could result in
acceleration of our obligation to repay our debt.
In the context of our engagements with banks and other financial institutions for receiving various credit facilities we have undertaken to maintain a
number of conditions and limitations on the manner in which we can operate our business, including limitations on our ability to incur debt and sell or acquire
assets. These credit facilities agreements also contain various covenants which require us to maintain certain financial ratios related to shareholders’ equity, total
rate of debt and liabilities, minimum outstanding balance of total cash and short-term investments and operating results 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, we have secured a credit facility with certain of the shares of each
of Formula’s publicly held subsidiaries Matrix and Sapiens and affiliate Magic Software. A breach of the restrictive covenants could result in the acceleration of
our obligations to repay our debt.
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 and services in international markets and to devote significant
resources to these efforts to expand our international operations as part of our growth strategy. 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 2013 and 2014, we received approximately 34% and
16.5% of our consolidated revenues, respectively, from customers located outside of Israel (including but not limited to the United States, Europe, Japan, Asia-
Pacific, India and South Africa). The expansion of our existing operations and entry into additional international markets will require significant management
attention and financial resources which could adversely affect our business. If we had continued to consolidate Magic’s revenues in all of 2014, 28% of our
revenues would have been generated from customers located outside of Israel.
Our international operation subjects us to many risks inherent to international business activities, including:
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limitations and disruptions resulting from the imposition of government controls;
changes in regulatory requirements;
export license requirements;
economic or political instability;
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trade restrictions;
changes in tariffs;
currency fluctuations;
difficulties in the collection of receivables;
foreign tax consequences;
compliance with the U.S. Foreign Corrupt Practices Act of 1977, as amended, or FCPA, particularly in emerging market countries;
increased financial accounting and reporting burdens and complexities;
greater difficulty in localizing certain of our products and licensing programs for international customers
greater difficulty in safeguarding intellectual property; and
difficulties in managing overseas subsidiaries and international operations.
As we continue to expand our business globally, our success will depend, in large part, on our ability to anticipate and effectively manage these and other
risks associated with our international operations. Any of these risks could harm our international operations and reduce our international sales, adversely
affecting our business, results of operations, financial condition and growth prospects.
Unfavorable national and global economic conditions could adversely affect our business, operating results and financial condition.
During periods of slowing economic activity our customers may reduce their demand for our products, technology and software services, which would
reduce our sales, and our business, operating results and financial condition may be adversely affected. Economies throughout the world currently face a number
of challenges, including threatened sovereign defaults, credit downgrades, restricted credit for businesses and consumers and potentially falling demand for a
variety of products and services. Notwithstanding the improving economic conditions in some of our markets, many companies are still cutting back
expenditures or delaying plans to add additional personnel or systems. Any further worsening of global economic conditions could result 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 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 success depends largely on the contributions of our employees and our ability to attract, motivate and retain qualified professional, including
technology, consulting, engineering, marketing and management professionals and also upon our ability to attract and retain qualified computer professionals to
serve as temporary IT personnel. Competition for the limited number of qualified professionals with a working knowledge of certain sophisticated computer
languages is intense. We compete for technical personnel with other providers of technical IT consulting and staffing services, systems integrators, providers of
outsourcing services, computer systems consultants, clients and temporary personnel agencies. A shortage of, and significant competition for software
professionals with the skills and experience necessary to perform the required services, may require us to forego projects for lack of resources and may
adversely affect our business, results of operations and financial condition. In addition, our ability to maintain and renew existing engagements and obtain new
business for our contract IT professional services operations depends, in large part, on our ability to hire and retain technical personnel with the IT skills that
keep pace with continuing changes in software evolution, industry standards and technologies, and client preferences. Demand for qualified professionals
conversant with certain technologies may outstrip supply as new and additional skills are required to keep pace with evolving computer technology or as
competition for technical personnel increases. Increasing demand for qualified personnel could also result in increased expenses to hire and retain qualified
technical personnel and could adversely affect our profit margins.
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In addition, as a provider of software solutions that rely upon technological advancements and because part of our software solutions are considered
highly complex and are generally used by our customers to perform critical business functions we rely heavily our research and development activities to remain
competitive. We consequently depend in large part on the ability to attract, train, motivate and retain heavily skilled information technology professionals for
our research and development team, particularly individuals with knowledge and experience in niche vertical industries. These skilled technology professionals
are often in high demand and short supply. If we are unable to hire or retain qualified research and development personnel and other technology professionals to
develop, implement and modify our solutions, we may be unable to meet the needs of our customers. Even if we succeed in retaining the necessary skilled
personnel and in our research and development efforts, our investments in our personnel and product development efforts increase our costs of operations and
thereby reduce our profitability, unless accompanied by increased revenues. Given the highly competitive industry in which we operate, we may not succeed in
increasing our revenues in line with our increasing investments in our personnel and research and development efforts.
Furthermore, if we seek to expand the marketing and offering of our products into new territories, that requires the retention of new, additional skilled
personnel with knowledge of the particular market and applicable regulatory regime. Such skilled personnel may not be available at a reasonable cost relative to
the additional revenues that we expect to recognize in those territories, or may not be available at all.
Errors or defects in our software solutions could inevitably arise and would harm our profitability and our reputation with customers, and could even
give rise to liability claims against us.
The quality of our solutions, including new, modified or enhanced versions thereof, is critical to our success. Since certain of our software solutions are
complex, they may contain errors that cannot be detected at any point in their testing phase. While we continually test all our software solutions for errors or
defects and work with customers our partners and end-users (who occasionally participate in our beta-testing of certain programs) to identify and correct them,
errors in our technology may be found in the future. Testing for errors or defects is complicated because it is difficult to simulate the breadth of operating
systems, user applications and computing environments that our customers use or in the applications developed with our technology. Errors or defects in our
technology have resulted in terminated work orders and could result in delayed or lost revenue, diversion of development resources and increased services,
termination of work orders, damage to our brand and warranty and insurance costs in the future. In addition, time-consuming implementations may also increase
the number of services personnel we must allocate to each customer, thereby increasing our costs and adversely affecting our business, results of operations and
financial condition.
In addition, since our customers rely on our solutions to operate, monitor and improve the performance of their business processes or to develop or
integrate their business applications, they are sensitive to potential disruptions that may be caused by the use of, or any defects in, our software. As a result, we
may be subject to claims for damages related to software errors in the future. Liability claims could require us to spend significant time and money in litigation
or to pay significant damages. Regardless of whether we prevail, diversion of key employees’ time and attention from our business, the incurrence of substantial
expenses and potential damage to our reputation might result. While the terms of our standard sales contracts typically limit our exposure to potential liability
claims and we carry errors and omissions insurance against such claims, there can be no assurance that such insurance will continue to be available on
acceptable terms, if at all, or that such insurance will provide us with adequate protection against any such claims. A significant liability claim against us could
have a material adverse effect on our business, results of operations and financial position. Accordingly, 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.
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Failure to meet customer expectations with respect to the implementation and use of our solutions or damage caused by our solutions to our
customers’ information systems could result in negative publicity, reduced sales and diversion of resources, may cause the cancellation of our contracts
and may subject us to liability claims, all of which would harm our business, results of operations, financial condition and growth prospects.
We generally provide our customers with upfront estimates regarding the duration, budget and costs associated with the implementation of our
products. Implementation of some of our solutions is complex and meeting the anticipated duration, budget and costs often depends on factors relating to our
customers or their other vendors. 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, our reputation could be harmed, 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 software services that we provide involve key aspects of customers’ information systems and may be considered
critical to the operations of our clients’ businesses. As a result, our customers have a greater sensitivity to failures in these systems than do customers of other
software products generally. In addition, our exposure to legal liability may be increased in the case of outsourcing contracts in which we become more
involved in our clients’ operations. 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. While we typically strive to include
provisions designed to limit our exposure to legal claims relating to our services and the solutions we develop, these provisions may not adequately protect us or
may not be enforceable in all cases. The general liability insurance coverage that we maintain, including coverage for errors and omissions, is subject to
important exclusions and limitations. We cannot be certain that this coverage will continue to be available on reasonable terms or will be available in sufficient
amounts to cover one or more large claims, or that the insurer will not disclaim coverage as to any future claim. A successful assertion of one or more large
claims against us that exceeds our available insurance coverage or changes in our insurance policies, including premium increases or the imposition of large
deductible or co-insurance requirements, could adversely affect our profitability.
Incorrect or improper use of our products or our failure to properly train customers on how to implement or utilize our products could result in
customer dissatisfaction and negatively affect our business, results of operations, financial condition and growth prospects.
Certain of our software solutions are complex and are deployed in a wide variety of network environments. The proper use of these solutions requires
training of the customer. If these solutions are not used correctly or as intended, inadequate performance may result.
Additionally, our customers or third-party partners may incorrectly implement or use our solutions. Our solutions may also be intentionally misused or
abused by customers or their employees or third parties who are able to access or use our solutions. Similarly, our solutions are sometimes installed or
maintained by customers or third parties with smaller or less qualified IT departments, potentially resulting in sub-optimal installation and, consequently,
performance that is less than the level anticipated by the customer. Because our customers rely on our software, services and maintenance support to manage a
wide range of operations, the incorrect or improper use of our solutions, our failure to properly train customers on how to efficiently and effectively use our
solutions, or our failure to properly provide implementation or maintenance services to our customers has resulted in terminated work orders and may result in
termination of work orders, negative publicity or legal claims against us in the future. Also, as we continue to expand our customer base, any failure by us to
properly provide these services will likely result in lost opportunities for follow-on sales of our software and services.
In addition, if there is substantial turnover of customer personnel responsible for implementation and use of our products, or if customer personnel are
not well trained in the use of our products, customers may defer the deployment of our products, may deploy them in a more limited manner than originally
anticipated or may not deploy them at all. Further, if there is substantial turnover of the customer personnel responsible for implementation and use of our
products, our ability to make additional sales may be substantially limited.
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Any unauthorized, and potentially improper, actions of our personnel could adversely affect our business, operating results and financial condition.
The recognition of our revenue depends on, among other things, the terms negotiated in our contracts with our customers. Our personnel may act outside
of their authority and negotiate additional terms without our knowledge. We have implemented policies to help prevent and discourage such conduct, but there
can be no assurance that such policies will be followed. For instance, in the event that our sales personnel negotiate terms that do not appear in the contract and
of which we are unaware, whether such additional terms are written or verbal, we could be prevented from recognizing revenue in accordance with our plans.
Furthermore, depending on when we learn of unauthorized actions and the size of the transactions involved, we may have to restate revenue for a previously
reported period, which would seriously harm our business, operating results and financial condition.
If existing customers do not make subsequent purchases from us and continue using our solutions and services or if our relationships with our largest
customers are impaired, our revenue and profitability could be negatively affected
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.
For example, five customers of one of our four significant subsidiaries and affiliates— Sapiens— and its subsidiaries accounted for 30% and 31% of
Sapiens’ consolidated revenues in 2013 and 2014, respectively (or 5% and 8% of our consolidated revenues, respectively). One significant customer of an
affiliate—Magic Software— accounted for 13% and 10% of its consolidated revenues in 2013 and 2014, respectively (or 2% and 3% of our consolidated
revenues, respectively). There can be no assurance that the existing customers of our significant subsidiaries and affiliates will enter into new project contracts
with us or that they will continue using our technologies and IT services. A significant decline in our revenue stream from existing customers would have an
adverse effect on our operating results.
Failure to manage our rapid growth effectively could harm our business.
Over the last 5 years we have experienced, and expect to continue to experience, rapid growth in our number of employees and in our international
operations that has placed, and will continue to place, a significant strain on our operational and financial resources and our personnel. To manage our
anticipated future growth effectively, we must continue to maintain and may need to enhance our information technology infrastructure, financial and
accounting systems and controls and manage expanded operations and employees in geographically distributed locations. We also must attract, train and retain a
significant number of additional qualified sales and marketing personnel, professional services personnel, software engineers, technical personnel and
management personnel. Our failure to manage our rapid growth effectively could have a material adverse effect on our business, results of operations and
financial condition. Our growth could require significant capital expenditures and may divert financial resources from other projects, such as the development of
new services or product enhancements. For example, since it may take as long as six months to hire and train for the development and implementation of our
proprietary software solutions certain new member of our professional services staff, we make decisions regarding the size of our professional services staff
based upon our expectations with respect to customer demand for our products and services. If these expectations are incorrect, and we increase the size of our
professional services organization without experiencing an increase in sales of our products and services, we will experience reductions in our gross and
operating margins and net income. If we are unable to effectively manage our growth, our expenses may increase more than expected, our revenues could
decline or grow more slowly than expected and we may be unable to implement our business strategy. We also intend to continue to expand into additional
international markets which, if not technologically or commercially successful, could harm our financial condition and prospects.
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There may be consolidation in the markets and industries in which we operate, which could reduce the use of our products and services and adversely
affect our revenues.
Mergers or consolidations among our customers could reduce the number of our customers and potential customers. This could adversely affect our
revenues even if these events do not reduce the aggregate number of customers or the activities of the consolidated entities. If our customers merge with or are
acquired by other entities that are not our customers, or that use fewer of our products and services, they may discontinue or reduce their use of our products and
services. Any of these developments could materially and adversely affect our results of operations and cash flows.
As we derive a portion of our revenues from the Israeli government, a reduction of government spending in Israel on IT services may reduce, our
revenues and profitability; and any delay in its annual budget approval process may negatively impact our cash flows.
We provide services for a wide range of Israeli governmental agencies. Any reduction in total Israeli government spending for political or economic
reasons, such as occurred during the Israeli recession ending in 2004 or the current worldwide recession, may reduce our revenues and profitability. In addition,
the government of Israel has experienced significant delays in the approval of its annual budget in recent years and will experience such a delay also during the
first half of 2015 with respect to the 2015 government budget, which allows government offices to utilize their monthly spending based on 1/12 of 2014
approved budget. Such delays in the future could negatively affect our cash flows by delaying receipt of payment from the government of Israel for services
performed.
If our interest in our subsidiaries’ outstanding equity interests becomes diluted below 50% or if we are unable to retain effective control over our
subsidiaries and affiliated company, we would cease to consolidate them and our operating results may fluctuate significantly.
We currently hold a controlling interest in Matrix, Sapiens and InSync through our direct equity holdings. As a result of our controlling interests in
those subsidiaries as of December 31, 2014, we consolidated their balance sheets with ours and, with respect to Sapiens, included its operating results beginning
from December 31, 2014 and with respect to InSync, beginning from April 1, 2014, following our consummation of the acquisition of InSync.
As of January 1, 2012, Formula’s interest in Sapiens outstanding common shares was 47.3%. On January 27, 2012, Formula consummated the
purchase of Sapiens common shares in private transactions, resulting in an increase in Formula’s interest in Sapiens' outstanding common shares from 47.3% to
52.1%, following which Formula regained control over Sapiens. As a result, a gain in an amount of $ 3.4 million was recorded during 2012 and is presented in
our income statement in the item “equity in gains of affiliated companies, net”. Formula purchased additional Sapiens common shares in market and off-market
transactions.
On November 19, 2013, Sapiens completed a follow-on public offering of its ordinary shares on the NASDAQ. Sapiens issued 6,497,400 shares at a
price of $ 6.25 per share before issuance expenses. Total net proceeds from the issuance amounted to approximately $37.8 million. As a result of the offering,
Formula’s interest in Sapiens' outstanding common shares was diluted below 50% (from 56.8% to 48.6%). Our investment in Sapiens following the dilution was
measured under the equity method of accounting. The gain recognized in relation to Formula’s loss of control in Sapiens amounted to $61.2 million and is
presented in the income statement as equity in gains of affiliated companies, net.
During the period following the offering through December 23, 2014, Formula purchased additional Sapiens common shares, bringing its interest in
Sapiens common shares to 50.2% of Sapiens common shares on December 23, 2014. As a result, Formula regained control over Sapiens as of such date and
Sapiens’ balance sheet is consolidated into Formula’s balance sheet.
From August 21, 2011 until January 27, 2012, and from November 19, 2013 until December 23, 2014 Sapiens' results of operations were reflected in our
results of operations using the equity method of accounting.
On March 5, 2014, following Magic Software’s public offering of additional 6,900,000 of its ordinary shares our percentage interest in Magic Software
outstanding ordinary shares decreased from 51.6% to 45.0% and Magic Software was no longer our subsidiary as of such date and thereafter its results of
operations were reflected in our results of operations using the equity method of accounting.
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Although it is our board of directors investment strategy to maintain effective control over our directly held subsidiaries, If we are unable to continue
maintaining a controlling interest in Matrix and Sapiens, as a result of equity issuances to third parties that are unaffiliated with us or otherwise or we are unable
to regain control over Magic Software, we would cease to consolidate the operating results of Matrix and Sapiens and not reconsolidate Magic Software, based
on relevant accounting guidelines. This, in turn, could result in significant fluctuations of our consolidated operating results. In addition, should the share price
of our traded subsidiaries and equity method investees fall significantly below the carrying amount of these investees for a long duration it may indicate that the
carrying amount of these investees has been impaired and may require us to record impairment losses.
Risks Related to our Intellectual Property
Assertions by third parties of infringement or other violation by us of their intellectual property rights could result in significant costs and
substantially harm our business and results of operations.
The software industry is characterized by the existence of a large number of patents and frequent claims and related litigation regarding patents and
other intellectual property rights. In particular, leading companies in the software industry own large numbers of patents, copyrights, trademarks and trade
secrets, which they may use to assert claims against us. From time to time, third parties, including certain of these leading companies, may assert patent,
copyright, trademark or other intellectual property claims against us, our customers and partners, and those from whom we license technology and intellectual
property.
Although we believe that our products and services do not infringe upon the intellectual property rights of third parties, we cannot assure you that third
parties will not assert infringement or misappropriation claims against us with respect to current or future products or services, or that any such assertions will
not require us to enter into royalty arrangements or result in costly litigation, or result in us being unable to use certain intellectual property. We cannot assure
you that we are not infringing or otherwise violating any third party intellectual property rights. Infringement assertions from third parties may involve patent
holding companies or other patent owners who have no relevant product revenues, and therefore our own issued and pending patents may provide little or no
deterrence to these patent owners in bringing intellectual property rights claims against us.
Any intellectual property infringement or misappropriation claim or assertion against us, our customers or partners, and those from whom we license
technology and intellectual property could have a material adverse effect on our business, financial condition, reputation and competitive position regardless of
the validity or outcome. If we are forced to defend against any infringement or misappropriation claims, whether they are with or without merit, are settled out
of court, or are determined in our favor, we may be required to expend significant time and financial resources on the defense of such claims. Furthermore, an
adverse outcome of a dispute may require us to pay damages, potentially including treble damages and attorneys’ fees, if we are found to have willfully
infringed on a party’s intellectual property; cease making, licensing or using our products or services that are alleged to infringe or misappropriate the
intellectual property of others; expend additional development resources to redesign our products or services; enter into potentially unfavorable royalty or
license agreements in order to obtain the right to use necessary technologies or works; and to indemnify our partners, customers, and other third parties. Royalty
or licensing agreements, if required or desirable, may be unavailable on terms acceptable to us, or at all, and may require significant royalty payments and other
expenditures. Any of these events could seriously harm our business, results of operations and financial condition. In addition, any lawsuits regarding
intellectual property rights, regardless of their success, could be expensive to resolve and divert the time and attention of our management and technical
personnel.
Although we apply measures to protect our intellectual property rights and our source code, there can be no assurance that the measures that we
employ to do so will be successful.
Our success and ability to compete depend in large part upon our ability to protect our proprietary technology. Since we have no registered patents, we
rely on a combination of trade secret and copyright laws and confidentiality, non-disclosure and assignment-of-inventions agreements to protect our proprietary
technology. We believe that due to the dynamic nature of the computer and software industries, copyright protection is less significant than factors such as the
knowledge and experience of our management and personnel, the frequency of product enhancements and the timeliness and quality of our support services. We
seek to protect the source code of our products as trade secret information and as unpublished copyright works. We also rely on security and copy protection
features in our proprietary software. We distribute our products under software license agreements that grant customers a personal, non-transferable license to
use our products and contain terms and conditions prohibiting the unauthorized reproduction or transfer of our products. In addition, while we attempt to protect
trade secrets and other proprietary information through non-disclosure agreements with employees, consultants and distributors, not all of our employees have
signed invention assignment agreements. Although we intend to protect our rights vigorously, there can be no assurance that these measures will be successful.
Our failure to protect our rights, or the improper use of our products by others without licensing them from us could have a material adverse effect on our results
of operations and financial condition.
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We and our customers rely on technology and intellectual property of third parties, the loss of which could limit the functionality of our products and
disrupt our business.
We use technology and intellectual property licensed from unaffiliated third parties in certain of our products, and we may license additional third-party
technology and intellectual property in the future. Any errors or defects in this third-party technology and intellectual property could result in errors that could
harm our brand and business. In addition, licensed technology and intellectual property may not continue to be available on commercially reasonable terms, or
at all. The loss of the right to license and distribute this third party technology could limit the functionality of our products and might require us to redesign our
products.
Further, although we believe that there are currently adequate replacements for the third-party technology and intellectual property we presently use
and distribute, the loss of our right to use any of this technology and intellectual property could result in delays in producing or delivering affected products until
equivalent technology or intellectual property is identified, licensed or otherwise procured, and integrated. Our business would be disrupted if any technology
and intellectual property we license from others or functional equivalents of this software were either no longer available to us or no longer offered to us on
commercially reasonable terms. In either case, we would be required either to attempt to redesign our products to function with technology and intellectual
property available from other parties or to develop these components ourselves, which would result in increased costs and could result in delays in product sales
and the release of new product offerings. Alternatively, we might be forced to limit the features available in affected products. Any of these results could harm
our business and impact our results of operations.
Some of our software services and technologies may use “open source” software, which may restrict how we use or distribute our services or require
that we release the source code of certain products subject to those licenses.
Some of our services and technologies may incorporate software licensed under so-called “open source” licenses, including, but not limited to, the
GNU General Public License and the GNU Lesser General Public License. In addition to risks related to license requirements, usage of open source software
can lead to greater risks than use of third-party commercial software, as open source licensors generally do not provide warranties or controls on origin of the
software. Additionally, open source licenses typically require that source code subject to the license be made available to the public and that any modifications
or derivative works to open source software continue to be licensed under open source licenses. These open source licenses typically mandate that proprietary
software, when combined in specific ways with open source software, become subject to the open source license. If we combine our proprietary software with
open source software, we could be required to release the source code of our proprietary software.
We take steps to ensure that our proprietary software is not combined with, and does not incorporate, open source software in ways that would require
our proprietary software to be subject to an open source license. However, few courts have interpreted open source licenses, and the manner in which these
licenses may be interpreted and enforced is therefore subject to some uncertainty. Additionally, we rely on multiple software programmers to design our
proprietary technologies, and although we take steps to prevent our programmers from including open source software in the technologies and software code
that they design, write and modify, we do not exercise complete control over the development efforts of our programmers and we cannot be certain that our
programmers have not incorporated open source software into our proprietary products and technologies or that they will not do so in the future. In the event
that portions of our proprietary technology are determined to be subject to an open source license, we could be required to publicly release the affected portions
of our source code, re-engineer all or a portion of our technologies, or otherwise be limited in the licensing of our technologies, each of which could reduce or
eliminate the value of our services and technologies and materially and adversely affect our business, results of operations and prospects.
19
We could be required to provide the source code of our products to our customers.
Some of our customers have the right to require the source code of certain of our products to be deposited into a source code escrow. Under certain
circumstances, our source code could be released to our customers. The conditions triggering the release of our source code vary by customer. A release of our
source code would give our customers access to our trade secrets and other proprietary and confidential information which could harm our business, results of
operations and financial condition.
Breaches of network or information technology security, natural disasters or terrorist attacks could have an adverse effect on our business.
Cyber attacks or other breaches of network or IT security, natural disasters, terrorist acts or acts of war may cause equipment failures or disrupt our
systems and operations. We may be subject to attempts to breach the security of our networks and IT infrastructure through cyber attack, malware, computer
viruses and other means of unauthorized access. While we maintain insurance coverage for some of these events, the potential liabilities associated with these
events could exceed the insurance coverage we maintain. Our inability to operate our facilities as a result of such events, even for a limited period of time, may
result in significant expenses or loss of market share to other competitors for our application platforms as well as in the process and business integration
technologies and IT services market. In addition, a failure to protect the privacy of customer and employee confidential data against breaches of network or IT
security could result in damage to our reputation. A failure to protect the privacy of customer and employee confidential data against breaches of network or IT
security could result in damage to our reputation. To date, we have not been subject to cyber attacks or other cyber incidents which, individually or in the
aggregate, resulted in a material impact to our operations or financial condition.
Maintaining the security of our products, computers and networks is a critical issue for us and our customers. Security researchers, criminal hackers
and other third parties regularly develop new techniques to penetrate computer and network security measures. In addition, hackers also develop and deploy
viruses, worms and other malicious software programs, some of which may be specifically designed to attack our products, systems, computers or networks.
Additionally, outside parties may attempt to fraudulently induce our employees or users of our products to disclose sensitive information in order to gain access
to our data or our customers’ data. These potential breaches of our security measures and the accidental loss, inadvertent disclosure or unauthorized
dissemination of proprietary information or sensitive, personal or confidential data about us, our employees or our customers, including the potential loss or
disclosure of such information or data as a result of hacking, fraud, trickery or other forms of deception, could expose us, our employees, our customers or the
individuals affected to a risk of loss or misuse of this information, result in litigation and potential liability or fines for us, damage our brand and reputation or
otherwise harm our business.
Risks Related to our Traded Securities
There is limited trading volume for our ADSs and ordinary shares, which reduces liquidity for our shareholders, and may furthermore cause the stock
price to be volatile, all of which may lead to losses by investors.
There has historically been limited trading volume for our ADSs and ordinary shares, respectively, both on the NASDAQ Global Select Market and the
TASE, such that still not reached the level that enables shareholders to freely sell their shares in substantial quantities on an ongoing basis and thereby readily
achieve liquidity for their investment. As a further result of the limited volume, our ordinary shares have experienced significant market price volatility in the
past and may experience significant market price and volume fluctuations in the future, in response to factors such as announcements of developments related to
our subsidiaries’ and affiliates’ business, announcements by competitors of our subsidiaries and affiliates, quarterly fluctuations in our financial results and
general conditions in the industry in which we through our subsidiary and affiliates compete.
20
The market price of our ordinary shares and ADSs 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. 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
2014
2013
2012
2011
2010
NASDAQ
In US$
Tel Aviv Stock Exchange*
In NIS
In US$
High
Low
High
Low
High
Low
33.79
26.64
17.88
20.49
18.92
21.02
16.22
13.55
11.14
10.82
114.10
94.99
69.21
75.57
68.98
83.70
57.89
54.41
43.94
40.21
32.83
26.96
17.83
20.55
18.21
21.52
15.51
13.59
11.81
10.77
_________________
* 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;
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
21
•
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:
•
•
•
•
•
•
•
•
•
•
•
•
general global economic conditions;
acquisitions and dispositions of, and consolidation of, our subsidiaries;
the size, time and recognition of revenue from significant contracts;
timing of product releases or enhancements;
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;
market acceptance of our new products, applications and services;
increases in selling and marketing expenses, as well as other operating expenses;
currency fluctuations; and
consolidation of our customers.
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 our 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.
22
The market prices of our ordinary share and ADSs may be adversely affected if the market prices of our publicly traded subsidiaries or affiliated
company decrease.
A significant portion of our assets is comprised of equity securities of directly held publicly traded companies. Our publicly traded subsidiaries and
affiliate are, as of the current time, Matrix, Sapiens and Magic Software. The share 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 and affiliated company, 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 were 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., can significantly influence the outcome of matters that require shareholder approval.
Asseco Poland S.A., or Asseco, owns approximately 48.7% of our outstanding ordinary shares (which excludes shares that we have repurchased that lack
voting rights and shares subject to restrictions that are voted in proportion to the votes of our other shares). Therefore, Asseco can significantly influence 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.
If we are unable to maintain effective internal control over financial reporting in accordance with Section 404 of the Sarbanes-Oxley Act of 2002, the
reliability of our financial statements may be questioned and our share price may suffer.
The Sarbanes-Oxley Act of 2002 imposes certain duties on us and on our executives and directors. To comply with this statute, we are required to
document and test our internal control over financial reporting, and our independent registered public accounting firm must issue an attestation report on our
internal control procedures, and our management is required to assess and issue a report concerning our internal control over financial reporting. Our efforts to
comply with these requirements have resulted in increased general and administrative expenses and a diversion of management time and attention, and we
expect these efforts to require the continued commitment of significant resources. We may identify material weaknesses or significant deficiencies in our
assessments of our internal controls over financial reporting. Failure to maintain effective internal control over financial reporting could result in investigation
or sanctions by regulatory authorities, and could adversely affect our operating results, investor confidence in our reported financial information and the market
price of our ordinary shares.
23
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 66% and 83.5% of our consolidated revenues in 2013 and 2014, respectively were generated from the Israeli market (had we consolidated Magic
Software’s revenues and Sapiens revenues for all of 2014, 63% of our revenues would have been 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.
In recent years, there have been hostilities between Israel and Hezbollah in Lebanon and Hamas in the Gaza strip, both of which resulted in rockets being
fired into Israel causing casualties and disruption of economic activities. Most recently, in July 2014, an armed conflict commenced between Israel and Hamas.
In addition, Israel faces threats from more distant neighbors, in particular, Iran. Also, since 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. 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
our control and there can be no assurance that these matters will not negatively affect our business, financial condition and results of operations 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 non-officers with certain expertise). 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 that will be available to certain of our Israeli subsidiaries and affiliates will require us to continue to meet various conditions and may
be terminated or reduced in the future, which could increase our costs and taxes.
Some of our Israeli subsidiaries and affiliates have been granted “Approved Enterprise” and “Beneficiary Enterprise” status, which provide certain
benefits, including tax exemptions and reduced tax rates under the Israeli Law for the Encouragement of Capital Investments, 1959, referred to as the
Investment Law. Income not eligible for Approved Enterprise and Beneficiary Enterprise benefits is taxed at regular rates (26.5% in 2014 and thereafter).
In the event of distribution of dividends in these subsidiaries from said tax-exempt income, the amount distributed will be subject to corporate tax at the
rate ordinarily applicable to the Approved/ Beneficiary Enterprise's income. Tax-exempt income generated under the Approved/Beneficiary Enterprise program
will be subject to taxes upon dividend distribution (which includes the repurchase of the Company's shares) or liquidation. The benefits period under the
Investment Law has yet to commence.
The entitlement to the above benefits (once they commence) is conditional upon the fulfillment of the conditions stipulated by the Investment Law and
applicable regulations. Should the Israeli subsidiaries fail to meet such requirements in the future, income attributable to the Approved Enterprise and
Beneficiary Enterprise programs could be subject to the statutory Israeli corporate tax rate and they may be required to refund a portion of the tax benefits
already received, with respect to such programs.
24
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 IT 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 , British Pound and
South African Rand, 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 2.3%, 7.0% and (12.0)% for the years ended December 31, 2012, 2013 and 2014, 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 1.6%, 1.8% and (-0.2)% for the years ended December 31, 2012, 2013 and
2014, respectively. We have engaged and may continue in the future to engage in certain hedging transactions, to decrease the risk of financial exposure from
fluctuations in the exchange rate of the non-dollar currency forecasted cash flows. 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.
25
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 Select 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.”
26
We believe that we were not a PFIC in 2014 but may be classified as such in 2015. Since a PFIC status is only 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, 2015 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
have been listed on the NASDAQ Global Select Market.
Since our inception, we have acquired effective 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. Asseco currently beneficially owns 48.7% of our issued and outstanding ordinary shares (which excludes shares that we have
repurchased that lack voting rights and shares subject to restrictions that are voted in proportion to the votes of our other shares).
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 interest in our remaining subsidiaries, as well as
provide us the opportunity to pursue new acquisitions of, and investments in, other businesses, particularly businesses offering products, technologies and
services that are complementary to ours and are suitable for integration into our business therefore increasing value for our shareholders (and ADS holders). We
expect to continue to develop and enhance the products, services and solutions of our subsidiaries and affiliates, 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 2012 fiscal year are described below. For
additional information relating to our investment, divestiture and financing activities during 2013 and 2014, see “Item 5. Operating and Financial Review and
Prospects— Liquidity and Capital Resources.”
Changes in our percentage ownership of Sapiens. As of January 1, 2012, our percentage interest in our subsidiary Sapiens was 47.3%. We
subsequently increased our investment in Sapiens, acquiring additional common shares of Sapiens in private transactions that raised our beneficial ownership to
56.6% of Sapiens’ outstanding share capital as of December 31, 2012. We purchased additional shares in 2013 which resulted in our percentage interest
increasing to 57.2% as of May 2013. In November 2013, Sapiens issued 6,497,400 of its common shares in a follow-on public offering, As a result, as of
December 31, 2013, our percentage interest in Sapiens decreased to 48.6%. We purchased additional shares in 2014 which resulted in our percentage interest
increasing to 50.2% as of December 31, 2014. Pursuant to our acquisitions of Sapiens common shares, we have invested an aggregate of $11.7 million, $2.7
million and $11.9 million in 2012, 2013 and 2014, respectively. The source of such funds has been our working capital and loans from financial institutions.
27
Changes in our percentage ownership of Magic Software. During 2012 and 2013, we increased our investment in Magic Software, acquiring additional
ordinary shares of Magic Software in private transactions that have raised our beneficial ownership to 52.3% and 51.6% of Magic Software’s outstanding share
capital as of December 31, 2012 and 2013, respectively. In March 2014, Magic Software issued 6,900,000 of its ordinary shares in a follow-on public offering,
of which we purchased 700,000 ordinary shares. As a result, our beneficial ownership percentage in Magic Software decreased to 45.0%. Pursuant to our
acquisitions of Magic Software’s ordinary shares, we have invested an aggregate of $2.6 million, $0 million and $6.6 million in 2012, 2013 and 2014,
respectively. The source of such funds has been our working capital and a bank loan.
Changes in our percentage ownership of Matrix. During 2012, 2013 and 2014, we have increased our investment in Matrix, acquiring additional
ordinary shares of Matrix in private transactions that have raised our beneficial ownership to 50.11%, 50.11% and 50.2% of Matrix outstanding share capital as
of December 31, 2012, 2013 and 2014, respectively. Pursuant to our acquisitions of Matrix ordinary shares, we have invested an aggregate of $0.4 million, $0.1
million and $1.3 million in 2012, 2013 and 2014, respectively. The source of such funds has been our working capital and a bank loan.
Acquisition of InSync Staffing Solutions Inc. In April 2014, Formula acquired all of the interests in InSync Staffing LLC, a U.S.-based full service
provider of staffing solutions for IT, engineering and other professional staff. We recorded a capital expenditure of $4.0 million in respect of this acquisition.
Acquisition of a software vendor by Magic Software. In October 2014, Magic Software acquired 100% of F.T.S. – Formula Telecom Solutions Ltd., or
FTS, an Israeli based software vendor. FTS specializes in the development, sale, service and support of Business Support Systems, including convergent
charging, billing, customer management, policy control and payment software solutions for the telecommunications, content, Machine to Machine/Internet of
Things or M2M/IoT, payment and other industries. FTS has a track record of successful implementation of many projects in Western and Eastern Europe, Asia
and Africa.
Acquisition of Knowledge Partners International LLC. On August 1, 2014, Sapiens acquired Knowledge Partners International LLC (“KPI”) and the
assets of The Decision Model Licensing LLC (“TDML”), for total consideration of $2.1 million in cash and 57,000 ordinary shares of Sapiens Decision,
Sapiens’ subsidiary which holds all of the interests in KPI (representing 3% of Sapiens Decision’s issued and outstanding ordinary shares immediately prior to
closing). In addition, one of the shareholders of KPI received 88,500 restricted shares of Sapiens Decision plus $450,000 in cash, subject to certain performance
criteria. The agreements for the foregoing acquisitions included, among other things, certain put and call options relating to the Sapiens Decision shares issued
upon consummation of the transaction and certain other benefits payable upon the occurrence of certain conditions.
Acquisition of Hoshen Eliav Ltd. During January 2014, Matrix purchased 100% of the share capital of Hoshen Eliav Ltd. from its former shareholders in
consideration of approximately $1.3 million in cash and contingent consideration estimated at approximately $0.2 million subject to the achievement of the
gross profit goals in the next three years. The company focuses on providing consulting to security companies.
Acquisition of Top Q (Aqua) Software Ltd. During March 2014, Matrix purchased 100% of the share capital of Top Q (Aqua) Software Ltd. from its
former shareholders in consideration of approximately $1.2 million in cash and contingent consideration based on the achievement of a gross profit goal. The
company is engaged in software testing and specializes in automated testing.
Acquisition of Managware Ltd. On October 2, 2014, Matrix purchased 100% of the share capital of Managware Ltd. from its former shareholders in
consideration of approximately $1.5 million in cash, contingent consideration of $0.7 million paid at the closing and contingent consideration payable in the
future subject to the Managware’s results for the years 2015 to 2017 and contingent upon the continued employment of the former shareholder of Managware.
Managware is engaged in the marketing of software and provides other services.
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Acquisition of Enterprise Division of U.S. IT, engineering and telecom consulting company by Magic Software. In November 2013, Magic Software
acquired the enterprise division of Allstates Technical Services, LLC, a U.S.-based full-service provider of consulting and staffing solutions for IT, Engineering
and Telecom personnel from KBR, Inc. (NYSE: KBR). With a 60-year history, this division, now known as Allstates Consulting Services LLC brings a strong
reputation and an experienced growth-focused management team serving some of the world’s leading telecom and technology companies.
Additional Acquisitions by Matrix and Magic Software. In 2013, Matrix and Magic Software completed the acquisition of four other activities for an
aggregate total consideration of up to $8.5 million, of which $3.8 million is contingent upon the acquired activities achieve certain targets over time.
Acquisition of US risk management company by Matrix. In January 2012, Matrix acquired from the holders 60% of the interests in AG 2000 Holdings
LLC, or AG 2000. The sole asset held by the acquiree was the share capital of Exzac Inc., a U.S. based company in the field of risk management for financial
institutions that deals in commerce, and which specializes in application services for enterprise fraud management, or Exzac. Matrix paid $6.9 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. At the
time, Exzac employed approximately 80 employees. The Purchaser (Matrix) and the seller received mutual call and put options respectively for the remaining
40% interest. On December 19, 2012 Matrix exercised part of its option to acquire from one of the sellers 20% interest in Exzac, for a total consideration of $5.0
million and an additional consideration determined based on a mechanism agreed between the parties which is based on the acquired business meeting certain
operational targets in 2014. The option for purchasing the remaining 20% was exercised after the Balance Sheet date (On January 5, 2014) in consideration of
$5.0 million and with and additional amount that will be calculated according to a predetermined formula based on the Acquiree's results in 2014.
Acquisition of Israeli software and systems development house by Magic Software. In July 2012, Magic Software acquired an 80% interest in Comm-IT
Group, which includes CommIT Technology Solutions Ltd. and CommIT Software Ltd. for a total consideration of $8.9 million, of which $5.0 million was paid
upon closing and the remaining $3.9 million is to be paid during the next two years, of which, $ 1.2 million is contingent upon the acquired business meeting
certain operational targets in 2012 and 2013, and $ 2.8 million in deferred payments. The Purchaser (Magic Software) and the seller hold mutual call and put
options respectively for the remaining 20% interest. Comm-IT Group is a software and systems development house that specializes in providing advanced IT
and communications services and solutions.
Additional Acquisitions by Matrix. In 2012, Matrix completed the acquisition of two other activities for an aggregate total consideration of up to $10.0
million.
B.
Business Overview
General
We are a global IT solutions and services holdings company that is principally engaged through our directly held subsidiaries and affiliates in providing
proprietary and non-proprietary software solutions and services, software product marketing and support, computer infrastructure and integration solutions and
learning and integration. 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 subsidiaries: Matrix, Sapiens and InSync and through our affiliated company Magic Software. Until March 4, 2014, Magic
Software was our subsidiary. As of March 5, 2014, as a result of the dilution caused by the public offering of Magic Software, we lost the controlling interest
and Magic Software became an affiliated company. The following is a description of the areas of our business activity:
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IT Services
We design and implement IT solutions and software systems 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, developing customized software, implementing software and modifying it based on the customer's needs,
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. As of December 31, 2014, we held 100% of the shares of InSync, 50.2% controlling interests in both Matrix and Sapiens and a 45.1% interest in Magic
Software through our equity holdings. As of December 31, 2014, we had the right to appoint a majority of the boards of directors of Matrix and Sapiens through
our equity holdings. We provide our subsidiaries and our affiliated company with our management, technical expertise and marketing experience to help them
to penetrate their respective markets.
We direct the overall strategy of our subsidiaries and affiliated company. While our subsidiaries and affiliated company each have independent
management, we monitor the growth of our subsidiaries and affiliated company 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 our subsidiaries’ and affiliated company’s performance.
We promote the synergy and cooperation among our subsidiaries and affiliated company 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.
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We, through our subsidiaries and affiliated company, offer a wide range of integrated IT solutions and services, including the implementation of
integration projects of computing and software, outsourcing, project management software, software development, software testing and QA, and software
services, depending on specific needs of the customer and depending on the subject expertise necessary professional all case by case basis, 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. Matrix employs approximately 7,260 software,
hardware, integration and training personnel, which provide advanced IT services to more than 600 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 operates through its subsidiaries in the following principal areas:
- Software solutions and services (Information Technology – IT).
- Software product marketing and support.
- Computer infrastructure and integration solutions.
- Learning and integration.
Software solutions and services: Matrix provides tailored software solutions and upgrades and expansions of existing software systems. Matrix’s
software services include, among others, outsourcing, developing customized software, adapting software to the customer's specific needs, implementing
software and modifying it based on the customer's needs, quality assurance and testing of developed technology and integrating all or part of the above
elements. The scope of work invested in each element varies from one customer to the other.
Software product marketing and support: Matrix activities in this area include marketing and support for various software products (mainly originated
outside of Israel), principally CRM, computer systems management infrastructures, web world content management, database and data warehouse mining,
application integration, database and systems, data management and software development tools.
Computer infrastructure and integration solutions: Matrix activities in this area consist of: (1) providing computer and telecommunication
infrastructure solutions; (2) selling and marketing personal computers, portable computers, Intel servers, peripheral equipment, operating systems, servers and
workstations that use UNIX and VMS and selling and marketing mainframe storage and backup systems such as HP and IBM; (3) providing computer and
peripheral equipment maintenance services, lab and helpdesk services and (4) selling and marketing cloud based solutions
Learning and integration: Matrix’s activities in this area consist of operating a network of high-tech training and instruction centers which provide
application courses, professional training courses and advanced professional studies in the high-tech industry.
Matrix provides solutions, services and products primarily to the following market sectors (or verticals): banking and finance, telecommunications,
defense, commerce and manufacturing, healthcare and the public and security forces sector.
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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 products and services offering
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 20 “expertise centers” (“Centers of Excellence”), in areas such as: Service Oriented Architecture (SOA),
Mobility (Mobile Technology), Customer Relations Management (CRM), Enterprise Resource Planning (ERP), eXtended Relationship Management
(XRM), Cloud Computing, Digital, User Experience, Open Source, Agile, Security and Cyber and Multi-Channel. These expertise centers are based on
business vertical 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.
• Quality assurance and related professional services under an offshore/”nearshore” model-
In the context of its offshore/”nearshore” activities, Matrix conducts IT-related activities, including content development, quality assurance, maintenance,
customer call center services 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. (the latter, a company
located near large Arab population centers in the Galilee, housing thousands of educated and skillful men and women interested in developing a career near their
homes) 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.
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, hi-tech companies, the Israeli Defense
Forces and government ministries and public agencies and media and publishing entities. Approximately 60% of Matrix customers in the software solutions and
services business segment are in business relations with it for more than ten years and 25% of them are between five to ten years.
Sapiens
Sapiens International Corporation N.V. is a leading global provider of software solutions for the insurance industry, with an emerging focus on the
broader financial services sector. Sapiens offers core software solutions for Property & Casualty/General Insurance, or P&C, and Life, Pensions, & Annuities, or
L&P, providers, allowing them to manage policy administration, claims management and billing functions. Sapiens also provides record-keeping software
solutions for providers of Retirement Services. In addition, Sapiens offers a variety of other technology-based solutions that enable organizations to deploy
business logic and comply with policies and regulations across their organizations. Sapiens’ solutions enable customers to respond to the rapidly-evolving
market needs and regulatory changes, while improving the efficiency of their core operations, thereby increasing revenues and reducing costs. Sapiens also
offers services to insurance providers and financial institutions around the globe, including consulting, migration, project delivery and implementation of our
solutions.
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Sapiens operates in the traditional core insurance and financial services markets. Its history of working closely with insurance and financial services
providers results in a deep understanding of these markets and their needs. Its target market includes both insurance carriers using legacy systems and those
using new technologies and financial services providers.
Sapiens offering is comprised primarily of (1) software solutions for the Insurance industry with emerging focus on the broader financial services
sector and (2) global services including project delivery and implementation of its solutions.
Sapiens offers its insurance customers a range of packaged software solutions that are:
• Comprehensive and function-rich, supporting generic insurance standards, regulations and processes by providing field-proven functionality and best
practices.
• Customizable to easily match our customers’ specific business requirements. Sapiens’ flexible architecture and configurable structure allows quick
functionality augmentation that permits use of its platform across different markets, unique business requirements and regulatory regimes, using its
knowledge and vast experience of insurance best practices.
Based on service-oriented architecture (“SOA”) that is engineered to provide easy integration to any external application under any technology, thus
allowing streamlined connectivity to all satellite applications and enhancing digital experience and omni-channel distribution. All this while
maintaining total platform independence and system reliability.
•
• Component-based and scalable, allowing customers to deploy the solutions in a phased and modular approach, reducing risk and destruction to the
business, while supporting the growth plans and cost efficiency of the organization.
Sapiens’ packaged software solutions enable:
• Rapid deployment of new insurance products, via configurable software, which creates a competitive advantage in all of the insurance markets
•
served by Sapiens.
Improvement of operational efficiency and reduction of risk, by providing full insurance process automation, with configurable workflows, audit
and control, streamlined insurance practices and simple integration and maintenance.
• Reduction of overhead for IT maintenance through easy-to-integrate solutions with flexible and modern architecture, resulting in lower costs for
•
ongoing maintenance, modifications, additions and integration.
Enhanced Omni-channel distribution & focus on the customers, through event-driven architecture, pro-active client management approach, rapid
access to all levels of data and a holistic view of clients and distributors
• Various deployment models – from on-premises deployment approach to Cloud and Hosted solutions.
•
Support of digitalization – digitalization holds massive potential for financial services institutions and insurers, but only if they manage to efficiently
digitalize their operations, support multi-channel distribution and ensure that agents and customers are able to access real-time, accurate data at any
time and from anywhere – including tablets and mobile devices.
Sapiens’ technology-based solutions include application development and business decision management platforms. Sapiens’ application development
platforms allow for the deployment of tailor-made solutions that address unique business needs for which pre-packaged software solutions may not be available.
Sapiens’ business decision management platform, Sapiens DECISION, allows business professionals to design, simulate, implement, change and analyze the
business logic that drives financial operations and compliance in a business-friendly format and environment. Sapiens’ platform facilitates the swift deployment
of new or changed business logic that originates from regulatory updates or market changes, reduces costs and improves efficiency by shortening the software
development lifecycle. This platform empowers the organization’s business users as they manage their business strategy, rules and logic by using business terms
rather than programming language
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Sapiens Solution Offerings
Sapiens Life, Pension & Annuity Solutions
Sapiens ALIS: Sapiens ALIS is a comprehensive L&P software solution for individual, group and worksite insurance products. ALIS provides
comprehensive support for the complete policy lifecycle of all life insurance products from quotation and illustrations, through underwriting, insurance billing
and servicing up to the claims management and exit processing.
Sapiens ALIS is a modular system and its functional components include all the components necessary for L&P insurers to manage their business.
Sapiens ALIS allows insurance carriers to manage their entire core business on a single platform and to integrate Sapiens ALIS with other systems for the
completion of a specific activity or domain.
Sapiens Retirement Services: Leveraging on Sapiens ALIS, Sapiens has also developed Sapiens Retirement Services: a modern, end-to-end packaged
software solution for record-keeping management for Defined Contribution Recordkeeping providers. Sapiens Retirement Services solution offers a complete
end-to-end support of the recordkeeping functionality, based on a modular deployment structure, allowing flexibility on using specific modules, which
seamlessly integrates with our customers’ preferred systems/modules. Sapiens Retirement Services supports the full range of Defined Contribution retirement
products, including, but not limited to, 401(k), ESOP and Profit Sharing, and the associated plan variations, including ERISA, Non-ERISA, Safe Harbor, Taft
Hartley and others.
Sapiens Closed Books: Sapiens Closed Books is a solution for life and pension insurance companies that enables them to efficiently and more effectively
administer policies and claims relating to closed books of business, where products are no longer open to new business.
Sapiens TOPAZ: Sapiens TOPAZ is offered uniquely in the Israeli market, enabling L&P carriers in Israel to handle a wide range of L&P activities and
regulations that are unique to the Israeli market.
Sapiens Property & Casualty/General Insurance Solutions
Sapiens IDIT: Sapiens IDIT is a component based software solution, addressing the specific needs of general insurance carriers for traditional
insurance, direct insurance, bancassurance and brokers markets, primarily in Europe and Asia-Pacific.
Sapiens IDIT integrates multiple front office and back office processes, including insurance product design, policy administration, underwriting, call
center and remote users and partners, backed by fully secured internet-based capabilities. Sapiens IDIT supports a broad range of general, personal and
commercial lines of business and provides a full set of components to support insurance core operations lifecycle from inception to renewal and claims. The
solution includes modular software components that can be customized to match specific insurance business requirements, while providing pre-configured
functionality.
Sapiens Insight. Insight for P&C is a software solution used by carriers that works on IBM System z (mainframe) and System i platforms. Insight for
P&C has been customized to meet specific business demands at the insurer level and regulatory needs at the state level.
Sapiens 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, Sapiens Reinsurance provides full financial control of the reinsurance practice, including support for all auditing requirements and regulatory
reporting.
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Sapiens Business Decision Management Solutions
Sapiens DECISION is a business decision management solution that consistently enforces business logic across all enterprise applications.
Organizations use it to track, verify and ensure that every decision is based on the most up-to-date rules and policies. The solution is powered by The Decision
Model®, a widely adopted decision management methodology, for which Sapiens owns a number of patents. Organizations are undergoing a paradigm shift in
the way they approach change, by replacing conventional policy and process management with an emerging discipline called decision management. Decision
management bridges the gap between business and IT, by enabling business users to rapidly frame requirements in formal business models that can be easily
understood by all stakeholders. This ensures that the business logic is complete, internally consistent and accurate, and doesn’t replicate existing logic.
Sapiens DECISION allows the reusability and governance of business logic across all business divisions and software applications, using any rules
engine or business process management system, and integrating seamlessly with the BRM or BPM system that the organization has in place.
Sapiens is currently focusing on the development and marketing of Sapiens DECISION in the financial services market in North America and Western
Europe, and is in the process of building best practices to be used mostly by mortgage banking, retail banking and investment banking. Sapiens also intends to
develop and market Sapiens DECISION for the insurance industry and leverage its industry knowledge and close relationships with its existing customers and
partners.
Technology Based Solutions
Sapiens eMerge: Sapiens eMerge is a rules-based, model-driven architecture that enables the creation of tailor-made, mission-critical core enterprise
applications with little or no coding. Sapiens’ technology is intended to allow customers to meet complex and unique requirements using a robust development
platform.
Sapiens' Global Services
Sapiens provides implementation and integration services to help its customers fully realize benefit from its software solutions. Some of the key
advantages of Sapiens’ professional services are:
•
•
Project Delivery Experience. 30 years of field-proven project delivery of core system solutions for the insurance industry, based on best practices
and accumulated experience.
Customer Integration: Using its know-how to help its customers deploy modern solutions while integrating these solutions with their legacy
environment that must be supported.
• Global Presence: Insurance and technology domain experts provide bandwidth of global professional services.
Sapiens’ implementation teams assist customers in building implementation plans, integrating its software solutions with their existing systems and
defining business rules and specific requirements unique to each customer and installation.
Sapiens also partners with several system integration consulting firms to achieve scalable, cost-effective implementations for our customers. Sapiens
has developed an efficient, repeatable methodology that is closely aligned with the unique capabilities of its solutions.
Through its service teams, Sapiens provides a wide scope of services and consultancy around its core solutions, both in the stage of the initial project
implementation as well as on-going additional services. Many of its customers also use its services and expertise on an ongoing basis to assist them with various
aspects of daily maintenance, ongoing system administration and the addition of new solution enhancements.
In addition, most of Sapiens’ clients elect to enter into an ongoing maintenance and support contract with Sapiens. The terms of such a contract are
usually twelve months and are renewed every year. A maintenance contract entitles the customer to technology upgrades (when made generally available) and
technical support. In addition, Sapiens offers introductory and advanced classes and training programs available at its offices and at customer sites.
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Sales and Marketing
Our subsidiaries and affiliated company conduct sales and marketing efforts primarily through division or product managers as well as through a global
channel-network of ISVs, system integrators, value-added distributors and resellers, and OEM and consulting partners. In certain cases, the companies devote
sales managers who, aided by their staffs, are responsible for ongoing customer relationships (by maintaining a high level of customer satisfaction and identify
up-selling opportunities), as well as sales to new customers. We believe that a high level of post-contract customer support is important to our continued
success. In addition, we employ a team of technical specialists who provide a full range of maintenance and support services to our customers to help them fully
exploit the capabilities of our solutions.
Our sales teams are located at our offices in Israel, North America, the United Kingdom, Japan, Germany, Belgium, France, the Netherlands, Hungary,
India, Australia, Singapore and South Africa. 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 and affiliated company attend trade shows and exhibitions in the high technology markets to improve their visibility and our market
recognition, while further supplementing their sales efforts with space advertising and products and services listing in appropriate directories. In addition, our
subsidiaries and affiliated company organize user group meetings (or client conferences) for their customers, where new products and services are highlighted
and to strengthen their relationship with our existing customer base. 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.
InSync
InSync is a US based national supplier of employees to Vendor Management Systems (VMS) Workforce Management Program accounts. InSync
specializes in providing professionals in the following areas; Accounting and Finance, Administrative, Customer Service, Clinical, Scientific and Healthcare,
Engineering, Manufacturing and Operations, Human Resources, IT Technology, LI/MFG, and Marketing and Sales. With an experienced team of IT recruiters,
InSync can rapidly respond to a wide range of requirements with well qualified candidates. InSync currently supports more than 30 VMS program customers
with employees in over 40 states.
Our Affiliated Company
Magic Software
Magic Software Enterprises Ltd. is a global provider of proprietary application development, business process integration and comprehensive packaged
software solutions and related professional services, and a vendor of IT professional and outsourcing services. Magic Software’s software is used by customers
to develop, deploy and integrate on-premise, mobile and cloud-based business applications quickly and cost effectively. In addition, Magic Software’s
technology enables enterprises to accelerate the process of delivering business solutions that meet current and future needs and allow customers to dramatically
improve their business performance and return on investment. With respect to IT services, Magic Software offers a complete portfolio of professional services
in the areas of infrastructure design and delivery, application development, technology consulting planning and implementation services, support services and
supplemental staffing services. In addition, Magic Software offers a variety of proprietary comprehensive packaged software solutions through certain of its
subsidiaries for (i) revenue management and monetization solutions in mobile, wireline, broadband and MVNO/MVNE, (ii) management system of both hubs
and traditional air cargo ground handling operations from physical handling and cargo documentation through customs, seamless EDI communications,
dangerous goods, special handling, track and trace, security to billing (iii) HCM solutions, to facilitate the collection, analysis and interpretation of quality data
about people, their jobs and their performance, to enhance HCM decision making and (iv) a comprehensive system for managing broadcast channels through
cloud-based on demand service or on premise solutions.
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Based on Magic Software’s technological capabilities, its software solutions enable customers to respond to the rapidly-evolving market needs and
regulatory changes, while improving the efficiency of their core operations. Magic Software has approximately 1,200 employees and operates through a
network of over 3,000 independent software vendors, who we refer to as Magic Software Providers, or MSPs, and hundreds of system integrators, distributors,
resellers, and consulting and OEM partners. Thousands of enterprises in approximately 50 countries use Magic Software’s products and services.
Magic Software’s product offering includes Magic xpa, an application platform for developing and deploying business applications, AppBuilder, an
application platform for building, deploying, and maintaining high-end, mainframe-grade business applications and Magic xpi, a platform for application
integration. These products enable Magic Software customers to improve their business performance and return on investment by supporting the affordable and
rapid delivery and integration of business applications, systems and databases. Using its products, enterprises and MSPs can achieve fast time-to-market by
rapidly building integrated solutions, deploy them in multiple environments while leveraging existing IT resources. In addition, Magic Software’s products are
scalable and platform-agnostic, enabling its customers to build solutions by specifying their business logic requirements in a high-level language rather than in
computer code, and to benefit from seamless platform upgrades and cross-platform functionality without the need to re-write their applications. Magic
Software’s technology also supports the development of mobile applications that can be deployed on a variety of smartphones and tablets, and in a cloud
environment.
Magic Software’s software solutions are used by customers to develop, deploy and integrate on-premise, mobile and cloud-based business applications
quickly and cost effectively. In addition, Magic Software’s technology enables enterprises to accelerate the process of delivering business solutions that meet
current and future needs and allow customers to dramatically improve their business performance and return on investment. Magic Software also provides
selected verticals with a complete software solution.
Magic Software’s software solutions enable enterprises to accelerate the planning, development, deployment and integration of on-premise, mobile and
cloud business applications that can be rapidly customized to meet current and future needs. Magic Software’s software solutions and professional services
empower customers to dramatically improve their business performance and return on investment by enabling the affordable and rapid delivery, integration and
mobilization of business applications, systems and databases. Magic Software’s technology and solutions are especially in demand when time-to-market
considerations are critical, budgets are tight, and integration is required with multiple platforms or applications, databases or existing systems and business
processes, as well as for RIAs and SaaS. Our technology also provides the option to deploy our software capabilities in the cloud, hosted in a web services cloud
computing environment. We believe these capabilities provide organizations with a faster deployment path and lower total cost of ownership. Our technology
also allows developers to stage multiple applications before going live in production.
Magic Software’s packaged software solutions offering includes
•
Leap™, a proprietary comprehensive core software solution for BSS, including convergent charging, billing, customer management, policy control
and payment software solutions for the telecommunications, content, and other industries;
• Hermes Solution, a proprietary comprehensive core software solution for both hubs and traditional air cargo ground handling operations;
• HR Pulse, a customized SaaS and on premise solution for HCM, and
• MBS Solution, a proprietary comprehensive core system for managing TV broadcast channels.
Development communities are facing high complexity, cost and extended pay-back periods in order to deliver cloud, RIAs, mobile and SaaS
applications. Magic xpa, Appbuilder and Magic xpi provide MSPs with the ability to rapidly build integrated applications in a more productive manner, deploy
them in multiple modes and architectures as needed, lower IT maintenance costs and speed time-to-market. Our solutions are comprehensive and industry
proven. These technologies can be applied to the entire software development market, from the implementation of micro-vertical solutions, through tactical
application renovation and process automation solutions, to enterprise spanning SOA migrations and composite applications initiatives. Unlike most competing
platforms, we offer a coherent and unified toolset based on the same proven metadata driven and rules-based declarative technology. Metadata platforms consist
of pre-compiled and pre-written technical and administrative functions, which are essentially ready-made business application coding that enables developers to
bypass the intensive technical code-writing stage of application development and integration and move quickly and efficiently to deployment. Through the use
of metadata-driven platforms such as Magic xpa, AppBuilder and Magic xpi, software vendors and enterprise customers can experience unprecedented cost
savings through fast and easy implementation and reduced project risk.
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Magic Software Technology and related services
• Magic xpa Application Platform, Magic Software’s metadata driven application platform, provides a simple, code-free and cost-effective
development and deployment environment that lets organizations and MSPs quickly create user-friendly, enterprise-grade, multi-channel mobile and
desktop business apps that employ the latest advanced functionalities and technologies.
Magic Software has continually enhanced its xpa application platform to respond to major market trends such as the growing demand for cloud
based offerings including RIAs, mobile applications and SaaS. Accordingly, Magic Software has added new functionalities and extensions to its
application platform, with the objective of enabling the development of RIAs, SaaS, mobile and cloud enabled applications. SaaS is a relatively new
business and technical model for delivering software applications, similar to a phone or cable TV model, in which the software applications are
installed and hosted in dedicated data centers and users subscribe to these centers and use the applications over an internet connection. This model
requires the ability to deliver RIAs. Magic xpa is a comprehensive RIA platform. 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.
Magic xpa 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. The Magic xpa Application Platform complies with event driven
and service oriented architectural principles. By offering technology transparency, this product allows customers to focus on their business
requirements rather than technological means. The Magic xpa single development paradigm significantly reduces the time and costs associated with
the development and deployment of cloud-based applications, including RIAs, mobile and SaaS. In addition, application owners can leverage their
initial investment when moving from full client mode to cloud mode, and modify these choices as the situation requires. Enterprises can use cloud
based Magic xpa applications in a SaaS model and still maintain 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 and is interoperable
with .NET and Java technologies.
Magic xpa can be applied to the full range of software development, from the implementation of micro-vertical solutions, through tactical
application renovation and process automation solutions, to enterprise spanning SOA migrations and composite applications initiatives. Unlike most
competing platforms, Magic Software offers a coherent and unified toolset based on the same proven metadata driven and rules based declarative
technology, resulting in increased cost savings through fast and easy implementation and reduced project risk.
The Magic xpa Application Platform was acknowledged in Gartner’s 2013 Magic Quadrant for On-Premise Application Platform as “gaining in
popularity versus Java as enterprises seek to exploit new technologies to improve developer productivity.” Magic Software’s Enterprise Mobility
Solution received the 2013 Shining Star Award for Enterprise Application Development from Mobile Village and also received Developer Week’s
2014 Top Innovator Award and a 2014 Mobile Village Superstar Award for Mobile Development.
38
In July 2014, Magic Software released Magic xpa Application Platform 2.5, with new features and enhancements to allow for fast and easy
enterprise mobility application creation and improved user experience along with the brand-new Magic Mobile Accelerator Framework, which
includes a set of pre-built, reusable and customizable components for a wide variety of popular mobile application features, including user interface
and display, navigation, graphs and charting, location services, synchronization, and device and application auditing. Designed to work together
under the same framework, accelerator components enable Magic developers to create attractive, functional mobile applications, faster and with less
effort than ever before.
•
AppBuilder Application Platform is a development environment used for managing, maintaining and reusing complicated applications needed by
large businesses. It 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 AppBuilder 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 to help enterprises focus on the business needs and definition and overlook technical hurdles.
AppBuilder developers define the business roles and prior to deployment the code is generated from the development environment to the required
run time environment. Several large MSPs have utilized AppBuilder to build state of the art applications that are deployed through many large
customers.
AppBuilder 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. AppBuilder has a platform-independent, business-rules language that enables
generation to multiple platforms. It is possible to generate the client part of an application as Java and the server part as COBOL. As businesses
change, the server part can be generated as Java without changing the application logic. Only a simple configuration option needs to be changed.
• Magic xpi Integration Platform is a graphical, wizard-based code-free solution delivering fast and simple integration and orchestration of business
processes and applications. Magic xpi allows businesses to more easily view, access, and leverage their mission-critical information, delivering true
enterprise application integration, or EAI, business process management, or BPM, and SOA infrastructure. Increasing the usability and life span of
existing legacy and other IT systems, Magic xpi allows fast 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 xpi allows the integration and interoperability of diverse solutions, including legacy applications, in a quick and efficient manner. Magic
Software has entered into agreements with additional system integrators, consultancies and service providers, who acquired Magic xpi skills and
offer Magic xpi licenses and related services to their customers. Magic Software also offers special editions of Magic xpi targeted at specific
enterprise application vendor ecosystems, such as SAP, Oracle JD Edwards, Microsoft Sharepoint and Salesforce.com. These special editions
contain specific features and pricing tailored for these market sectors.
In January 2013, Magic Software’s Magic xpi Integration Platform received the CIO Choice 2013 Honor and Recognition Title for Enterprise
Application Integration Software.
In April 2013, Magic Software released Magic xpi 4.0, a significant major release that provides new capabilities in the areas of high availability,
scalability and fault-tolerance for enterprise integration solutions. The architecture for Magic xpi 4.0 is based on IMDG technology, enabling very
high-availability and performance, while preserving Magic Software’s easy-to-use and simplicity tradition and allowing existing integration projects
to migrate seamlessly to the new release.
In December 2014, Magic Software released Magic xpi 4.1 incorporating feedback from the field to bring our customers a lot of additional value in
terms of redundancy, reliability, stability, performance, and monitoring. For example, users can now define an alternate host for the server to work
with if the main host is unavailable or if the startup procedure on the main host fails. Magic Software also added a new mechanism to rebalance the
Space partitions so that the primary partition and its backup will not run on the same machine when they are deployed on a clustered environment.]
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Vertical-software solutions
•
Leap. We market Leap™ through our FTS subsidiary, which has over 18 years of BSS experience, based on dozens of projects delivered to
customers in over 40 countries. Magic Software implements revenue management and monetization solutions in mobile, wireline, broadband,
MVNO/E, payments, e-commerce, M2M / Internet of Things, mobile money, cable, cloud and content markets under the brand name of Leap™.
FTS works with telecommunications, content and payment service providers globally to help them manage complex transactions and relationships
with greater flexibility and independence. Analyzing transactions from a business standpoint, FTS offers end-to-end and add-on telecom billing,
charging, policy control and payments solutions to customers worldwide, and services both growing and major providers.
• Hermes. Hermes is a proprietary, state-of-the-art, packaged software solution for managing air cargo ground handling stations, or GHA,
encompassing all aspects of cargo handling, from physical handling and cargo documentation through customs, seamless EDI communications,
dangerous goods, special handling, track and trace, security to billing. Over the last 10 years the Hermes system has been implemented into over 70
terminals globally in all five continents, providing efficiency and accuracy in connection with the handling of more than 5 million tons of freight
annually. Customers benefit through faster processing and more accurate billing, reporting and ultimately enhanced revenue. Customers include
independent ground handlers, airlines with a cargo arm or hubs belonging to one airline or those catering to a number of airlines transiting cargo to
additional destinations. The Hermes solution is delivered on a licensed or fully hosted basis.
• HR Pulse. HR Pulse, which is now in its 10th release, is a proprietary platform that creates and customizes software applications for HCM, with the
goal to combine technology with effective processes, to facilitate the collection, analysis and interpretation of quality data about people, their jobs
and their performance, to enhance HCM decision making, resulting in increased organizational efficiency and effectiveness. HR Pulse addresses five
distinct functional areas with the ability to also work as one consolidated system:
Performance and goal management
Development management
Talent management and succession planning
Compensation and merit review
Instant feedback
Magic Software’s offering includes customizable HCM SaaS Solutions that provides a menu of templates that can be used to affordably and
expeditiously create customized HCM solutions for companies. The HR Pulse platform promotes the building and implementation of solutions that
address broader business challenges as well. Such offerings include 360 degree feedback, employee surveys, leadership and management
development, coaching and job evaluation.
Magic Software’s technology and solutions are especially in demand when time-to-market considerations are critical. Magic Software’s technology
enables 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 integration products empower customers to dramatically improve their business performance and return on
investment by enabling the affordable and rapid integration of diverse applications, systems and databases to streamline business processes from within one
comprehensive framework.
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.
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Magic Software’s technologies are used by a wide variety of developers, integrators and solution providers, which can generally be divided into two
sectors: (i) those performing in-house development (corporate IT departments) and (ii) 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 Magic xpa, Magic xpi, and Enterprise Mobility 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 MSPs who use Magic Software
technology to develop solutions for their customers, and with distributors to deliver successful solutions in focused market sectors.
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.
Customer 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, Magic xpa and Magic xpi, 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.
Magic Software IT Strategic Consulting and Staffing Services
Magic Software also provides a broad range of IT consulting services in the areas of infrastructure design and delivery, application development,
technology planning and implementation services, as well as supplemental staffing services. Magic Software’s wholly-owned subsidiaries, Coretech Consulting
Group LLC, Fusion Solutions LLC, Xsell Resources Inc., Allstates Consulting Services LLC, and the Comm-IT Group provide advanced IT consulting and
staffing services to a wide variety of companies including Fortune 1000 companies. Magic Software’s technical personnel generally supplement the in-house
capabilities of its clients. Magic Software’s approach is to make available a broad range of technical personnel to meet the requirements of its clients rather than
focusing on specific specialized areas. Magic Software has extensive knowledge of and have worked with virtually all types of wireless and wireline telecom
infrastructure technologies as well as in the areas of infrastructure design and delivery, application development, project management, technology planning and
implementation services. Magic Software’s consulting partners come from a wide range of industries, including finance, insurance, government, health care,
logistics, manufacturing, media, retail and telecommunications. With an experienced team of recruiters in the telecom and other IT areas and with a substantial
and a growing database of telecom talent, Magic Software can rapidly respond to a wide range of requirements with well qualified candidates. Magic Software’s
client list includes major global telecoms, OEMs and engineering, furnish and installation service companies. Magic Software has built long-term relationships
with its clients by providing expert telecom talent. Magic Software provides individual consultants for contract and contract-to-hire assignments as well as
candidates for full time placement. In addition, Magic Software configures teams of technical consultants for assigned projects at its clients’ sites.
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Magic Software markets and sells its products and related services in more than 50 countries worldwide through a broad channel network, including its
own direct sales representatives and offices, independent country distributors, MSPs that use its technology to develop and sell solutions to their customers, and
system integrators. Industries that are significantly represented in the Magic Software’s community include finance, insurance, government, health care,
logistics, manufacturing media, retail and telecommunications.
Revenues Distribution Among Operating Segments
The following table summarizes our consolidated revenues generated by each of our directly held subsidiaries. Sapiens revenues reflect for 2012 and
2013, the period starting on January 27, 2012, the date on which Formula gained its controlling interest in Sapiens and ending on November 19, 2013, the date
on which Formula’s percentage interest in Sapiens decreased to under 50%, resulting in the deconsolidation of Sapiens’ results and for 2014, the period starting
on December 23, 2014, the date on which Formula regained its controlling interest in Sapiens. Magic Software’s revenues reflect all of the revenues of Magic
Software for 2012 and 2013 and, for 2014, the period ending on March 5, 2014, the date on which Formula’s interest in Magic Software decreased to under
50%, resulting in the deconsolidation of Magic Software’s results.
Matrix
Sapiens
Magic
(U.S. dollars in thousands)
InSync
Total
2014
2013
2012
586,333
533,922
512,491
-
117,281
104,110
27,299
144,678
126,380
22,785
-
-
636,417
795,881
742,981
Geographical Distribution of Revenues
The following table summarizes our revenues classified by geographic regions of our customers, for the periods indicated:
2012
Year ended December 31,
2013
(U.S. dollars in thousands)
2014
Israel
International:
United States
Europe
Other
Total
499,025
526,179
531,193
137,298
74,126
32,532
155,002
84,864
29,836
87,270
14,576
3,378
742,981
795,881
636,417
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Competition
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, with frequent new product introductions, and mergers and acquisitions. 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 One-1,
Hilan Ltd. (including its subsidiary Ness A.T Ltd.), Malam—Team, Taldor Computer Systems, IBM Israel, HP Israel, Aman, Emet, the Elad Group, and Yael.
Matrix’s international competitors in the Israeli marketplace include HP, IBM, Oracle, Microsoft, CA, Dell. 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.
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, and delivery models vary, with some competitors keeping delivery in-house, or using IT outsourcing (ITO) or business process outsourcing (BPO).
Examples of Sapiens’ primary competitors are:
• Global software providers with their own IP;
•
Local/domestic software vendors with their own IP, operating in a designated geographic market and/or within a designated segment of the
insurance industry;
BPO providers who offer end-to-end outsourcing of insurance carriers business, including core software administration (although BPO
providers want to buy comprehensive software platforms to serve as part of the BPO proposition from vendors and may seek to purchase
Sapiens’ solutions for this purpose); and
Internal IT departments, who often prefer to develop solutions in-house.
•
•
43
With respect to Sapiens DECISION, Sapiens is a considered a pioneer in this innovative, disruptive market landscape. Since the introduction to the
market of Sapiens innovative approach to enterprise architecture, Sapiens has identified only a small number of potential competitors.
With respect to Magic xpa, Magic Software competes in the application platform, SOA architecture and enterprise mobility markets. Among its current
competitors are Kony, IBM, Microsoft, Adobe, Oracle, SAP Sybase and Antenna Software/Pegasystems. With respect to Magic xpi, Magic Software competes
in the integration platform market. Among its current competitors are IBM, Informatica, TIBCO, and Software AG.
There are several similar products in the market utilizing the model driven architecture, or MDA, approach utilized by Magic Software’s AppBuilder.
The market for this type of platform is highly competitive. Companies such as CA and IBM have tools that compete directly with AppBuilder. Furthermore,
new development paradigms have become very popular in IT software development and developers today have many alternatives.
The telecom BSS domain in which Magic Software operates through its FTS subsidiary is a highly competitive market in which FTS competes based
on product quality, service quality, timeliness in delivery and pricing. Within the global billing, charging and policy control market, FTS principally competes
against global IT providers and the in-house IT departments of telecommunications operators. Among the competitors focused on this market are Amdocs,
Ericsson, Comverse, NetCracker Technology, CSG Systems, Redknee Solutions and Oracle Communications.
There are also a number of smaller or regional telecom BSS competitors who compete on a regional or domestic market level. These tend to be smaller
players, and may include companies such as Comarch, Mind CTI, Tecnotree, Cerillion, Openet and Elitcore, among others.
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 our affiliated company and the industries in which they operate. The first quarter usually reflects a decline following a highly 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. In Israel, for example, during the Jewish holidays period (typically at the end of the third quarter
and beginning of the fourth quarter or at the end of the first quarter and beginning of the second quarter), when the number of working days is lower, we tend to
see a decrease in our revenues which may impact our quarterly results. In 2014, the second and third quarters were slower quarters than usual as a result of the
Jewish holidays periods while the fourth quarter was significantly stronger. In 2015, we expect seasonality due to the Jewish holidays period to impact the
second and third quarters.
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 and affiliated
company, 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.
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Intellectual Property Rights
We do not hold any patents and rely upon 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.
Regulatory Impact
The global financial services industry served by both Sapiens and Matrix is heavily subject to government and market regulation, which is constantly
changing. Financial services companies must comply with regulations such as the Sarbanes-Oxley Act, Solvency II, Basel III, Retail Distribution Review
(known as RDR) in the United Kingdom, the Dodd-Frank Act and other directives regarding transparency. In addition, many individual countries have
increased supervision over local financial services companies. For example, in Europe, regulators and insurers have been very active, motivated by past
financial crises and the need for pension restructuring. Distribution of policies is being optimized with the increasing use of Bank Assurance (selling of
insurance through a bank’s established distribution channels), supermarkets and kiosks (insurance stands). Increased activity such as that in Europe would
generally tend to have a positive impact on the demand for our software solutions and services; nevertheless, insurers are cautiously approaching spending
increases, and while many companies have not taken proactive steps to replace their software solutions in recent years, many of them are now looking for
innovative, modern replacements to meet the regulatory changes.
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 reforms 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 and increasing transparency. 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 such as the new adjustments published with respect to the required capital liquidity of Banks in Israel
following the Basel III guidelines 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.
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The following table presents certain information regarding the control and ownership of our significant subsidiaries, as of April 24, 2015.
Subsidiary
Matrix IT Ltd.
Sapiens International Corporation N.V.
InSync Staffing Solutions, Inc.
Magic Software Enterprises Ltd.
Country of Incorporation
Israel
Curaçao
Delaware
Israel
Percentage
of Ownership
50.0%
50.0%
100%
45.6%
The common shares of Sapiens and the ordinary shares of Magic Software are traded on the NASDAQ Capital Market and the NASDAQ Global Select
Market and on, respectively and on the TASE, and the ordinary shares of Matrix are traded on the TASE.
D.
Property, Plants and Equipment
Our corporate headquarters, as well as the headquarters and principal administrative, finance, sales, marketing and research and development office of
Magic Software, are located in Or-Yehuda, Israel, a suburb of Tel Aviv. Magic Software leases its and our office space, constituting approximately 39,321
square feet, under a lease which expires in December 2015. 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. In 2014, Magic Software rent costs totaled $1.7 million, in
the aggregate, for all of its leased offices.
Matrix leases approximately 100,000 square feet of office space in Herzliya, Israel pursuant to a lease which expires on October 31, 2018. Matrix’s
facility in Herzliya serves as Matrix’s corporate headquarters. In addition, Matrix leases an aggregate of approximately 365,078 square feet of office space in
several other locations in Israel and in the United States. Matrix rent costs totaled 15.6 million, in the aggregate, for all of its leased offices.
Sapiens leases office spaces in Israel, the United States, Canada, the United Kingdom, Belgium and Japan. The lease terms for the spaces that Sapiens
currently occupies are generally five to eleven years. In Israel, based on Sapiens current occupancy, they lease approximately 101,500 square feet of office
space; in the United States, approximately 9,100 square feet; in Canada, approximately 400 square feet; in the United Kingdom, approximately 17,700 square
feet, in Belgium, approximately 2,100 square feet and in Japan, approximately 4,400 square feet. In 2014, Sapiens rent costs totaled $3.8 million, in the
aggregate, for all of its leased offices. Sapiens corporate headquarters are located in Israel and its core research and development activities are performed at its
offices across Israel. The lease at Sapiens headquarters in Holon, Israel is for a term of 11 years and Sapiens holds an option to extend the term for additional
five years.
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 our subsidiaries and our affiliated company 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.
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ITEM 5. OPERATING AND FINANCIAL REVIEW AND PROSPECTS
Overview
Formula is a global IT solutions and services holding company that is principally engaged through its directly held subsidiary and affiliated companies
in providing proprietary and non-proprietary software solutions and services, software product marketing and support, computer infrastructure and integration
solutions and learning and integration.
Since our inception, we have acquired effective controlling interests, and have invested, in companies which are engaged in the IT solutions and
services business. We, together with our subsidiary and affiliates, are known as the Formula Group.
As of December 31, 2014, we held a controlling interest in Matrix, Sapiens and InSync and a 45.1% interest in Magic Software through our equity
holdings. As of December 31, 2014, we had the right to appoint a majority of the boards of directors of Matrix and Sapiens through our equity holdings. We
provide our subsidiaries and our affiliated company with our management, technical expertise and marketing experience to help them to penetrate their
respective markets.
We consolidate the results of operations of our subsidiaries in which we hold a controlling interest. In the years ended December 31, 2012, 2013 and
2014, we consolidated the results of Matrix. In the years ended December 31, 2012, 2013 and 2014, excluding from January 1, 2012 until January 27, 2012, and
from November 19, 2013 until December 23, 2014, for which periods Sapiens' results of operations were reflected in our results of operations using the equity
method of accounting, we consolidated the results of Sapiens. We consolidated the results of operations of InSync following our acquisition of InSync on April
1, 2014. In the years ended December 31, 2012 and 2013 and for the period beginning on January 1, 2014 through March 5, 2014, we consolidated the results of
Magic Software. Thereafter, Magic Software’s results of operations were reflected in our results of operations using the equity method of accounting.
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.
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).
We have restated our consolidated financial statements for 2013 in order to retrospectively reflect the effect of a correction of a misstatement in
Matrix’s revenues and accounts receivables during the years 2009 to 2013. Accordingly, the consolidated financial statements for the years ended December 31,
2013 and 2012 have been restated from amounts previously reported.
Our functional and reporting currency
The currency of the primary economic environment in which we operate is the U.S. since most of our assets are denominated in dollars. The functional
currencies of our 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.
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Critical Accounting Policies
Our discussion and analysis of our financial condition and results of operations are based upon our consolidated financial statements, which have been
prepared in accordance with U.S. GAAP. The preparation of our financial statements required us to make estimations and judgments that affect the reporting
amounts of assets, liabilities, revenues and expenses and related disclosure of contingent assets and liabilities within the reporting period. We have based our
estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the
basis of making judgments about the values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these
estimates under different assumptions or conditions. More detailed descriptions of these policies are provided in Note 2 to our consolidated financial statements
contained elsewhere in this annual report.
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 information technology (or “IT”) services which also include: non-proprietary software products,
including maintenance, integration and infrastructure, staffing, training and deployment. In addition, we generate revenues from licensing the rights to use our
proprietary software, provision of related IT professional services (which may or may not be considered essential to the functionality of the software license),
related maintenance and technical support, as well as implementation and post-implementation consulting 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,
delivery of the product has occurred, the fee is fixed or determinable, and collectability is probable. We generally consider all arrangements with payment terms
extending beyond minimum six or maximum twelve months from the delivery of the elements not to be fixed or determinable. If the fee is not fixed or
determinable, revenue is recognized as payments become due from the customer, provided that all other revenue recognition criteria have been met.
Revenues from the sale of products are recognized after all the significant risks and rewards of ownership of the products have been transferred to the
buyer, we do not retain any continuing management involvement that is associated with ownership and does not retain the effective control of the sold products,
the amount of revenues can be measured reliably, it is probable that the economic benefits associated with the transaction will flow to us and the costs incurred
or to be incurred in respect of the transaction can be measured reliably.
Revenues derived from the sale of hardware products and infrastructure solutions are recognized after all the significant risks and rewards of ownership
of the products have been transferred to the buyer, we do not retain any continuing management involvement that is associated with ownership and do not retain
the effective control of the sold products, the amount of revenues can be measured reliably, it is probable that the economic benefits associated with the
transaction will flow to us and the costs incurred or to be incurred in respect of the transaction can be measured reliably.
Revenues derived from licensing the rights to use software 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.
48
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.
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 ("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.
Revenues from professional services provided on an hourly basis which are not deemed essential to the functionality of the licenses are recognized as
the services are rendered. 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.
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.
With respect to revenues that involve significant implementation and customization services to customer specific requirements and which are
considered essential to the functionality of the product offered (for example when we sell software licenses as part of an overall solution offered to a customer
that combines the sale of software licenses which includes significant implementation that is considered essential to the functionality of the license) whether
generated by fixed-price or time-and-materials contracts we account for revenues for the services together with the software under contract, using the
percentage-of-completion method in accordance with ASC 605-35, "Construction-Type and Production-Type Contracts". The percentage-of-completion method
is used when the required services are quantifiable, based on the estimated 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. This type of revenue is included in our Proprietary software
products and related services and software services revenue streams.
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 each of December 31, 2013 and 2014, no estimated losses were identified.
Revenue from third-party sales is recorded at a gross or net amount according to certain indicators. The application of these indicators for gross and net
reporting of revenue depends on the relative facts and circumstances of each sale and requires significant judgment.
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 to
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."
49
We establish technological feasibility upon completion of a detailed program design or working model.
Research and development incurred by between completion of the detailed program design and the point at which the product is ready for general
release, have been capitalized. Research and development costs incurred in the process of developing product enhancements are generally charged to expenses
as incurred.
Capitalized software costs are amortized on a product by product basis by the straight-line method over the estimated useful life of the software product
(between 3-7 years). We assess the recoverability of our intangible assets on a regular basis by determining whether the amortization of the asset over its
remaining economical useful life can be recovered through undiscounted future operating cash flows from the specific software product sold. During the years
ended December 31, 2012 and 2013, 2014, no unrecoverable amounts were identified.
During the years ended December 31, 2012, 2013 and 2014, capitalized software development costs of consolidated subsidiaries aggregated to
approximately $ 8.4 million, $9.6 million and $0.7 million, respectively, and amortized capitalized software development costs of consolidated subsidiaries
aggregated to $8.1 million, $8.5 million and $0.1 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 (the two-step impairment test).
In September 2011, the FASB issued ASU 2011-08 which amends the provisions for testing goodwill for impairment. Under the new provisions, an
entity has the option to first assess qualitative factors to determine whether the existence of events or circumstances leads to a determination that it is more likely
than not that the fair value of a reporting unit is less than its carrying amount. If, after assessing the totality of events or circumstances, an entity determines it is
not more likely than not that the fair value of a reporting unit is less than its carrying amount, then performing the two-step impairment test is unnecessary.
As of December 31, 2014, and following Sapiens deconsolidation on November 19, 2013 until December 23, 2014, Magic deconsolidation on March 5,
2014 and Insync consolidation on April 1, 2014, we operated through 9 reporting units. As of December 31, 2013, we operated through 6 reporting units.
We performed an annual impairment tests as of December 31, of each of 2012, 2013 and 2014 and did not identify any impairment losses for any of
our reporting units.
Sapiens operates in four reporting units. For testing the reporting units in Sapiens in 2012, we adopted the provisions of ASU 2011-08, for the annual
impairment. This analysis, conducted on December 31, 2012 determined that there are no indicators of impairment existed, because: (1) the Sapiens market
capitalization was consistently substantially in excess of its book value, (2) the reporting unit’s overall financial performance has been stable or improving, and
(3) forecasts of operating income and cash flows generated by our reporting units appear sufficient to support the book values of the net assets of each reporting
unit
In 2013, Sapiens was accounted for under the equity method. In 2014, since we have consolidated Sapiens on December 23, 2014, no impairment test
was required.
Magic operates in two reporting units. We adopted the provisions of ASU 2011-08 for Magic's reporting units, for its annual impairment test in 2012
and 2013. This analysis determined that no indicators of impairment existed primarily because (1) Magic's market capitalization was consistently substantially
in excess of its book value, (2) the reporting units’ overall financial performance has been stable or improving, and (3) forecasts of operating income and cash
flows generated by the reporting units' appear sufficient to support the book values of the net assets of each reporting unit.
50
As of December 31, 2014, Magic was accounted for under the equity method.
Matrix – In 2012, 2013 and 2014, we performed step one of the quantitative impairment test for each of Matrix's reporting units. We compared the fair
value of the reporting units to the carrying value of net assets allocated to each of the reporting units. Since the fair value of each of the reporting units exceed
the carrying value of the net assets allocated, to each of the reporting units, no further testing was required and no goodwill impairment was recorded.
Impairment in Value of Long-Lived Assets and Intangible Assets Subject to Amortization
Our long-lived assets 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 such 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, 2012, 2013 and 2014, no impairment was identified.
Business Combinations
We account for business combinations under ASC 805, "Business Combinations." ASC 805 requires recognition of assets acquired, liabilities assumed,
non-controlling interest and redeemable non-controlling interest in the acquiree at the acquisition date, measured at their fair values as of that date. As required
by ASC 820, "Fair Value Measurements and disclosures" we apply assumptions that marketplace participants would consider in determining the fair value of
assets acquired, liabilities assumed, non-controlling interest and redeemable non-controlling interest in the acquiree at the acquisition date. 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.
Variable Interest Entities
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.
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 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.
One of Magic’s U.S. based consulting and staffing services business that was acquired by one of Magic Software’s 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.
51
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 Formula and its 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. We accrued interest and penalties related to unrecognized tax benefits in
its provisions for income taxes.
Investments in affiliates
Affiliates are companies in which we have significant influence over the financial and operating policies without having control and that are not
subsidiaries. Our investment therein is accounted for in our consolidated financial statements using the equity method.
Under the equity method, the investment in the affiliate is presented at cost with the addition of post-acquisition changes in our share of net assets,
including other comprehensive income of the affiliate. Profits and losses resulting from transactions between us and the affiliate are eliminated to the extent of
the interest in the affiliate. The equity method is applied until the loss of significant influence or classification as an asset held-for-sale.
We evaluate investments in equity investees, for evidence of other-than-temporary declines in value. Such evaluation is dependent on the specific facts
and circumstances. Accordingly, in determining whether other-than-temporary declines exist, we evaluate various indicators for other-than-temporary declines
and evaluates financial information (e.g. Share price in the market, budgets, business plans, financial statements, etc.).
As of December 31, 2014, the carrying amount of our investment in Magic Software exceeded its market value. In order to demonstrate that other-than-
temporary impairment of the investee has not occurred, we considered the financial condition and near-term prospects of Magic Software as well as our intent
and ability to retain our investment for a period of time sufficient to allow for any anticipated recovery in market value. In addition we used the income
approach, which utilizes a discounted cash flow model, to determine the fair value of Magic Software, based on which Magic Software's fair value exceeded its
carrying amount by 12%, therefore, during 2014, no impairment loss was recognized.
Judgments and assumptions related to revenue, operating income, future short-term and long-term growth rates, weighted average cost of capital,
interest, capital expenditures, cash flows, and market conditions are inherent in developing the discounted cash flow model. With respect to the assumptions
used, management believes that reasonably possible changes in the key assumptions would not change the Company's conclusion.
Our financial statements and the financial statements of the affiliate are prepared as of the same dates and periods. The accounting policies applied in
the financial statements of the affiliate are uniform and consistent with the policies applied in the financial statements of the Company.
Losses of an affiliate in amounts which exceed its equity are recognized by us to the extent of its investment in the affiliate plus any losses that us may
incur as a result of a guarantee or other financial support provided in respect of the affiliate. For this purpose, the investment includes long-term receivables
(such as loans granted) for which settlement is neither planned nor likely to occur in the foreseeable future.
Recently Issued Accounting Pronouncements
In August 2014, the Financial Accounting Standards Board (“FASB”) issued amended guidance related to disclosure of uncertainties about an entity’s
ability to continue as a going concern. The new guidance requires management to evaluate whether there is substantial doubt about the entity’s ability to
continue as a going concern and, as necessary, to provide related footnote disclosures. The guidance has an effective date of December 31, 2016.
In May 2014, Financial Accounting Standards Board ("FASB") issued ASU 2014-09, "Revenue from Contracts with Customers (Topic 606)", a
comprehensive new revenue recognition standard that will supersede existing revenue guidance under US GAAP and IFRS ("ASU 2014-09"). ASU 2014-09's
core principle is that a company will recognize revenue when it transfers promised goods or services to customers in an amount that reflects the consideration to
which the company expects to be entitled in exchange for those goods or services. ASU 2014-09 is effective for annual periods beginning after December 15,
2016, including interim periods within that period. Early adoption is not permitted under US GAAP. We are currently evaluating the method of adoption, as
well as the effect that adoption of this ASU will have on our consolidated financial statements.
In April 2014, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update No. 2014-08 (ASU 2014-08) “Presentation of
Financial Statements (Topic 205) and Property, Plant, and Equipment (Topic 360): Reporting Discontinued Operations and Disclosures of Disposals of
Components of an Entity. The new guidance limits the presentation of discontinued operations to business circumstances when the disposal of the business
operation represents a strategic shift that has had or will have a major effect on operations and financial results. This guidance is effective for fiscal years
beginning January 1, 2015. We believe that the adoption of this new standard will not materially impact our consolidated financial statements.
A.
Operating Results
Year Ended December 31, 2014 Compared to Year Ended December 31, 2013
The following tables set forth certain data from our results of operations for the years ended December 31, 2013 and 2014, as well as such data as a
percentage of our revenues for those years. The data has been derived from our audited consolidated financial statements included in this annual report. The
operating results for the below years should not be considered indicative of results for any future period. This information should be read in conjunction with the
audited consolidated financial statements and notes thereto included in this annual report.
52
Sapiens results of operations reflect for 2012 and 2013, the period starting on January 27, 2012, the date on which Formula gained its controlling
interest in Sapiens and ending on November 19, 2013, the date on which Formula’s percentage interest in Sapiens decreased to under 50%, resulting in the
deconsolidation of Sapiens’ results and for 2014, the period starting on December 23, 2014, the date on which Formula regained its controlling interest in
Sapiens. Magic Software’s results of operations reflect all of Magic Software’s results of operations for 2013 and, for 2014, the period ending on March 5,
2014, the date on which Formula’s interest in Magic Software decreased below 50%, resulting in the deconsolidation of Magic Software’s results.
Statement of Income Data
(U.S. dollars, in thousands, except share and per share data)
Revenues
Cost of revenues
Gross profit
Operating expenses:
Research and development, net
Selling, marketing, general and administrative
Other expenses (income), net
Total operating expenses
Operating income
Financial expenses, net
Income before taxes on income
Taxes on income
Equity in gains of affiliated companies, net
Net income
Change in redeemable non-controlling interests
Net income attributable to non-controlling interests
Net income attributable to Formula’s shareholders
Statement of Income Data as a Percentage of Revenues
Revenues
Cost of revenues
Gross profit
Operating expenses:
Research and development, net
Selling, marketing, general and administrative
Other expenses (income), net
Total operating expenses
Operating income
Financial expenses, net
Income before taxes on income
Taxes on income
Equity in gains of affiliated companies, net
Net income
Change in redeemable non-controlling interests
Net income attributable to non-controlling interests
Net income attributable to Formula’s shareholders
53
Year ended
December 31,
2013
2014
$
$
$
795,881
603,080
192,801
14,168
117,877
14
132,059
60,742
6,236
54,506
8,728
60,683
106,461
1,735
24,039
80,687 $
636,417
530,083
106,334
787
70,517
(5)
71,299
35,035
4,866
30,169
10,074
74,590
94,685
154
13,698
80,833
Year ended
December 31,
2013
2014
100.0%
75.8%
24.2%
1.8%
14.8%
0.0%
16.6%
7.6%
0.8%
6.8%
1.1%
7.6%
13.3%
0.2%
3.0%
10.1%
100%
83.3%
16.7%
0.1%
11.1%
(0.0%)
11.2%
5.5%
0.7%
4.8%
1.6%
11.7%
14.9%
0.0%
2.2%
12.7%
Revenues. Revenues in 2014 decreased by 20.0%, from $ 795.9 million in 2013 to $ 636.4 million in 2014. Revenues from the two categories of our
operations were as follows: revenues from the delivery of software services increased by 1.4%, from $ 616.5 million in 2013 to $ 625.3 million in 2014, and
revenues from the sale of our proprietary software products and related services decreased by 93.8%, from $ 179.4 million in 2013 to $ 11.1 million in 2014.
Our comparable pro-forma revenues, had consolidated Magic's and Sapiens' results of operations for the years 2014 and 2013, would have totaled $ 930.8
million in 2014, compared to $ 814.0 million in 2013, reflecting a year over year increase of 4.3%.
The increase in software services revenues was primarily due to (i) the growth in Matrix's revenues, from NIS 1,925.6 million (approximately $ 533.9
million) in 2013 to NIS 2,100.5 million (approximately $ 586.3 million) in 2014, reflecting an increase of 10.0% when measured in NIS, Matrix local currency
(compared to an increase of 9.8% when measured in USD). The increase in Matrix revenues was primarily attributable to an increase of 10.0% in Matrix’s
software solutions and services business unit from NIS 1,405.6 million (approximately $ 389.8 million) to NIS 1,550.2 (approximately $ 433.3 million) and an
increase of 5.4% in Matrix remaining three areas of operations resulting from organic growth as well as from acquisitions, and (ii) the acquisition of InSync on
April 1, 2014, offset by the decrease in Magic Software’s software services revenues which are consolidated in our financial statements from $ 82.6 million in
2013 to $ 16.2 million in 2014, which resulted primarily from the deconsolidation of Magic’s results of operations from our consolidated results of operation as
of March 5, 2014, upon the follow-on public offering of its ordinary shares on the NASDAQ Global Select Market, pursuant to which Formula lost its
controlling interest in Magic Software.
The decrease in revenues from proprietary software products and related services was primarily due to the deconsolidation of Sapiens’ results of
operations from our consolidated results of operations as of November 19, 2013, upon the follow-on public offering of its common shares on the NASDAQ
Capital Market, pursuant to which Formula lost its controlling interest in Sapiens and from the deconsolidation of Magic’s results of operations from our
consolidated results of operation as of March 5, 2014, upon the follow-on public offering of its ordinary shares on the NASDAQ Global Select Market, pursuant
to which Formula lost its controlling interest in Magic Software.
A breakdown of our overall revenues into proprietary software products and related services and software services revenues for the years ended
December 31, 2013 and 2014, the percentage those respective categories of revenues constituted out of our total revenues in those years, and the percentage
change for each such category of revenues from 2013 to 2014, are provided in the below table:
Revenue category
Proprietary software products and related services
Software services
Total
$
$
179,400
616,481
795,881
54
Year ended
December 31, 2013
Revenues
Percentage
Year-over-
year
change
($ in thousands)
Year ended
December 31, 2014
Revenues
Percentage
22.5%
77.5%
100%
(168,269) $
8,805
(159,464) $
11,131
625,286
636,417
1.75%
98.25%
100%
Revenues by geographical region
The dollar amount and percentage share of our revenues attributable to each of the geographical regions in which we conduct our operations for the
years ended December 31, 2013 and 2014, respectively, as well as the percentage change between such years, were as follows:
Geographical region
Israel
International
United States
Europe
Other
Total
Year ended
December 31, 2013
Revenues
Percentage
Year-over-
year
change
($ in thousands)
Year ended
December 31, 2014
Revenues
Percentage
$
526,179
155,002
84,864
29,836
795,881
$
66.1%
19.5%
10.7%
3.7%
100%
5,014 $
531,193
(67,732)
(70,288)
(26,458)
(159,464) $
87,270
14,576
3,378
636,417
83.5%
13.7%
2.3%
0.5%
100%
Cost of Revenues. Cost of revenues consists primarily of wages, personnel expenses, other personnel-related expenses of software consultants,
subcontractors and engineers, amortization of capitalized software, and hardware and other materials costs. Cost of revenues decreased by 12.1% from $ 603.1
million in 2013 to $ 530.1 million in 2014, mainly due to the accompanying decrease in revenues in 2014. As a percentage of software services revenues, costs
of revenues in 2013 and 2014 were 82.2% and 84.1%, 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 from $ 96.2 million in 2013 to $ 4.1 million in 2014, mainly due to the
deconsolidation of Sapiens’ results of operations from our consolidated results of operations as of November 19, 2013, upon the follow-on public offering of its
common shares on the NASDAQ Capital Market, pursuant to which Formula lost its controlling interest in Sapiens and from the deconsolidation of Magic’s
results of operations from our consolidated results of operation as of March 5, 2014, upon the follow-on public offering of its ordinary shares on the NASDAQ
Global Market, pursuant to which Formula lost its controlling interest in Magic.
The cost of revenues for software services increased from $ 506.9 million in 2013 to $ 526.0 million in 2014, mainly due to the accompanying increase
in revenues in 2014. As a percentage of revenues, costs of revenues for software services in 2013 and 2014 remained relatively consistent at 83.7% in 2013
compared to 82.7% in 2014. The increase in the percentage of costs of revenues from revenues is attributable to the deconsolidation of Magic software’s
software services operation which carried a higher gross margin than Matrix and InSync and from a decrease in Matrix’s aggregated gross margin due to a
decrease in the gross margins of Matrix’s software solutions and services and learning and integration business units.
Cost of revenues for the years ended December 31, 2013 and 2014 include insignificant amounts of stock-based compensation recorded under
ASC 718.
Research and Development Expenses, net. Research and development, or R&D, expenses 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 expenses, net, consist of research and development expenses, gross, less capitalized software costs. Research and development expenses, gross,
decreased from $ 23.8 million in 2013 to $ 1.5 million in 2014, mainly due to the deconsolidation of Sapiens’ results of operations from our consolidated results
of operations as of November 19, 2013, upon the follow-on public offering of its common shares on the NASDAQ Capital Market, pursuant to which Formula
lost its controlling interest in Sapiens and from the deconsolidation of Magic’s results of operations from our consolidated results of operation as of March 5,
2014, upon the follow-on public offering of its ordinary shares on the NASDAQ Global Select Market, pursuant to which Formula lost its controlling interest in
Magic.
55
In 2014, we capitalized software costs of $ 0.7 million, compared to $ 9.6 million in 2013. Capitalization of software costs in 2013 and 2014 was
attributable to our subsidiaries engaged in providing proprietary software solutions (i.e., Magic Software and Sapiens). Research and development expenses, net,
decreased from $ 14.2 million in 2013 to $ 0.8 million in 2014, mainly due to the factors described above.
As a percentage of revenues, research and development expenses, net, decreased from 1.8% in 2013 to 0.1% in 2014. Research and development
expenses, net, in 2014 was attributable to Magic Software, which consolidated research and development expenses, net amounted to approximately $ 0.8
million .Research and development expenses, net, in 2013 were attributable to Magic Software and Sapiens, which consolidated research and development
expenses, net amounted to approximately $ 3.7 million and $ 10.5 million, respectively. Amortization of capitalized software costs was $0.1 million in 2014 and
$ 8.5 million in 2013, which amounts were included in cost of revenues. Research and development expenses for the years ended December 31, 2013 and 2014
include insignificant amounts of stock-based compensation recorded under ASC 718.
Selling, Marketing, General and Administrative Expenses. Selling, marketing, general and administrative expenses consist primarily of cost of salaries,
severance and related expenses of sales, marketing, management and administrative employees, travel expenses, selling expenses, rent, utilities,
communications expenses, expenses related to external consultants, depreciation, amortization and other expenses. Selling, marketing, general and
administrative expenses decreased from $ 117.9 million recorded in 2013 to $ 70.5 million recorded in 2014. As a percentage of revenues, selling, general and
administrative expenses decreased from 14.8% in 2013 to 11.1% in 2014.
The decrease in the absolute amount of selling, marketing, general and administrative expenses was primarily attributable to the deconsolidation of
Sapiens’ results of operations from our consolidated results of operations as of November 19, 2013, upon the follow-on public offering of its common shares on
the NASDAQ Capital Market, pursuant to which Formula lost its controlling interest in Sapiens and from the deconsolidation of Magic’s results of operations
from our consolidated results of operation as of March 5, 2014, upon the follow-on public offering of its ordinary shares on the NASDAQ Global Select Market,
pursuant to which Formula lost its controlling interest in Magic.
Selling, general and administrative expenses for the years ended December 31, 2013 and 2014 include $ 3.9 million and $ 5.0 million, respectively, of
stock-based compensation recorded under ASC 718.
Other Income, net. We recorded other income of $ 5,000 in 2014, as compared to a loss of $ 14,000 in other income in 2013, each representing
insignificant amounts.
Operating Income. Our operating income decreased from $ 60.7 million in 2013 to $ 35.0 million in 2014. The decrease in operating income was
primarily attributable to the deconsolidation of Sapiens’ results of operations from our consolidated results of operations as of November 19, 2013, upon the
follow-on public offering of its common shares on the NASDAQ, pursuant to which Formula lost its controlling interest in Sapiens and from the
deconsolidation of Magic’s results of operations from our consolidated results of operation as of March 5, 2014, upon the follow-on public offering of its
ordinary shares on the NASDAQ, pursuant to which Formula lost its controlling interest in Magic. Formula's comparable pro-forma operating income, had it
continued to consolidate Magic's and Sapiens' results of operations for the years 2014 and 2013, would have totaled $ 66.7 million, compared to $ 62.4 million
in the same period last year, reflecting a year over year increase of 6.9%
Financial Expenses, net. Financial expenses, net decreased from $ 6.2 million in 2013 to $ 4.9 million in 2014. 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 decrease in financial expenses, net in 2014 was mainly attributable to a decrease in short term debt interest expenses from $ 3.6 million recorded in 2013 to
$ 1.9 million in 2014 and an increase in financial income from $2.0 million in 2013 to $3.8 million in 2014 primarily attributable to financial income of $ 2.6
million with respect to the devaluation of Formula’s long term loan denominated in NIS, offset by an increase in financial costs related to long-term debt
increasing form $ 4.6 million in 2013 to $ 6.8 million in 2014.
56
Taxes on Income. Taxes on income increased from $ 8.7 million in 2013 to $ 10.1 million in 2014. The increase in taxes on income in 2014 was mainly
attributable to (i) an increase in Matrix taxes on income, increasing from $ 6.9 million in 2013 to $ 9.0 million in 2014, primarily attributable to an increase in
current taxes in Matirx subsidiaries due to local taxes in Israel (of 26.5%) and in North America (of 38%) resulting from an increase in taxable income, ii) a
deferred tax income recorded in Matrix of approximately $ 0.7 million in 2013 due to an increase in its deferred tax assets resulting from an increase in the
Israeli corporate tax rate from 25% to 26.5% and iii) the acquisition of InSync on April 1, 2014, offset primarily by a decrease in tax expenses resulting from the
deconsolidation of Magic’s results of operations from our consolidated results of operation as of March 5, 2014, upon the follow-on public offering of its
ordinary shares on the NASDAQ Global Select Market, pursuant to which Formula lost its controlling interest in Magic.
Gain derived from deconsolidation of subsidiary and equity in gains of affiliated companies net.
On November 19, 2013, Sapiens completed a follow-on public offering of its common shares. Sapiens issued 6,497,400 shares at a price of $ 6.25 per
share before issuance expenses. Total net proceeds from the issuance amounted to approximately $37.8 million. As a result of the offering, our interest in
Sapiens' outstanding common shares was diluted from 56.8% to 48.6%. Our investment in Sapiens following the dilution was measured under the equity method
of accounting. The gain recognized in relation of our loss of control in Sapiens amounted to $61.2 million and is presented in the income statement as equity in
gains of affiliated companies, net.
During the period following the offering through December 23, 2014, Formula purchased additional Sapiens common shares, bringing its interest in
Sapiens common shares to 50.2% of Sapiens common shares on December 23, 2014. As a result, Formula regained control over Sapiens as of such date and
Sapiens’ balance sheet is consolidated into Formula’s balance sheet. The gain recognized in relation to the consolidation of Sapiens and the related re-
measurement of the investment to fair value amounted to $ 3.4 million and is presented in the income statement as equity in gains of affiliated companies, net
From November 19, 2013 until December 31, 2014, Sapiens' results of operations were reflected in our results of operations using the equity method of
accounting.
On March 5, 2014, Magic completed a follow-on public offering of its ordinary shares on the NASDAQ. Magic issued 6,900,000 shares at a price of $
8.50 per share before issuance expenses. Total net proceeds from the issuance amounted to $ 54.7. As a result of the offering, Formula’s interest in Magic’s
outstanding ordinary shares diluted from 51.6% to 45.0%. Formula's investment in Magic following the dilution was measured under the equity method of
accounting due to loss of control in Magic in accordance with ASC 810. The gain recognized in relation of Formula loss of control in Magic and the related re-
measurement of the investment to fair value amounted to $ 83.5 million and is presented in the income statement as equity in gains of affiliated companies, net.
In addition Formula recorded deferred tax expense of $ 16.4 million presented in the income statement as equity in gains of affiliated companies, net.
From March 5, 2014 until December 31, 2014, Magic Software's results of operations were reflected in our results of operations using the equity
method of accounting.
Our equity in gains of affiliates, net was $ 4.0 million in 2014, compared to $ 0.5 million in 2013. Our equity in gains of affiliates in 2014 was
attributable primarily to our equity in gains recorded in Magic Software and Sapiens, which was partially offset by our equity in losses recorded in Matrix.
57
Change in redeemable non-controlling interests. Change in redeemable non-controlling interest in 2014 amounted to an expense of $ 0.2 million.
Change in redeemable non-controlling interest in 2013 amounted to an expense of $ 1.7 million related mainly to (i) expenses recorded in Magic Software with
respect to the acquisition of Comm-IT Group having an effect of $ 0.5 million and (ii) expenses recorded in Matrix with respect to the acquisitions of Exzac
Inc., K.B.I.S. Ltd., Match Point I.T. Ltd., and Babcom Centers Ltd having an aggregate impact of $ 1.2 million..
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 decreased from $ 24.0 million in 2013 to $ 13.7 million in 2014. This decrease resulted primarily from the deconsolidation of Sapiens’
results of operations from our consolidated results of operations as of November 19, 2013, upon the follow-on public offering of its common shares on the
NASDAQ Capital Market, pursuant to which Formula lost its controlling interest in Sapiens and from the deconsolidation of Magic’s results of operations from
our consolidated results of operation as of March 5, 2014, upon the follow-on public offering of its ordinary shares on the NASDAQ Global Select Market,
pursuant to which Formula lost its controlling interest in Magic.
Year Ended December 31, 2013 Compared to Year Ended December 31, 2012
The following tables set forth certain data from our results of operations for the years ended December 31, 2012 and 2013, as well as such data as a
percentage of our revenues for those years. The data has been derived from our audited consolidated financial statements included in this annual report. The
operating results for the below years should not be considered indicative of results for any future period. This information should be read in conjunction with the
audited consolidated financial statements and notes thereto included in this annual report.
Sapiens results of operations reflect for 2012 and 2013, the period starting on January 27, 2012, the date on which Formula gained its controlling
interest in Sapiens and ending on November 19, 2013, the date on which Formula’s percentage interest in Sapiens decreased to under 50%, resulting in the
deconsolidation of Sapiens’ results.
Statement of Income Data
(U.S. dollars, in thousands, except share and per share data)
Revenues
Cost of revenues
Gross profit
Operating expenses:
Research and development, net
Selling, marketing, general and administrative
Other expenses (income), net
Total operating expenses
Operating income
Financial expenses, net
Income before taxes on income
Taxes on income
Equity in gains (losses) of affiliated companies, net
Net income
Change in redeemable non-controlling interests
Net income attributable to non-controlling interests
Net income attributable to Formula’s shareholders
58
Year ended
December 31,
2012
2013
$
$
$
742,981
564,803
178,178
12,349
110,758
(174)
122,933
55,245
6,672
48,573
6,145
3,744
46,172
(967)
23,766
23,373 $
795,881
603,080
192,801
14,168
117,877
14
132,059
60,742
6,236
54,506
8,728
60,683
106,461
1,735
24,039
80,687
Statement of Income Data as a Percentage of Revenues
Revenues
Cost of revenues
Gross profit
Operating expenses:
Research and development, net
Selling, marketing, general and administrative
Other expenses (income), net
Total operating expenses
Operating income
Financial expenses, net
Income before taxes on income
Taxes on income
Equity in gains (losses) of affiliated companies, net
Net income
Change in redeemable non-controlling interests
Net income attributable to non-controlling interests
Net income attributable to Formula’s shareholders
Year ended
December 31,
2012
2013
100.0%
76.0%
24.0%
1.7%
14.9%
0.0%
16.6%
7.4%
0.9%
6.5%
0.8%
0.5%
6.2%
(0.1)%
3.2%
3.1%
100.0%
75.8%
24.2%
1.8%
14.8%
0.0%
16.6%
7.6%
0.8%
6.8%
1.1%
7.6%
13.3%
0.2%
3.1%
10.1%
Revenues. Revenues in 2013 increased by 7.1%, from $ 743.0 million in 2012 to $ 795.9 million in 2013. Revenues from the two categories of our
operations were as follows: revenues from the delivery of software services increased by 6.5%, from $ 578.8 million in 2012 to $ 616.5 million in 2013, and
revenues from the sale of our proprietary software products and related services increased by 9.3%, from $ 164.2 million in 2012 to $ 179.4 million in 2013.
The increase in software services revenues was attributable to (i) the growth in Matrix's revenues, from $ 512.5 million in 2012 to $ 533.9 million in
2013, reflecting an increase of 4.2% (compared to a decrease of 2.5% when measured in NIS, Matrix’s local currency) primarily attributable to the appreciation
of the NIS versus the U.S. dollar, having a positive impact of approximately $ 35.0 million and an increase of 2.08% in Matrix’s software solutions and services
area of operation which was entirely offset by the decrease in Matrix’s remaining three areas of operations, and (ii) the increase in Magic Software’s software
services revenues from $ 66.3 million in 2012 to $ 82.6 million in 2013, primarily attributable to increased demand for our professional services and to the
inclusion of the professional services revenues of the Comm-IT Group for a full year.
The increase in revenues from proprietary software products and related services was primarily due to (i) the increase in Sapiens’ revenues from $
104.1 million to $ 117.3 million, reflecting an increase of 12.7%, primarily attributable to an increase in both the sales of Sapiens’ software solutions licenses
and Sapiens’ project delivery and implementation services, support and maintenance services and other post implementation professional services, and (ii)
increase in Magic Software’s revenues from software products and related services from $ 60.1 million to $ 62.1 million reflecting an increase of 3.3%,
primarily attributable to an increase in Magic Software’s project activity which was partially offset by the negative impact of the devaluation of the Japanese
Yen against the U.S. dollar having an impact of $ 2.7 million.
59
A breakdown of our overall revenues into proprietary software products and related services and software services revenues for the years ended
December 31, 2012 and 2013, the percentage those respective categories of revenues constituted out of our total revenues in those years, and the percentage
change for each such category of revenues from 2012 to 2013, are provided in the below table:
Revenue category
Proprietary software products and related services
Software services
Total
$
$
164,173
578,808
742,981
Revenues by geographical region
Year ended
December 31, 2012
Revenues
Percentage
Year-over-
year
change
($ in thousands)
Year ended
December 31, 2013
Revenues
Percentage
22.1%
77.9%
100%
15,227 $
37,673
52,900 $
179,400
616,481
795,881
22.5%
77.5%
100%
The dollar amount and percentage share of our revenues attributable to each of the geographical regions in which we conduct our operations for the
years ended December 31, 2012 and 2013, respectively, as well as the percentage change between such years, were as follows:
Geographical region
Israel
International
United States
Europe
Other
Total
Year ended
December 31, 2012
Revenues
Percentage
Year-over-
year
change
($ in thousands)
Year ended
December 31, 2013
Revenues
Percentage
$
499,025
137,298
74,126
32,532
742,981
$
67.2%
18.4%
10.0%
4.4%
100%
27,154 $
526,179
17,704
10,738
(2,696)
52,900 $
155,002
84,864
29,836
795,881
66.1%
19.5%
10.7%
3.7%
100%
Cost of Revenues. Cost of revenues consists primarily of wages, personnel expenses, other personnel-related expenses of software consultants,
subcontractors and engineers, amortization of capitalized software, and hardware and other materials costs. Cost of revenues increased by 6.8% from $564.8
million in 2012 to $ 603.1 million in 2013, mainly due to the accompanying growth in revenues in 2013. As a percentage of revenues, costs of revenues in 2012
and 2013 were 76%.
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 increased to $ 96.2 million in 2013 from $ 83.8 million in 2012, mainly due to the
increase of $ 11.0 million from 2012 in the aggregate recorded in Sapiens relating to salaries and other personnel-related expenses with respect to hiring
additional employees and subcontractors to support the increasing demand for their products and travel expenses and an increase of $ 1.4 million recorded in
Magic Software primarily attributable to the first time inclusion of the costs of revenues of Pilat (North America) and Pilat Europe, wholly owned subsidiaries
of Magic Software, which were acquired on February 26, 2013.
The cost of revenues for software services increased from $ 481.0 million in 2012 to $ 506.9 million in 2013, mainly due to the accompanying growth
in revenues in 2013. As a percentage of revenues, costs of revenues for software services in 2012 and 2013 remained relatively consistent at 82.9% in 2012
compared to 82.1% in 2013.
Cost of revenues for the years ended December 31, 2012 and 2013 include insignificant amounts of stock-based compensation recorded under ASC
718.
60
Research and Development Expenses, net. Research and development, or R&D, expenses 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 expenses, net, consist of research and development expenses, gross, less capitalized software costs. Research and development expenses, gross,
increased from $ 20.8 million in 2012 to $ 23.5 million in 2013, mainly due to the (i) increase in gross research and development expenses from $ 12.9 million
in 2012 to $ 15.1 million in 2013 that were incurred by Sapiens solutions for development aimed at expediting and deepening Sapiens’ product development
efforts in line with their efforts to support future growth and support demand for product enhancements and future products , (ii) increase in gross research and
development expenses that were incurred by Magic Software, from $ 7.9 million recorded in 2012 to $ 8.4 million recorded in 2013, primarily attributable to
Magic Software’s additional investment in 2013 in its application development and integration platforms and acquired application products.
In 2012, we capitalized software costs of $ 8.4 million, compared to $ 9.6 million in 2013. Capitalization of software costs in 2013 was attributable to
our subsidiaries engaged in providing proprietary software solutions (i.e., Magic Software and Sapiens). Research and development expenses, net, increased
from $ 12.3 million in 2012 to $ 14.2 million in 2013, mainly due to the factors described above with respect to the corresponding increase in gross research and
development expenses in 2013.
As a percentage of revenues, research and development expenses, net, increased from 1.7% in 2012 to 1.8% in 2013. Research and development
expenses, net, in 2013 were attributable primarily to Magic Software and Sapiens, which had research and development expenses, net of approximately $ 3.7
million and $ 10.5 million, respectively. Amortization of capitalized software costs was $ 8.5 million in 2013 and $ 8.1 million in 2012, which amounts were
included in cost of revenues. Research and development expenses for the years ended December 31, 2012 and 2013 include insignificant amounts of stock-
based compensation recorded under ASC 718.
Selling, Marketing, General and Administrative Expenses. Selling, marketing, general and administrative expenses consist primarily of cost of salaries,
severance and related expenses of sales, marketing, management and administrative employees, travel expenses, selling expenses, rent, utilities,
communications expenses, expenses related to external consultants, depreciation, amortization and other expenses. Selling, marketing, general and
administrative expenses increased from $ 110.8 million recorded in 2012 to $ 117.9 million recorded in 2013. As a percentage of revenues, selling, general and
administrative expenses remained relatively consistent at 14.9% recorded in 2012 compared to 14.8% recorded in 2013.
The increase in the absolute amount of selling, marketing, general and administrative expenses was primarily attributable to (i) an increase in Magic
Software’s general and administrative expenses from $ 10.6 million recorded in 2012 to $ 13.2 million recorded in 2013, primarily attributable to the
acquisitions of subsidiaries by Magic Software which were consolidated for the entire year for the first time in 2013, while recording approximately the same
level of selling and marketing expenses of approximately $ 23.0 million during both 2012 and 2013, (ii) an increase in Matrix’s selling, marketing, general and
administrative expenses from $49.9 million recorded in 2012 to $ 52.3 million recorded in 2013, primarily attributable to the devaluation of the U.S. dollar
versus the NIS having a negative impact of $ 3.4 million offset by a decrease of approximately $ 1.0 million primarily attributable to decrease of amortization of
intangible assets associated with business combinations completed in previous years, and (iii) increase in bonus payments recorded in Formula stand-alone
resulted from increased Group’s absolute profitability. Selling, marketing, general and administrative expenses attributable to Sapiens were substantially
unchanged in 2013 from 2012 as a result of 2013 reflecting only 10.5 months of Sapiens’ results.
Selling, general and administrative expenses for the years ended December 31, 2012 and 2013 include $ 4.8 million and $ 3.9 million, respectively, of
stock-based compensation recorded under ASC 718.
Other Income, net. We recorded a loss of $ 14,000 in other income in 2013, as compared to other income of $ 174,000 in 2012, each representing
insignificant amounts.
61
Operating Income. Our operating income increased from $55.2 million in 2012 to $ 60.7 million in 2013. The increase in operating income was
primarily attributable to increased operating income of Magic Software and Sapiens and Matrix which the latter was positively impacted by the devaluation of
the U.S. dollar against the NIS (from a representative average exchange rate of NIS 3.8558 per US$1 in 2012 to NIS 3.6108 per US$1 in 2013) on translation
into dollars of Matrix operating income generated in NIS. These factors can be quantified as follows: Matrix had operating income of $ 37.7 million in 2013
compared to $ 31.7 million in 2012; Magic Software had operating income of $ 19.0 million in 2013 compared to $ 15.6 million in 2012; and Sapiens had
operating income of $ 9.9 million in 2013, reflecting results from January 1, 2013 through November 19, 2013 compared to $7.8 million in 2012, reflecting
results from January 27, 2012 through December 31, 2012.
Financial Expenses, net. Financial expenses, net decreased from $ 6.7 million in 2012 to $ 6.2 million in 2013. 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 decrease in financial expenses, net in 2013 was mainly attributable to an increase in interest expenses related to our long and short term financial liabilities
to banks and others from $ 8.0 million in 2012 to $ 8.2 million in 2013 which was offset by an increase in gains amounted to $ 1.0 million that we recognized
from trading and available for sale marketable securities in 2013 relative to gains amounted to $ 0.3 million that we recognized from trading and available for
sale marketable securities in 2012.
Taxes on Income. Taxes on income increased to $ 8.7 million in 2013 from $ 6.1 million in 2012. The increase in taxes on income in 2013 was mainly
attributable to (i) an increase in Magic Software’s taxes on income, increasing from $ 0.1 million in 2012 to $ 1.6 million in 2013, primarily attributable to
current taxes in Magic Software’s subsidiaries due to local taxes in Japan, Europe and Israel and to the decrease of its deferred tax assets with respect to
utilization of carry-forward tax losses and (ii) an increase in Sapiens’s taxes on income, increasing from tax income of $ 0.5 million in 2012 to a tax expense of
$ 0.4 million in 2013 which resulted from an increase in Sapiens’ income in the United States, United Kingdom and other jurisdictions in which it operates, as
well as an increase in Sapiens’ deferred tax expenses associated with utilizing a portion of its net operating losses and with deferred tax expenses recorded with
respect to amortization of intangible assets.
Gain derived from deconsolidation of subsidiary and equity in gains of affiliated companies net. From August 21, 2011 until January 27, 2012,
Sapiens’ results of operations were reflected in our results via the equity method of accounting. On January 27, 2012, we consummated the purchase of Sapiens
common shares from two former shareholders of FIS and IDIT (Sapiens' recently acquired companies) and others, resulting in an increase in our interest in
Sapiens' outstanding common shares from 47.3% to 52.1%, following which we regained control over Sapiens. The gain recognized in respect of our gain of
control of Sapiens amounted to $ 3.4 million.
On November 19, 2013, Sapiens completed a follow-on public offering of its common shares. Sapiens issued 6,497,400 shares at a price of $ 6.25 per
share before issuance expenses. Total net proceeds from the issuance amounted to approximately $ 37.8 million. As a result of the offering, our interest in
Sapiens' outstanding common shares was diluted from 56.8% to 48.6%. Our investment in Sapiens following the dilution was measured under the equity method
of accounting. The gain recognized in relation of our loss of control in Sapiens amounted to $ 61.2 million and is presented in the income statement as equity in
gains of affiliated companies, net.
Our equity in losses of affiliates, net was $ 481,000 in 2013, compared to equity in gains of $ 334,000 in 2012. Our equity in losses of affiliates in 2013
was attributable primarily to our equity in losses recorded in Matrix, which was partially offset by our equity in gains of Sapiens. Our equity in gains of
affiliates in 2012 was attributable primarily to our equity in gains of Sapiens, which was partially offset by our equity in losses recorded in Matrix.
62
Change in redeemable non-controlling interests. Change in redeemable non-controlling interest in 2013 amounted to an expense of $ 1.7 million
related mainly to (i) expenses recorded in Magic Software with respect to the acquisition of Comm-IT Group having an effect of $ 0.5 million and (ii) expenses
recorded in Matrix with respect to the acquisitions of Exzac Inc., K.B.I.S. Ltd., Match Point I.T. Ltd., and Babcom Centers Ltd having an aggregate impact of $
1.2 million. Change in redeemable non-controlling interest in 2012 amounted to income of $0.9 million related mainly to Matrix’s acquisition of Exzac Inc.
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 substantially the same at $ 24.0 million in 2013 compared to $ 23.8 million in 2012.
Impact of Inflation and Currency Fluctuations on Results of Operations
Most of our revenues and expenses from our software services revenue line 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 and profitability
for our software services in dollar terms. The representative average exchange rate of the NIS to the dollar in 2012, 2013 and 2014, as reported by the Bank of
Israel, was NIS 3.8558 per US$1, NIS 3.6108 per US$1 and NIS 3.5779 per US$1, respectively. On the other hand, a significant portion of our revenues from
proprietary software products and related services is currently mainly denominated in U.S dollar, 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 2011 and in 2012 with respect to the Euro and the British pound and as
was in the case of the Japanese Yen in 2012, 2013 and 2014) reduces the revenue growth rate and profitability for our proprietary software products and related
services in dollar terms, thereby adversely affecting our operating results. On the other hand, the devaluation of the NIS relative to the dollar, which occurred in
2012, decreased the relative value of the NIS-denominated operating costs related to our proprietary software product revenues, and, therefore, partially
compensate the negative affect over our revenues and our profitability.
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 1.6%, 1.8% and (-0.2)% for the years ended December 31, 2012, 2013 and 2014, respectively, thereby partially
offsetting the depreciation of the NIS relative to the dollar in 2012, compounding the impact of the appreciation of the NIS relative to the dollar in 2013, 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,
2012
2013
2014
Inflation rate in Israel
%
Devaluation
(appreciation) of NIS
against the US$*
%
Devaluation
(appreciation) of Euro
against the US$*
%
1.6
1.8
(-0.2)
63
(2.3)
(7.0)
(12)%
(2.0)
(4.4)
(11.5)
*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.
Effective Corporate Tax Rates in Israel
Tax regulations have a material impact on our business, particularly in Israel where we have the headquarters or our subsidiary and affiliated companies. The
following summary describes the current tax structure applicable to companies in Israel, with special reference to its effect on us. The following also contains a
discussion of government programs from which we, and some of our subsidiaries, benefit. To the extent that the discussion is based on tax legislation that has
not been subject to judicial or administrative interpretation, there can be no assurance that the views expressed in the discussion will be accepted by the tax
authorities in question.
Corporate Tax
The Israeli corporate tax rate is 26.5% for 2014 and thereafter. The corporate tax rate was increased to 26.5% for 2014 and thereafter. However, the
effective tax rate payable by a company that derives income from an Approved Enterprise, a Beneficiary Enterprise or Preferred Enterprise, as further discussed
below, may be considerably less. In addition, Israeli companies are currently subject to regular corporate tax rate on their capital gains.
Besides being subject to the general corporate tax rules in Israel, certain of our Israeli subsidiaries have also, from time to time, applied for and
received certain grants and tax benefits from, and participate in, programs sponsored by the Government of Israel, as described below.
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 15%. 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.
Tax Benefits Under the Law for the Encouragement of Capital Investments, 5719-1959
The Law for the Encouragement of Capital Investments, 5719-1959 (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, a Beneficiary Enterprise or a Preferred Enterprise, is entitled to benefits as discussed below. These benefits may include
cash grants from the Israeli government and tax benefits, based upon, among other things, the location of the facility in which the investment is made or the
election of the grantee. In order to qualify for these incentives, an Approved Enterprise, a Beneficiary Enterprise or a Preferred Enterprise is required to comply
with the requirements of the Investment Law.
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The Investment Law has been amended several times over the last years, with the two most significant changes effective as of April 1, 2005 (the “2005
Amendment”), and as of January 1, 2011 (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 were entitled to
choose to continue to enjoy such benefits, provided that certain conditions are met, or elect instead irrevocably to forego such benefits and elect the benefits of
the 2011 Amendment.
The 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 Income from Approved Enterprises Approved Before April 1, 2005
Under the Investment Law prior to the 2005 Amendment, a company that wished to receive benefits on its investment program that is implemented in
accordance with the provisions of the Investment Law, or an Approved Enterprise, had to receive an approval from the Investment Center of the Israeli Ministry
of Economy (formerly the 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 that is defined both by the financial scope of the investment, including sources of funds, and by the physical
characteristics of the facility or other assets. The tax benefits available under any certificate of approval relate only to taxable income attributable to the specific
program and are contingent upon meeting the criteria set out in the certificate of approval.
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. Certain of our Israeli subsidiary and affiliated companies receive the benefits through the alternative benefits program. Under the
alternative benefits program, 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 in Israel of the Approved Enterprise, and a reduced corporate
tax rate of between 10% to 25% for the remainder of the benefits period, depending on the level of foreign investment in the company in each year, as detailed
below. The benefits commence on the date in which that taxable income is first earned. The benefits period under Approved Enterprise status is limited to 12
years from the year the enterprise commences its operations, or 14 years from the year of the approval as an Approved Enterprise, 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 income 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.
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 benefits period 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 corporate 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:
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Percentage of non-Israeli ownership
Corporate Tax Rate
Over 25% but less than 49%
49% or more but less than 74%
74% or more but less than 90%
90% or more
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 subject to tax in respect of the amount of
dividend distributed (grossed up to reflect such pre-tax income that it would have had to earn in order to distribute the dividend) at the corporate tax rate that
would have been otherwise applicable if such income had not been tax-exempted under the alternative benefits program. This rate generally ranges from 10% to
25%, depending on the extent to which non-Israeli shareholders hold such company’s shares.
In addition, dividends paid out of income attributed to an Approved Enterprise (or out of dividends received from a company whose income is
attributed to an Approved Enterprise) are generally subject to withholding tax at the rate of 15%, or at a 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 a 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 would be required to
refund the amount of tax benefits, adjusted to the Israeli consumer price index and interest.
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 undistributed income derived from Approved Enterprise programs of certain of our Israeli subsidiary and affiliated
companies 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.
Tax benefits under the 2005 Amendment that became effective on April 1, 2005.
The 2005 Amendment applies to new investment programs and investment programs commencing after 2004, and does not apply to investment
programs approved prior to April 1, 2005. The 2005 Amendment provides that terms and benefits included in any certificate of approval that was granted before
the 2005 Amendment became effective (April 1, 2005) will remain subject to the provisions of the Investment Law as in effect on the date of such approval.
Pursuant to the 2005 Amendment, the Investment Center will continue to grant Approved Enterprise status to qualifying investments. The 2005 Amendment,
however, limits the scope of enterprises that may be approved by the Investment Center by setting criteria for the approval of a facility as an Approved
Enterprise.
An enterprise that qualifies under the new provisions is referred to as a Beneficiary Enterprise, rather than Approved Enterprise. 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 the tax benefits previously available under the alternative benefits program.
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 Beneficiary Enterprise may, at its discretion, approach the Israel Tax Authority for a pre-ruling
confirming that it is in compliance with the provisions of the Investment Law.
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Tax benefits are available under the 2005 Amendment to production facilities (or other eligible facilities), which are generally required to derive more
than 25% of their business income from export to specific markets with a population of at least 14 million in 2012 (such export criteria will further increase in
the future by 1.4% per annum). In order to receive the tax benefits, the 2005 Amendment states that a company must make an investment which meets certain
conditions set forth in the amendment for tax benefits and which exceeds a minimum amount specified in the Investment Law. Such investment entitles a
company to a Beneficiary Enterprise status with respect to the investment, and may be made over a period of no more than three years from the end of the year
in which the company chose to have the tax benefits apply to the Beneficiary 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 Beneficiary 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 Beneficiary 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 Beneficiary Enterprise depends on, among other things,
the geographic location of the Beneficiary 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 Beneficiary Enterprise in Israel, and a reduced corporate tax rate of between 10% to 25%
for the remainder of the benefits period, depending on the level of foreign investment in the company in each year, as explained above.
Dividends paid out of income attributed to a Beneficiary Enterprise (or out of dividends received from a company whose income is attributed to a
Beneficiary 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 attributed to a Beneficiary Enterprise during the benefits period and actually paid at any time
up to 12 years thereafter, except with respect to an FIC, in which case the 12-year limit does not apply. Furthermore, a company qualifying for tax benefits
under the 2005 Amendment which pays a dividend out of income attributed to its Beneficiary Enterprise during the tax exemption period will be subject to tax
in respect of the amount of the dividend distributed (grossed-up to reflect the pre-tax income that it would have had to earn in order to distribute the dividend) at
the corporate tax rate that would have otherwise been applicable
The benefits available to a Beneficiary 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 would be required to refund the amount of tax benefits, adjusted to the consumer price index and interest, or other
monetary penalty.
Income that is attributable to one of Sapiens’ Israeli subsidiaries, will be exempt from income tax for a period of two years commencing 2014, under
the 2005 Amendment.
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 terms are defined in the Investment
Law) as of January 1, 2011. A Preferred Company is defined as either (i) a company incorporated in Israel which is not wholly owned by a governmental entity
or (ii) a limited partnership that (a) was registered under the Israeli Partnerships Ordinance and (b) all of its limited partners are companies incorporated in
Israel, but not all of them are governmental entities; which has, among other things, Preferred Enterprise status and is controlled and managed from Israel.
Pursuant to the 2011 Amendment, a Preferred Company was entitled to a reduced corporate tax rate of 15% with respect to its preferred income attributed to its
Preferred Enterprise in 2012, unless the Preferred Enterprise was located in a certain development zone, in which case the rate was 10%. Such corporate tax rate
was reduced to 12.5% and 7%, respectively, in 2013 and was increased to 16% and 9%, respectively, in 2014 and thereafter. 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 20% 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 is required to be withheld (although, if such
dividends are subsequently distributed to individuals or a non-Israeli company, withholding tax at a rate of 20% or such lower rate as may be provided in an
applicable tax treaty will apply).
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The 2011 Amendment also provided transitional provisions to address companies already enjoying current benefits under the Investment Law. These
transitional provisions provide, among other things, that unless an irrevocable request is made to apply the provisions of the Investment Law as amended in
2011 with respect to income to be derived as of January 1, 2011: (i) the terms and benefits included in any certificate of approval that was granted to an
Approved Enterprise, which chose to receive grants, before the 2011 Amendment became effective, will remain subject to the provisions of the Investment Law
as in effect on the date of such approval, and subject to certain conditions; (ii) the terms and benefits included in any certificate of approval that was granted to
an Approved Enterprise, that had participated in an alternative benefits program, before the 2011 Amendment became effective, will remain subject to the
provisions of the Investment Law as in effect on the date of such approval, provided that certain conditions are met ; and (iii) a Beneficiary 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.
As of December 31, 2014, none of our Israeli subsidiary and affiliated companies had filed a request to apply the new benefits under the 2011
Amendment.
Tax Benefits and Grants for Research and Development
Israeli tax law allows, under certain conditions, a tax deduction for research and development expenditures, including capital expenditures, for the year
in which they are incurred. Such expenditures must relate to scientific research and development projects, and must be approved by the relevant Israeli
government ministry, determined by the field of research, and the research and development must be for the promotion or development of the company.
Furthermore, the research and development must be carried out by or on behalf of the company seeking such tax deduction. The amount of such deductible
expenses is reduced by the sum of any funds received through government grants for the finance of such scientific research and development projects.
Expenditures not approved by the relevant Israeli government ministry, but otherwise qualifying for deduction, are deductible over a three-year period.
However, the amounts of any government grants made available are subtracted from the amount of the deductible expenses.
Law for the Encouragement of Industry (Taxes), 5729-1969
The Law for the Encouragement of Industry (Taxes), 5729-1969, or the Industry Encouragement Law, provides several tax benefits for an “Industrial
Company”. Pursuant to the Industry Encouragement Law, a company qualifies as an Industrial Company if it is an Israeli resident company that was
incorporated in Israel and at least 90% of its income in any tax year (other than income from certain government loans) is generated from an “Industrial
Enterprise” that it owns and located in Israel. An “Industrial Enterprise” is defined as an enterprise whose major activity, in a given tax year, is industrial
production.
An Industrial Company is entitled to certain tax benefits, including:
• Deduction of the cost of the purchases of patents, or the right to use a patent or know-how used for the development or promotion of the Industrial
Enterprise, over an eight year period commencing on the year in which such rights were first exercised;
Straight-line deduction of expenses related to a public offering in equal amounts over a three-year period commencing on the year of offering;
The right to elect, under certain conditions, to file a consolidated tax return together with Israeli Industrial Companies controlled by it; and
•
•
• Accelerated depreciation rates on equipment and buildings.
Eligibility for benefits under the Industry Encouragement Law is not subject to receipt of prior approval from any governmental authority.
We believe that certain of our Israeli subsidiary and affiliated companies currently qualify as Industrial Companies within the definition under the
Industry Encouragement Law. We cannot assure you that we will continue to qualify as Industrial Companies or that the benefits described above will be
available in the future.
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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.
Current Outlook
We had cash and cash equivalents and short-term investments of $100.8 million and $129.7 million at December 31, 2013 and December 31, 2014,
respectively. At December 31, 2013 and December 31, 2014, we had indebtedness to banks and others of $98.1 million and $150.0 million, respectively, of
which $35.6 million and $41.8 million were current liabilities and $62.4 million and $108.2 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 six months, subject to the foregoing minimum repayment of one-third of
the total principal amount during each of 2012, 2013 and 2014. As of December 31, 2013 the remaining balance was $4.0 million, to be repaid on November 14,
2014. On February 14, 2014, our board of directors determined to effect an early redemption of the outstanding principal balance of the loan. The early
redemption payment was made in one installment, on the interest payment date on February 18, 2014.
In January 2014, Formula agreed to the terms of a NIS 200 million loan (approximately $57.6 million) that was extended to us by a leading Israeli
institutional investor. The loan is secured by certain of the shares of each of our publicly held subsidiaries and affiliated company. The loan's average duration is
approximately four years (paid over a period of 6 years) and carries a fixed annual interest rate of 5.5%.
Under the terms of the loan with the Israeli institutional investor, Formula has undertaken to maintain the following financial covenants, as they will be
expressed in its financial statements, as described:
1. Our equity shall not be lower than $ 160 million at all times.
2. The ratio of our equity to total assets will not be less than 20%.
3. The ratio of our total financial debts less cash, short-term deposits and short-term marketable securities to the annual EBITDA will not exceed 3.5 to
1.
4. The ratio of our total financial debts less cash, short-term deposits and short-term marketable securities to the total assets will not exceed 30%.
5. Formula’s liabilities to banks and other financial institutions in its standalone balance sheet shall not be higher than NIS 450 million (approximately
$ 115.7 million).
6. Formula will not create any pledge on all or part of its property and assets in favor of any third party and will not provide any guarantee to secure
any third party's debts as they are today and as they will be without the financial institution's consent.
7. Formula will not sell and/or transfer all or part of its assets to others in any manner whatsoever without the financial institution’s advance written
consent, unless it is done in the ordinary course of business.
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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, only Matrix and Formula have such material credit facilities outstanding. The long-term debt obligations of Matrix bear fixed interest at an
average annual rate of 2.9%-5.9%. These credit facilities expire over a period of time that ranges from 1 to 7 years. The long-term debt obligation of Formula
bears a fixed rate annual interest of 5.5%.
Until June 30, 2013, Matrix had its 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). 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) was due to be repaid in four annual installments, on December 31, 2010, 2011, 2012 and 2013. The first 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 and third payments were made in 2012 in an aggregate amount of approximately $33.0 million, respectively. On May 28, 2013, Matrix's
board of directors decided on early redemption of the outstanding balance of the debentures (series A). The early redemption payment was made in one
installment, at the interest payment date on June 30, 2013 (the "Early Redemption Date"). The amount of actual redemption was approximately NIS 60.8 million
(approximately $16.8 million). After the early redemption, the debentures were written off for trading and from the TASE Clearing House. The amount per NIS
1 par value that Matrix redeemed equals to the value of the bonds` liability value, (i.e. principal plus interest and linkage differences to the actual date of early
redemption).
As of December 31, 2014, Matrix had aggregate short-term obligations to banks and others of NIS 162.6 million (approximately $41.8 million) and
aggregate long-term obligations to banks of NIS 220.8 million (approximately $56.8 million) under its credit facilities.
In November 2013, Magic Software received a loan from a US bank institution, in the amount of $3.0 million, to be paid monthly in equal payments, for
a period of 36 months bearing interest of Libor+3.5%. The loan agreement contains various covenants which require Magic Software to maintain certain
financial ratios. During 2014, Magic Software made an early redemption and repaid the entire amount.
On November 19, 2013, Sapiens completed a follow-on public offering of its common shares. Sapiens issued 6,497,400 shares at a price of $ 6.25 per
share before issuance expenses. Total net proceeds from the issuance amounted to approximately $37.8 million. On March 5, 2014, Magic Software completed a
follow-on public offering of its ordinary shares. Magic Software issued 6,900,000 shares at a price of $ 8.50 per share before issuance expenses. Total net
proceeds from the issuance were approximately $ 54.7 million.
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’ and affiliated company’s) 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 $ 68.6 million in 2013 to $ 16.7 million in 2014.
Net cash provided by operations in 2014 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 $ 9.0 million, (ii) stock-based compensation expenses, in an amount of $ 5.0 million, (iii) increase
in deferred revenues in an amount of $ 7.3 million, (iv) changes in deferred taxes and in value of debentures in an aggregate amount of $ 20.2 million, (v)
impairment of other investments in an amount of $ 1.3 million, and (vi) an increase in trade payables and in other accounts payable and employees and payroll
accrual, in an aggregate amount of $ 6.2 million. Material downwards adjustments in cash flow for non-cash activity, including changes in operating assets and
liabilities, consisted of adjustments of (i) an increase in trade receivables in an amount of $13.6 million, (ii) decrease in value of long term loans in an amount of
$ 6.2 million, (iii) a decrease in inventory, in an amount of $0.2 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, (iv) change in liabilities in respect of business
combinations in an amount of $ 3.3 million (v) increase in other current and long term account receivables in an amount of $ 5.7 million and (vi) gain derived
from deconsolidation of Magic Software, consolidation of Sapiens and equity in gains of affiliated companies in an amount of $ 90.9 million.
Cash flow provided by operating activities in 2014 was primarily comprised of $ 23.1 million provided by Matrix offset by $ 7.0 million used by
Formula.
Cash flow provided by our operating activities decreased from $ 73.1 million in 2012 to $ 68.6 million in 2013.
Net cash provided by operations in 2013 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 $ 24.3 million, (ii) stock-based compensation expenses, in an amount of $ 4.0 million, (iii) increase
in deferred revenues in an amount of $ 5.0 million (iv) changes in deferred taxes and in value of debentures in an aggregate amount of $ 0.7 million and, (v) an
increase in trade payables and in other accounts payable and employees and payroll accrual, in an aggregate amount of $ 5.8 million. Material downwards
adjustments in cash flow for non-cash activity, including changes in operating assets and liabilities, consisted of adjustments of (i) an increase in trade
receivables, in an amount of $ 5.7 million. (ii) a decrease in inventory, in an amount of $0.1 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, and (iii) gain derived
from deconsolidation of Sapiens, in an amount of $61.2 million.
Cash flow provided by operating activities in 2013 was primarily comprised of $35.6 million provided by Matrix, $12.8 million provided by Sapiens
(reflecting approximately 10.5 months of activity consolidated in our reports from January 1, 2013 until November 19, 2013) and $22.3 million provided by
Magic Software, reflecting the $21.6 million, $9.9 million and $15.8 million, of net income generated by these subsidiaries, respectively, in 2013, as adjusted
for non-cash operating line items and changes in non-cash operating assets and liabilities (as detailed above).
Cash Generated by (Used in) Financing Activities
Cash generated by financing activities of $ 31.6 in 2014 compared to cash used in financing activities of $38.4 million in 2013, mainly reflecting the
cumulative effect of the following financing-related transactions that occurred over the course of those years:
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Year Ended December 31, 2014
In April 2014, Matrix distributed to its shareholders a cash dividend in an aggregate amount of approximately $ 5.8 million, of which $ 2.9 million was
paid to non-controlling interests in Matrix.
In June 2014, Matrix distributed to its shareholders a cash dividend in an aggregate amount of approximately $ 4.9 million, of which $ 2.4 million was
paid to non-controlling interests in Matrix.
In July 2014, Formula distributed to its shareholders a cash dividend in an aggregate amount of approximately $7.1 million.
In September 2014, Matrix distributed to its shareholders a cash dividend in an aggregate amount of approximately $ 3.3 million, of which $ 1.6
million was paid to non-controlling interests in Matrix.
In December 2014, Matrix distributed to its shareholders a cash dividend in an aggregate amount of approximately $ 4.1 million, of which $ 2.0 million
was paid to non-controlling interests in Matrix.
In December 2014, Formula distributed a cash dividend in an aggregate amount of approximately $7.9 million. The dividend was paid to Formula
shareholders after the balance sheet date in February 2015.
In addition, net cash provided by financing activities in 2014 was attributable to (i) repayment of long term loans from banks and others in an amount
of $ 25.1 million, and (ii) cash paid in conjunction with acquisition of activities in an amount of $14.8 million offset by (i) an increase in short term bank credit,
net and proceeds from long term debt in the aggregate amount of $ 97.3 million, and (ii) purchase of non-controlling interests and redeemable non-controlling
interests in an amount of $ 1.7 million.
Year Ended December 31, 2013
In February 2013, Sapiens distributed to its shareholders a cash dividend in an aggregate amount of approximately $5.8 million, of which $2.5 million
was paid to non-controlling interests in Sapiens.
In March 2013, Magic Software distributed to its shareholders a cash dividend in an aggregate amount of approximately $4.4 million, of which $2.1
million was paid to non-controlling interests in Magic Software.
In April 2013, Matrix distributed to its shareholders a cash dividend in an aggregate amount of approximately $5.0 million, of which $2.5 million was
paid to non-controlling interests in Matrix.
In June 2013, Matrix distributed to its shareholders a cash dividend in an aggregate amount of approximately $3.8 million, of which $1.9 million was
paid to non-controlling interests in Matrix.
In July 2013, Formula distributed to its shareholders a cash dividend in an aggregate amount of approximately $5.4 million.
In September 2013, Magic Software distributed to its shareholders a cash dividend in an aggregate amount of approximately $3.3 million, of which
$1.6 million was paid to non-controlling interests in Magic Software.
In September 2013, 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 December 2013, Matrix distributed to its shareholders a cash dividend in an aggregate amount of approximately $4.1 million, of which $2.1 million
was paid to non-controlling interests in Matrix.
In December 2013, Formula distributed a cash dividend in an aggregate amount of approximately $4.6 million. The dividend was paid to Formula
shareholders after the balance sheet date in February 2014.
In addition, net cash used in financing activities in 2013 was attributable to (i) repayment of long term loans from banks and others in an amount of $
17.6 million (ii) cash paid in conjunction with acquisition of activities in an amount of $ 3.9 million, and, (iii) repayment of debentures in Matrix in an amount
of $ 16.8 million, offset by (i) an increase in short term bank credit, net and proceeds from long term debt in the aggregate amount of $ 23.8 million, and, and
(ii) purchase of non-controlling interests and redeemable non-controlling interests in an amount of $ 4.4 million.
Cash Used in Investing Activities
Net cash used in our investing activities was $ 19.8 million in 2014 compared to $63.3 million in 2013, mainly reflecting the cumulative effect of the
following investment-related transactions that occurred over the course of those years:
Year Ended December 31, 2014
On March 5, 2014, Magic Software completed a follow-on public offering of its ordinary shares on the NASDAQ. Magic issued 6,900,000 shares at a
price of $ 8.50 per share before issuance expenses. Total net proceeds from the issuance amounted to $ 54.7. As a result of the offering, Formula’s interest in
Magic Software’s outstanding ordinary shares diluted from 51.6% to 45.0% and Formula's investment in Magic Software was measured under the equity
method of accounting due to loss of control in Magic Software. We recorded a capital expenditure of $ 37.4 million in respect of losing control in Magic
Software.
In April 2014, Formula acquired the VMS operations of InSync Staffing LLC, a U.S.-based full service provider of staffing solutions for IT,
engineering and telecom. We recorded a capital expenditure of $ 4.0 million in respect of this acquisition.
In September 2014, Magic Software distributed to its shareholders a cash dividend in an aggregate amount of approximately $4.2 million, of which
$1.9 million was paid to Formula.
On December 23, 2014, following the purchase by Formula of Sapiens common shares, bringing Formula interest in Sapiens common shares to 50.2%
and as a result, regaining control over Sapiens, we recorded a net capital proceed of $ 42.4 million in respect of regaining control in Sapiens
In addition, net cash used in investing activities in 2014 was attributable to (i) purchase of property and equipment in an amount of $ 4.0 million (ii)
investments in affiliated companies in an amount of $7.6 million, (iii) expenditure (net of cash acquired) with respect to business acquisitions in an amount of $
4.4 million, and, (iv) net investment in short term deposits in an amount of $ 6.1 million.
Year Ended December 31, 2013
In February 2013, Magic Software purchased Pilat Europe Limited Ltd. and Pilat (North America) Inc. which provides custom human capital
management solutions, for a total consideration of $ 1,233.
In November 2013, Magic Software acquired the enterprise division of Allstates Technical Services, LLC, a U.S.-based full-service provider of
consulting and staffing solutions for IT, Engineering and Telecom personnel from KBR, Inc. (NYSE: KBR). With a 60-year history, this division, now known
as Allstates Consulting Services LLC brings a strong reputation and an experienced growth-focused management team serving some of the world’s leading
telecom and technology companies.
73
In May 2013, Magic Software’s subsidiary, Comm-IT Technology Solutions Ltd., acquired Dario Solutions IT Ltd. and Valinor Ltd., both incorporated
in Israel, for a total consideration of $5.3 million, of which $2.3 million is contingently payable upon the acquired business meeting certain operational targets
in 2013, 2014 and 2015. Dario, a Microsoft Gold Level Partner, provides integration services especially with respect to Microsoft products for large and mid-
range customers in Israel and specializes in virtualization and private cloud; server based computing, storage area networks, multiple users system management
and mobile solutions. Valinor specializes in project and product consultation, installation and implementation of databases and employs a wide range of
information system architects, including data base system architects, or DBAs, who have expertise in database management. Valinor assists its customers in
finding creative and effective solutions, including development, conversion, upgrade and installation of complex database systems that handle large amounts of
information. As a Microsoft Certified Partner and an Oracle Gold Level Partner, Valinor collaborates with both of these major software providers and is
involved in different projects in Israel and internationally.
In December 2013, Matrix purchased 100% of the share capital of Strategic Sales Systems Inc. from its former shareholders in consideration of
approximately NIS 1.4 million (approximately $0.4 million) in cash. Matrix may pay an additional consideration in the amount of approximately NIS 5.2
million ($1.5 million) subject to certain revenue and profit goals.
Company Commitments
In January 2014, Formula agreed to the terms of a NIS 200 million loan (approximately $57.6 million) that was extended to us by a leading Israeli
institutional investor. The loan is secured by certain of the shares of each of our publicly held subsidiaries and affiliated company. The loan's average duration is
approximately four years (paid over a period of 6 years) and carries a fixed annual interest rate of 5.5%.
In the context of Formula’s engagements the above mentioned leading financial institution, Formula has undertaken to maintain the following financial
covenants, as they will be expressed in its financial statements, as described:
1. Our equity shall not be lower than $ 160 million at all times.
2. The ratio of our equity to total assets will not be less than 20%.
3. The ratio of our total financial debts less cash, short-term deposits and short-term marketable securities to the annual EBITDA will not exceed 3.5 to
1.
4. The ratio of our total financial debts less cash, short-term deposits and short-term marketable securities to the total assets will not exceed 30%.
5. Formula’s liabilities to banks and other financial institutions in its standalone balance sheet shall not be higher than NIS 450 million (approximately
$ 115.7 million).
6. Formula will not create any pledge on all or part of its property and assets in favor of any third party and will not provide any guarantee to secure
any third party's debts as they are today and as they will be without the financial institution's consent.
7. Formula will not sell and/or transfer all or part of its assets to others in any manner whatsoever without the financial institution’s advance written
consent, unless it is done in the ordinary course of business.
We do not have material commitments for capital expenditures by Formula as of December 31, 2014 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.”
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Subsidiary Commitments
Our subsidiaries do not have any material commitments for capital expenditures as of December 31, 2014 or as of the date of this annual report.
As alluded to above (see “—Current Outlook”), the loan agreements and indentures to which we are party contain a number of conditions and limitations
on the way in which we (mainly Matrix and Formula) can operate our businesses, including limitations on our ability to raise debt and sell or acquire assets not
in normal business activity. 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 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 as of December 31, 2014 have provided bank guarantees aggregating to approximately $ 14.0 million 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 as of December 31, 2014 have also provided additional bank guarantees aggregating to $ 5.2 million 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 the credit agreement described above, a lien has been incurred over a certain portion of our investment in outstanding shares of Matrix,
Sapiens and Magic Software.
C.
Research and Development, Patents and Licenses, etc.
The net amounts that we spent on research and development activities in 2012, 2013 and 2014 totaled $ $12.3 million, $14.2 million and $0.8 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
For information see discussion in Item 4. “Information on the Company-Business Overview-Industry Background and Trends” and Item 5. “Operating
and Financial Review and Prospects - Results of Operations.”
E.
Off-Balance Sheet Arrangements
We are not a party to any off-balance sheet arrangements. In addition, we have no unconsolidated special purpose financing or partnership entities that
are likely to create material contingent obligations.
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F.
Tabular Disclosure of Contractual Obligations
The following table summarizes our contractual obligations and commitments as of December 31, 2014.
Long-term debt obligations (1)
Lease obligations
Liability in respect of the acquisition of operations
Liability to the OCS(4)
Uncertainties in income taxes (ASC 740) (2)
Accrued severance payments, net (3)
Total
Total
Less
than 1
year
Payments due by period
1-3
years
(U.S. dollars, in thousands
3-5
Years
More
than
5 years
134,329
59,991
12,760
4,720
1,283
12,627
225,710
26,127
21,891
1,782
788
59,904
23,692
10,978
1,010
-
-
-
-
50,588
95,584
36,634
11,664
11,289
3,119
-
-
1,010
1,912
-
-
48,933
-
-
16,695
(1) Does not include interest.
(2)
Payment of uncertain tax benefits would result from settlements with taxation authorities. Due to the difficulty in determining the timing of settlements,
this information is not included in the above table. We do not expect to make any significant payments for these uncertain tax positions within the next 12
months.
(3) Accrued severance payments, net relate to accrued severance obligations and notice obligations mainly to our Israeli employees as required under Israeli
labor law or personal employment agreements. We are legally required to pay severance upon certain circumstances, primarily upon termination of
employment by our company, retirement or death of the respective employee. Our liability for all of our Israeli employees is fully provided for by
monthly deposits with insurance policies and by an accrual.
(4) Does not include additional contingent liabilities to the OCS of approximately $2.9 million as described in Note 13(f) to our consolidated financial
statements contained elsewhere in this annual report.
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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 April 24, 2015.
Name
Guy Bernstein
Asaf Berenstin
Marek Panek
Rafal Kozlowski
Dafna Cohen (1) (3)
Eli Zamir(1) (2) (3)
Iris Yahal(1) (2) (3)
Position
Age
47 Chief Executive Officer
37 Chief Financial Officer
45 Chairman of the Board of
Directors
41 Director
45 Director
45 External director
53 External 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
2015 annual shareholders meeting
2015 annual shareholders meeting
2015 annual shareholders meeting
April 2016
April 2016
(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.
(3) Serves on the compensation committee of our board of directors.
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 PriceWaterhouseCoopers. 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.
Marek Panek has served as one of our directors since November 2010, as a representative of Asseco. Since January 2007 he has been the Vice
President of the Board of Directors of Asseco Poland S.A. and he is responsible for supervising the Strategy and Development Division and the EU Projects
Office. Mr. Panek also holds several other positions at Asseco and its affiliates, including Chairman of the Board of Directors of Asseco Denmark (since March
2011), Chairman of the Board of Asseco Resovia S.A. (since August 2010), Supervisory Board Member of Asseco Central Europe, a.s .(since September 2011),
Member of the Management Board of Sintagma UAB (since April 2011), Member of Management Board of Asseco Lietuva UAB (since June 2011),
Supervisory Board Member of Asseco Kazahstan LLP (since June 2014), Member of the Board of Directors of ZAO R-Style Softlab (since May 2014),
Supervisory Board Member of Insseco Sp. Z o.o (since February 2015), Supervisory Board Member of Asseco Northern Europe S.A. (2010-2013), Chairman of
the Board of Asseco DACH (2008-2011). 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 ZE 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 been awarded a master’s degree in engineering.
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Rafał Kozlowski has served as one of our directors since August 2012. Since June 2012, Mr. Kozlowski has served as Vice President of the
Management Board and Chief Financial Officer of Asseco. Mr. Kozlowski is also a member of the Asseco Group Board of Directors. From May 2008 to May
2012, Mr. Kozlowski served as Vice President of Asseco South Eastern Europe S.A. responsible for the company's financial management. Mr. Rafał Kozlowski
was directly involved in the acquisitions of companies incorporated within the holding of Asseco South Eastern Europe, as well as in the holding's IPO process
at the Warsaw Stock Exchange From 1996 to 1998, he served as Financial Director at Delta Software, and subsequently, from 1998 to 2003 as Senior Manager
at Veraudyt. In the years 2004-2006, he was Head of Treasury Department at Softbank S.A. where he was delegated to act as Vice President of Finance at the
company's subsidiary Sawan S.A. From 2007 through June 2009, he served as Director of Controlling and Investment Division at Asseco Poland S.A. Mr.
Kozlowski graduated of the University of Warsaw, obtaining Master's degree at the Faculty of Organization and Management in 1998. He completed the Project
Management Program organized by PMI in 2004, and the International Accounting Standards Program organized by Ernst & Young Academy of Business in
the years 2005-2006.
Dafna Cohen has served as one of our directors since October 2009, a member of our audit committee since January 2011 and a member of our
compensation committee since July 2013. Ms. Cohen is the Head of Business control and Investor Relations of EL-AL Israel Airlines Ltd., a company traded on
the TASE . Ms. Cohen has served as a member of board of directors of Gilat Satellite Networks Ltd since 2014 (NASDAQ and TASE). Ms. Cohen served as
Director of Global Treasury of MediaMind Technologies Inc. (previously traded on NASDAQ) and as a member of Investment committee of the Board from
2010 to 2011. Prior to that, Ms. Cohen served as a Director of Investments and as a Treasurer of Emblaze Ltd. and as a member of Investment committee of the
Board from 2005 to 2009 (London Stock Exchange). Prior to that, Ms. Cohen served as an Investment Manager for Leumi Partners, a wholly owned subsidiary
of Bank Leumi and as a manager at the derivatives sector of the Investment Division of Bank Leumi. Ms. Cohen previously served as a member of boards of
directors of XTL Biopharmaceuticals Ltd. (NASDAQ and TASE) from 2009 to 2015, Europort Ltd from 2012 to 2014 (TASE) and of Inventech Central Ltd
from 2011 to 2012 (TASE). Ms. Cohen holds an M.B.A. in finance and accounting and a B.A. degree in economics and political science, both from The Hebrew
University of Jerusalem.
Eli Zamir has served as one of our external directors, as a member of our audit committee since March 2013 and a member of our compensation
committee since July 2013. Mr. Zamir currently serves as an independent financial advisor. From 2007 to December 2014 Mr. Zamir served as the CEO of
Invest Pro Ltd., a private investment firm. From 1995 to 2002, Mr. Zamir served as a portfolio manager and from 2002 to 2007 Mr. Zamir served as the CEO of
an underwriter. Until 2014, Mr. Zamir served as a director of Synopsis Ltd., a public company listed on the TASE. Mr. Zamir holds a B.A. degree in accounting
and finance from Tel-Aviv University and an M.B.A. degree, from Ben Gurion University.
Iris Yahal has served as one of our external directors, the chairperson of our audit committee since April 2013 and a member of our compensation
committee since July 2013. Ms. Yahal is an independent strategic transaction advisor for various software, renewable energy, infrastructure and biotech
companies since 2007. From 1995 through 2007, Ms. Yahal served as Chief Financial Officer of BluePhoenix Solutions Ltd., a public company listed on the
NASDAQ Global Market and the TASE. In addition, from 1999 through 2007 Ms. Yahal served as a director of BluePhoenix Solutions and each of its
international subsidiaries. From 1991 until 1996, Ms. Yahal served as a controller at Argotech Ltd. which, at that time, was a wholly owned subsidiary of our
Company, operating as a start-up incubator. Prior to 1991, Ms. Yahal worked as an auditor with Wallenstein and Co., a public accounting firm. Ms. Yahal holds
a B.A. degree in accounting and statistics and an M.B.A degree in business administration, both from Tel- Aviv University and is a certified public accountant
in Israel.
Arrangements for the Election of Directors; Family Relationships
Asseco is our largest shareholder, holding approximately 49.0% of our outstanding share capital (which excludes shares that we have repurchased that
lack voting rights and shares subject to restrictions that are voted in proportion to the votes of our other shares. Asseco has significant influence over the election
of the members of our board of directors (other than our external directors). Other than as described immediately below, 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.
78
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 2014, Formula paid to its directors and executive officers, consisting of the individuals listed above in the table under “—Directors and Senior
Management”, direct remuneration and provided related benefits of approximately $3.2 million, in the aggregate with respect to 2014 and $2.97 million paid in
respect of 2013. 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 2014. In addition Formula recorded with respect to its directors and executive officers, consisting of the individuals
listed above in the table under “—Directors and Senior Management” expenses with respect to equity based compensation in the total amount of $ 4.7 million.
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 2014 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.
Summary Compensation Table
For so long as we qualify as a foreign private issuer, we are not required to comply with the proxy rules applicable to U.S. domestic companies,
including the requirement to disclose information concerning the amount and type of compensation paid to its chief executive officer, chief financial officer and
the three other most highly compensated executive officers, rather than an aggregate, basis. Nevertheless, a recent amendment to the regulations promulgated
under the Israeli Companies Law requires us to disclose the annual compensation of our five most highly compensated officers on an individual basis, rather
than on an aggregate basis, as was previously permitted for Israeli public companies listed overseas. Under the Companies Law regulations, this disclosure is
required to be included in the annual proxy statement for our annual meeting of shareholders each year, which we furnish to the SEC under cover of a Report of
Foreign Private Issuer on Form 6-K. Because of that disclosure requirement under Israeli law, we are also including such information in this annual report,
pursuant to the disclosure requirements of Form 20-F.
The tables below reflect the compensation granted to our 5 most highly compensated officers and directors during or with respect to the year ended
December 31, 2014. All amounts reported in the table reflect the cost to the Company, as recognized in our financial statements for the year ended December
31, 2014.
79
Compensation of Management (1)
Name and Position(2), (3)
Guy Bernstein – CEO
Salary ($)
510,698
Benefits
And
Perquisites
($)
(4)
Variable
Compensation ($)
(6)
Equity Based
Compensation
($) (5)
(7)
(1)
(2)
All amounts reported in the table are in terms of cost to Formula, as recorded in Formula’s financial statements. We have only one office holder who is a
member of management who is compensated by Formula. For disclosure concerning compensation paid by us to our remaining four most highly
compensated office holders (all of whom are directors), please see the table under “Compensation of Directors” below.
The executive officer listed in the table is a full-time employee or consultants of Formula. Cash compensation amounts denominated in currencies other
than the U.S. dollar were converted into U.S. dollars at the average conversion rate for 2014.
(3) Our Chief Financial Officer, Asaf Berenstin, also serves as the chief financial officer of Magic Software. Pursuant to an agreement between Magic
Software and Formula, Mr. Berenstin allocates 25%-30% of his time to Formula. Because he is not compensated by our Formula, Mr. Berenstin is not
listed in this table.
(4) Amounts reported in this column include benefits and perquisites, including those mandated by applicable law. Such benefits and perquisites may include,
to the extent applicable to the executive officer, payments, contributions and/or allocations for savings funds, pension, severance, vacation, car or car
allowance, medical insurances and benefits, risk insurances (e.g., life, disability, accident), convalescence pay, payments for social security, tax gross-up
payments and other benefits and perquisites consistent with the Company’s guidelines.
(5) Amounts reported in this column represent the expense recorded in our financial statements for the year ended December 31, 2014 with respect to equity-
based compensation. Assumptions and key variables used in the calculation of such amounts are described in paragraph (x) of Note 2 to our consolidated
financial statements, contained elsewhere in this annual report.
(6) Under his service agreement with us, our chief executive officer, is entitled to 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.
(7)
In March 2012, concurrently with the amendment and extension of Mr. Bernstein’s service agreement as our Chief Executive Officer, our Board of
Directors awarded him options exercisable for 1,122,782 ordinary shares of Formula, which took the place of 543,840 redeemable ordinary shares that
had been granted to him in March 2011 and had been redeemed by Formula. The exercise price of the options granted in March 2012 was NIS 0.01 per
share, and the options were exercised in their entirety in June 2013 by Mr. Bernstein. Our redemption right with respect to the ordinary shares issuable
upon exercise of these options lapses in equal quarterly installments over an eight year period that commenced in March 2012 and concludes in December
31, 2019. This March 2012 grant has been accounted for by Formula as a modification to the March 2011 grant to Mr. Bernstein. The total compensation
expense that we recorded in our financial statements for the year ended December 31, 2014 in respect of Mr. Bernstein’s March 2012 option grant
(constituting his equity compensation for all of 2014) was $4.7 million.
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Compensation of Directors
The following table sets forth information with respect to compensation of our directors (none of whom serves as an employee of our Company) during
fiscal year 2014. The fees to the directors were paid by Formula.
Name and Principal Position
Marek Panek - Chairman
Rafal Kozlowski - Director
Dafna Cohen - Director
Eli Zamir - External Director
Iris Yahal - External Director
Total Fees Earned or
Paid in Cash ($)(1)
35,200
35,600
62,600
42,300
42,300
(1) All amounts reported in the table are in terms of cost to the Company, as recorded in the Company’s financial statements.
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.
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.
81
In June 2013, all 1,122,782 options were exercised into ordinary shares. Such ordinary shares have been deposited with a trustee and, pursuant to the
terms of our 2011 Plan and the option agreement with respect to such options, our chief executive officer is not permitted to vote or dispose of them until the
shares are released from the trust. All shares participate in dividends and have the right to vote, however for so long as the shares are held by the trustee (even if
they have vested) the voting rights may only be exercised by the trustee. In accordance with the guidelines of our 2011 Share Incentive Plan for so long as the
shares underlying any grant under the plan are being held by the trustee they will be voted by the trustee in the same proportion as the results of the other shares
voting in the shareholder meeting. Only those shares for which the vesting period has expired may be collected from the trustee. As of April 24, 2015, all
1,122,782 shares were deposited with the trustee and 456,130 ordinary shares were vested.
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 and 2011 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 five persons, of which each of Dafna Cohen, Eli Zamir and Iris
Yahal 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. Mr. Zamir and Ms. Yahal 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. 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.
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.
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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: (a) any affiliation or other disqualifying relationship with the company, with any person or entity controlling the company or a relative of
such person, or with any entity controlled by or under common control with the company; or (b) in the case of a company with no shareholder holding 25% or
more of its voting rights, had at the date of appointment as an external director, any affiliation or other disqualifying relationship with a person then serving as
chairman of the board or chief executive officer, a holder of 5% or more of the issued share capital or voting power in the company or the most senior financial
officer. 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.
The term "office holder" is defined under the Israeli Companies Law as a general manager, chief business manager, deputy general manager, vice
general manager, any other person assuming the responsibilities of any of these positions regardless of that person's title, a director and any other manager
directly subordinate to the general manager.
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
received, during his or her tenure as an external director, direct or indirect compensation from the company including amounts paid pursuant to indemnification
or exculpation contracts or commitments and insurance coverage for his or her service as an external director, other than as permitted by the Israeli Companies
Law and the regulations promulgated thereunder. 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. A director of one company may not be
appointed as an external director of another company if a director of the other company is acting as an external director of the first company at such time.
External directors are elected by a majority vote at a shareholders’ meeting, provided that either:
•
•
such majority includes at least a majority of the shares held by all shareholders who are not controlling shareholders and 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, excluding abstentions, to which we refer as a disinterested majority, or
the total number of shares voted by non-controlling shareholders and by shareholders who do not have a personal interest in the election of the external
director against the election of the external director does not exceed two percent (2%) of the aggregate voting rights in the company.
According to regulations promulgated under the Israeli Companies Law, a person may be appointed as an external director only if he or she has
professional qualifications or if he or she has accounting and financial expertise (each, as defined below). In addition, at least one of the external directors must
be determined by our board of directors to 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 serving in one of the following capacities, or at least five years of cumulative experience serving in two or more of the
following capacities: (a) a senior business management position in a company with a significant volume of business; (b) a senior position in the company's
primary field of business; or (c) a senior position in public administration or service. Our board of directors has determined that Ms. Iris Yahal and Mr. Eli
Zamir have the requisite professional qualifications and 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 or (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. 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 (i) his or her service for each such additional term is recommended by one or more shareholders holding at least 1% of the company's
voting rights and is approved at a shareholders meeting by a disinterested majority, where the total number of shares held by non-controlling, disinterested
shareholders voting for such reelection exceeds 2% of the aggregate voting rights in the company, provided that the external director and certain of his or her
related parties meet additional independence requirements; or (ii) his or her service for each such additional term is recommended by the board of directors and
is approved at a meeting of shareholders by the same majority required for the initial election of an external director. In March 2013, Mr. Zamir and Ms. Yahal
were appointed as our external directors, each to hold office until March 2016. In accordance with the regulations under the Companies Law (Relief 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 Select 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. This
restriction extends for a period of two years with regard to the former external director and his or her spouse or child and for one year with respect to other
relatives of the former external director.
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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 Ms. Iris Yahal and Mr. Eli Zamir have been determined by the board to
possess such accounting and financial expertise.
Unaffiliated Directors Under the Companies Law
Under 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.
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 on a regular basis 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, our audit committee is responsible for (i) determining whether there are deficiencies 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 of directors to improve such
practices, (ii) determining whether to approve certain related party transactions , including transactions in which an office holder has a personal interest and
whether such transaction is extraordinary or material, (iii) establishing the approval process (including, potentially, the approval of the audit committee) for
certain transactions with a controlling shareholder or in which a controlling shareholder has a personal interest, (iv) where the board of directors approves the
working plan of the internal auditor, examining such working plan before its submission to the board and propose amendments thereto, (v) examining 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), (vi) examining the scope of the company's auditor's work and compensation
and submitting a recommendation with respect thereto to the board of directors or the general meeting of shareholders, depending on which of them is
considering the appointment of our auditor and (vii) establishing procedures with respect to the handling 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 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 requiring its approval, 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.
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.
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Our audit committee consists of our two external directors, Mr. Eli Zamir and Ms. Iris Yahal, as well as Ms. Dafna Cohen. Each of Mr. Zamir,
Ms.Yahal and Ms. Cohen qualifies as an independent director under both the NASDAQ listing rules and Rule 10A-3 of the Exchange Act. 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.”
Compensation Committee and Compensation Policy
Under the Companies Law, the board of directors of a public company must appoint a compensation committee. The compensation committee must be
comprised of at least three directors, including all of the external directors, who must constitute a majority of the members of the compensation committee.
However, subject to certain exceptions, Israeli companies whose securities are traded on stock exchanges such as the NASDAQ Global Select Market, and who
do not have a controlling shareholder, do not have to meet this majority requirement; provided, however, that the compensation committee meets other
Companies Law composition requirements, as well as the requirements of the jurisdiction where the company's securities are traded. Each compensation
committee member who is not an external director must be a director whose compensation does not exceed an amount that may be paid to an external director.
The compensation committee is subject to the same Israeli Companies Law restrictions as the audit committee as to who may not be a member of the
compensation committee.
The duties of the compensation committee include the recommendation to the company's board of directors of a policy regarding the terms of
engagement of office holders, to which we refer as a compensation policy. That policy must be adopted by the company's board of directors, after considering
the recommendations of the compensation committee, and will need to be brought for approval by the company's shareholders, which approval requires what we
refer to as a Special Majority Approval for Compensation. A Special Majority Approval for Compensation requires shareholder approval by a majority vote of
the shares present and voting at a meeting of shareholders called for such purpose, provided that either: (a) such majority includes at least a majority of the
shares held by all shareholders who are not controlling shareholders and do not have a personal interest in such compensation arrangement; or (b) the total
number of shares of non-controlling shareholders and shareholders who do not have a personal interest in the compensation arrangement and who vote against
the arrangement does not exceed 2% of the company's aggregate voting rights. We adopted a compensation policy during 2013.
The compensation policy serves as the basis for decisions concerning the financial terms of employment or engagement of office holders, including
exculpation, insurance, indemnification or any monetary payment or obligation of payment in respect of employment or engagement. The compensation policy
must relate to certain factors, including advancement of the company's objectives, the company's business plan and its long-term strategy, and creation of
appropriate incentives for office holders. It must also consider, among other things, the company's risk management, size and the nature of its operations. The
compensation policy must furthermore consider the following additional factors:
•
•
•
•
•
•
•
the knowledge, skills, expertise and accomplishments of the relevant office holder;
the office holder's roles and responsibilities and prior compensation agreements with him or her;
the relationship between the terms offered and the average compensation of the other employees of the company, including those employed
through manpower companies;
the impact of disparities in salary upon work relationships in the company;
the possibility of reducing variable compensation at the discretion of the board of directors;
the possibility of setting a limit on the exercise value of non-cash variable equity-based compensation; and
as to severance compensation, the period of service of the office holder, the terms of his or her compensation during such service period, the
company's performance during that period of service, the person's contribution towards the company's achievement of its goals and the
maximization of its profits, and the circumstances under which the person is leaving the company.
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The compensation policy must also include the following principles:
•
•
•
•
•
the link between variable compensation and long-term performance and measurable criteria;
the relationship between variable and fixed compensation, and the ceiling for the value of variable compensation;
the conditions under which an office holder would be required to repay compensation paid to him or her if it was later shown that the data
upon which such compensation was based was inaccurate and was required to be restated in the company's financial statements;
the minimum holding or vesting period for variable, equity-based compensation; and
maximum limits for severance compensation.
The compensation committee is responsible for (a) recommending the compensation policy to a company's board of directors for its approval (and
subsequent approval by its shareholders) and (b) duties related to the compensation policy and to the compensation of a company's office holders as well as
functions previously fulfilled by a company's audit committee with respect to matters related to approval of the terms of engagement of office holders,
including:
•
•
•
•
recommending whether a compensation policy should continue in effect, if the then-current policy has a term of greater than three (3) years
(approval of either a new compensation policy or the continuation of an existing compensation policy must in any case occur every three
years);
recommending to the board of directors periodic updates to the compensation policy;
assessing implementation of the compensation policy; and
determining whether the compensation terms of the chief executive officer of the company need not be brought to approval of the
shareholders.
Our board of directors has adopted a compensation committee charter setting forth the responsibilities of the compensation committee, which include:
•
•
•
the responsibilities set forth in the compensation policy;
reviewing and approving the granting of options and other incentive awards to the extent such authority is delegated by our board of
directors; and
reviewing, evaluating and making recommendations regarding the compensation and benefits for our non-employee directors.
Our compensation committee consists of our two external directors, Mr. Eli Zamir and Ms. Iris Yahal, as well as Ms. Dafna Cohen. Each of the members of our
compensation committee qualifies as an independent director under the NASDAQ listing rules.
Internal Auditor
Under the Companies Law, the board of directors is required to 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 Foreign Private Issuer
We are 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. 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
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 and affiliated company
participate in the premium payments of the insurance, on a proportional basis. The total premium we paid during 2014 was approximately $ 112,100.
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)
a financial obligation 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;
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
(v)
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 actual operations at the time that the undertaking to indemnify is
given, and to the amounts or criteria that our board of directors deems reasonable under the circumstances, and further provided that such events and amount or
criteria are set forth in the undertaking to indemnify, 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 undertakings 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
Insync
Total
2014
2013
2012
7,260
1,181
1,017
650
10,108
6,518
1,302
938
-
8,758
6,500
1,006
791
-
8,297
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.
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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 April 24, 2015, 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, and Mr. Asaf Berenstin, 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 260,040 of Formula’s ordinary shares, and furthermore holds the above 1,122,782
shares, which were 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”) and of which as of April 24, 2015, 456,130 are vested and the remainder are subject to
restrictions.
At the current time, to our best knowledge, Mr. Asaf Berenstin owns 10,000 of Formula’s ordinary shares, which were granted to him in November
2014 (as described on Note 11(b) to our consolidated financial statements contained elsewhere in this annual report) and of which as of April 24, 2015, 625 are
vested and the remainder are subject to restrictions.
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 April 30, 2015, options to purchase 4,000 shares
remain available for future grants under the 2008 Plan.
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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, share 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.
In March 2012, our board of directors increased the amount of ordinary shares reserved for issuance under the 2011 Share Incentive Plan by 1,200,000
shares.
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 and, in March 2012, we approved the grant of options to purchase 1,122,782 ordinary
shares to our Chief Executive Officer, each to be exercisable for NIS 0.01 per share. (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.)
On November 13, 2014, our board of directors approved the grant of 10,000 restricted shares to our chief financial officer under the 2011 Plan. These
restricted shares vest on a quarterly basis over a four-year period, commencing on November 13, 2014 and concluding on November 13, 2018, provided that
during such time the chief financial officer will continue to serve as (i) an officer of Formula and/or (ii) an officer in one of the directly held affiliates, except
that if he fail to meet the service condition due to the request of the board of directors of either Formula or any of its directly held affiliates (other than a
termination of his provision of services which is based on actions or omissions by him that will constitute “cause” under his grant agreement with Formula);
then, the chief financial officer will be deemed to have complied with clauses (i) or (ii) above. Notwithstanding the foregoing, if a change of control of Formula
occurs, then all unvested restricted shares will immediately become vested.
As of April 24, 2015, options to purchase 68,378 shares remain available for future grants under the 2011 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.
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 April 24, 2015 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 14,728,782 ordinary shares
outstanding as of April 24, 2015 (which includes ordinary shares subject to restrictions and repurchase by us). 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.
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Name
Asseco Poland S.A. (3)
Menora Mivtachim Holdings Ltd.(4)
Clal Insurance Enterprises Holdings Ltd.(5)
All directors and executive officers as a group (6 persons)
* Less than 1%
Number of Ordinary
Shares
Beneficially Owned (1)
6,823,602
769,838(4)
867,951(5)
716,795(6)
Percentage of Ownership
(2)
46.3%
5.2%
5.9%
4.9%
(1)
(2)
(3)
(4)
(5)
(6)
Beneficial ownership is determined in accordance with the rules of the Securities and Exchange Commission and generally includes voting or
investment power with respect to securities. Ordinary shares relating to options currently exercisable or exercisable within 60 days of the date of this
table are deemed outstanding for computing the percentage of the person holding such securities but are not deemed outstanding for computing the
percentage of any other person. Except as indicated by footnote, and subject to community property laws where applicable, the persons named in the
table above have sole voting and investment power with respect to all shares shown as beneficially owned by them.
The percentages shown are based on 14,728,782 ordinary shares issued and outstanding as of April 24, 2015.
Based on the Schedule 13D filed by Asseco with the SEC on December 6, 2010. Due to the public ownership of its shares, Asseco is not controlled by
any other corporation or any one individual or group of shareholders.
Based on Amendment No. 1 to the Schedule 13G filed by Menora Mivtachim Holdings Ltd., or Menora Holdings on February 17, 2015. Menora
Holdings is a holding company publicly-traded on the TASE. 61.986% of Menora Holdings’ outstanding shares are held directly and indirectly by the
family of Menachem Gurevitch, 2.76% are held by other affiliates of Menora Holdings and 38.135% are publicly held. Such ordinary shares are held
for members of the public through, among others, provident funds and/or mutual funds and/or pension funds and/or index-linked securities and/or
insurance policies, which are managed by subsidiaries of Menora Holdings, each of which subsidiaries operates under independent management and
makes independent voting and investment decisions.
Clal Insurance Enterprises Holdings Ltd., referred to as Clal Insurance, is publicly traded on the TASE. Pursuant to Amendment No. 9 to Schedule
13G filed on February 17, 2015, all of the 867,951 ordinary shares reported as beneficially owned by Clal Insurance 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.
In April 2010, Guy Bernstein, the Company's Chief Executive Officer, exercised options to purchase 260,040 ordinary shares previously granted to
him, in connection with his service agreement. In accordance with the terms of the grant, all 260,040 ordinary shares are currently deposited with a
trustee and Mr. Bernstein is not permitted to vote or dispose of them until the shares are released from the trust, upon Mr. Bernstein’s request.
Furthermore, in March 2012, concurrently with the amendment and extension of Mr. Bernstein’s service agreement, we approved a grant of options to
him, exercisable for 1,122,782 ordinary shares, subject to certain vesting conditions. In June 2013, all 1,122,782 options were exercised into shares
however they have been deposited per the grant agreement with a trustee. In accordance with the terms of that second 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. As of April 24, 2015, 456,130 of such ordinary shares have vested and may be
released to Mr. Bernstein upon his request. Because of the foregoing limitations on voting and investment power, other than the 716,170 which may be
released to Mr. Bernstein on request, none of the ordinary shares held by Mr. Bernstein are deemed to be beneficially owned by him. Besides Mr.
Bernstein, none of our other directors or executive officers beneficially owns any ordinary shares (whether actual ordinary shares or shares issuable
upon exercise of options). On November 13, 2014, we approved under the 2011 Plan the grant of 10,000 restricted shares to Mr. Asaf Berenstin, our
chief financial officer, of which as of April 24, 2015, 625 are vested and the remainder are subject to restrictions.
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As of April 24, 2015, 14,728,782 ordinary shares were issued and outstanding, which excludes 24,780 ordinary shares that we purchased during 2002
and 543,840 that we purchased during 2011. On April 24, 2015, we had two shareholders of record, one of which was 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 April 24, 2015, 510,715 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.
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)
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;
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(iii)
(iv)
(v)
(vi)
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 2014 was approximately $112,100.
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.
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.
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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 2014, 16.5% 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
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 sought damages in the amount of approximately NIS 52 million (approximately
$13.4 million). The arbitrator rendered his ruling in January 2015 and determined the damages that Magic Software and one of its subsidiaries should pay the
plaintiffs. Therefore, Magic financial results of operations of 2014 includes a net impact of $1.6 million resulting from the arbitration expenses recorded in
excess to accruals recorded in previous years.
On September 10, 2014, a motion for certification of a class action (together with a statement of claim) was filed by an alleged shareholder of Formula's
subsidiary Matrix against Matrix and Matrix's directors and chief executive officer, and against Formula, as Matrix’s controlling shareholder. The
motion included a claim for damages caused, according to the alleged shareholder, to the shareholders of Matrix as a result of the publication of financial
statements that included misleading information, which, according to the applicant, have a significant impact on Matrix’s results of operations, a breach of the
duty of disclosure under Israeli securities laws and negligent supervision over the financial statements, based on reports regarding the correction of errors
discovered in the financial statements of Matrix. On January 13, 2015, the applicant filed an amended request, which included, among other things, a financial
expert opinion and an increase to the amount of the claim in accordance with the above request, with the losses to the applicant estimated to be NIS 0.225 and
the losses of the entire group estimated to be NIS 41,000 (approximately $ 10,543). Matrix and Formula have not yet filed a response. At this time, given the
multiple uncertainties involved and in large part to the highly speculative nature of the damages sought by the plaintiff we are unable to estimate the amount of
the probable loss, if any, to be recognized with respect to this claim.
Other than the foregoing, 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. Other than the foregoing, 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.
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 proceeding described
above) is not material. Furthermore, in respect of our ordinary course legal, administrative and regulatory proceedings (i.e., other than the particular material
proceeding 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.
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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 December 2014, Formula declared a cash dividend to its shareholders, to be paid in February 2014, of $0.535 per share. The aggregate amount
distributed by Formula was approximately $7.9 million.
In July 2014, Formula distributed to its shareholders a cash dividend of $0.48 per share. The aggregate amount distributed by Formula was
approximately $7.1 million.
In December 2013, Formula declared a cash dividend to its shareholders, to be paid on February 2014, of $0.31 per share. The aggregate amount
distributed by Formula was approximately $4.6 million.
In July 2013, Formula distributed to its shareholders a cash dividend of $0.37 per share. The aggregate amount distributed by Formula was
approximately $5.4 million.
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 September 2012, Magic Software’s board of directors also adopted a policy for distributing dividends, under which Magic Software will distribute a
dividend of up to 50% of its annual distributable profits each year, subject to any applicable law. It is possible that Magic Software’s board of directors will
decide, subject to the conditions stated above, to declare additional dividend distributions. Magic Software’s board of directors may at its discretion and at any
time, change, whether as a result of a one-time decision or a change in policy, the rate of dividend distributions or determine not to distribute a dividend.
In August 2010, Matrix board of directors decided to change Matrix dividend distribution policy whereby every year, Matrix will distribute a dividend
at a rate of 75% (instead of 50% before) of its annual net income. The dividend will be distributed on a quarterly basis.
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 as reported by the Bank of Israel on
each respective date.
Annual:
2015 (through April 24, 2015)
2014
2013
2012
2011
2010
Quarterly:
Second Quarter 2015 (through April 24, 2015)
First Quarter 2015
Fourth Quarter 2014
Third Quarter 2014
Second Quarter 2014
First Quarter 2014
Fourth Quarter 2013
Third Quarter 2013
Second Quarter 2013
First Quarter 2013
Fourth Quarter 2012
Third Quarter 2012
Second Quarter 2012
First Quarter 2012
Most Recent Six Months:
April 2015
March 2015
February 2015
January 2015
December 2014
November 2014
NIS
Price Per
Ordinary Share
U.S.$
Price Per
Ordinary Share
High
Low
High
Low
109.60
114.10
94.99
69.21
75.57
68.45
109.60
106.20
99.96
105.00
114.10
107.90
94.99
91.90
83.5
71.17
65.50
65.00
69.21
64.14
109.60
106.2
97.05
91.98
96.09
99.96
81.00
83.70
57.89
54.41
65.61
40.21
103.00
81.00
83.70
89.90
98.19
86.87
80.23
80.05
68.29
57.89
57.52
54.41
57.56
56.99
103.00
96.72
81.00
81.91
83.70
87.07
27.82
32.83
26.64
17.88
19.78
17.92
27.82
26.20
26.38
28.94
32.83
30.79
26.64
25.46
22.80
19.50
16.99
16.41
17.88
17.23
27.82
26.20
24.68
23.35
24.27
26.38
20.57
21.52
16.22
13.55
17.17
10.53
26.22
20.57
21.52
25.89
28.56
24.48
21.79
21.70
19.07
16.22
14.50
13.55
14.73
14.77
26.22
24.39
20.57
20.86
21.52
22.49
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Price Range of American Depositary Shares
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.
Annual:
2015 (through April 24, 2015)
2014
2013
2012
2011
2010
Quarterly:
Second Quarter 2015 (through April 24, 2015)
First Quarter 2015
Fourth Quarter 2014
Third Quarter 2014
Second Quarter 2014
First Quarter 2014
Fourth Quarter 2013
Third Quarter 2013
Second Quarter 2013
First Quarter 2013
Fourth Quarter 2012
Third Quarter 2012
Second Quarter 2012
First Quarter 2012
Most Recent Six Months:
April 2015
March 2015
February 2015
January 2015
December 2014
November 2014
B.
Plan of Distribution
Not applicable.
C.
Markets
U.S.$
Price Per
ADS
High
Low
27.98
33.79
26.64
17.88
20.49
18.92
27.48
27.98
27.41
29.85
33.79
31.03
26.64
25.46
22.80
19.50
16.99
16.23
17.88
17.23
27.48
27.98
24.66
22.97
22.85
25.86
20.47
21.02
16.22
17.04
11.14
10.82
26.16
20.47
21.02
25.00
28.20
24.02
21.79
21.70
19.07
16.29
15.06
16.21
17.04
16.92
26.16
24.36
20.75
20.47
21.02
22.52
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.”
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D.
Selling Shareholders
Not applicable.
E.
Dilution
Not applicable.
F.
Expenses of the Issue
Not applicable.
ITEM 10. ADDITIONAL INFORMATION
A.
Share Capital
Not applicable.
B.
Memorandum and Articles of Association
We are registered with the Israeli Companies Registrar 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.
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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.
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 of 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.
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. An interested office holder's disclosure must
be made promptly and in any event no later than the first meeting of the board of directors at which the transaction is considered. 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.
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Under the Companies Law, 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.
If it is determined that an office holder has a personal interest in a transaction, approval by the board of directors is required for the transaction, unless
the company's articles of association provide for a different method of approval. Further, so long as an office holder has disclosed his or her personal interest in
a transaction, the board of directors may approve an action by the office holder that would otherwise be deemed a breach of his or her duty of loyalty. However,
a company may not approve a transaction or action that is not in the company's interest or that is not performed by the office holder in good faith. An
extraordinary transaction in which an office holder has a personal interest requires approval first by the company's audit committee and subsequently by the
board of directors. The compensation of, or an undertaking to indemnify or insure, an office holder who is not a director requires approval first by the company's
compensation committee, then by the company's board of directors. If such compensation arrangement or an undertaking to indemnify or insure is inconsistent
with the company's stated compensation policy, or if the office holder is the chief executive officer (apart from a number of specific exceptions), then such
arrangement is further subject to a Special Majority Approval for Compensation. Arrangements regarding the compensation, indemnification or insurance of a
director require the approval of the compensation committee, board of directors and shareholders by ordinary majority, in that order, and under certain
circumstances, a Special Majority Approval for Compensation.
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.
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
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•
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.
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.
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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.
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.
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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.
C.
Material Contracts
Please see “Item 5. Operating and Financial Review and Prospects – B. Liquidity and Capital Resources – Company Commitments” for a description of
our loan agreement with an Israeli institutional investor and “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
those agreements, 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.
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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 holders of our ordinary shares and ADSs in light of each
holder’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.
Israeli Taxation Considerations for Our Shareholders
Tax Consequences Regarding Disposition of Our ADSs or Ordinary Shares
Israeli law generally imposes a capital gain 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 Individuals
As of January 1, 2006, the tax rate applicable to Real Capital Gain derived by Israeli individuals from the sale of shares which had been purchased on
or after January 1, 2003, whether or not listed on a stock exchange, is 20% unless such shareholder claims a deduction for interest and linkage differences
expenses in connection with the purchase and holding of such shares, in which case the gain will generally be taxed at a rate of 25%. Additionally, if such 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 company director)) at the time of sale or at any time during the preceding 12-month period, such gain will be
taxed at the rate of 25%. Individual shareholders dealing in securities in Israel are taxed at their marginal rates applicable to business income (up to 48% in
2014).
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Notwithstanding the foregoing, the capital gain tax rate applicable to individuals was raised from 20% to 25% from 2012 and onwards (or from 25% to
30% if the selling individual shareholder is a substantial shareholder at any time during the 12-month period preceding the sale and/or claims a deduction for
interest and linkage differences expenses in connection with the purchase and holding of such shares). With respect to assets (not shares that are listed on a stock
exchange) purchased on or after January 1, 2003, the portion of the gain generated from the date of acquisition until December 31, 2011 will be subject to the
previous capital gain tax rates (20% or 25%) and the portion of the gain generated from January 1, 2012 until the date of sale will be subject to the new tax rates
(25% or 30%).
Israeli Resident Corporations.
Under current Israeli tax legislation, the tax rate applicable to Real Capital Gain derived by Israeli resident corporations from the sale of shares of an
Israeli company is the general corporate tax rate. As described above, the corporate tax rate for 2014 and onwards is 26.5%.
Non-Israeli Residents
Israeli capital gain tax is imposed on the disposal of capital assets by a non-Israeli resident if such assets are either (i) located in Israel; (ii) shares or
rights to shares in an Israeli resident company; or (iii) represent, directly or indirectly, rights to assets located in Israel, unless a tax treaty between Israel and the
seller’s country of residence provides otherwise. As mentioned above, Real Capital Gain derived by a company is generally subject to tax at the corporate tax
rate (25% in 2013 and 26.5% as of 2014) or, if derived by an individual, at the rate of 25% (for assets other than shares that are listed on stock exchange – 20%
for the portion of the gain generated up to December 31, 2011) or 30% (for any asset other than shares that are listed on stock exchange – 25% with respect to
the portion of the gain generated up to December 31, 2011), if generated from the sale of an asset purchased on or after January 1, 2003. Individual and
corporate shareholders dealing in securities in Israel are taxed at the tax rates applicable to business income (a corporate tax rate for a corporation and a
marginal tax rate of up to 48% for an individual in 2014).
Notwithstanding the foregoing, shareholders that are non-Israeli residents (individuals and corporations) are generally exempt from Israeli capital gain
tax on any gains derived from the sale, exchange or disposition of shares publicly traded on the Tel Aviv Stock Exchange or on a recognized stock exchange
outside of Israel, provided, among other things, that (i) such gains are not derived through a permanent establishment that the non-Israeli resident maintains in
Israel, (ii) the shares were purchased after being listed on a recognized stock exchange, and (iii) with respect to shares listed on a recognized stock exchange
outside of Israel, such shareholders are not subject to the Israeli Income Tax Law (Inflationary Adjustments) 5745-1985. However, non-Israeli corporations will
not be entitled to the foregoing exemptions if Israeli residents (a) have a controlling interest of 25% or more in such non-Israeli corporation, or (b) are the
beneficiaries of or are entitled to 25% or more of the revenues or profits of such non-Israeli corporation, whether directly or indirectly. Such an exemption is not
applicable to a person whose gains from selling or otherwise disposing of the shares are deemed to be business income.
In addition, a sale of shares by a non-Israeli resident may also be exempt from Israeli capital gain 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 rights during any part of the 12-month period preceding
such sale, exchange or disposition; (ii) the shareholder, if an individual, has been present in Israel for a period or periods of 183 days or more in the aggregate
during the applicable taxable year; or (iii) the capital gain arising from such sale is attributable to a permanent establishment of the shareholder which is
maintained in Israel. In each case, the sale, exchange or disposition of such shares would be subject to Israeli tax, to the extent applicable; however, under the
U.S.-Israel Treaty, a U.S. resident would be permitted to claim a credit for the Israeli tax against the U.S. federal income tax imposed with respect to the sale,
exchange or disposition, subject to the limitations in U.S. laws applicable to foreign tax credits. The U.S-Israel Treaty does not provide such credit against any
U.S. state or local taxes.
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In some instances where our shareholders may be liable for Israeli tax on the sale of their Ordinary Shares, the payment of the consideration may be
subject to the withholding of Israeli tax at source. Shareholders may be required to demonstrate that they are exempt from tax on their capital gains in order to
avoid withholding at source at the time of sale. Specifically, in transactions involving a sale of all of the shares of an Israeli resident company, in the form of a
merger or otherwise, the Israel Tax Authority may require from shareholders who are not liable for Israeli tax to sign declarations in forms specified by this
authority or obtain a specific exemption from the Israel Tax Authority to confirm their status as non Israeli resident, and, in the absence of such declarations or
exemptions, may require the purchaser of the shares to withhold taxes at source.
Taxes Applicable to Dividends
Israeli Resident Shareholders
Israeli 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 25%, or 30% if the recipient of such dividend is a substantial shareholder at the time of distribution or
at any time during the preceding 12-month period. However, dividends distributed from taxable income accrued during the period of benefit of an Approved
Enterprise, Beneficiary Enterprise or Preferred Enterprise are subject to withholding tax at the rate of 15% (and 20% with respect to Preferred Enterprise),
subject to certain conditions. An average rate will be set in case the dividend is distributed from mixed types of income (regular and Approved/ Beneficiary/
Preferred income).
Israeli Resident Corporations. Generally, Israeli resident corporations are generally exempt from Israeli corporate tax on the receipt of dividends paid
on our ordinary shares and ADSs. However, dividends distributed from taxable income accrued during the benefits period of an Approved Enterprise or
Beneficiary 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.
Non-Israeli Resident 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 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), or 15% if the dividend is distributed from income attributed to an Approved Enterprise or a Beneficiary
Enterprise (and 20% with respect to a Preferred Enterprise). Such dividends are generally subject to Israeli withholding tax at a rate of 25% so long as the shares
are registered with a Nominee Company (whether the recipient is a substantial shareholder or not), unless a reduced rate is provided under an applicable tax
treaty. 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, not generated by our
Approved, Beneficiary or Preferred Enterprises, as applicable, 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 Beneficiary Enterprise or a Preferred Enterprise are subject to a withholding tax rate of 15% for such a U.S.
corporate 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 Beneficiary 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.
Excess Tax
Individuals who are subject to tax in Israel are also subject to an additional tax at a rate of 2% on annual income exceeding NIS 811,560 for 2014,
which amount is linked to the annual change in the Israeli consumer price index, including, but not limited to, dividends, interest and capital gain, subject to the
provisions of an applicable tax treaty.
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 “Tax Consequences if We Are a Passive Foreign Investment Company,” a distribution paid by us with respect to
our ordinary shares and 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 U.S. federal income tax purposes.
Dividends that are received by U.S. holders that are individuals, estates or trusts generally will be taxed at the rate applicable to long-term capital gains,
provided those dividends meet the requirements of “qualified dividend income.” The maximum long-term capital gains rate is 20% for individuals with annual
taxable income over $400,000. In addition, under the Patient Protection and Affordable Care Act, higher income taxpayers must pay an additional 3.8 percent
tax on net investment income to the extent certain threshold amounts of income are exceeded. See “Tax on Net Investment Income” in this Item below. For this
purpose, qualified dividend income generally includes dividends paid by a foreign corporation if certain holding period and other requirements are met and
either (a) the stock of the foreign corporation with respect to which the dividends are paid is “readily tradable” on an established securities market in the U.S.
(e.g., the NASDAQ Capital Market) or (b) the foreign corporation is eligible for benefits of a comprehensive income tax treaty with the U.S. which includes an
information exchange program and is determined to be satisfactory by the U.S. Secretary of the Treasury. Dividends that fail to meet such requirements and
dividends received by corporate U.S. holders are taxed at ordinary income rates. No dividend received by a U.S. holder will be a qualified dividend (i) if the
U.S. holder held the ordinary share and ADS 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 share and
ADSs (or substantially identical securities); or (ii) to the extent that 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 share and ADS 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), or “PFIC”, for any taxable year, dividends paid on our ordinary shares
and ADSs in such year or in the following taxable year would not be qualified dividends. See the discussion below regarding our PFIC status under “Tax
Consequences if We Are a Passive Foreign Investment Company.” In addition, a non-corporate U.S. holder will be able to take qualified dividend income 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 income will be taxed at ordinary income rates.
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 our ordinary shares and ADSs to the extent thereof, and then as capital gain from the deemed disposition of the ordinary shares and ADSs.
Corporate holders will not be allowed a deduction for dividends received in respect of the ordinary shares and ADSs.
109
Distributions of current or accumulated earnings and profits paid in foreign currency to a U.S. holder will be includible in the income of a U.S. holder
in a U.S. dollar amount calculated by reference to the exchange rate on the day the distribution is received. A U.S. holder that receives a foreign currency
distribution and converts the foreign currency into U.S. dollars subsequent to receipt may have foreign exchange gain or loss based on any appreciation or
depreciation in the value of the foreign currency against the U.S. dollar, which will generally be U.S. source ordinary income or loss.
Taxation of the Disposition of the Ordinary Shares or ADSs
Subject to the discussion below under “Tax Consequences if We Are a Passive Foreign Investment Company,” upon the sale, exchange or other
disposition of our ordinary shares and ADSs, a U.S. holder will recognize capital gain or loss in an amount equal to the difference between the amount realized
on the disposition and the U.S. holder’s tax basis in our ordinary shares and ADSs. The gain or loss recognized on the disposition of the ordinary shares and
ADSs will be long-term capital gain or loss if the U.S. holder held the ordinary shares and ADSs for more than one year at the time of the disposition and would
be eligible for a reduced rate of taxation for certain non-corporate U.S. holders. The maximum long-term capital gains rate is 20% for individuals with annual
taxable income over $400,000. In addition, under the Patient Protection and Affordable Care Act, higher income taxpayers must pay an additional 3.8 percent
tax on net investment income to the extent certain threshold amounts of income are exceeded. See “Tax on Net Investment Income” in this Item below. Capital
gain from the sale, exchange or other disposition of ordinary shares and ADSs held for one year or less is short-term capital gain and taxed as ordinary income.
Gain or loss recognized by a U.S. holder on a sale, exchange or other disposition of our ordinary shares and ADSs generally will be treated as U.S. source
income or loss. The deductibility of capital losses is subject to certain limitations.
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 that uses the accrual method 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 its ordinary shares and ADSs 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.
Tax Consequences if We Are a Passive Foreign Investment Company
We would 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 would 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. As discussed below, we believe that we were
not a PFIC for 2014.
If we were a PFIC, each U.S. holder would (unless it made one of the elections discussed below on a timely basis) be taxable on gain recognized from
the disposition of our ordinary shares and ADSs (including gain deemed recognized if our ordinary shares and ADSs are used as security for a loan) and upon
receipt of certain excess distributions (generally, distributions that exceed 125% of the average amount of distributions in respect to such shares received during
the preceding three taxable years or, if shorter, during the U.S. holder’s holding period prior to the distribution year) with respect to our ordinary shares and
ADSs as if such income had been recognized ratably over the U.S. holder’s holding period for the shares. The U.S. holder’s income for the current taxable year
would include (as ordinary income) amounts allocated to the current taxable year and to any taxable year prior to the first day of the first taxable year for which
we were a PFIC. Tax would also be computed at the highest ordinary income tax rate in effect for each other taxable year to which income is allocated, and an
interest charge on the tax as so computed would also apply. The tax liability with respect to the amount allocated to the taxable year prior to the taxable year of
the distribution or disposition cannot be offset by any net operating losses. Additionally, if we were a PFIC, U.S. holders who acquire our ordinary shares and
ADSs from decedents (other than nonresident aliens) would be denied the normally-available step-up in basis for such shares to fair market value at the date of
death and, instead, would have a tax basis in such shares equal to the lesser of the decedent’s basis or the fair market value of such shares on the decedent's date
of death. .
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As an alternative to the tax treatment described above, a U.S. holder could elect to treat us as a “qualified electing fund” (a “QEF”), in which case the
U.S. holder would be taxed, for each taxable year that we are a PFIC, on its pro rata share of our ordinary earnings and net capital gain (subject to a separate
election to defer payment of taxes, which deferral is subject to an interest charge). Special rules apply if a U.S. holder makes a QEF election after the first
taxable year in its holding period in which we are a PFIC. We have agreed to supply U.S. holders with the information needed to report income and gain under a
QEF election if we were a PFIC. Amounts includable in income as a result of a QEF election will be determined without regard to our prior year losses or the
amount of cash distributions, if any, received from us. A U.S. holder’s basis in its ordinary shares and ADSs will increase by any amount included in income
and decrease by any amounts not included in income when distributed because such amounts were previously taxed under the QEF rules. So long as a U.S.
holder’s QEF election is in effect with respect to the entire holding period for its ordinary shares and ADSs, any gain or loss realized by such holder on the
disposition of its ordinary shares and ADSs held as a capital asset generally will be capital gain or loss. Such capital gain or loss ordinarily would be long-term
if such U.S. holder had held such ordinary shares and ADSs for more than one year at the time of the disposition and would be eligible for a reduced rate of
taxation for certain non-corporate U.S. holders. The maximum long-term capital gains rate is 20% for individuals with annual taxable income over $400,000.
The QEF election is made on a shareholder-by-shareholder basis, applies to all ordinary shares and ADSs held or subsequently acquired by an electing U.S.
holder and can be revoked only with the consent of the IRS.
As an alternative to making a QEF election, a U.S. holder of PFIC stock that is “marketable stock” (e.g., “regularly traded” on the NASDAQ Capital
Market) may, in certain circumstances, avoid certain of the tax consequences generally applicable to holders of stock in a PFIC by electing to mark the stock to
market as of the beginning of such U.S. holder’s holding period for our ordinary shares and ADSs. Special rules apply if a U.S. holder makes a mark-to-market
election after the first year in its holding period in which we are a PFIC. As a result of such an election, in any taxable year that we are a PFIC, a U.S. holder
would generally be required to report gain or loss to the extent of the difference between the fair market value of the ordinary shares and ADSs at the end of the
taxable year and such U.S. holder’s tax basis in such shares and ADSs at that time. Any gain under this computation, and any gain on an actual disposition of
our ordinary shares and ADSs in a taxable year in which we are PFIC, would be treated as ordinary income. Any loss under this computation, and any loss on an
actual disposition of our ordinary shares and ADSs in a taxable year in which we are PFIC, would be treated as ordinary loss to the extent of the cumulative net-
mark-to-market gain previously included. Any remaining loss from marking our ordinary shares and ADSs to market will not be allowed, and any remaining
loss from an actual disposition of our ordinary shares and ADSs generally would be capital loss. A U.S. holder’s tax basis in its ordinary shares and ADSs is
adjusted annually for any gain or loss recognized under the mark-to-market election. There can be no assurances that there will be sufficient trading volume
with respect to our ordinary shares and ADSs for the ordinary shares and ADSs to be considered “regularly traded” or that our ordinary shares and ADSs will
continue to trade on the NASDAQ Capital Market. Accordingly, there are no assurances that our ordinary shares and ADSs will be marketable stock for these
purposes. As with a QEF election, a mark-to-market election is made on a shareholder-by-shareholder basis, applies to all ordinary shares and ADSs held or
subsequently acquired by an electing U.S. holder and can only be revoked with consent of the IRS (except to the extent our ordinary shares and ADSs no longer
constitute “marketable stock”).
Based on an analysis of our assets and income, we believe that we were not a PFIC for 2014. We currently expect that we will not be a PFIC in 2015.
The tests for determining PFIC status are applied annually and it is difficult to make accurate predictions of future income and assets, which are relevant to this
determination. Accordingly, there can be no assurance that we will not become a PFIC in any future taxable years. U.S. holders who hold our ordinary shares
and ADSs during a period when we are a PFIC will be subject to the foregoing rules, even if we cease to be a PFIC, subject to certain exceptions for U.S.
holders who made QEF, mark-to-market or certain other special elections. U.S. holders are urged to consult their tax advisors about the PFIC rules, including
the consequences to them of making a mark-to-market or QEF election with respect to our ordinary shares and ADSs in the event that we qualify as a PFIC.
111
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.
Tax on Net Investment Income
A U.S. holder that is an individual or estate, or a trust that does not fall into a special class of trusts that is exempt from the tax, will be subject to a
3.8% tax on the lesser of (1) the U.S. holder’s “net investment income” for the relevant taxable year and (2) the excess of the U.S. holder’s modified adjusted
gross income for the taxable year over a certain threshold (which in the case of individuals will be between $125,000 and $250,000, depending on the
individual’s circumstances). A U.S. holder’s net investment income generally will include its dividends on our ordinary shares and ADSs and net gains from
dispositions of our ordinary shares and ADSs, unless those dividends or gains are derived in the ordinary course of the conduct of trade or business (other than
trade or business that consists of certain passive or trading activities). Net investment income, however, may be reduced by deductions properly allocable to that
income. A U.S. holder that is an individual, estate or trust is urged to consult its tax adviser regarding the applicability of the Medicare tax to its income and
gains in respect of its investment in our ordinary shares or ADSs.
Non-U.S. Holders of Ordinary Shares or ADSs
Except as provided below, a non-U.S. holder of our ordinary shares and ADSs will not be subject to U.S. federal income or withholding tax on the
receipt of dividends on, or the proceeds from the disposition of, our ordinary shares and ADSs, unless, in the case of U.S. 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, such 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 on the disposition of our ordinary shares and ADSs by an individual non-U.S. holder 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.
Information Reporting and Backup Withholding
A U.S. holder generally is subject to information reporting and may be subject to backup withholding at a rate of up to 28% with respect to dividend
payments on, or receipt of the proceeds from the disposition of, our ordinary shares and ADSs. Backup withholding will not apply with respect to payments
made to exempt recipients, including corporations and tax-exempt organizations, or if a U.S. holder provides correct taxpayer identification number, certifies
that such holder is not subject to backup withholding or otherwise establishes an exemption. Non-U.S. holders are not subject to information reporting or
backup withholding with respect to dividend payments on, or receipt of the proceeds from the disposition of, ordinary shares and ADSs in the U.S., or by a U.S.
payer or U.S. middleman, provided that such non-U.S. holder provides a taxpayer identification number, certifies to its foreign status, or otherwise establishes
an exemption. Backup withholding is not an additional tax and may be claimed as a credit against the U.S. federal income tax liability of a holder, or
alternatively, the 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.
112
Information Reporting by Certain U.S. Holders
U.S. citizens and individuals taxable as resident aliens of the United States that own “specified foreign financial assets” with an aggregate value in a
taxable year in excess of $50,000 (as determined under rules in Treasury regulations) and that are required to file a U.S. federal income tax return generally will
be required to file an information report with respect to those assets with their tax returns. IRS Form 8938 has been issued for that purpose. “Specified foreign
financial assets” include any financial accounts maintained by foreign financial institutions, foreign stocks held directly, and interests in foreign estates, foreign
pension plans or foreign deferred compensation plans. Under those rules, our ordinary shares, whether owned directly or through a financial institution, estate or
pension or deferred compensation plan, would be “specified foreign financial assets”. Under Treasury regulations, the reporting obligation applies to certain
U.S. entities that hold, directly or indirectly, specified foreign financial assets. Penalties can apply if there is a failure to satisfy this reporting obligation. A U.S.
Holder is urged to consult his tax adviser regarding his reporting obligation.
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 2015). 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.
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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,
2014, 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.
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 and British pound and to a lesser extent Japanese Yen, 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, British pound and to a lesser extent Japanese Yen—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, 2014 would have resulted in a net increase in the
dollar reporting value of our operating income of $ 3.1 million for 2014 and an increase in the dollar reporting value of our total revenues of $59.0 million for
that year, due primarily to the positive impact to the profitability of our software services business line earned mainly in NIS which would outweigh the adverse
impact to the profitability of our proprietary software products 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, 2014 would have caused a net decrease in the dollar reporting value of our operating income of $ 2.5 million for 2014
and a decrease in the dollar reporting value of our total revenues of $ 48.3 million for that year, due primarily to the adverse impact on the revenues and
profitability of our software services business line earned mainly in NIS which would outweigh the increase in dollar value of the proprietary software products
business line expenses recorded in mainly in NIS.
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 two subsidiaries and one affiliate—Matrix, Sapiens, and Magic Software, respectively— 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.
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Generally, we do not hold nor have we issued, to any material extent, any derivatives or other financial instruments for trading purposes.
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.
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ITEM 13. DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES
None.
PART II
ITEM 14. MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USE OF PROCEEDS
None.
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, 2014.
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, 2014.
(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, 2014. In making this assessment, our management used the criteria set forth Internal Control—Integrated
Framework (2013) . Based on this assessment, our management concluded that, as of December 31, 2014, 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, 2014 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, 2014.
(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, 2014 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 2014, that has materially affected, or is
reasonably likely to materially affect, our internal control over financial reporting.
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ITEM 16. RESERVED
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.
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., 5 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, 2014.
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, 2013 and December 31,
2014, respectively:
2013
2014
Audit Fees(1)
Audit-Related Fees(2)
Tax Fees(3)
Total
(U.S. dollars in thousands)
1,372
-
343
1,715
1,187
24
319
1,530
(1) The audit fees for the years ended December 31, 2013 and 2014 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 its
subsidiary and affiliated companies; issuance of comfort letters and consents; and assistance with review of documents filed with the SEC.
117
(2) Audit-related fees for the year ended December 31, 2013 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, 2013 and 2014 were for services related to tax compliance, including the preparation of tax returns and
claims for refund, and tax advice.
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. Our Audit Committee has adopted a
policy and procedures for the pre-approval of audit and non-audit services rendered by our independent registered public accountants, Kost Forer Gabbay &
Kasierer, a member of Ernst & Young Global. Pre-approval of an audit or non-audit service may be given as a general pre-approval, as part of the audit
committee’s approval of the scope of the engagement of our independent auditor, or on an individual basis. Any proposed services that exceed general pre-
approved levels also require specific pre-approval by our audit committee. The policy prohibits retention of the independent public accountants to perform the
prohibited non-audit functions defined in Section 201 of the Sarbanes-Oxley Act of 2002 or the rules of the SEC, and also requires the Audit Committee to
consider whether proposed services are compatible with the independence of the public accountants.
During 2013 and 2014, all audit and non-audit services were pre-approved by our audit committee in accordance with the policy and 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.
• 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.
118
• 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 16H. MINE SAFETY DISCLOSURES
Not applicable.
ITEM 17. FINANCIAL STATEMENTS
PART III
We have elected to provide financial statements and related information pursuant to Item 18.
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, 2014 and 2013
Consolidated Statements of Income for the Years Ended December 31, 2014, 2013 and 2012
Consolidated Statements of Comprehensive Income
Statements of Changes in Equity for the Years Ended December 31, 2014, 2013 and 2012
Consolidated Statements of Cash Flows for the Years Ended December 31, 2014, 2013 and 2012
Notes to Consolidated Financial Statements
Additional Reports of Independent Registered Public Accounting Firms
F-2-F-4
F-5-F-6
F-7
F-8
F-9-F-10
F-11-F-14
F-15-F-76
F-77-F-79
ITEM 19. EXHIBITS
Exhibit No.
1.1
1.2
2.1
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)
4.1
Form of Letter of Indemnification for officers and directors, adopted by Formula Systems (1985) Ltd. on January 8, 2012 (3)
119
Exhibit No.
4.2
4.3
8
12.1
12.2
13.1
13.2
15.1
15.2
15.3
15.4
101
*Filed herewith.
English translation of Formula Systems (1985) Ltd. Employees and Office Holders Share Option Plan (2008)(4)
Formula Systems (1985) Ltd. 2011 Share Incentive Plan and amendment(5)
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 KDA Audit Corporation*
The following financial information from Formula Systems (1985) Ltd.'s annual report on Form 20-F for the year ended December
31, 2014 formatted in XBRL (eXtensible Business Reporting Language): (i) Consolidated Balance Sheets at December 31, 2013
and 2014; (ii) Consolidated Statements of Income for the years ended December 31, 2012, 2013 and 2014; (iii) Consolidated
Statements of Comprehensive Income for the years ended December 31, 2012, 2013 and 2014; (iv)Consolidated Statements of
Changes in Equity for the years ended December 31, 2012, 2013 and 2014; (v) Consolidated Statements of Cash Flows for the
years ended December 31, 2012, 2013 and 2014; and (vi) Notes to the Consolidated Financial Statements, tagged as blocks of
text.*
(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.
(5) Incorporated by reference to the annual report on Form 20-F for the 2013 fiscal year filed by the registrant with the Securities and Exchange
Commission on April 30, 2014.
120
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
April 30, 2015
Date
EXHIBIT INDEX
Exhibit No.
1.1
1.2
2.1
4.1
4.2
4.3
8
12.1
12.2
13.1
13.2
15.1
15.2
15.3
15.4
101
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)
Formula Systems (1985) Ltd. 2011 Share Incentive Plan and amendment(5)
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 KDA Audit Corporation*
The following financial information from Formula Systems (1985) Ltd.'s annual report on Form 20-F for the year ended December 31,
2014 formatted in XBRL (eXtensible Business Reporting Language): (i) Consolidated Balance Sheets at December 31, 2013 and 2014;
(ii) Consolidated Statements of Income for the years ended December 31, 2012, 2013 and 2014; (iii) Consolidated Statements of
Comprehensive Income for the years ended December 31, 2012, 2013 and 2014; (iv)Consolidated Statements of Changes in Equity for
the years ended December 31, 2012, 2013 and 2014; (v) Consolidated Statements of Cash Flows for the years ended December 31,
2012, 2013 and 2014; and (vi) Notes to the Consolidated Financial Statements, tagged as blocks of text.*
*Filed herewith.
(1) Incorporated by reference to the Registration Statement on Form F-1 (File No. 333-8858).
(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.
(5) Incorporated by reference to the annual report on Form 20-F for the 2013 fiscal year filed by the registrant with the Securities and Exchange Commission on
April 30, 2014.
FORMULA SYSTEMS (1985) LTD. AND ITS SUBSIDIARIES
CONSOLIDATED FINANCIAL STATEMENTS
AS OF DECEMBER 31, 2014
U.S. DOLLARS IN THOUSANDS
INDEX
Reports of Independent Registered Public Accounting Firm
Consolidated Balance Sheets
Consolidated Statements of Income
Consolidated Statements of Comprehensive Income
Statements of Changes in Equity
Consolidated Statements of Cash Flows
Notes to Consolidated Financial Statements
Additional Reports of Independent Registered Public Accounting Firms
- - - - - - - - - - - - - - - - - - -
Page
F2- F4
F-5 - F-6
F-7
F-8
F-9 - F-10
F-11 - F-14
F-15 - F-76
F-77 - F-79
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCUNTING 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, 2013 and 2014 and the related consolidated statements of income, comprehensive income, shareholders' equity and cash flows for each of the three years in
the period ended December 31, 2014. 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 1% as of December 31, 2013, and total revenues of 3%, 3% and 1% for each of the years ended December 31, 2012, 2013 and 2014, 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.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require
that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits
provide a reasonable basis for our opinion.
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 and its subsidiaries as of December 31, 2013 and 2014 and the related consolidated results
of their operations and their cash flows for each of the three years in the period ended December 31, 2014, 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, 2014, based on criteria established in Internal Control-Integrated Framework issued by the Committee of
Sponsoring Organizations of the Treadway Commission (2013 framework) and our report dated April 30, 2015 expressed an unqualified opinion thereon.
Tel-Aviv, Israel
April 30, 2015
/s/ Kost Forer Gabbay & Kasierer
KOST FORER GABBAY & KASIERER
A Member of Ernst & Young Global
F-2
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, 2014,
based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission
(2013 framework) (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.
In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2014, based on
COSO criteria.
F-3
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, 2013 and 2014, and the related consolidated statements of income, comprehensive income,
shareholders’ equity and cash flows for each of the three years ended December 31, 2012, 2013 and 2014, respectively, and our report dated April 30, 2015
expressed an unqualified opinion thereon.
Tel-Aviv, Israel
April 30, 2015
/s/ Kost Forer Gabbay & Kasierer
KOST FORER GABBAY & KASIERER
A Member of Ernst & Young Global
F-4
CONSOLIDATED BALANCE SHEETS
U.S. dollars in thousands
ASSETS
CURRENT ASSETS:
FORMULA SYSTEMS (1985) LTD.
AND ITS SUBSIDIARIES
December 31,
2013
2014
Cash and cash equivalents
Marketable securities (Note 4)
Short-term deposits
Trade receivables (net of allowances for doubtful accounts of $ 5,066 and $ 2,316 as of December 31,
$
$
82,123
17,956
672
2013 and 2014, respectively)
Other accounts receivable and prepaid expenses (Note 16a)
Inventories
Total current assets
LONG-TERM RECEIVABLES:
Marketable Securities (Note 4)
Deferred taxes (Note 15e)
Prepaid expenses and other accounts receivable
Total long-term receivables
193,582
36,488
2,407
333,228
520
13,152
8,761
22,433
107,416
15,784
6,454
191,995
36,458
2,259
360,366
33,748
12,738
10,287
56,773
INVESTMENTS IN AFFILIATED COMPANIES (Note 6)
161,501
169,143
SEVERANCE PAY FUND
PROPERTY, PLANTS AND EQUIPMENT, NET (Note 7)
INTANGIBLE ASSETS, NET (Note 9)
GOODWILL (Note 8)
Total assets
The accompanying notes are an integral part of the financial statements.
F-5
68,148
19,408
39,643
65,322
19,879
76,025
227,434
373,231
$
871,795
$
1,120,739
CONSOLIDATED BALANCE SHEETS
U.S. dollars in thousands (except share and per share data)
LIABILITIES AND EQUITY
CURRENT LIABILITIES:
Liabilities to banks (Note 16b)
Trade payables
Deferred revenue
Dividend payable
Employees and payroll accrual
Other accounts payable (Note 16c)
Liabilities in respect of business combinations
Total current liabilities
LONG-TERM LIABILITIES:
Liabilities to banks and others (Note 10)
Other long term liabilities
Deferred taxes (Note 15e)
Deferred revenue
Liability in respect of business combinations
Liability in respect of capital lease
Accrued severance pay
Total long-term liabilities
COMMITMENTS AND CONTINGENCIES (Note 13)
FORMULA SYSTEMS (1985) LTD.
AND ITS SUBSIDIARIES
December 31,
2013
2014
$
$
35,636
52,645
28,454
4,565
54,365
22,853
12,452
41,818
52,335
34,556
7,876
62,540
24,913
1,782
210,970
225,820
62,447
-
8,157
4,990
2,871
1,418
81,258
108,203
6,204
31,118
4,838
825
903
77,948
161,141
230,039
REDEEMABLE NON-CONTROLLING INTEREST (Note 2d)
23,529
10,313
EQUITY (Note 14):
Formula Systems (1985) equity:
Share capital:
Ordinary shares of NIS 1 par value -
Authorized: 25,000,000 shares at December 31, 2013 and 2014;
Issued: 15,287,402 and 15,297,402 at December 31, 2013 and 2014, respectively.
Outstanding: 14,718,782 and 14,728,782 at December 31, 2013 and 2014, respectively
Additional paid-in capital
Accumulated earnings
Accumulated other comprehensive loss
Treasury shares (568,620 shares as of December 31, 2013 and 2014)
Total Formula Systems (1985) shareholders’ equity
Non-controlling interests
Total equity
4,181
132,325
184,105
(1,011)
(259)
319,341
156,814
476,155
4,184
136,038
249,998
(1,305)
(259)
388,656
265,911
654,567
Total liabilities, redeemable non-controlling interest and equity
$
871,795
$
1,120,739
The accompanying notes are an integral part of the financial statements.
F-6
CONSOLIDATED STATEMENTS OF INCOME
U.S. dollars in thousands (except share and per share data)
Revenues (Note 16g):
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, marketing, general and administrative expenses
Other expenses (income), net (Note 16e)
Operating income
Financial expenses, net (Note 16d)
Income before taxes on income
Taxes on income (Note 15g)
Equity in gains of affiliated companies, net (Note 6)
Net income
Change in redeemable non-controlling interests
Net income attributable to non-controlling interests
FORMULA SYSTEMS (1985) LTD.
AND ITS SUBSIDIARIES
Year ended December 31,
2013
2014
2012
$
164,173 $
578,808
179,400
616,481
$
11,131
625,286
742,981
795,881
636,417
83,784
481,019
96,180
506,900
4,055
526,028
564,803
603,080
530,083
178,178
12,349
110,758
(174)
55,245
(6,672)
48,573
6,145
192,801
14,168
117,877
14
60,742
(6,236)
54,506
8,728
42,428
45,778
3,744
60,683
46,172
106,461
(967)
23,766
1,735
24,039
106,334
787
70,517
(5)
35,035
(4,866)
30,169
10,074
20,095
74,590
94,685
154
13,698
Net income attributable to Formula Systems (1985) Shareholders
$
23,373 $
80,687
$
80,833
Net earnings per share attributable to Formula Systems (1985) Shareholders (Note 16h)
Basic
Diluted
Shares used in computing earnings per share (Note 16h):
Basic
Diluted
The accompanying notes are an integral part of the financial statements.
F-7
$
$
1.73 $
5.88 $
1.67 $
5.68 $
5.80
5.59
13,596,000
13,724,652
13,929,326
13,789,766
14,122,779
14,408,115
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
U.S. dollars in thousands
FORMULA SYSTEMS (1985) LTD.
AND ITS SUBSIDIARIES
Year ended December 31,
2013
2014
2012
Net income
$
46,172 $
106,461 $
94,685
Other comprehensive income (loss), net of tax
Foreign currency translation adjustments
Unrealized gain from derivative instruments, net
Unrealized gain (loss) from available-for-sale securities, net
Realized gain from foreign currency translation adjustments
Realized gain (loss) from derivative instruments, net
Realized loss (gain) from available-for-sale securities
Equity in other comprehensive income (loss) of affiliated companies, net
Total other comprehensive income (loss), net of tax
Total Comprehensive income
Comprehensive income attributable to redeemable non-controlling interests
Comprehensive income attributable to non-controlling interests
5,624
29
(56)
-
-
669
-
12,531
143
170
-
-
-
-
6,266
12,844
52,438
119,305
(1,021)
1,735
24,892
30,794
(15,081)
-
119
15,606
-
-
(7,718)
(7,074)
87,611
154
6,918
Comprehensive income attributable Formula Systems (1985) shareholders
$
28,567 $
86,776
$
80,539
The accompanying notes are an integral part of the financial statements.
F-8
FORMULA SYSTEMS (1985) LTD.
AND ITS SUBSIDIARIES
STATEMENTS OF CHANGES IN EQUITY
U.S. dollars in thousands (except share and per share data)
Share Capital
Number
Amount
Additional
paid-in
capital
other
Retained comprehensive Treasury
loss
earnings
shares (cost)
Non-
controlling
interests
Total
Equity
Accumulated
Balance as of January 1, 2012
13,596,000
$ 3,876
$ 135,674
$ 89,978 $
(12,240) $
(259) $ 131,883
$348,912
Net Income
Other comprehensive income
Stock-based Compensation expenses (Note 12a)
Non-controlling interests changes due to holding changes, including exercise of
employees stock options and repurchase of shares by subsidiaries
Acquisition of non-controlling interests
Non-controlling interest as part of acquisitions
Return of prior year Formula’s shareholders’ dividend withheld tax
Dividend to non- controlling interests in subsidiaries
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
1,988
23,373
-
-
(1,733)
(3,162)
-
-
-
-
-
-
76
-
-
5,140
-
-
-
-
-
-
-
-
-
-
-
-
-
-
23,766
1,126
2,932
47,139
6,266
4,920
(4,073)
76,475
175
-
(11,041)
(5,806)
73,313
175
76
(11,041)
Balance as of December 31, 2012
13,596,000
3,876
132,767
113,427
(7,100)
(259)
221,243
463,954
Net Income
Other comprehensive income
Stock-based Compensation expenses (Note 12a)
Exercise of employees stock options (Note 12a)
Non-controlling interests changes due to holding changes, including exercise of
employees stock options and repurchase of shares by subsidiaries
Acquisition of non-controlling interests
Dividend to Formula's shareholders
Dividend to non- controlling interests in subsidiaries
-
-
-
1,122,782
-
-
-
305
-
-
1,988
(302)
80,687
-
-
-
-
-
-
-
-
-
-
-
(715)
(1,413)
-
-
-
-
(10,009)
-
-
6,089
-
-
-
-
-
-
-
-
-
-
-
-
-
-
24,039
6,755
1,990
-
104,726
12,844
3,978
3
(80,677)
(1,377)
-
(15,159)
(81,392)
(2,790)
(10,009)
(15,159)
Balance as of December 31, 2013
14,718,782
4,181
132,325
184,105
(1,011)
(259)
156,814
476,155
The accompanying notes are an integral part of the financial statements.
F-9
FORMULA SYSTEMS (1985) LTD.
AND ITS SUBSIDIARIES
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
other
Retained comprehensive Treasury
earnings
loss
shares (cost)
Non-
controlling
interests
Total
Equity
Accumulated
Balance as of December 31, 2013
14,718,782
4,181
132,325
184,105
(1,011)
(259)
156,814
476,155
Net Income
Other comprehensive income (loss)
Stock-based Compensation expenses (Note 12a)
Exercise of employees stock options (Note 12a)
Non-controlling interests changes due to holding changes, including exercise of
employees stock options
Acquisition of non-controlling interests
Consolidation of affiliate
Deconsolidation of subsidiary
Dividend to Formula's shareholders
Dividend to non- controlling interests in subsidiaries
-
-
-
10,000
-
-
-
-
-
-
-
-
3
-
-
-
-
-
-
-
4,676
(3)
(361)
(599)
80,833
-
-
-
-
-
-
-
-
-
(14,940)
-
-
(15,900)
-
-
-
-
5,115
10,491
-
-
-
-
-
-
-
-
-
-
-
13,698
(6,780)
307
-
728
(658)
178,863
(65,670)
-
(11,391)
94,531
(22,680)
4,983
-
367
(1,257)
183,978
(55,179)
(14,940)
(11,391)
Balance as of December 31, 2014
14,728,782
4,184
136,038
249,998
(1,305)
(259)
265,911 654,567
Year ended December 31,
2013
2014
2012
Accumulated unrealized gain (loss) from available-for-sale securities
Accumulated currency translation adjustments
Accumulated share of other comprehensive income of equity affiliates
Accumulated unrealized gain (loss) from derivative instruments
$
288
(7,314)
-
(74)
$
468 $
(1,863)
384
-
Accumulated other comprehensive loss
$
(7,100) $
(1,011)
592
322
(2,219)
-
(1,305)
The accompanying notes are an integral part of the financial statements.
F-10
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 of available for sale marketable securities
Gain derived from deconsolidation of subsidiary, consolidation of affiliate and equity in
losses )gains) of affiliated companies
Impairment of other investments
Depreciation and amortization
Changes in value of debentures
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 value of long term loans and deposits, net
Changes in deferred taxes, net
Change in liability in respect of business combinations
Gain from sale and increase in value of marketable securities classified as trading
Realized gain from sale of available for sale securities
Decrease (increase) in inventories
Decrease )increase) in trade receivables
Decrease (increase) in other current and long-term accounts receivable
Increase 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
2012
Year ended December 31,
2013
2014
$
46,172
$
106,461
$
94,685
700
(3,744)
-
25,650
2,070
(1,132)
(136)
-
4,920
360
(923)
429
(376)
(31)
346
76
2,506
3,421
(7,448)
208
-
(60,684)
-
24,349
670
(1,645)
-
15
3,978
21
728
(845)
(472)
-
(128)
(5,658)
(9,113)
3,324
2,515
5,035
-
(90,859)
464
8,962
-
(134)
-
-
4,983
(6,168)
14,393
(3,344)
(397)
-
(153)
(13,595)
(5,678)
5,331
848
7,335
16,673
Net cash provided by operating activities
73,068
68,551
The accompanying notes are an integral part of the financial statements.
F-11
CONSOLIDATED STATEMENTS OF CASH FLOWS
U.S. dollars in thousands
Cash flows from investing activities:
Payments for business acquisitions, net of cash acquired (Appendix C)
Purchase of controlling interest in an affiliated company, net of cash acquired (Appendix D)
Changes due to deconsolidation and realization of investments in previously-consolidated
subsidiaries (Appendix E)
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 (investment in) marketable securities, net
Proceeds from sale of property, plants and equipment
Investment in and loans to affiliates and other companies
Dividends from affiliated company
Changes in short term deposits, net
Capitalization of software development and other costs
Net cash used in investing activities
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
Purchase of non-controlling interests and redeemable non-controlling interests
Cash paid in conjunction with acquisitions of activities
Repayment of capital lease
Repayment of debenture
Net cash provided by financing activities
Effect of exchange rate changes on cash and cash equivalents
Increase (decrease) in cash and cash equivalents
Cash and cash equivalents at beginning of year
FORMULA SYSTEMS (1985) LTD.
AND ITS SUBSIDIARIES
2012
Year ended December 31,
2013
2014
(20,047)
14,052
-
136
-
(4,994)
2,507
-
(364)
-
5,235
(8,433)
(13,253)
-
(31,105)
-
(193)
(6,868)
(1,519)
102
-
-
(597)
(9,899)
(11,908)
(63,332)
1,508
(12,940)
76
422
(12,982)
41,505
(19,166)
(3,669)
(188)
(33,015)
3,036
(16,648)
(5,444)
2,301
(17,586)
21,493
(4,447)
(3,863)
(456)
(16,792)
(38,449)
(38,406)
355
4,072
23,066
88,172
(29,115)
111,238
(8,412)
42,442
(37,374)
-
(87)
(4,038)
218
-
(7,613)
1,891
(6,141)
(703)
(19,817)
166
(12,131)
(11,629)
5,572
(25,119)
91,706
(1,727)
(14,840)
(445)
-
31,553
(3,116)
25,293
82,123
Cash and cash equivalents at end of year
$
111,238
$
82,123
$
107,416
The accompanying notes are an integral part of the financial statements.
F-12
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
Purchase of property and equipment
C. Acquisition of newly-consolidated subsidiaries and activities, net of cash acquired:
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
Deferred tax liability, net
Liability to formerly shareholders
Cash paid in conjunction with acquisitions of activities
Redeemable non-controlling interests at acquisition date
Non-controlling interests at acquisition date
Total
D. Purchase of controlling interests in an affiliated company, net of cash acquired:
Assets and liabilities of subsidiaries consolidated as of acquisition date:
Working capital (other than cash and cash equivalents)
Marketable securities
Other long-term assets, deferred expenses
Property and equipment
Goodwill and intangible assets
Long-term liabilities
Deferred tax liability (asset), net
Investment in affiliated company
Redeemable non-controlling interests at acquisition date
Non-controlling interests at acquisition date
Adjustment to other comprehensive (loss) gain
Gain from purchase of controlling interests in an affiliated company,
Total
The accompanying notes form an integral part of the financial statements.
F-13
FORMULA SYSTEMS (1985) LTD.
AND ITS SUBSIDIARIES
2012
Year ended December 31,
2013
2014
4,251
4,808
17,986
14,371
-
-
-
2,780
(3,312)
(760)
(43,536)
7,215
687
-
(140)
19,555
244
(1,534)
(78)
(16,891)
5,038
212
-
-
-
-
(20,047)
(13,253)
10,835
-
-
(1,814)
(161,319)
3,211
(247)
75,242
-
82,565
2,169
3,410
14,052
-
-
-
-
-
-
-
-
-
-
-
-
-
5,400
14,467
7,876
-
(4,400)
(92)
(5,778)
659
408
791
-
-
-
(8,412)
4,873
(33,098)
(2,554)
(4,763)
(287,441)
7,449
8,616
161,810
159
178,863
5,115
3,413
42,442
CONSOLIDATED STATEMENTS OF CASH FLOWS
U.S. dollars in thousands
E.
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
Deferred tax asset, net
Goodwill and intangible assets
Liabilities to banks
Redeemable non-controlling interests at loss of control date
Non-controlling interests at loss of control date
Investment in affiliated company presentation due to loss of control
Adjustment to other comprehensive (loss) gain
Gain from realization of investments in subsidiaries
Total
The accompanying notes form an integral part of the financial statements.
F-14
FORMULA SYSTEMS (1985) LTD.
AND ITS SUBSIDIARIES
2012
Year ended December 31,
2013
2014
-
-
-
-
-
-
-
-
-
-
-
(12,114)
4,085
571
-
160,960
-
-
(84,228)
(158,592)
(2,951)
61,164
18,720
1,849
(3,954)
(1,578)
94,135
(3,172)
(2,806)
(65,769)
(168,810)
10,491
83,520
(31,105)
(37,374)
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 and began its business operations 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. The Company is considered an Israeli resident. As of November, 2010, the controlling
shareholder of the Company is Asseco Poland S.A. ("Asseco"), a Polish public company, traded on the Warsaw Stock Exchange.
Formula, through its subsidiaries and affiliates (collectively, the "Company" or the "Group") is engaged in providing proprietary and non-
proprietary software solutions and services, software product marketing and support, computer infrastructure and integration solutions and
learning and integration. The Group operates through four directly held subsidiary and affiliated companies: Matrix IT Ltd. ("Matrix");
Magic Software Enterprises Ltd. ("Magic"), Sapiens International Corporation N.V ("Sapiens") and Insync Staffing Inc. (“Insync”).
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 3a for further information), which was mainly financed by the issuance of Sapiens
common shares, Formula's interest in Sapiens was diluted from 75.6% to 42.2%. Formula's investment in Sapiens following the dilution
was measured under the equity method of accounting. The gain recognized in 2011 in relation of the Company’s loss of control in Sapiens
and the related re-measurement of the investment to fair value amounted to $ 25,833 and is presented in the income statement as equity in
gains of affiliated companies, net. By December 31, 2011, Formula’s interest in Sapiens outstanding common shares increased to 47.3%.
On January 27, 2012, Formula consummated the purchase of Sapiens common shares from two former shareholders of FIS and IDIT
(Sapiens' recently acquired companies) and others, resulting in an increase in Formula’s interest in Sapiens' outstanding common shares
from 47.3% to 52.1%, following which Formula regained control over Sapiens. The gain recognized in relation to the consolidation of
Sapiens and the related re-measurement of the investment to fair value amount to $3,410 and is presented in the income statement as equity
in gains of affiliated companies, net (see additional information in note 3a).
On November 19, 2013, Sapiens completed a follow-on public offering of its common shares on the NASDAQ. Sapiens issued 6,497,400
shares at a price of $ 6.25 per share before issuance expenses. Total net proceeds from the issuance amounted to approximately $ 37,791.
As a result of the offering, Formula’s interest in Sapiens' outstanding common shares diluted from 56.8% to 48.6%. Formula's investment
in Sapiens following the dilution was measured under the equity method of accounting due to loss of control in Sapiens in accordance with
ASC 810. The gain recognized in relation of Formula loss of control in Sapiens and the related re-measurement of the investment to fair
value amounted to $ 61,164 and is presented in the income statement as equity in gains of affiliated companies, net (see additional
information in note 3a).
F-15
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands, except share and per share data
NOTE 1:- GENERAL (Cont.)
FORMULA SYSTEMS (1985) LTD.
AND ITS SUBSIDIARIES
From August 21, 2014 through December 23, 2014, Formula purchased an aggregate of 1,545,802 common shares of Sapiens through
broker-initiated and private transactions for an aggregate purchase price of $ 11,908, pursuant to which Formula’s holdings in Sapiens
were increased to 50.2%. As a result of Formula’s gaining of control in Sapiens, Formula’s investment in Sapiens was consolidated in
Formula’s closing balances as of December 31, 2014. The gain recognized in relation to the consolidation of Sapiens and the related re-
measurement of the investment to fair value amounted to $ 3,413 and is presented in the income statement as equity in gains of affiliated
companies, net (see additional information in note 3a).
Magic:
On March 5, 2014, Magic completed a follow-on public offering of its ordinary shares on the NASDAQ. Magic issued 6,900,000 shares at
a price of $ 8.50 per share before issuance expenses. Total net proceeds from the issuance amounted to $ 54,726. As a result of the
offering, Formula’s interest in Magic’s outstanding ordinary shares diluted from 51.6% to 45.0%. Formula's investment in Magic
following the dilution was measured under the equity method of accounting due to loss of control in Magic in accordance with ASC 810.
The gain recognized in relation of Formula loss of control in Magic and the related re-measurement of the investment to fair value
amounted to $ 83,520 offset by $ 16,361 deferred tax expenses, both presented in the income statement as equity in gains of affiliated
companies, net.
For a description of the Company's operations, see Note 16f.
b.
The following table presents certain information regarding the control and ownership of Formula's significant subsidiaries and affiliates, as
of the dates indicated (the list consists only of active companies that are held directly by Formula):
Name of subsidiary (affiliate)
Matrix
Magic(1)
Sapiens(2)
Insync
Percentage of ownership
and control
December 31,
2013
2014
50.1
51.6
48.6
-
50.2
45.1
50.2
100
1)
From March 5, 2014 until December 31, 2014 Magic's results of operations were reflected in the Company's results of operations
using the equity method of accounting.
F-16
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands, except share and per share data
NOTE 1:- GENERAL (CONT.)
FORMULA SYSTEMS (1985) LTD.
AND ITS SUBSIDIARIES
2)
From August 21, 2011 until January 27, 2012, and from November 19, 2013 until December 23, 2014 Sapiens' results of operations
were reflected in the Company's results of operations using the equity method of accounting.
c.
Restatement of consolidated financial statements:
The Company has restated its consolidated financial statements for 2013 in order to retrospectively reflect the effect of a correction of a
misstatement in Matrix’s revenues and accounts receivables during the years 2009 – 2013. Accordingly, the consolidated financial
statements for the years ended December 31, 2013 and 2012 have been restated from amounts previously reported.
The impacts of these restatements of the consolidated financial statements are summarized below:
Consolidated Balance Sheets:
December 31, 2013
As previously
reported
change
As presented
in these financial
statements
Trade receivables, net
$
201,144 $
(7,562) $
193,582
Other accounts receivable and prepaid expenses
34,609
1,879
Total Formula Systems (1985) shareholders’ equity
322,185
(2,844)
36,488
319,341
Non-controlling interests
$
159,653 $
(2,839) $
156,814
F-17
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands, except share and per share data
NOTE 1:- GENERAL (Cont.)
Consolidated Statement of Income:
Revenues
Taxes on income
Net income
Net income attributable to non-controlling interests
FORMULA SYSTEMS (1985) LTD.
AND ITS SUBSIDIARIES
Year ended December 31, 2013
As previously
reported
change
As presented
in these financial
statements
$
796,674 $
(793) $
795,881
8,926
107,056
24,336
(198)
(595)
(297)
Year ended December 31, 2012
As previously
reported
The
change
As presented
In these financial
statements
$
744,731 $
(1,750) $
742,981
6,583
(438)
47,484
(1,312)
24,421
(655)
8,728
106,461
24,039
80,687
5.68
6,145
46,172
23,766
23,373
1.67
Net income attributable to Formula Systems (1985) shareholders
Diluted net earnings per share attributable to Formula Systems (1985)
$
$
80,985 $
(298) $
5.70 $
(0.02) $
Revenues
Taxes on income
Net income
Net income attributable to non-controlling interests
Net income attributable to Formula Systems (1985) shareholders
Diluted net earnings per share attributable to Formula Systems (1985)
$
$
24,030 $
(657) $
1.72 $
(0.05) $
F-18
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 the consolidated financial statements in conformity with U.S. GAAP requires management to make estimates and
assumptions that affect the amounts reported 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. The most
significant assumptions are employed in estimates used in determining values of goodwill and identifiable intangible assets and their
subsequent impairment analysis, revenue recognition, tax assets and tax positions, legal contingencies, research and development
capitalization, contingent consideration related to acquisitions, classification of leases, determining the fair value of redeemable non-
controlling interests and stock-based compensation costs. 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 of its subsidiaries are conducted is the
U.S. dollar (the "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. Monetary
accounts maintained in currencies other than the dollar are remeasured into dollars in accordance with the Financial Accounting Standards
Board ("FASB) Accounting Standards Codification ("ASC") 830, "Foreign Currency Matters". All transaction gains and losses of the
remeasurement of monetary balance sheet items are reflected in the statements of income as financial income or expenses, as appropriate.
For those subsidiaries whose functional currency is not the dollar, all balance sheet amounts have been translated using the exchange rates
in effect at each balance sheet date. Statement of income amounts have been translated using the average exchange rate prevailing during
each year. Such translation adjustments are reported as a component of other comprehensive income (loss) in 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 parents’ 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-19
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 parents’ ownership interest in a subsidiary that causes a loss of control results 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.
A change in the company’s ownership interest in non-controlling investment that causes a gain of control results in a consolidation of the
subsidiary. Gain or loss is recognized upon the consolidation of an subsidiary, as the difference between (1) the sum of the fair value of
any consideration delivered, the fair value of the former non-controlling investment at the date the subsidiary is consolidated, and the
carrying amount of any non-controlling interest in the subsidiary (including any accumulated other comprehensive income attributable to
the non-controlling interest) at the date the subsidiary is consolidated, and (2) the carrying amount of the subsidiary's assets and liabilities.
Non-controlling interests of subsidiaries represent the non-controlling 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,
separate from permanent equity, on the consolidated balance sheets and measured at each reporting period at the higher of their redemption
amount or the Non-controlling interest book value, in accordance with the requirements of ASC 810 "Consolidation" and ASC 480-10-
S99-3A, "Distinguishing Liabilities from Equity".
The following table provides a reconciliation of the redeemable non-controlling interests:
January 1, 2014
Net income attributable to redeemable non-controlling interests
Foreign currency translation adjustments
Net change in fair value
Cash paid in conjunction with liabilities related to acquisitions of activities
Change due to loss of control in subsidiary
Consolidation of redeemable non-controlling interests
December 31, 2014
F-20
$
23,529
154
(1,496)
(3,863)
(5,364)
(2,806)
159
$
10,313
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands, except share and per share data
NOTE 2:-
SIGNIFICANT ACCOUNTING POLICIES (Cont.)
e.
Cash and cash equivalents
FORMULA SYSTEMS (1985) LTD.
AND ITS SUBSIDIARIES
Cash and cash equivalents are short-term highly liquid investments that are readily convertible to cash with original maturities of three
months or less, at the date acquired. Cash and cash equivalent includes amounts held primarily in New-Israeli Shekel, U.S. dollars, Euro
and British Pound.
f.
Short-term and restricted 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. Restricted deposits include deposits used to secure certain
subsidiaries’ ongoing projects and credit lines from banks as well as, security deposits with respect to leases. On December 31, 2014, the
Company maintained a balance of $ 484 of restricted deposits that represents security deposits with respect to lease agreements and credit
lines from banks in one of our subsidiaries. Restricted deposits are classified on the Company’s consolidated balance sheets as other
receivables
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. Unrealized gains and losses from marketable securities classified as "available for sale" are comprised of the
difference between fair value and the amortized cost of such securities and 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.
The Company recognizes an impairment charge when a decline in the fair value of an investment that falls below the cost basis is
determined to be other-than-temporary. Factors considered in making such a determination include the duration and severity of the
impairment, the reason for the decline in value, the potential recovery period and the Company’s intent to sell, including whether it is more
likely than not that the Company will be required to sell the investment before recovery of cost basis. For securities that are deemed other-
than-temporarily impaired, the amount of impairment is recognized in “net gain on sale of marketable securities previously impaired” in
the statements of income and is limited to the amount related to credit losses, while impairment related to other factors is recognized in
other comprehensive income. During 2014 and 2013 the Company did not recognize an impairment charge as the decline in fair value of
its investment in marketable securities is not judged to be other-than-temporary.
F-21
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
During 2012 the Company recorded $ 700 of other-than-temporary impairment on equity marketable securities. See further details in Note
4.
Unrealized gains and losses from marketable securities classified as "trading" are reported in the consolidated statements of income.
h.
Inventories
Inventories are mainly comprised of purchased merchandise and products which consist of educational software kits, computers, peripheral
equipment and spare parts. 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 slow moving inventories
accordingly. No such impairments have been recognized in any period presented.
i.
Investments in affiliates
Affiliates are companies in which the Group has significant influence over the financial and operating policies without having control and
that are not subsidiaries. The Group's investment therein is accounted for in the consolidated financial statements of the Group using the
equity method.
Under the equity method, the investment in the affiliate is presented at cost with the addition of post-acquisition changes in the Group's
share of net assets, including other comprehensive income of the affiliate. Profits and losses resulting from transactions between the Group
and the affiliate are eliminated to the extent of the interest in the affiliate. The equity method is applied until the loss of significant
influence or classification as an asset held-for-sale.
Management evaluates investments in equity investees, for evidence of other-than-temporary declines in value. Such evaluation is
dependent on the specific facts and circumstances. Accordingly, in determining whether other-than-temporary declines exist, management
evaluates various indicators for other-than-temporary declines and evaluates financial information (e.g. Share price in the market, budgets,
business plans, financial statements, etc.).
As of December 31, 2014, the carrying amount of the investment in Magic exceeded its market value. In order to demonstrate that other-
than-temporary impairment of the investee has not occurred, the company considered the financial condition and near-term prospects of
Magic as well as the Company's intent and ability to retain its investment for a period of time sufficient to allow for any anticipated
recovery in market value. In addition the Company used the Income Approach, which utilizes a discounted cash flow model, to determine
the fair value of Magic, based on which Magic's fair value exceeded its carrying amount by 12%, therefore, during 2014, no impairment
loss was recognized. Judgments and assumptions related to revenue, operating income, future short-term and long-term growth rates,
weighted average cost of capital, interest, capital expenditures, cash flows, and market conditions are inherent in developing the discounted
cash flow model. With respect to the assumptions used, management believes that reasonably possible changes in the key assumptions
would not change the Company's conclusion.
F-22
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 financial statements of the Company and of the affiliate are prepared as of the same dates and periods. The accounting policies applied
in the financial statements of the affiliate are uniform and consistent with the policies applied in the financial statements of the Company.
Losses of an affiliate in amounts which exceed its equity are recognized by the Group to the extent of its investment in the affiliate plus
any losses that the Group may incur as a result of a guarantee or other financial support provided in respect of the affiliate. For this
purpose, the investment includes long-term receivables (such as loans granted) for which settlement is neither planned nor likely to occur
in the foreseeable future.
j.
Property, plant and equipment, net
Property, plant and equipment are stated at cost, net of accumulated depreciation. Depreciation is calculated by the straight-line method
over the estimated useful lives of the assets at the following annual rates:
Computers and peripheral equipment
Office furniture and equipment
Motor vehicles
Buildings
Leasehold improvements
k.
Research and development costs
%
7-33 (mainly 33%)
6-20
14-15
2-4
Over the shorter of the lease term or useful
economic life
Research and development costs incurred in the process of software development before establishment of technological feasibility
are charged to 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". Based on the Group’s
product development process, technological feasibility is established upon completion of a detailed program design or working
model.
Costs incurred by the Company between completion of the detailed program design and the point at which the product is ready for
general release, have been capitalized.
Capitalized software costs are amortized on a product by product basis by the straight-line method over the estimated useful life of
the software product (between 3-7 years). The Group assesses the recoverability of its intangible assets on a regular basis by
determining whether the amortization of the asset over its remaining economical useful life can be recovered through undiscounted
future operating cash flows from the specific software product sold. During the years ended December 31, 2012, 2013 and 2014, no
unrecoverable amounts were identified.
F-23
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
During the years ended December 31 2012, 2013 and 2014, capitalized software development costs of consolidated subsidiaries
aggregated to approximately $ 8,433, $9,606 and $ 703, respectively, and amortized capitalized software development costs of
consolidated subsidiaries aggregated to $ 8,100, $ 8,495 and $ 139, respectively.
l.
Other intangible assets
Other intangible assets are comprised mainly of customer-related intangible assets, backlogs, brand names, capitalized courses
development costs and acquired technology and Patent, 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. The
useful life of intangible assets is as follows
Customer relationship and acquired technology
Capitalized courses development costs
Brand names
Other intangibles
Patent
Years
3-15
5-6
5
2-10
10
m.
Impairment of long-lived assets and intangible assets subject to amortization
The Group's long-lived assets 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 such 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, 2012, 2013 and 2014, no impairment was identified.
n.
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 (the two-step impairment test).
F-24
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
In September 2011, the FASB issued ASU 2011-08 which amends the provisions for testing goodwill for impairment. Under the new
provisions, an entity has the option to first assess qualitative factors to determine whether the existence of events or circumstances leads to
a determination that it is more likely than not that the fair value of a reporting unit is less than its carrying amount. If, after assessing the
totality of events or circumstances, an entity determines it is not more likely than not that the fair value of a reporting unit is less than its
carrying amount, then performing the two-step impairment test is unnecessary.
As of December 31, 2014, and following Sapiens deconsolidation on November 19, 2013 until December 23, 2014, Magic deconsolidation
on March 5, 2014 and Insync consolidation on April 1, 2014, the Company operated through 9 reporting units. As of December 31, 2013,
the Company operated through 6 reporting units.
The Company performed an annual impairment tests as of December 31, of each of 2012, 2013 and 2014 and did not identify any
impairment losses for any of the Company’s reporting units.
Sapiens operates in four reporting units. For testing the reporting units in Sapiens in 2012, the Company adopted the provisions of ASU
2011-08, for the annual impairment. This analysis, conducted on December 31, 2012 determined that there are no indicators of impairment
existed, because: (1) the Sapiens market capitalization was consistently substantially in excess of its book value, (2) the reporting unit’s
overall financial performance has been stable or improving, and (3) forecasts of operating income and cash flows generated by the
Company’s reporting units appear sufficient to support the book values of the net assets of each reporting unit
In 2013, Sapiens was accounted for under the equity method –see Note 2(i). In 2014, since the company consolidated Sapiens on
December 23, 2014, no impairment test was required.
Magic operates in two reporting units. The Company adopted the provisions of ASU 2011-08 for Magic's reporting units, for its annual
impairment test in 2012 and 2013. This analysis determined that no indicators of impairment existed primarily because (1) Magic's market
capitalization was consistently substantially in excess of its book value, (2) the reporting units’ overall financial performance has been
stable or improving, and (3) forecasts of operating income and cash flows generated by the reporting units' appear sufficient to support the
book values of the net assets of each reporting unit.
As of December 31, 2014, Magic was accounted for under the equity method –see Note 2(i).
Matrix – In 2012, 2013 and 2014, the Company performed step one of the quantitative impairment test for each of Matrix's reporting units.
The Company compared the fair value of the reporting units to the carrying value of net assets allocated to each of the reporting units.
Since the fair value of each of the reporting units exceed the carrying value of the net assets allocated, to each of the reporting units, no
further testing was required and no goodwill impairment was recorded.
F-25
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands, except share and per share data
NOTE 2:-
SIGNIFICANT ACCOUNTING POLICIES (Cont.)
o.
Business combinations
FORMULA SYSTEMS (1985) LTD.
AND ITS SUBSIDIARIES
The Company accounts for business combinations under ASC 805, "Business Combinations." ASC 805 requires recognition of assets
acquired, liabilities assumed, non-controlling interest and redeemable non-controlling interest in the acquiree at the acquisition date,
measured at their fair values as of that date. As required by ASC 820, "Fair Value Measurements and disclosures" the Company applies
assumptions that marketplace participants would consider in determining the fair value of assets acquired, liabilities assumed, non-
controlling interest and redeemable non-controlling interest in the acquiree at the acquisition date. 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.
p.
Variable interest entities
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 requires judgment and involves
the use of significant estimates and assumptions. Those 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 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.
One of Magic’s U.S. based consulting and staffing services business which was acquired by one of Magic’s 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.
F-26
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands, except share and per share data
NOTE 2:-
SIGNIFICANT ACCOUNTING POLICIES (Cont.)
q.
Severance pay
FORMULA SYSTEMS (1985) LTD.
AND ITS SUBSIDIARIES
Formula's and its Israeli 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 based on the most recent salary of the employees multiplied by the number of years of employment as of the
balance sheet date, and are presented on an undiscounted basis (referred to as the "Shut Down Method"). Employees are entitled to one
month's salary for each year of employment or a portion thereof. The obligation for all of its Israeli employees is covered in part by
managers' insurance policies, for which Formula and its Israeli subsidiaries make monthly deposits with insurance policies and pension
funds ("the plan assets"). Plan assets comprise of assets held by a long-term employee benefit fund or qualifying insurance policies. Plan
assets are not available to the Group's own creditors and cannot be returned directly to the Group. The Plan assets include profits (losses)
accumulated up to the balance sheet date. The Plan assets may be withdrawn only upon the fulfillment of the obligation pursuant to Israel's
Severance Pay Law or employment agreements. The value of the Plan assets is based on the cash-surrendered value of these policies and is
recorded as an asset on the Company's consolidated balance sheets.
Formula's and its Israeli subsidiaries' defined with certain of their Israeli employees contribution plans pursuant to Section 14 of the
Severance Pay Law., under which they pay fixed contributions and will have no legal or constructive obligation to pay further
contributions if the fund does not hold sufficient amounts to pay all employee benefits relating to employee service in the current and prior
periods. Contributions to the defined contribution plan in respect of severance or retirement pay are recognized as an expense when
contributed concurrently with performance of the employee's services. Deposits under Section 14 are not recorded as an asset on the
Company's balance sheet.
Total expenses in respect of severance pay for the years 2012, 2013 and 2014 were $ 3,264, $ 3,862 and $ 2,093, respectively.
r.
Revenue Recognition
The Group derives its revenues primarily from the sale of information technology (or “IT”) services which also include sale of: non-
proprietary software products, including maintenance, integration and infrastructure, staffing, training and deployment. In addition, the
Group generates revenues from licensing the rights to use its proprietary software, provision of related IT professional services (which may
or may not be considered essential to the functionality of the software license), related maintenance and technical support, as well as
implementation and post-implementation consulting services.
F-27
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
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, delivery of the product has occurred, the fee is fixed or determinable, and collectability is probable. The
Group generally considers all arrangements with payment terms extending beyond minimum six or maximum twelve months from the
delivery of the elements not to be fixed or determinable. If the fee is not fixed or determinable, revenue is recognized as payments become
due from the customer, provided that all other revenue recognition criteria have been met
Revenues from the sale of products are recognized after all the significant risks and rewards of ownership of the products have been
transferred to the buyer, the Group does not retain any continuing management involvement that is associated with ownership and does not
retain the effective control of the sold products, the amount of revenues can be measured reliably, it is probable that the economic benefits
associated with the transaction will flow to the Group and the costs incurred or to be incurred in respect of the transaction can be measured
reliably.
Revenues derived from the sale of hardware products and infrastructure solutions are recognized after all the significant risks and rewards
of ownership of the products have been transferred to the buyer, the Group does not retain any continuing management involvement that is
associated with ownership and does not retain the effective control of the sold products, the amount of revenues can be measured reliably,
it is probable that the economic benefits associated with the transaction will flow to the Group and the costs incurred or to be incurred in
respect of the transaction can be measured reliably.
Revenues derived from licensing the rights to use software 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.
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.
As required by ASC 985-605, the Group 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-28
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
Revenues from professional services provided on an hourly basis which are not deemed essential to the functionality of the licenses are
recognized as the services are rendered. Revenues from time-and-materials contracts for which the Group is reimbursed for labor hours at
fixed hourly billing rates are recognized as revenues as the services are provided.
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 Group also provides consulting services that are not deemed
essential to the functionality of the license, as well as outsourcing IT services.
With respect to revenues that involve significant implementation and customization services to customer specific requirements and which
are considered essential to the functionality of the product offered (for example when the Group sells software licenses as part of an overall
solution offered to a customer that combines the sale of software licenses which includes significant implementation that is considered
essential to the functionality of the license) whether generated by fixed-price or time-and-materials contracts the Company accounts for
revenues for the services together with the software under contract, using the percentage-of-completion method in accordance with ASC
605-35, "Construction-Type and Production-Type Contracts". The percentage-of-completion method is used when the required services are
quantifiable, based on the estimated 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. This type of revenues is included in the Company’s
Proprietary software products and related services and software services revenue streams.
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 each of December 31,
2013 and 2014, no estimated losses were identified.
Revenue from third-party sales is recorded at a gross or net amount according to certain indicators. The application of these indicators for
gross and net reporting of revenue depends on the relative facts and circumstances of each sale and requires significant judgment.
The Group 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-29
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands, except share and per share data
NOTE 2:-
SIGNIFICANT ACCOUNTING POLICIES (Cont.)
s.
Advertising costs
FORMULA SYSTEMS (1985) LTD.
AND ITS SUBSIDIARIES
Expenditures incurred on advertising, marketing or promotional activities, such as production of catalogues and promotional pamphlets,
are recognized as an expense when the Group has the right of access to the advertising goods or when the Group receives those services.
Advertising costs amounting to $ 2,645, $ 2,387 and $ 2,027 were recorded in the years 2012, 2013 and 2014, 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 "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 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. The Company accrued interest and penalties related to unrecognized tax benefits in its provisions for income taxes.
u.
Basic and diluted net earnings per share
Basic net earnings per share are computed based on the weighted average number of 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 dilutive
potential equivalent ordinary shares considered outstanding during the year, in accordance with ASC 260, "Earnings Per Share".
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.
w.
Concentration of credit risk
Financial instruments that potentially subject the Group to concentrations of credit risk consist principally of cash and cash equivalents,
short-term bank deposits, restricted cash, trade receivables, marketable securities and foreign currency derivative contracts.
F-30
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 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 Company's marketable securities include investments in commercial and government bonds and foreign banks. The Company's
marketable securities are considered to be highly liquid and have a high credit standing. In addition, management limits the amount that the
Company may invest in any one type of investment or issuer, thereby reducing credit risk concentrations. And considered its portfolios in
foreign banks to be well-diversified (also refer to Note 4).
The Group's trade receivables are generally derived from sales to large organizations located mainly in Israel, North America, Europe and
Asia Pacific. The Group performs ongoing credit evaluations of its customers and to date has not experienced any material losses. In
certain circumstances, Formula, its subsidiaries and its affiliates 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 bad debt expense for the years ended December 31, 2012, 2013 and 2014 was $ 1,014, $ 1,926 and $ 1,119 respectively. 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 by factoring of accounts receivable and credit card vouchers 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. All
sales of receivable were closed during the years and as so there are no outstanding sales of receivables as of December 31, 2012, 2013 and
2014.
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-31
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 enters from time to time 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 2y below).
x.
Stock-based compensation
The Group accounts for share-based compensation in accordance with ASC 718, "Compensation - Stock Compensation." which 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 straight line method over the requisite service period of each of the awards, net of estimated forfeitures.
Formula, Magic, Sapiens and Insync measure and recognize compensation expense for share-based awards based on estimated fair values
on the date of grant using the Binomial option-pricing model ("the Binomial model"). Matrix uses the Black-Scholes option-pricing model
to measure the fair values of the awards at the date of grant. The Binomial model takes into account variables such as volatility, dividend
yield rate, and risk-free interest rate and also allows for the use of dynamic assumptions and considers the contractual term of the option,
the probability that the option will be exercised prior to the end of its contractual life, and the probability of termination or retirement of the
option holder in computing the value of the option.
Stock based compensation expenses recorded on the subsidiaries' level are presented in non-controlling interests.
The fair value for Formula's subsidiaries' share options granted to employees and directors was estimated using the following weighted-
average assumptions:
Magic (the Binomial model):
Dividend yield
Expected volatility
Risk-free interest rate(1)
Expected forfeiture (employees)
Expected forfeiture (executives)
Contractual term of up to
Suboptimal exercise multiple(2) (employees)
Suboptimal exercise multiple(2) (executives)
Year ended December 31,
2014
2013
0%
32%-59%
0.1%-2.6%
-
-
10 years
2
2
0%
32% - 59%
0.1%-2.6%
-
-
10 years
-
2
1) The risk-free interest rate is based on the yield from U.S. Treasury zero-coupon bonds with an equivalent term to the contractual term
of the options.
F-32
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
2) The suboptimal exercise factor is the ratio by which the stock price must increase over the exercise price before employees are
expected to exercise their stock options. This factor is estimated based on employees' historical option exercise behavior.
Sapiens (the Binomial model):
Contractual life
Expected exercise factor (weighted average)
Dividend yield
Expected volatility (weighted average)
Risk-free interest rate
Year ended December 31,
2013
2014
2012
6 years
1.5-2
0%
60%
0.2%-1.0%
6 years
1.5-2
0%
54.29%
0.95%-2.1%
6 years
1.5-2
0%
48.94%
1.82-1.85%
The risk-free interest rate assumption is based on the yield from U.S. Treasury zero-coupon bonds with an equivalent term as of the
Sapiens’ employee stock options. Since dividend payment is applied to reduce the exercise price of the option, the effect of the dividend
protection is reflected by using an expected dividend assumption of zero. The expected life of options granted is derived from the output of
the option valuation model and represents the period of time the options are expected to be outstanding. The expected exercise factor is
based on industry acceptable rates since no actual historical behavior by option holders exists. Expected volatility is based on the historical
volatility of the Sapiens share price.
Matrix (Black-Scholes option-pricing model):
There were no grants by Matrix during 2012, 2013 and 2014.
Insync (the Binomial model):
There were no grants by Insync during 2014.
Formula (the Binomial model):
For grants to Formula's employees - see Note 11.
y.
Derivatives instruments
A material portion of the Group's revenues, expenses and earnings is exposed to changes in foreign exchange rates. Depending on market
conditions, foreign exchange risk is also 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 to Euro, Japanese Yen and New Israeli Shekel ("NIS") exchange rate
fluctuations.
F-33
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
ASC 815, "Derivatives and Hedging," requires companies to recognize all of their derivative instruments as either assets or liabilities in
their balance sheet 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 Formula 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, in order to hedge against the risk of overall changes in future cash
flows. From time to time, Magic hedges portions of its 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. Matrix's and Sapiens' transactions, however, did
not qualify as hedging instruments under ASC 815, and as such resulted in recognition of gains or losses related to the transactions in
current earnings during the period.
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.
Magic’s notional principal of foreign exchange contracts to purchase NIS with U.S. dollars was $ 0 and $ 1,736 as of December 31, 2013
and 2014, respectively.
At December 31, 2013 and 2014, the Company did not have any cash flow hedges.
In 2013 and 2012 the ineffective net gain (loss) and amounts related to derivatives not classified as hedging recognized in the statements
income were $ 139 and $ 245, respectively.
z.
Comprehensive income (loss)
The Company accounts for comprehensive income (loss) in accordance with ASC 220 "Comprehensive Income." This codification
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 a hedge, and
unrealized gain and loss on available-for-sale marketable securities.
F-34
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands, except share and per share data
NOTE 2:-
SIGNIFICANT ACCOUNTING POLICIES (Cont.)
aa.
Fair value measurement
FORMULA SYSTEMS (1985) LTD.
AND ITS SUBSIDIARIES
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; 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. The Company categorized each of its 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 (see Note 5).
Foreign currency derivative contracts are classified within Level 2 as the valuation inputs are based on quoted prices and market
observable data of similar instruments.
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.
Capital lease
The Group has accounted for its assets which are under a capital lease arrangement in accordance with ASC 840 "Leases.". In order to
determine whether to classify a lease as a capital lease or an operating lease, the Group evaluates whether the lease transfers substantially
all the risks and benefits incidental to ownership of the leased asset. In this respect, the Group evaluates such criteria as the existence of a
bargain purchase option, the lease term in relation to the economic life of the asset and the present value of the minimum lease payments in
relation to the fair value of the asset. 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.
F-35
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands, except share and per share data
NOTE 2:-
SIGNIFICANT ACCOUNTING POLICIES (Cont.)
ac.
Recently issued accounting pronouncements
FORMULA SYSTEMS (1985) LTD.
AND ITS SUBSIDIARIES
In August 2014, the Financial Accounting Standards Board (“FASB”) issued amended guidance related to disclosure of uncertainties about
an entity’s ability to continue as a going concern. The new guidance requires management to evaluate whether there is substantial doubt
about the entity’s ability to continue as a going concern and, as necessary, to provide related footnote disclosures. The guidance has an
effective date of December 31, 2016.
In May 2014, Financial Accounting Standards Board ("FASB") issued ASU 2014-09, "Revenue from Contracts with Customers (Topic
606)", a comprehensive new revenue recognition standard that will supersede existing revenue guidance under US GAAP and IFRS ("ASU
2014-09"). ASU 2014-09's core principle is that a company will recognize revenue when it transfers promised goods or services to
customers in an amount that reflects the consideration to which the company expects to be entitled in exchange for those goods or services.
ASU 2014-09 is effective for annual periods beginning after December 15, 2016, including interim periods within that period. Early
adoption is not permitted under US GAAP. The Company is currently evaluating the method of adoption, as well as the effect that
adoption of this ASU will have on its consolidated financial statements.
In April 2014, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update No. 2014-08 (ASU 2014-08)
“Presentation of Financial Statements (Topic 205) and Property, Plant, and Equipment (Topic 360): Reporting Discontinued Operations
and Disclosures of Disposals of Components of an Entity. The new guidance limits the presentation of discontinued operations to business
circumstances when the disposal of the business operation represents a strategic shift that has had or will have a major effect on operations
and financial results. This guidance is effective for fiscal years beginning January 1, 2015. The company believes that the adoption of this
new standard will not materially impact its consolidated financial statements.
F-36
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
FORMULA SYSTEMS (1985) LTD.
AND ITS SUBSIDIARIES
a.
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 Formula's interest in Sapiens
from 75.6% to 42.2% and the Formula'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 maintained significant influence over Sapiens, and started
using the equity method of accounting on Sapiens results.
Upon the loss of control, in 2011, 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 the retained investment in Sapiens was measured according to Sapiens' share price on August 21, 2011 of $4.1 per share.
On January 27, 2012, Formula consummated the purchase of Sapiens common shares from two former shareholders of FIS and IDIT
(Sapiens' recently-acquired companies) and other shareholders, resulting in Formula’s interest in Sapiens' outstanding common shares
increasing from 47.3% to 52.1%, regaining a controlling interest in Sapiens and recording a gain in the amount of $ 3,410. 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 January 27, 2012 of $4.28 per share.
The acquisition was accounted for using the purchase method. The results of operations of Sapiens have been consolidated commencing as
of January 27, 2012.
The following table summarizes the estimated fair values of the assets acquired and liabilities assumed, with reference to the acquisition as
of January 27, 2012:
Net assets
Customer relationships
Developed Technology
Backlog
OCS liability (See note 13f)
Deferred tax liability
Non-controlling interest
Goodwill
Net assets acquired
$
112,536
5,644
2,926
2,828
(3,740)
(1,974)
(81,605)
51,614
$
88,229
F-37
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
In performing the purchase price allocation, management considered, among other factors, analyses of historical financial performance,
highest and best use of the acquired assets and estimates of future performance of Sapiens' business. In performing the purchase price
allocation, the fair value of intangible assets such as customer relationship was determined based on the income approach and core
technology was valued using the relief from royalty method.
On November 19, 2013, Sapiens completed a follow-on public offering of its ordinary shares on the NASDAQ. Sapiens issued 6,497,400
shares at a price of $ 6.25 per share before issuance expenses. Total net proceeds from the issuance amounted to approximately $ 37,791.
As a result of the offering, Formula’s interest in Sapiens' outstanding common shares diluted from 56.8% to 48.6% and due to loss of
control in Sapiens in accordance with ASC 810, the Company started applying the equity method of accounting to reflect its investment in
Sapiens. The gain recognized in relation of Formula’s interest in in Sapiens' outstanding common shares, diluting to 48.6%, amounted to $
61,164 and is presented in the income statement as equity in gains of affiliated companies, net. The fair value of the retained investment in
Sapiens was measured according to Sapiens' share price on November 19, 2013 of $7.09 per share.
The following represents the unaudited pro forma condensed results of operations for the years ended December 31, 2011 and 2012, as if
Sapiens had been controlled by Formula during the entire period from January 1, 2012, after giving effect to purchase accounting
adjustments, including amortization of intangible assets as well as the gains recorded upon the changes in control over Sapiens which
occurred during the period. This pro forma financial information is not necessarily indicative of the combined results that would have been
attained had the purchase of Sapiens shares taken place at the beginning of 2011, nor is it necessarily indicative of future results.
Total revenues
Net income attributable to Formula Shareholders
Earnings per share
Basic
Diluted
F-38
Year ended December 31,
2012
2011
Unaudited
$
$
$
$
672,311 $
15,580 $
751,642
20,486
1.15
$
1.13 $
1.52
1.46
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
From August 21, 2014 through December 23, 2014, Formula purchased an aggregate of 1,545,802 common shares of Sapiens through
broker-initiated and private transactions for an aggregate purchase price of $ 11,908, pursuant to which Formula’s holdings in Sapiens
were increased to 50.2%. As a result of Formula’s gaining of control in Sapiens, Formula’s investment in Sapiens was consolidated in
Formula’s closing balances as of December 31, 2014. The gain recognized in relation to the consolidation of Sapiens and the related re-
measurement of the investment to fair value amounted to $ 3,413 and is presented in the income statement as equity in gains of affiliated
companies, net.
The acquisition was accounted for using the purchase method. The results of operations of Sapiens have been consolidated commencing as
of December 23, 2014.
The following table summarizes the estimated fair values of the assets acquired and liabilities assumed, with reference to the acquisition as
of December 23, 2014:
Net assets
Customer relationships
Developed and acquired Technology
Backlog and deferred revenues
OCS liability (See note 13f)
Deferred tax liability, net
Non-controlling interest
Goodwill
Net assets acquired
$
175,507
20,707
19,066
3,864
(4,437)
(10,796)
(178,174)
149,559
$
175,296
In performing the purchase price allocation, management considered, among other factors, analyses of historical financial performance,
highest and best use of the acquired assets and estimates of future performance of Sapiens' business. In performing the purchase price
allocation, the fair value of intangible assets such as customer relationship was determined based on the income approach and core
technology was valued using the relief from royalty method. The estimated fair values of the tangible and intangible assets recognized in
relation to the acquisition of Sapiens are provisional and are based on information that was available as of the date Formula gained control
in Sapiens. The Company's management 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 as soon as practicable but no
later than the measurement period one year from the date of acquisition ("the measurement period").
F-39
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 following represents the unaudited pro forma condensed results of operations for the years ended December 31, 2014 and 2013, as if
Sapiens had been controlled by Formula during the entire period from January 1, 2013, after giving effect to purchase accounting
adjustments, including amortization of intangible assets as well as the gains recorded upon the changes in control over Sapiens which
occurred during the period. This pro forma financial information is not necessarily indicative of the combined results that would have been
attained had the purchase of Sapiens shares taken place at the beginning of 2013, nor is it necessarily indicative of future results.
Total revenues
Net income attributable to Formula Shareholders
Earnings per share
Basic
Diluted
Year ended December 31,
2014
2013
Unaudited
$
$
$
$
813,977 $
20,027
$
793,124
82,033
1.46 $
1.38 $
5.89
5.67
b.
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 $12,565. During 2012, the Company paid an additional amount of $140
with respect to the acquisition. 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 acquisition was accounted for via the purchase method. The results of operations were included in the consolidated financial
statements of the Company commencing on January 1, 2012.
The following table summarizes the estimated fair values of the assets acquired and liabilities assumed:
Net liabilities
Intangible assets
Goodwill
Net assets acquired
$
(3,248)
7,251
8,702
$
12,705
Identifiable intangible assets, including customer relationships were valued using a variation of the income 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-40
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
Amounts of $ 4,430, $ 2,138 and $ 683 of the purchase price were allocated to customer relationships, developed technology and backlog,
respectively. The Company amortizes the customer relationships, backlog and acquired technology over periods of 15 years, 15 years and
3.5 years, respectively.
c.
In January 2012, Matrix purchased from the holders (the "Founders") in AG 2000 Holdings LLC ("the Acquiree") 60% of their interests.
The sole asset held by the acquiree was the share capital of Exzac Inc., a U.S. based company in the field of risk management for financial
institutions that deals in commerce, and which specializes in application services for enterprise fraud management ("Exzac"). In
consideration for the shares, the Company paid the Founders an amount of $ 6,750, with the addition of approximately $ 215 for the
Acquiree's equity. Moreover, the Founders were entitled to an additional consideration (earn-out) that is contingent on meeting certain
targets based on the excess of operating income results over predetermined amount, but in any event not more than $ 2,500.
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 contingent payment was recorded at present value and was amortized using the
interest method during the relevant period into financial expenses.
The Company believes that the acquisition of this business will enable it to expand its professional services offering in the U.S and
leverage its relationships with top tier customers. Acquisition related costs were immaterial.
Matrix and the Founders received mutual options for the purchase of the founders' remaining shares in the Acquiree. As a result of the
mutual options provided, the Company recorded a redeemable non-controlling interest in an amount of $ 17,706.
On December 19, 2012, the option was partially exercised and Matrix purchased from one of the Founders its shares in the Acquiree (20%
of the Acquiree's shares) in consideration of $ 5,000 and with an additional consideration that will be calculated according to a formula
based on the Acquiree's results in 2014.
On January 5, 2014, the option for purchasing the remaining 20% in the Acquiree, was exercised in consideration of $ 5,000 and with an
additional amount that will be calculated according to a predetermined formula based on the Acquiree's results in 2014.
At the request of the sellers, in November 2014, the Company agreed to an early settlement of the remaining contingent amount based on
estimated calculation of the Acquiree's results in 2014. As a result of the early payment the Company recorded a net gain of $ 2,544. As of
December 31, 2014 the Company holds 100% in Exzac without any liability to any of the sellers.
F-41
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 acquisition was accounted for by the purchase method. The results of operations were included in the consolidated financial statements
of the Company commencing as of January 2, 2012.
Net assets
Customer relationships
Backlog and non-compete agreement
Redeemable non-controlling interest
Goodwill
Net assets acquired
$
267
3,195
338
(17,706)
23,156
$
9,250
Identifiable intangible assets, including customer relationship were valued using a variation of the income approach. This method utilized a
forecast of expected cash inflows, cash outflows and contributory charges for economic returns on tangible and intangible assets employed.
Amounts of $ 3,195 and $ 338 of the purchase price were allocated to customer relationships and the backlog and non-compete
agreements, respectively. The Company amortizes the customer relationships and backlog and non-compete agreement over periods of 4-5
years and 1-3 years, respectively.
d.
In July 2012, Magic acquired an 80% interest in Comm-IT Group, (including "Comm-IT Technology Solutions" and "Comm-IT
Software"), a software and systems development house that specializes in providing advanced IT and communications services and
solutions, for a total consideration of $ 8,933, of which $ 4,990 was paid upon closing and the remaining $ 3,943 is to be paid during the
next two years, of which, $ 1,192 is contingent upon the acquired business meeting certain operational targets in 2012 and 2013, and
$ 2,751 in deferred payments. The Purchaser (Magic) and the seller hold mutual call and put options respectively for the remaining 20%
interest. As a result of the put option, the Company recorded a redeemable non-controlling interest in an amount of $ 1,750.
The Company believes that the acquisition of this business will enable it to expand its professional services offering and leverage its
relationships with top tier customers. Acquisition related costs were immaterial.
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 contingent payment was recorded at present value and was amortized using the
interest method during the relevant period into financial expenses.
F-42
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 acquisition was accounted for via the purchase method. The results of operations were included in the consolidated financial
statements of the Company commencing as of July 1, 2012.
On May 2013 the Company finalized the process of identifying the intangible assets for its acquisition. The following table summarizes the
fair value of the assets and liabilities acquired:
Net assets
Non-controlling interest
Intangible assets
Goodwill
Deferred tax liability, net
Net assets acquired
As reported
on December
31, 2012
Adjustment
Modified
$
1,219 $
(1,880)
3,873
5,809
-
$
14
130
397
439
(1,068)
1,233
(1,750)
4,270
6,248
(1,068)
$
9,021 $
(88) $
8,933
e.
f.
During the year ended December 31, 2012, Formula and its subsidiaries completed additional two other acquisitions for a total cash
consideration of approximately $10,146 (of which approximately $ 332 was paid during 2013). The Company allocated $ 7,085 to
goodwill and $ 2,776 to other intangible assets. These acquisitions generally enhance the Group's technologies, and product offerings. Pro
forma results of operations for these acquisitions have not been presented because they are not material to the consolidated results of
operations, either individually or in the aggregate.
On November 11, 2013, Magic acquired the operations of Allstates Technical Services, LLC, A U.S. based full-service provider of
consulting and staffing solutions for IT, Engineering and Telecom personnel, for a total consideration of $10,963. The Company believed
the acquisition will broadens its existing U.S. footprint and adds leading Fortune 500 companies to its customer base, making an important
contribution to its growth strategy in the IT professional services operating segment. The results of operations were included in the
consolidated financial statements of the Company commencing November 11, 2013. The following table summarizes the estimated fair
values of the assets acquired and liabilities assumed as at the acquisition date:
Net assets
Intangible assets
Goodwill
Net assets acquired
$
3,063
2,874
5,026
$
10,963
F-43
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.)
g.
h,
During the year ended December 31, 2013, Formula and its subsidiaries completed additional four other acquisitions for a total cash
consideration of up to approximately $8,475, of which $ 5,919 was attributed to goodwill and $ 1,905 to other identifiable intangible
assets. These acquisitions generally enhance the group's technologies, and product offerings. Pro forma results of operations for these
acquisitions have not been presented because they are not material to the consolidated results of operations, either individually or in the
aggregate.
During the year ended December 31, 2014, Formula and its subsidiaries completed additional four other acquisitions for a total cash
consideration of up to approximately $8,697, of which $ 2,317 was attributed to goodwill and $ 2,284 to other identifiable intangible
assets. These acquisitions generally enhance the group's technologies, product and services offerings. Pro forma results of operations for
these acquisitions have not been presented because they are not material to the consolidated results of operations, either individually or in
the aggregate,
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
Total long-term securities
December 31,
2013
2014
$
17,102
854
$
17,956
$
$
$
15,784
-
15,784
33,748
520
$
$
520 $
33,748
(1)
The Company recognized trading gains in amounts of $ 987 and $ 909 during the years ended December 31, 2013 and 2014,
respectively.
b.
The following is a summary of marketable securities which are classified as available-for-sale:
2013
2014
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
190
450
$
-
-
-
$
3
25
299
$
410
215
749
5,128 $
27,970
331
- $
-
-
$
-
-
319
5,128
27,970
650
Total available-for-sale marketable securities
$
1,047 $
- $
327 $
1,374 $
33,429 $
- $
319 $
33,748
F-44
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 4:- MARKETABLE SECURITIES (Cont.)
During the year ended December 31, 2012 the Company recorded an impairment loss for its investment in equity securities in an amount of
$ 700.
In 2012, 2013 and 2014 the Company received proceeds from sale and maturity of available for-sale marketable securities of $ 2,674, $ 0
and $ 400, and recorded related net gains (losses) of $ 31, $ 0 and $ 0 in financial income, respectively.
c.
The amortized costs of available-for-sale debt securities at December 31, 2014, by contractual maturities, are shown below:
Due between one year to three years
Amortized
cost
Gross unrealized
gains (losses)
Gains
Losses
$
$
33,098 $
33,098
$
- $
- $
Estimated
fair value
- $
33,098
-
$
33,098
The following is the change in the other comprehensive income from available-for-sale securities during 2014 and 2013:
Other
comprehensive
income
Other comprehensive income from available-for-sale securities as of January 1, 2013
$
Unrealized gain from available-for-sale securities
Other comprehensive income from available-for-sale securities as of December 31, 2013
Unrealized loss from available-for-sale securities
Other comprehensive income from available-for-sale securities as of December 31, 2014
$
173
154
327
(8)
319
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 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, 2014 and 2013:
F-45
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands, except share and per share data
NOTE 5: - FAIR VALUE MEASUREMENT (Cont.)
FORMULA SYSTEMS (1985) LTD.
AND ITS SUBSIDIARIES
Assets:
Equity securities
Government and corporate debentures
Foreign currency derivative contracts
Total financial assets
Liabilities:
Contingent consideration (*)
Total financial liabilities
Redeemable non-controlling interest (*)
Assets:
Equity securities
Government and corporate debentures
Foreign currency derivative contracts
Total financial assets
Liabilities:
Contingent consideration (*)
Total financial liabilities
Fair value measurements using input type
December 31, 2014
Level 1
Level 2
Level 3
Total
4,428
12,006
-
-
33,098
87
16,434
33,185
-
-
-
-
-
-
-
-
-
-
2,607
2,607
4,428
45,104
87
49,619
2,607
2,607
10,313
10,313
Fair value measurements using input type
December 31, 2013
Level 1
Level 2
Level 3
Total
$
$
4,051
14,210
-
18,261
-
-
- $
215
-
215
-
-
$
-
-
-
4,051
14,425
-
-
18,476
13,740
13,740
13,740
13,740
Redeemable non-controlling interest (*)
$
- $
- $
23,529 $
23,529
(*)
The fair value of redeemable non-controlling interest and contingent consideration was determined based on the present value of the future
expected cash flow.
The following table summarizes the activity for those financial liabilities where fair value measurements are estimated utilizing Level 3 inputs:
Carrying value as of January 1
Acquisition of new subsidiary
Change due to loss of control in subsidiary
Increase of contingent consideration
Repayment of contingent consideration
Exchange differences
Net income attributable to redeemable non-controlling interests
Net changes in fair value
December 31,
2013
2014
$
34,139 $
-
-
2,459
(1,313)
2,474
546
(1,036)
37,269
1,113
(6,787)
-
(12,701)
(2,015)
154
(4,113)
Carrying value as of December 31
$
37,269 $
12,920
F-46
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands, except share and per share data
NOTE 6:- INVESTMENTS IN AFFILIATED COMPANIES
The following table summarizes activity related to formula’s investment in affiliates:
FORMULA SYSTEMS (1985) LTD.
AND ITS SUBSIDIARIES
January 1, 2014
Deconsolidation of Magic and accounting for the remaining investment under equity method (see Note 1)
Consolidation of Sapiens
Equity in gains of affiliated companies, net:
$
Equity in gains of affiliated companies, net
Exercise of employees stock options in affiliate
Equity in other comprehensive gain (loss) of affiliates, net
Purchase of additional shares
Dividends received from affiliates
Classification of deferred income
December 31, 2014
2014
160,165
168,810
(161,810)
9,058
(4,931)
(7,793)
7,614
(1,891)
(79)
169,143
Following are details relating to the financial position and results of operations of affiliates in the aggregate:
a.
Group's share of its associates' statement of financial position based on the interests therein as of the below reporting dates:
Current assets
Noncurrent assets (*)
Current liabilities
Noncurrent liabilities
Associates’ equity relating to non-controlling interest by options
Other investments
$
December 31,
2013
2014
$
50,107
136,117
(19,005)
(7,054)
160,165
-
1,336
58,635
129,946
(12,057)
(4,813)
171,711
(2,568)
-
$
161,501
$
169,143
(*)
Includes balances of other intangible assets and goodwill in an amount of $ 117,234 and $ 126,610 as of December 31, 2013 and
2014, respectively.
F-47
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands, except share and per share data
NOTE 6:- INVESTMENTS IN AFFILIATED COMPANIES (Cont.)
b.
Group's share of its associates' statement of operation based on the interests therein during the periods shown below (with respect to the
Group's interest in Sapiens, for the period from January 1st, 2012 until January 27, 2012 and from November 19, 2013 until December 23,
2014 only, and with respect to the Group’s interest in Magic, only for the period from March 5, 2014):
FORMULA SYSTEMS (1985) LTD.
AND ITS SUBSIDIARIES
Revenues
Income (loss)
NOTE 7:-
PROPERTY, PLANTS AND EQUIPMENT, NET
Year ended
December 31,
2013
2012
2014
$
$
5,750 $
10,021 $
138,561
340 $
(481) $
9,058
Composition:
Cost:
Computers and equipment
Motor vehicles
Buildings
Leasehold improvements
Accumulated depreciation:
Computers and equipment
Motor vehicles
Buildings
Leasehold improvements
December 31,
2013
2014
$
21,219 $
386
3,281
15,698
40,584
13,230
182
1,904
5,860
21,176
22,955
255
2,928
17,410
43,548
13,557
133
1,787
8,192
23,669
Depreciated cost
$
19,408 $
19,879
Depreciation expenses totaled $ 5,500, $ 6,241 and $ 4,774 for the years ended December 31, 2012, 2013 and 2014, respectively.
F-48
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands, except share and per share data
NOTE 8:- GOODWILL
The changes in the carrying amount of goodwill for the years ended December 31, 2013 and 2014 were as follows:
FORMULA SYSTEMS (1985) LTD.
AND ITS SUBSIDIARIES
Balance as of January 1, 2013
Gain of control in subsidiaries
Deconsolidation of a subsidiary
Reclassifications and goodwill adjustment
Foreign currency translation adjustments
Balance as of December 31, 2013
Gain of control in subsidiaries
Deconsolidation of a subsidiary
Negative goodwill write-off
Foreign currency translation adjustments
Balance as of December 31, 2014
$
326,860
12,357
(124,052)
(567)
12,836
$
227,434
220,379
(62,040)
831
(13,543)
$
373,231
The Company performed annual impairment tests during the fourth quarter of 2014 and did not identify any impairment losses (See Note 2n).
NOTE 9:-
INTANGIBLE ASSETS, NET
a.
Intangible assets, net, are comprised of the following as of the below dates:
Original amounts:
Capitalized Software costs
Customer relationship
Acquired technology
Patent
Other intangibles
Accumulated amortization:
Capitalized Software costs
Customer relationship
Acquired technology
Patent
Other intangibles
December 31,
2013
2014
$
68,124 $
39,853
3,112
-
5,384
91,696
47,048
6,473
1,234
6,769
116,473
153,220
53,899 $
18,950
429
-
3,552
76,830
53,744
16,390
3,882
51
3,128
77,195
Total
$
39,643 $
76,025
F-49
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands, except share and per share data
NOTE 9:-
INTANGIBLE ASSETS, NET (Cont.)
b. Amortized expenses totaled $ 20,150, $ 17,213 and $ 4,188 for the years ended December 31, 2012, 2013 and 2014, respectively.
c. Estimated other intangible assets amortization for the years ended:
FORMULA SYSTEMS (1985) LTD.
AND ITS SUBSIDIARIES
December 31,
2015
2016
2017
2018
2019
2020 and thereafter
Total
$
13,397
11,573
10,448
10,277
9,622
20,708
$
76,025
NOTE 10:- LIABILITIES TO BANKS AND OTHERS
a.
Composition:
December 31,
2014
Interest rate
%
Linkage
Basis
Long-term
liabilities
Current
maturities
December 31, 2014
Total long-term
liabilities net of
current
maturities
Total long-term
liabilities net of
current
maturities
December 31,
2013
2.9-5.9
NIS - Unlinked
$
134,329
$
26,127
$
108,202 $
Libor + 3.5%
USD -Unlinked
Other
-
-
-
-
-
-
60,578
1,849
20
Total
$
134,329 $
26,127 $
108,202 $
62,447
b.
Maturity dates:
First year (current maturities)
Second year
Third year
Fourth year
Fifth year and thereafter
Total
c.
For details of liens, guarantees and credit facilities, see Note 13.
F-50
December 31,
2013
2014
$
24,050 $
22,829
16,860
13,116
9,642
26,127
31,512
28,393
22,631
25,666
$
86,497 $
134,329
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands, except share and per share data
NOTE 11:- EMPLOYEE OPTION PLANS
FORMULA SYSTEMS (1985) LTD.
AND ITS SUBSIDIARIES
a.
In. March 2011, Formula's shareholders approved the adoption of Formula's 2011 Employee and Officer Share Incentive Plan (the "2011
plan"). Pursuant to the 2011 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) Ordinary shares, restricted shares or options to purchase up to 545,000 ordinary shares
of Formula. The 2011 plan is administered by Formula's board of directors. The 2011 plan provides that share based compensation may be
granted, from time to time, to such grantees to be determined by the board, at an exercise price and under such terms to be determined at its
sole and absolute discretion. Share based compensation may be granted under the plan through March 2021. In 2012, the Company
increased the amount of ordinary shares reserved for issuance under the 2011 plan by 1,200,000 options.
In March 2011, concurrently with the amendment and extension of Formula chief executive officer's service agreement, the Company
approved him a grant of options exercisable for an additional 543,840 ordinary shares. The options vest in equal quarterly installments,
over a four year period that commence in December 31, 2011 and concludes in December 31, 2015. The exercise price of the options is
NIS 0.01 per share. In May 2011, the chief executive officer exercised all of these options for redeemable restricted 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 Formula share price on the grant date and totaled $ 9,055 ($ 16.65 per
share).
In December 2011, at which time Formula was negotiating an amendment and an 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, the board of directors of
Formula awarded him with a new share option incentive plan, following the redemption of the 543,840 redeemable ordinary shares, which
were granted to him in March 2011 and which were not yet vested in their redemption date. Under the 2011 plan, the chief executive
officer of Formula was granted with options exercisable to 1,122,782 ordinary shares of Formula (the "New grant"), as long as he continue
to serve as (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., Formula’s 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
F-51
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands, except share and per share data
NOTE 11:- EMPLOYEE OPTION PLANS (Cont.)
FORMULA SYSTEMS (1985) LTD.
AND ITS SUBSIDIARIES
December 31, 2019. The exercise price of the options is NIS 0.01 per share. The New grant is accounted for as a modification to the March
2011 grant to the chief executive officer. Total fair value of the grant was calculated based on the share price on the grant date and totaled
$ 18,347 ($ 16.34 per share).
In accordance with the terms of the option grant, the shares issuable upon exercise of the options will be deposited with a trustee and
Formula chief executive officer will not be permitted to vote or dispose of them until the shares are released from the trust.
In June 2013 all options were exercised into shares however they have been deposited with a trustee and Formula’s chief executive officer
is not permitted to vote or dispose of them until the shares are released from the trust. All shares participate in dividends and have the right
to vote, however for so long as the shares are held by the trustee (even if they have vested) the voting rights may only be exercised by the
trustee. In accordance with the guidelines of Formula incentive plan for so long as the shares underlying any grant under the plan are being
held by the trustee they will be voted by the trustee in the same proportion as the results of the shareholder meeting. Only those shares for
which the vesting period has expired may be collected from the trustee. As of December 31, 2014 all 1,122,782 shares were deposited with
the trustee.
b.
c.
In November 2014, Formula board of directors awarded its chief financial officer with 10,000 restricted shares under the 2011 plan (the
“restricted shares”). These restricted shares vest on a quarterly basis over a four-year period, commencing on November 13, 2014 and
concludes in November 13, 2018, provided that during such time the chief financial officer will continue to serve as (i) an officer of the
Company and/or (ii) an officer in one of the directly held affiliates, except that if he fail to meet the service condition due to the request of
the board of directors of either Formula or any of its directly held affiliates (other than a termination of his provision of services which is
based on actions or omissions by him that will constitute “cause” under his grant agreement with Formula); then, the chief financial officer
will be deemed to have complied with clauses (i) or (ii) above. Notwithstanding the foregoing, if a change of control of the Company
occurs, then all unvested restricted shares will immediately become vested. Total fair value of the grant was calculated based on the
Formula share price on the grant date and equaled to $ 239 ($ 23.9 per share).
Formula's subsidiaries grant, from time to time, options to their employees to purchase shares in the respective companies.. 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 2x.
F-52
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands, except share and per share data
NOTE 11:- EMPLOYEE OPTION PLANS (Cont.)
d. 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
Cost of revenues
Research and development expenses
Selling and marketing expenses
General and administrative expenses
Total stock-based compensation expense
Matrix:
Year ended December 31,
2013
2012
2014
$
$
16 $
114
82
4,708
$
11
67
86
3,814
1
5
15
4,962
4,920 $
3,978
$
4,983
The following table is a summary of employee option activity as of December 31, 2014, and changes during the year ended December 31,
2014, in Matrix:
Outstanding at January 1, 2014
Granted
Exercised
Expired and forfeited
Outstanding at December 31, 2014
Exercisable at December 31, 2014
Weighted
average
remaining
contractual
term
(in years)
Weighted
average
exercise
price
Aggregate
intrinsic
value
4.29
-
4.29
4.29
3.95
3.95
1.96
-
1.0
1.0
1,671
-
303
303
Number
of options
2,025,000
-
1,465,000
25,000
535,000
535,000
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, 2014. This value would change based on the change in the market value of
Matrix' ordinary shares and the change in the exchange rate between the New Israeli Shekel and U.S. dollar. As of December 31, 2014,
there’s no unrecognized compensation costs related to non-vested share-based compensation arrangements granted under Matrix equity
incentive plan. The total intrinsic value of options exercised during the years ended December 31, 2012, 2013, and 2014 was $ 376, $ 380
and $2,286, respectively.
F-53
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands, except share and per share data
NOTE 11:- EMPLOYEE OPTION PLANS (Cont.)
Sapiens:
i)
A summary of the stock option activities in 2014 is as follows:
FORMULA SYSTEMS (1985) LTD.
AND ITS SUBSIDIARIES
Outstanding at January 1, 2014
Granted
Exercised
Expired and forfeited
Outstanding at December 31, 2014
Year ended December 31, 2014
Weighted
average
exercise
price
Weighted
average
remaining
contractual
life (in years)
Aggregate
intrinsic value
Amount of
options
$
3,878,495
340,000
(1,225,368)
(197,046)
2,796,081
2.57
7.61
1.81
2.85
3.49
3.38
$
19,949
3.07
10,957
Exercisable at December 31, 2014
1,817,761
$
2.27
2.24
$
9,277
In 2012, 2013 and 2014, Sapiens granted 432,805, 595,000 and 340,000 stock options to purchase its shares to employees and directors,
respectively. The weighted average grant date fair values of the options granted during the years ended December 31, 2012, 2013 and 2014
were $ 1.96, $ 2.51 and $ 3.19, respectively. The total intrinsic value of options exercised during the years ended December 31, 2012, 2013
and 2014 was $ 2,668, $ 2,839 and $ 7,446, respectively.
The options outstanding under Sapiens' stock option plans as of December 31, 2014 have been separated into ranges of exercise price as
follows:
Ranges of
exercise price
Options
outstanding
as of
December 31,
2014
Weighted
Average
remaining
contractual
Term
(Years)
Options
Weighted Exercisable
average
exercise
price
$
December 31,
2014
as of
0.85-1.45
1.63
2.09-2.41
2.85
3.60-3.69
3.92
4.87-5.00
5.40-5.68
6.42
7.16-7.83
0.71
4.06
5.81
2.97
3.90
2.49
4.36
4.55
4.85
5.22
3.07
1.33
1.63
2.38
2.85
3.69
3.92
4.91
5.48
6.42
7.61
971,368
113,056
121,754
208,932
209,152
45,166
85,750
22,500
33,333
6,750
3.49
1,817,761
971,368
113,056
121,754
208,932
435,805
45,166
343,000
90,000
100,000
367,000
2,796,081
F-54
Weighted
Average
Exercise
price of
Options
Exercisable
$
1.33
1.63
2.38
2.85
3.69
3.92
4.91
5.48
6.42
7.66
2.27
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands, except share and per share data
NOTE 11:- EMPLOYEE OPTION PLANS (Cont.)
FORMULA SYSTEMS (1985) LTD.
AND ITS SUBSIDIARIES
As of December 31, 2014, there was $ 2,069 of total unrecognized compensation cost related to non-vested options, which is expected to
be recognized over a period of up to four years.
ii)
Warrants:
The following table summarizes information regarding outstanding warrants to purchase Sapiens Common shares as of December 31,
2014:
Warrants to
Common
shares
Weighted average
exercise price per
share
Warrants
exercisable
11,000
17,000
28,000
2.00
2.24
2.15
11,000
17,000
28,000
Exercisable through
May - 15
February - 15
Magic:
A summary of employee option activity under the Magic plans as of December 31, 2014 and changes during the year ended December 31,
2014 are as follows:
Outstanding at January 1, 2014
Granted
Exercised
Forfeited
Weighted
average
remaining
contractual
term
(in years)
Weighted
average
exercise
price
Aggregate
intrinsic
value
Number
of options
$
703,110
155,000
$
(115,721) $
(3,500) $
3.16
7.47
1.86
4.00
6.68
$
2,298
Outstanding at December 31, 2014
738,889
$
4.26
6.42
$
1,248
Exercisable at December 31, 2014
448,639 $
2.95
5.03 $
1,348
Vested and expected to vest at December 31, 2014
738,889 $
4.26
6.42 $
1,248
The weighted-average grant-date fair value of options granted to Magic’s employees and officers during the years ended December 31,
2012, 2013 and 2014 was $4.0, $ 6.0 and $ 3.76, 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, 2014. This
amount is changed based on the market value of the Company's ordinary shares. Total intrinsic value of options exercised during the years
ended December 31, 2012, 2013 and 2014 was $ 572, $ 529 and $ 741, respectively. As of December 31, 2014, there was $ 646 of
unrecognized compensation cost related to non-vested share-based compensation arrangements granted under the Magic’s plans. This cost
is expected to be recognized over a period of approximately three years.
F-55
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands, except share and per share data
NOTE 11:- EMPLOYEE OPTION PLANS (Cont.)
FORMULA SYSTEMS (1985) LTD.
AND ITS SUBSIDIARIES
The options outstanding as of December 31, 2014, have been separated into ranges of exercise price categories, as follows:
Exercise price
Options
outstanding
Weighted
average
remaining
contractual life
(years)
Weighted
average
exercise price
Options
exercisable
Weighted
average
exercise price
of exercisable
options
In $
0-1
1.01-2
2.01-3
3.01-4
4.01-5
5.01-6
6.01-7
7.01-8
8.01-9
4,000
69,200
173,667
252,022
-
85,000
75,000
-
80,000
4.24 $
1.85 $
4.80 $
6.12 $
- $
8.61 $
9.87 $
- $
9.36 $
-
1.20
2.30
3.96
-
6.00
6.89
-
8.01
4,000 $
69,200 $
173,667 $
180,522 $
- $
21,250 $
- $
- $
- $
-
1.20
2.30
3.95
-
6.00
-
-
-
738,889
6.42 $
4.26
448,639 $
2.95
NOTE 12: - LIABILITY IN RESPECT OF CAPITAL LEASE
The following are details of the Company’s future minimum lease commitments in respect of capital leases as of December 31, 2014:
First year (included in other accounts payable)
Second year until fifth year
Total
NOTE 13:- COMMITMENTS AND CONTINGENCIES
a.
Liens:
Minimum
lease
payments
Present value
of minimum
lease payment
Interest
480
941
1,421
41
38
79
439
903
1,342
Pursuant to financial institution credit agreement, a lien has been incurred by the Company over a certain portion of its investment in
outstanding shares of Matrix, Magic and Sapiens.
b.
Guarantees:
1.
The Group has provided certain bank guarantees in an aggregate of approximately $ 14,000 as security for its subsidiary companies’
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.
F-56
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands, except share and per share data
NOTE 13:- COMMITMENTS AND CONTINGENCIES (Cont.)
FORMULA SYSTEMS (1985) LTD.
AND ITS SUBSIDIARIES
2.
The Group has provided bank guarantees in an aggregate of approximately $ 5,200 as security for its subsidiary companies rent to
be paid for offices. If such 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 Formula and Matrix, with various financial institutions, the Group
committed to the following:
i)
Matrix
In the context of Matrix engagements with banks for receiving credit facilities, Matrix has undertaken to maintain the following
financial covenants, as they will be expressed in its financial statements, as described:
a) The total rate of Matrix debts and liabilities to banks with the addition of debts in respect of debentures that have been and/or
will be issued by it and shareholders' loans that have been and/or will be provided by it (collectively, "the debts") will not
exceed 40% of its total balance sheet.
b) The ratio of Matrix debts less cash to the annual EBITDA will not exceed 3.5.
c) Matrix equity shall not be lower than NIS 275,000 (approximately $ 70,712) at all times.
d) Matrix balances of cash and short-term investments in its balance sheet shall not be lower than NIS 50,000 (approximately $
12,857).
e)
In the event that Formula ceases to hold 30% of Matrix share capital or is no longer the largest shareholder in Matrix, the credit
may be placed for immediate repayment.
f) Matrix will not create any pledge on all or part of its property and assets in favor of any third party and will not provide any
guarantee to secure any third party's debts as they are today and as they will be without the banks' consent.
g) Matrix will not sell and/or transfer all or part of its assets to others in any manner whatsoever without the banks' advance
written consent, unless it is done in the ordinary course of business.
h) 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 $ 70,712). As of December 31, 2014, Matrix's equity
was approximately NIS 601,200 (approximately $ 154,590, as measured based on IFRS).
F-57
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands, except share and per share data
NOTE 13:- COMMITMENTS AND CONTINGENCIES (Cont.)
ii)
Formula
FORMULA SYSTEMS (1985) LTD.
AND ITS SUBSIDIARIES
In the context of Formula engagements with a certain financial institution for receiving a credit facility, Formula has undertaken to
maintain the following financial covenants, as they will be expressed in its financial statements, as described:
a) Company equity shall not be lower than $ 160,000 at all times.
b) The ratio of Company’s equity to total assets will not be less than 20%.
c) The ratio of Company’s financial debts less cash, short-term deposit and short-term marketable securities to the annual
EBITDA will not exceed 3.5
d) The ratio of Company’s financial debts less cash, short-term deposit and short-term marketable securities to the total assets will
not exceed 30%.
e) Formula’s liabilities to banks and other financial institutions in its standalone balance sheet shall not be higher than NIS
450,000 (approximately $ 115,711).
f)
Formula will not create any pledge on all or part of its property and assets in favor of any third party and will not provide any
guarantee to secure any third party's debts as they are today and as they will be without the financial institution's consent.
g) Formula will not sell and/or transfer all or part of its assets to others in any manner whatsoever without the financial
institution’s advance written consent, unless it is done in the ordinary course of business.
As of the date of the financial statements, Formula and Matrix are in compliance with the above financial covenants.
d.
Legal proceedings:
1.
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 sought damages in the amount of
approximately NIS 52,000 (approximately $13,371). The arbitrator determined that both Magic and its subsidiary breached the non-
disclosure agreement. In January 2015 the arbitrator rendered his ruling and determined that Magic should pay damages to the
plaintiffs. The group’s Equity in gains of affiliated companies, net includes a net impact of $722 resulting from the arbitration. Magic
is considering its options following this ruling.
F-58
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands, except share and per share data
NOTE 13:- COMMITMENTS AND CONTINGENCIES (Cont.)
FORMULA SYSTEMS (1985) LTD.
AND ITS SUBSIDIARIES
2. On September 10, 2014, a motion for certification of a class action (together with a statement of claim) was filed by an alleged
shareholder of Formula's subsidiary Matrix against Matrix and Matrix's directors and chief executive officer, and against Formula, as
Matrix’s controlling shareholder. The motion included a claim for damages caused, according to the alleged shareholder, to the
shareholders of Matrix as a result of the publication of financial statements that included misleading information, which, according to
the applicant, have a significant impact on Matrix’s results of operations, a breach of the duty of disclosure under Israeli securities
laws and negligent supervision over the financial statements, based on reports regarding the correction of errors discovered in the
financial statements of Matrix. On January 13, 2015, the applicant filed an amended request, which included, among other things, a
financial expert opinion and an increase to the amount of the claim in accordance with the above request, with the losses to the
applicant estimated to be NIS 0.225 and the losses of the entire group estimated to be NIS 41,000 (approximately $ 10,543). Matrix
and Formula have not yet filed a response.
At this time, given the multiple uncertainties involved and in large part to the highly speculative nature of the damages sought by the
plaintiff the Company is unable to estimate the amount of the probable loss, if any, to be recognized.
3.
In addition to the above-described 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 (that is, 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.
F-59
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands, except share and per share data
NOTE 13:- COMMITMENTS AND CONTINGENCIES (Cont.)
e.
Operating lease commitments:
FORMULA SYSTEMS (1985) LTD.
AND ITS SUBSIDIARIES
The following are details of the Company’s future minimum lease commitments for office equipment, office space and motor vehicles
under non-cancelable operating leases as of December 31, 2014:
2015
2016
2017
2018
2019 and Thereafter
$
21,891
13,206
10,486
8,490
5,918
$
59,991
Rent expenses for the years 2012, 2013 and 2014, were approximately $ 15,559, $ 20,408 and $ 15,979, respectively.
f.
Royalty commitments:
Sapiens Technologies (1982) Ltd. ("Sapiens Technologies"), a subsidiary of Sapiens incorporated in Israel, was partially financed under
programs sponsored by the Israel’s Office of the Chief Scientist ("OCS") for the support of certain research and development activities
conducted in Israel. In exchange for participation in the programs by the OCS, Sapiens Technologies agreed to pay 3%-3.5% of total net
consolidated license and maintenance revenue and 0.35% of the net consolidated consulting services revenue related to the software
developed within the framework of these programs based on an understanding with the OCS reached in January 2012.
The royalties will be paid up to a maximum amount equaling 100%-150% of the grants provided by the OCS, linked to the dollar, and for
grants received after January 1, 1999, bear annual interest at a rate based on LIBOR.
Royalty expenses in Sapiens amounted to $ 574, $ 514 and $ 618 in 2012, 2013 and 2014, respectively. Royalty expenses in Sapiens
consolidated and included in cost of revenues amounted to $ 574, $ 450 and $ 0 in 2012, 2013 and 2014, respectively
As of December 31, 2014, Sapiens had a contingent liability to pay royalties of $7,576.
F-60
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 14:- EQUITY
The composition of the Company’s share capital is as follows:
Ordinary shares, NIS 1 par value each
25,000,000 15,297,402 14,728,782 25,000,000 15,287,402 14,718,782
In August 2013, we declared an additional cash dividend of $0.09 per share ($3.4 million in the aggregate) to our shareholders of record on August 21, 2013 that
was payable on September 3, 2013.
December 31, 2014
December 31, 2013
Authorized
Issued Outstanding Authorized
Issued Outstanding
a.
b.
c.
d.
e.
f.
g.
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 568,620 of its ordinary shares.
In June 2013, Formula declared a cash dividend of approximately $ 5,446 ($ 0.37 per share) to shareholders of record on August July 2,
2013 that was payable on July 18, 2013.
In December 2013, Formula declared a cash dividend of approximately $ 4,563 (or $ 0.31 per share) to shareholders of record on January
20, 2014 that was payable on February 6, 2014.
On June 2014, Formula declared a cash dividend of approximately $ 7,065 (or $ 0.48 per share) to shareholders of record on July 14, 2014
that was payable on July 31, 2014.
On December 24, 2014, Formula declared a cash dividend of approximately $ 7,875 (or $ 0.535 per share) to shareholders of record on
January 19, 2015 that was payable on February 4, 2015.
For information concerning Formula employees and officers share option plan, see Note 11.
F-61
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands, except share and per share data
NOTE 15:-
INCOME TAXES
a.
Israeli taxation:
FORMULA SYSTEMS (1985) LTD.
AND ITS SUBSIDIARIES
1.
2.
Taxable income of Israeli companies is subject to tax at the rate of 25% in 2012 and 2013 and 26.5% in 2014 and onwards.
Tax benefits under the Israeli Law for the Encouragement of Capital Investments, 1959 (“the Law"):
Certain production and development facilities of Formula's Israeli subsidiaries and affiliates have been granted "Approved
Enterprise" and "Beneficiary Enterprise" status pursuant to the Law, which provides certain tax benefits to its investment programs
including tax exemptions and reduced tax rates. Income not eligible for Approved Enterprise and Beneficiary 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.
For all the above referred to operations, the benefit periods under the Law have not yet commenced.
The entitlement to the above benefits is conditional upon the fulfillment of the conditions stipulated by the Law and related
regulations (see below). Should any of Formula's Israeli subsidiaries 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, 2014, management believes that Formula's Israeli subsidiaries and affiliates are in compliance with
all of the conditions required by the Investment Law.
Effective January 1, 2011, the Israeli Knesset enacted the Law for Economic Policy for 2011 and 2012 (Amended Legislation), and
among other things, amended the Law, ("the Amendment"). According to the Amendment, the benefit tracks in the Law were
modified and a flat tax rate applies to the Formula's Israeli subsidiaries and affiliates entire preferred income. These subsidiaries and
affiliates will be able to opt to apply (the waiver is non-recourse) the Amendment and from then on it will be subject to the amended
tax rate of 16%.
F-62
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands, except share and per share data
NOTE 15:-
INCOME TAXES (Cont.)
FORMULA SYSTEMS (1985) LTD.
AND ITS SUBSIDIARIES
Under the terms of the Approved Enterprise program, income that is attributable to one of Sapiens’ Israeli subsidiaries will be
exempt from income tax for a period of two years commencing 2014. The tax holiday has resulted in a tax savings of approximately
$ 1,900 in the year ended December 31, 2014. If such tax-exempt income is distributed in a manner other than upon complete
liquidation of the company, it would be taxed at the reduced corporate tax rate applicable to such profits (25%), and an income tax
liability of up to approximately $1,800 would be incurred as of December 31, 2014.
Certain of Formula Israeli subsidiaries and affiliates intend to apply the new incentives regime under the Amendment to their
industrial activities in Israel in 2014 and believe that they will qualify as an “Beneficiary Company” under the Amendment.
3.
Tax benefits under the Israeli Law for the Encouragement of Industry (Taxes), 1969:
It is Formula’s management belief that some of its Israeli subsidiaries currently qualify as an "Industrial Company," within the
meaning of the Law for the Encouragement of Industry (Taxes), 1969 (the "Industrial Encouragement Law"). That Industrial
Encouragement Law defines an "Industrial Company" as a company that is resident in Israel and that derives at least 90% of its
income in any tax year, other than income from defense loans, capital gains, interest and dividends, from an enterprise whose major
activity in a given tax year is industrial production. Under the Industrial Encouragement Law, these Israeli subsidiaries are entitled
to amortization of the cost of purchased know-how and patents over an eight-year period for tax purposes as well as accelerated
depreciation rates on equipment and buildings.
Eligibility for the benefits under the Industrial Encouragement Law is not subject to receipt of prior approval from any
governmental authority.
4.
Foreign Exchange Regulations
Under the Foreign Exchange Regulations, some of Formula's Israeli subsidiaries calculate their tax liability in U.S. Dollars
according to certain orders. The tax liability, as calculated in U.S. Dollars is translated into NIS according to the exchange rate as of
December 31st of each year.
b.
Non-Israeli subsidiaries:
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 has been provided in relation to undistributed earnings of the non-Israelis subsidiaries. This is
because the Group intends to permanently reinvest undistributed earnings in the foreign subsidiaries in which those earnings arose. If these
earnings were distributed to Israel in the form of dividends or otherwise, the Company may be subject to additional Israeli income taxes
(subject to an adjustment for foreign tax credits) and foreign withholding taxes.
F-63
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands, except share and per share data
NOTE 15:-
INCOME TAXES (Cont.)
FORMULA SYSTEMS (1985) LTD.
AND ITS SUBSIDIARIES
The amount of undistributed earnings of foreign subsidiaries and affiliates that are considered to be reinvested as of December 31, 2014
was $ 19,850 and 21,152, respectively. However, a determination of the amount of the unrecognized deferred tax liability for temporary
difference related to those undistributed earnings of foreign subsidiaries is not practicable due to the complexity of the structure of our
group of subsidiaries and affiliates for tax purposes and the difficulty of projecting the amount of future tax liability.
c.
Net operating loss carry forwards:
Formula
Formula stand alone had cumulative losses for tax purposes as of December 31, 2014 totaling approximately $ 66,820 (as of December 31,
2013, the amount was $ 61,261), which can be carried forward and offset against taxable income in the future for an indefinite period.
Matrix
Matrix had cumulative losses for tax purposes as of December 31, 2014 totaling approximately $ 33,920 (as of December 31, 2013, the
amount was $ 33,700), which can be carried forward and offset against taxable income in the future for an indefinite period,
Magic
As of December 31, 2014, Magic and its Israeli subsidiaries had operating loss carry forwards of $ 15,929, which can be carried forward
and offset against taxable income in the future for an indefinite period. Magic's subsidiaries in Europe had estimated total available tax loss
carry forwards of $ 4,999 as of December 31, 2014, to offset against future taxable income. Magic's subsidiaries in the U.S. had estimated
total available tax loss carry forwards of $ 427 as of December 31, 2014, which can be carried forward and offset against taxable income
for a period of up to 20 years, from the year the loss was incurred.
Utilization of U.S. net operating losses may be subject to substantial annual limitations due to the "change in ownership" provisions
("annual limitations") of the Internal Revenue Code of 1986 and similar state provisions. The annual limitation may result in the expiration
of net operating losses before utilization.
Sapiens
As of December 31, 2014, certain subsidiaries of Sapiens had tax loss carry-forwards totaling approximately $ 38,800. Most of these carry-
forward tax losses have no expiration date.
F-64
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands, except share and per share data
NOTE 15:-
INCOME TAXES (Cont.)
Insync
As of December 31, 2014 Insync had no tax loss carry-forwards.
FORMULA SYSTEMS (1985) LTD.
AND ITS SUBSIDIARIES
Formula, its subsidiaries and its affiliates have cumulative losses for tax purposes as of December 31, 2014 totaling approximately
$ 168,445 (as of December 31, 2013, the amount was $ 177,211), of which $ 142,191 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 $ 26,254 of which was in
respect of companies abroad (as of December 31, 2013, that amount was $ 30,284).
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 15(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, its subsidiaries and its affiliates:
Formula
Formula's tax years 2011 through 2014 remain subject to examination by the Israeli Tax Authorities.
Matrix
Matrix and its subsidiaries have received final tax assessments (or assessments that are deemed final) up to and including the 2010 tax
year.
Magic
Magic (the Israeli entity) and its Israeli subsidiaries have received final tax assessments (or assessments that are deemed final) through the
year 2010. Non-Israeli subsidiaries of Magic are taxed according to the tax laws in their respective jurisdictions of domicile 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.
F-65
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands, except share and per share data
NOTE 15:-
INCOME TAXES (Cont.)
Sapiens
FORMULA SYSTEMS (1985) LTD.
AND ITS SUBSIDIARIES
As of December 31, 2014, most of the Sapiens' Israeli subsidiaries are subject to Israeli income tax audits for the tax years 2009 through
2014, to U.S. federal income tax audits for the tax years of 2009 through 2014, and to other for the tax years of 2006 through 2014.
e.
Deferred tax assets (liabilities), net:
1.
Composition, net:
Net operating losses carried forward
Allowances, reserves and intangible assets
Capitalized software costs
Differences in measurement basis (cash basis for tax purposes)
Valuation allowance
Total
2.
Presentation in balance sheets:
Other current assets (Note 16a)
Other non-current assets
Other current liabilities (Note 16c)
Long-term liabilities
f.
Income before taxes on income:
December 31,
2013
2014
$
34,293 $
3,409
(1,723)
(6,104)
29,875
(20,692)
35,611
(30,159)
(5,677)
(1,997)
(2,222)
(12,369)
$
9,183 $
(14,591)
December 31,
2013
2014
$
6,755 $
13,152
(2,567)
(8,157)
5,164
12,738
(1,375)
(31,118)
$
9,183 $
(14,591)
Year ended December 31,
2013
2014
2012
Domestic
Foreign
Total
$
35,680 $
12,893
46,924
7,582
$
$
20,640
9,529
$
48,573 $
54,506 $
30,169
F-66
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands, except share and per share data
NOTE 15:-
INCOME TAXES (Cont.)
g.
Taxes on income:
Taxes on income (tax benefit) consist of the following:
FORMULA SYSTEMS (1985) LTD.
AND ITS SUBSIDIARIES
Year ended December 31,
2013
2014
2012
Current taxes:
Domestic
Foreign
Deferred taxes:
Domestic
Foreign
Deferred taxes, net
Taxes on income
h.
Theoretical tax:
$
5,955 $
1,113
$
5,474
2,526
9,188
2,857
7,068
8,000
12,045
(453)
(32)
2,464
(1,538)
(1,901)
(70)
(485)
926
(1,971)
$
6,583 $
8,926 $
10,074
The following table presents 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 statements of income:
Year ended December 31,
2013
2014
2012
Income before income taxes, as per the statement of operations
$
48,573
$
54,506
$
30,169
Statutory tax rate in Israel
Theoretical tax expense
Reconciliation:
Non-deductible expenses
Effect of different tax rates
Deferred taxes on current losses (utilization of carry forward 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
Uncertain tax position
Taxes in respect of prior years
Other
25%
25%
26.5%
12,143
13,627
7,995
1,965
547
(761)
-
(4,179)
(1,260)
(2,456)
146
810
813
(183)
(677)
(1,110)
(3,560)
(638)
(354)
267
848
1,032
-
-
33
193
(294)
Income taxes as per the statement of operations
$
6,145
$
8,728
$
10,074
Effective tax rate - in %
12.7%
16.0%
33.4%
F-67
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands, except share and per share data
NOTE 15:-
INCOME TAXES (Cont.)
i.
Uncertain tax positions:
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, 2013
Increase due to consolidation of Sapiens
Increase related to current year tax positions
Decrease related to prior years' tax positions
Balance as of December 31, 2013
Increase due to deconsolidation of Magic
Increase due to consolidation of Sapiens
Increase related to current year tax positions
Decrease related to prior years' tax positions
Balance as of December 31, 2014
$
4,487
(634)
-
(2,836)
1,017
(472)
705
115
(82)
1,283
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, 2012, 2013 and 2014, the amounts recognized, on a consolidated basis, for interest and penalties expenses
related to uncertain tax positions were $ 97, $ 17 and $ 0, respectively. In addition, the Group's consolidated liability for unrecognized tax
benefits including accrued interest and penalties related to uncertain tax positions was $ 58 and $ 198 at December 31, 2013 and 2014,
respectively, which is included within income tax accrual in the Group's consolidated balance sheets. The increase in liability for
unrecognized tax benefits including accrued interest and penalties related to uncertain tax positions is due to the consolidation of Sapiens
having an impact of $ 198 which was offset by the deconsolidation of Magic amounting to ($ 58).
As of December 31, 2014, the entire amount of unrecognized tax benefit (i.e., $ 1,283) could affect the Group's income tax provision and
the effective tax rate.
F-68
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands, except share and per share data
NOTE 16:- SUPPLEMENTARY FINANCIAL STATEMENT INFORMATION
Balance Sheets:
a.
Other accounts receivable and prepaid expenses:
Composition:
Government departments
Employees(1)
Prepaid expenses and advances to suppliers
Deferred taxes
Restricted deposits
Related Parties
Other
Total
FORMULA SYSTEMS (1985) LTD.
AND ITS SUBSIDIARIES
December 31,
2013
2014
$
$
14,599
420
13,920
6,755
289
22
483
12,934
433
15,829
5,164
484
402
1,212
$
36,488
$
36,458
(1)
Some of these balances are linked to the CPI, and bear interest at an annual rate of 4%.
b.
Liabilities to Banks and others:
Composition:
December 31,
2014
Interest rate
%
Bank credit
Short-term bank loans
Current maturities of long-term loans from banks (see Note 10)
2.2
1.75-2.25
Total
F-69
Linkage
basis
Unlinked
December 31,
2013
2014
$
$
-
11,586
24,050
35,636 $
378
15,313
26,127
41,818
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands, except share and per share data
NOTE 16: - SUPPLEMENTARY FINANCIAL STATEMENT INFORMATION (Cont.)
c.
Other accounts payable:
Composition:
Government institutions
Customer advances
Deferred taxes (Note 15e)
Accrued royalties to the OCS (Note 13f)
Accrued expenses and other current liabilities
Total
d.
Financial expenses, net:
Composition:
FORMULA SYSTEMS (1985) LTD.
AND ITS SUBSIDIARIES
December 31,
2013
2014
$
$
13,068
2,601
2,567
-
4,617
12,830
187
1,375
788
9,733
22,853
$
24,913
2012
Year ended December 31,
2013
2014
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)
$
$
1,043
(6,144)
(1,828)
257
$
983
(4,629)
(3,577)
987
2,888
(6,800)
(1,862)
908
Total
$
(6,672) $
(6,236) $
(4,866)
(1)
(2)
Includes gains (losses) from trading securities still held by the Company for the years 2012, 2013 and 2014 in amounts of $ 957, $
985 and $ 908, respectively (see Note 4).
Includes impairment of available-for-sale marketable securities for 2013 of $ 714 (see Note 4).
e.
Other expenses (income), net:
Composition:
gain (loss) on sale of fixed assets, net
Other loss (income)
Total
2012
Year ended December 31,
2013
2014
$
$
(22)
(152)
(174)
$
$
14
-
14
-
(5)
(5)
F-70
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands, except share and per share data
NOTE 16: - SUPPLEMENTARY FINANCIAL STATEMENT INFORMATION (Cont.)
f.
Operating segments:
FORMULA SYSTEMS (1985) LTD.
AND ITS SUBSIDIARIES
The Company operates in the software services and proprietary software products and related services through its three directly held
subsidiaries: Matrix, Sapiens and Insync and through its affiliate Magic.
Matrix
Matrix provides software solutions and 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
operates through its directly and indirectly held subsidiaries in the following segments: (1) Software solutions and services (Information
Technology – IT); (2) Learning and integration; (3) Computer infrastructure and integration solutions; and, (4) Software product marketing
and support.
Software solutions and services:
The software solutions and services provided by Matrix consist of providing tailored software solutions and upgrading and expanding
existing software systems. These services include, among others, developing customized software, adapting software to the customer's
specific needs, implementing software and modifying it based on the customer's needs and integrating all or part of the above elements.
The scope of work invested in each element varies from one customer to the other.
Learning and integration:
Matrix's activities in this segment consist of operating a network of high-tech training and instruction centers which provide application
courses, professional training courses and advanced professional studies in the high-tech industry.
Computer infrastructure and integration solutions:
Matrix's activities in this segment consist of: (1) providing computer and telecommunication infrastructure solutions; (2) selling and
marketing personal computers, portable computers, Intel servers, peripheral equipment, operating systems, servers and workstations that
use UNIX and VMS and selling and marketing mainframe storage and backup systems such as IP and IBM; (3) providing computer and
peripheral equipment maintenance services, lab and helpdesk services.
Software product marketing and support:
Matrix's activities in this segment include marketing and support for various software products the principal of which being CRM,
computer systems management infrastructures, web world content management, database and data warehouse mining, application
integration, database and systems, data management and software development tools.
F-71
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands, except share and per share data
NOTE 16: - SUPPLEMENTARY FINANCIAL STATEMENT INFORMATION (Cont.)
Sapiens
FORMULA SYSTEMS (1985) LTD.
AND ITS SUBSIDIARIES
Sapiens is a leading global provider of proprietary software solutions for the insurance industry, with an emerging focus on the broader
financial services sector. We offer core software solutions for Property & Casualty/General Insurance, or P&C, and Life, Annuities, &
Pensions, or L&P, providers, allowing them to manage policy administration, claims management and billing functions. Sapiens also
provides record-keeping software solutions for providers of Retirement Services and offer a variety of technology-based solutions that
enable organizations to deploy business logic and comply with policies and regulations across their organizations. Sapiens solutions enable
customers to respond to evolving market needs and regulatory changes, while improving the efficiency of their core operations, thereby
increasing revenues and reducing costs.
Sapiens has developed scalable, configurable, rule-based core software platforms which offer its clients comprehensive and function-rich
solutions. Sapiens solutions allow its customers to support new delivery channels such as mobile and social, rapidly deploy new products,
and improve operational efficiency. As its software is customizable to match specific business requirements, it supports its customers’
operations across different market segments, geographies and regulatory regimes. In addition, its software solutions enable compliance
with complex and rapidly evolving regulations in the insurance and wider financial services industry.
Sapiens technology-based solutions include application development and business decision management platforms. its application
development platforms allow for the deployment of tailor-made solutions that address unique business needs for which pre-packaged
software solutions may not be available. Its business decision management platform, Sapiens DECISION, allows business professionals to
design, simulate, implement, change and analyze the business logic that drives financial operations and compliance in a business-friendly
format and environment. Its platform facilitates the swift deployment of new or changed business logic that originates from regulatory
updates or market changes, reduces costs and improves efficiency by shortening the software development lifecycle. This platform
empowers the organization’s business users as they manage their business strategy, rules and logic by using business terms rather than
programming language. 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.
From August 21, 2011, the date on which Formula lost its control in Sapiens, as described in Note 1, until January 27, 2012, the date on
which Formula regained its control in Sapiens, as described in Note 1, and from November 19, 2013, the dates on which Formula lost its
control in Sapiens, as described in Note 1 until December 23, 2014, the date on which Formula regained its control in Sapiens, as described
in Note 1, Sapiens' results of operations were reflected in the Company's results using the equity method of accounting and therefore were
not considered an operating segment during these periods.
F-72
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands, except share and per share data
NOTE 16: - SUPPLEMENTARY FINANCIAL STATEMENT INFORMATION (Cont.)
Magic
FORMULA SYSTEMS (1985) LTD.
AND ITS SUBSIDIARIES
Magic is a global provider of proprietary application development and business process integration software solutions and related
professional services, and a vendor of IT outsourcing services.
Magic software solutions are used by customers to develop, deploy and integrate on-premise, mobile and cloud-based business applications
quickly and cost effectively. In addition, its technology enables enterprises to accelerate the process of delivering business solutions that
meet current and future needs and allow customers to dramatically improve their business performance and return on investment. Its
software solutions include application platforms for developing and deploying specialized and high-end large-scale business applications
(Magic xpa application platform, formerly branded uniPaaS and Appbuilder) and an integration platform that allows the integration and
interoperability of diverse solutions, applications and systems in a quick and efficient manner (Magic xpi business and process integration
platform, formerly branded iBOLT). These solutions enable Magic customers to improve their business performance and return on
investment by supporting the affordable and rapid delivery and integration of business applications, systems and databases.
Using its products solutions, enterprises and independent software vendors can accelerate time-to-market by rapidly building integrated
solutions, deploying them in multiple environments while leveraging existing IT resources. In addition, its solutions are scalable and
platform-agnostic, enabling its customers to build solutions by specifying their business logic requirements in a commonly used language
rather than in computer code, and to benefit from seamless platform upgrades and cross-platform functionality without the need to re-write
applications. Magic technology also enables future proof protection and supports current market trends such as the development of mobile
applications that can be deployed on a variety of smartphones and tablets, and cloud environments.
With respect to IT outsourcing services, Magic offers a complete portfolio of professional services in the areas of infrastructure design and
delivery, application development, technology consulting planning and implementation services, support services and supplemental
staffing services.
Magic 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.
From March 5, 2014, the date on which Formula lost its control in Magic, as described in Note 1, until December 31, 2014, Magic's results
of operations were reflected in the Company's results using the equity method of accounting and therefore were not considered an
operating segment during this period.
F-73
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands, except share and per share data
NOTE 16: - SUPPLEMENTARY FINANCIAL STATEMENT INFORMATION (Cont.)
Insync
FORMULA SYSTEMS (1985) LTD.
AND ITS SUBSIDIARIES
InSync is a US based national supplier of employees to Vendor Management Systems (VMS) Workforce Management Program accounts.
Insync specializes in providing professionals in the following areas; Accounting and Finance, Administrative, Customer Service, Clinical,
Scientific and Healthcare, Engineering, Manufacturing and Operations, Human Resources, IT Technology, LI/MFG, and Marketing and
Sales. InSync currently supports more than 30 VMS program customers with employees in over 40 states.
The Company evaluates the performances of each of its directly held subsidiaries based on operating income/loss. Headquarters and
finance expenses of Formula are allocated proportionally among the subsidiaries:
Revenues:
2014
2013
2012
Inter-segment sales:
2014
2013
2012
Operating income:
2014
2013
2012
Identifiable assets:
2014
2013
Goodwill:
2014
2013
Identifiable liabilities:
2014
2013
Depreciation and amortization:
2014
2013
2012
Matrix
Sapiens
Magic
Insync
Total
586,618
534,792
513,181
-
117,281
104,110
27,299
144,958
126,380
22,785
-
-
636,702
797,031
743,671
285
870
690
30,003
34,376
31,775
-
-
-
-
280
-
-
9,015
7,825
3,350
17,351
15,645
-
-
-
1,682
285
1,150
690
35,035
60,742
55,245
Matrix
Sapiens
Magic
Insync
Total
326,469
350,063
201,237
-
-
108,067
7,641
-
535,347
458,130
155,974
165,253
217,257
-
-
62,181
-
-
373,231
227,434
201,736
226,127
7,400
7,381
7,873
55,561
-
-
8,588
10,333
-
23,762
1,436
-
258,733
249,889
1,386
8,380
7,444
(655)
-
-
8,131
24,349
25,650
F-74
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 16: - SUPPLEMENTARY FINANCIAL STATEMENT INFORMATION (Cont.)
Investments in segment assets:
2014
2013
2012
Matrix
Sapiens
Magic
Insync
Total
3,848
3,577
3,157
-
2,794
1,327
161
497
510
29
-
-
4,038
6,868
4,994
The following table presents 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:
Year ended December 31,
2013
2014
2012
Revenues:
Revenues as above
Less inter-segment transactions
Revenues as per statements of operations
Identifiable assets:
Total assets of operating segments
Assets not identifiable to a particular segment
Elimination of inter-segment assets and other
Total assets as per consolidated balance sheets
Identifiable liabilities:
Total liabilities of operating segments
Liabilities not identifiable to a particular segment
Elimination of inter-segment liabilities and other
$
$
743,671 $
(690)
797,031
$
(1,150)
636,702
(285)
742,981 $
795,881
$
636,417
December 31,
2013
2014
$
685,564
186,231
$
-
908,578
212,161
-
871,795
1,120,739
249,889
145,751
-
258,733
207,439
-
Total liabilities as per consolidated balance sheets
$
395,640
466,172
g.
Geographical information:
1.
The Company's long-lived assets are located as follows:
Israel
United States
Europe
Japan
Other
Total
F-75
December 31,
2013
2014
$
18,018 $
439
682
209
60
18,204
451
1,098
109
17
$
19,408 $
19,879
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands, except share and per share data
NOTE 16: - SUPPLEMENTARY FINANCIAL STATEMENT INFORMATION (Cont.)
2.
Revenues:
The Company’s revenues classified by geographic area (based on the location of customers) are as follows:
FORMULA SYSTEMS (1985) LTD.
AND ITS SUBSIDIARIES
Year ended December 31,
2013
2012
2014
Israel
International:
United States
Europe
Other
Total
h.
Earnings per share:
$
499,025 $
526,179 $
531,193
137,298
74,126
32,532
155,002
84,864
29,836
87,270
14,576
3,378
$
742,981 $
795,881 $
636,417
The following table presents the computation of basic and diluted net earnings per share for the Company:
Year ended December 31,
2013
2012
2014
Numerator:
Net income basic earnings per share - income available to shareholders
$
23,373 $
80,687
$
80,833
Amount for diluted earnings per share - income available to shareholders
23,373
80,687 $
80,833
Weighted average shares outstanding
Denominator for basic net earnings per share
Effect of dilutive securities
13,596
194
13,725
398
13,929
479
Denominator for diluted net earnings per share
13,790
14,123
14,408
Basic net earnings per share
Diluted net earnings per share
1.73
5.88
$
1.67 $
5.68
5.80
5.59
- - - - - - - - - - - - - - - - - - -
F-76
37 Broadhurst Gardens, London NW6 3QT
Tel: 020 - 7624 2251 Fax: 020 - 7372 2328
E - mail: lc@levy-cohen.co.uk
To the Board of Directors and Shareholders of
Magic Software Enterprises (UK) Limited
We have audited the accompanying balance sheet of Magic Software Enterprises (UK) Limited (the “Company”) as of December 31, 2014
and 2013, and the related profit and loss account and changes in shareholders’ equity for each of the three years in the period ended December 31,
2014. 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 audit.
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. We were not engaged to perform an audit of the Company’s 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, and 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, the financial statements referred to above present fairly, in all material respects, the financial position of
the Company at December 31, 2013 and 2012, and the related profit and loss account and changes in shareholders’ equity for each of the three years in
the period ended December 31, 2014, in conformity with U.S. generally accepted accounting principles.
Yours sincerely,
LEVY COHEN & CO.
Registered Auditors and Certified
Public Accountants
J. Cohen C.P.A. (ISR)
R. Shahmoon ACA
Registered to carry out audit work in the UK by The Institute of Chartered Accountants in England and Wales. Details about our
audit registration can be viewed at www.auditregister.org.uk under reference no. C008178288.
January 29, 2015
F-77
37 Broadhurst Gardens, London NW6 3QT
Tel: 020 - 7624 2251 Fax: 020 - 7372 2328
E - mail: lc@levy-cohen.co.uk
To the Board of Directors and Shareholders of
Hermes Logistics Technologies Limited
We have audited the accompanying balance sheet of Hermes Logistics Technologies Limited (the “Company”) as of December 31, 2014 and
2013, and the related profit and loss account and changes in shareholders’ equity for each of the three years in the period ended December 31, 2014.
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 audit.
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. We were not engaged to perform an audit of the Company’s 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, and 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, the financial statements referred to above present fairly, in all material respects, the financial position of
the Company at December 31, 2014 and 2013, and the related profit and loss account and changes in shareholders’ equity for each of the three years in
the period ended December 31, 2014, in conformity with U.S. generally accepted accounting principles.
Yours sincerely,
LEVY COHEN & CO.
Registered Auditors and Certified
Public Accountants
J. Cohen C.P.A. (ISR)
R. Shahmoon ACA
Registered to carry out audit work in the UK by The Institute of Chartered Accountants in England and Wales. Details about our
audit registration can be viewed at www.auditregister.org.uk under reference no. C008178288.
March 13, 2015
F-78
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Shareholders of
Magic Software Japan K. K.
We have audited the accompanying balance sheets of Magic Software Japan K.K. (the "Company”) as of December 31, 2013 and 2014, and the related
statements of operations and cash flows for each of the three years in the period ended December 31, 2014. 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 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. We were not
engaged to perform an audit of the Company's 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, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of the Company as of December 31,
2013 and 2014, and the related statements of operations and cash flows for each of the three years in the period ended December 31, 2014 in conformity with
accounting principles generally accepted in the United States of America.
Tokyo, Japan
January 28, 2015
KDA Audit Corporation
F-79
Name of Subsidiary
InSync Staffing Services, Inc.
Matrix IT Ltd.
Magic Software Enterprises Ltd.
Sapiens International Corporation N.V.
List of Subsidiaries
Jurisdiction of Incorporation
Exhibit 8
Delaware
Israel
Israel
Curaçao
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, 2014 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: April 30, 2015
/s/ Guy Bernstein
Guy Bernstein
Chief Executive Officer
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, 2014 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: April 30, 2015
/s/ Asaf Berenstin
Asaf Berenstin
Chief Financial Officer
(Principal Financial and Accounting Officer)
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, 2014, 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:
(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: April 30, 2015
/s/ Guy Bernstein
Guy Bernstein
Chief Executive Officer
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, 2014, 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:
(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: April 30, 2015
/s/ Asaf Berenstin
Asaf Berenstin
Chief Financial Officer
(Principal Financial Officer)
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 reports dated April 30, 2015, 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, 2013.
Tel- Aviv, Israel
April 30, 2015
/s/ Kost, Forer, Gabbay & Kasierer
KOST, FORER, GABBAY & KASIERER
A Member of Ernst & Young Global
Exhibit 15.1
CONSENT OF INDEPENDENT AUDITORS
OF
Hermes Logistics Technologies Limited
Exhibit 15.2
We consent to the incorporation by reference in the Registration Statement on Form S-8 (No. 333-156686) Formula Systems (1985) Ltd., of our report dated
March 13, 2015, with respect to the financial statements of Hermes Logistics Technologies Limited as of December 31, 2014, which report appears in the
annual report on Form 20-F of Formula Systems (1985) Ltd. for the year ended December 31, 2014.
Yours sincerely,
LEVY COHEN & CO.
/s/ Levy Cohen and Co.
Registered Auditors and certified public accountants
London, England
April 28, 2015
CONSENT OF INDEPENDENT AUDITORS
OF
Magic Software Enterprises (UK) Limited
Exhibit 15.3
We consent to the incorporation by reference in the Registration Statement on Form S-8 (No. 333-156686) Formula Systems (1985) Ltd., of our report dated
January 29, 2015, with respect to the financial statements of Magic Software Enterprises (UK) Limited as of December 31, 2014, which report appears in the
annual report on Form 20-F of Formula Systems (1985) Ltd. for the year ended December 31, 2014.
Yours sincerely,
LEVY COHEN & CO.
/s/ Levy Cohen and Co.
Registered Auditors and certified public accountants
London, England
April 28, 2015
CONSENT OF INDEPENDENT AUDITORS
OF
Magic Software Japan K.K
Exhibit 15.4
We consent to the incorporation by reference in the Registration Statement on Form S-8 (No. 333-156686) of Formula Systems (1985) Ltd., of our report dated
January 28, 2015, with respect to the financial statements of Magic Software Japan K.K as of December 31, 2014, which report appears in the annual report on
Form 20-F of Formula Systems (1985) Ltd. for the year ended December 31, 2014.
Tokyo, Japan
April 28, 2015
/s/ KDA Audit Corporation
KDA Audit Corporation
Registered Auditors