SECURITIES AND EXCHANGE COMMISSION
Washington D.C. 20549
FORM 20-F
OR
⌧
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2010
OR
(cid:133)
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from __________ to __________
(cid:133)
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: 0-19415
MAGIC SOFTWARE ENTERPRISES 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)
Amit Birk; +972 (3) 538 9322; abirk@magicsoftware.com
5 Haplada Street, Or Yehuda 60218, Israel
(Name, Telephone, E-mail and/or Facsimile number and Address of Company Contact Person
Securities registered or to be registered pursuant to Section 12(b) of the Act:
Title of each class
Ordinary Shares, NIS 0.1 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:
Ordinary Shares, par value NIS 0. 1 per share…………..35,909,606 (as of December 31, 2010)
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.
Yes (cid:133) 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 (cid:133) 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 (cid:133)
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 (cid:133) No (cid:133)
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 (cid:133)
Accelerated filer (cid:133)
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 (cid:133)
Other (cid:133)
If “Other” has been checked in response to the previous question, indicate by check mark which financial statement item the registrant has elected to follow:
Item 17 (cid:133) Item 18 (cid:133)
If this is an annual report, indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes (cid:133) No ⌧
This annual report on Form 20-F is incorporated by reference into the registrant’s Registration Statements on Form S-8, File Nos. 333-13270, 333-
113552, 333-132221 and 333-149553.
INTRODUCTION
Magic Software Enterprises Ltd. develops, markets, sells and supports an application platform and business and process integration solutions and offers
information technology, or IT, professional services. Our products and services are available through a global network of regional offices, independent software
vendors, or ISVs, system integrators, or SIs, distributors and value added resellers, or VARs, as well as original equipment manufacturers, or OEMs, and
consulting partners in approximately 50 countries. Our technology provides our partners and customers with the ability to develop business applications, leverage
existing IT resources, enhance business agility, and focus on core business priorities to gain maximum return on their existing and new IT investments. We are
known for our metadata driven, code-free approach, allowing users to focus on business logic rather than technology requirements. This approach forms the
driving principle of both our uniPaaS application platform and our iBOLT business and process integration suites. Our ordinary shares are listed on the
NASDAQ Global Select Market under the symbol “MGIC” and are also traded on the Tel Aviv Stock Exchange.
As used in this annual report, the terms “we,” “us,” “our,” and Magic mean Magic Software Enterprises Ltd. and its subsidiaries, unless otherwise
indicated.
We have obtained trademark registrations for Magic® in the United States, Canada, Israel, the Netherlands (Benelux), Switzerland, Thailand and the
United Kingdom. All other trademarks and trade names appearing in this annual report are owned by their respective holders.
Our consolidated financial statements appearing in this annual report are prepared in U.S. dollars and in accordance with generally accepted accounting
principles in the United States, 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.
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, you may read the document itself for a complete recitation of its terms.
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.”
i
PART I
ITEM 1.
ITEM 2.
ITEM 3.
ITEM 4.
ITEM 4 A.
ITEM 5.
ITEM 6.
ITEM 7.
ITEM 8.
ITEM 9.
ITEM 10.
TABLE OF CONTENTS
Selected Financial Data
Capitalization and Indebtedness
Reasons for the Offer and Use of Proceeds
Risk Factors
IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS
OFFER STATISTICS AND EXPECTED TIMETABLE
KEY INFORMATION
A.
B.
C.
D.
INFORMATION ON THE COMPANY
A.
B.
C.
D.
History and Development of the Company
Business Overview
Organizational Structure
Property, Plants and Equipment
UNRESOLVED STAFF COMMENTS
Major Shareholders
Related Party Transactions
Interests of Experts and Counsel
Directors and Senior Management
Compensation
Board Practices
Employees
Share Ownership
OPERATING AND FINANCIAL REVIEW AND PROSPECTS
Operating Results
A.
Liquidity and Capital Resources
B.
Research and Development, Patents and Licenses
C.
Trend Information
D.
Off-Balance Sheet Arrangements
E.
F.
Tabular Disclosure of Contractual Obligations
DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES
A.
B.
C.
D.
E.
MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS
A.
B.
C.
FINANCIAL INFORMATION
Consolidated Statements and Other Financial Information
A.
B.
Significant Changes
THE OFFER AND LISTING
A.
B.
C.
D.
E.
F.
ADDITIONAL INFORMATION
Share Capital
A.
Memorandum and Articles of Association
B.
Material Contracts
C.
Exchange Controls
D.
Taxation
E.
Dividends and Paying Agents
F.
Statement by Experts
G.
Documents on Display
H.
Offer and Listing Details
Plan of Distribution
Markets
Selling Shareholders
Dilution
Expenses of the Issue
ii
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ITEM 11.
ITEM 12.
PART II
ITEM 13.
ITEM 14.
ITEM 15.
ITEM 16.
ITEM 16A.
ITEM 16B.
ITEM 16C.
ITEM 16D.
ITEM 16E.
ITEM 16F.
ITEM 16G.
PART III
ITEM 17.
ITEM 18.
ITEM 19.
SIGNATURES
Subsidiary Information
I.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS
DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES
DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES
MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USE OF PROCEEDS
CONTROLS AND PROCEDURES
RESERVED
AUDIT COMMITTEE FINANCIAL EXPERT
CODE OF ETHICS
PRINCIPAL ACCOUNTANT FEES AND SERVICES
EXEMPTIONS FROM THE LISTING STANDARDS FOR AUDIT COMMITTEES
PURCHASES OF EQUITY SECURITIES BY THE ISSUER AND AFFILIATED PURCHASERS
CHANGES IN REGISTRANT’S CERTIFYING ACCOUNTANT
CORPORATE GOVERNANCE
FINANCIAL STATEMENTS
FINANCIAL STATEMENTS
EXHIBITS
iii
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81
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85
87
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 table presents selected consolidated financial data as of the dates and for each of the periods indicated. For the years ended December 31,
2006 and 2007, this data includes discontinued operations. 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, 2008, 2009 and 2010 and the consolidated balance
sheet data as of December 31, 2009 and 2010 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, 2006 and 2007 and the consolidated balance sheet data as of December 31,
2006, 2007 and 2008 from our audited consolidated financial statements that are not included in this annual report, with the relevant adjustments for the years
ended December 31, 2006 and 2007due to the discontinued operations.
Income Statement Data:
Revenues:
Software
Maintenance and technical support
Consulting services
Total revenues
Cost of revenues:
Software
Maintenance and technical support
Consulting services
Total cost of revenues
Gross profit
Operating costs and expenses:
Research and development, net
Selling and marketing
General and administrative
Other income, net
Restructuring and impairment
Operating income (loss)
Financial income (expense), net
Other income, net
2006
Year ended December 31,
2008
(U.S. dollars in thousands, except share and per share data)
2007
2009
$
$
18,788
11,531
22,252
52,571
$
17,707
12,605
28,116
58,428
4,557
1,602
21,181
27,340
31,088
2,716
15,558
11,532
-
-
1,282
161
170
5,433
2,873
16,862
25,168
27,403
2,462
15,712
13,784
-
2,157
(6,712)
332
278
1
20,913 $
14,530
26,537
61,980
4,898
2,263
19,978
27,139
34,841
2,350
17,357
10,867
-
-
4,267
448
-
$
17,261
13,821
24,268
55,350
5,388
2,189
18,687
26,264
29,086
1,310
15,308
8,210
1,972
-
6,230
238
42
2010
20,111
14,407
54,060
88,578
5,320
2,070
44,058
51,448
37,130
2,072
17,526
8,194
-
-
9,338
(224)
159
2006
Year ended December 31,
2008
(U.S. dollars in thousands, except share and per share data)
2009
2007
Income (loss) before taxes on income
Tax benefit (taxes on income)
Income (loss) after taxes on income
Equity in earnings (losses) of affiliates
Net income (loss) from continued operations
Net income from discontinued operations
Net income (loss)
Less: Net income (loss) allocated to non-controlling interest
Net income attributable to Magic's Shareholders
Basic net income (loss) per share
Diluted net income (loss) per share
Shares used to compute basic income (loss) per share
Shares used to compute diluted income (loss) per share
Dividends
$
$
$
Balance Sheet Data:
(6,102)
(310)
(6,412)
15
(6,397) $
1,320
(5,077)
71
5,006
(0.16) $
(0.16) $
31,184
31,184
-
1,613
(362)
1,251
(86)
1,165 $
11,465
12,630
(22)
12,608
0.40
0.39
31,443
32,023
-
$
$
4,715
(199)
4,516
(8)
4,508 $
-
4,508
-
4,508
0.14 $
0.14 $
31,769
32,032
-
6,510
(334)
6,176
-
6,176 $
-
6,176
-
6,176
0.19
0.19
31,899
32,107
15,974
$
$
2010
9,273
102
9,375
-
9,375
-
9,375
-
9,375
0.29
0.29
32,140
32,731
-
2006
2007
December 31,
2008
(U.S. dollars in thousands)
2009
2010
$
15,584
$
28,737
$
33,851 $
28,021
$
48,815
11,653
71,172
47,644
16,446
82,298
61,244
32,588
81,164
66,755
41,868
87,551
57,188
46,542
111,950
88,865
Working capital
Cash, cash equivalents, short term deposits and marketable
securities
Total assets including discontinued operations
Total equity
B.
CAPITALIZATION AND INDEBTEDNESS
Not applicable.
C.
REASONS FOR THE OFFER AND USE OF PROCEEDS
Not applicable.
D.
RISK FACTORS
Investing in our ordinary shares involves a high degree of risk and uncertainty. You should carefully consider the risks and uncertainties described
below before investing in our ordinary shares. Our business, prospects, financial condition and results of operations could be adversely affected due to any of
the following risks. In that case, the value of our ordinary shares could decline, and you could lose all or part of your investment.
2
Risks Related to Our Business and Our Industry
We are dependent on a limited number of product families and a decrease in revenues from these products would adversely affect our business, results of
operations and financial condition.
We derive our revenues from sales of application platform and integration products primarily under our uniPaaS and iBOLT brands, and from related
professional services, software maintenance and technical support as well as from other IT professional services, which include IT consulting and staffing
services. Our future growth depends heavily on our ability to effectively develop and sell new products developed by us or acquired from third parties as well as
add new features to existing products. A decrease in revenues from our principal products would adversely affect our business, results of operations and financial
condition.
We have a history of quarterly fluctuations in our results of operations and expect these fluctuations to continue.
We have experienced, and in the future may continue to experience, significant fluctuations in our quarterly results of operations. Factors that may
contribute to fluctuations in our quarterly results of operations include:
• The size and timing of orders;
• The high level of competition that we encounter;
• The timing of our product introductions or enhancements or those of our competitors or of providers of complementary products;
• Market acceptance of our new products, applications and services;
• The purchasing patterns and budget cycles of our customers and end-users;
• The mix of product sales;
• Exchange rate fluctuations;
• General economic conditions; and
• The integration of newly acquired businesses.
Our customers ordinarily require the delivery of our products promptly after we accept their orders. With the exception of contracts for services, we
usually do not have a backlog of orders for our products. Consequently, revenues from our products in any quarter depend on orders received and products
provided by us and accepted by the customers in that quarter. The deferral of the placing and acceptance of any large order from one quarter to another could
materially adversely affect our results of operations for the former quarter. Our customers sometimes require an acceptance test for services we provide and as a
result, we may have a significant backlog of orders for our services. Our revenues from services depend on orders received and services provided by us and
accepted by our customers in that quarter. If sales in any quarter do not increase correspondingly or if we do not reduce our expenses in response to level or
declining revenues in a timely fashion, our financial results for that quarter may be materially adversely affected. For these reasons, quarter-to-quarter
comparisons of our results of operations are not necessarily meaningful and you should not rely on the results of our operations in any particular quarter as an
indication of future performance.
Unfavorable national and global economic conditions could have a material adverse effect on our business, operating results and financial condition.
During periods of slowing economic activity our customers may reduce their demand for our products, technology and professional services, which
would reduce our sales, and our business, operating results and financial condition may be materially adversely affected. In addition, this 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.
3
Our revenues from Japan, which accounted for 12% of our total revenues for the year ended December 31, 2010, may be adversely affected as result of
the recent national disaster in Japan and pending or future purchases may be delayed or cancelled as a result.
We may encounter difficulties in realizing the potential financial or strategic benefits of recent business acquisitions. We expect to make additional
acquisitions in the future that could disrupt our operations and harm our operating results.
In January 2010, we purchased a consulting and staffing services business of a U.S.-based IT services company for approximately $13.7 million to be
paid over a three year period. The acquired business provides a comprehensive range of consulting and staffing services for telecom, network communications
and the IT industry. The business employs approximately 233 persons with offices located in Dallas, Texas.
We may make additional acquisitions in the future. We intend to continue to address the need to develop new products and enhance existing products
through acquisitions of other companies, product lines, technologies, and personnel. Acquisitions involve numerous risks, including the following:
• Difficulties in integrating the operations, systems, technologies, products, and personnel of the acquired companies;
• 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;
• Difficulties in entering markets in which we have no or limited direct prior experience and where competitors in such markets have stronger market
positions;
•
•
Initial dependence on unfamiliar supply chains or relatively small supply partners;
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.
Mergers and acquisitions of high-technology 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 materially 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 already developed and
marketed products, there can be no assurance that product enhancements will be made in a timely fashion or that pre-acquisition due diligence will have identified
all possible issues that might arise with respect to such products.
The revenues of our principal IT professional services subsidiary are dependent upon one key customer and a significant decrease in revenues from such
customer could materially adversely affect our business, results of operations and financial condition.
The revenues of our principal IT professional services subsidiary are dependent upon Ericsson Inc., or Ericsson, which is currently our largest customer,
accounting for 29% of our total revenues in 2010. We do not know if, or for how much longer, Ericsson will continue to purchase the services of such
subsidiary. A significant decrease in revenues from Ericsson may adversely affect our business, results of operations and financial condition.
4
We derive a significant portion of our revenues from independent distributors who are under no obligation to purchase our products and the loss of such
independent distributors could adversely affect our business, results of operations and financial condition.
We sell our products through our direct sales representatives, as well as through third parties that use our technology to develop and sell solutions for
their customers, referred to as ISVs or Magic Software Providers, or MSPs, and also through SIs. These independent distributors then resell our products to end-
users. We are dependent upon the acceptance of our products by our independent distributors and their active marketing and sales efforts. Typically, our
arrangements with our independent distributors do not require them to purchase specified amounts of products or prevent them from selling non-competitive
products. The independent distributors may not continue, or may not give a high priority to, marketing and supporting our products. Our results of operations
could be materially adversely affected by changes in the financial condition, business, marketing strategies, local and global economic conditions, or results of
our independent distributors.
We may lose independent distributors on whom we currently depend and we may not succeed in developing new distribution channels which could adversely
affect our business, results of operations and financial condition.
If any of our distribution relationships are terminated, we may not be successful in replacing them on a timely basis, or at all. In addition, we will need
to develop new sales channels for new products, and we may not succeed in doing so. Any changes in our distribution and sales channels, or our inability to
establish effective distribution and sales channels for new markets, could adversely impact our ability to sell our products and result in a loss of revenues and
profits.
Changes in the ratio of our revenues generated from different revenue elements may adversely affect our gross profit margins.
We derive our revenues from the sale of software licenses, related professional services, maintenance and technical support as well as from other IT
professional services. Our gross margin is affected by the proportion of our revenues generated from the sale of each of those elements of our revenues. Our
revenues from the sale of our software licenses, related professional services, maintenance and technical support have higher gross margins than our revenues
from the sale of IT professional services. In 2010, as a result of our acquisition of two IT consulting and staffing services businesses, the percentage of our
revenues derived from IT professional services increased significantly compared to prior years. If the relative proportion of our revenues from the sale of IT
professional services continues to increase as a percentage of our total revenues, our gross profit margins will decline in the future. Our software licenses
revenues include the sale of the third party software license sales, which have a lower gross margin than the sales of our software products. Any increase in the
portion of third party software license sales out of total license sales will decrease our gross profit margin.
We derive a significant portion of our revenues from IT professional services. Our ability to attract and retain qualified computer professionals may
adversely affect our business, results of operations and financial condition.
The success of three of our subsidiaries is dependent upon their 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 services offered by these subsidiaries may adversely affect our business, results of operations and financial condition.
In addition, the ability of our subsidiaries to maintain and renew existing engagements and obtain new business for their contract IT professional services
operations depends, in large part, on their 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
5
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.
Our widespread operations may strain our management, operational and financial resources and could have a material adverse affect on our business,
results of operations and financial condition.
Our widespread operations have significantly strained our management, operational and financial resources in the past. Any future growth may increase
this strain. To manage future growth effectively, we must:
• Expand our operational, management, financial, marketing and research and development functions;
• Train, motivate, manage and retain qualified employees; and
• Hire additional personnel.
We may not succeed in managing future growth, which could adversely affect our business, results of operations and financial condition.
We may encounter difficulties with our international operations and sales which could adversely affect our business, results of operations and financial
condition.
While our principal executive offices are located in Israel, 92% of our sales in 2008, 93% of our sales in 2009 and 95% of our sales in 2010 were
generated in other countries. This subjects us to many risks inherent to international business activities, including:
• Limitations and disruptions resulting from the imposition of government controls;
• Changes in regulatory requirements;
• Export license requirements;
• Economic or political instability;
• Trade restrictions;
• Changes in tariffs;
• Currency fluctuations;
• Difficulties in the collection of receivables;
• Foreign tax consequences;
• Greater difficulty in safeguarding intellectual property; and
• Difficulties in managing overseas subsidiaries and international operations.
We may encounter significant difficulties in connection with the sale of our products and services in international markets as a result of one or more of
these factors and our business, results of operations and financial condition could be adversely affected.
Currency exchange rate fluctuations in the world markets in which we conduct business could have a material adverse affect on our business, results of
operations and financial condition.
Our financial statements are stated in U.S. dollars, our functional currency. However, over 44% of our revenues are derived from sales outside the
United States, particularly Europe, Japan, Israel, the United Kingdom and South Africa. We also maintain substantial non-U.S. dollar balances of assets,
including cash and accounts
6
receivable, and liabilities, including accounts payable. Therefore, fluctuations in the value of the currencies in which we do business relative to the U.S. dollar
may have a material adverse effect on our business, results of operations and financial condition, by decreasing the U.S. dollar value of assets held in other
currencies and increasing the U.S. dollar amount of liabilities payable in other currencies, or by decreasing the U.S. dollar value of our revenues in other
currencies and increasing the U.S. dollar amount of our expenses in other currencies. Even if we use derivatives or other instruments to hedge part or all of our
exposures from time to time, they may not effectively eliminate such risk, if at all.
Declines in our share price and/or operating performance could result in a future impairment of our goodwill or long-lived assets.
We assess potential impairments of goodwill annually and whenever there is evidence that events or changes in circumstances indicate that an
impairment condition may exist. We assess potential impairments of our long-lived assets, including property and equipment, customer relationships and
capitalized software, whenever there is evidence that events or changes in circumstances indicate that the carrying value may not be recoverable. In the past, our
share price, and consequently our market capitalization, have experienced significant fluctuations and may experience significant fluctuations in the
future. During 2008, our share price dropped by 32%, while in 2009 and in 2010, it increased by 78% and 170%, respectively. If the value of our market
capitalization falls below the value of our shareholders’ equity, it might indicate that an impairment of goodwill is required. We determine the value of each of
our reporting units using the income approach, which utilizes a discounted cash flow model, as we believe that this approach best approximates our fair value at
this time. Our ability to reconcile the gap between our market capitalization and aggregate fair value of the reporting units depends on various factors, some of
which are qualitative, such as estimated control premium that an investor would be willing to pay for a controlling interest in us, while others involve
management judgment. If our market capitalization falls below our shareholders’ equity, or actual results of operations materially differ from our modeling
estimates, we may be required to record a non-cash impairment charge of our goodwill and/or other long-lived assets. A significant impairment loss could have a
material adverse effect on our operating results and on the carrying value of our goodwill and/or our long-lived assets on our balance sheet.
We face intense competition in the software as a service, or SaaS, market for our application platform as well as in the process and business integration
technologies and IT services market. This competition could adversely affect our business, results of operations and financial condition.
We compete with other companies in the areas of application platforms, business integration and business process management, or BPM, tools, and in
the applications and services markets in which we operate. The enhancement of the SaaS market increases the competition in these areas, and some of our
competitors claim to offer a fully automated eDeveloper conversion process, converting eDeveloper based applications to .NET based applications. We expect
that competition will increase in the future, both with respect to our technology, applications and services which we currently offer and applications and services
which we and other vendors are developing. Increased competition, direct and indirect, could adversely affect our business, financial condition and results of
operations.
Some of our existing and potential competitors are larger companies, have substantially greater resources than us, including financial, technological,
marketing, skilled human resources and distribution capabilities, and enjoy greater market recognition than us. We may not be able to differentiate our products
and/or services from those of our competitors, offer our products as part of integrated systems or solutions to the same extent as our competitors, or successfully
develop or introduce new products that are more cost-effective, or offer better performance than our competitors. Failure to do so could adversely affect our
business, financial condition and results of operations.
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We face intense competition in the strategic IT consulting and staffing services market. This competition could adversely affect our business, results of
operations and financial condition.
The technical IT consulting and staffing services industry is highly competitive and fragmented and has low barriers to entry. We, through three of our
subsidiaries in the United States, compete for potential clients with providers of outsourcing services, systems integrators, computer systems consultants, other
providers of technical IT consulting services and, to a lesser extent, temporary personnel agencies. 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. We believe that the principal competitive factors in obtaining and retaining clients are accurate assessment of clients’ requirements, timely
assignment of technical employees with appropriate skills and the price of services. We believe that the principal competitive factors in attracting qualified
technical personnel are compensation, availability, quality and variety of projects and schedule flexibility. We expect competition to increase and we may not be
able to remain competitive.
Some of our existing and potential competitors are larger companies, having substantially greater resources than us, including financial, technological,
marketing, skilled human resources and distribution capabilities, and enjoy greater market recognition than us. We may not be able to differentiate our strategic
IT consulting and staffing services from those of our competitors, or offer better performance than our competitors. Failure to do so could adversely affect our
business, financial condition and results of operations.
We may not succeed in increasing our market share in the business and process integration markets with our iBOLT products, or leverage our advantage in
the rich internet application, mobile, cloud and SaaS enabled application platform fields, which could adversely affect our business, results of operations and
financial condition.
Our iBOLT Integration Suite provides business integration and process management with a particular focus on enterprise business applications. iBOLT
allows the integration and interoperability of diverse solutions, including legacy applications, in a quick and efficient manner. Since we launched iBOLT in 2003,
we have continued to develop this product and enhance it, releasing successive versions over the years (the current version is 3.2). In 2005, we started a line of
special editions of iBOLT tailored for specific application packages, and we have released several such special editions, for SAP, Oracle JD Edwards,
Salesforce.com, IBM i, HL7, Lotus Notes and Lotus Domino, Microsoft Dynamics CRM and Microsoft Sharepoint.
The business integration and BPM markets in which we operate are extremely competitive and subject to rapid changes. Our competitors utilize varying
approaches to the provision of technology to business integration and BPM markets. We may not have the resources, skills and product variety required to
successfully increase our market share in these markets. In addition, even if we succeed in convincing prospective customers and the market that our products are
effective and provide real business benefits, our target customers may not choose them due to technical, cost, support or other reasons.
Our future success will be largely dependent on the acceptance of future releases of our core technologies in the areas of application platforms, mobile
development and platform as a service, or PaaS, solutions, and if we are unsuccessful with these efforts, our business, results of operations and financial
condition will be adversely affected.
In 2008, we released a new generation of our eDeveloper application platform, branded uniPaaS. uniPaaS is compatible with previous versions of
eDeveloper, adds cloud-based capabilities including rich internet applications, or RIAs, and mobile, and in the future will include PaaS capabilities. Our future
success will be in great measure dependent on the continued acceptance of uniPaaS. The continued acceptance of this product relies in part on the continued
acceptance and growth of cloud markets including RIAs, mobile and SaaS, for which uniPaaS is particularly useful and advantageous. We will need to continue
to update the uniPaas product and if a new version of such product is not accepted, our business, results of operations and financial condition may be adversely
affected.
8
Our efforts to increase our worldwide presence may not be profitable, which could adversely affect our business, results of operations and financial
condition.
Our success in becoming a stronger competitor in the sale of application platform and integration solutions is dependent upon our ability to increase our
sales in all our markets, including, but not limited to the United States, Europe, Japan, Asia and South Africa. Our efforts to increase our penetration into these
markets are subject to risks inherent to such markets, including the high cost of doing business in such locations. Our efforts may be costly and they may not
result in profits, which could adversely affect our business, results of operations and financial condition.
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.
We compete in a market that is characterized by rapid technological change. 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 keeps pace with such technological
developments, emerging new markets and changing customer requirements.
If release dates of any future products or enhancements are delayed or if, when released, they fail to achieve market acceptance, our business, financial
condition and results of operations would be materially adversely affected.
Our products have a lengthy sales cycle which could adversely affect our revenues.
Our customers typically use our technology to develop and deploy as well as integrate applications that are critical to their businesses. As a result, the
licensing and implementation of our technology generally involves a significant commitment of attention and resources by prospective customers. Because of the
long approval process that typically accompanies strategic initiatives or capital expenditures by companies, our sales process is often delayed, with little or no
control over any delays encountered by us. Our sales cycle can be further extended for sales made through third party distributors.
Our products may contain defects that may be costly to correct, delay market acceptance of our products and expose us to difficulties in the collection of
receivables and to litigation.
Despite quality assurance testing performed by us, as well as by our partners and end-users who participate in our beta-testing programs, errors may be
found in our software products or in applications developed with our technology. This risk is exacerbated by the fact that a significant percentage of the
applications developed with our technology were and are likely to continue to be developed by our ISV partners and SIs over whom we exercise no supervision or
control. If defects are discovered, we may not be able to successfully correct them in a timely manner or at all. Defects and failures in our products could result
in a loss of, or delay in, market acceptance of our products, as well as difficulties in the collection of receivables and litigation, and could damage our
reputation. The professional liability insurance that we maintain may not be sufficient against potential claims.
Our standard license agreement with our customers contains provisions designed to limit our exposure to potential product liability claims that may not
be effective or enforceable under the laws of some jurisdictions. Accordingly, we could fail to realize revenues and suffer damage to our reputation as a result of,
or in defense of, a substantial claim.
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Our proprietary technology is difficult to protect and unauthorized use of our proprietary technology by third parties may impair our ability to compete
effectively.
Our success and ability to compete depend in large part upon our ability to protect our proprietary technology. 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 do not have any
patents. Our policy is to require employees and consultants to execute confidentiality agreements upon the commencement of their relationships with us. These
measures may not be adequate to protect our technology from third-party infringement, and our competitors might independently develop technologies that are
substantially equivalent or superior to ours. Additionally, our products may be sold in foreign countries that provide less protection for intellectual property rights
than that provided under U.S. or Israeli laws.
We are subject to litigation relating to intellectual property infringement. Third parties have in the past, and may in the future, claim that we infringe upon
their intellectual property rights and could harm our business.
From time to time third parties have in the past, and may in the future, assert infringement claims against us or claim that we have violated a patent or
infringed upon a copyright, trademark or other proprietary right belonging to them. Any infringement claim, even one without merit, could result in the
expenditure of significant financial and managerial resources to defend any such claims. In February 2010, a U.S. company filed a lawsuit against us and one of
our subsidiaries, claiming an alleged breach by us and the subsidiary of its intellectual property rights in connection with one of our products. Intellectual
property litigation is expensive and any court ruling against us could have a material adverse affect on our financial condition and results of operations.
We may be unable to attract, train and retain qualified personnel, which could adversely affect our business, results of operations and financial condition.
In the event our business grows in the future, we will need to hire additional qualified personnel. The process of locating, training and successfully
integrating qualified personnel into our operations can be lengthy and expensive. We may not be able to attract the personnel we need. Any loss of members of
senior management or key technical personnel, or any failure to attract or retain highly qualified employees as needed, could have a material adverse effect on our
business, financial condition and results of operations.
Because we are controlled by Formula Systems (1985) Ltd. and Asseco Poland S.A., investors will not be able to affect the outcome of shareholder votes.
Formula Systems (1985) Ltd., or Formula Systems (symbol: FORTY), an Israeli company whose shares trade on the NASDAQ Global Select Market
and the Tel Aviv Stock Exchange, directly owns 18,560,352, or 51.3%, of our outstanding ordinary shares. Asseco Poland S.A., or Asseco, a Polish company
listed on Warsaw Stock Exchange, owns 50.2% of the outstanding shares of Formula Systems. Although transactions between us and our controlling
shareholders are subject to special approvals under Israeli law (see Item 6C. “Directors, Senior Management and Employees - Board Practices - Disclosure of
Personal Interests of a Controlling Shareholder; Approval of Transactions with Controlling Shareholders”), Formula Systems and Asseco will be able to exercise
control over our operations and business strategy and affairs, including any determinations with respect to potential mergers or other business combinations
involving us, our acquisition or disposition of assets, our incurrence of indebtedness, our issuance of any additional ordinary shares or other equity securities, our
repurchase or redemption of ordinary shares and our payment of dividends. Similarly, Formula Systems and Asseco will be able to control most matters requiring
shareholder approval, including the election of our directors (subject to a special majority required for the election of outside directors). Such concentration of
ownership may have the effect of delaying or preventing an acquisition or a change in control of us.
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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. Our efforts to comply with the requirements of
Section 404 of the Sarbanes-Oxley Act of 2002 governing internal control and procedures for financial reporting, which started in connection with our 2007
Annual Report on Form 20-F, 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 have a material adverse effect on our operating results, investor confidence in our reported financial information and the market
price of our ordinary shares.
Risks Related to Our Ordinary Shares
Our share price has been very volatile in the past and may continue to be susceptible to significant market price and volume fluctuations in the future.
Our ordinary shares have experienced significant market price and volume fluctuations in the past and may experience significant market price and
volume fluctuations in the future. During 2008, our share price dropped by 32%, while in 2009 and in 2010 it increased by 78% and 170%, respectively. Our
market price and volume may fluctuate in response to factors such as the following, some of which are beyond our control:
• Quarterly variations in our operating results;
• Changes in expectations as to our future financial performance, including financial estimates by securities analysts and investors;
• Announcements of technological innovations or new products by us or our competitors;
• Announcements by us or our competitors of significant contracts, acquisitions, strategic partnerships, joint ventures or capital commitments;
• Changes in the status of our intellectual property rights;
• Announcements by third parties of significant claims or proceedings against us;
• Additions or departures of key personnel;
• 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;
• Future sales of our ordinary shares by our directors, officers and significant shareholders;
• Political and economic conditions, such as a recession or interest rate or currency rate fluctuations or political events;
• Other events or factors in any of the markets in which we operate, including those resulting from war, incidents of terrorism, natural disasters or
responses to such events; and
• General trends of the stock markets.
Domestic and international stock markets often experience extreme price and volume fluctuations. The market prices of ordinary shares of software
companies have been extremely volatile. Stock prices of many software companies have often fluctuated in a manner unrelated or disproportionate to the
operating performance of such companies.
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In the past, securities class action litigation has often been brought against registrants following periods of volatility in the market price of their
securities. We may in the future be the target of similar litigation. Securities litigation could result in substantial costs and divert management’s attention and
resources.
The trading volume of our shares has been low in the past and may be low in the future, resulting in lower than expected market prices for our shares.
Our shares have traded at low volumes in the past and may trade at low volumes in the future for reasons that may be related or unrelated to our
performance. This may result in a lack of liquidity, which could negatively affect the market price for our ordinary shares
We have not established a dividend policy and may not pay cash dividends in the future.
Although we paid a cash dividend in January 2010, we did not pay any cash dividends on our ordinary shares in the last five fiscal years and we do not
currently have a dividend distribution policy in place. Future dividend distributions are subject to the discretion of our board of directors and will depend on
various factors, including our operating results, future earnings, capital requirements, financial condition and tax implications of dividend distributions on our
income, future prospects and any other factors deemed relevant by our board of directors. The distribution of dividends also may be limited by Israeli law, which
permits the distribution of dividends only out of profits (as defined by Israeli law) or otherwise upon the permission of the court. You should not rely on an
investment in our company if you require dividend income from your investment.
Our ordinary shares are traded on more than one market and this may result in price variations.
Our ordinary shares are traded primarily on the NASDAQ Global Select Market and on the Tel Aviv Stock Exchange. Trading in our ordinary shares on
these markets is made in different currencies (U.S. dollars on the NASDAQ Global Select Market and NIS on the Tel Aviv Stock Exchange), and at different
times (resulting from different time zones, different trading days and different public holidays in the United States and Israel). Consequently, the trading prices of
our ordinary shares on these two markets may differ. Any decrease in the trading price of our ordinary shares on one of these markets could cause a decrease in
the trading price of our ordinary shares on the other market.
If U.S. tax authorities were to treat us as a “passive foreign investment company,” that could have adverse consequences on U.S. holders.
Holders of our ordinary shares who are U.S. residents face income tax risks. There is a risk that we will be treated as a “passive foreign investment
company,” commonly referred to as PFIC. Our treatment as a PFIC could result in a reduction in the after-tax return to the U.S. holders of our ordinary shares
and would likely cause a reduction in the value of our shares. For U.S. federal income tax purposes, we will generally be classified as a PFIC for any taxable year
in which either: (i) 75% or more of our gross income is passive income or (ii) at least 50% of the average value of our assets for the taxable year produce or are
held for the production of passive income. If we were determined to be a PFIC for U.S. federal income tax purposes, highly complex rules would apply to U.S.
holders owning our ordinary shares and such U.S. holders could suffer adverse U.S. tax consequences. Accordingly, you are urged to consult your tax advisors
regarding the application of such rules. United States residents should carefully read “Item 10E. Additional Information - Taxation, United States Federal Income
Tax Consequences” for a more complete discussion of the U.S. federal income tax risks related to owning and disposing of our ordinary shares.
12
Risks Related to Our Location in Israel
Political, economic and military instability in Israel may disrupt our operations and negatively affect our business condition, harm our results of operations
and adversely affect our share price.
We are incorporated under the laws of, and our executive offices and research and development facilities are located in, the State of Israel. Although
most of our sales are made to customers outside Israel, we are influenced to a limited extent by the political, economic and military conditions affecting
Israel. Specifically, we could be adversely affected by any major hostilities involving Israel, the interruption or curtailment of trade between Israel and its present
trading partners, or a significant downturn in the economic or financial condition of Israel.
Since the establishment of the State of Israel in 1948, Israel and its Arab neighbors have engaged in a number of armed conflicts. A state of hostility,
varying from time to time in intensity and degree, has led to security and economic problems for Israel. Major hostilities between Israel and its neighbors may
hinder Israel’s international trade and lead to economic downturn. This, in turn, could have a material adverse effect on our operations and business. In recent
years, there was an escalation in violence among Israel, Hamas, the Palestinian Authority and other groups. Ongoing or future violence between Israel and the
Palestinians, armed conflicts, terrorist activities, tension along Israel’s northern borders, or political instability in the region would likely negatively affect
business conditions and could significantly harm our results of operations.
Recent popular uprisings in various countries in the Middle East are affecting the political stability of those countries. Such instability may lead to a
deterioration in the political and trade relationships that exist between the State of Israel and these countries. In addition, such instability may affect the global
economy and marketplace as a result of changes in oil and gas prices. Since our executive offices and research and development facilities are located in the State
of Israel, any such events that affect the State of Israel may impact us in unpredictable ways. If our operations are significantly impacted by such events, our
results of operations may be adversely affected.
Furthermore, there are a number of countries, primarily in the Middle East, as well as Malaysia and Indonesia, that restrict business with Israel or Israeli
companies, and we are precluded from marketing our products to these countries. Restrictive laws or policies directed towards Israel or Israeli businesses may
have an adverse impact on our operations, our financial results or the expansion of our business.
Our results of operations may be negatively affected by the obligation of our personnel to perform military service.
Many of our executive officers and employees in Israel are obligated to perform annual reserve duty in the Israeli Defense Forces and may be called for
active duty under emergency circumstances at any time. If a military conflict or war arises, these individuals could be required to serve in the military for
extended periods of time. Our operations could be disrupted by the absence for a significant period of one or more of our executive officers or key employees or
a significant number of other employees due to military service. Any disruption in our operations could adversely affect our business.
We currently have the ability to benefit from government tax benefits, which may be cancelled or reduced in the future.
We are eligible to receive tax benefits under Government of Israel programs. In order to maintain our eligibility for these tax benefits, we must continue
to meet specific conditions. If we fail to comply with these conditions in the future, the tax benefits we could receive may be cancelled.
Service and enforcement of legal process on us and our directors and officers may be difficult to obtain.
We are incorporated in Israel and some of our directors, executive officers and the Israeli experts named in this annual report reside outside the United
States. Service of process upon them may be difficult to effect within the United States. Furthermore, most of our assets and the assets of some of our executive
officers and some of the
13
experts named in this annual report are located outside the United States. Therefore, a judgment obtained against us or any of them in the United States, including
one based on the civil liability provisions of the U.S. federal securities laws may not be collectible in the United States and may not be enforced by an Israeli
court. It also may be difficult for you to assert U.S. securities law claims in original actions instituted in Israel. For more information regarding the enforceability
of civil liabilities against us, our directors and executive officers and the Israeli experts named in this prospectus, including the terms under which certain
judgments may be enforced by an Israeli court, please see “Enforceability of Civil Liabilities.”
Provisions of Israeli law may delay, prevent or make difficult an acquisition of us, which could prevent a change of control and therefore depress the price of
our shares.
Israeli corporate law regulates mergers, requires tender offers for acquisitions of shares above specified thresholds, requires special approvals for
transactions involving directors, officers or significant shareholders and regulates other matters that may be relevant to these types of transactions. Furthermore,
Israeli tax considerations may make potential transactions unappealing to us or to some of our shareholders. These provisions of Israeli corporate and tax law
may have the effect of delaying, preventing or complicating a merger with, or other acquisition of, us. This could cause our ordinary shares to trade at prices
below the price for which third parties might be willing to pay to gain control of us. Third parties who are otherwise willing to pay a premium over prevailing
market prices to gain control of us may be unable or unwilling to do so because of these provisions of Israeli law.
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,
articles of association and by 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 his or her rights and fulfilling his or her
obligations toward the company and other shareholders and to refrain from abusing his power 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 actions and
transactions involving interests of officers, directors or other interested parties which require the shareholders’ general meeting’s 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 Israeli Companies Law does not establish criteria for
determining whether or not a shareholder has acted in good faith. Moreover, the law is relatively new and there is no case law available on the duty of a non-
controlling shareholder to act in good faith.
As a foreign private issuer whose shares 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 shares 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 NASDAQ Listing Rules. We follow Israeli law and practice instead of The NASDAQ Listing Rules
regarding the requirement that our independent directors have regularly scheduled meetings at which only independent directors are present. As a foreign private
issuer listed on the NASDAQ Global Select Market, we may also follow home country practice with regard to, among other things, the composition of the board
of directors, director nomination procedure, compensation of officers and quorum at shareholders’ meetings. In addition, we may follow our home country law,
instead of the NASDAQ Listing Rules, which 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%
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or more interest in the company and certain acquisitions of the stock or assets of another company. 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 an 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 each such requirement that it does not follow and describe the home country practice followed by the issuer
instead of any such requirement. Accordingly, our shareholders may not be afforded the same protection as provided under NASDAQ’s corporate governance
rules.
ITEM 4.
INFORMATION ON THE COMPANY
A.
HISTORY AND DEVELOPMENT OF THE COMPANY
We were incorporated under the laws of the State of Israel in February 1983 as Mashov Software Export (1983) Ltd. and we changed our name to Magic
Software Enterprises Ltd. in 1991. We are a public limited liability company and operate under the Israeli Companies Law 1999 and associated legislation. Our
registered offices and principal place of business are located at 5 Haplada Street, Or Yehuda 60218, Israel, and our telephone number is +972-3-538-9292. Our
U.S. subsidiary, Magic Software Enterprises Inc., is located at 23046 Avenida de la Carlota, Laguna Hills, CA 926653. Our address on the Internet is
www.magicsoftware.com. The information on our website is not incorporated by reference into this annual report.
We develop, market and support uniPaaS, an application platform for developing and deploying business applications, and iBOLT, a platform for
business and process integration. We also offer IT professional services in the areas of infrastructure design and delivery, application development, technology
planning and implementation services, and supplemental staffing services. The uniPaaS and iBOLT platforms enable enterprises to accelerate the process of
building and deploying applications that can be rapidly customized and integrated with existing systems. As an IT technology innovator, we have over 25 years
of experience in assisting software and enterprise companies worldwide to produce and integrate their business applications. Our application platform, uniPaaS,
is used by thousands of enterprises and ISVs to develop solutions for their users and customers in approximately 50 countries. We also refer to these ISVs as
MSPs. We also provide maintenance and technical support as well as professional services to our enterprise customers and MSPs. In addition, we sell our
iBOLT technology for business integration to customers using specific popular software applications, such as SAP, Salesforce.com, IBM i (AS/400) or Oracle JD
Edwards or other business applications. We refer to these vendor-centered market sectors as eco-systems.
On January 17, 2010, we purchased the consulting and staffing services business of a U.S.-based IT services company for approximately $13.7 million to
be paid over a three year period. The acquired business provides a comprehensive range of consulting and staffing services for telecom, network communications
and the IT industry. The business employs approximately 233 persons with offices located in Dallas, Texas in the United States. The acquisition had a positive
effect on the growth of our IT professional services revenues in 2010 and we believe that the acquired business will enable us to continue to expand our presence
in the U.S. market and leverage our relationships with top tier customers.
On October 31, 2010, we purchased an 88% interest in a consulting and staffing services company and have an option to increase our holdings to
100%. We paid a cash purchase price of $ 1.6 million. The acquired company provides a comprehensive range of consulting and staffing services for the IT
industry in the areas of infrastructure design and delivery, application development, technology planning and implementation services.
On January 1, 2011, we acquired 51% of our South African distributor, Magix Integration (Proprietary) Ltd., with an option to increase our holdings to
75%, for a total investment of up to $2.5 million. Magix Integration (Proprietary) Ltd. specializes in the software integration and application development of our
platforms as well as the support of large-scale and complex systems in the public and financial sectors in South Africa. We believe that this acquisition will
contribute to our growth and further strengthen our presence in the region.
In 2010, we continued to work closely with IBM as an Advanced Partner of the IBM Partnerworld for Developer Business Partner program and as a
Member Partner of IBM Partnerworld for Software. IBM has
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awarded us with its ServerProven® certification for our uniPaaS and iBOLT products following a rigorous testing and evaluation process. Only those products
that are validated by IBM to install quickly, start up easily and run reliably on IBM servers are awarded this certification, designed by IBM to assist its customers
to easily identify complete solutions for their business-critical e-business needs. We are also part of IBM’s System i Tools Innovation Program. As part of our
activities with IBM’s customers and business partners, we released a special edition of iBOLT for Oracle JD Edwards, targeted at users of JD Edwards Enterprise
One Oracle enterprise resource planning, or ERP, software on the IBM System i platform.
In November 2010, we signed a global alliance agreement with MicroStrategy® Incorporated (NASDAQ: MSTR), a leading worldwide provider of
business intelligence software, enabling us to deliver an integrated business intelligence solution to our uniPaaS and iBOLT customers worldwide. MicroStrategy
Incorporated was positioned in the ‘Leaders’ Quadrant of the “Gartner 2010 Magic Quadrant for Business Intelligence Platforms Report.”
Our capital expenditures for the years ended December 31, 2008, 2009 and 2010, were approximately $0.7 million, $0.6 million and $0.6 million,
respectively. These expenditures were principally for network equipment and computers, furniture and office equipment and leasehold improvements.
B.
BUSINESS OVERVIEW
Industry Overview
In recent years the multiplication of enterprise applications has lead to a level of complexity of an enterprise’s information system that is obstructing
business progress and evolution, reducing business agility and often resulting in multiple versions of similar data objects, such as customer records. We believe
that one of the main challenges modern enterprises face today is “creating a single view of the truth,” which is the better way to make effective and relevant
business decisions. Business integration is employed to facilitate this. Traditionally, given their cost and complexity, business integration solutions were targeted
at large enterprises. Consequently, business integration tools are mostly complex, require significant implementation resources, take a long time to implement
and are costly. Given the critical need for business integration across the demand and supply chain, enterprises of all sizes require such solutions. We recognized
this trend and emerging need when we designed iBOLT.
Another major evolution in enterprises is the trend of reusing IT assets, such as enterprise applications, which is driving the move towards service
oriented architecture, or SOA. Due to the large investments in enterprise applications, such as ERP and CRM, on the one hand, and the accelerating business
change, on the other hand, organizations need to find a way to continue to leverage their IT investments while increasing their ability to change business
processes and support new ones. The software industry’s response is a new SOA, a new paradigm of application development, service oriented development
architecture, and composite applications. Most of these involve metadata (which is data that describes other data, similar to a table of content describing a book),
rather than traditional programming. We have developed and enhanced this paradigm over the last 25 years, and we believe that we have one of the largest
installed-base of products employing such technology.
Additionally, mobile, cloud and SaaS are each becoming a well-established phenomenon in some areas of enterprise IT. These are growing into
mainstream options for software-based business solutions and will affect most of enterprise IT departments in the next three years in one way or another. It
appears that SaaS and cloud enabled application platforms are becoming dominant players in the growing SaaS application industry. We are developing our
technology to provide the functionality of a cloud-enabled application platform as a result of the growing demand from application vendors to repackage their
applications as a SaaS offering.
General
Our 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. Our development, deployment and
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integration products empower customers to dramatically improve their business performance and return on investment by enabling the affordable and rapid
delivery and integration of business applications, systems and databases. Our technology and solutions are especially in demand when time-to-market
considerations are critical, budgets are tight, integration is required with multiple platforms or applications, databases or existing systems and business processes,
as well as for RIAs, cloud computing and SaaS.
We address 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. Our development paradigm is aligned with modern
application development theories and enables developers to create better solutions in less time and with fewer resources.
Our technology, comprised of the iBOLT and uniPaaS solutions, is 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 stemming
from 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 uniPaaS
and iBOLT, software vendors and enterprise customers can experience unprecedented cost savings through fast and easy implementation and reduced project risk.
Development communities are facing high complexity, cost and extended pay-back periods in order to deliver cloud, RIAs, mobile and SaaS
applications. uniPaaS and iBOLT provide ISV’s 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 decreasing time-to-market.
With the launch of iBOLT, we started a process of expanding from the application development field to the business integration and process
management fields, which are presently converging, from a technology perspective, into the composite application field. Products for these fields require SOA,
application integration capabilities, process management, orchestration capabilities and information delivery capabilities. We believe that our technology and
products provide all of these capabilities.
With the impending introduction of our cloud-enabled application platform, we expect to strengthen our position as a leading application platform
provider opening the path for us to address the top-tier sector of the market. The increasing adoption of the SaaS delivery and business model within the overall
cloud environment requires the use of a new generation of application platforms, which support the relevant functions required for SaaS and cloud
deployment. We are one of the first vendors to offer such a platform. By leveraging the easy migration of applications between the different versions of our
products, our MSPs have the potential to be among the first and most versatile sources of SaaS applications. Industry analysts as well as several of our major
MSPs have recognized this, and we have begun to work with some of them in this context.
Our Products
The underlying principles and purpose of our technology are to provide:
• Simplicity – the use of code-free development tools instead of hard coding and multiple programming languages.
• Business focus – the use of pre-compiled business logic and components eliminates repetitive, low level technical and coding tasks.
• Comprehensiveness – the use of a comprehensive development and deployment platform offers a full end-to-end development, deployment and
integration capability.
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• Automation of mundane tasks - to accelerate development and maintenance and reduce risk; and
•
Interoperability - to support business logic across multiple hardware and software platforms, operating systems and geographies.
We offer two complementary products that address the wide spectrum of composite applications.
uniPaaS Application Platform
The uniPaaS application platform was released during 2008 as the next generation of eDeveloper. uniPaaS was released in recognition of the growing
market demand for cloud based offerings including RIAs, mobile applications and SaaS. It features new functionality and extensions to our 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 operated 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.
uniPaaS 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.
uniPaaS 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. Our uniPaaS 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 uniPaaS 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 eventually modify these choices as the situation requires. Furthermore, enterprises can use cloud based uniPaaS applications in a SaaS model and still
have their databases in the privacy of their own data centers. It also supports most hardware and operating system environments such as Windows, Unix, Linux
and AS/400, as well as multiple databases. In addition, uniPaas is interoperable with .NET and Java technologies.
uniPaaS 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,
we offer a coherent and unified toolset stemming from the same proven metadata driven and rules based declarative technology, resulting in unprecedented cost
savings through fast and easy implementation and reduced project risk.
In April 2010, we released version 1.9 of uniPaaS, which includes new RIA deployment capabilities and additional enhancements and improvements.
Our uniPaaS application platform was acknowledged in Gartner’s 2010 Magic Quadrant for Application Infrastructure for Systematic SOA-Style
Application Projects and Gartner placed in the Visionaries quadrant. In its report, Gartner presents uniPaaS as an easy-to-develop platform with substantial
support for various nonfunctional requirements built in, and notes that it is emerging as a highly capable cloud-enabled application platform.
iBOLT Business and Process Integration
The iBOLT business integration suite is a graphical, wizard-based code-free solution delivering fast and simple integration and orchestration of business
processes and applications. iBOLT allows businesses to more easily view, access, and leverage their mission-critical information, delivering true enterprise
application integration, or EAI, BPM, and SOA, infrastructure.
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iBOLT allows the integration and interoperability of diverse solutions, including legacy applications, in a quick and efficient manner. In January 2010,
we released iBOLT Version 3.2 and since then we have continued to develop the iBOLT channel and entered into agreements with additional SIs, consultancies
and service providers, who acquired iBOLT skills and offer iBOLT licenses and related services to their customers. Increasing the usability and life span of
existing legacy and other IT systems, iBOLT 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. We also offer special editions of iBOLT targeted at specific
enterprise application vendor ecosystems, such as SAP, JD Edwards or Salesforce.com. These special editions contain specific features and pricing tailored for
these market sectors. In addition, during 2010, we released special editions for Microsoft Sharepoint.
Our Value Proposition
Our technology and solutions are especially in demand when budgets are tight and time-to-market considerations are critical. Our 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. Our 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.
We address 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.
uniPaaS, our metadata driven application platform, is aligned with modern application development theories and enables developers to create better
solutions in less time and with fewer resources. uniPaaS offers our customers - ISVs, SIs and enterprises - the following benefits:
• Faster Time to Market. uniPaaS eliminates the difficulties and costs of developing distinct client and server paradigms and partitioning.
• Lower Total Cost of Ownership. When deployment is required uniPaaS automatically instructs the business logic to the various technical
components, saving the need for human intervention or planning and enabling deployment at an unprecedented low cost of ownership.
• Deployment Flexibility. Unique to the market, uniPaaS gives users the power to choose how they deploy their applications, whether full client or
web, on-premise or on-demand, software or SaaS.
• Scalability and Adaptability. uniPaaS enables application owners to move from full client mode to RIAs, mobile and SaaS and back again as
business situations and demands change.
• Portability. uniPaaS can be used with most hardware platforms, operating systems and databases. Applications developed with our technology for
one platform can also be deployed on other supported platforms.
• Database Access and Technology Independence. Our technology can easily move data across platforms and convert the data from one database
format to another.
• Comprehensiveness. uniPaaS incorporates all aspects of the development and deployment process, which usually requires organizations to buy and
integrate multiple and diverse server and client paradigms.
• Global Experience and Expertise. uniPaaS leverages 25 years of research and development, including applied customer experience and feedback.
We believe that iBOLT offers our customers and partners the following benefits:
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• Time to Market. Based on our customers’ experience and feedback, we believe that iBOLT’s services, components and wizards allow for faster
project delivery.
• Cost Effectiveness. Many vendors design their business logic in a way that’s so complex; customers can barely use it. iBOLT’s graphical business
flow editor allows users to easily and intuitively configure their business processes, ensuring that their end project is practical, usable and gives
value for their investment.
• Comprehensiveness. iBOLT is a comprehensive integration technology stack, guaranteeing powerful and cost-effective integration for any business
scenario.
• Deployment Flexibility. iBOLT has a significant range of built-in certified and optimized adaptors to maximize the integration flexibility and
intuitive use.
• Scalability and Adaptability. iBOLT is used by hundreds of companies of every size in almost every industry sector worldwide and is responsible
for tens of millions of transactions daily.
• Global Experience and Expertise. iBOLT leverages 25 years of research and development, including applied customer experience and
feedback. uniPaaS stands at the core of the iBOLT integration suite, from studio to its actual deployment.
Special editions of iBOLT with optimized adaptors are available to expand the capabilities of the most commonly used ERP and CRM packages,
including SAP Business One, SAP Business All-in-One, SAP R/3, Salesforce.com, Oracle JD Edwards, IBM i Series, Lotus Notes and Lotus Domino,
HL7,Microsoft Dynamics CRM and Microsoft Sharepoint.
Our Strategy
Our goal is to achieve a leadership position in the application platform and business integration markets. We focus on providing technology,
applications and IT consulting and staffing services that enable enterprises to meet their business needs on time and budget. The key elements of our strategy to
achieve this goal are to:
• Develop and up-sell to our installed base and partner community by leveraging our solutions (uniPaaS, iBOLT and professional services);
• Utilize connectivity/integration solutions (iBOLT based) in existing ecosystems (SAP, Salesforce.com, JD Edwards, Lotus Notes and Lotus
Domino, HL7, Microsoft Dynamics CRM and OEMs) to enlarge our installed base;
• Strengthen our alliances with SAP, Salesforce.com, Oracle JD Edwards and IBM i;
• Develop additional alliances with leading application vendors and develop offerings and partner programs for their ecosystems, such as Oracle’s JD
Edwards and Salesforce.com;
• Focus on recruiting OEM partners that will incorporate our iBOLT integration technology into their product offerings;
• Promote uniPaaS (RIAs, mobile and SaaS platforms) into the mid- and upper-markets of both enterprises and ISVs;
•
Increase the number of software houses and ISVs that use uniPaaS to build their applications;
• Focus our sales efforts on our core products, uniPaaS and iBOLT; and
• Focus our efforts on further building a strong partner base of SIs, ISVs, distributors, resellers, OEMs and consulting partners of our core
technologies.
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Product Development
The software industry is characterized by rapid technological changes and is highly competitive with respect to timely product innovation. We must
maintain compatibility and competitiveness in the face of ongoing changes in industry standards.
We place considerable emphasis on research and development in order to improve and expand the functionality of our technology and to develop new
applications. We believe that our future success depends upon our ability to maintain our technological leadership, to enhance our existing products and to
introduce new commercially viable products addressing the needs of our customers on a timely basis. We also intend to support emerging technologies as they
are introduced in the same way we have supported new technologies in the past. We will continue to devote a significant portion of our resources to research and
development. We believe that internal development of our technology is the most effective means of achieving our strategic objective of providing an extensive,
integrated and feature-rich development technology.
During 2010, our research and development focused on the following products:
•
uniPaaS: In April 2010, in response to customers’ needs and service requests, we released uniPaaS version 1.9 and subsequent service packs for
uniPaaS 1.9.
• RIA Technology: We continued to develop our RIA capabilities with an enhanced version of uniPaaS and RIA client module. We are currently
working on developing new RIAs for additional mobile phone platforms such as BlackBerry, Android and iPhone.
•
In January 2010, we released iBOLT 3.2. This release includes enhancements in all iBOLT capabilities, including connectors, stability, monitoring,
etc.
• Hermes software. We continued to develop the Hermes software solution for air cargo handling. HERMES Release 4.0 incorporates new and
advanced functionality. During 2010, HERMES Release 4.0 was deployed by additional several customers across the globe, and its deployment to
new and existing customers will continue throughout 2011. We expect to begin development of HERMES Release 5.0 in the second half of 2011,
which will focus on a technology platform migration.
Product Services
Professional Services. We offer fee-based consulting services in connection with installation assurance, application audits and performance
enhancement, application migration and application prototyping and design. Consulting services are aimed at both generating additional revenues and ensuring
successful implementation of uniPaaS and iBOLT projects through knowledge transfer. As part of management efforts to focus on license sales, our goal is to
provide such activities as a complementary service to our customers and partners. We believe that the availability of effective consulting services is an important
factor in achieving widespread market acceptance.
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, we have built upon our established global presence to form business alliances with our MSPs that use our technology to develop
solutions for their customers, and distributors to deliver successful solutions in focused market sectors.
Maintenance. We offer our customers annual maintenance contracts providing for upgrades and new versions of our products for an annual fee.
Technical Support. We believe that a high level of customer support is important to the successful marketing and sale of our products. Our in-house
technical support group provides training and post-sale support. We believe that effective technical support during product evaluation as well as after the sale has
substantially contributed to product acceptance and customer satisfaction and will continue to do so in the future.
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We offer an online support system for our 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, we offer a Support Knowledge Base tool providing the full range of technical notes and other documentation including
technical papers, product information, and answers to most common customer queries and known issues that have already been reported.
Training. We conduct formal and organized training on our development tools. We develop courses, pertaining to our principal products, uniPaaS and
iBOLT and provide 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 the 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.
IT Strategic Consulting and Staffing Services
We provide a broad range of consulting services in the areas of infrastructure design and delivery, application development, technology planning and
implementation services, as well as supplemental staffing services. Our wholly-owned subsidiaries, Coretech Consulting Group LLC and Fusion Solutions LLC,
and our 88%-owned subsidiary, Xsell Resources Inc., provide IT consulting and staffing services to a wide variety of companies including Fortune 1000
companies. The technical personnel we provide generally supplement the in-house capabilities of our clients. Our approach is to make available to our clients a
broad range of technical personnel to meet their requirements rather than focusing on specific specialized areas. We have extensive knowledgeable of and have
worked with virtually all types of telecom infrastructure technologies in wireless and wireline as well as in the areas of infrastructure design and delivery,
application development, project management, technology planning and implementation services. With an experienced team of recruiters in the telecom and other
IT areas and with a substantial and a growing database of telecom talent, we can rapidly respond to a wide range of requirements with well qualified candidates.
Our client list includes major global telecoms, OEM’s and engineering, furnish and installation service companies. We have built long-term relationships with
our clients by providing expert telecom talent. We provide individual consultants for contract and contract-to-hire assignments as well as candidates for full time
placement. In addition, we configure teams of technical consultants for assigned projects at our clients’ sites.
Customers, End-Users and Markets
We market and sell our products and services in more than 50 countries worldwide. The following table presents our revenues by revenue type and
geographical market for the periods indicated:
Software sales
Maintenance and technical support
Consulting services
Total revenues
$
$
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2008
Year ended December 31,
2009
(In thousands)
$
20,913
14,530
26,537
61,980
$
17,261 $
13,821
24,268
55,350 $
2010
20,111
14,407
54,060
88,578
Israel
Europe
United States.
Japan
Other
Total revenues
$
$
4,760
25,359
20,096
10,110
1,655
61,980
$
3,614 $
22,516
18,485
8,895
1,840
55,350 $
2008
Year ended December 31,
2009
(In thousands)
$
2010
4,405
21,788
48,888
10,806
2,691
88,578
Industries that are significantly represented by our partners include finance, insurance, government, health care, logistics, manufacturing media, retail
and telecommunications. Our uniPaaS and iBOLT technologies are used by a wide variety of developers, integrators and solution providers, which can generally
be divided into two sectors: in the first sector are those performing in-house development (corporate IT departments) and in the second sector are MSPs (ISVs),
including large SIs and smaller independent developers, and VARs that use our technology to develop or provide solutions to their customers. MSPs who are
packaged software publishers use our technology to write standard packaged software products that are sold to multiple clients, typically within a vertical industry
sector or a horizontal business function.
Among the thousands of customers running their business systems with our technology are the following:
Adecco Nederland, Allstate Life Insurance, Anritsu, Auchan, Bank Leumi, Bank of Cyprus UK, BNP Paribas, BSkyB, Carrefour, CBS Outdoor, CCV,
Club Med, Eldan, Electra, Ekro, Euroclear, Factory Master, Finanz Informatik, Franken Brunnen, Fujitsu-ten, Gakken, GGD Amsterdam, Groupe Flo, Hebrew
University of Jerusalem, HONDA, Immobilier, ING Commercial Finance, Industry, Japan Chamber of Commerce, Menzies (John Menzies plc), Nespresso,
Nintendo, RDC Datacentrum, Rosenbauer, Staff Development Management Systems (SDMS Ltd), SECOM Techno Service, Symbra, Tecan, Total and Vinci.
Sales, Marketing and Distribution
We market, sell and support our products through our own direct sales force as well as through a global channel-network of ISVs, SIs, value-added
distributors and resellers, as well as OEM and consulting partners. Our own sales force is based in our regional offices in the United States, Japan, the United
Kingdom, France, South Africa, Germany, the Netherlands, Hungary, India and Israel, and through local distributors elsewhere, our channel-network is present in
about 50 countries worldwide.
Direct Sales. For uniPaaS, our direct sales force pursues enterprise accounts and software solution providers. Our sales personnel carry out strategic
sales with a direct approach to decision makers, managing a constantly monitored consultative type of sales cycle. iBOLT is mostly sold via indirect channels
and through our ecosystem business relationships, but we have some direct customers with integration needs.
At December 31, 2010, we had approximately 107 sales personnel including a team of sales engineers who provide pre-sale technical support,
presentations and demonstrations in order to support our sales force.
Indirect Sales. We maintain an indirect sales channel for iBOLT, through our ecosystem business relationships, as well as via SIs, value added
distributors and resellers, OEM partners, as well as consultancies and service providers. We maintain an indirect sales channel for uniPaaS through ISVs and SIs,
who use our application platform to develop and deploy different applications selling them to their end-user customers. We carry out marketing activities with
our indirect channels and increased the number of new channel partners for both uniPaaS and iBOLT during 2010.
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Distributors. In general, we distribute our products through local distributors in those countries where we do not have a sales office. A local distributor
is typically a software marketing organization with the capability to add value with consulting, training, and support. Distributors that are also MSPs are
generally responsible for the implementation of both our application platform and business and process integration suite and localization into their native
languages. The distributors also translate our marketing literature and technical documentation. Distributors must undergo our program of sales and technical
training. Marketing, sales, training, consulting, product and client support are provided by the local distributor. We are available for backup support for the
distributor and for end-users. In coordination with the local subsidiaries and distributors, we also provide sales support for large and multinational accounts. We
have approximately 25 distributors in Europe, Latin America and Asia, many of whom are also MSPs.
VARs. In general, we resell our products through VARs that extend their capabilities with our offerings. These include SAP VARs.
Global Marketing Activities. We carry out a wide range of marketing activities aimed at generating awareness of our solutions offerings. Among our
activities, we focus on online communication on social networks, including corporate blogs, public relations and media coverage, case studies, industry analyst
relations, an extensive program of Internet-based webcasts, search engine optimization campaigns, on-line advertising, exhibitions, attendance at trade shows,
lead generation campaigns, and end-user and distributor conferences and seminars. We conduct distributor and user conferences to update our worldwide
affiliates and user base on our new product offerings, marketing activities, pricing, good practices, technical information and the like.
In order to foster improved relationships with our channel partners, we periodically sponsor local events and other regional marketing activities. On our
corporate Internet website, we host an online solutions directory, which highlights applications developed and offered by our partners. Furthermore, in 2009 we
introduced an effective partner portal, which includes all updated marketing materials and campaigns we developed and in April 2010, we launched our
developers’ network where all developers using our software can exchange ideas, learn best practices and hear recent tips for more effective use of our technology
and more.
iBOLT Ecosystems. The important ecosystem businesses pursued by us to date include:
• SAP. During 2004, we entered into a partnership with SAP that focused on providing a special edition of iBOLT as a collaboration platform for the
SAP Business One product, an integrated business management solution designed specifically for small and midsize businesses. Our iBOLT
Special Edition was accepted by the SAP community, and our company was awarded by SAP the ISV Partner Leadership in Innovation 2005 award,
in 2006 we were awarded the SAP Software Solution Partner Quality Excellence Award, and in 2007 we were awarded the SAP global award for
SAP Business One Global Solution Partner Award for Leadership in Innovation. Our iBOLT Special Edition partner program is endorsed by over
230 SAP Business One partners across the globe which have signed a partnership agreement with us and have become a significant new addition to
the our partner community. In the beginning of 2007, we announced a new iBOLT Special Edition for SAP R/3 ERP software and we received
SAP’s xAPPS certification. iBOLT is also certified for SAP All-in-One special edition. In addition to the direct economic impact of iBOLT sales,
we are experiencing the following benefits that arise from our partnership with SAP: (i) recognition and validation of our technology as a
mainstream player in the business integration and composite application development domains; (ii) privileged access to a pre-qualified partner
community that can also employ iBOLT in non-SAP related projects; and (iii) revitalization of our partner community, by offering them access to
the SAP Partner Program and branding of their existing applications.
•
IBM. In March 2007, we qualified for the IBM Business Partner SOA Specialty. For this specialty, IBM selects business partners who market SOA
content, services, or both that demonstrate compatibility with or complement the IBM SOA Foundation products, who endorse the IBM SOA
strategy, and whose marketing activities IBM determines to be in agreement with its own. We offer SOA capabilities in the System i (iSeries /
AS/400) market and we qualified for this specialty with respect to one of our SOA projects. Our technology allows IBM System i users to better
utilize the
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value of their legacy systems and integrate them with different applications in their organization to maximize the return on their existing
investments.
• Salesforce.com. In late 2007, we joined the partners’ program of Salesforce.com and became AppExchange certified. This enables us to address the
Salesforce.com ecosystem and introduce our iBOLT for Salesforce.com to its partners and customers. Since then, we have participated in
Salesforce.com’s regional Success Tours, Tour-de-Force events, as well as launched our iBOLT for Salesforce.com at Dreamforce Europe 2008 in
May in London, and participated at Dreamforce U.S. in November 2008, where we released the advanced version of iBOLT for Salesforce.com.
During 2009, we participated in Salesforce.com’s U.S. and EMEA cloud events. We have signed partnerships and already implemented our
solutions with customers in the United Kingdom, the United States, Germany and Israel. Together with nefos GmbH, we won the integration award
at the 2010 Cloudforce event in Munich, Germany. Cloudforce Munich is one of the largest cloud computing events in Europe. We and nefos
received the award (the only award of the event) for our outstanding achievements in integrating Salesforce.com and SAP in a customer project.
• Oracle JD Edwards. Since late 2006 we have been actively marketing iBOLT to users of Oracle’s JD Edwards ERP Systems. We are Platinum
Sponsors of the Quest International Users Group and promote our solutions to users of JD Edwards Enterprise One and JD Edwards World at Oracle
Collaborate, Oracle Open World and UKOUG events. We have recruited more than a dozen partners and continue to win new customer deals
related to our JD Edwards business.
Competition
The markets for our uniPaaS and iBOLT technologies and applications are characterized by rapidly changing technology, evolving industry standards,
frequent new product introductions and rapidly changing customer requirements. These markets are therefore highly competitive, and we expect competition to
intensify in the future. The enhancement of the SaaS market increases the competition in these areas, and one of our competitors, even claims to offer a fully
automated eDeveloper conversion process, converting eDeveloper based applications to .NET based applications. We constantly follow and analyze the market
trends and our competitors in order to effectively compete in these markets and avoid losing market share to other players and to our competitors.
With the introduction of uniPaaS in mid-2008, we further shifted our activities from the integrated development environment market, in which we were
competing with eDeveloper in the past, towards the application platform and web oriented architecture market. Our current competitors include Cordys, IBM,
Microsoft, Adobe, Oracle, Pegasystems, Progress, Fiorano, Intersystems, Sun, Ultimus and Unify. In the iBOLT integration market, our competitors include
Microsoft BizTalk, Informatica, TIBCO and Software AG. Additional competitors may enter each of our markets at any time. Moreover, our customers may
seek to develop internally the products that we currently sell to them and thereafter they may also compete with us.
Our goal is to maintain our technology superiority, time to market and worldwide channel network, as well as our constant market analysis to quickly
address changing market dynamics. We believe that the principal competitive factors affecting the market for our products include developer productivity, rapid
results, product functionality, performance, reliability, portability, interoperability, ease-of-use, demonstrable economic benefits for developers and users relative
to cost, quality of customer support and documentation, ease of installation, vendor reputation and experience, financial stability as well as intuitive and out of the
box solutions to extend the capabilities of ERP and/or CRM and other application vendors for enterprise integration.
Intellectual Property
We do not hold any patents and rely upon a combination of copyright, trademark, trade secret laws and contractual restrictions to protect our rights in our
software products. Our policy has been to pursue copyright protection for our software and related documentation and trademark registration of our product
names. Also, our key employees and independent contractors and distributors are required to sign non-disclosure and secrecy agreements.
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We provide our products to customers under a non-exclusive, non-transferable license. Usually, we have not required end-users of our products to sign
license agreements. However, in some instances license agreements are required to be signed by the end-users. Generally, a “shrink wrap” license agreement is
included in the product packaging, which explains that by opening the package seal, the user is agreeing to the terms contained therein. It is uncertain whether
license agreements of this type are legally enforceable in all of the countries in which the software is marketed.
Our trademark rights include rights associated with our use of our trademarks and rights obtained by registration of our trademarks. We have obtained
trademark registrations in South Africa, Canada, China, Israel, the Netherlands (Benelux), Switzerland, Thailand, Japan, the United Kingdom and the United
States. The initial terms of the registration of our trademarks range from 10 to 20 years and are renewable thereafter. Our use and registration of our trademarks
do not ensure that we have superior rights to others that may have registered or used identical or related marks on related goods or services. We do not believe
that patent laws are a significant source of protection for our products. We have registered a copyright for our software in the United States and Japan. Also, we
have registered copyrights for some of our manuals in the United States and have acquired an International Standard Book Number (ISBN) for some of our
manuals. Our copyrights expire 70 years from date of first publication.
Since the software industry is characterized by rapid technological changes, the policing of the unauthorized use of software is a difficult task and
software piracy is expected to continue to be a persistent problem for the packaged software industry. As there can be no assurance that the above-mentioned
means of legal protection will be effective against piracy of our products, and since policing unauthorized use of software is difficult, software piracy can be
expected to be a persistent potential problem.
We believe that because of the rapid pace of technological change in the software industry, the legal protections for our products are less significant
factors in our success than the knowledge, ability and experience of our employees, the frequency of product enhancements and the timeliness and quality of our
support services.
C.
ORGANIZATIONAL STRUCTURE
Asseco, a Polish company listed on the Warsaw Stock Exchange, has a 50.2% controlling interest in our controlling shareholder Formula Systems, an
Israeli company (NASDAQ: FORTY). Formula Systems beneficially owns 51.3% of our outstanding ordinary shares. Formula Systems is an international IT
company principally engaged, through its subsidiaries, in providing software consulting services, developing proprietary software products and producing
computer-based solutions.
The following table sets forth the legal name, location and country of incorporation and percentage ownership of each of our subsidiaries:
Subsidiary/Affiliate Name
Magic Software Japan K.K
Magic Software Enterprises Inc
Magic Software Enterprises (UK) Ltd
Hermes Logistics Technologies Limited
Magic Software Enterprises Spain Ltd
Coretech Consulting Group, Inc
Coretech Consulting Group LLC
Magic Software Enterprises (Israel) Ltd
Magic Software Enterprises Netherlands B.V
Magic Software Enterprises France
Magic Beheer B.V
Magic Benelux B.V
Magic Software Enterprises GMBH
Country of
Incorporation
Japan
Delaware
United Kingdom
United Kingdom
Spain
Pennsylvania
Delaware
Israel
Netherlands
France
Netherlands
Netherlands
Germany
Ownership
Percentage
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
26
Subsidiary/Affiliate Name
Magic Software Enterprises India Pvt. Ltd
Onyx Magyarorszag Szsoftverhaz
CarPro Systems Ltd
Fusion Solutions, LLC
Xsell Resources Inc.
Magix Integration (Proprietary) Ltd
D.
PROPERTY, PLANTS AND EQUIPMENT
Country of
Incorporation
India
Hungary
Israel
Delaware
Pennsylvania
South Africa
Ownership
Percentage
100%
100%
90.48%
100%
88%
51%
Our headquarters and principal administrative, finance, sales, marketing and research and development office is located in a 39,321 square feet of space
that we lease in Or Yehuda, Israel, a suburb of Tel Aviv. We pay an aggregate annual rent of $0.3 million for the facilities under a lease agreement expiring in
December, 2014. We have an option to terminate the lease agreement upon six months prior written notice.
Our subsidiaries lease office space in Laguna Hills, California; King of Prussia, Pennsylvania; Dallas, Texas; Paris, France; Munich, Germany; Pune,
India; Bangalore, India; Tokyo, Japan; Budapest, Hungary; Houten, the Netherlands; Johannesburg; South Africa; and Bracknell, the United Kingdom. The
aggregate annual cost for such facilities was $1,487 in the year ended December 31, 2010.
ITEM 4 A. UNRESOLVED STAFF COMMENTS
Not applicable.
ITEM 5. OPERATING AND FINANCIAL REVIEW AND PROSPECTS
A.
OPERATING RESULTS
The following discussion of our results of operations should be read together with our consolidated financial statements and the related notes, which
appear elsewhere in this annual report. The following discussion contains forward-looking statements that reflect our current plans, estimates and beliefs and
involve risks and uncertainties. Our actual results may differ materially from those discussed in the forward-looking statements. Factors that could cause or
contribute to such differences include those discussed below and elsewhere in this annual report.
Background
We were incorporated under the laws of Israel in February 1983 and began operations in 1986. Our ordinary shares were listed on the NASDAQ Global
Market (symbol: MGIC) from our initial public offering in the United States on August 16, 1991 until January 3, 2011, at which date the listing of our ordinary
shares was transferred to the NASDAQ Global Select Market. Since November 16, 2000, our ordinary shares have also traded on the Tel Aviv Stock Exchange.
We develop market, sell and support an application platform and business and process integration solutions. We have 16 wholly-owned subsidiaries,
incorporated in the United States, Europe, Asia, and Israel. Our subsidiaries are engaged in developing, marketing and supporting vertical applications, as well as
in selling and supporting our products, and three of our subsidiaries provide IT consulting and staffing services.
Overview
We develop market, sell and support uniPaaS, an application platform for software development and deployment, and iBOLT, a platform for business
integration and BPM. Both uniPaaS and iBOLT enable enterprises
27
to accelerate the process of building and deploying applications that can be rapidly customized and integrated with existing systems.
As an IT technology innovator, we have over 25 years of experience in assisting software companies and enterprise software companies worldwide to
produce and integrate their business applications. Our application platform, uniPaaS, is used by thousands of enterprises and ISVs to develop solutions for their
users and customers in approximately 50 countries. We also refer to these ISVs as MSPs. We also provide maintenance and technical support as well as
professional services to our enterprise customers and to MSPs. In addition, we sell our iBOLT technology for business integration to customers using specific
popular software applications, such as SAP, Salesforce.com, IBM i (AS/400) or Oracle JD Edwards or other business applications. We refer to these vendor-
centered market sectors as ecosystems.
On December 23, 2010, we raised approximately $21.4 million before costs ($20.3 million, net of issuance expenses) in a private placement to
institutional investors in the United States and abroad. We issued an aggregate of 3,287,616 ordinary shares at a price of $6.50 per share in the offering. Certain
of the purchasers also received warrants to purchase up to an aggregate of 1,134,231 ordinary shares at an exercise price of $8.26 per share. The warrants are
exercisable as of six months from the date of issuance, have a term of three years, and the exercise price is subject to future adjustment for various events, such as
stock splits or dividend distributions. If the warrants are exercised in full, we will receive additional proceeds of approximately $9.4 million.
During 2010, we generated cash flows from operations of $14.4 million, compared to $7.5 million in the previous year. Our cash and cash equivalents,
together with our investments, were $46.5 million as of December 31, 2010, compared with $41.9 million as of December 31, 2009.
We believe that our strong cash position, our solid balance sheet and our financing capabilities all provide a key competitive advantage and collectively
will enable us to be well positioned to manage our business.
Strategy and Focus Areas
Our vision of how the industry will evolve is being driven by the change in enterprise mobility, RIA and cloud computing. This transition appears to be
occurring as we expected. We believe that our technology will allow us to expand our offerings into the cloud and mobile enterprise markets with speed, scale
and flexibility. We intend to remain focused on both the technology and business architectures that will enable our customers to take advantage of the cost
efficiencies and competitive advantages conveyed by these technologies. We intend to continue to prudently take advantage of opportunities to capture market
transitions and to put our assets to use in existing and new markets as the recovery occurs. We believe that our strategy and our ability to innovate and execute
may enable us to improve our competitive position in difficult business conditions and may continue to provide us with long-term growth opportunities.
Segments
Historically, we reported our results on the basis of one reportable segment, which was comprised of two reporting units. During 2010, as a result of a
change in our management structure associated with the acquisition of a U.S.-based IT consulting and staffing services business in January 2010, we began to
report our results on the basis of two reportable business segments: proprietary software technology and IT professional services, each of which has one reporting
unit. The reporting unit of our IT professional services segment is comprised of our three IT consulting and staffing subsidiaries, Coretech Consulting Group
LLC, Fusion Solutions LLC and Xsell Resources Inc., and the reporting unit of our proprietary software technology segment is comprised of all of our other
subsidiaries. Set forth below is segment information for the years ended December 31, 2008, 2009 and 2010.
28
2008
Total revenues
Expenses
Operating income (loss)
2009
Total revenues
Expenses
Operating income (loss)
2010
Total revenues
Expenses
Operating income (loss)
General
Proprietary
software products
IT professional
services
Unallocated
expense
Total
(U.S. dollars in thousands)
$
$
$
$
$
$
49,087 $
40,000
12,893 $
11,754
- $
5,959
9,087 $
1,139 $
(5,959) $
43,120 $
36,448
12,230 $
11,048
- $
3,596
6,672 $
1,182 $
(3,596) $
46,262 $
36,556
42,316 $
39,249
- $
3,435
9,706 $
3,067 $
(3,435) $
61,980
57,713
4,267
55,350
51,092
4,258
88,578
79,240
9,338
Our consolidated financial statements appearing in this annual report have been prepared in U.S. dollars and in accordance with generally accepted
accounting principles in the United States, 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.
Transactions and balances originally denominated in dollars are presented at their original amounts. Transactions and balances in other currencies are
converted into dollars in accordance with the Financial Accounting Standards Board, or FASB, Accounting Standards Codification, or ASC, 830 “Foreign
Currency Matters.” The majority of our sales are made outside of Israel and a substantial part of them is in dollars. In addition, a substantial portion of our costs
is incurred in dollars. Since the dollar is the primary currency of the economic environment in which we and certain of our subsidiaries operate, the dollar is our
functional and reporting currency and accordingly, monetary accounts maintained in currencies other than the dollar are remeasured using the foreign exchange
rate at the balance sheet date. Operational accounts and non monetary balance sheet accounts are measured and recorded at the exchange rate in effect at the date
of the transaction. For certain foreign subsidiaries whose functional currency is other than the U.S. dollar, all balance sheet accounts have been translated using
the exchange rates in effect at each balance sheet date. Operational accounts have been translated using the average exchange rate prevailing during each year.
The resulting translation adjustments are reported as a component of accumulated other comprehensive income (loss) in equity.
Critical Accounting Policies and Estimations
We have identified the policies below as critical to the understanding of our financial statements. The preparation of our consolidated financial
statements in conformity with U.S. GAAP requires management to make estimates and assumptions in certain circumstances that affect the amounts reported in
the accompanying financial statements and the related footnotes. Actual results may differ from these estimates. To facilitate the understanding of our business
activities, certain of our accounting policies that we believe are the most important to the portrayal
29
of our financial condition and results of operations and that require management’s subjective judgments are described below. We base our judgments on our
experience and various assumptions that we believe are reasonable.
Revenue Recognition
We derive our revenues from licensing the rights to use our software, related professional services maintenance and technical support as well as from
other IT professional services. We sell our products primarily through direct sales force and indirectly through distributors.
As required by ASC 985-605, “Software Revenue Recognition,” we determine the value of the software component of our multiple-element
arrangements using the residual method when vendor specific objective evidence, or VSOE, of fair value exists for the undelivered elements of the support and
maintenance agreements. VSOE is based on the price charged when an element is sold separately or renewed. Under the residual method, the fair value of the
undelivered elements is deferred and the remaining portion of the arrangement fee is allocated to the delivered elements and is recognized as revenue.
We account for our software sales in accordance with ASC 985-605, “Software Revenue Recognition.” Software license revenue is recognized 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 revenue included in multiple element arrangements is deferred and recognized on a straight-line basis over the term of the
maintenance and support agreement.
We generally do not grant a right of return to our customers. When a right of return exists, we defer revenue until the right of return expires, at which
time revenue is recognized provided that all other revenue recognition criteria are met.
Revenue from professional services consists of billable hours for services provided, recognized as the services are rendered.
Arrangements that include professional services bundled with licensed software and other software related elements, are evaluated to determine whether
those services are essential to the functionality of other elements of the arrangement. When services are considered essential to the software, revenues under the
arrangement are recognized using contract accounting based on ASC 605-35, “Construction-Type and Production-Type Contracts,” on a percentage of
completion method based on inputs measures. 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 for the entire contract. During the years ended December 31, 2008, 2009 and 2010, no such estimated losses were
identified.
When professional services are not considered essential to the functionality of other elements of the arrangement, revenue allocable to the consulting
services is recognized as the services are performed, using the VSOE fair value. In most cases, we have determined that the services are not considered essential
to the functionality of other elements of the arrangement.
Deferred revenue includes unearned amounts received under maintenance and support contracts, and amounts received from customers but not yet
recognized as revenues.
Research and 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.”
We establish technological feasibility upon completion of a detailed program design or working model.
30
Capitalized software costs are amortized on a product by product basis, by the greater of the amount computed using the: (i) ratio of current gross
revenues from sales of the software to the total of current and anticipated future gross revenues from sales of that software, or (ii) the straight-line method over
the estimated useful life of the product (three to five years). We assess the recoverability of this intangible asset on a regular basis by determining whether the
amortization of the asset over its remaining life can be recovered through undiscounted future operating cash flows from the specific software product sold. As of
December 31, 2008, 2009 and 2010], no impairment losses have been identified.
Business Combinations
Effective January 1, 2009, we adopted the amended ASC 805, “Business Combinations.” ASC 805 requires recognition of assets acquired, liabilities
assumed, and non-controlling interest in the acquiree at the acquisition date, measured at their fair values as of that date. ASC 805 also requires the fair value of
acquired in-process research and development to be recorded as intangibles with indefinite lives, contingent consideration to be recorded on the acquisition date,
and restructuring and acquisition-related deal costs to be expensed as incurred. Any excess of the fair value of net assets acquired over purchase price and any
subsequent changes in estimated contingencies are to be recorded in earnings. In addition, changes in valuation allowance related to acquired deferred tax assets
and in acquired income tax position are to be recognized in earnings.
ASC 805 is applied prospectively for all business combinations occurring after January 1, 2009, except for changes in valuation allowance related to
deferred tax assets and changes in acquired income tax position originating from business combinations that occurred prior to the effective date of ASC 805,
which are recognized in earnings following the adoption date.
Variable Interest Entities
ASC 810, “Consolidation,” provides a framework for identifying variable interest entities, or VIEs, and determining when a registrant should include the
assets, liabilities, non-controlling interests and results of activities of a VIE in its consolidated financial statements.
The 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 January 1, 2010, we adopted an updated guidance for the consolidation of VIEs. The new guidance replaces the prior quantitative approach for
identifying which enterprise should consolidate a VIE, which was based on which enterprise was exposed to a majority of the risks and rewards, with a qualitative
approach, based on which 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 about whether an enterprise
should consolidate a VIE is required to be evaluated continuously as changes to existing relationships or future transactions. The adoption of this standard did not
have a material impact on our financial position or results of operations.
The U.S.-based consulting and staffing services business that we acquired through one of our wholly-owned subsidiaries on January 17, 2010 is
considered to be a VIE. The subsidiary 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 the benefits accruing from the acquired business.
Goodwill
We have recorded goodwill as a result of past acquisitions. Goodwill represents the excess of the purchase price in a business combination over the fair
value of net tangible and intangible assets acquired.
31
We operate in two operating segments, each of which is comprised of one reporting unit. Goodwill was allocated to the reporting units at acquisition.
We follow ASC 350, “Intangibles – Goodwill and Other” and perform our goodwill annual impairment test for our two reporting units at December 31 of each
year, or more often if indicators of impairment are present.
As required by ASC 350, we compare the fair value of each reporting unit to its carrying value (‘step 1’). If the fair value exceeds the carrying value of
the reporting unit net assets, goodwill is considered not impaired, and no further testing is required. If the carrying value exceeds the fair value of the reporting
unit, then the implied fair value of goodwill is determined by subtracting the fair value of all the identifiable net assets from the fair value of the reporting unit. An
impairment loss is recorded for the excess, if any, of the carrying value of goodwill over its implied fair value (‘step 2’).
Effective January 1, 2009, as required by ASC 820, “Fair Value Measurements and disclosures,” we apply assumptions that market place participants
would consider in determining the fair value of each reporting unit.
In order to determine the fair value of our two reporting units, we implemented an ‘income approach’. Under the income approach expected future cash
flows are discounted to their present value using an appropriate rate of return. Judgments and assumptions related to future cash flows (projected revenues,
operating expenses and capital expenditures), future short-term and long-term growth rates, and weighted average cost of capital, which are based on our internal
assumptions, and believed to be similar to those of market participants and to represent both the specific risks associated with the business, and capital market
conditions, are inherent in developing the discounted cash flow model.
In addition, we compared our market capitalization, including an estimated control premium that an investor would be willing to pay for a controlling
interest in our company to the fair value of our reporting units, based on a third-party valuation study. The determination of a control premium requires the use of
judgment and is based primarily on comparable industry and deal-size transactions, related synergies and other benefits. Our reconciliation of the gap between
our market capitalization and the aggregate fair value of our company depends on various factors, some of which are qualitative and involve management
judgment, including stable relatively high backlog coverage and experience in meeting operating cash flow targets.
Since the fair value of our two reporting units exceeded their carrying amount, no impairment losses were recognized in 2008, 2009 and 2010
Impairment of long-lived assets and intangible assets subject to amortization
We review our long-lived assets for impairment in accordance with ASC 360, “Property, Plant and Equipment,” whenever events or changes in
circumstances indicate that the carrying value of an asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of
the carrying amount of an asset to the future undiscounted cash flows expected to be generated by the assets. If such assets are considered to be impaired, the
impairment to be recognized is measured by the amount by which the carrying value of the assets exceeds the fair value of the assets. During the years ended
December 31, 2008, 2009 and 2010, no impairment indicators have been identified.
As required by ASC 820, “Fair Value Measurements,” effective January 1, 2009, we apply assumptions that marketplace participants would consider in
determining the fair value of long-lived assets (or asset groups).
Intangible assets with finite lives are comprised of distribution rights, acquired technology and customer relationships, and are amortized over their
useful life using a method of amortization that reflects the pattern in which the economic benefits of the intangible assets are consumed or otherwise used up. We
recorded an intangible asset attributable to customer relationships that we acquired in connection with the acquisition of a U.S.-based IT consulting and staffing
services business in January 2010 and such customer relationships have been amortized since such time on a cash generating basis, over a period of four to 15
years. Distribution rights and acquired technology are being amortized on a straight line basis over a period of four to 15 years.
32
Marketable Securities
We account for investments in marketable securities in accordance with ASC 320 “Investments – Debt and Equity Securities.” Our 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. Our marketable securities consist mainly of debt securities which are designated as available-for-sale and are stated at fair value, with
unrealized gains and losses reported in accumulated other comprehensive income (loss), a separate component of shareholders’ equity. 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.
We recognize an impairment charge when a decline in the fair value of an investment that falls below its cost basis is determined to be other-than-
temporary.
Declines in fair value of available-for-sale equity securities that are considered other-than-temporary, based on criteria described in SAB Topic 5M,
“Other Than Temporary Impairment of Certain Investments in Equity Securities,” are charged to earnings (based on the entire difference between fair value and
amortized cost). Factors considered in making such a determination include the duration and severity of the impairment, the financial condition and near-term
prospects of the issuer, and the intent and ability of the company to retain its investment for a period of time sufficient to allow for any anticipated recovery in
market value.
For declines in value of debt securities, effective January 1, 2009, we apply an amendment to ASC 320. Under the amended impairment model, an
other-than-temporary impairment (OTTI) loss is deemed to exist and recognized in earnings if management intends to sell or if it is more likely than not that it
will be required to sell, a debt security, before recovery of its amortized cost basis.
If the criteria mentioned above, does not exist, we evaluate the collectability of the security in order to determine if the security is other than temporary
impaired.
For debt securities that are deemed other-than-temporary impaired, the amount of impairment recognized in the statement of operations is limited to the
amount related to “credit losses” (the difference between the amortized cost of the security and the present value of the cash flows expected to be collected), while
impairment related to other factors is recognized in other comprehensive income.
During 2008, we recorded a $131,000 other-than-temporary impairment of marketable securities. We did not record any impairment of marketable
securities in 2009 and 2010.
Stock-based compensation
We account for stock-based compensation in accordance with ASC 718 “Compensation – Stock Compensation.” ASC 718 requires registrants 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 our consolidated statement of operation. We recognize compensation
expenses for the value of our awards, which have graded vesting based on the accelerated method over the requisite service period of each of the awards, net of
estimated forfeitures. To measure and recognize compensation expense for share-based awards we use the Binomial option-pricing model. The Binomial model
for option pricing requires a number of assumptions, of which the most significant are the suboptimal exercise factor and expected stock price volatility. The
suboptimal exercise factor is estimated based on employees' historical option exercise behavior. 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. Expected volatility is based upon actual historical stock
price movements and was calculated as of the grant dates for different periods, since the Binomial model can be used for different expected volatilities for
different periods. 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. Although we paid a cash dividend in January 2010, we have no foreseeable plans to pay dividends and
33
therefore we use an expected dividend yield of zero in the option pricing model. The expected term of options granted is derived from the output of the option
valuation model and represents the period of time that options granted are expected to be outstanding. Estimated forfeitures are based on actual historical pre-
vesting forfeitures. For awards with performance conditions, compensation cost is recognized over the requisite service period if it is 'probable' that the
performance conditions will be satisfied, as defined in ASC 450-20-20, “Loss Contingencies.”
Contingencies
From time to time, we are subject to claims arising in the ordinary course of our business, including claims relating to product liability, employees,
suppliers and public authorities. In determining whether liabilities should be recorded for pending litigation claims, we assess the allegations made and the
likelihood that we will be able to defend against the claim successfully. When we believe that it is probable that we will not prevail in a particular matter, we
estimate the amount of liability based, in part, on advice of legal counsel.
Fair Value Measurements
We account for certain assets and liabilities at fair value under ASC 820, “Fair Value Measurements and Disclosures.” Fair value is an exit price,
representing the amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants. As such, fair
value is a market-based measurement that should be determined based on assumptions that market participants would use in pricing an asset or a liability. As a
basis for considering such assumptions, ASC 820 establishes a three-tier value hierarchy, which prioritizes the inputs used in the valuation methodologies in
measuring fair value:
Level 1 - Observable inputs that reflect quoted prices (unadjusted) for identical assets or liabilities in active markets;
Level 2 - significant other observable inputs based on market data obtained from sources independent of the reporting entity;
Level 3 - Unobservable inputs which are supported by little or no market activity (for example cash flow modeling inputs based on assumptions).
The fair value hierarchy also requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring
fair value. We categorized each of our fair value measurements in one of these three levels of hierarchy.
Assets and liabilities measured at fair value on a recurring basis are comprised of marketable securities foreign currency forward contracts and
contingent consideration (See Note 5 to the consolidated financial statements).
The carrying amounts reported in the balance sheet for cash and cash equivalents, 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.
Accounting for income tax
We account for income taxes in accordance with ASC 740, “Income Taxes.” ASC 740 prescribes the use of the “asset and liability” method whereby
deferred tax asset and liability account balances are determined based on differences between financial reporting and tax bases of assets and liabilities and are
measured using the enacted tax rates and laws that will be in effect when the differences are expected to reverse. We provide a valuation allowance, if necessary,
to reduce deferred tax assets to their estimated realizable value. Deferred tax assets are classified as current or non-current according to the expected reversal
dates.
34
Effective as of January 1, 2007, we utilize a two-step approach in recognizing and measuring uncertain tax positions accounted for in accordance with
ASC 740. Under the first step we evaluate a tax position taken or expected to be taken in a tax return by determining if the weight of available evidence indicates
that it is more likely than not that, based on 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 have accrued interest and penalties related to unrecognized tax benefits in our provisions for income taxes. The total amount of gross
unrecognized tax benefits (taxes on income) for the years ended December 31, 2008, 2009 and 2010 were $16,000, $(217,000) and $874,000, respectively.
Significant Revenues and Expenses
Revenues. Revenues are derived from sales of software licenses, related professional services, maintenance and technical support and other IT
professional services. Revenues may continue to be affected by factors including market uncertainty, which can result in cautious spending in our global markets;
changes in the geopolitical environment; sales cycles; high fluctuation of exchange rates; changes in the mix of direct sales and indirect sales and variations in
sales channels.
Cost of Revenues. Cost of revenues for software sales consist primarily of software production costs, royalties and licenses payable to third parties, as
well as amortization of capitalized software. Cost of revenues for maintenance and technical support and professional services consists primarily of personnel
expenses, subcontracting and other related costs. Cost of revenues is affected by changes in the mix of revenues sold; price competition; sales discounts; currency
fluctuation; and increases in labor costs. Service gross margin may be impacted by various factors such as the change in mix between technical support services
and advanced services, the timing of technical support service contract initiations and renewals and the timing of our strategic investments in headcount and
resources to support this business.
Research and Development Expenses, Net. Research and development costs consist primarily of salaries of employees engaged in on-going research and
development activities and other related expenses. The capitalization of software development costs is applied as reductions to gross research and development
costs to calculate net research and development expenses.
The following table sets forth the gross research and development costs, capitalized software development costs, and the net research and development
expenses for the periods indicated:
Gross research and development costs
Less capitalized software development costs
Research and development expenses, net
2008
Year ended December 31
2009
(U.S. dollars in thousands)
2010
$
$
$
4,927
(2,577)
2,350 $
4,438 $
(3,128)
1,310 $
5,667
(3,595)
2,072
Selling and Marketing Expenses. Selling and marketing expenses consist primarily of salaries and related expenses for sales and marketing personnel,
sales commissions, marketing programs, website related expenses, public relations, promotional materials, travel expenses and trade show exhibit expenses.
General and Administrative Expenses. General and administrative expenses consist primarily of salaries and related expenses for executive, accounting,
human resources and administrative personnel, professional fees, provisions for doubtful accounts, and other general corporate expenses.
Financial income (expenses), net. Net financial income (expenses) consists primarily of interest earned on cash equivalents and marketable securities,
interest paid on loans received and currency translation adjustments.
35
Results of Operations
The following table presents selected consolidated statement of operations data for the periods indicated as a percentage of total revenues:
Revenues:
Software
Maintenance and technical support
Consulting services
Total revenues
Cost of revenues:
Software
Maintenance and technical support
Consulting services
Total cost of revenues
Gross profit
Operating costs and expenses:
Research and development, net
Selling and marketing,
General and administrative
Other income, net
Total operating expenses, net
Operating income
Financial income (expenses), net
Other income, net
Income before taxes on income
Tax benefit (taxes on income)
Net income attributable to Magic’s shareholders
2008
Year ended December 31,
2009
2010
33.7%
23.5
42.8
100.0%
7.9
3.7
32.2
43.8
56.2
3.8
28.0
17.5
-
49.3
6.9
0.7
-
7.6
(0.3)
7.3
31.2%
25.0
43.8
100.0%
9.7
4.0
33.8
47.5
52.5
2.4
27.7
14.8
3.6
41.3
11.2
0.4
0.1
11.7
(0.6)
11.1
22.7%
16.3
61.0
100.0%
6.0
2.3
49.7
58.0
42.0
2.3
19.8
9.2
-
31.3
10.7
(0.3)
0.2
10.6
-
10.6
Year Ended December 31, 2010 Compared With Year Ended December 31, 2009
Revenues. Revenues in 2010 increased by 60% from $55.4 million in 2009 to $88.6 million in 2010. Revenues from proprietary software products
increased by 7% from $43.1 million in 2009 to $46.3 million in 2010, as a result of increased sales of licenses due to the recovery from the global economic
downturn in Japan, the United States and United Kingdom. Revenues from IT professional services increased by 246% from $12.2 million in 2009 to $42.3
million in 2010, primarily as a result of the acquisition of a U.S.-based IT professional services business on January 17, 2010.
Revenues from sales of licenses increased by 13% from $14.7 million in 2009 to $16.6 million in 2010. Revenues from sales of applications increased
by 35% from $2.6 million in 2009 to $3.5 million in 2010. The increase in license and applications sales was primarily due to the recovery from the global
economic downturn in Japan, the United States and United Kingdom. Revenues from maintenance and technical support increased by 4.3% from $13.8 million in
2009 to $14.4 million in 2010, primarily as a result of the increase in licenses revenues. Revenues from IT consulting services increased by 123% from $24.3
million in 2009 to $54.1 million in 2010, primarily as a result of the acquisition of a U.S.-based IT professional services business on January 17, 2010.
The following table presents our revenues by geographical market for the years ended December 31, 2009 and 2010:
36
Israel
Europe
United States
Japan
Other
Total revenues
Year ended December 31,
2009
2010
(In thousands)
3,614 $
22,516
18,485
8,895
1,840
55,350 $
4,405
21,788
48,888
10,806
2,691
88,578
$
$
Cost of Revenues. Cost of revenues increased by 95% from $26.3 million in 2009 to $51.4 million in 2010. Cost of revenues for licenses decreased by
10% from $4.1 million in 2009 to $3.7 million in 2010, primarily due to a decrease in the amortization of capitalized software expenses in 2010 due to the full
amortization of older releases prior to the 2010 period, which decrease was offset by the amortization of new releases. Cost of revenues for applications increased
by 23% from $1.3 million in 2009 to $1.6 million in 2010, mainly due to the increase in application revenues. Cost of revenues for maintenance and technical
support decreased by 5% from $2.2 million in 2009, to $2.1 million in 2010. Cost of revenues for IT consulting services increased by136% from $18.7 million in
2009 to $44.1 million in 2010, as a result of the acquisition of a U.S.-based IT professional services business on January 17, 2010. Cost of revenues for each of
the years ended December 31, 2009 and 2010 includes $2,000 of stock-based compensation recorded under ASC 718.
Gross Profit. Gross profit in 2010 was 42% compared to gross profit of 52.5% in 2009. The decrease in gross profit was mainly due to the change in the
ratio of our revenues primarily as a result of the increase in IT consulting services revenues, which have lower margins than our revenues from licenses and
maintenance and technical support.
Research and Development Expenses, Net. Gross research and development costs increased by 30% from $4.4 million in 2009 to $5.7 million in 2010.
Net research and development expenses increased by 62% from $1.3 million in 2009 to $2.1 million in 2010. In 2010, we capitalized $3.6 million of software
development costs compared to $3.1 million in 2009. The increase in gross research and development costs and capitalization costs is due to increased research
and development activity in 2010. The increase in gross research and development costs in 2010 was also due to the depreciation of the U.S. dollar against the
NIS, which increased the U.S. dollar value of our NIS denominated costs. Net research and development costs as a percentage of revenues was 2.3% in 2010
compared to 2.4% in 2009. Research and development expenses for the years ended December 31, 2009 and 2010 include $26,000 and $61,000, respectively, of
stock-based compensation recorded under ASC 718.
Selling and Marketing Expenses. Selling and marketing expenses increased by 14% from $15.3 million in 2009 to $17.5 million in 2010. The increase
in selling and marketing expenses is primarily due to the acquisition of a U.S.- based IT professional services business on January 17, 2010 as well as from
increased worldwide selling and marketing activities and increased bonuses and commissions to our sales personal as a result of increased sales. Selling and
marketing expenses as a percentage of revenues was 20% in 2010 as compared to 28% in 2009. Selling and marketing expenses for the years ended December 31,
2009 and 2010 include $32,000 and $75,000, respectively, of stock-based compensation recorded under ASC 718.
General and Administrative Expenses. General and administrative expenses remained constant at $8.2 million both in 2009 and 2010. General and
administrative expenses for the years ended December 31, 2009 and 2010 include $70,000 and $162,000, respectively, of stock-based compensation recorded
under ASC 718.
Other Income, Net. We recorded other income, net of $2.0 million in 2009 compared to $0.2 million in 2010. Other income, net in 2009 is attributable
to the capital gain that we recorded from the sale of our Israel-based
37
headquarters’ office building in December 2009 in consideration of $5.2 million, of which $4.9 million was received in December 2009 and the remaining $0.3
million was received in 2010 following the receipt of certain approvals from the Israeli tax authorities and local municipality that we have no outstanding
obligations. Other income, net in 2009 is also attributable to the capital gain that we recorded from the sale of our Hungarian office building facility in June 2009
for total consideration of $0.5 million. Other income in 2010 is attributable to proceeds from the sale of the assets of CarPro Systems Ltd. in December 2006.
Financial Income (Expenses), Net. We had financial expenses, net of $0.2 million in 2010 compared to financial income, net of $0.2 million in 2009.
Our financial income, net in 2009 consists of interest income on deposits and marketable securities. Our financial expenses, net in 2010 was primarily due to the
depreciation of the Euro against the U.S. dollar, which adversely affected the U.S. dollar value of Euro denominated assets, including cash and accounts
receivable.
Tax Benefit (Taxes on Income). We recorded taxes on income of $0.3 million in 2009 compared to a tax benefit of $0.1 million in 2010. Taxes on
income are primarily attributable to taxes incurred in Europe and the United States. The tax benefit in 2010 was derived from an increase in a deferred income
tax asset recorded with respect to carryforward tax losses in Israel, reversing a previous valuation allowance on a deferred income tax asset.
Net Income. We recorded net income of $9.4 million in 2010 compared to net income of $6.2 million in 2009. The increase in net income in 2010 is
attributable to the increase in our operations, mainly in the Japanese and U.S. markets, as well as to the revenues generated from the U.S.-based IT professional
services business that we acquired in January 2010. Our net income in 2009 benefited from approximately $2.2 million capital gains that we record as a result of
the sale of our Hungarian facility in June 2009 and our Israel-based headquarters’ office building in December 2009.
Year Ended December 31, 2009 Compared With Year Ended December 31, 2008
Revenues. Revenues in 2009 decreased by 11% from $62.0 million in 2008 to $55.4 million in 2009. Revenues from proprietary software products
decreased by 12% from $49.1 million in 2008 to $43.1 million in 2009, as a result of the economic downturn during 2009, which led to a significant reduction in
ongoing orders for our products, particularly in the Japanese and European markets. Revenues from IT professional services revenues decreased by 5% from
$12.9 million in 2008 to $12.2 million in 2009. License revenues decreased by 18% from $17.9 million in 2008 to $14.7 million in 2009, primarily attributable to
the generally lower demand for our products caused by the global economic downturn. As a result of this economic downturn during 2009, we experienced a
significant reduction in ongoing orders for our products, particularly in the Japanese and European markets. Revenues from sales of applications decreased by
13% from $3.0 million in 2008 to $2.6 million in 2009, primarily due to a reduction in orders in the Japanese market and exchange rate differences attributed to
the depreciation of the British Pound against the U.S. dollar, which adversely affected the U.S. dollar value of our British Pound denominated revenues from sales
of applications. Revenues from maintenance and technical support decreased by 5% from $14.5 million in 2008 to $13.8 million in 2009, primarily as a result of
the depreciation of the Euro and British Pound against the U.S. dollar, which adversely affected the U.S. dollar value of our Euro and British Pound denominated
revenues from maintenance and technical support. Revenues from consulting and other services decreased by 9% from $26.6 million in 2008 to $24.3 million in
2009, primarily as a result of the advancement of a number of customers’ projects to production stage, consequently reducing the technology consulting needs of
these customers, and the lower demand caused by the global economic downturn.
38
The following table presents our revenues by geographical market for the years ended December 31, 2008 and 2009:
Israel
Europe
United States
Japan
Other
Total revenues
Year ended December 31,
2008
2009
(In thousands)
4,760 $
25,359
20,096
10,110
1,655
61,980 $
3,614
22,516
18,485
8,895
1,840
55,350
$
$
Cost of Revenues. Cost of revenues decreased by 3% from $27.1 million in 2008 to $26.3 million in 2009. Cost of revenues for licenses increased by
28% from $3.2 million in 2008 to $4.1 million in 2009, primarily due to an increase in amortization of capitalized software development expenses from $2.4
million in 2008 to $3.7 million in 2009. Cost of revenues for applications decreased by 24% from $1.7 million in 2008 to $1.3 million in 2009, due to the
decrease in application revenues and increased margins on sales of applications. Cost of revenues for maintenance and technical support were $2.2 in 2009, the
same as in 2008. Cost of revenues for consulting and other services decreased by 7% from $20.0 million in 2008 to $18.7 million in 2009, consistent with the
decrease in consulting and other services revenues. Cost of revenues for the years ended December 31, 2008 and 2009 includes $20,000 and $2,000, respectively,
of stock-based compensation recorded under ASC 718.
Gross Profit. Gross profit in 2009 was 52.5% compared to gross profit of 56.2% in 2008. The decrease in gross profit was mainly a result of the
decrease in the license sales and maintenance and technical support, which maintain high gross profit margins.
Research and Development Expenses, Net. Gross research and development costs decreased by 10% from $4.9 million in 2008 to $4.4 million in 2009.
Net research and development expenses decreased by 44% from $2.3 million in 2008 to $1.3 million in 2009. In 2009, we capitalized $3.1 million of software
development costs compared to $2.6 million in 2008 due to an increase in product enhancements. The decrease in gross research and development costs in 2009
was primarily due to a reduction in salary costs that we implemented in 2009 and the depreciation of the NIS against the U.S. dollar, which decreased the U.S.
dollar value of our NIS denominated salary costs. Net research and development costs as a percentage of revenues in 2009 was 2.4% compared to 3.8% in 2008.
Research and development expenses for the years ended December 31, 2008 and 2009 include $13,000 and $26,000, respectively, of stock-based compensation
recorded under ASC 718.
Selling and Marketing Expenses. Selling and marketing expenses decreased by 12% from $17.4 million in 2008 to $15.3 million in 2009. The decrease
in selling and marketing expenses is consistent with the decrease in total sales and is also attributable to expense control initiatives implemented by management
in 2009. Selling and marketing expenses for the years ended December 31, 2008 and 2009 include $112,000 and $32,000, respectively, of stock-based
compensation recorded under ASC 718.
General and Administrative Expenses. General and administrative expenses decreased by 25% from $10.9 million in 2008 to $8.2 million in 2009. The
decrease in general and administrative expenses is primarily attributable to a reduction in salary costs that we implemented in 2009 together with other expense
control initiatives. General and administrative expenses for the years ended December 31, 2008 and 2009 include $99,000 and $70,000, respectively, of stock-
based compensation recorded under ASC 718.
39
Other Income, Net. We recorded other income of $2.0 million in 2009, which is mainly attributable to the sale of our Israel-based headquarters’ office
building in December 2009 in consideration of $5.2 million, of which $4.9 million was received in December 2009 and the remaining $0.3 million was received
in 2010 following the receipt of certain approvals from the Israeli tax authorities and local municipality that we have no outstanding obligations. We did not
record other income in 2008.
Financial Income, Net. Financial income, net decreased from $0.4 million in 2008 to $0.2 million in 2009. The decrease in financial income, net was
primarily due to lower prevailing interest rates on deposits and marketable securities and the effect of changes in currency rates.
Taxes on Income. We recorded taxes on income of $0.2 million in 2008 compared to $0.3 million in 2009. Taxes on income are primarily attributable to
taxes incurred in Europe and the United States. Most of our subsidiaries have accumulated carryforward losses for tax purposes.
Equity in Earnings (Losses) of Affiliates. Prior to the sale of our 40% ownership interest in Nextstep in June 2008, we recognized income and loss from
the operations of Nextstep. In 2008, we recorded equity in losses of affiliates of $8,000. As a result of the sale of our interest in Nextstep in June 2008, we
recorded a loss of $61,000. We did not record equity in losses of affiliates in 2009.
Net Income (Loss). We recorded net income of $4.5 million from continued operations in 2008 compared to net income of $6.2 million from continued
operations in 2009. The increase in net income in 2009 is mainly attributable to the capital gain of approximately $2 million that we recorded from the sale of our
Israel-based headquarters’ office building as well as expense control initiatives implemented by management in 2009.
Impact of Currency Fluctuations and of Inflation
Our financial statements are stated in U.S. dollars, our functional currency. However, a substantial portion of our revenues and costs are incurred in
other currencies, particularly NIS, Euros, Japanese yen, and the British pound. We also maintain substantial non-U.S. dollar balances of assets, including cash,
accounts receivable, and liabilities, including accounts payable. Therefore, fluctuations in the value of the currencies in which we do business relative to the U.S.
dollar may have a material adverse effect on our business, results of operations and financial condition. The depreciation of such other currencies in relation to
the U.S. dollar has the effect of reducing the U.S. dollar value of any of our liabilities which are payable in those other currencies (unless such costs or payables
are linked to the U.S. dollar). Such depreciation also has the effect of decreasing the U.S. dollar value of any asset that is denominated in such other currencies or
receivables payable in such other currencies (unless such receivables are linked to the U.S. dollar). In addition, the U.S. dollar value of revenues and expenses
denominated in such other currencies would increase. Conversely, the appreciation of any currency in relation to the U.S. dollar has the effect of increasing the
U.S. dollar value of any unlinked assets and the U.S. dollar amounts of any unlinked liabilities and increasing the U.S. dollar value of revenues and expenses
denominated in other currencies.
In addition, while we incur a portion of our costs in NIS, the U.S. dollar cost of our operations in Israel is influenced by the extent to which any increase
in the rate of inflation in Israel is (or is not) offset, or is offset on a lagging basis, by a devaluation of the NIS in relation to the U.S. dollar.
Because exchange rates between the NIS, Euro, Japanese Yen and the British pound and the U.S. dollar fluctuate continuously, exchange rate
fluctuations and especially larger periodic devaluations will have an impact on our profitability and period-to-period comparisons of our results. We cannot
assure you that in the future our results of operations may not be materially adversely affected by currency fluctuations.
The following table sets forth, for the periods indicated, (i) depreciation or appreciation of the U.S. dollar against the most important currencies for our
business, the NIS, Euro, Japanese yen, the British pound; and (ii) inflation as reflected in changes in the Israeli consumer price index.
40
New Israeli Shekel
Euro
Japanese Yen
British Pound
Israeli Consumer Price Index
Conditions in Israel
2006
2007
Year Ended December 31,
2008
2009
2010
2.0%
4.2%
(7.6)%
6.4%
(0.1)%
9.9%
11.7%
6.2%
2.2%
3.4%
1.2%
(5.3)%
23.1%
(27.2)%
3.8%
0.7%
3.5%
(1.4)%
10.9%
4.0%
6.4%
(7.4)%
13.4%
(4.4)%
2.6%
We are incorporated under the laws of Israel, and our principal executive offices and most of our research and development facilities are located in the
State of Israel. See Item 3.D. “Key Information - Risk Factors - Risks Relating to Our Location in Israel” for a description of governmental, economic, fiscal,
monetary or political polices or factors that have materially affected or could materially affect our operations.
Corporate Tax Rate
Israeli companies are subject to corporate tax at the rate of 25% in the 2010 tax year. In accordance with a recent amendment to the Income Tax
Ordinance (Amendment No. 171 dated July 23, 2009), the corporate tax rate declined to 24% in 2011 and is scheduled to further decline to 23% in 2012, 22% in
2013, 21% in 2014, 20% in 2015 and 18% in 2016 and thereafter. However, the effective tax rate payable by a company that derives income from an “approved
enterprise” (as further discussed below), may be considerably less.
Eight investment programs at our facility in Or Yehuda have been granted “approved enterprise” status under the Law for Encouragement of Capital
Investments, 1959, commonly referred to as the Investment Law, and we are, therefore, eligible for certain tax benefits. Subject to compliance with applicable
requirements, the portion of our income derived from the approved enterprise programs will be tax-exempt for a period of two to four years commencing in the
first year in which an approved enterprise generates taxable income and will be subject, for a period of five to eight years, to a reduced corporate tax (such
reduced tax rates are dependent on the level of foreign investments in the company). However, these benefits will not be available to us with respect to any
income derived by our non-Israeli subsidiaries.
On April 1, 2005, an amendment to the Investment Law, or the Amendment, came into effect that has significantly changed the provisions of the
Investment Law. The Amendment limits the scope of enterprises which are eligible to receive tax benefits, such as generally requiring that at least 25% of the
enterprise’s income will be derived from export. Additionally, the Amendment enacted major changes in the manner in which tax benefits are awarded under the
Investment Law so that companies no longer require Investment Center approval in order to qualify for tax benefits. Such an enterprise is a Privileged Enterprise,
rather than the previous terminology of Approved Enterprise. The period of tax benefits for a new Privileged Enterprise commences in the "Year of
Commencement,” which is the later of: (1) the year of election, or (2) the year in which taxable income is first generated by the company after the election year.
However, the amendment to the Investment Law provides that terms and benefits included in any certificate of approval granted prior to the Amendment
will remain subject to the provisions of the Investment Law as they were on the date of such approval. Therefore, our existing approved enterprise programs will
generally not be subject to the provisions of the Amendment. As a result of the Amendment, tax-exempt income will subject us to taxes upon distribution or
liquidation and we may be required to record deferred tax liability with respect to such tax-exempt income. As of December 31, 2010, we did not generate
income under the provision of the Amendment.
In December 2010, the Israeli Parliament passed the Law for Economic Policy for 2011 and 2012 (Amended Legislation), which, among other things,
amends the Investment Law, effective as of January 1, 2011. According to the new legislation, the benefit tracks under the Investment Law were modified and a
uniform tax rate will apply to all of the income of a Privileged Enterprise. We may elect to irrevocably implement the amendment (while waiving benefits
provided under the Investment Law as currently in effect) and subsequently would be
41
subject to the amended tax rates that are: 2011 and 2012 - 15% (in development area A - 10%), 2013 and 2014 - 12.5% (in development area A - 7%) and in 2015
and thereafter - 12% (in development area A - 6%).
As of December 31, 2010, our net operating loss carry-forwards for Israeli tax purposes was approximately $35.1 million. Under current Israeli tax
laws, operating loss carry-forwards do not expire and may be offset against future taxable income. As of December 31, 2010, our subsidiaries in Europe had
estimated total available tax loss carry-forwards of $6.6 million, which may be offset against future taxable income for 15 to 20 years, respectively.
We have received final tax assessments through the year 2005 from the Israeli tax authorities.
Recently Issued Accounting Standards
In October 2009, the FASB issued amendments to the accounting and disclosure for revenue recognition of multiple deliverable revenue arrangements
codified in ASC 605-25. The amendments modify the criteria for recognizing revenue in multiple element arrangements and require companies to develop a best
estimate of the selling price to separate deliverables and allocate arrangement consideration using the relative selling price method. Additionally, the amendments
eliminate the residual method for allocating arrangement considerations. The amendments establish a selling price hierarchy for determining the selling price of a
deliverable, which is based on: a) vendor-specific objective evidence; b) third-party evidence; or c) estimates. In addition, the guidance significantly expands
required disclosures related to a vendor’s multiple-deliverable revenue arrangements. ASC 605-25 is effective prospectively for revenue arrangements entered
into or materially modified in fiscal years beginning on or after June 15, 2010, with early adoption permitted. We have not early adopted the guidance. We do
not believe that the adoption of the new guidance will have material impact on our consolidated financial statements.
In January 2010, the FASB updated the “Fair Value Measurements Disclosures” codified in FASB ASC 820. More specifically, the update requires (a)
an entity to disclose separately the amounts of significant transfers in and out of Levels 1 and 2 fair value measurements and to describe the reasons for the
transfers; and (b) information about purchases, sales, issuances and settlements to be presented separately (i.e. to present the activity on a gross basis rather than
net) in the reconciliation for fair value measurements using significant unobservable inputs (Level 3 inputs). The update clarifies existing disclosure requirements
for the level of disaggregation used for classes of assets and liabilities measured at fair value, and requires disclosures about the valuation techniques and inputs
used to measure fair value for both recurring and nonrecurring fair value measurements using Level 2 and Level 3 inputs. The update became effective as of the
first quarter ended December 31, 2010, except for the gross presentation of the Level 3 roll forward information, which is required for annual reporting of
December 31, 2010. The adoption of the new guidance did not have a material impact on our consolidated financial statements.
In February 2010, the FASB issued Accounting Standard Update, or ASU, 2010-09 - amendments to certain recognition and disclosure requirements of
“Subsequent Events” codified in ASC 855. The update removes the requirement to disclose the date through which subsequent events were evaluated in both
originally issued and reissued financial statements for "SEC Filers." ASU 2010-09 still requires our company to evaluate subsequent events through the date that
the financial statements are issued. The adoption of the new guidance did not have a material impact on our consolidated financial statements.
In December 2010, the FASB Emerging Issues Task Force issued ASU 2010-29, Disclosure of Supplementary Pro Forma Information for Business
Combinations codified in ASC 805, “Business Combinations.” ASU 2010-29 responds to diversity in practice about the interpretation of the pro forma disclosure
requirements for business combinations. When a public entity's business combinations are material on an individual or aggregate basis, the notes to its financial
statements must provide pro forma revenue and earnings of the combined entity as if the acquisition date(s) had occurred as of the beginning of the annual
reporting period. The ASU clarifies that if comparative financial statements are presented, the pro forma disclosures for both periods presented (the year in which
the acquisition occurred and the prior year) should be reported as if the acquisition had occurred as of the beginning of the comparable prior annual reporting
period only and not as if it had occurred at the beginning of the current annual reporting period. The ASU also expands the supplemental pro forma disclosure
requirements to
42
include a description of the nature and amount of any material non-recurring adjustments that are directly attributable to the business combination. We have
determined not to early adopt the new guidance.
B.
LIQUIDITY AND CAPITAL RESOURCES
Historically, we have financed our operations through cash generated by operations, funds generated by our public offerings in 1991 (approximately $8.5
million), 1996 (approximately $5.0 million) and 2000 (approximately $79.6 million), private equity investments in 1998 (approximately $12.2 million), as well as
from research and development and marketing grants primarily from the Government of Israel. In addition, we have also financed our operations through short-
term loans and borrowings under available credit facilities.
In June 2008, we sold our 40% interest in Nextstep in consideration of $150,000 and recorded a capital loss of $61,000.
In December 2009, we sold our Israel-based headquarters’ office building in consideration of $5.2 million, of which $4.9 million was received in
December 2009 and the remaining $0.3 million was received in 2010 following the receipt of certain approvals from the Israeli tax authorities and local
municipality that we have no outstanding obligations. We recorded a capital gain of $2.0 million as a result of the transaction in 2009.
On January 17, 2010, we purchased a consulting and staffing services business of a U.S.-based IT services company for approximately $13.7 million to
be paid over a three year period, of which $8.6 million was paid in 2010, $1.9 million was paid in 2011 and the remainder will be paid in 2012 and 2013. The
acquisition had a positive effect on the growth of our IT professional services revenues in 2010.
On October 31, 2010, we purchased an 88% interest in a consulting and staffing services company, and have an option to increase our holdings to 100%.
We paid a cash purchase price of $1.6 million. The acquired company provides a comprehensive range of consulting and staffing services for IT industry in the
areas of infrastructure design and delivery, application development, technology planning and implementation services.
In order to strengthen our presence in Southern Africa, on January 1, 2011, we acquired 51% of our South African distributor, Magix Integration
(Proprietary) Ltd., with an option to increase out holdings to 75%, for a total investment of up to $2.5 million. Magix Integration (Proprietary) Ltd. specializes in
the software integration and application development of our platforms as well as the support of large-scale and complex systems in the public and financial
sectors in South Africa.
On December 23, 2010, we raised approximately $21.4 million before costs ($20.3 million net of issuance expenses) in a private placement to
institutional investors in the United States and abroad. We issued an aggregate of 3,287,616 ordinary shares at a price of $6.50 per share in the offering. Certain
of the purchasers also received warrants to purchase up to an aggregate of 1,134,231 ordinary shares at an exercise price of $8.26 per share. The warrants are
exercisable as of six months from the date of issuance, have a term of three years, and the exercise price is subject to future adjustment for various events, such as
stock splits or dividend distributions. If the warrants are exercised in full, we will receive additional proceeds of approximately $9.4 million.
As of December 31, 2010, we had approximately $46.5 million in cash and cash equivalents and working capital of approximately $48.8 million,
compared to approximately $41.9 million in cash and cash equivalents and working capital of approximately $28.0 million at December 31, 2009.
As of December 31, 2010, our total debt was approximately $11,000 compared to approximately $53,000 as of December 31, 2009, comprised solely of
long-term loans (including current maturities).
In December 2009, we announced that our board of directors had declared a cash dividend of $0.50 per share and the payment of the dividend in the
aggregate amount of approximately $16.0 million was made on January 25, 2010.
43
We do not currently have significant capital spending or purchase commitments; however we anticipate a moderate increase in capital expenditures and
lease commitments during 2011 consistent with the anticipated growth in our operations, infrastructure and personnel. We believe that our accumulated cash, in
conjunction with cash generated from operations and available funds, will be sufficient to meet our cash requirements for working capital and capital expenditures
for at least the next 12 months. We expect that cash provided by operating activities may fluctuate in future periods as a result of a number of factors, including
fluctuations in our operating results, accounts receivable collections, and the timing and amount of tax and other payments.
We invested the proceeds from our December 2010 private placement in short-term deposit accounts that bear annual interest of 1%-2%. We believe the
overall credit quality of our portfolio is strong, with our cash equivalents and fixed income portfolio invested in securities with a weighted-average credit rating
exceeding A. Our fixed income and publicly traded equity securities are classified as either Level 1 or Level 2 investments, as measured under ASC 820, “Fair
Value Measurements and Disclosures,” as these vendors either provide a quoted market price in an active market or use observable inputs.
Cash Flows
The following table summarizes our cash flows for the periods presented:
2008
Net income from continuing operations
Adjustments to reconcile net income from continuing operations to net cash
$
provided by operating activities from continuing operations:
Net cash provided by operating activities from continuing operations
Net cash used in operating activities from discontinued operations
Net cash provided by operating activities
Net cash provided by (used in) investing activities
Net cash provided by (used in) financing activities
Effect of exchange rate changes on cash and cash equivalents
Increase (decrease) in cash and cash equivalents from continuing operation
Year ended December 31,
2009
(U.S. dollars in thousands)
6,176 $
$
4,508
3,186
7,694
(21)
7,673
11,266
(3,371)
(458)
15,131
1,358
7,534
-
7,534
(10,376)
(62)
(55)
(2,959)
2010
9,375
5,022
14,397
-
14,397
(391)
4,915
390
19,311
Net cash provided by operating activities was $14.4 million for the year ended December 31, 2010, compared to $7.5 million and $7.7 million for the
year ended December 31, 2009 and 2008, respectively. Net cash provided by operations in 2010 consists primarily of our ongoing operations activity and of net
income adjusted for non-cash activity, including depreciation and amortization of our capitalized research and development assets and customer relations and an
increase in accrued expenses and other accounts payable, offset by an increase in deferred income taxes assets. Net cash provided by operations in 2009 consists
primarily of our ongoing operations activity and of net income adjusted for non cash activity, including depreciation and amortization of our capitalized research
and development assets and a decrease in trade receivables, which was offset by gain on sale of property and equipment, a decrease in accrued expenses and other
accounts payable and an increase in deferred income taxes. Net cash provided by operations in 2008 consists primarily of our ongoing operations activity and of
net income adjusted for non cash activity, including depreciation and amortization of our capitalized research and development assets and an increase in accrued
expenses and other accounts payable.
Net cash used in investing activities was approximately $0.4 million for the year ended December 31, 2010, compared to net cash used in investing
activities of approximately $10.4 million for the year ended December 31, 2009 and net cash provided by investing activities of approximately $11.3 million for
the year ended December 31,
44
2008. Net cash used in investing activities in 2010 is primarily attributable to $10.2 million used for the acquisition of two U.S.-based IT services businesses,
$3.6 million of capitalized software development costs, $1.2 million prepayment on investment, $0.6 million for investment in property and $0.4 million for
investment in marketable securities, which was offset by $13.8 million net proceeds from short-term and long-term deposits, $1.2 million proceeds from sale and
maturity of marketable securities and $0.4 million proceeds from the sale of property and equipment. Net cash used in investing activities in 2009 is primarily
attributable to $12.0 million net investments in short-term and long-term deposits, $3.1 million capitalized software development costs and $1.6 million
investment in marketable securities, which was offset by $4.9 million proceeds received from the sale of our Israel-based headquarters’ office building in
December 2009. Net cash provided by investing activities in 2008 is primarily attributable to $15.3 million net proceeds received from the sale of our wholly-
owned AAOD subsidiary, as well as $150,000 proceeds from the sale of Nextstep, offset by $2.6 million capitalized software development costs, $0.7 million for
the purchase of property and equipment and $1.3 million investment in marketable securities and short term bank deposits.
Net cash provided by financing activities was approximately $4.9 million for the year ended December 31, 2010, primarily attributable to $20.3 million
net proceeds from a private placement of our ordinary shares that we completed in December 2010, which was offset by a $16.0 million aggregate dividend paid
in January 2010. Net cash used in financing activities was approximately $0.1 million and $3.4 million for the years ended December 31, 2009 and 2008,
respectively, primarily attributable to the repayment of short-term loans.
C.
RESEARCH AND DEVELOPMENT, PATENTS AND LICENSES
Our research and development and support personnel work closely with our customers and prospective customers to determine their requirements and to
design enhancements and new releases to meet their needs. We periodically release enhancements and upgrades to our core products. In the years ended
December 31, 2008, 2009 and 2010, we invested $4.9 million, $4.4 million and $5.7 million in research and development, respectively. Research and
development activities take place in our facilities in Israel, India and Japan.
As of December 31, 2010, we employed 96 employees in research and development activities, of which 40 persons were located in Israel, 51 persons in
India and five persons in Japan. Our product development team includes technical writers who prepare user documentation for our products. In addition, we
have also entered into arrangements with subcontractors for the preparation of product user documentation and certain product development work.
For additional information regarding product development see Item 4. “Information on the Company - Business Overview - Product Development.”
D.
TREND INFORMATION
In 2010, we experienced growth in our revenues and profitability as market conditions improved mainly in the U.S. and Japanese markets, and our
principal products received wider market acceptance. With our most recent acquisitions, we expect this trend to continue into 2011.
For more information on trends in our industry, please see 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.
45
F.
TABULAR DISCLOSURE OF CONTRACTUAL OBLIGATIONS
The following table summarizes our minimum contractual obligations as of December 31, 2010 and the effect we expect them to have on our liquidity
and cash flow in future periods.
Contractual Obligations
Operating lease obligations
Liabilities due to acquisition activities
Severance payments, net*
Uncertainties in income taxes (ASC 740)
Long term loan
Total contractual obligations
Payments due by period
$
Total
2,735,000
5,106,000
211,000
1,253,000
11,000
$
9,316,000
$
less than
1 year
1,437,000
1,906,000
$
$
-
-
9,000
$
3,352,000
1-3 years
3-5 years
$
155,000
1,143,000
3,200,000
-
-
2,000
4,345,000
$
-
-
-
155,000
*Severance payments relate to accrued severance obligations mainly to our Israeli employees as required under Israeli labor law. We are legally
required to pay severance upon certain circumstances, primarily upon termination of employment by our company, retirement or death of the respective
employee. Our liability for all of our Israeli employees is fully provided for by monthly deposits with insurance policies and by an accrual.
ITEM 6.
DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES
A.
DIRECTORS AND SENIOR MANAGEMENT
Set forth below are the name, age, principal position and a biographical description of each of our directors and executive officers:
Name
Guy Bernstein
Asaf Berenstin
Itiel Efrat (1)
Elan Penn (1)(2)
Naamit Salomon
Yehezkel Zeira (1)
(1) Member of our Audit Committee
(2) Member of our Investment Committee
Age
43
33
47
60
46
67
Position
Acting Chief Executive Officer and Director
Acting Chief Financial Officer
Outside Director
Outside Director
Director
Director
Messrs. Guy Bernstein and Yehezkel Zeira and Ms. Naamit Salomon were elected at our 2010 annual general meeting of shareholders for a one year
period, to serve as directors until our 2011 annual general meeting of shareholders. Messrs. Itiel Efrat and Elan Penn will serve as our outside directors pursuant
to the provisions of the Israeli Companies Law for three-year terms until December 28, 2012 and December 29, 2011, respectively.
On April 26, 2010, Mr. Guy Bernstein was appointed as our acting chief executive officer and Mr. Asaf Berenstin was appointed as our acting chief
financial officer. The fathers of Guy Bernstein and Asaf Berenstin are brothers. Other than such relationship, there are no family relationships among our
directors and senior executives.
Guy Bernstein has served as our acting chief executive officer since April 2010 and has served as a director of our company since January 2007. Mr.
Bernstein served as the chairman of our board of directors from April 2008 to April 2010. Mr. Bernstein has served as the chief executive officer of Formula
Systems, our parent company, since January 2008. From December 2006 to November 2010, Mr. Bernstein served as a director and the chief executive officer of
Emblaze Ltd. or Emblaze, our former controlling shareholder. Mr. Bernstein also serves as a director of Sapiens International Corporation N.V., or Sapiens, and
is the chairman of the board of directors of
46
Matrix IT Ltd., both of which are subsidiaries of Formula Systems. From April 2004 to December 2006, Mr. Bernstein served as the chief financial officer of
Emblaze and he has served as a director of Emblaze since April 2004. Prior to that and from 1999, Mr. Bernstein served as our chief financial and operations
officer. Prior to joining our company, Mr. Bernstein was at Kost Forer Gabbay & Kasierer, a member of Ernst & Young Global, where he acted 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
(CPA) in Israel.
Asaf Berenstin has served as our acting chief financial officer since April 2010. Prior to that and from August 2008, Mr. Berenstin served as our
corporate controller. Prior to joining our company and from July 2007, Mr. Berenstin served as assistant controller at Gilat Satellite Networks Ltd. (NASDAQ:
GILT). From October 2003 to July 2008, Mr. Berenstin was a certified public accountant at Kesselman & Kesselman, a member of PriceWaterhouseCooper. Mr.
Berenstin holds a B.A degree in accounting and economics and M.B.A. degree, both from Tel-Aviv University, and is a certified public accountant (CPA) in
Israel.
Itiel Efrat has served as an outside director of our company since December 2006 and is a member of our audit committee. Mr. Efrat is the founder and
has served as co-managing director of ERB Ltd., a leading financial consulting firm, since 1995. Mr. Efrat was also the founder and is a member of the board of
directors of ESOP-Excellence Trust Company since 2004. Mr. Efrat is a certified public accountant (CPA) in Israel and holds a B.A. degree in accounting and
economics from Tel-Aviv College of Management.
Elan Penn has served as an outside director of our company (within the meaning of the Israeli Companies Law) since December 2005 and is a member
of our audit committee. Mr. Penn was elected as an outside director for a second three-year term as of December 29, 2008 and expiring on December 29, 2011.
Mr. Penn has served as chief executive officer and chairman of Penn Publishing Ltd., a private company based in Tel Aviv, Israel since 2001. From 2000 to
2001, Mr. Penn served as vice president of finance and administration of A.I. Research and Development Ltd. Mr. Penn served as chief executive officer of
Sivan Computer Training Company Ltd. during the years 1998 through 2000. From 1992 to 2000, Mr. Penn served as vice president of finance and
administration of Mashov Computers Ltd. From 1987 to 1991 and again from 1992 to 1997, Mr. Penn served as our company’s vice president of finance and
administration. Mr. Penn also serves as a director of Telcoor Telekom Ltd. Mr. Penn holds a B.A. degree in economics from the Hebrew University of Jerusalem
and a Ph.D. in management science from the University of London.
Naamit Salomon has served as director of our company since March 2003. Since January 2010, Ms. Salomon has served as a partner in an investment
company. Ms. Salomon serves as a director of Sapiens, which is part of the Formula group. Ms. Salomon served as the chief financial officer of Formula
Systems from August 1997 until December 2009. From 1990 through August 1997, Ms. Salomon served as the controller of two large privately held companies
in the Formula group. Ms. Salomon holds a B.A. degree in economics and business administration from Ben Gurion University and an L.L.M. degree from Bar-
Ilan University.
Yehezkel Zeira has served as a director of our company since December 2005 and is a member of our audit committee. Mr. Zeira has served as an
independent IT consultant since 2001. From 2000 to 2001, Mr. Zeira served as executive vice president international of Ness Technologies Inc., and from 1970
to 2000, Mr. Zeira served in various positions at Advanced Technology Ltd., including as chief executive officer which position he assumed in 1982. Mr. Zeira is
also a lecturer at Ben Gurion University Faculty of Engineering. Mr. Zeira holds a B. Sc. degree in industrial engineering and an M. Sc. degree in operations
research, both from the Technion - Israel Institute of Technology and has participated in the Harvard Business School program for management development.
47
The following table lists our other key employees:
Name
Amit Ben-Zvi
Amit Birk
Eyal Pfeifel
Oded Lavee
Regev Yativ
Tania Amar
Udi Ertel
Age
44
Position
Vice President, International Sales and Chief Executive Officer of Hermes
Logistics Technologies Limited
40
Vice President, Mergers and Acquisitions and General Counsel and
Corporate Secretary
42
42
42
44
51
Chief Technology Officer
Vice President Research and Development
President and Chief Executive Officer Magic Software Enterprises Inc.
Vice President, Global Marketing
Vice President, Sales and Distribution
Amit Ben-Zvi has served as our vice president, international sales and chief executive officer of our subsidiary, Hermes Logistics Technologies Limited,
since October 2007. Prior to that and from September 2005, Mr. Ben-Zvi served as the vice president marketing and manager of our iBOLT division. From July
2002 to July 2005, Mr. Ben-Zvi served as chief executive officer of WizCom Technologies, a publicly traded company specializing in scanning pens and mobile
data capture products. Prior to that and from January 2000, Mr. Ben-Zvi served as the chief executive officer of ISYS Operational Management Systems Ltd., a
software applications company based in Israel. From December 1997 to January 2000, Mr. Ben-Zvi served as chief operating officer of Top Imaging Systems
Ltd., a publicly traded company. Mr. Ben-Zvi holds a B.A. degree in accounting and L.L.B. degree, both from Tel-Aviv University.
Amit Birk has served as our vice president, mergers and acquisitions, general counsel and corporate secretary since May 1999. From 1997 to 1998, Mr.
Birk was an associate at Avital Dromi & Co., a leading law firm in Tel Aviv, Israel. Since November 2007, Mr. Birk has served as an outside director of BGI
Investment (1961) Ltd., an Israeli public company. Mr. Birk holds an L.L.B. degree from the University of Sheffield, an M.B.A. degree from Bar Ilan University
and a Practical Engineer degree from ORT College. Mr. Birk is also a certified mediator.
Eyal Pfeifel has served as our chief technology officer since October 2009. From February 2007 to July 2009, Mr. Pfeifel served as the chief technology
officer of Ai Research and Technology. Mr. Pfeifel previously worked with our company, as marketing general manager our Japanese branch from 1998 to 2000
and as product manager at our headquarters from 1993 to 1998. Mr. Pfeifel has also served in a range of other senior positions, including vice president for
product management at Artificial Intelligence, director of product marketing for Babylon and director of business development for M-Systems
Oded Lavee has served as our vice president, research and development since June 2008. Mr. Lavee is responsible for our research and development and
quality control in three locations, Israel, India and Japan. Mr. Lavee has more than 20 years experience in development tools, applications and integration
projects. Prior to his current position and from April 2003, Mr. Lavee served as headquarters representative and senior consultant at our Japanese branch. Mr.
Lavee has extensive knowledge of the Japanese market including language and cultural skills. Mr. Lavee has also held executive roles including head of
development and co-founder in a range of hi-technology companies in Israel. Mr. Lavee holds a BA degree in computer science and East Asian studies from Tel
Aviv University.
Regev Yativ has served as the president and chief executive officer of our subsidiary Magic Software Enterprises Inc. since January 2008. Prior to that
and from October 2006, Mr. Yativ served as our vice president international sales and was responsible for our business activities and branches in Europe and
Japan, as well as the Israel-based team that oversees the distribution network in the Asia Pacific region, Latin America and South Africa. From September 2002
until June 2006, Mr. Yativ served as our vice president and managing director of Europe, Middle East and Africa, based at our Netherlands office. From 2001 to
2002, Mr. Yativ served as chief operating officer of Agro Marches Int. Paris, a company specializing in software and eBusiness platforms and managed its
48
branches across Europe. From 1999 to 2001, Mr. Yativ was the chief executive officer of G.E.D B.V. in Amsterdam, an investments and business development
group dealing in software and eBusiness solutions throughout Europe. Mr. Yativ holds a B.A. degree in linguistics and Middle East science from Tel Aviv
University.
Tania Amar has served as our vice president, global marketing since October 2010. Ms. Amar has 20 years of global marketing experience. Prior to
joining our company and from January 2009, Ms. Amar served as vice president, marketing and business development at Jerusalem Venture Partners. From 2003
to 2008, Ms. Amar served as director of global marketing for NICE Systems (Nasdaq: NICE). From 1998 to 2003, Ms. Amar served as corporate public relations
director for Comverse Network Systems (Nasdaq: CMVT). Ms. Amar holds a BA degree in Economics and an MBA in economics and finance, both from the
University of Paris-Dauphine.
Udi Ertel has served as our vice president, sales and distribution since January 2011. Mr. Ertel is responsible for our sales and business activities in
South Africa, Hungary and distribution in the Asia Pacific region, East Europe and the Mediterranean basin. Mr. Ertel joined our company in 2004, initially
serving as the chief executive office of our Israeli subsidiary, Magic Software Enterprises (Israel) Ltd., and from January 2009 as our vice president, global
services and operations. Before joining our company, Mr. Ertel served for nine years as the chief executive officer of Complot (83) Ltd. Mr. Ertel holds a BSc
degree in computer science and mathematics and completed his studies towards an MBA degree (without thesis), both from Tel Aviv University in Israel.
B.
COMPENSATION
The following table sets forth all compensation we paid with respect to all of our directors and executive officers as a group for the year ended December
31, 2010.
All directors and executive officers as a group (8 persons)
Salaries, fees,
commissions and
bonuses
$
337,000
Pension, retirement
and similar benefits
73,000
$
During the year ended December 31, 2010, we paid to each of our outside and independent directors an annual fee of approximately $11,000 and a per-
meeting attendance fee of approximately $470. Such fees are paid based on the fees detailed in a schedule published semi-annually by the Committee for Public
Directors under the Israeli Securities Law. The above compensation excludes stock- based compensation costs in accordance with ASC 718.
As of December 31, 2010, our directors and executive officers as a group, then consisting of 8 persons, held options to purchase an aggregate of 463,802
ordinary shares, at exercise prices ranging from $0 to $4.02 per share. Of such options, options to purchase 62,500 ordinary shares expire in 2011, options to
purchase 133,302 ordinary shares expire in 2013, options to purchase 20,000 ordinary shares expire in 2018, options to purchase 10,000 ordinary shares expire in
2019 and options to purchase 238,000 ordinary shares expire in 2020. All such options were granted under our 2000 Stock Option Plan and 2007 Incentive
Compensation Plan. See Item 6E. “Directors, Senior Management and Employees - Share Ownership - Stock-Based Compensation Plans.”
C.
BOARD PRACTICES
Introduction
According to the Israeli Companies Law and our Articles of Association, the management of our business is vested in our board of directors. The board
of directors may exercise all powers and may take all actions that are not specifically granted to our shareholders. Our executive officers are responsible for our
day-to-day management. The executive officers have individual responsibilities established by our board of directors. Executive officers are appointed by and
serve at the discretion of the board of directors, subject to any applicable agreements.
49
Election of Directors
Our articles of association provide for a board of directors consisting of no less than three and no more than 11 members or such other number as may be
determined from time to time at a general meeting of shareholders. Our board of directors is currently composed of five directors.
Pursuant to our articles of association, all of our directors are elected at our annual general meeting of shareholders, which are required to be held at least
once during every calendar year and not more than 15 months after the last preceding meeting. Except for our outside directors (as described below), our
directors are elected by a vote of the holders of a majority of the voting power represented and voting at such meeting and hold office until the next annual
meeting of shareholders following the annual meeting at which they were appointed. Directors (other than outside directors) may be removed earlier from office
by resolution passed at a general meeting of our shareholders. Our board of directors may temporarily fill vacancies in the board until the next annual meeting of
shareholders, provided that the total number of directors will not exceed the maximum number permitted under our articles of association.
Under the Israeli Companies Law, our board of directors is required to determine the minimum number of directors who must have “accounting and
financial expertise” (as such term is defined in regulations promulgated under the Israeli Companies Law). In determining such number, the board of directors
must consider, among other things, the type and size of the company and the scope of and complexity of its operations. Our board of directors has determined
that at least one director must have “accounting and financial expertise,” within the meaning of the regulations promulgated under the Israeli Companies Law.
We are exempt from the requirements of the NASDAQ Listing Rules with regard to the nomination process of directors, since we are a controlled
company within the meaning of NASDAQ Listing Rule 5615(c)(1). See Item 16G. “Corporate Governance.”
Outside and Independent Directors
Outside Directors. The Israeli Companies Law requires companies incorporated under the laws of the State of Israel with shares that have been offered
to the public in or outside of Israel to appoint at least two outside directors. No person may be appointed as an outside director if the person or the person’s
relative, partner, employer or any entity under the person’s control has or had, on or within the two years preceding the date of the person’s appointment to serve
as outside director, any affiliation with the company or any entity controlling, controlled by or under common control with the company. The term “affiliation”
includes an employment relationship, a business or professional relationship maintained on a regular basis, control and service as an “office holder” as defined in
the Israeli Companies Law, however, “affiliation” does not include service as a director of a private company prior to its first public offering if the director was
appointed to such office for the purpose of serving as an outside director following the company’s first public offering. In addition, no person may serve as an
outside director if the person’s position or other activities create or may create a conflict of interest with the person’s responsibilities as an outside director or may
otherwise interfere with the person’s ability to serve as an outside director. If, at the time outside directors are to be appointed, all current members of the board
of directors are of the same gender, then at least one outside director must be of the other gender.
At least one of the outside directors must have “accounting and financial expertise” and the other outside directors must have “professional expertise,” as
such terms are defined by regulations promulgated under the Israeli Companies Law.
The outside directors are elected by a majority vote at a shareholders meeting. The shareholders voting in favor of their election must include at least
one-third of the shares of the non-controlling shareholders of the company who voted on the matter (not including abstentions). This minority approval
requirement need not be met if the total shareholdings of those non-controlling shareholders who vote against their election represent 1% or less of all of the
voting rights in the company.
50
In general, outside directors serve for a three-year term and may be reelected to one additional three-year term. However, Israeli companies listed on
certain stock exchanges outside Israel, including The NASDAQ Global Select Market, may appoint an outside director for additional terms of not more than three
years subject to certain conditions. Such conditions include the determination by the audit committee and board of directors, that in view of the director’s
professional expertise and special contribution to the company’s board of directors and its committees, the appointment of the outside director for an additional
term is in the best interest of the company.
Outside directors may be removed from office only by the same percentage of shareholders as is required for their election, or by a court, and then only
if the outside directors cease to meet the statutory qualifications for their appointment, violate their duty of loyalty to the company or are found by a court to be
unable to perform his or hers duties on a full time basis. Outside directors may also be removed by the court if they are found guilty of bribery, fraud,
administrative offenses or use of inside information.
Each committee of the board of directors must include at least one outside director and the audit committee must be comprised of at least three directors
and include all the outside directors. An outside director is entitled to compensation as provided in regulations adopted under the Israeli Companies Law and is
otherwise prohibited from receiving any other compensation, directly or indirectly, in connection with such service.
Until the lapse of two year from termination of office, we may not engage an outside director to service as an office holder and cannot employ or receive
services from that person, either directly or indirectly, including through a corporation controlled by that person.
Independent Directors. NASDAQ Listing Rules require us to establish an audit committee comprised of at least three members and only of independent
directors each of whom satisfies the respective “independence” requirements of the Securities and Exchange Commission and NASDAQ.
As a controlled company, within the meaning of NASDAQ Listing Rule 5615(c)(1), we are exempt from the NASDAQ Listing Rules requirement that a
majority of a company’s board of directors qualify as independent directors, within the meaning of the NASDAQ Listing Rules. See Item 16G. “Corporate
Governance.”
Our Board of Directors has determined that Messrs. Itiel Efrat and Mr. Elan Penn both qualify as independent directors under the Securities and
Exchange Commission and NASDAQ requirements and as outside directors under the Israeli Companies Law requirements. Our Board of Directors has further
determined that Mr. Yehezkel Zeira qualifies as an independent director under the Securities and Exchange Commission and NASDAQ requirements.
Pursuant to the Israeli Companies Law, an Israeli company whose shares are publicly traded may elect to adopt a provision in its articles of association
pursuant to which a majority of its board of directors will constitute individuals complying with certain independence criteria prescribed by the Israeli Companies
Law. Pursuant to Israeli regulations adopted in January 2011, directors who comply with the independence requirements of NASDAQ and the Securities and
Exchange Commission are deemed to comply with the independence requirements of the Israeli Companies Law. We have not included such a provision in our
articles of association.
Committees of the Board of Directors
Audit Committee. Our audit committee, established in accordance with Section 114 of the Israeli Companies Law and Section 3(a)(58)(A) of the
Securities Exchange Act of 1934, assists our board of directors in overseeing the accounting and financial reporting processes of our company and audits of our
financial statements, including the integrity of our financial statements, compliance with legal and regulatory requirements, our independent public accountants’
qualifications and independence, the performance of our internal audit function and independent public accountants, finding any irregularities in the business
management of our company for which purpose the audit committee may consult with our independent auditors and internal auditor, proposing to the board of
directors ways to correct such irregularities and such other duties as may be directed by our board of directors. The responsibilities of the audit committee also
include approving related-party transactions as required by law.
51
Under Israeli law, an audit committee may not approve an action or a transaction with a controlling shareholder, or with an office holder, unless at the time of
approval two outside directors are serving as members of the audit committee and at least one of the outside directors was present at the meeting in which an
approval was granted.
Our audit committee also serves as our Financial Statement Review Committee, as defined in regulations promulgated under the Israeli Companies Law
recently enacted and applicable to the review process of financial statements commencing from the 2010 year-end financial statements.
Our audit committee is currently composed of Messrs. Efrat, Penn and Zeira, each of whom satisfies the respective “independence” requirements of the
Securities and Exchange Commission and NASDAQ. We also comply with Israeli law requirements for audit committee members. Mr. Elan Penn has been
elected as the chairperson of the audit committee. Our Board of Directors has determined that Mr. Penn qualifies as a financial expert. The audit committee
meets at least once each quarter.
Investment Committee. Our board of directors has established an investment committee, which administers our investments. Mr. Penn, an outside
director, and Ms. Dafna Cohen, a board member of our parent company Formula Systems, are the current members of our investment committee. Our investment
committee meets approximately once each quarter.
Internal Auditor
The Israeli Companies Law also requires the board of directors of a public company to appoint an internal auditor proposed by the audit committee. A
person who does not satisfy the Israeli Companies Law's independence requirements may not be appointed as an internal auditor. The role of the internal auditor
is to examine, among other things, the compliance of the company’s conduct with applicable law and orderly business practice. Our internal auditor complies
with the requirements of the Israeli Companies Law. Mr. Eyal Weizman currently serves as our internal auditor.
Directors’ Service Contracts
There are no arrangements or understandings between us and any of our subsidiaries, on the one hand, and any of our directors, on the other hand,
providing for benefits upon termination of their employment or service as directors of our company or any of our subsidiaries.
Approval of Related Party Transactions Under Israeli Law
Fiduciary Duties of Office Holders
The Israeli Companies Law codifies the fiduciary duties that “office holders,” including directors and executive officers, owe to a company. An “office
holder” is defined in the Israeli Companies Law as a director, general manager, chief business manager, deputy general manager, vice general manager, any other
person assuming the responsibilities of any of the foregoing positions without regard to such person’s title or any other manager directly subordinate to the
general manager. An office holder’s fiduciary duties consist of a duty of care and a duty of loyalty. The duty of care requires an office holder to act at a level of
care that a reasonable office holder in the same position would employ under the same circumstances. This includes the duty to utilize reasonable means to obtain
(i) information regarding the appropriateness of a given action brought for his approval or performed by him by virtue of his position and (ii) all other information
of importance pertaining to the foregoing actions. The duty of loyalty includes (i) avoiding any conflict of interest between the office holder’s position in the
company and any other position he holds or his personal affairs, (ii) avoiding any competition with the company’s business, (iii) avoiding exploiting any business
opportunity of the company in order to receive personal gain for the office holder or others, and (iv) disclosing to the company any information or documents
relating to the company’s affairs that the office holder has received due to his position as an office holder.
52
Disclosure of Personal Interests of an Office Holder
The Israeli Companies Law requires that an office holder promptly, and no later than the first board meeting at which such transaction is considered,
disclose any personal interest that he or she may have and all related material information known to him or her and any documents in their position, in connection
with any existing or proposed transaction by us. In addition, if the transaction is an extraordinary transaction, that is, a transaction other than in the ordinary
course of business, other than on market terms, or likely to have a material impact on the company’s profitability, assets or liabilities, the office holder must also
disclose any personal interest held by the office holder’s spouse, siblings, parents, grandparents, descendants, spouse’s descendants and the spouses of any of the
foregoing, or by any corporation in which the office holder or a relative is a 5% or greater shareholder, director or general manager or in which he or she has the
right to appoint at least one director or the general manager.
Approval of Transactions with Office Holders
Under the Israeli Companies Law, all arrangements as to compensation of office holders who are not directors require approval by the board of directors,
and exculpation, insurance and indemnification of, or an undertaking to, indemnify an office holder who is not a director requires both board of directors and
audit committee approval. The compensation of office holders who are directors must be approved by our audit committee, board of directors and shareholders.
Some transactions, actions and arrangements involving an office holder (or a third party in which an office holder has an interest) must be approved by
the board of directors or as otherwise provided for in a company’s articles of association, however, a transaction that is adverse to the company’s interest may not
be approved. In some cases, such a transaction must be approved by the audit committee and by the board of directors itself, and under certain circumstances
shareholder approval may be required. A director who has a personal interest in a transaction that is considered at a meeting of the board of directors or the audit
committee may not be present during the board of directors or audit committee discussions and may not vote on the transaction, unless the transaction is not an
extraordinary transaction or the majority of the members of the board or the audit committee have a personal interest, as the case may be. In the event the majority
of the members of the board of directors or the audit committee have a personal interest, then the approval of the general meeting of shareholders is also required.
Disclosure of Personal Interests of a Controlling Shareholder; Approval of Transactions with Controlling Shareholders
The disclosure requirements which apply to an office holder also apply to such transaction with respect to his or her personal interest in the transaction.
The Israeli Companies Law provides that an extraordinary transaction with a controlling shareholder or an extraordinary transaction with another person in whom
the controlling shareholder has a personal interest or a transaction with a controlling shareholder or his relative regarding terms of service and employment, must
be approved by the audit committee, the board of directors and shareholders. The shareholder approval for such a transaction must include at least one-third of the
shareholders who have no personal interest in the transaction who voted on the matter (not including abstentions). The transaction can be approved by
shareholders without this one-third approval if the total shareholdings of those shareholders who have no personal interest and voted against the transaction do not
represent more than one percent of the voting rights in the company.
Under the Companies Regulations (Relief from Related Party Transactions), 5760-2000, promulgated under the Israeli Companies Law, as amended,
certain extraordinary transactions between a public company and its controlling shareholder(s) do not require shareholder approval. In addition, under such
regulations, directors’ compensation and employment arrangements in a public company do not require the approval of the shareholders if both the audit
committee and the board of directors agree that such arrangements are solely for the benefit of the company. Also, employment and compensation arrangements
for an office holder that is a controlling shareholder of a public company do not require shareholder approval if certain criteria are met. The foregoing exemptions
from shareholder approval will not apply if one or more shareholders holding at least 1% of the issued and outstanding share capital of the company or of the
company’s voting rights, objects to the use of these exemptions provided that
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such objection is submitted to the company in writing not later than fourteen days from the date of the filing of a report regarding the adoption of such resolution
by the company pursuant to the requirements of the Israeli Securities Law. If such objection is duly and timely submitted, then the transaction or compensation
arrangement of the directors will require shareholders’ approval as detailed above.
In addition, a private placement of securities that will (i) cause a person to become a controlling shareholder or (ii) increase the relative holdings of a
shareholder that holds 5% or more of the company’s outstanding share capital, or (iii) will cause any person to become, as a result of the issuance, a holder of
more than 5% of the company’s outstanding share capital in a private placement in which 20% or more of the company’s outstanding share capital prior to the
placement are offered, the payment for which (in whole or in part) is not in cash or not under market terms, requires approval by the board of directors and the
shareholders of the company.
The Israeli 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 25% or greater shareholder of the company. This rule does not apply if there is already another 25% or greater
shareholder of the company. Similarly, the Israeli 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 hold greater than a 45% interest in the company, unless there is another shareholder holding more than a
45% interest in the company. These requirements do not apply if, in general, the acquisition was made in a private placement that received shareholder approval,
(i) was from a 25% or greater shareholder of the company which resulted in the acquirer becoming a 25% or greater shareholder of the company, if there is not
already a 25% or greater shareholder of the company, or (ii) was from a shareholder holding a 45% interest in the company which resulted in the acquirer
becoming a holder of a 45% interest in the company if there is not already a 45% or greater shareholder of the company.
If, as a result of an acquisition of shares, the acquirer will hold more than 90% of a public company’s outstanding shares or a class of shares, the
acquisition must be made by means of a tender offer for all of the outstanding shares or a class of shares. If less than 5% of the outstanding shares are not
tendered in the tender offer, all the shares that the acquirer offered to purchase will be transferred to the acquirer. The Israeli Companies Law provides for
appraisal rights if any shareholder files a request in court within three months following the consummation of a full tender offer. If more than 5% of the
outstanding shares are not tendered in the tender offer, then the acquirer may not acquire shares in the tender offer that will cause his shareholding to exceed 90%
of the outstanding shares.
Provisions Restricting Change in Control of Our Company
Tender Offer. A person wishing to acquire shares or any class of shares of a publicly traded Israeli company and who would as a result hold over 90% of
the company’s issued and outstanding share capital or of a class of shares which are listed, is required by the Israeli Companies Law to make a tender offer to all
of the company’s shareholders for the purchase of all of the issued and outstanding shares of the company. If the shareholders who do not respond to the offer
hold less than 5% of the issued share capital of the company, all of the shares that the acquirer offered to purchase will be transferred to the acquirer by operation
of law. The Israeli Companies Law provides for an exception regarding the threshold requirement for a shareholder that prior to and following February 2000
holds over 90% of a company’s issued and outstanding share capital. However, the shareholders may petition the court to alter the consideration for the
acquisition. If the dissenting shareholders hold more than 5% of the issued and outstanding share capital of the company, the acquirer may not acquire additional
shares of the company from shareholders who accepted the tender offer if following such acquisition the acquirer would then own over 90% of the company’s
issued and outstanding share capital.
The Israeli 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 25% or greater shareholder of the company. This rule does not apply if there is already another 25% shareholder of the
company. Similarly, the Israeli 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 45% or greater shareholder of the company, if there is no 45% or greater shareholder of the company.
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These requirements regarding tender offers do not apply to companies that are traded outside of Israel if, local law or the rules of the foreign stock
exchange impose a limit on the percentage of control which may be acquired or require that acquisitions will be made by a way of a tender offer to the public.
Merger. The Israeli Companies Law permits merger transactions if approved by each party’s board of directors and the majority of each party’s shares
voted on the proposed merger at a shareholders’ meeting called on at least 21 days’ prior notice. Under the Israeli Companies Law, merger transactions may be
approved by holders of a simple majority of our shares present, in person or by proxy, at a general meeting and voting on the transaction. In determining whether
the required majority has approved the merger, if shares of a company are held by the other party to the merger, or by any person holding at least 25% of the
outstanding voting shares or 25% of the means of appointing directors of the other party to the merger, then a vote against the merger by holders of the majority
of the shares present and voting, excluding shares held by the other party or by such person, or anyone acting on behalf of either of them, is sufficient to reject the
merger transaction. If the transaction would have been approved but for the exclusion of the votes of certain shareholders as provided above, a court may still
approve the merger upon the request of holders of at least 25% of the voting rights of a company, if the court holds 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 if it concludes that there exists a reasonable concern that, as a result of the merger, the surviving company will
be unable to satisfy the obligations of any of the parties to the merger. In addition, a merger may not be executed unless at least 30 days have passed from the
receipt of the shareholders’ approval and 50 days have passed from the time that a proposal for approval of the merger has been filed with the Israeli Registrar of
Companies.
Exculpation, Indemnification and Insurance of Directors and Officers
Exculpation of Office Holders
The Israeli Companies Law provides that an Israeli company cannot exculpate an office holder from liability with respect to a breach of his duty of
loyalty, but may, if permitted by its articles of association, exculpate in advance an office holder from his liability to the company, in whole or in part, with
respect to a breach of his or her duty of care. However, a company may not exculpate in advance a director from his or her liability to the company with respect
to a breach of his duty of care in the event of distributions.
Insurance for Office Holders
The Israeli Companies Law provides that a company may, if permitted by its articles of association, insure an office holder for acts or omissions
performed by the office holder in such capacity for:
• A breach of his or her duty of care to the company or to another person;
• A breach of his or her duty of loyalty to the company, provided that the office holder acted in good faith and had reasonable cause to assume that his
act would not prejudice the company’s interests; and
• A financial liability imposed upon the office holder in favor of another person as a result of an action which was performed by that office holder.
Indemnification of Office Holders
The Israeli Companies Law provides that a company may, if permitted by its articles of association, indemnify an office holder for acts or omissions
performed by the office holder in such capacity for:
• A financial liability imposed on the office holder 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, actually incurred by the office holder as a result of an investigation or proceeding
instituted against him or her by a competent authority,
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provided that such investigation or proceeding concluded without the filing of an indictment against the office holder or the imposition of any
financial liability in lieu of criminal proceedings, or concluded without the filing of an indictment against the office holder and a financial liability
was imposed on the officer holder in lieu of criminal proceedings with respect to a criminal offense that does not require proof of criminal intent;
and
• Reasonable litigation expenses, including attorneys’ fees, incurred by such office holder or which were imposed on him by a court, in proceedings
the company instituted against the office holder or that were instituted on the company’s behalf or by another person, or in a criminal charge from
which the office holder was acquitted, or in a criminal proceeding in which the office holder was convicted of a crime which does not require proof
of criminal intent.
In accordance with the Israeli Companies Law, a company’s articles of association may permit the company to:
• Undertake in advance to indemnify an office holder, except that with respect to a financial liability imposed on the office holder by any judgment,
settlement or court-approved arbitration award, the undertaking must be limited to types of occurrences, which, in the opinion of the company’s
board of directors, are, at the time of the undertaking, foreseeable due to the company’s activities and to an amount or standard that the board of
directors has determined is reasonable under the circumstances; and
• Retroactively indemnify an office holder of the company.
Limitations on Exculpation, Insurance and Indemnification
The Israeli Companies Law provides that neither a provision of the articles of association permitting the company to enter into a contract to insure the
liability of an office holder, nor a provision in the articles of association or a resolution of the board of directors permitting the indemnification of an office
holder, nor a provision in the articles of association exempting an office holder from duty to the company shall be valid, where such insurance, indemnification or
exemption relates to any of the following:
•
•
•
•
a breach by the office holder of his duty of loyalty, except with respect to insurance coverage or indemnification if the office holder acted in good
faith and had reasonable grounds to assume that the act would not prejudice the company;
a breach by the office holder of his duty of care if such breach was committed intentionally or recklessly, unless the breach was committed only
negligently;
any act or omission committed with intent to derive an unlawful personal gain; and
any fine or forfeiture imposed on the office holder.
In addition, pursuant to the Israeli Companies Law, exemption of, procurement of insurance coverage for, an undertaking to indemnify or
indemnification of an office holder must be approved by the audit committee and the board of directors and, if such office holder is a director or a controlling
shareholder or a relative of the controlling shareholder, also by the shareholders general meeting. A special majority at the general meeting is required if a
controlling shareholder is interested in such transaction as an office holder or as a relative of an office holder, as described above.
Our articles of association allow us to insure, indemnify and exempt our office holders to the fullest extent permitted by law, subject to the provisions of
the Israeli Companies Law. We currently maintain a directors’ and officers’ liability insurance policy with a per claim and aggregate coverage limit of $20
million, including legal costs incurred world-wide.
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Recent Amendment to the Israeli Companies Law
In March 2011, the Israeli Parliament adopted Amendment No. 16 to the Israeli Companies Law, or Amendment No. 16, which implements a
comprehensive reform in corporate governance in Israel. Most of the provisions of Amendment No. 16 will become effective 60 days after its official publication
in the Israeli Official Gazette. A summary of the principal changes introduced by Amendment No. 16 is set forth below:
• A higher shareholder approval threshold was adopted to permit a chief executive officer to also serve as chairman of the board and vice versa,
and a prohibition was adopted on the chairman’s ability to serve the company in any capacity other than as the chief executive officer;
• The majority of the members of the audit committee is now required to be “independent” (as such term is defined under the Israeli Companies
Law); the chairman of the audit committee is required to be an outside director, and the following are disqualified from serving as members of
the audit committee: the chairman, any director employed by the company or by its controlling shareholder or by an entity controlled by the
controlling shareholder, a director who regularly provides services to the company or to its controlling shareholder or to an entity controlled by
the controlling shareholder, and any director who derives most of its income from the controlling shareholder;
• The functions to be performed by the audit committee were expanded to include, among others the following: determination whether certain
related party actions and transactions are “material” or “extraordinary” in connection with their approval procedures, to assess the scope of
work and compensation of the company’s independent accountant, to assess the company’s internal audit system and the performance of its
internal auditor and to set whistle blower procedures (including protections afforded to whistle blowers);
• The threshold to elect outside directors was increased, such that the election of outside directors now requires a majority vote at a shareholders’
meeting, provided that either: at least a majority (previously, one-third) of the shares of non-controlling shareholders voted at the meeting on the
matter vote in favor of the election of the outsider director, or the total number of shares of non-controlling shareholders voted against the
election of the outside director does not exceed 2% (previously, 1%) of the voting rights in the company;
• The independence requirements of outside directors were enhanced such that an individual may not be appointed as an outside director in a
company that does not have a controlling shareholder, in the event that he has affiliation, at the time of his appointment, to the chairman, chief
executive officer, a 5% shareholder or the chief financial officer; in addition, an individual may not be appointed as an outside director if his
relative, partner, employer, supervisor, or an entity he controls, has other than negligible business or professional relations with any of the
persons with which the outside director himself may not be affiliated in order to qualify as an outside director;
• Outside directors may be re-elected following the initial term for an additional term by means of one of the following mechanisms: (i) the board
of directors proposed the nominee and his appointment was approved by the shareholders in the manner required to appoint outside directors for
their initial term (which was the only available way to re-elect external directors prior to the adoption of Amendment No. 16), or (ii) a
shareholder holding 1% or more of the voting rights proposed the nominee, and the nominee is approved by a majority of the votes cast by the
shareholders of the company, excluding the votes of any controlling shareholder and those who have a personal interest in the matter as a result
of their relationship with any controlling shareholder, provided that, the aggregate votes cast by shareholders who are not controlling
shareholders and do not have a personal interest in the matter as a result of their relationship with the controlling shareholders in favor of the
nominee constitute more than 2% of the voting rights in the company;
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• The terms of employment of an officer now require the approval of the audit committee as well as the board of directors;
• The threshold to approve extraordinary transactions with a controlling shareholder or in which a controlling shareholder has a personal interest
was increased, such that: (i) at least a majority (previously one-third) of the votes cast by shareholders who have no personal interest in the
transaction and who vote on the matter are voted in favor of the transaction, or (ii) the votes cast by shareholders who have no personal interest
in the transaction voted against the transaction do not represent more than 2% (previously 1%) of the voting rights in the company; in addition,
any such extraordinary transaction whose term is more than three years, require approval as described above every three years, unless (with
respect to transactions not involving management fees) the audit committee approves that a longer term is reasonable under the circumstances;
• With respect to full tender offers (tender offers for the acquisition of all outstanding shares in a company), the time-frame for a shareholder to a
request appraisal rights with respect to the tender offer was extended from three to six months following the consummation of a tender, but it is
now permitted for the acquirer to elect that any shareholder tendering his shares will not be entitled to appraisal rights.
As of the filing date of this annual report on Form 20-F, the official text of Amendment No. 16 was not published in the Israeli Official Gazette.
Consequently, there can be no assurance that the official text of Amendment No. 16 will conform to the above description, which was derived from unofficial
sources.
D.
EMPLOYEES
The following table presents the number of our employees categorized by geographic location as of December 31:
Israel
Asia
North America
Europe
Total
2008
Year ended December 31,
2009
2010
102
112
128
80
422
111
112
100
74
397
The following table presents the number of our employees categorized by activity as of December 31:
Technical support and consulting
Research and development
Marketing and sales
Operations and administrations
Total
2008
Year ended December 31,
2009
2010
177
96
89
60
422
158
97
84
58
397
106
99
394
79
678
410
96
107
65
678
In connection with our acquisition of the assets of a U.S.-based IT services company in January 2010, we hired 233 employees who are engaged in
network design, security, outsourced support and management, all of whom are located in the United States.
Our relationships with our employees in Israel are governed by Israeli labor legislation and regulations, extension orders of the Israeli Ministry of Labor
and personal employment agreements. Israeli labor laws and
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regulations are applicable to all of our employees in Israel. The laws concern various matters, including severance pay rights at termination, notice period for
termination, retirement or death, length of workday and workweek, minimum wage, overtime payments and insurance for work-related accidents. We currently
fund our ongoing legal severance pay obligations by paying monthly premiums for our employees’ insurance policies and or pension funds. At the time of
commencement of employment, our employees generally sign written employment agreements specifying basic terms and conditions of employment as well as
non-disclosure, confidentiality and non-compete provisions.
E.
SHARE OWNERSHIP
Beneficial Ownership of Executive Officers and Directors
The following table sets forth certain information as of March 17, 2011 regarding the beneficial ownership by each of our directors and executive
officers:
Name
Elan Penn
Guy Bernstein (3)
Asaf Berenstin (4)
Itiel Efrat
Naamit Salomon
Yehezkel Zeira
* Less than 1%
Number of Ordinary Shares
Beneficially Owned (1)
Percentage of
Ownership (2)
—
200,000
15,000
—
—
—
—
*
*
—
—
—
(1)
(2)
(3)
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 36,175,222 ordinary shares issued and outstanding as of March 17, 2011.
Subject to currently exercisable options granted under our 2007 Stock Option Plan, having an exercise price of $0 per share that expires in November,
2020. Consideration received by Mr. Guy Bernstein for the sale of any ordinary shares issued upon the exercise of such options prior to the third
anniversary of the date of the option grant will be held in trust and Mr. Bernstein will be entitled to the consideration from the sale of ordinary shares
underlying one-third of the options on each of the first, second and third anniversaries of the option grant, provided that Mr. Bernstein has not terminated
his service as an executive officer, consultant or director of our company prior to a scheduled release date.
(4)
Subject to currently exercisable options granted under our 2007 Stock Option Plan, having an exercise price ranging from $0 to $1.11 per share that
expire in 2018 and 2019.
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Stock-Based Compensation Plans
1991 Stock Option Plan
Our 1991 Employee Stock Option Plan, or the 1991 Plan, as amended, authorized the grant of options to purchase an aggregate of 6,750,000 ordinary
shares. Employees and directors of our company and its subsidiaries were eligible to participate in the 1991 Plan. The 1991 Plan had a ten-year term and no
options were granted under the 1991 Plan after July 31, 2001. Options to purchase 28,319 ordinary shares were forfeited in 2010 and as of December 31, 2010,
no options were outstanding under the 1991 Plan.
2000 Stock Option Plan
In 2000, we adopted our 2000 Employee Stock Option Plan, or the 2000 Plan, under which we may grant options to employees, officers, directors and
consultants of our company and its subsidiaries. The 2000 Plan initially authorized the grant of options to purchase up to 3,000,000 ordinary shares. In January
2004, our shareholders approved an increase in the number of shares available for grant under the 2000 Plan by 1,000,000 ordinary shares and in December 2005
our shareholders approved an additional increase in the number of shares available for grant under the 2000 Plan by 600,000 ordinary shares. As such, up to an
aggregate of 4,600,000 ordinary shares may be issued under the 2000 Plan.
Awards under the 2000 Plan may be granted in the forms of incentive stock options as provided in Section 422 of the U.S. Internal Revenue Code of
1986, as amended, non-qualified stock options, options granted pursuant to Section 102 of the Israeli Tax Ordinance and options granted pursuant to Section 3.9
of the Israeli Tax Ordinance. The 2000 Plan has a term of ten years and will terminate in November 2010. No award of options may be made after such date.
Our Board of Directors and Option Committee, which was appointed by the board of directors, administer the 2000 Plan. Subject to the provisions of
the 2000 Plan and applicable law, the Option Committee has the authority, in its sole discretion, to:
• Propose to grant awards under the 2000 Plan and recommend to the board of directors the persons to whom such awards be granted;
• Determine the form, terms and conditions of the written stock option agreement evidencing the option, including (but not limited to) the type of
option and the number of shares to which it pertains, the option price, the option period and its vesting schedule, and exercisability of the option in
special cases (such as death, retirement, disability and change of control);
• Prescribe the form and provisions of the notice of exercise and payment of the option;
• Nominate a trustee for options issued under Section 102 of the Israeli Tax Ordinance, in accordance with the provisions of such Section 102;
• Adjust any or all of the number and type of shares that thereafter may be made the subject of options, the number and type of shares subject to
outstanding options, and the grant or exercise price with respect to any option, or, if deemed appropriate, make provision for a cash payment to the
holder of any outstanding option in order to prevent dilution or enlargement of the benefits or potential benefits intended to be made available under
the 2000 Plan in the event of any dividend or other distribution, recapitalization, stock split, reverse stock split, reorganization, merger,
consolidation, split-up, spin-off, combination, repurchase, or exchange of shares or other securities;
•
Interpret the provisions of the 2000 Plan; and
• Prescribe, amend, and rescind rules and regulations relating to the 2000 Plan or any award thereunder as it may deem necessary or advisable.
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Neither the Board of Directors nor the Option Committee may, without the consent of the optionee, alter or in any way impair the rights of such optionee
under any award previously granted. Neither the termination of the 2000 Plan nor the change of control of our company (except to the extent provided in the
2000 Plan) will affect any option previously granted.
Under the 2000 Plan, the option price per share may not be less than 65% of the fair market value (as such term is defined in the 2000 Plan) of such
share on the date of the award; except that, that in the case of an award of an incentive stock option made to a 10% owner (as such term is defined in the 2000
Plan), the option price per share may not be less than 110% of the fair market value of such share on the date of the award.
An option may not be exercisable after the expiration of ten years from the date of its award, except that in case of an incentive stock option made to a
10% owner (as such term is defined in the 2000 Plan), such option may not be exercisable after the expiration of five years from its date of award. No option may
be exercised after the expiration of its term.
Options are not assignable or transferable by the optionee, other than by will or the laws of descent and distribution, and may be exercised during the
lifetime of the optionee only by the optionee or his guardian or legal representative; provided, however, that during the optionee’s lifetime, the optionee may, with
the consent of the Option Committee transfer without consideration all or any portion of his options to members of the optionee’s immediate family, a trust
established for the exclusive benefit of members of the optionee’s immediate family, or a limited liability company in which all members are members of the
optionee’s immediate family.
During 2010, options to purchase an aggregate 637,439 ordinary shares were exercised under the 2000 Plan at an average exercise price of $1.95 per
share. As of December 31, 2010, options to purchase an aggregate 782,438 ordinary shares were outstanding under the 2000 Plan having an average exercise
price of $2.89 per share. As of December 31, 2010, our executive officers and directors as a group, then consisting of 8 persons, held options to purchase 133,302
ordinary shares under the 2000 Plan, having an average exercise price of $4.02 per share.
2007 Incentive Compensation Plan.
In 2007, we adopted our 2007 Incentive Compensation Plan, or the 2007 Plan, under which we may grant options, restricted shares, restricted share units
and performance awards to employees, officers, directors and consultants of our company and its subsidiaries. The shares subject to the 2007 Plan may be either
authorized and unissued shares or previously issued shares acquired by our company or any of its subsidiaries. The total number of shares that may be delivered
pursuant to awards under the 2007 Plan shall not exceed 1,500,000 shares in the aggregate. If any award shall expire, terminate, be cancelled or forfeited without
having been fully exercised or satisfied by the issuance of shares, then the shares subject to such award shall be available again for delivery in connection with
future awards under the 2007 Plan.
The 2007 Plan commenced on August 8, 2007 and will terminate upon the earliest of (i) the expiration of its ten year period, or (ii) the termination of all
outstanding awards in connection with a corporate transaction, or (iii) in connection with, and as a result of, any other relevant event, including the 2007 Plan’s
termination by the Board of Directors.
Under the 2007 Plan, the option committee shall have full discretionary authority to grant or, when so restricted by applicable law, recommend the Board
of Directors to grant, pursuant to the terms of the 2007 Plan, options and restricted shares and restricted share units to those individuals who are eligible to receive
awards under the 2007 Plan.
The 2007 Plan provides that each option will expire on the date stated in the award agreement, which will not be more than ten years from its date of
grant. The exercise price of an option shall be determined by the option committee of the Board of Directors and set forth in the award agreement. Unless
determined otherwise by the Board of Directors, the exercise price shall be equal to, or higher than, the fair market value of our company’s shares on the date of
grant.
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Under the 2007 Plan, restricted shares and restricted share units shall not be purchased for less than the ordinary share’s par value, unless determined
otherwise by the Board of Directors.
Our Board of Directors may, from time to time, alter, amend, suspend or terminate the 2007 Plan, with respect to awards that have not been granted,
subject to shareholder approval, if and to the extent required by applicable law. In addition, no such amendment, alteration, suspension or termination of the 2007
Plan or any award theretofore granted, shall be made which would materially impair the previously accrued rights of a participant under any outstanding award
without the written consent of such participant, provided, however, that the Board of Directors may amend or alter the 2007 Plan and the option committee may
amend or alter any award, including any agreement, either retroactively or prospectively, without the consent of the applicable participant, (1) so as to preserve or
come within any exemptions from liability under any law or the rules and releases promulgated by the SEC, or (2) if the Board of Directors or the option
committee determines in its discretion that such amendment or alteration either (I) is required or advisable for us, the 2007 Plan or the award to satisfy, comply
with or meet the requirements of any law, regulation, rule or accounting standard or (II) is not reasonably likely to significantly diminish the benefits provided
under such award, or that such diminishment has been or will be adequately compensated.
During 2010, options to purchase an aggregate 498,000 ordinary shares were granted under the 2007 Plan, having an average exercise price of $1.44 per
share. As of December 31, 2010, options to purchase an aggregate 881,750 ordinary shares were outstanding under the 2007 Plan having an average exercise
price of $1.24 per share. As of December 31, 2010, our executive officers and directors as a group, consisting of 8 persons, held options to purchase 330,500
ordinary shares under the 2007 Plan, having an average exercise price of $0.34 per share (after a dividend adjustment).
ITEM 7. MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS
A.
MAJOR SHAREHOLDERS
Formula Systems, an Israeli company traded on the NASDAQ Global Select Market and the Tel Aviv Stock Exchange, holds 18,560,352 or 51.3% of
our outstanding ordinary shares. Formula Systems is controlled by Asseco, a Polish company listed on the Warsaw Stock Exchange, which holds 50.2% of the
ordinary shares of Formula Systems. Accordingly, Asseco ultimately controls our company.
The following table sets forth certain information regarding the beneficial ownership by all shareholders known to us to own beneficially 5.0% or more
of our ordinary shares:
Name
Formula Systems (1985) Ltd. (3)
Asseco Poland S.A. (3)
Number of
Ordinary Shares
Beneficially
Owned(1)
18,560,352
18,560,352
Percentage of
Ownership (2)
51.3%
51.3%
(1) 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.
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(2)
The percentages shown are based on 36,175,222 ordinary shares issued and outstanding as of March 17, 2011.
(3) Asseco owns 50.2% of the outstanding shares of Formula Systems As such, Asseco may be deemed to be the beneficial owner of the aggregate
18,560,352 ordinary shares held directly by Formula Systems. The address of Formula Systems is 5 Haplada Street, Or-Yehuda, Israel. The
address of Asseco is 35-322 Rzeszow, ul. Olchowa 14, Poland.
Significant Changes in the Ownership of Major Shareholders
During 2008, our parent company Formula Systems purchased 2,392,531 of our ordinary shares in open-market transactions, increasing its ownership
interest in our company from 16,167,821 ordinary shares, or 51.2% of our ordinary shares at such time, to 18,560,352 ordinary shares, or 58.2% of our ordinary
shares at such time. Following the private placement to institutional investors that we completed in December 2010, Formula Systems’ ownership interest in our
company decreased to 51.3% of our outstanding shares.
Until November 26, 2010, Formula Systems, our parent company, was controlled by Emblaze, an Israeli company traded on the London Stock
Exchange. On November 26, 2010, Emblaze sold its controlling stake in Formula Systems to Asseco, a Polish company listed on the Warsaw Stock Exchange.
Accordingly, since such time Asseco ultimately controls our company. Asseco owns 50.2% of the outstanding ordinary shares of Formula Systems as of March
10, 2011.
Major Shareholders Voting Rights
Our major shareholders do not have different voting rights.
Record Holders
Based on a review of the information provided to us by our U.S. transfer agent, as of March 15, 2011, there were approximately 93 record holders, of
which 75 record holders holding approximately 99.8% of our ordinary shares had registered addresses in the United States. These numbers are not representative
of the number of beneficial holders of our shares nor are they representative of where such beneficial holders reside, since many of these ordinary shares were
held of record by brokers or other nominees (including one U.S. nominee company, CEDE & Co., which held approximately 95.5% of our outstanding ordinary
shares as of such date).
B.
RELATED PARTY TRANSACTIONS
None.
C.
INTERESTS OF EXPERTS AND COUNSEL
Not applicable.
ITEM 8.
FINANCIAL INFORMATION
A.
CONSOLIDATED STATEMENTS AND OTHER FINANCIAL INFORMATION
See the consolidated financial statements, including the notes thereto, included in Item 18.
Export Sales
Our export sales constitute a significant portion of our total sales volume. See Note 19(c) to our consolidated financial statements.
63
Legal Proceedings
From time to time, claims arising in the ordinary course of our business are brought against us.
In June 2004, an Israeli company filed a lawsuit against us in the District Court of Tel Aviv - Jaffa seeking damages of NIS 8.0 million (approximately
$2.2 million), with an option to increase the amount sought to approximately NIS 17.0 million (approximately $4.8 million), for recovery of alleged damages
caused to the plaintiff by our alleged failure to integrate a software system. In March 2011, we signed a settlement agreement with the plaintiff according to
which we will not incur any financial liabilities and therefore, we have not recorded any provision related to this lawsuit.
In March 2006, a client of one of our subsidiaries filed a lawsuit against the subsidiary claiming an alleged breach of the agreement between the parties.
The plaintiff is seeking damages in the amount of Euro 488,000 (approximately $650,000). In June 2009, the court rejected the plaintiff’s claims. In July 2009,
the plaintiff filed an appeal. Since the lower court rejected the plaintiff’s claims and we believe that the appeal is without merit, and as we cannot predict the
outcome of the appeal nor can we make any estimate of the amount of damages, no provision has been made for the appeal.
In August 2009, a software company and one of its owners filed a lawsuit in arbitration against us and one of our subsidiaries, claiming an alleged
breach of a non-disclosure agreement between the parties. The plaintiffs are seeking damages in the amount of approximately $14 million. The arbitrator
determined that both we and our subsidiary breached the non-disclosure agreement, but closing summaries have not yet been submitted in the proceedings with
respect to the amount of damages and therefore, at this time we are not able to estimate the amount of damages and no provision has been made for the lawsuit.
In February 2010, a U.S. company filed a lawsuit against us and one of our subsidiaries, claiming an alleged breach by us and the subsidiary of its
intellectual property rights in connection with one of our products. Due to the preliminary stage of the litigation, our management believes that it cannot predict
the outcome of this lawsuit nor can it estimate the amount of damages, therefore no provision has been made for the lawsuit.
Dividend Distributions Policy
We paid a cash dividend of $0.50 per ordinary share in January 2010, for an aggregate amount of $16 million. Prior to that and since 2003, we have not
paid any cash dividends on our ordinary shares and we do not currently have a dividend distribution policy in place. Any future dividend policy will be
determined by the board of directors and will be based upon conditions then existing, including our results of operations, financial condition, current and
anticipated cash needs, contractual restrictions and other conditions as the board of directors may deem relevant.
According to the Israeli Companies Law, a company may distribute dividends out of its profits provided that there is no reasonable concern that such
dividend distribution will prevent the company from paying all its current and foreseeable obligations, as they become due. Notwithstanding the foregoing,
dividends may be paid with the approval of a court, provided that there is no reasonable concern that such dividend distribution will prevent the company from
satisfying its current and foreseeable obligations, as they become due. Profits, for purposes of the Israeli Companies Law, means the greater of retained earnings
or earnings accumulated during the preceding two years, after deducting previous distributions that were not deducted from the surpluses.
64
B.
SIGNIFICANT CHANGES
ITEM 9.
THE OFFER AND LISTING
A.
OFFER AND LISTING DETAILS
Annual Stock Information
The following table sets forth, for each of the years indicated, the range of high ask and low bid prices of our ordinary shares on the NASDAQ Global
Market and the Tel Aviv Stock Exchange:
Year
2006
2007
2008
2009
2010
NASDAQ
Tel Aviv Stock Exchange*
High
Low
High
Low
$
$
$
$
$
2.74
2.97
2.38
2.50
8.43
$
$
$
$
$
1.20 $
1.72 $
0.94 $
0.98 $
1.55 $
2.22
2.87
2.47
2.38
8.11
$
$
$
$
$
1.41
1.74
0.91
1.04
1.56
* The U.S. dollar price of shares on the Tel Aviv Stock Exchange is determined by dividing the price of an ordinary share in NIS by the representative exchange
rate of the NIS against the U.S. dollar on the same date.
Quarterly Stock Information
The following table sets forth, for each of the financial quarters in the two most recent financial years, the range of high ask and low bid prices of our
ordinary shares on the NASDAQ Global Market and the Tel Aviv Stock Exchange:
2009
First Quarter
Second Quarter
Third Quarter
Fourth Quarter
2010
First Quarter
Second Quarter
Third Quarter
Fourth Quarter
NASDAQ
Tel Aviv Stock Exchange*
High
Low
High
Low
$
$
$
$
$
$
$
$
1.64
1.50
1.94
2.50
3.19
2.93
2.87
8.43
$
$
$
$
$
$
$
$
0.98 $
1.14 $
1.22 $
1.70 $
1.55 $
2.00 $
2.00 $
2.45 $
1.82
1.46
1.91
2.38
3.08
2.83
2.68
8.11
$
$
$
$
$
$
$
$
1.04
1.19
1.26
1.63
1.56
1.91
1.97
2.50
* The U.S. dollar price of shares on the Tel Aviv Stock Exchange is determined by dividing the price of an ordinary share in NIS by the representative exchange
rate of the NIS against the U.S. dollar on the same date.
65
Monthly Stock Information
The following table sets forth, for the most recent six months, the range of high ask and low bid prices of our ordinary shares on the NASDAQ Global
Select Market (for periods from January 3, 2011) or the NASDAQ Global Market (for periods prior to January 3, 2011) and the Tel Aviv Stock Exchange:
October 2010
November 2010
December 2010
January 2011
February 2011
NASDAQ
Tel Aviv Stock Exchange*
High
Low
High
Low
$
$
$
$
$
2.78
7.28
8.43
8.99
9.74
$
$
$
$
$
2.45 $
2.67 $
5.74 $
6.33 $
6.87 $
2.74
7.07
8.11
8.58
9.55
$
$
$
$
$
2.50
2.68
5.96
6.14
6.96
* The U.S. dollar price of shares on the Tel Aviv Stock Exchange is determined by dividing the price of an ordinary share in NIS by the representative exchange
rate of the NIS against the U.S. dollar on the same date.
B.
PLAN OF DISTRIBUTION
Not applicable.
C.
MARKETS
Our ordinary shares were listed on the NASDAQ Global Market (symbol: MGIC) from our initial public offering in the United States on August 16,
1991 until January 3, 2011, at which date the listing of our ordinary shares was transferred to the NASDAQ Global Select Market. Since November 16, 2000, our
ordinary shares have also traded on the Tel Aviv Stock Exchange.
D.
SELLING SHAREHOLDERS
Not applicable.
E.
DILUTION
Not applicable.
F.
EXPENSES OF THE ISSUE
Not applicable.
ITEM 10. ADDITIONAL INFORMATION
A.
SHARE CAPITAL
Not applicable.
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B.
MEMORANDUM AND ARTICLES OF ASSOCIATION
Set out below is a description of certain provisions of our Articles of Association and of the Israeli Companies Law related to such provisions. This
description is only a summary and does not purport to be complete and is qualified by reference to the full text of the Articles of Association, which are
incorporated by reference as exhibits to this Annual Report, and to Israeli law.
Purposes and Objects of the Company
We are a public company registered with the Israeli Companies Registry as Magic Software Enterprises Ltd., registration number 52-003674-0. Section
2 of our memorandum of association provides that we were established for the purpose of engaging in all fields of the computer business and in any other lawful
activity permissible under Israeli law.
The Powers of the Directors
Under the provisions of the Israel Companies Law and our articles of association, subject to specified exceptions, a director cannot participate in a
meeting nor vote on a proposal, arrangement or contract in which he or she is materially interested. In addition, our directors cannot vote compensation to
themselves or any members of their body without the approval of our audit committee and our shareholders at a general meeting. See “Item 6C. Directors, Senior
Management and Employees – Board Practices – Approval of Related Party Transactions Under Israeli Law.”
The authority of our directors to enter into borrowing arrangements on our behalf is not limited, except in the same manner as any other transaction by
us.
Under our articles of association, retirement of directors from office is not subject to any age limitation and our directors are not required to own shares
in our company in order to qualify to serve as directors.
Rights Attached to Shares
Our authorized share capital consists of 50,000,000 ordinary shares of a nominal value of NIS 0.1 each. All outstanding ordinary shares are validly
issued, fully paid and non-assessable. The rights attached to the ordinary shares are as follows:
Dividend rights. Holders of our ordinary shares are entitled to the full amount of any cash or share dividend subsequently declared. The board of
directors may declare interim dividends and propose the final dividend with respect to any fiscal year only out of the retained earnings, in accordance with the
provisions of the Israeli Companies Law. See “Item 8A. Financial Information – Consolidated and Other Financial Information – Dividend Distributions
Policy.” All unclaimed dividends or other monies payable in respect of a share may be invested or otherwise made use of by the Board of Directors for our
benefit until claimed. Any dividend unclaimed after a period of three years from the date of declaration of such dividend will be forfeited and will revert to us;
provided, however, that the Board of Directors may, at its discretion, cause us to pay any such dividend to a person who would have been entitled thereto had the
same not reverted to us. We are not obligated to pay interest or linkage differentials on an unclaimed dividend.
Voting rights. Holders of ordinary shares have one vote for each ordinary share held on all matters submitted to a vote of shareholders. Such 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.
The quorum required at any meeting of shareholders consists of at least two shareholders present in person or represented by proxy who hold or
represent, in the aggregate, at least one-third (33%) of the voting rights in the company. A meeting adjourned for lack of a quorum is generally adjourned to the
same day in the following week
67
at the same time and place or any time and place as the directors designate in a notice to the shareholders. At the reconvened meeting, the required quorum
consists of any two members present in person or by proxy.
Under our articles of association, all resolutions require approval of no less than a majority of the voting rights represented at the meeting in person or by
proxy and voting thereon.
Pursuant to our articles of association, our directors (except outside directors) are elected at our annual general meeting of shareholders by a vote of the
holders of a majority of the voting power represented and voting at such meeting and hold office until the next annual general meeting of shareholders and until
their successors have been elected. All the members of our Board of Directors (except the outside directors) may be reelected upon completion of their term of
office. Asseco, our controlling shareholder, and Formula Systems, our parent company, will be able to exercise control over the election of our directors (subject
to a special majority required for the election of outside directors). See “Item 7A. Major Shareholders and Related Party Transactions – Major
Shareholders.” For information regarding the election of outside directors, see “Item 6C. Directors, Senior Management and Employees – Board Practices —
Election of Directors.”
Rights to share in the company’s profits. Our shareholders have the right to share in our profits distributed as a dividend and any other permitted
distribution. See this Item 10B. “Additional Information – Memorandum and Articles of Association – Rights Attached to Shares – Dividend Rights.”
Rights to share in surplus in the event of liquidation. In the event of our liquidation, after satisfaction of liabilities to creditors, our assets will be
distributed to the holders of ordinary shares in proportion to the nominal value of their holdings. This right may be affected by the grant of preferential dividend
or distribution rights to the holders of a class of shares with preferential rights that may be authorized in the future.
Liability to capital calls by the company. Under our memorandum of association and the Israeli Companies Law, the liability of our shareholders to
provide us with additional funds is limited to the par value of the shares held by them.
Limitations on any existing or prospective major shareholder. See Item 6C. “Directors and Senior Management –Board Practices – Approval of Related
Party Transactions Under Israeli Law.”
Changing Rights Attached to Shares
According to our articles of association, the rights attached to any class of shares may be modified or abrogated by us, subject to the consent in writing
of, or sanction of a resolution passed by, the holders of a majority of the issued shares of such class at a separate general meeting of the holders of the shares of
such class.
Annual and Extraordinary Meetings
Under the Israeli Companies Law a company must convene an annual meeting of shareholders at least once every calendar year and within fifteen
months of the last annual meeting. Depending on the matter to be voted upon, notice of at least 21 days or 35 days prior to the date of the meeting is required.
Our board of directors may, in its discretion, convene additional meetings as “special general meetings.” With respect to “special general meetings,” notice of at
least 35 days prior to the date of the meeting is required. In addition, the board must convene a special general meeting upon the demand of two of the directors,
25% of the nominated directors, one or more shareholders having at least 5% of the outstanding share capital and at least 1% of the voting power in the company,
or one or more shareholders having at least 5% of the voting power in the company. See Item 10B. “Additional Information - Memorandum and Articles of
Association - Rights Attached to Shares - Voting Rights.”
68
Limitations on the Rights to Own Securities in Our Company
Neither our memorandum of association or our articles of association nor the laws of the State of Israel restrict in any way the ownership or voting of
shares by non-residents, except with respect to subjects of countries which are in a state of war with Israel.
Provisions Restricting Change in Control of Our Company
The Israeli Companies Law requires that mergers between Israeli companies be approved by the board of directors and general meeting of shareholders
of both parties to the transaction. The approval of the board of directors of both companies is subject to such boards’ confirmation that there is no reasonable
doubt that following the merger the surviving company will be able to fulfill its obligations towards its creditors. Each company must notify its creditors about
the contemplated merger. Under the Israeli Companies Law, our articles of association are deemed to include a requirement that such merger be approved by an
extraordinary resolution of the shareholders, as explained above. The approval of the merger by the general meetings of shareholders of the companies is also
subject to additional approval requirements as specified in the Israeli Companies Law and regulations promulgated thereunder. See also “Item 6C. Directors,
Senior Management and Employees – Board Practices – – Approval of Related Party Transactions Under Israeli Law.”
Disclosure of Shareholders Ownership
The Israeli Securities Law and the regulations promulgated thereunder require that a company whose shares are traded on a stock exchange in Israel, as
in the case of our company, report the share ownership of its interested parties. An interested party is defined under the Israeli Securities Law as any one of the
following: (i) a person holding 5% or more of the company’s issued capital stock or voting power, or who is entitled to appoint one or more of the company’s
directors or its general manager; or (ii) any person acting as a director or general manager of the company; or (iii) any company, in which any of the above
persons either holds 25% or more of its capital stock or voting power or is entitled to appoint 25% or more of its directors.
Changes in Our Capital
Changes in our capital are subject to the approval of the shareholders by a majority of the votes of shareholders present at the meeting, in person or by
proxy, and voting on the matter.
C.
MATERIAL CONTRACTS
In December 2009, we sold and leased back our headquarters and principal administrative, finance, sales, marketing and research and development
office building located in Or Yehuda, Israel, a suburb of Tel Aviv. The office building was sold for the total consideration of $5.2 million, of which $4.9 million
was received in December, 2009 and the remaining $0.3 million were received in 2010 following the receipt of certain approvals from the Israeli tax authorities
and local municipality that we have no outstanding obligations.
We have negotiated new lease terms for our headquarters and principal administrative, finance, sales, marketing and research and development office
building effective as of February 1, 2011. Based on the new terms we currently occupy 23,747 square feet of space in such building at an annual aggregate rent of
$0.4 million under a lease agreement expiring in December 2014. We have an option to terminate the lease upon six months prior written notice.
On January 17, 2010, we completed the acquisition of a U.S.-based consulting and staffing services business for approximately $13.7 million to be paid
over a three year period. The acquired business provides a comprehensive range of consulting and staffing services for telecom, network communications and the
IT industry. The business employs approximately 233 persons with offices throughout the United States.
69
On December 23, 2010, we raised approximately $21.4 million before costs ($20.3 million net of issuance expenses) in a private placement to
institutional investors in the United States and abroad pursuant to three Securities Purchase Agreements that we entered into on December 20, 2010. We issued
an aggregate of 3,287,616 ordinary shares at a price of $6.50 per share in the offering. Certain of the purchasers also received warrants to purchase up to an
aggregate of 1,134,231 ordinary shares at an exercise price of $8.26 per share. The warrants are exercisable as of six months from the date of issuance, have a
term of three years, and the exercise price is subject to future adjustment for various events, such as stock splits or dividend distributions. If the warrants are
exercised in full, we will receive additional proceeds of approximately $9.4 million.
While we have numerous contracts with customers, resellers and distributors we do not deem any such individual contract to be material.
D.
EXCHANGE CONTROLS
Israeli law and regulations do not impose any material foreign exchange restrictions on non-Israeli holders of our ordinary shares. In May 1998, a new
“general permit” was issued under the Israeli Currency Control Law, 1978, which removed most of the restrictions that previously existed under such law, and
enabled Israeli citizens to freely invest outside of Israel and freely convert Israeli currency into non-Israeli currencies.
Non-residents of Israel who purchase our ordinary shares will be able to convert dividends, if any, thereon, and any amounts payable upon our
dissolution, liquidation or winding up, as well as the proceeds of any sale in Israel of our ordinary shares to an Israeli resident, into freely repatriable dollars, at
the exchange rate prevailing at the time of conversion, provided that the Israeli income tax has been withheld (or paid) with respect to such amounts or an
exemption has been obtained.
E.
TAXATION
The following is a discussion of Israeli and United States tax consequences material to our shareholders. To the extent that the discussion is based on
new tax legislation which 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 discussion is not intended, and should not be construed, as legal or professional tax advice and is not
exhaustive of all possible tax considerations
Holders of our ordinary shares should consult their own tax advisors as to the United States, Israeli or other tax consequences of the purchase, ownership
and disposition of ordinary shares, including, in particular, the effect of any foreign, state or local taxes.
ISRAELI TAX CONSIDERATIONS
The following is a summary of some of the current tax law applicable to companies in Israel, with special reference to its effect on us. The following
also contains a discussion of specified Israeli tax consequences to our shareholders and government programs benefiting us. 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. The discussion is not intended, and should not be construed, as legal or professional tax advice and is not
exhaustive of all possible tax considerations.
General Corporate Tax Structure
Israeli companies were generally subject to corporate tax at the rate of 27%, 26% and 25% of their taxable income in 2008, 2009 and 2010
respectively. The corporate tax was reduced to a rate of 24% in 2011, and will be further reduced to 23% in 2012, 22% in 2013, 21% in 2014, 20% in 2015 and
18% in 2016 and thereafter. However, the rate is effectively reduced for income derived from an approved enterprise, as discussed below.
70
Tax Benefits Under the Law for the Encouragement of Capital Investments, 1959
Certain of our facilities have been granted “approved enterprise” status under the Law for the Encouragement of Capital Investments, 1959, as amended,
or the Investment Law.
Tax Benefits for Income from Approved Enterprises Approved Before April 1, 2005
Prior to April 1, 2005, the Investment Law provided that a proposed capital investment in production facilities or other eligible facilities may be
designated as an “approved enterprise.” Each 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 relate only to taxable profits
attributable to the specific program and are contingent upon meeting the criteria set out in the certificate of approval
Prior to April 1, 2005, an approved enterprise was entitled to either receive a grant from the Government of Israel or an alternative package of tax
benefits, referred to as the Alternative Benefits. We elected to forego the entitlement to grants and elected the Alternative Benefits package, under which
undistributed income that we generate from our approved enterprises will be completely tax exempt. The period of such tax exemption for a company electing the
Alternative Benefits ranges between two and ten years, depending upon the location within Israel and the type of the approved enterprise. Because we are located
in Or Yehuda, the period of tax exemption applicable is two to four years (as described below).
On expiration of the exemption period, the approved enterprise would be eligible for beneficial tax rates otherwise available for approved enterprises
under the Investment Law (for our company, a rate of 25%) for the remainder of the otherwise applicable benefits period.
Alternative Benefits are available until the earlier of (i) seven consecutive years, commencing in the year in which the specific approved enterprise first
generates taxable income, (ii) 12 years from commencement of production and (iii) 14 years from the date of approval of the approved enterprise status.
Dividends paid out of income generated by an approved enterprise (or out of dividends received from a company whose income is derived from an
approved enterprise) are generally subject to withholding tax at the rate of 15%. This withholding tax is deductible at source by the approved enterprise. 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. Since we
elected the Alternative Benefits track, we will be subject to payment of corporate tax at the rate of 25% in respect of the gross amount of the dividend that we may
distribute out of profits which were exempt from corporate tax in accordance with the provisions of the Alternative Benefits track. If we are also deemed to be a
“Foreign Investors’ Company,” or FIC, and if the FIC (the definition of which appears below) is at least 49% owned by non-Israeli residents, the corporate tax
rate paid by us in respect of the dividend we may distribute from income derived by our approved enterprises during the tax exemption period may be taxed at a
lower rate.
Since we have elected the Alternative Benefits package, we are not obliged to attribute any part of dividends that we may distribute to exempt profits,
and we may decide from which year’s profits to declare dividends. We currently intend to reinvest any income that we may in the future derive from our
approved enterprise programs and not to distribute the income as a dividend.
If we qualify as a FIC, our approved enterprises will be entitled to additional tax benefits. Subject to certain conditions, a FIC is a company with a level
of foreign investment 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. Such a company will be eligible for an extension of the period during which it is
71
entitled to tax benefits under its approved enterprise status (so that the benefit periods may be up to ten years) and for further tax benefits if the level of foreign
investment exceeds 49%.
The Investment Center of the Ministry of Industry and Trade has granted approved enterprise status under Israeli law to eight investment programs at our
manufacturing facility. We have elected the Alternative Benefits package with respect to each of these approved enterprise programs. 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, as described above. If a company does not meet these conditions, it may be required to refund the amount of tax benefits, together with consumer price
index linkage adjustment and interest.
Tax Benefits under an Amendment that Became Effective on April 1, 2005
On April 1, 2005, an amendment to the Investment Law became effective. The Investment Law provides that terms and benefits included in any
certificate of approval that was granted before the April 2005 amendment came into effect will remain subject to the provisions of the Investment Law as they
were on the date of such approval.
Under the April 2005 amendment it is no longer necessary for a company to acquire approved enterprise status in order to receive the tax benefits
previously available under the Alternative Benefits provisions. 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 out by the amendment. Companies are entitled to approach the Israeli Tax Authority for a
pre-ruling regarding their eligibility for benefits under the amendment.
Tax benefits are available under the April 2005 amendment to production facilities (or other eligible facilities), which are generally required to derive
more than 25% of their business income from export. In order to receive the tax benefits, the amendment states that the company must make an investment which
meets all the conditions set out in the amendment for tax benefits and exceeds a minimum amount specified in the Investment Law. Such investment allows the
company to receive a “benefited enterprise” status, and may be made over a period of no more than three years ending at the end of the year in which the
company requested to have the tax benefits apply to the benefited enterprise, referred to as the Year of Election. Where the company requests to have the tax
benefits apply to an expansion of existing facilities, only the expansion will be considered to be a benefited enterprise and the company’s effective tax rate will be
the weighted average of the applicable rates. In this case, the minimum investment required in order to qualify as a benefited enterprise is required to exceed a
certain amount or certain percentage of the value of the company’s production assets before the expansion.
The extent of the tax benefits available under the April 2005 amendment to qualifying income of a benefited enterprise are determined by the geographic
location of the benefited enterprise. The location will also determine the period for which tax benefits are available.
Dividends paid out of income derived by a benefited enterprise will be treated similarly to payment of dividends by an approved enterprise under the
Alternative Benefits track. Therefore, dividends paid out of income derived by a benefited enterprise (or out of dividends received from a company whose income
is derived from a benefited enterprise) are generally subject to withholding tax at the rate of 15% (deductible at source). The reduced rate of 15% is limited to
dividends and distributions out of income derived from a benefited enterprise during the benefits period and actually paid at any time up to 12 years thereafter. A
company qualifying for tax benefits under the amendment which pays a dividend out of income derived by its benefited enterprise during the tax exemption
period will be subject to tax in respect of the gross amount of the dividend at the otherwise applicable rate of 25%, (or lower in the case of a qualified “FIC”
which is at least 49% owned by non-Israeli residents). The dividend recipient would be subject to tax at the rate of 15% on the amount received which tax would
be deducted at source.
As a result of the April 2005 amendment, tax-exempt income generated under the provisions of the amended law will subject us to taxes upon
distribution of the tax-exempt income to shareholders or liquidation of
72
the company, and we may be required to record a deferred tax liability with respect to such tax-exempt income. The April 2005 amendment sets a minimal
amount of foreign investment required for a company to be regarded a FIC.
In December 2010, the Israeli Parliament passed the Law for Economic Policy for 2011 and 2012 (Amended Legislation), which, among other things,
amends the Investment Law, effective as of January 1, 2011. According to the new legislation, the benefit tracks under the Investment Law were modified and a
uniform tax rate will apply to all of the income of the Privileged Enterprise. We may elect to irrevocably implement the amendment (while waiving benefits
provided under the Investment Law as currently in effect) and subsequently would be subject to the amended tax rates that are: 2011 and 2012 - 15% (in
development area A - 10%), 2013 and 2014 - 12.5% (in development area A - 7%) and in 2015 and thereafter - 12% (in development area A - 6%).
Tax Benefits and Grants for Research and Development
Israeli tax law allows, under certain conditions, a tax deduction in the year incurred for expenditures (including capital expenditures) in scientific
research and development projects if the expenditures are approved by the relevant Israeli government ministry (determined by the field of research) and the
research and development is for the promotion of the enterprise and is carried out by or on behalf of the company seeking such deduction. Expenditures not so
approved are deductible over a three-year period. However, expenditures made out of proceeds made available to us through government grants are not deductible
according to Israeli law.
Law for the Encouragement of Industry (Taxes), 1969
Under the Law for the Encouragement of Industry (Taxes), 1969, the following preferred corporate tax benefits, among others, are available to
“Industrial Corporations,” as such term is defined in such Law, which may be applicable to us:
• Amortization of purchases of know-how and patents over eight years for tax purposes.
• Amortization of expenses incurred in connection with certain public security issuances over a three-year period.
• Tax exemption for shareholders who held shares before a public offering on capital gains derived from the sale (as defined by law) of securities, if
realized after more than five years from the public issuance of additional securities of the company. (As of November 1994, this exemption was
repealed, however, it applies to our shareholders pursuant to a grand-fathering clause.) This exemption applies only to gains that accrued before
January 1, 2003.
• Accelerated depreciation rates on equipment and buildings.
Israeli Capital Gains Tax
An individual is subject to a 20% tax rate on real capital gains derived from the sale of shares, as long as the individual is not a “substantial
shareholder” (generally a shareholder with 10% or more of the right to profits, right to nominate a director and voting rights) in the company issuing the shares.
A substantial shareholder will be subject to tax at a rate of 25% in respect of real capital gains derived from the sale of shares issued by the company in
which he or she is a substantial shareholder. The determination of whether the individual is a substantial shareholder will be made on the date that the securities
are sold. In addition, the individual will be deemed to be a substantial shareholder if at any time during the 12 months preceding this date he had been a
substantial shareholder.
Non-Israeli residents are exempt from Israeli capital gains tax on any gains derived from the sale of shares in an Israeli corporation publicly traded on the
Tel Aviv Stock Exchange and/or on a foreign stock exchange, provided such gains do not derive from a permanent establishment of such shareholders in Israel
and that such
73
shareholders did not acquire their shares prior to the issuer’s initial public offering. However, non-Israeli corporations will not be entitled to such exemption if an
Israeli resident (i) has a controlling interest of 25% or more in such non-Israeli corporation, or (ii) is the beneficiary of or is entitled to 25% or more of the
revenues or profits of such non-Israeli corporation, whether directly or indirectly .
In some instances where our shareholders may be liable to Israeli tax on the sale of their ordinary shares, the payment of the consideration may be
subject to the withholding of Israeli tax at the source.
Pursuant to the treaty between the governments of the United States and Israel with respect to taxes on income, or the U.S.-Israel tax treaty, the sale,
exchange or disposition of our ordinary shares by a person who qualifies as a resident of the United States under the treaty and who is entitled to claim the
benefits afforded to him by the treaty, will generally not be subject to Israeli capital gains tax. This exemption shall not apply to a person who held, directly or
indirectly, shares representing 10% or more of the voting power in our company during any part of the 12 month period preceding the sale, exchange or
disposition, subject to certain conditions. A sale, exchange or disposition of our shares by a U.S. resident qualified under the treaty, who held, directly or
indirectly, shares representing 10% or more of the voting power in our company at any time during the preceding 12 month period would be subject to Israeli tax,
to the extent applicable and subject to any other available exemptions; however, under the treaty, this U.S. resident would be permitted to claim a credit for these
taxes against the U.S. income tax with respect to the sale, exchange or disposition, subject to the limitations in U.S. laws applicable to foreign tax credits.
Israeli Tax on Dividend Income
Taxation of Israeli Residents
Israeli resident individuals are generally subject to Israeli income tax on the receipt of dividends paid on our ordinary shares, other than bonus shares
(share dividends) or stock dividends, at the rate of 20%, or 25% for a shareholder that is considered a substantial shareholder within the meaning of the Israeli Tax
Ordinance, at any time during the 12-month period preceding such distribution. Dividends paid on our ordinary shares to Israeli resident companies are exempt
from such tax (except with respect to dividends that are distributed from the income derived outside of Israel, which are subject to the 25% tax rate) on dividends
paid out of approved enterprise or benefited enterprise income.
Trust funds, pension funds and other institutions which are exempt from tax based on Section 9(2) of the Israeli Tax Ordinance are exempt from the tax
on dividend distributions.
The withholding tax on dividends paid on our ordinary shares is 20% (including for a shareholder considered a substantial shareholder within the
meaning of the Israeli Tax Ordinance).
Dividends paid from income derived from our approved enterprise or benefited enterprise are subject to tax, which is withheld at the source at the rate of
15%, although we cannot assure you that we will designate the profits that are being distributed in a way that will reduce shareholders’ tax liability.
Taxation of Non-Israeli Residents
Under Israeli tax law, a distribution of dividends from income attributable to an approved enterprise will be subject to tax in Israel at the rate of 15%,
which is withheld and paid by the company paying the dividend, if the dividend is distributed during the benefits period or within the following 12 years (the 12-
year limitation does not apply to a Foreign Investors’ Company). Any distribution of dividends from income that is not attributable to an approved enterprise will
be subject to tax in Israel at the rate of 25%, except that dividends distributed on or after January 1, 2006 to an individual who is deemed “a non-substantial
shareholder” will be subject to tax at the rate of 20%.This rate is subject to reduction under the provisions of an applicable double tax treaty.
Under the US-Israel Tax Treaty, Israeli withholding tax on dividends paid to a U.S. treaty resident may not in general exceed 25%, or 15% in the case of
dividends paid out of the profits of an approved enterprise. Where the
74
recipient is a U.S. corporation owning 10% or more of the voting stock of the paying corporation and the dividend is not paid from the profits of an approved
enterprise, the Israeli tax withheld may not exceed 12.5%, subject to certain conditions.
UNITED STATES FEDERAL INCOME TAX CONSEQUENCES
The following is a summary of certain material U.S. federal income tax consequences that apply to U.S. Holders who hold ordinary shares as capital
assets. This summary is based on the United States Internal Revenue Code of 1986, as amended, or the Code, Treasury regulations promulgated thereunder,
judicial and administrative interpretations thereof, and the U.S.-Israel Tax Treaty, all as in effect on the date hereof and all of which are subject to change either
prospectively or retroactively. This summary does not address all tax considerations that may be relevant with respect to an investment in ordinary shares. This
summary does not account for the specific circumstances of any particular investor, such as:
•
•
•
•
•
•
•
•
•
•
broker-dealers,
financial institutions,
certain insurance companies,
investors liable for alternative minimum tax,
tax-exempt organizations,
non-resident aliens of the U.S. or taxpayers whose functional currency is not the U.S. dollar,
persons who hold the ordinary shares through partnerships or other pass-through entities,
persons who acquire their ordinary shares through the exercise or cancellation of employee stock options or otherwise as compensation for services,
investors that actually or constructively own 10% or more of our voting shares, and
investors holding ordinary shares as part of a straddle, or appreciated financial position or a hedging or conversion transaction.
If a partnership or an entity treated as a partnership for U.S. federal income tax purposes owns ordinary shares, the U.S. federal income tax treatment of a
partner in such a partnership will generally depend upon the status of the partner and the activities of the partnership. A partnership that owns ordinary shares and
the partners in such partnership should consult their tax advisors about the U.S. federal income tax consequences of holding and disposing of ordinary shares.
This summary does not address the effect of any U.S. federal taxation other than U.S. federal income and gift and estate taxation. In addition, this
summary does not include any discussion of state, local or foreign taxation.
You are urged to consult your tax advisors regarding the foreign and United States federal, state and local tax considerations of an investment in ordinary
shares.
For purposes of this summary, a U.S. Holder is:
•
•
•
an individual who is a citizen or, for U.S. federal income tax purposes, a resident of the United States;
a corporation created or organized in or under the laws of the United States or any political subdivision thereof;
an estate whose income is subject to U.S. federal income tax regardless of its source; or
75
•
a trust that (a) is subject to the primary supervision of a court within the United States and the control of one or more U.S. persons or (b) has a valid
election in effect under applicable U.S. Treasury regulations to be treated as a U.S. person.
Taxation of Dividends
The gross amount of any distributions received with respect to ordinary shares, including the amount of any Israeli taxes withheld therefrom, will
constitute dividends for U.S. federal income tax purposes to the extent of our current and accumulated earnings and profits, as determined for U.S. federal income
tax purposes. You will be required to include this amount of dividends in gross income as ordinary income. Distributions in excess of our current and
accumulated earnings and profits will be treated as a non-taxable return of capital to the extent of your tax basis in the ordinary shares and any amount in excess
of your tax basis will be treated as gain from the sale of ordinary shares. See “-Disposition of Ordinary Shares” below for the discussion on the taxation of capital
gains. Dividends will not qualify for the dividends-received deduction generally available to corporations under Section 243 of the Code.
Dividends that we pay in NIS, including the amount of any Israeli taxes withheld therefrom, will be included in your income in a U.S. dollar amount
calculated by reference to the exchange rate in effect on the day such dividends are received. A U.S. Holder who receives payment in NIS and converts NIS into
U.S. dollars at an exchange rate other than the rate in effect on such day may have a foreign currency exchange gain or loss that would be treated as ordinary
income or loss. U.S. Holders should consult their own tax advisors concerning the U.S. tax consequences of acquiring, holding and disposing of NIS.
Subject to complex limitations, any Israeli withholding tax imposed on such dividends will be a foreign income tax eligible for credit against a U.S.
Holder's U.S. federal income tax liability (or, alternatively, for deduction against income in determining such tax liability). The limitations set out in the Code
include computational rules under which foreign tax credits allowable with respect to specific classes of income cannot exceed the U.S. federal income taxes
otherwise payable with respect to each such class of income. Dividends generally will be treated as foreign-source passive category income or, in the case of
certain U.S. Holders, general category income for United States foreign tax credit purposes. Further, there are special rules for computing the foreign tax credit
limitation of a taxpayer who receives dividends subject to a reduced tax, see discussion below. A U.S. Holder will be denied a foreign tax credit with respect to
Israeli income tax withheld from dividends received on the ordinary shares to the extent such U.S. Holder has not held the ordinary shares for at least 16 days of
the 31-day period beginning on the date which is 15 days before the ex-dividend date or to the extent such U.S. Holder is under an obligation to make related
payments with respect to substantially similar or related property. Any days during which a U.S. Holder has substantially diminished its risk of loss on the
ordinary shares are not counted toward meeting the 16-day holding period required by the statute. The rules relating to the determination of the foreign tax credit
are complex, and you should consult with your personal tax advisors to determine whether and to what extent you would be entitled to this credit.
Subject to certain limitations, “qualified dividend income” received by a noncorporate U.S. Holder in tax years beginning on or before December 31,
2011 will be subject to tax at a reduced maximum tax rate of 15 percent. Distributions taxable as dividends paid on the ordinary shares should qualify for the 15
percent rate provided that either: (i) we are entitled to benefits under the income tax treaty between the Untied States and Israel, or the Treaty, or (ii) the ordinary
shares are readily tradable on an established securities market in the United States and certain other requirements are met. We believe that we are entitled to
benefits under the Treaty and that the ordinary shares currently are readily tradable on an established securities market in the United States. However, no
assurance can be given that the ordinary shares will remain readily tradable. The rate reduction does not apply unless certain holding period requirements are
satisfied. With respect to the ordinary shares, the U.S. Holder must have held such shares for at least 61 days during the 121-day period beginning 60 days before
the ex-dividend date. The rate reduction also does not apply to dividends received from passive foreign investment companies, see discussion below, or in respect
of certain hedged positions or in certain other situations. U.S. Holders of ordinary shares should consult their own tax advisors regarding the effect of these rules
in their particular circumstances.
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The Health Care Reform and Education Reconciliation Act of 2010 (Pub. Law 111-152) requires certain U.S. Holders who are individuals to pay a 3.8%
tax on the lesser of the excess of their modified adjusted gross income over a threshold amount ($250,000 for married persons filing jointly and $200,000 for
single taxpayers) or their “net investment income,” which generally includes capital gains from the disposition of property, for taxable years beginning after
December 31, 2012. This tax is in addition to any capital gains taxes due on such investment income. A similar tax will apply to estates and trusts. U.S. Holders
should consult their tax advisors regarding the effect, if any, this law may have on them.
Disposition of Ordinary Shares
If you sell or otherwise dispose of ordinary shares, you will recognize gain or loss for U.S. federal income tax purposes in an amount equal to the
difference between the amount realized on the sale or other disposition and the adjusted tax basis in ordinary shares. Subject to the discussion below under the
heading "Passive Foreign Investment Companies," such gain or loss will generally be capital gain or loss and will be long-term capital gain or loss if you have
held the ordinary shares for more than one year at the time of the sale or other disposition. In general, any gain that you recognize on the sale or other disposition
of ordinary shares will be U.S.-source for purposes of the foreign tax credit limitation; losses will be generally allocated against U.S. source income. Deduction of
capital losses is subject to certain limitations under the Code.
In the case of a cash basis U.S. Holder who receives NIS in connection with the sale or disposition of ordinary shares, the amount realized will be based
on the U.S. dollar value of the NIS received with respect to the ordinary shares as determined on the settlement date of such exchange. A U.S. Holder who
receives payment in NIS and converts NIS into United States dollars at a conversion rate other than the rate in effect on the settlement date may have a foreign
currency exchange gain or loss that would be treated as ordinary income or loss.
An accrual basis U.S. Holder may elect the same treatment required of cash basis taxpayers with respect to a sale or disposition of ordinary shares,
provided that the election is applied consistently from year to year. Such election may not be changed without the consent of the Internal Revenue Service, or the
IRS. In the event that an accrual basis U.S. Holder does not elect to be treated as a cash basis taxpayer (pursuant to the Treasury regulations applicable to foreign
currency transactions), such U.S. Holder may have a foreign currency gain or loss for U.S. federal income tax purposes because of differences between the U.S.
dollar value of the currency received prevailing on the trade date and the settlement date. Any such currency gain or loss would be treated as ordinary income or
loss and would be in addition to gain or loss, if any, recognized by such U.S. Holder on the sale or disposition of such ordinary shares.
Passive Foreign Investment Companies
For U.S. federal income tax purposes, we will be considered a passive foreign investment company, or PFIC, for any taxable year in which either (i)
75% or more of our gross income is passive income, or (ii) the average percentage of our assets for the taxable year which are produced or held for the production
of passive income is at least 50%. For this purpose, passive income includes generally dividends, interest, royalties, rents, annuities and the excess of gains over
losses from the disposition of assets which produce passive income. If we were determined to be a PFIC for U.S. federal income tax purposes, highly complex
rules would apply to U.S. Holders owning ordinary shares. Accordingly, you are urged to consult your tax advisors regarding the application of such rules.
Based on our current and projected income, assets and activities, we believe that we are not currently a PFIC nor do we expect to become a PFIC in the
foreseeable future. However, because the determination of whether we are a PFIC is based upon the composition of our income and assets from time to time,
there can be no assurances that we will not become a PFIC for any future taxable year.
If we are treated as a PFIC for any taxable year, dividends would not qualify for the reduced maximum tax rate, discussed above, and, unless you elect
either to treat your investment in ordinary shares as an investment in a "qualified electing fund", or a QEF election, or to "mark-to-market" your ordinary shares,
as described below,
77
•
•
•
•
you would be required to allocate income recognized upon receiving certain dividends or gain recognized upon the disposition of ordinary shares
ratably over the holding period for such ordinary shares,
the amount allocated to each year during which we are considered a PFIC other than the year of the dividend payment or disposition would be
subject to tax at the highest individual or corporate tax rate, as the case may be, and an interest charge would be imposed with respect to the
resulting tax liability allocated to each such year,
the amount allocated to the current taxable year and any taxable year before we became a PFIC would be taxable as ordinary income in the current
year, and
you would be required to make an annual return on IRS Form 8621 regarding distributions received with respect to ordinary shares and any gain
realized on your ordinary shares.
If you make either a timely QEF election or a timely mark-to-market election in respect of your ordinary shares, you would not be subject to the rules
described above. If you make a timely QEF election, you would be required to include in your income for each taxable year your pro rata share of our ordinary
earnings as ordinary income and your pro rata share of our net capital gain as long-term capital gain, whether or not such amounts are actually distributed to you.
You would not be eligible to make a QEF election unless we comply with certain applicable information reporting requirements.
Alternatively, assuming the ordinary shares qualify as “marketable stock” within the meaning of section 1296(e) of the Code, if you elect to “mark-to-
market” your ordinary shares, you will generally include in income, in each year in which we are considered a PFIC, any excess of the fair market value of the
ordinary shares at the close of each tax year over your adjusted basis in the ordinary shares. If the fair market value of the ordinary shares had depreciated below
your adjusted basis at the close of the tax year, you may generally deduct the excess of the adjusted basis of the ordinary shares over its fair market value at that
time. However, such deductions would generally be limited to the net mark-to-market gains, if any, that you included in income with respect to such ordinary
shares in prior years. Income recognized and deductions allowed under the mark-to-market provisions, as well as any gain or loss on the disposition of ordinary
shares with respect to which the mark-to-market election is made, is treated as ordinary income or loss, except that in a year that we are not considered a PFIC, a
gain or loss will be treated as capital gain or loss.
Backup Withholding and Information Reporting
Payments in respect of ordinary shares may be subject to information reporting to the U.S. Internal Revenue Service and to U.S. backup withholding tax
at a rate equal to the fourth lowest income tax rate applicable to individuals, which, under current law, is 28%. Backup withholding will not apply, however, if
you (i) are a corporation or fall within certain exempt categories, and demonstrate the fact when so required, or (ii) furnish a correct taxpayer identification
number and make any other required certification.
Backup withholding is not an additional tax. Amounts withheld under the backup withholding rules may be credited against a U.S. Holder’s U.S. tax
liability, and a U.S. Holder may obtain a refund of any excess amounts withheld under the backup withholding rules by filing the appropriate claim for refund
with the IRS.
U.S. Gift and Estate Tax
An individual U.S. Holder of ordinary shares will generally be subject to U.S. gift and estate taxes with respect to ordinary shares in the same manner
and to the same extent as with respect to other types of personal property.
F.
DIVIDENDS AND PAYING AGENTS
Not applicable.
78
G.
STATEMENT BY EXPERTS
Not applicable.
H.
DOCUMENTS ON DISPLAY
We are subject to certain of the reporting requirements of the Securities and Exchange Act of 1934, as amended, or the Exchange Act, as applicable to
“foreign private issuers” as defined in Rule 3b-4 under the Exchange Act. As a foreign private issuer, we are exempt from certain provisions of the Exchange Act.
Accordingly, our proxy solicitations are not subject to the disclosure and procedural requirements of Regulation 14A under the Exchange Act, and transactions in
our equity securities by our officers and directors are exempt from reporting and the “short-swing” profit recovery provisions contained in Section 16 of the
Exchange Act. In addition, we are not required under the Exchange Act to file periodic reports and financial statements as frequently or as promptly as U.S.
companies whose securities are registered under the Exchange Act. However, we file with the Securities and Exchange Commission an annual report on Form 20-
F containing financial statements audited by an independent accounting firm. We also submit to the Securities and Exchange Commission reports on Form 6-K
containing (among other things) press releases and unaudited financial information. We post our annual report on Form 20-F on our website
(www.magicsoftware.com) promptly following the filing of our annual report with the Securities and Exchange Commission. The information on our website is
not incorporated by reference into this annual report.
This annual report and the exhibits thereto and any other document we file pursuant to the Exchange Act may be inspected without charge and copied at
prescribed rates at the Securities and Exchange Commission public reference room at 100 F Street, N.E., Room 1580, Washington, D.C. 20549. You may obtain
information on the operation of the Securities and Exchange Commission’s public reference room in Washington, D.C. by calling the Securities and Exchange
Commission at 1-800-SEC-0330. The Exchange Act file number for our Securities and Exchange Commission filings is 000-19415.
The Securities and Exchange Commission maintains a website at www.sec.gov that contains reports, proxy and information statements, and other
information regarding registrants that make electronic filings with the Securities and Exchange Commission using its EDGAR (Electronic Data Gathering,
Analysis, and Retrieval) system.
The documents concerning our company that are referred to in this annual report may also be inspected at our offices located at 5 Haplada Street, Or
Yehuda 60218, Israel.
I.
SUBSIDIARY INFORMATION
Not applicable.
ITEM 11. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS
We are exposed to a variety of market risks, primarily changes in interest rates affecting our investments in marketable securities and foreign currency
fluctuations.
Cash Investments, Marketable Securities and Interest Rate Risk
Our cash investment policy seeks to preserve principal and maintain adequate liquidity while maximizing the income we receive from our investments
without significantly increasing the risk of loss. To minimize investment risk, we maintain a diversified portfolio across various maturities, types of investments
and issuers, which may include, from time to time, money market funds, U.S. government bonds, state debt, bank deposits and certificates of deposit, and
investment grade corporate debt. Our cash management policy does not allow us to purchase or hold commodity instruments, structures or “sub-prime” related
holdings (such as auction rate securities and collateralized debt obligation) or other financial instruments for trading purposes.
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As of December 31, 2010, we had approximately $43.7 million in cash and cash equivalents and $2.9 million in marketable securities. Our marketable
securities include investments in commercial and government bonds and foreign banks. As of such date our marketable securities portfolio was composed
primarily of governmental and commercial bonds bearing average annual interest rates of approximately 2.7%, with average maturities of 1.4 years and maximum
maturities of 3.8 years. The performance of the capital markets affects the values of the funds we hold in marketable securities. These assets are subject to market
fluctuations, such as the declines experienced in 2008 and the first six months of 2009. In such case, the fair value of our investments may decline. As of
December 31, 2010, net unrealized gain in our marketable securities portfolio totaled $218,000. We periodically monitor our investments for adverse material
holdings related to the underlying financial solvency of the issuers of the marketable securities in our portfolio.
Our exposure to market risk for changes in interest rates relates primarily to our investment in marketable securities. Investments in both fixed rate and
floating rate interest bearing securities carry a degree of interest rate risk. The fair market value of fixed rate securities may be adversely impacted due to a rise in
interest rates, while floating rate securities may produce less income than predicted if interest rates fall. Due in part to these factors, our future financial results
may be negatively affected in the event that interest rates fluctuate.
Foreign Currency Exchange Risk
Our financial results may be negatively impacted by foreign currency fluctuations. Our foreign operations are transacted through a global network of
subsidiaries. These sales and related expenses are generally denominated in currencies other than the U.S. dollar, except in Israel, where our sales are
denominated in U.S. dollars and our expenses are denominated in NIS. Because our financial results are reported in U.S. dollars, our results of operations may be
adversely impacted by fluctuations in the rates of exchange between the U.S. dollar and such other currencies as the financial results of our foreign subsidiaries
are converted into U.S. dollars in consolidation. Our earnings are predominantly affected by fluctuations in the value of the U.S. dollar as compared to the NIS, as
well as the value of the U.S. dollar as compared to the Euro, Japanese Yen and British Pound.
We measure and record non-monetary accounts in our balance sheet (principally fixed assets and prepaid expenses) in U.S. dollars. For this
measurement, we use the U.S. dollar value in effect at the date that the asset or liability was initially recorded in our balance sheet (the date of the transaction).
In 2010, we entered into forward contracts to hedge the fair value of assets and liabilities denominated in NIS, Euro and Japanese Yen. As of December
31, 2010, we had outstanding forward contracts that did not meet the requirement for hedge accounting in the amount of $2.1 million. These contracts were for a
period of up to 12 months. The net gains (losses) recognized in “financial income, net” during 2010 were insignificant.
During 2010, we entered into forward contracts to hedge against the risk of overall changes in future cash flow from payments of payroll and related
expenses denominated in NIS. As of December 31, 2010, we had outstanding forward contracts that met the requirement for hedge accounting, in the amount of
$0.8 million. These contracts met the requirement for cash flow hedge accounting and as such losses in the amount of $0.1 million were recognized when the
related expense were incurred and classified in operating expenses during 2010.
Our operating expenses may be effected by fluctuations in the value of the U.S dollar as it relates to foreign currencies, with Israel, Europe and Japan
having the greatest potential impact. In managing our foreign exchange risk we periodically enter into foreign exchange hedging contracts. Our goal is to mitigate
the potential exposure with these contracts. By way of example, an increase of 10% in the value of the NIS relative to the U.S. dollar in 2010 would have resulted
in a decrease in the U.S. dollar reporting value of our operating income of $1.7 million for that year, while a decrease of 10% in the value of the NIS relative to
the U.S. dollar in 2010 would have resulted in an increase in the U.S. dollar reporting value of our operating income of $1.4 million for the year. An increase of
10% in the value of the Euro, the Japanese yen and the British Pound relative to the U.S. dollar in 2010 would have resulted in an increase in the U.S. dollar
reporting value of our operating income of $0.5 million, $0.3 million and $0.2 million , respectively, for that year, while a decrease of 10% in the value of the
Euro, Japanese Yen and British
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Pound relative to the U.S. dollar in 2010 would have resulted in a decrease in the U.S. dollar reporting value of our operating income of $0.5 million, $0.3 million
and $0.2 million, respectively, for that year.
Equity Price Risk
As of December 31, 2010, we had $2.9 million of trading securities that are classified as available for sale. Those securities have exposure to equity price
risk. The estimated potential loss in fair value resulting from a hypothetical 10% decrease in prices quoted on stock exchanges is approximately $290,000.
ITEM 12. DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES
Not applicable.
PART II
ITEM 13. DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES
None.
ITEM 14. MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USE OF PROCEEDS
Not applicable.
ITEM 15. CONTROLS AND PROCEDURES
Disclosure Controls and Procedures
We maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed in its Exchange Act reports is
recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms, and that such
information is accumulated and communicated to our acting chief executive officer and acting chief financial officer to allow timely decisions regarding required
disclosure. Our management, including our acting chief executive officer and acting chief financial officer, conducted an evaluation of our disclosure controls and
procedures, as defined under Exchange Act Rule 13a-15(e), as of the end of the period covered by this Annual Report on Form 20-F. Based upon that evaluation,
our acting chief executive officer and acting chief financial officer have concluded that, as of such date, our disclosure controls and procedures were effective.
Management's Annual Report on Internal Control over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over our financial reporting. Internal control over financial
reporting is defined in Rule 13a-15(f) or 15d-15(f) promulgated under the Securities Exchange Act of 1934 as a process designed by, or under the supervision of,
the company’s principal executive and principal financial officers and effected by the company’s board of directors, management and other personnel, 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 and includes those policies and procedures that:
•
•
pertain to the maintenance of records that in reasonable detail accurately and fairly reflect the transaction and dispositions of the assets of the
company;
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
81
expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and
•
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.
Our management assessed the effectiveness of our internal control over financial reporting as of December 31, 2010. In making this assessment, our
management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in Internal Control-Integrated
Framework. Based on that assessment, our management concluded that as of December 31, 2010, our internal control over financial reporting was effective.
This annual report does not include an attestation report of our independent registered public accounting firm regarding internal control over financial
reporting. Our management’s report was not subject to attestation by our registered public accounting firm pursuant to temporary rules of the Securities and
Exchange Commission that permit us to provide only management’s report in this annual report.
Changes in Internal Control over Financial Reporting
There was no change in our internal controls over financial reporting that occurred during the period covered by this annual report that has materially
affected, or is reasonably likely to materially affect, our internal controls over financial reporting.
ITEM 16. RESERVED
ITEM 16A. AUDIT COMMITTEE FINANCIAL EXPERT
Our board of directors has determined that Mr. Elan Penn, an outside director within the meaning of the Israeli Companies Law, meets the definition of
an audit committee financial expert, as defined by rules of the Securities and Exchange Commission. For a brief listing of Mr. Penn’s relevant experience, see
Item 6.A. “Directors, Senior Management and Employees — Directors and Senior Management.”
ITEM 16B. CODE OF ETHICS
We have adopted a code of ethics that applies to any chief executive officer and all senior financial officers of our company, including the chief financial
officer, chief accounting officer or controller, or persons performing similar functions. The code of ethics is publicly available on our website at
www.magicsoftware.com. Written copies are available upon request. If we make any substantive amendment to the code of ethics or grant any waivers, including
any implicit waiver, from a provision of the codes of ethics, we will disclose the nature of such amendment or waiver on our website.
ITEM 16C. PRINCIPAL ACCOUNTANT FEES AND SERVICES
Independent Registered Public Accounting Firm Fees
The following table sets forth, for each of the years indicated, the fees billed by our principal independent registered public accounting firm. All of such
fees were pre-approved by our Audit Committee.
Services Rendered
Audit (1)
Audit-related (2)
Tax (3)
Total
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Year Ended December 31,
2009
139,000 $
-
20,000 $
159,000 $
2010
191,000
7,500
35,000
233,500
$
$
$
1) Audit fees relate to audit services provided for each of the years shown in the table, including fees associated with the annual audit, various
accounting issues and audit services provided in connection with other statutory or regulatory filings.
(2) Audit-related fees in 2010 relate to due diligence services performed in connection with our acquisition of a U.S. based-IT services company in
2010.
(3) Tax fees relate to services performed by the tax division for tax compliance, planning and advice.
Pre-Approval Policies and Procedures
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 Securities and
Exchange Commission, and also requires the Audit Committee to consider whether proposed services are compatible with the independence of the public
accountants.
ITEM 16D.
EXEMPTIONS FROM THE LISTING STANDARDS FOR AUDIT COMMITTEES
Not applicable.
ITEM 16E.
PURCHASES OF EQUITY SECURITIES BY THE ISSUER AND AFFILIATED PURCHASERS
Neither we nor any affiliated purchaser has purchased any of our securities during 2010.
ITEM 16F.
CHANGES IN REGISTRANT’S CERTIFYING ACCOUNTANT
None.
ITEM 16G.
CORPORATE GOVERNANCE
NASDAQ Exemptions for a Controlled Company
We are a controlled company within the meaning of NASDAQ Listing Rule 5615(c)(1), since Formula Systems holds more than 50% of our voting
power. Under NASDAQ Listing Rule 5615(c)(1), a controlled company is exempt from the following requirements of NASDAQ Listing Rule 5605:
• The requirement that the majority of the company’s board of directors qualify as independent directors, as defined under NASDAQ Listing
Rules. Instead, we follow Israeli law and practice which requires that we appoint at least two outside directors, within the meaning of the Israeli
Companies Law, to our board of directors. In addition, we have the mandated three independent directors, within the meaning of the rules of the
Securities and Exchange Commission and NASDAQ, on our audit committee. See Item 6C. “Directors, Senior Management and Employees -
Board Practices - Outside and Independent Directors.”
• The requirement that the compensation of the chief financial officer and all other executive officers be determined, or recommended to the board of
directors for determination, either by (i) a majority of the independent directors or (ii) a compensation committee comprised solely of independent
directors. Under the Israeli Companies Law, arrangements as to compensation of office holders who are not directors require approval by the board
of directors, provided that they are not deemed extraordinary
83
transactions, unless otherwise provided in the articles of association. Our articles of association do not provide otherwise. Any compensation
arrangement with an office holder who is not a director that is deemed an extraordinary transaction, the exemption of such office holder from
liability, the insurance of such office holder and the indemnification of such office holder, or an undertaking to indemnify such office holder, require
the approval of both audit committee and board of directors. The compensation, exemption, indemnification and insurance of office holders who are
directors must be approved by our audit committee, board of directors and shareholders. If the office holder is a controlling shareholder or a relative
of a controlling shareholder, any extraordinary transaction, compensation, exemption, indemnification and insurance of the office holder must be
approved by our audit committee, board of directors and shareholders, supported by the vote of at least one-third of the shares of the shareholders
that have no personal interest in the transaction voting on the matter, or provided that the total number of shares held by shareholders that have no
personal interest in the transaction that voted against the proposal did not exceed one percent of all of the voting rights in the company.
• The requirement that director nominees either be selected or recommended for the board of directors’ selection, either by (a) a majority of
independent directors or (b) a nominations committee comprised solely of independent directors. Instead, we follow Israeli law and practice, in
accordance with which directors may be recommended by our board of directors for election by our shareholders.
If the “controlled company” exemptions would cease to be available to us under the NASDAQ Listing Rules, we may instead elect to follow Israeli law
instead of the foregoing NASDAQ requirements, as described below.
NASDAQ Listing Rules and Home Country Practice
Under NASDAQ Listing Rule 5615(a)(3), foreign private issuers, such as our company, are permitted to follow certain home country corporate
governance practices instead of certain provisions of the NASDAQ Listing Rules. As a foreign private issuer listed on the NASDAQ Global Select Market, we
may follow home country practice with regard to, among other things, the composition of the board of directors, compensation of officers, director nomination
process and quorum at shareholders’ meetings. We may also follow home country practice with regard to, the NASDAQ Listing Rules requirement to 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). A foreign private issuer that elects to follow a home country practice instead of any of such
NASDAQ requirements must submit to NASDAQ, in advance, a written statement from an independent counsel in such issuer’s home country certifying that the
issuer’s practices are not prohibited by the home country’s laws.
In June 2005, we provided NASDAQ with a notice of non-compliance with respect to the NASDAQ requirement that independent directors have
regularly scheduled meetings at which only independent directors are present. Instead, we follow Israel law and practice, under which independent directors are
not required to hold executive sessions.
84
PART III
ITEM 17. FINANCIAL STATEMENTS
Not applicable.
ITEM 18. FINANCIAL STATEMENTS
Index to Financial Statements
Report of Independent Registered Public Accounting Firm
Consolidated Balance Sheets
Consolidated Statements of Income
Statements of Changes in Equity
Consolidated Statements of Cash Flows
Notes to Consolidated Financial Statements
Appendix to Consolidated Financial Statements – Details of Subsidiaries and Affiliate
ITEM 19. EXHIBITS
Index to Exhibits
Exhibit
Description
F-1
F-2
F-3 – F-4
F- 5
F- 6
F-7 – F-9
F-10– F-53
F-54
1.1
1.2
2.1
4.1
4.2
4.3
4.4
4.5
4.6
Memorandum of Association of the Registrant1
Articles of Association of the Registrant2
Specimen of Ordinary Share Certificate3
2000 Employee Stock Option Plan4
2007 Incentive Compensation Plan5
Asset Purchase Agreement dated February 1, 2010, between Fusion LLC, a wholly-owned subsidiary of the Registrant, and a U.S.-based IT services
company6
Securities Purchase Agreement dated December 20, 2010, among the Registrant and the purchasers whose names appear on the signature page thereto,
providing for the issuance of shares and warrants pursuant to Regulation D under the Securities Act of 19337
Securities Purchase Agreement dated December 20, 2010, among the Registrant and the purchasers whose names appear on the signature page
thereto, providing for the issuance of shares and warrants pursuant to Regulation S under the Securities Act of 19337
Securities Purchase Agreement dated December 20, 2010, among the Registrant and the purchasers whose names appear on the signature page thereto,
providing for the issuance of shares pursuant to Regulation S under the Securities Act of 19337
4.7
8.1
12.1
Form of Warrant7
List of Subsidiaries of the Registrant
Certification of Chief Executive Officer pursuant to Rule 13a-14(a) under the Securities Exchange Act of 1934, as amended
85
12.2
13.1
13.2
15.1
15.2
15.3
15.4
15.5
15.6
(1)
(2)
(3)
(4)
(5)
(6)
(7)
Certification of Chief Financial Officer pursuant to Rule 13a-14(a) under the Securities Exchange Act of 1934, as amended
Certification of Chief Executive Officer pursuant to 18 U.S.C. 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
Certification of Chief Financial Officer pursuant to 18 U.S.C. 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 & Co., Chartered Accountants (relating to Magic Software Enterprises (UK) Limited)
Consent of Levy Cohen & Co., Chartered Accountants (relating to Hermes Logistics Technologies Limited)
Consent of KDA Audit Corporation (relating to Magic Software Japan K.K.)
Consent of Verstegen accountants en adviseurs (relating to Magic Benelux B.V.)
Consent of Mária Négyessy, Registered Auditors (relating to Magic (Onyx) Magyarország Szoftverház Kft.)
Filed as Exhibit 3.2 to the registrant’s registration statement on Form F-1, registration number 33-41486, and incorporated herein by reference.
Filed as Exhibit 3.1 to the registrant’s registration statement on Form F-1, registration number 33-41486, and incorporated herein by reference.
Filed as Exhibit 4.1 to the registrant’s registration statement on Form F-1, registration number 33-41486, and incorporated herein by reference.
Filed as Exhibit 10.2 to the registrant’s annual report on Form 20-F for the year ended December 31, 2000, and incorporated herein by reference.
Filed as Exhibit 4.3 to the registrant’s annual report on Form 20-F for the year ended December 31, 2007, and incorporated herein by reference.
Filed as Exhibit 4.4 to the registrant’s annual report on Form 20-F for the year ended December 31, 2009, and incorporated herein by reference.
Filed as an Item to the registrant’s Form 6-K for the month of December 2010, filed on December 23, 2010, and incorporated herein by reference.
86
MAGIC SOFTWARE ENTERPRISES LTD. AND ITS SUBSIDIARIES
CONSOLIDATED FINANCIAL STATEMENTS
AS OF DECEMBER 31, 2010
IN U.S. DOLLARS
INDEX
Report of Independent Registered Public Accounting Firm
Consolidated Balance Sheets
Consolidated Statements of Income
Statements of Changes in Equity
Consolidated Statements of Cash Flows
Notes to Consolidated Financial Statements
Appendix to Consolidated Financial Statements - Details of Subsidiaries and Affiliate
- - - - - - - - - - - -
F-1
Page
F-2
F-3 - F-4
F-5
F-6
F-7 - F-9
F-10 - F-53
F-54
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Shareholders and the Board of Directors of
MAGIC SOFTWARE ENTERPRISES LTD.
We have audited the accompanying consolidated balance sheets of Magic Software Enterprises Ltd. ("the Company") and its subsidiaries as of
December 31, 2009 and 2010, and the related consolidated statements of income, changes in equity and cash flows for each of the three years in the period ended
December 31, 2010. These financial statements are the responsibility of 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 14% and 12% as of
December 31, 2009 and 2010, respectively, and total revenues of 39%, 36% and 24% for the years ended December 31, 2008, 2009 and 2010, 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. 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 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, 2009 and 2010, and the related consolidated results
of their operations and their cash flows for each of the three years in the period ended December 31, 2010, in conformity with U.S. generally accepted accounting
principles.
Tel-Aviv, Israel
March 17, 2011
/s/Kost Forer Gabbay & Kasierer
KOST FORER GABBAY & KASIERER
A Member of Ernst & Young Global
F-2
MAGIC SOFTWARE ENTERPRISES LTD. AND ITS SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
U.S. dollars in thousands
ASSETS
CURRENT ASSETS:
Cash and cash equivalents
Short-term bank deposits
Available-for-sale marketable securities (Note 4)
Trade receivables (net of allowance for doubtful accounts of $ 2,376 and $ 2,276 at December 31, 2009 and 2010,
$
respectively)
Other accounts receivable and prepaid expenses (Note 6)
Current assets of discontinued operations (Note 18)
Total current assets
LONG-TERM RECEIVABLES:
Severance pay fund
Other long-term receivables
Total long-term receivables
PROPERTY AND EQUIPMENT, NET (Note 7)
IDENTIFIABLE INTANGIBLE ASSETS, NET (Note 8)
GOODWILL (Note 9)
December 31,
2009
2010
$
24,350
13,838
3,680
12,004
3,869
27
57,768
404
749
1,153
1,762
10,133
16,735
43,661
24
2,857
17,801
4,029
-
68,372
325
2,141
2,466
1,827
14,661
24,624
The accompanying notes are an integral part of the consolidated financial statements.
F-3
$
87,551 $
111,950
MAGIC SOFTWARE ENTERPRISES LTD. AND ITS SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
U.S. dollars in thousands (except share and per share data)
LIABILITIES AND EQUITY
CURRENT LIABILITIES:
Short-term credit and current maturities of long-term loans (Note 10)
Trade payables
Accrued expenses and other accounts payable (Note 11)
Deferred revenues
Current liabilities of discontinued operations (Note 18)
Total current liabilities
ACCRUED SEVERANCE PAY
LONG-TERM LOANS (Note 12)
LIABILITIES DUE TO ACQUISITION ACTIVITIES (Note 3)
COMMITMENTS AND CONTINGENCIES (Note 16)
EQUITY (Note 14):
Magic Software Enterprises Shareholders' equity:
Share capital:
Ordinary shares of NIS 0.1 par value -
Authorized: 50,000,000 shares at December 31, 2009 and 2010;
Issued and Outstanding: 31,936,426 and 35,909,606 shares at December 31, 2009 and 2010, respectively
Additional paid-in capital
Accumulated other comprehensive income
Accumulated deficit
Total equity
Total liabilities and equity
The accompanying notes are an integral part of the consolidated financial statements.
F-4
December 31,
2009
2010
$
$
43
2,662
25,159
1,569
314
29,747
606
10
-
9
2,994
15,028
1,526
-
19,557
536
2
2,990
683
101,099
74
794
122,917
447
(44,668)
(35,293)
57,188
88,865
$
87,551
$
111,950
CONSOLIDATED STATEMENTS OF INCOME
U.S. dollars in thousands (except per share data)
MAGIC SOFTWARE ENTERPRISES LTD. AND ITS SUBSIDIARIES
Revenues (Note 19):
Software
Maintenance and technical support
Consulting services
Total revenues
Cost of revenues:
Software
Maintenance and technical support
Consulting services
Total cost of revenues
Gross profit
Operating costs and expenses:
Research and development, net (Note 15a)
Selling and marketing
General and administrative
Other income, net
Total operating costs and expenses
Operating income
Financial income (expenses), net (Note 15b)
Other income, net
Income before taxes on income
Tax benefit (taxes on income) (Note 13)
Income after taxes on income
Equity in losses of affiliates
Net income
Net earnings per share attributable to Magic Software Enterprises Shareholders (Note 17):
Net basic earnings per share
Net diluted earnings per share
The accompanying notes are an integral part of the consolidated financial statements.
F-5
Year ended December 31,
2009
2008
2010
$
20,913 $
14,530
26,537
$
17,261
13,821
24,268
61,980
55,350
4,898
2,263
19,978
5,388
2,189
18,687
27,139
26,264
34,841
29,086
2,350
17,357
10,867
-
1,310
15,308
8,210
1,972
30,574
22,856
4,267
448
-
4,715
(199)
4,516
(8)
6,230
238
42
6,510
(334)
6,176
-
$
4,508 $
6,176 $
$
$
0.14 $
0.19 $
0.14 $
0.19 $
20,111
14,407
54,060
88,578
5,320
2,070
44,058
51,448
37,130
2,072
17,526
8,194
-
27,792
9,338
(224)
159
9,273
102
9,375
-
9,375
0.29
0.29
MAGIC SOFTWARE ENTERPRISES LTD. AND ITS SUBSIDIARIES
STATEMENTS OF CHANGES IN ' EQUITY
U.S. dollars in thousands (except share data)
Balance as of January 1, 2008
31,542,050
$
675
$
100,443
$
(496)
$
(39,378)
$
61,244
Share
capital
Number
Share
capital
Amount
Additional
paid-in
capital
Accumulated
other
comprehensive
income (loss)
Accumulated
deficit
Other
comprehensive
income
Total
shareholders'
equity
Exercise of stock options
Stock-based compensation expenses
Other comprehensive income:
Foreign currency translation adjustments
Realized and unrealized loss from available-for-sale securities
Reclassified to the statement of operation due to other than
temporary impairment loss from marketable securities
Net income
Total comprehensive income
351,830
-
-
-
-
7
-
-
-
-
225
244
-
-
-
Balance as of December 31, 2008
31,893,880
682
100,912
Exercise of stock options
Stock-based compensation expenses
Dividend
Other comprehensive income:
Foreign currency translation adjustments
Unrealized gain from derivative instruments, net
Realized and unrealized gain from available-for-sale securities
Net income
Total comprehensive income
Balance as of December 31, 2009
Exercise of stock options
Issuance of Ordinary shares (net of issuance expenses $1,080)
Stock-based compensation expenses
Other comprehensive income:
Foreign currency translation adjustments
Unrealized gain from derivative instruments, net
Realized and unrealized gain from available-for-sale securities
Net income
Total comprehensive income
42,546
-
-
-
-
-
-
31,936,426
685,564
3,287,616
-
-
-
-
-
1
-
-
-
-
-
-
683
19
92
-
-
-
-
-
57
130
-
-
-
-
-
101,099
1,320
20,198
300
-
-
-
-
-
-
519
(39)
47
-
31
-
-
-
(136)
5
174
-
74
-
-
-
416
6
(49)
-
-
-
-
-
4,508
(34,870)
-
-
(15,974)
-
-
-
6,176
(44,668)
-
-
-
-
-
-
9,375
$
$
$
$
$
$
519
(39)
47
4,508
5,035
(136)
5
174
6,176
6,219
416
6
(49)
9,375
9,748
232
244
519
(39)
47
4,508
66,755
58
130
(15,974)
(136)
5
174
6,176
57,188
1,339
20,290
300
416
6
(49)
9,375
Balance as of December 31, 2010
35,909,606
$
794
$
122,917
$
447
$
(35,293)
$
88,865
The accompanying notes are an integral part of the consolidated financial statements.
F-6
CONSOLIDATED STATEMENTS OF CASH FLOWS
U.S. dollars in thousands
Cash flows from operating activities:
Net income from continuing operations
Adjustments to reconcile net income from continuing
operations to net cash provided by operating activities from
continuing operations:
Depreciation and amortization
Equity in losses of affiliates
Accrued severance pay, net
Gain on sale of property and equipment
Stock-based compensation expenses
Amortization of marketable securities premium, accretion of discount and other than temporary
losses, net
Loss (gain) on sale of marketable securities
Gain on sale of subsidiary's operation
Loss on sale of affiliate
Decrease (increase) in trade receivables, net
Decrease in other accounts receivable and prepaid expenses
Increase (decrease) in trade payables
Increase (decrease) in accrued expenses and other accounts payable
Decrease in deferred revenues
Deferred income taxes, net
MAGIC SOFTWARE ENTERPRISES LTD.
AND ITS SUBSIDIARIES
Year ended December 31,
2009
2008
2010
$
4,508 $
6,176
$
9,375
3,615
8
(172)
-
244
211
(53)
(170)
61
(395)
142
(82)
437
(660)
-
4,560
-
(20)
(2,249)
130
57
3
(105)
-
1,368
747
(363)
(1,281)
(433)
(1,056)
4,566
-
11
-
300
(17)
3
(146)
-
(198)
241
26
2,103
(85)
(1,782)
Net cash provided by operating activities from continuing operations
7,694
7,534
14,397
Net cash used in operating activities from discontinued operations
(21)
-
-
Net cash provided by operating activities
7,673
7,534
14,397
The accompanying notes are an integral part of the consolidated financial statements.
F-7
CONSOLIDATED STATEMENTS OF CASH FLOWS
U.S. dollars in thousands
Cash flows from investing activities:
Capitalized software development costs
Purchase of property and equipment
Acquisition of subsidiaries
Proceeds from sale of subsidiary's operation
Proceeds from sale of affiliated company
Proceeds from sale of property and equipment
Proceeds from sale of marketable securities
Proceeds from maturity of marketable securities
Investment in marketable securities
Prepayment on investment
Proceeds from short-term and long-term deposits
Loans to employees and other deposit ,net
Investment in short-term bank deposit
Net cash used in investing activities from continuing operations
Net cash provided by investing activities from discontinued operations
Net cash provided by (used in) investing activities
Cash flows from financing activities:
Proceeds from exercise of options by employees
Issuance of Ordinary shares
Dividend paid
Short-term credit, net
Repayment of long-term loans
Net cash provided by (used in) financing activities
Effect of exchange rate changes on cash and cash equivalents from continuing operations
Increase (decrease) in cash and cash equivalents from continuing operations
Cash and cash equivalents at the beginning of the year
MAGIC SOFTWARE ENTERPRISES LTD.
AND ITS SUBSIDIARIES
Year ended December 31,
2009
2008
2010
(2,577)
(737)
-
170
150
-
1,182
410
(1,032)
-
174
-
(1,810)
(4,070)
15,336
11,266
232
-
(3,432)
(171)
(3,371)
(458)
15,131
12,178
(3,128)
(580)
-
105
-
5,277
107
1,400
(1,604)
-
24,191
-
(36,144)
(10,376)
-
(10,376)
58
-
(2)
(118)
(62)
(55)
(2,959)
27,309
(3,595)
(583)
(10,225)
146
-
414
361
830
(393)
(1,160)
15,077
28
(1,291)
(391)
-
(391)
1,339
20,290
(15,974)
(717)
(23)
4,915
390
19,311
24,350
Cash and cash equivalents at end of the year
$
27,309
$
24,350
$
43,661
The accompanying notes are an integral part of the consolidated financial statements.
F-8
CONSOLIDATED STATEMENTS OF CASH FLOWS
U.S. dollars in thousands
Supplementary information on investing and financing activities not involving cash flows:
Non-cash activities:
Payable on account of dividend
Deferred payment
Contingent payment
Receivables from sale of property
Supplemental disclosure of cash flow activities:
Cash paid during the year for:
Income taxes
Interest
As discussed in Note 3:
MAGIC SOFTWARE ENTERPRISES LTD.
AND ITS SUBSIDIARIES
Year ended December 31,
2009
2008
2010
$
$
$
$
$
$
-
$
-
$
-
$
-
$
15,974
$
-
-
$
-
$
450
$
4,645
414
-
534 $
873
$
15 $
3
$
709
131
• On January 17, 2010, the Company purchased a consulting and staffing services business of a U.S.-based IT services company, for total consideration of $
13,683 to be paid over a three year period.
• On October 31, 2010, the Company purchased an 88% interest in a consulting and staffing services company and has an option to increase its holdings to
100%. The Company paid a cash purchase price of $ 1,600.
The accompanying notes are an integral part of the consolidated financial statements.
F-9
MAGIC SOFTWARE ENTERPRISES LTD.
AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands (except for share data)
NOTE 1:- GENERAL
Magic Software Enterprises Ltd. ("the Company"), an Israeli company, and its subsidiaries ("the Group") develop market and support software
development and deployment technology ("the Magic technology") and applications developed using the Magic technology. Magic technology
enables enterprises to accelerate the process of building and deploying software applications that can be rapidly customized and integrated with
existing systems. The principal markets of the Group are Europe, United States, Japan and Israel (see Note 19). Through its subsidiaries the
Company provides flexible and comprehensive range of consulting and staffing services in the areas of infrastructure design and delivery,
application development, technology planning and implementation services.
For information about the Company's holdings in subsidiaries and affiliates, see Appendix A to the consolidated financial statements.
NOTE 2: - SIGNIFICANT ACCOUNTING POLICIES
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 generally accepted accounting principles requires management to make
estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. The most significant assumptions
are employed in estimates used in determining values of goodwill and identifiable intangible assets, revenue recognition, tax assets and tax
positions, legal contingencies, and stock-based compensation costs. Actual results could differ from those estimates.
Financial statements in United States dollars
A substantial portion of the revenues and expenses of the Company and certain of its subsidiaries is generated in U.S. dollars ("dollar"). The
Company's management believes that the dollar is the currency of the primary economic environment in which the Company and its subsidiaries
operate. Thus, the functional and reporting currency of the Company and certain of its subsidiaries is the dollar.
Accordingly, 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.
F-10
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands (except for share data)
NOTE 2:- SIGNIFICANT ACCOUNTING POLICIES (Cont.)
MAGIC SOFTWARE ENTERPRISES LTD.
AND ITS SUBSIDIARIES
The financial statements of foreign subsidiaries, whose functional currency is not the U.S. dollar, have been translated into dollars. All balance sheet
amounts have been translated using the exchange rates in effect at each balance sheet dates. 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 accumulated other
comprehensive income (loss) in equity.
Principles of consolidation
The consolidated financial statements include the accounts of the Company and its wholly-owned and majority-owned subsidiaries. Intercompany
balances and transactions, including profit from intercompany sales not yet realized outside the Group, have been eliminated upon consolidation.
Cash and cash equivalents
Cash and cash equivalents include short-term highly liquid investments that are readily convertible to cash with original maturities of three months
or less, at the date acquired.
Short-term deposits
Short-term deposits include deposits with original maturities of more than three months and less than one year. Such deposits are presented at cost
(including accrued interest) which approximates their fair value. The deposits as of December 31, 2009 are in U.S. dollars and in Hungarian Forint
and bear interest at an average annual rate of 0.96% and 5.72%, respectively.
The deposits as of December 31, 2010 are in Hungarian Forint and bear interest at an average annual rate of 3.75%.
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 and reported at fair value.
Debt and equity securities that are designated as available-for-sale are stated at fair value, with unrealized gains and losses reported in accumulated
other comprehensive income (loss), a separate component of shareholders' equity. 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.
F-11
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands (except for share data)
NOTE 2: - SIGNIFICANT ACCOUNTING POLICIES (Cont.)
MAGIC SOFTWARE ENTERPRISES LTD.
AND ITS SUBSIDIARIES
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.
Declines in fair value of available-for-sale equity securities that are considered other-than-temporary, based on criteria described in SAB Topic 5M,
"Other Than Temporary Impairment of Certain Investments in Equity Securities“, are charged to earnings (based on the entire difference between
fair value and amortized cost). Factors considered in making such a determination include the duration and severity of the impairment, the financial
condition and near-term prospects of the issuer, and the intent and ability of the Company to retain its investment for a period of time sufficient to
allow for any anticipated recovery in market value.
For declines in value of debt securities, effective as of January 1, 2009, the Company applies an amendment to ASC 320. Under the amended
impairment model, an other-than-temporary impairment loss is deemed to exist and recognized in earnings if the Company intends to sell or if it is
more likely than not that it will be required to sell, a debt security, before recovery of its amortized cost basis.
If the criteria mentioned above does not exist, the Company evaluates the collectability of the security in order to determine if the security is other
than temporary impaired.
For debt securities that are deemed other-than-temporary impaired, the amount of impairment recognized in the statement of operations is limited to
the amount related to "credit losses" (the difference between the amortized cost of the security and the present value of the cash flows expected to be
collected), while impairment related to other factors is recognized in other comprehensive income. No such impairments have been recognized in all
period presented.
Property and equipment, net
Property and equipment are stated at cost, net of accumulated depreciation. Depreciation is calculated by the straight-line method over the estimated
useful lives of the assets, at the following annual rates:
Buildings*
Computers and peripheral equipment
Office furniture and equipment
Motor vehicles
Software
Leasehold improvements
Years
25
3
7 - 15 (mainly 7)
7
3 – 5 (mainly 5)
Over the shorter of the lease term or useful economic life
*
In December 2009, the Company sold its Israel-based headquarters' office building, for the sum of $ 5,200 in cash (see Note 7).
F-12
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands (except for share data)
NOTE 2: - SIGNIFICANT ACCOUNTING POLICIES (Cont.)
Business Combinations
MAGIC SOFTWARE ENTERPRISES LTD.
AND ITS SUBSIDIARIES
Effective as of January 1, 2009, the Company adopted the amended ASC 805, "Business Combinations". ASC 805 requires recognition of assets
acquired, liabilities assumed, and non-controlling interest in the acquiree at the acquisition date, measured at their fair values as of that date. ASC
805 also requires the fair value of acquired in-process research and development to be recorded as intangibles with indefinite lives, contingent
consideration to be recorded on the acquisition date, and restructuring and acquisition-related deal costs to be expensed as incurred. Any excess of
the fair value of net assets acquired over purchase price and any subsequent changes in estimated contingencies are to be recorded in earnings. In
addition, changes in valuation allowance related to acquired deferred tax assets and in acquired income tax position are to be recognized in earnings.
ASC 805 is applied prospectively for all business combinations occurring after January 1, 2009, except for changes in valuation allowance related to
deferred tax assets and changes in acquired income tax position originating from business combinations that occurred prior to the effective date of
ASC 805, which are recognized in earnings following the adoption date.
Variable Interest Entities
ASC 810, "Consolidation" provides a framework for identifying variable interest entities, or VIEs and determining when a company should include
the assets, liabilities, non-controlling interests and results of activities of a VIE in its consolidated financial statements.
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 adopted an updated guidance for the consolidation of VIEs. The new guidance replaces the prior
quantitative approach for identifying which enterprise should consolidate a VIE, which was based on which enterprise was exposed to a majority of
the risks and rewards, with a qualitative approach, based on which 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 about whether an enterprise should consolidate a VIE is required to be evaluated continuously as changes to
existing relationships or future transactions. The adoption of ASC 810 did not have a material impact on the Company’s financial position or results
of operations.
F-13
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands (except for share data)
NOTE 2: - SIGNIFICANT ACCOUNTING POLICIES (Cont.)
MAGIC SOFTWARE ENTERPRISES LTD.
AND ITS SUBSIDIARIES
The U.S. based consulting and staffing services business that the Company acquired through one of its wholly owned subsidiaries on January 17,
2010 is considered to be a VIE. The subsidiary 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.
Impairment of long-lived assets and intangible assets subject to amortization
The Company'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 assets to be held and used is
measured by a comparison of the carrying amount of an asset to the future undiscounted cash flows expected to be generated by the assets. If such
assets are considered to be impaired, the impairment to be recognized is measured by the amount by which the carrying amount of the assets
exceeds the fair value of the assets. During the years ended December 31, 2008, 2009 and 2010, no impairment were identified.
As required by ASC 820, "Fair Value Measurements," effective as of January 1, 2009, the Company applies assumptions that marketplace
participants would consider in determining the fair value of long-lived assets (or asset groups).
Intangible assets with finite lives are comprised of distribution rights, acquired technology and customer relationships, and are amortized over their
useful life using a method of amortization that reflects the pattern in which the economic benefits of the intangible assets are consumed or otherwise
used up. Distribution rights and acquired technology were amortized on a straight line basis and customer relationships was amortized on a cash
generating basis, over a period of four to 15 years.
Segments
Historically, the Company reported its results on the basis of one reportable segment, which was comprised of two reporting units: CoreTech and
Magic. During 2010, as a result of a change in the Company’s management structure associated with the acquisition of a U.S-based consulting and
staffing services business in January 2010, the Company began to report its results on the basis of two reportable business segments: proprietary
software technology and IT professional services, each of which is comprised of one reporting unit. The reporting unit of the IT professional
services segment is comprised of the Company’s three IT consulting and staffing subsidiaries, Coretech Consulting Group LLC, Fusion Solutions
LLC and Xsell Resources Inc., and the reporting unit of the proprietary software technology segment is comprised of all of the Company’s other
subsidiaries.
F-14
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands (except for share data)
NOTE 2: - SIGNIFICANT ACCOUNTING POLICIES (Cont.)
Goodwill
Goodwill has been recorded as a result of past acquisitions.
MAGIC SOFTWARE ENTERPRISES LTD.
AND ITS SUBSIDIARIES
The Company follows ASC 350, "Intangibles – Goodwill and Other". The Company performs its goodwill annual impairment test for its two
reporting units (identified under the segments above) at December 31 of each year, or more often if indicators of impairment are present.
As required by ASC 350, the Company compares the fair value of each reporting unit to its carrying value ('step 1') If the fair value exceeds the
carrying value of the reporting unit net assets, goodwill is considered not impaired, and no further testing is required. If the carrying value exceeds
the fair value of the reporting unit, then the implied fair value of goodwill is determined by subtracting the fair value of all the identifiable net assets
from the fair value of the reporting unit. An impairment loss is recorded for the excess, if any, of the carrying value of goodwill over its implied fair
value ('step 2').
Effective as of January 1, 2009, as required by ASC 820, "Fair Value Measurements and disclosures", the Company applies assumptions that market
place participants would consider in determining the fair value of each reporting unit.
In order to determine the fair value of its two reporting units, the Company implemented an 'income approach'. Under the income approach expected
future cash flows are discounted to their present value using an appropriate rate of return. Judgments and assumptions related to future cash flows
(projected revenues, operating expenses, and capital expenditures), future short-term and long-term growth rates, and weighted average cost of
capital, which are based on management's internal assumptions, and believed to be similar to those of market participants and to represent both the
specific risks associated with the business, and capital market conditions, are inherent in developing the discounted cash flow model.
In addition, the Company compared its market capitalization, including an estimated control premium that an investor would be willing to pay for a
controlling interest in the Company, to the fair value of the Company's reporting units, based on a third-party valuation study. The determination of
a control premium requires the use of judgment and is based primarily on comparable industry and deal-size transactions, related synergies and other
benefits. The Company's reconciliation of the gap between its market capitalization and the aggregate fair value of the Company depends on various
factors, some of which are qualitative and involve management judgment, including stable relatively high backlog coverage and experience in
meeting operating cash flow targets.
Since the fair value of the Company's two reporting units exceeded their carrying amount, no impairment losses were recognized in 2008, 2009 or
2010 (See Note 9).
F-15
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands (except for share data)
NOTE 2: - SIGNIFICANT ACCOUNTING POLICIES (Cont.)
Revenue recognition
MAGIC SOFTWARE ENTERPRISES LTD.
AND ITS SUBSIDIARIES
The Company derives its revenues from licensing the rights to use its software, related professional services, maintenance and technical support as
well as from other IT professional services. The Company sells its products primarily through its direct sales force and indirectly through
distributors.
As required by ASC 985-605, the Company determines the value of 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 is recognized as
revenue.
The Company accounts for its software sales in accordance with ASC 985-605, "Software Revenue Recognition". Software license revenue is
recognized 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 revenue included in multiple element arrangements is deferred and recognized on a straight-line basis over the term of the
maintenance and support agreement.
The Company generally does not grant a right of return to its customers. When a right of return exists, the Company defers revenue until the right of
return expires, at which time revenue is recognized provided that all other revenue recognition criteria are met.
Revenue from professional services consists of billable hours for services provided and is recognized as the services are rendered.
Arrangements that include professional services bundled with licensed software and other software related elements, are evaluated to determine
whether those services are essential to the functionality of other elements of the arrangement. When services are considered essential to the software,
revenues under the arrangement are recognized using contract accounting based on ASC 605-35, "Construction-Type and Production-Type
Contracts", on a percentage of completion method based on inputs measures. 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 for the entire contract. During the years ended December 31,
2008, 2009 and 2010, no such estimated losses were identified.
F-16
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands (except for share data)
NOTE 2: - SIGNIFICANT ACCOUNTING POLICIES (Cont.)
MAGIC SOFTWARE ENTERPRISES LTD.
AND ITS SUBSIDIARIES
When professional services are not considered essential to the functionality of other elements of the arrangement, revenue allocable to the consulting
services is recognized as the services are performed, using VSOE fair value. In most cases, the Company has determined that the services are not
considered essential to the functionality of other elements of the arrangement.
Deferred revenue includes unearned amounts received under maintenance and support contracts, and amounts received from customers but not yet
recognized as revenues.
Research and 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".
The Company and its subsidiaries establish technological feasibility upon completion of a detailed program design or working model.
Research and development costs incurred in the process of developing product improvements are generally charged to expenses as incurred.
Capitalized software costs are amortized on a product by product basis. Amortization equals the greater of the amount computed using the: (i) ratio
of current gross revenues from sales of the software to the total of current and anticipated future gross revenues from sales of that software, or (ii)
the straight-line method over the estimated useful life of the product (three to five years). The Company assesses the recoverability of these
intangible assets on a regular basis by determining whether the amortization of the asset over its remaining life can be recovered through
undiscounted future operating cash flows from the specific software product sold. During the years ended December 31, 2008, 2009 and 2010, no
impairment losses were identified.
Severance pay
The Company's and its Israeli subsidiary's obligation for severance pay with respect to their Israeli employees (for the period for which the
employees were not included under Section 14 of the Severance Pay Law, 1963) is calculated pursuant to the Israeli Severance Pay Law and
employee agreements based on the most recent salary of the employees multiplied by the number of years of employment and are presented on an
undiscounted basis (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 Company's obligation for all of its Israeli employees is fully provided for by monthly deposits with insurance policies and by an
accrual. The value of these policies is recorded as an asset in the Company's balance sheet.
F-17
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands (except for share data)
NOTE 2: - SIGNIFICANT ACCOUNTING POLICIES (Cont.)
MAGIC SOFTWARE ENTERPRISES LTD.
AND ITS SUBSIDIARIES
The carrying value of deposited funds includes profits (losses) accumulated up to the balance sheet date. The deposited funds may be withdrawn
only upon the fulfillment of the obligations pursuant to the Israeli Severance Pay Law or labor agreements.
The Company's and its Israeli subsidiary's agreements with their Israeli employees are in accordance with Section 14 of the Severance Pay Law -
1963, mandating that upon termination of such employees' employment, all the amounts accrued in their insurance policies shall be released to them
instead of severance compensation. Upon release of deposited amounts to the employee, no additional liability exists between the parties regarding
the matter of severance pay and no additional payments shall be made by the Company to the employee.
Severance expenses for the years ended December 31, 2008, 2009 and 2010 amounted to approximately $ 584, $ 403 and $ 461, respectively.
Advertising expenses
Advertising expenses are charged to selling and marketing expenses, as incurred. Advertising expenses for the years ended December 31, 2008,
2009 and 2010 amounted to $ 255, $ 227 and $ 320, respectively.
Income taxes
The Company and its subsidiaries account for income taxes in accordance with ASC 740, "Income Taxes". The ASC prescribes the use of the "asset
and liability" method whereby deferred tax asset and liability account balances are determined based on differences between financial reporting and
tax bases of assets and liabilities and are measured using the enacted tax rates and laws that will be in effect when the differences are expected to
reverse. The Company and its subsidiaries provide a valuation allowance, if necessary, to reduce deferred tax assets to their estimated realizable
value. Deferred tax assets are classified as current or non-current according to the expected reversal dates.
Effective as of January 1, 2007, the Company utilizes 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 the Company evaluates a tax position taken or expected to be
taken in a tax return by determining if the weight of available evidence indicates that it is more likely than not that, based on its technical merits, the
tax position will be sustained on audit, including resolution of any related appeals or litigation processes. The second step is to measure the tax
benefit as the largest amount that is more than 50% likely to be realized upon ultimate settlement with the tax authorities. The Company accrued
interest and penalties related to unrecognized tax benefits in its provisions for income taxes. The total amount of gross unrecognized tax benefits
(taxes on income) for the years ended December 31, 2008, 2009 and 2010 was $ 16, $ (217) and $ 874, respectively.
F-18
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands (except for share data)
NOTE 2: - SIGNIFICANT ACCOUNTING POLICIES (Cont.)
Basic and diluted net earnings per share
MAGIC SOFTWARE ENTERPRISES LTD.
AND ITS SUBSIDIARIES
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
Ordinary shares considered outstanding during the year, in accordance with ASC 260, "Earnings Per Share.”
A portion of the outstanding stock options have been excluded from the calculation of the diluted earnings per share because such securities are anti-
dilutive. The total weighted average number of Ordinary shares related to the outstanding options excluded from the calculations of diluted earnings
per share was 1,397,389, 1,477,526 and 615,838 for the years ended December 31, 2008, 2009 and 2010, respectively.
Stock-based compensation
The Company accounts for stock-based compensation in accordance with ASC 718, "Compensation - Stock Compensation.”
ASC 718 requires companies to estimate the fair value of equity-based payment awards on the date of grant using an option-pricing model. The
value of the portion of the award that is ultimately expected to vest is recognized as an expense over the requisite service periods in the Company's
consolidated statement of income.
The Company recognizes compensation expenses for the value of its awards, which have graded vesting based on the accelerated method over the
requisite service period of each of the awards, net of estimated forfeitures.
The Company measures and recognizes 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"). The Binomial model for option pricing requires a number of assumptions, of which the
most significant are the suboptimal exercise factor and expected stock price volatility. The suboptimal exercise factor is estimated based on
employees' historical option exercise behavior. 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. Expected volatility is based upon actual historical stock price movements and
was calculated as of the grant dates for different periods, since the Binomial model can be used for different expected volatilities for different
periods. 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. The Company has no foreseeable plans to pay dividends and therefore use an expected dividend yield of zero in the option pricing model.
The expected term of options granted is derived from the output of the option valuation model and represents the period of time that options granted
are expected to be outstanding. Estimated forfeitures are based on actual historical pre-vesting forfeitures.
F-19
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands (except for share data)
NOTE 2: - SIGNIFICANT ACCOUNTING POLICIES (Cont.)
MAGIC SOFTWARE ENTERPRISES LTD.
AND ITS SUBSIDIARIES
For awards with performance conditions, compensation cost is recognized over the requisite service period if it is 'probable' that the performance
conditions will be satisfied, as defined in ASC 450-20-20, "Loss Contingencies."
The fair value for the Company's stock options granted to employees and directors was estimated using the following weighted-average
assumptions:
Dividend yield
Expected volatility
Risk-free interest rate
Expected forfeiture (employees)
Expected forfeiture (executives)
Contractual term of up to
Suboptimal exercise multiple (employees)
Suboptimal exercise multiple (executives)
2008
2009
2010
0%
56% - 65%
1.83%
11%
8%
10 years
2.48
3
0%
63%
2.73%-3.7%
9.8%
7.5%
10 years
2.35
3
0%
61.2% - 62.8%
2.53%-3.71%
9.7%
7.1%
10 years
2.3
3
During the years ended December 31, 2008, 2009 and 2010, the Company recognized stock-based compensation expense related to employee stock
options in the amount of $ 244, $ 130 and $ 300, respectively, as follows:
Cost of revenue
Research and development
Selling and marketing
General and administrative
Total stock-based compensation expense
Concentrations of credit risk
2008
Year ended
December 31,
2009
2010
$
$
$
20
13
112
99
244 $
2 $
26
32
70
130 $
2
61
75
162
300
Financial instruments that potentially subject the Company and its subsidiaries to concentration of credit risk consist principally of cash and cash
equivalents, short-term deposits, marketable securities and trade receivables.
The Company's cash and cash equivalents and short-term deposits are invested primarily in deposits with major banks worldwide, mainly in the
United States and Israel, however, 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. The Company believes that such institutions are of high rating and therefore bear low risk.
F-20
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands (except for share data)
NOTE 2:- SIGNIFICANT ACCOUNTING POLICIES (Cont.)
MAGIC SOFTWARE ENTERPRISES LTD.
AND ITS SUBSIDIARIES
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 considered its portfolios in foreign banks to be
well-diversified.
Trade receivables of the Company and its subsidiaries are derived from sales to customers located primarily in the United States, Europe, Japan and
Israel. The Company performs ongoing credit evaluations of its customers and to date, has not experienced any material losses. An allowance for
doubtful accounts is determined with respect to those amounts that the Company has determined to be doubtful of collection. The doubtful accounts
expense for the years ended December 31, 2008, 2009 and 2010 was $ 444, $ 267 and $ 204, respectively.
The Company has entered into foreign exchange forward contracts intended to protect against the changes in value of forecasted non-dollar currency
cash flows related to salary and related expenses. These derivative instruments are designed to offset the Company's non-dollar currency exposure
(See Note 2 below).
Discontinued operations
Under ASC 205-20, "Presentation of Financial Statements - Discontinued Operation", when a component of an entity, as defined by the master
glossary of ASC, has been disposed of or is classified as held for sale, the results of its operations, including the gain or loss on the disposed
component, should be classified as discontinued operations and the assets and liabilities of such component should be classified as assets and
liabilities attributed to discontinued operations; that is, provided that the operations, assets and liabilities and cash flows of the component have been
eliminated from the Company's consolidated operations and the Company will no longer have any significant continuing involvement in the
operations of the component. (See Note18).
Fair Value Measurements
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;
F-21
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands (except for share data)
NOTE 2:- SIGNIFICANT ACCOUNTING POLICIES (Cont.)
MAGIC SOFTWARE ENTERPRISES LTD.
AND ITS SUBSIDIARIES
Level 2 -
significant other observable inputs based on market data obtained from sources independent of the reporting entity;
Level 3 -
Unobservable inputs which are supported by little or no market activity (for example cash flow modeling inputs based on
assumptions).
The fair value hierarchy also requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when
measuring fair value. The Company categorized each of its fair value measurements in one of these three levels of hierarchy.
Assets and liabilities measured at fair value on a recurring basis are comprised of marketable securities and foreign currency forward contracts. (See
Note 5).
The carrying amounts reported in the balance sheet for cash and cash equivalents, 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.
Comprehensive income (loss)
The Company accounts for comprehensive income (loss) in accordance with ASC 220, "Comprehensive Income." This Statement establishes
standards for the reporting and display of comprehensive income and its components in a full set of general purpose financial statements.
Comprehensive income (loss) generally represents all changes in equity during the period except those resulting from investments by, or
distributions to, shareholders. The Company determined that its items of other comprehensive income (loss) relate to gain and loss on foreign
currency translation adjustments, unrealized gain and loss on derivative instruments designated as hedges and unrealized gain and loss on available-
for-sale marketable securities.
Derivative instruments
A significant portion of the Company's revenues, expenses and earnings is exposed to changes in foreign exchange rates. Depending on market
conditions, foreign exchange risk also is managed through the use of derivative financial instruments and foreign currency debt. 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 NIS exchange rate fluctuations.
F-22
MAGIC SOFTWARE ENTERPRISES LTD.
AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands (except for share data)
NOTE 2:- SIGNIFICANT ACCOUNTING POLICIES (Cont.)
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 the Company are designed to reduce the market risk associated with the exposure of its underlying transactions
to fluctuations in currency exchange rates.
The notional amounts of outstanding foreign exchange forward contracts at December 31, 2010 are summarized below:
Euro
Japanese Yen
New Israeli Shekel
Forward contracts
Buy
Sell
$
$
1,003 $
1,066
845
2,914 $
1,015
1,106
834
2,955
At December 31, 2010, the effective portion of the Company’s cash flow hedges before tax effect was $11, all of which is expected to be
reclassified from accumulated other comprehensive income to revenues within the next 12 months.
F-23
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands (except for share data)
NOTE 2:- SIGNIFICANT ACCOUNTING POLICIES (Cont.)
The following tables present fair value amounts and gains and losses of derivative instruments and related hedged items:
MAGIC SOFTWARE ENTERPRISES LTD.
AND ITS SUBSIDIARIES
Cash flow hedging:
Foreign exchange forward contracts
Derivatives not designated as hedging:
Foreign exchange forward contracts
Total derivatives
Cash flow hedging:
Foreign exchange forward contracts
Derivatives not designated as hedging:
Foreign exchange forward contracts
Total derivatives
Fair Values of Derivative Instruments
Assets
December 31,
Balance Sheet Item
2009
2010
"Other accounts
receivable and
prepaid expenses"
$
5
$
11
" Accrued expenses
and other accounts
payable "
5
10
$
(51)
(40)
$
Gain (loss)
recognized in
other
comprehensive
income
December 31,
2010
Gain (loss)
Recognized in Statements of Income
Statements
of
Income Item
Year ended December 31,
2010
2009
$
"operating
expenses"
$
11
90
$
(55)
"Financial
expenses, net"
38
$
128 $
4
51
F-24
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands (except for share data)
NOTE 2:- SIGNIFICANT ACCOUNTING POLICIES (Cont.)
Reclassification:
MAGIC SOFTWARE ENTERPRISES LTD.
AND ITS SUBSIDIARIES
Certain amounts in prior years' financial statements have been reclassified to conform with the current year's presentation.
Impact of Recently Issued Accounting Standards
1.
Adoption of New Accounting Standards during the period:
ASU 2010-06 - In January 2010, the FASB updated the "Fair Value Measurements Disclosures" codified in ASC 820. More specifically, this
update require (a) an entity to disclose separately the amounts of significant transfers in and out of Levels 1 and 2 fair value measurements
and to describe the reasons for the transfers; and (b) information about purchases, sales, issuances and settlements to be presented separately
(i.e. present the activity on a gross basis rather than net) in the reconciliation for fair value measurements using significant unobservable
inputs (Level 3 inputs). This update clarifies existing disclosure requirements for the level of disaggregation used for classes of assets and
liabilities measured at fair value, and requires disclosures about the valuation techniques and inputs used to measure fair value for both
recurring and nonrecurring fair value measurements using Level 2 and Level 3 inputs. As applicable to the Company, this update became
effective as of the first quarter ended December 31, 2010, except for the gross presentation of the Level 3 roll forward information, which is
required for annual reporting of December 31, 2010. The adoption of the new guidance did not have a material impact on the Company’s
consolidated financial statements.
ASU 2010-09 - In February 2010, the FASB issued ASU 2010-09 - amendments to certain recognition and disclosure requirements of
Subsequent Events codified in ASC 855. This update removes the requirement to disclose the date through which subsequent events were
evaluated in both originally issued and reissued financial statements for "SEC Filers." ASU 2010-09 still requires the Company to evaluate
subsequent events through the date that the financial statements are issued. The adoption of the new guidance did not have a material impact
on the Company’s consolidated financial statements.
F-25
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands (except for share data)
NOTE 2:- SIGNIFICANT ACCOUNTING POLICIES (Cont.)
2.
Recently issued accounting Standards:
MAGIC SOFTWARE ENTERPRISES LTD.
AND ITS SUBSIDIARIES
ASU 2009-13 - In October 2009, the FASB issued amendments to the accounting and disclosure for revenue recognition of multiple
deliverable revenue arrangements codified in ASC 605-25. These amendments, modify the criteria for recognizing revenue in multiple
element arrangements and require companies to develop a best estimate of the selling price to separate deliverables and allocate arrangement
consideration using the relative selling price method. Additionally, the amendments eliminate the residual method for allocating arrangement
considerations. These amendments establish a selling price hierarchy for determining the selling price of a deliverable, which is based on: a)
vendor-specific objective evidence; b) third-party evidence; or c) estimates. In addition, this guidance significantly expands required
disclosures related to a vendor's multiple-deliverable revenue arrangements. ASU 2009-13 is effective prospectively for revenue
arrangements entered into or materially modified in fiscal years beginning on or after June 15, 2010, with early adoption permitted. The
Company did not early adopt this guidance and does not believe that the adoption of the new guidance will have material impact on its
consolidated financial statements.
ASU 2010-29 - In December 2010, the FASB Emerging Issues Task Force issued ASU 2010-29, Disclosure of Supplementary Pro Forma
Information for Business Combinations codified in ASC 805, "Business Combinations." This ASU responds to diversity in practice about the
interpretation of the pro forma disclosure requirements for business combinations. When a public entity's business combinations are material
on an individual or aggregate basis, the notes to its financial statements must provide pro forma revenue and earnings of the combined entity
as if the acquisition date(s) had occurred as of the beginning of the annual reporting period. The ASU clarifies that if comparative financial
statements are presented, the pro forma disclosures for both periods presented (the year in which the acquisition occurred and the prior year)
should be reported as if the acquisition had occurred as of the beginning of the comparable prior annual reporting period only and not as if it
had occurred at the beginning of the current annual reporting period. The ASU also expands the supplemental pro forma disclosure
requirements to include a description of the nature and amount of any material non-recurring adjustments that are directly attributable to the
business combination. The Company has determined not to early adopt the new guidance.
F-26
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands (except for share data)
NOTE 3:- BUSINESS COMBINATION, SIGNIFICANT TRANSACTION AND SALE OF BUSINESS
MAGIC SOFTWARE ENTERPRISES LTD.
AND ITS SUBSIDIARIES
a.
b.
In 2007, the Company decided to liquidate its Italian subsidiary. Consequently, the results of Magic Software Enterprises Italy S.r.l ("Magic
Italy") have been classified as discontinued operations for the years ended December 31, 2008 and 2009 (see also Note 18). In March 2009, a
liquidator was appointed by the Company for Magic Italy.
The Company purchased a consulting and staffing services business of a U.S-based IT services company on January 17, 2010, for a total
consideration of $ 13,683, of which $ 8,625 was paid upon closing and the remaining $ 5,058 is to be paid over a three year period, of which,
$ 506 is contingent upon the acquired business meeting revenue goals, and $ 4,552 in deferred payments. The Company believes that there is
sufficient probability that such goals will be met. The Company classified both the deferred payment and contingent considerations as a
liability as of the date of the transaction.
In accordance with ASC 805-30-35-1 the Company re-measures the contingent consideration based on the fair value at each reporting date
until the contingency is resolved or the payment is made, while the changes in fair value are recognized in earnings in the financial expenses
using the interest method over the period. The deferred payment was recorded at present value and is amortized using the interest method
during the relevant period into financial expenses.
The acquired business provides a comprehensive range of consulting and staffing services for the telecom, network communications and the
information technology industry. The cash consideration of $ 8,625 was financed with the Company's own resources. The Company believes
that the acquisition of this business activity will enable it to expand its presence in the U.S. market and leverage its relationships with top tier
customers as well as take advantage of the synergies between its existing IT services and the acquired operation.
The acquisition was accounted for by the purchase method. The results of operations were included in the consolidated financial statements of
the Company commencing January 17, 2010. The consideration for the acquisition was attributed to net assets on the basis of fair value of
assets acquired and liabilities assumed, based on an appraisal performed by management, which included a number of factors, including the
assistance of independent appraisers.
F-27
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands (except for share data)
NOTE 3:- BUSINESS COMBINATION, SIGNIFICANT TRANSACTION AND SALE OF BUSINESS (Cont.)
The following table summarizes the estimated fair values of the assets acquired and liabilities assumed, with reference to the acquisition as of
January 17, 2010:
MAGIC SOFTWARE ENTERPRISES LTD.
AND ITS SUBSIDIARIES
Working capital, including deferred tax liability
Fixed assets
Goodwill
Customer relationships
Total assets acquired
Liabilities due to acquisition activities
Net assets acquired
$
$
3,925
54
4,831
4,873
13,683
5,058
8,625
Identifiable intangible assets, including customer relationship were valued using a variation of the income approach known as the "Multi-
Period Excess Earnings Approach." This method utilized a forecast of expected cash inflows, cash outflows and contributory charges for
economic returns on tangible and intangible assets employed.
An amount of $ 4,850 of the purchase price was allocated to customer relationships, as described above. The Company amortizes its
intangible assets over periods ranging from four to 15 years, based on two types of customers' relationship identified.
Below are certain unaudited pro forma combined statements of income data for the year ended December 31, 2009, as if the acquisition had
occurred January 1, 2009, after giving effect to (a) purchase accounting adjustments, including amortization of identifiable intangible assets,
mainly customers' relationship. This pro forma financial information is not necessarily indicative of the combined results that would have
been attained had the acquisition taken place at the beginning of 2009, nor is it necessarily indicative of future results. Pro forma for 2010
was not provided since the activity was consolidated in the 2010 statement of income for 11.5 months, which was considered as fully
consolidated for 2010.
Total revenues
Net Income
Earnings per share
Basic
Diluted
F-28
Year ended
December 31,
2009
Unaudited
$
$
$
$
79,137
7,948
0.25
0.25
MAGIC SOFTWARE ENTERPRISES LTD.
AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands (except for share data)
NOTE 3:- BUSINESS COMBINATION, SIGNIFICANT TRANSACTION AND SALE OF BUSINESS (Cont.)
C.
On October 31, 2010, the Company purchased an 88% interest in a consulting and staffing services company and has an option to increase its
holdings to 100%. The Company paid a cash purchase price of $ 1,600. The acquired company provides a comprehensive range of consulting
and staffing services for information technology industry. The Company believes that the acquisition of this business activity will enable it to
expand its presence in the U.S. market and leverage its relationships with top tier customers as well as take advantage of the synergies
between its existing IT services and the acquired operation.
The acquisition was accounted for by the purchase method. The results of operations were included in the consolidated financial statements of
the Company commencing October 31, 2010.
The following table summarizes the estimated fair values of the assets acquired and liabilities assumed, with reference to the acquisition as of
October 31, 2010:
Fixed assets
Provisional allocation *)
Total assets acquired
Working deficit
Short term bank credit
Total liabilities assumed
Net assets acquired
*)
Price purchase allocation was not finalized
F-29
$
66
2,508
2,574
257
717
974
$
1,600
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands (except for share data)
NOTE 4:- MARKETABLE SECURITIES
MAGIC SOFTWARE ENTERPRISES LTD.
AND ITS SUBSIDIARIES
The Group invests in marketable debt and equity securities, which are classified as available-for-sale. The following is a summary of marketable
securities:
Amortized
cost
Unrealized
losses
Unrealized
gains
Market
value
Amortized
cost
Unrealized
losses
Unrealized
gains
Market
value
2009
2010
December 31,
Available-for-sale:
Governmental bonds
Commercial bonds
Equity funds
Total available-for-sale marketable
securities
$
407 $
2,888
118
$
-
-
-
$
37
175
55
$
444
3,063
173
407 $
2,114
118
$
-
-
-
$
37
90
91
$
3,413 $
- $
267 $
3,680 $
2,639 $
- $
218 $
444
2,204
209
2,857
The amortized costs of available-for-sale debt securities at December 31, 2010, by contractual maturities, are shown below:
Due in one year or less
Due between one year to five years
Amortized
cost
Unrealized gains (losses)
Gains
Losses
Estimated
fair value
$
1,525
$
996
40 $
87
$
2,521 $
127 $
$
-
-
- $
1,565
1,083
2,648
The actual maturity dates may differ from the contractual maturities because debtors may have the right to call or prepay obligations without
penalties.
The following is the change in the other comprehensive income of available-for-sale securities during 2010:
Other comprehensive income from available-for-sale securities as of January 1, 2010
Reclassification to earnings of realized gain from available-for-sale securities
Unrealized gain from available-for-sale securities
Other comprehensive income from available-for-sale securities as of December 31, 2010
F-30
Other
Comprehensive
Income
$
$
267
(62)
13
218
MAGIC SOFTWARE ENTERPRISES LTD.
AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands (except for share data)
NOTE 5:- FAIR VALUE MEASUREMENTS
In accordance with ASC 820, the Company measures its investment in marketable securities and foreign currency derivative contracts at fair value.
Marketable securities are classified within Level 1. This is because these assets are valued using quoted prices in active markets. 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 Company's financial assets measured at fair value on a recurring basis, excluding accrued interest components, consisted of the following types
of instruments as of the following dates:
Assets:
Government bonds
Corporate bonds
Equity fund
Total financials assets
Liabilities:
Foreign currency derivative contracts
Contingent consideration
Total financials liabilities
Assets:
Government bonds
Corporate bonds
Foreign currency derivative contracts
Equity fund
December 31, 2010
Fair value measurements using input type
Level 1
Level 2
Level 3
Total
$
$
$
$
$
$
444
186
209
$
-
2,018
-
$
-
-
-
444
2,204
209
839
$
2,018
$
-
$
2,857
-
$
40
$
$
-
480
-
$
40
$
480
$
40
480
520
December 31, 2009
Fair value measurements using input type
Level 1
Level 2
Level 3
Total
$
444
195
-
173
- $
2,868
10
-
$
-
-
-
-
444
3,063
10
173
Total financials assets
$
812 $
2,878 $
- $
3,690
Fair value measurements using significant unobservable inputs (Level 3):
Opening balance
Contingent consideration
Amortization
Closing balance
Year ended
December 31,
2010
$
$
-
414
66
480
F-31
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands (except for share data)
NOTE 6: - OTHER ACCOUNTS RECEIVABLE AND PREPAID EXPENSES
Short-term lease deposits and other accounts receivable
Advanced payments due to M&A activities (Note 20)
Receivable from sale of properties
Prepaid expenses
Government authorities
Deferred taxes
Employee loans
Other
NOTE 7:- PROPERTY AND EQUIPMENT
Cost:
Buildings and leasehold improvements
Computers and peripheral equipment
Office furniture and equipment
Motor vehicles
Software
Accumulated depreciation:
Buildings and leasehold improvements
Computers and peripheral equipment
Office furniture and equipment
Motor vehicles
Software
Depreciated cost
MAGIC SOFTWARE ENTERPRISES LTD.
AND ITS SUBSIDIARIES
December 31,
2009
2010
$
$
925
-
1,306
574
390
561
63
50
501
1,160
-
589
597
1,099
66
17
$
3,869
$
4,029
December 31,
2009
2010
$
$
290
9,171
1,704
136
2,075
342
9,121
1,663
125
2,353
13,376
13,604
107
8,781
1,302
125
1,299
160
8,723
1,219
72
1,603
11,614
11,777
$
1,762
$
1,827
In 2009, the Company sold its office buildings in Hungary and Israel for $ 535 and $ 5,200, respectively. As a result of the sales, the Company
recorded net gains of approximately $ 289 and $ 1,960, respectively.
F-32
MAGIC SOFTWARE ENTERPRISES LTD.
AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands (except for share data)
NOTE 7:- PROPERTY AND EQUIPMENT (Cont.)
Depreciation expenses amounted to $ 1,015, $ 910 and $ 626 for the years ended December 31, 2008, 2009 and 2010, respectively. As for charges,
see Note 16c.
NOTE 8:-
IDENTIFIABLE INTANGIBLE ASSETS
a.
Intangible assets:
Original amounts:
Capitalized software costs
Customer relationship and acquired technology
Accumulated amortization:
Capitalized software costs
Customer relationship and acquired technology
Intangible assets, net
December 31,
2009
2010
$
40,812
$
1,907
44,501
6,757
42,719
51,258
30,679
1,907
34,126
2,471
32,586
36,597
$
10,133 $
14,661
b.
Amortization expenses amounted to $ 2,600, $ 3,650 and $ 3,940 for the years ended December 31, 2008, 2009 and 2010, respectively.
c.
The estimated future amortization expense of other intangible assets as of December 31, 2010 is as follows:
2011
2012
2013
2014
2015
Thereafter
F-33
$
3,561
3,371
2,662
1,455
989
2,623
$
14,661
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands (except for share data)
NOTE 9:- GOODWILL
Changes in the carrying amount of goodwill for the years ended December 31, 2010 and 2009 according to the Company's reporting units are as
follows:
MAGIC SOFTWARE ENTERPRISES LTD.
AND ITS SUBSIDIARIES
As of January 1, 2009
Foreign currency translation adjustments
As of December 31, 2009
Investments in subsidiaries
Foreign currency translation adjustments
IT
professional
services
Proprietary
software
products
Total
$
5,089 $
11,740
$
16,829
-
(94)
(94)
5,089
7,339
-
11,646
-
550
16,735
7,339
550
As of December 31, 2010
$
12,428 $
12,196 $
24,624
The Company determined the fair value of each reporting unit using the income approach. The material assumptions used for the income approach
for 2010 were five years of projected net cash flows, a discount rate of 15% and a long-term growth rate of 3.0%. The Company considered
historical rates and current market conditions when determining the discount and growth rates to use in its analyses. If these estimates or their
related assumptions change in the future, the Company may be required to record impairment charges for its goodwill.
NOTE 10:- SHORT-TERM CREDIT AND CURRENT MATURITIES OF LONG-TERM LOANS
Classified by currency, linkage terms and interest rates, the credit and loans are as follows:
Short-term credit:
In, or linked to, U.S. dollar
Current maturities of long-term loans
Interest rate
December 31,
2009
2010
2009
2010
6.11%-6.25%
-
$
$
22 $
21
43 $
-
9
9
F-34
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands (except for share data)
NOTE 11:- ACCRUED EXPENSES AND OTHER ACCOUNTS PAYABLE
Employees and payroll accruals
Accrued expenses
Dividend payable
Deferred payments related to acquisition cost
Government authorities and other
NOTE 12:- LONG-TERM LOANS
Long-term loans are comprised as follows:
In Japanese Yen
Less - current maturities
NOTE 13:- TAXES ON INCOME
a.
Israeli taxation:
MAGIC SOFTWARE ENTERPRISES LTD.
AND ITS SUBSIDIARIES
December 31,
2009
2010
$
$
3,409
3,683
15,974
-
2,093
5,092
3,714
-
1,906
4,316
$
25,159 $
15,028
Interest rate
December 31,
2009
2010
2009
2010
1.86%
1.72% $
$
31
(21)
$
10
$
11
(9)
2
1.
The rate of the Israeli corporate tax is as follows: 2008 - 27%, 2009 - 26%, 2010 - 25%. Tax at a reduced rate of 25% applies on capital
gains arising after January 1, 2003, instead of the regular tax rate.
In July 2009, the Israeli Parliament passed the Law for Economic Efficiency (Amended Legislation for Implementing the Economic
Plan for 2009 and 2010), 2009, which prescribes, among others, an additional gradual reduction in the rates of the Israeli corporate tax
and capital gains tax starting 2011 to the following tax rates: 2011 - 24%, 2012 - 23%, 2013 - 22%, 2014 - 21%, 2015 - 20%, 2016 and
thereafter - 18%.
F-35
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands (except for share data)
NOTE 13:- TAXES ON INCOME (Cont.)
MAGIC SOFTWARE ENTERPRISES LTD.
AND ITS SUBSIDIARIES
2. Measurement of taxable income under the Income Tax (Inflationary Adjustments) Law, 1985:
According to the law, through 2007, the Company's and its Israeli subsidiaries results for tax purposes were adjusted for the changes in
the Israeli consumer price index ("CPI"). As explained in Note 2, the financial statements are measured in dollars. The difference
between the annual change in the Israeli CPI and in the NIS/dollar exchange rate causes a difference between taxable income and the
income before taxes reflected in the financial statements.
In accordance ASC 740-10-25-3 (f), the Company has not provided deferred income taxes on the above difference resulting from
changes in exchange rates and indexing for tax purposes.
In February 2008, the Israeli parliament passed an amendment to the Income Tax (Inflationary Adjustments) Law, 1985, which limits
the scope of the law starting 2008 and thereafter. Since 2008, the results for tax purposes are measured in nominal values, excluding
certain adjustments for changes in the Israeli CPI carried out in the period up to December 31, 2007. Adjustments relating to capital
gains such as for sale of property (betterment) and securities continue to apply until disposal. Since 2008, the amendment to the law
includes, among others, the cancellation of the inflationary additions and deductions and the additional deduction for depreciation.
3.
Tax benefits under the Law for the Encouragement of Capital Investments, 1959 ("the Law"):
Certain production and development facilities of the Company have been granted Approved Enterprise status pursuant to the Law,
which provides certain tax benefits to its investment programs. For these programs, the Company has elected the alternative benefits
track, waiving grants in return for tax exemptions. Pursuant to the alternative benefits track, the income of the Company derived from
the Approved Enterprise programs is tax-exempt for periods of two to four years and will be eligible for reduced tax rates for
additional periods of five to eight years (such reduced tax rates are dependent on the level of foreign investments in the Company).
The period of benefits for those expansions has not yet commenced.
The tax benefit periods provided end at the earlier of 12 years from the commencement of production or 14 years from receipt of the
approval for the Approved Enterprise. As of December 31, 2010, the Company has not generated any taxable income under any of its
"Approved Enterprises" programs and thus the benefit period has not yet commenced and these benefits have not yet commenced.
F-36
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands (except for share data)
NOTE 13:- TAXES ON INCOME (Cont.)
MAGIC SOFTWARE ENTERPRISES LTD.
AND ITS SUBSIDIARIES
The benefits available to an Approved Enterprise are conditional upon the fulfillment of conditions stipulated in the Law and its
regulations and the criteria set forth in the specific letters of approval. In the opinion of the Company's management, the Company has
been in full compliance with the conditions of the above programs through December 31, 2010.
If dividends were to be distributed out of tax-exempt profits deriving from an Approved Enterprise, the Company would be liable for
corporate tax at a rate of 25%.
On April 1, 2005, an amendment to the Investment Law came into effect ("the Amendment") that has significantly changed the
provisions of the Investment Law. The Amendment enacted major changes in the manner in which tax benefits are awarded under the
Investment Law so that companies are no longer required to get the Investment Center's prior approval to qualify for tax benefits. Such
an enterprise is a "Privileged Enterprise", rather than the previous terminology of Approved Enterprise. The period of tax benefits for a
new Privileged Enterprise commences in the "Year of Commencement", which is the later of: (1) the year of election, or (2) the year in
which taxable income is first generated by the company after the election year.
The Amendment limits the scope of enterprises, which may be approved by the Investment Center by setting criteria for the approval
of a facility as a Privileged Enterprise such as the provision generally requiring that at least 25% of the Privileged Enterprise's income
will be derived from export.
In December 2010, the Israeli Parliament passed the Law for Economic Policy for 2011 and 2012 (Amended Legislation), which
among other things, amends the Law effective as of January 1, 2011. According to the new legislation, the benefit tracks under the
Law were modified and a uniform tax rate applies to all of the Company's income from a Privileged Enterprise. The Company may
elect to irrevocably implement the amendment (while waiving benefits provided under the Law as currently in effect) and subsequently
would be subject to the amended tax rates that are: 2011 and 2012 - 15% (in development area A - 10%), 2013 and 2014 - 12.5% (in
development area A - 7%) and in 2015 and thereafter - 12% (in development area A - 6%).
4.
The Company has received final tax assessments through the year 2005.
F-37
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands (except for share data)
NOTE 13:- TAXES ON INCOME (Cont.)
b.
Non-Israeli subsidiaries:
MAGIC SOFTWARE ENTERPRISES LTD.
AND ITS SUBSIDIARIES
Non-Israeli subsidiaries are taxed according to the tax laws in their respective domiciles of residence. If earnings are distributed to Israel in
the form of dividends or otherwise, the Company may be subject to additional Israeli income taxes (subject to an adjustment for foreign tax
credits) and foreign withholding taxes. The Company's management has determined that it will not distribute any amounts of its undistributed
tax income as a dividend. The Company intends to reinvest the amount of such tax income. Accordingly, no deferred income taxes have been
provided.
c.
Net operating loss carryforwards:
As of December 31, 2010, the Company and its Israeli subsidiaries had operating loss carryforwards of $ 35,128, which can be carried
forward and offset against taxable income in the future for an indefinite period.
The Company's subsidiaries in Europe had estimated total available tax loss carryforwards of $ 6,638 as of December 31, 2010, to offset
against future taxable income for 15-20 years.
d.
Income before taxes on income:
Domestic
Foreign
Year ended
December 31,
2009
2008
2010
$
1,370 $
3,345
1,225
5,285
$
4,288
4,985
$
4,715 $
6,510 $
9,273
F-38
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands (except for share data)
NOTE 13:- TAXES ON INCOME (Cont.)
e. Taxes on income:
Taxes on income consist of the following:
Current:
Domestic
Foreign
Deferred taxes:
Domestic
Foreign
MAGIC SOFTWARE ENTERPRISES LTD.
AND ITS SUBSIDIARIES
Year ended
December 31,
2009
2008
2010
$
16 $
183
1,082
$
308
199
1,390
446
1,234
1,680
-
-
-
(1,056)
(2,681)
899
Tax benefit (taxes on income)
$
(199) $
(334) $
102
f.
Deferred income taxes:
Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial
reporting purposes and the amounts used for income tax purposes. Significant components of the Company and its subsidiaries deferred tax
assets are as follows:
Net operating loss carryforwards, net
Allowances and reserves
Less: valuation allowance
Net deferred tax assets
Deferred taxes are included in the consolidated balance sheets, as follows:
Current assets
Non-current assets
* Reclassified
F-39
December 31,
2009
2010
$
10,405*
647
$
12,630
(9,996) *
9,358
800
10,158
(7,320)
$
1,056
$
2,838
$
$
$
561
495
1,099
1,739
1,056
$
2,838
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands (except for share data)
NOTE 13:- TAXES ON INCOME (Cont.)
MAGIC SOFTWARE ENTERPRISES LTD.
AND ITS SUBSIDIARIES
The net change in valuation allowance for the year ended December 31, 2010 was $ 2,676 mainly as a result of a change in management's
estimation with respect to utilization of certain carryforward losses.
g.
Reconciliation of the theoretical tax expense to the actual tax expense:
The main reconciling items of the statutory tax rate of the Company (2009 - 26% and 2010 - 25%) to the effective tax rate (22% and 24%,
respectively) are valuation allowances provided for deferred tax assets (in all reported periods). During these years tax expenses mainly
represent taxes for a limited number of subsidiaries that do not have net operating loss carryforwards.
Reconciling items between the 2010 statutory tax rate (25%) of the Company and the effective tax rate is presented in the following table:
Year ended
December 31,
2009
2010
Income before taxes, as reported in the consolidated statements of operations
$
6,510
$
9,273
Statutory tax rate
Theoretical tax expenses on the above amount at the Israeli statutory tax rate
Tax adjustment in respect of different tax rates
Deferred taxes on losses for which full valuation allowance was provided in the past
$
Changes in valuation allowance
Taxes in respect of prior years
Nondeductible expenses
Uncertain tax position and other differences
26%
25%
$
1,693
418
(2,148)
(1,056)
1,131
120
176
2,318
525
(1,663)
(2,676)
318
181
895
h.
The Company adopted an amendment to ASC 740 "Income Taxes" with regards to tax uncertainties as of January 1, 2007. During the years
ended December 31, 2008, 2009 and 2010, the Company recorded $ 16, $ (217) and $ 874 of tax expenses (income), respectively, as a result
of the amendment.
$
334
$
(102)
F-40
MAGIC SOFTWARE ENTERPRISES LTD.
AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands (except for share data)
NOTE 13:- TAXES ON INCOME (Cont.)
The Company has not recorded any material interest or penalties during any of the years presented.
A reconciliation of the beginning and ending balances of the total amounts of gross unrecognized tax benefits is as follows:
Gross unrecognized tax positions at January 1, 2009
Decrease in tax positions taken in prior years
Increase in tax positions taken in current year
Gross unrecognized tax positions at December 31, 2009
Decrease related to settlement with tax authorities
Increase in tax positions taken in current year
$
596
(229)
12
379
-
815
Gross unrecognized tax benefits at December 31, 2010
$
1,194
The Company recognizes interest and penalties related to unrecognized tax benefits in taxes on income. During the year ended December 31,
2010, the Company recorded $59, for interest and penalties expenses related to uncertain tax positions. The liability for unrecognized tax
benefits included accrued interest and penalties of $ 21 and $ 59 at December 31, 2009 and 2010, respectively.
As of December 31, 2010, the entire amount of unrecognized tax benefit could affect the company's income tax provision and the effective
tax rate.
NOTE 14:- SHAREHOLDERS' EQUITY
a.
The Ordinary shares of the Company are listed on the NASDAQ Global Select Market in the United States and are traded on the Tel-Aviv
Stock Exchange in Israel.
b.
Issuance of Ordinary shares:
On December 23, 2010, the Company issued 3,287,616 Ordinary shares at a price of $ 6.5 per share and in a total amount of $ 20,290 net of
issuance expenses. The shares were issued to institutional investors in a private placement. In addition, certain of the purchasers received
warrants to purchase up to an aggregate of 1,134,231 Ordinary shares at an exercise price of $ 8.26 per share. The warrants are exercisable as
of six months from the date of issuance, have a term of three years, and the exercise price is subject to future adjustment for various events,
such as stock splits or dividend distributions.
F-41
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands (except for share data)
NOTE 14:- SHAREHOLDERS' EQUITY (Cont.)
c.
Stock Option Plans:
MAGIC SOFTWARE ENTERPRISES LTD.
AND ITS SUBSIDIARIES
Under the Company's 1991, 2000 and 2007 Stock Option Plans, as amended (collectively, "the Plans"), options may be granted to employees,
officers, directors and consultants of the Company and its subsidiaries. Pursuant to the 1991, 2000 and 2007 Stock Option Plans, the
Company reserved for issuance 6,750,000, 4,600,000 and 1,500,000 Ordinary shares, respectively. As of December 31, 2010, an aggregate of
523,249 Ordinary shares of the Company are still available for future grants under the Plans. Each option granted under the Plans is
exercisable for a period of ten years from the date of the grant of the option. The 2000 Plan expired on May 5, 2010 and the 2007 Plan will
expire on August 1, 2017. No options were granted under the 1991 Plan after July 31, 2001. The exercise price for each option is determined
by the Board of Directors and set forth in the Company's award agreement. Unless determined otherwise by the Board of Directors, the option
exercise price shall be equal to or higher than the share market price at the grant date. The options generally vest over three years. Any option
that is forfeited or canceled before expiration becomes available for future grants under the Plans.
A summary of employee option activity under the Plans as of December 31, 2009 and changes during the year ended December 31, 2010 are
as follows:
Number
of options
Weighted
average
exercise
price
$
1,927,199
498,000
(685,564)
(75,447)
1,664,188
$
933,688
$
1,583,891
$
2.28
1.44
1.95
5.59
2.02
2.59
2.06
Weighted
average
remaining
contractual
term
(in years)
Aggregate
intrinsic value
5.51
$
1,246
6.49
$
6,928
4.48
$
3,352
6.36
$
6,528
Outstanding at January 1, 2010
Granted
Exercised
Forfeited
Outstanding at December 31, 2010
Exercisable at December 31, 2010
Vested and expected to vest at December 31, 2010
F-42
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands (except for share data)
NOTE 14:- SHAREHOLDERS' EQUITY (Cont.)
A summary of employee option activity under the Plans as of December 31, 2010 whose vesting is contingent upon meeting various
departmental and Companywide performance goals, including revenue growth and net gain index is as follows:
MAGIC SOFTWARE ENTERPRISES LTD.
AND ITS SUBSIDIARIES
Outstanding at January 1, 2010
Granted
Exercised
Forfeited
Outstanding at December 31, 2010
Exercisable at December 31, 2010
Vested and expected to vest at December 31, 2010
Weighted
average
exercise
price
Number
of options
Weighted
average
remaining
contractual
term
(in years)
Aggregate
intrinsic
value
$
267,291
-
(48,125)
(41,250)
177,916 $
77,916 $
163,602 $
1.72
-
1.97
1.97
1.59
1.92
1.59
$
8.19
-
7.32 $
6.81 $
7.32 $
156
-
816
332
751
A summary of employee option activity under the Plans as of December 31, 2008 and 2009 and changes during the years ended on those
dates, are as follows:
Year ended December 31,
2008
2009
Number
of options
Weighted
average
exercise price
Number
of options
Weighted
average
exercise
price
Outstanding at the beginning of the year
Granted
Exercised
Forfeited
$
3,673,528
145,000
$
(351,830) $
(1,076,653) $
2.22
1.12
0.65
2.35
$
2,390,045
350,000
$
(42,546) $
(770,300) $
Outstanding at the end of the year
2,390,045
$
2.31
1,927,199
$
Exercisable at the end of the year
1,581,051
$
2.53
1,512,823
$
2.31
0.88
1.36
1.79
2.28
2.56
Vested and expected to vest at December 31, 2008 and
2009,respectively
2,113,510
$
2.37
1,881,429
$
2.31
F-43
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands (except for share data)
NOTE 14:- SHAREHOLDERS' EQUITY (Cont.)
MAGIC SOFTWARE ENTERPRISES LTD.
AND ITS SUBSIDIARIES
During 2007 and 2008, the Company granted certain executives and other key employees, options to purchase 825,000 Ordinary shares and
100,000 Ordinary shares, respectively, with vesting contingent upon meeting various departmental and company wide performance goals,
including revenue growth and net gain index. The options have an exercise price equal to the fair market value of the Company's Ordinary
shares on the date of grant, contingently vest over a period of four years, and are for a term of ten years. The fair value of those options was
estimated on the date of grant using the same option valuation model used for the other options granted. If such goals are not met, no
compensation cost is recognized and any recognized compensation cost is reversed. The inputs for expected volatility, expected dividends,
expected term and risk-free rate used in estimating those options' fair value are the same as those noted in the table related to options issued
under the Plans.
On November 4, 2009, as part of a termination agreement, the Company extended the exercise period of outstanding options to purchase
62,500 Ordinary shares for an additional one year period from date of termination. The Company accounted for the period extension as a
modification and recorded an additional compensation expense $ 10, during 2009.
The weighted-average grant-date fair value of options granted during the years ended December 31, 2008, 2009 and 2010 was $ 0.68, $ 0.87
and $ 1.88, 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, 2010. This amount is changed based on the market value of
the Company's Ordinary shares. Total intrinsic value of options exercised for the years ended December 31, 2008, 2009 and 2010 was $ 383,
$ 26 and $ 1,895, respectively. As of December 31, 2010, there was $ 89 of total unrecognized compensation cost related to non-vested share-
based compensation arrangements granted under the Plans. This cost is expected to be recognized over a period of approximately four years.
F-44
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands (except for share data)
NOTE 14:- SHAREHOLDERS' EQUITY (Cont.)
MAGIC SOFTWARE ENTERPRISES LTD.
AND ITS SUBSIDIARIES
The options outstanding as of December 31, 2010, have been separated into ranges of exercise price categories, as follows:
Exercise
price
Options
outstanding
as of
December 31,
2010
Weighted
average
remaining
contractual
life (years)
Weighted
average
exercise price
Options
exercisable
as of
December 31,
2010
Weighted
average
exercise price
of exercisable
options
0-1
1-2
2-3
3-4
4-5
5-6
350,576
499,237
393,667
228,458
144,750
47,500
1,664,188
8
6
8
4
3
3
6
$
$
$
$
$
$
$
0.12
1.36
2.30
3.76
4.05
5.95
$
75,576
$
341,737
$
135,667
$
188,458
144,750
$
47,500 $
2.02
933,688 $
0.58
1.35
2.36
3.85
4.05
5.95
2.59
d.
Accumulated other comprehensive income:
2008
December 31,
2009
2010
Accumulated realized and unrealized gain on available-for-sale securities, net
Accumulated foreign currency translation adjustments
Other
$
93 $
(62)
-
$
267
(198)
5
Total other comprehensive income
$
31 $
74 $
218
218
11
447
e.
On December 30, 2009, the Company declared a dividend distribution of $ 0.50 per share ($ 15,974 in the aggregate) which was paid on
January 25, 2010.
F-45
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands (except for share data)
NOTE 15:- SELECTED STATEMENTS OF INCOME DATA
a.
Research and development costs, net:
Total costs
Less - capitalized software costs
Research and development, net
b.
Financial income, net:
Interest income net of bank charges
Interest expenses related to liabilities in connection with acquisition
Other-than-temporary losses of marketable securities
Gain (loss) arising from foreign currency translation
Financial income(expenses), net
NOTE 16:- COMMITMENTS AND CONTINGENCIES
a.
Lease commitments:
MAGIC SOFTWARE ENTERPRISES LTD.
AND ITS SUBSIDIARIES
Year ended
December 31,
2009
2008
2010
$
4,927 $
(2,577)
4,438
(3,128)
$
5,667
(3,595)
$
2,350 $
1,310 $
2,072
Year ended
December 31,
2009
2008
2010
$
485 $
-
(131)
94
$
482
-
-
(244)
$
448 $
238 $
13
(173)
-
(64)
(224)
Certain of the motor vehicles, facilities and equipment of the Company and its subsidiaries are rented under long-term operating lease
agreements. Future minimum lease commitments under non-cancelable operating leases as of December 31, 2010, are as follows:
2011
2012
2013
2014 and thereafter
$
1,437
684
459
155
$
2,735
Rent expenses for the years ended December 31, 2008, 2009 and 2010 were approximately $ 1,198, $ 1,231 and $ 1,487, respectively.
F-46
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands (except for share data)
NOTE 16:- COMMITMENTS AND CONTINGENCIES (Cont.)
MAGIC SOFTWARE ENTERPRISES LTD.
AND ITS SUBSIDIARIES
The Company leases motor vehicles under a cancelable lease agreement. The Company has an option to be released from this lease
agreement, which may result in penalties in a maximum amount of $ 64.
The Company currently occupies approximately 39,321 square feet of space based on a lease agreement expiring in December, 2014. The
Company has an option to terminate the lease agreement upon six months prior written notice.
b.
Guarantees:
The Company has provided three of its clients with bank guarantees totaling $ 148, which are linked to the New Israeli Shekel, of which $ 7
is valid through October 2011 and $ 141 is valid through December 2011.
c.
Charges:
In connection with a lease agreement for equipment, the Company placed a lien on the computer equipment leased under the agreement.
Lawsuits have been brought against the Company in the ordinary course of business.
The Company intends to defend itself vigorously against those lawsuits.
1.
2.
In June 2004, an Israeli company filed a lawsuit against the Company in the District Court of Tel Aviv - Jaffa seeking damages of NIS
8.0 million (approximately $ 2,250), with an option to increase the amount sought to approximately NIS 17.0 million (approximately $
4,800), for recovery of alleged damages caused to the plaintiff by the Company's alleged failure to integrate a software system. In
March 2011 the parties signed a settlement agreement according to which the Company will not incur any financial liabilities and
therefore the Company did not record any provision related to this lawsuit.
In March 2006, a client of one of the Company's subsidiaries filed a lawsuit against the subsidiary claiming an alleged breach of the
agreement between the parties. The plaintiff is seeking damages in the amount of € 488 thousand (approximately $ 650 thousands). In
June 2009, the court rejected the plaintiff's claims. In July 2009, the plaintiff filed an appeal. Since the lower court rejected the
plaintiff’s claims and the Company believes that the appeal is without merit, and as the Company cannot predict the outcome of the
appeal nor can it make any estimate of the amount of damages; therefore, no provision has been made for the appeal.
F-47
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands (except for share data)
NOTE 16:- COMMITMENTS AND CONTINGENCIES (Cont.)
MAGIC SOFTWARE ENTERPRISES LTD.
AND ITS SUBSIDIARIES
3.
4.
In August 2009, a software company and one of its owners filed a claim in arbitration against the Company and one of its subsidiaries,
claiming an alleged breach of a non-disclosure agreement between the parties. The plaintiffs are seeking damages in the amount of $
14,600. The arbitrator determined that both the Company and the subsidiary breached the non-disclosure agreement, but closing
summaries have not yet been submitted in the proceedings with respect to the amount of damages and therefore, at this time the
Company is not able to estimate the amount of damages and no provision has been made for the arbitration.
In February 2010, a U.S. company filed a lawsuit against the Company and one of its subsidiaries claiming an alleged breach by the
Company and the subsidiary of its intellectual property rights in connection with one of the Company's products. No monetary damage
was claimed. Due to the preliminary stage of the litigation, and based on the advice of its legal advisors, the Company, cannot predict
the outcome of the lawsuit nor can it make any estimate of the amount of damages; therefore, no provision has been made for the
lawsuit.
d.
Royalty commitments:
The Government of Israel, through the Fund for the Encouragement of Marketing Activities ("the Fund"), awarded the Company grants for
participation in its foreign marketing expenses. The Company received an aggregate amount of grants of $ 1,526 for the years up to and
including 2005. The Company is committed to pay royalties at the rate of 3% of the increase in exports, up to the amount of the grants. As of
December 31, 2010, the remaining contingent obligation of the Company amounted to $ 341.
F-48
MAGIC SOFTWARE ENTERPRISES LTD.
AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands (except for share data)
NOTE 17:- NET EARNINGS PER SHARE
The following table sets forth the computation of basic and diluted net earnings per share:
Numerator for basic and diluted earnings per share - net income available to shareholders
$
4,508
$
6,176
$
9,375
Weighted average Ordinary shares outstanding:
Denominator for basic net earnings per share
Effect of dilutive securities
31,769,045
262,955
31,899,198
208,088
32,139,686
592,360
Denominator for diluted net earnings per share
32,032,000
32,107,287
32,731,046
Year ended
December 31,
2009
2008
2010
Basic net earnings per share
Diluted net earnings per share
NOTE 18:- DISCONTINUED OPERATIONS
$
$
0.14
$
0.19
$
0.14
$
0.19
$
0.29
0.29
During 2007, the Company disposed of its Italian subsidiary (Magic Italy), which met the definition of a component under ASC 205. Accordingly,
the results of operations of the subsidiary and businesses and the gain resulting from the disposals have been classified as discontinued operations in
the statement of income and prior period results have been reclassified accordingly. In addition, comparative data of the assets and liabilities
attributed to the discontinued operations have been reclassified in the balance sheet.
The breakdown of assets and liabilities attributed to discontinued operations of the Company as of December 31, 2009 and 2010 was as follows:
Assets:
Cash and cash equivalents
Trade receivables, net
Other receivables and prepaid expenses
Liabilities:
Other payables and accrued expenses
F-49
December 31,
2009
2010
$
$
$
$
$
1
1
25
27 $
314 $
314 $
-
-
-
-
-
-
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands (except for share data)
NOTE 19:- SEGMENT AND GEOGRAPHICAL INFORMATION
MAGIC SOFTWARE ENTERPRISES LTD.
AND ITS SUBSIDIARIES
a.
Historically, the Company reported its results on the basis of one reportable segment, which was comprised of two reporting units: CoreTech
and Magic. (See Note 1 for a brief description of the Company's business.) During 2010, as a result of a change in the Company’s
management structure associated with the acquisition of a U.S-based consulting and staffing services business, the Company began to report
its results on the basis of two reportable business segments: proprietary software technology and IT professional services, each of which is
comprised of one reporting unit. The reporting unit of the IT professional services segment is comprised of the Company’s three IT
consulting and staffing subsidiaries, Coretech Consulting Group LLC, Fusion Solutions LLC and Xsell Resources Inc., and the reporting unit
of the proprietary software technology segment is comprised of all of the Company’s other subsidiaries.
The Company evaluates segment performance based on revenues and operating income (loss) of each segment. The accounting policies of the
operating segments are the same as those described in the summary of significant accounting policies. This data is presented in accordance
with ASC 280, "Segment Reporting."
Headquarters' General and administrative costs have not been allocated between the different segments.
Proprietary software products
The Company develops markets, sells and supports a proprietary application platform and business and process integration solutions.
IT professional services
The Company offers flexible services in the areas of infrastructure design and delivery, application development, technology planning and
implementation services, as well as supplemental staffing services.
There are no significant transactions between the two segments.
b.
The following is information about reported segment results of operation:
2008
Total revenues
Expenses
Segment operating income (loss)
Depreciation and amortization
F-50
Proprietary
software
products
IT
professional
services
Unallocated
expense
Total
$
$
$
$
49,087
40,000
9,087 $
12,893 $
11,754
1,139 $
-
$
5,959
(5,959) $
61,980
57,713
4,267
2,848 $
7 $
761 $
3,616
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands (except for share data)
NOTE 19:- SEGMENT AND GEOGRAPHICAL INFORMATION (Cont.)
2009
Total revenues
Expenses
Segment operating income (loss)
Depreciation and amortization
2010
Total revenues
Expenses
Segment operating income (loss)
Depreciation and amortization
MAGIC SOFTWARE ENTERPRISES LTD.
AND ITS SUBSIDIARIES
Proprietary
software
products
IT
professional
services
Unallocated
expense
Total
$
$
$
43,120
36,448
$
12,230 $
11,048
-
3,596
$
55,350
51,092
6,672
$
1,182 $
(3,596) $
4,258
3,923
$
10 $
627
$
4,560
Proprietary
software
products
IT
professional
services
Unallocated
expense
Total
$
$
$
46,262
36,556
$
42,316 $
39,249
-
$
3,435
88,578
79,240
9,706 $
3,067 $
(3,435) $
9,338
3,610 $
615 $
341 $
4,566
c.
The Company's business is divided into the following geographic areas: Israel, Europe, the United States, Japan and other regions. Total
revenues are attributed to geographic areas based on the location of the customers. The Company has adjusted all prior year comparative
amounts to reflect this change in classification to be consistent for all periods presented.
F-51
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands (except for share data)
NOTE 19:- SEGMENT AND GEOGRAPHICAL INFORMATION (Cont.)
The following table presents total revenues classified according to geographical destination for the years ended December 31, 2008, 2009 and
2010:
MAGIC SOFTWARE ENTERPRISES LTD.
AND ITS SUBSIDIARIES
Israel
Europe
United States
Japan
Other
d.
The Company's long-lived assets are located as follows:
Israel
Europe
United States
Japan
Other
Year ended
December 31,
2009
2008
2010
$
4,760 $
25,359
20,096
10,110
1,655
$
3,614
22,516
18,485
8,895
1,840
4,405
21,788
48,888
10,806
2,691
$
61,980 $
55,350
$
88,578
December 31,
2009
2010
$
$
15,653
1,522
5,169
5,826
460
15,760
1,487
16,893
6,506
466
$
28,630
$
41,112
e.
f.
The Company does not allocate its assets to its reportable segments; accordingly, asset information by reportable segments is not presented.
In 2010, the Company had one customer that accounted for 28% and of the revenues. In 2009, the Company had one customer that accounted
for 11% of the revenues.
NOTE 20:- SUBSEQUENT EVENTS
On January 1, 2011, the Company completed the acquisition of its South African distributor, Magix Integration (Proprietary) Ltd ("Magix"). Based
on the acquisition terms the Company will control 51% of Magix with an option to increase its holdings to 75%; for a total consideration of up to
$ 2,500 to be paid in 2011. Magix specializes in the software integration and application development of Magic Software platforms as well as the
support of large-scale and complex systems in the public and financial sectors in South Africa. The Company believes that the acquisition of this
business activity will enable it to expand its presence in the South African market and leverage its relationships with top tier customers.
F-52
MAGIC SOFTWARE ENTERPRISES LTD.
AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands (except for share data)
NOTE 20:-
SUBSEQUENT EVENTS
On March 11, 2011, a massive earthquake off the eastern coast of Japan triggered a devastating tsunami tidal wave, causing damage and destruction. It is
too early to predict the long-term impact of this disaster on the economy of Japan and elsewhere. Our net sales in Japan accounted for approximately 12%
of our total net revenues in 2010.
F-53
APPENDIX A
Appendix to Consolidated Financial Statements - Details of Subsidiaries and Affiliate
DETAILS OF SUBSIDIARIES AND AFFILIATE
Details of the percentage of control of the share capital and voting rights of subsidiaries and an affiliate as of December 31, 2010:
MAGIC SOFTWARE ENTERPRISES LTD.
AND ITS SUBSIDIARIES
Name of Company
Magic Software Japan K.K.
Magic Software Enterprises Inc.
Magic Software Enterprises (UK) Ltd.
Hermes Logistics Technologies Limited.
Magic Software Enterprises Spain Ltd.
Coretech Consulting Group Inc.
Coretech Consulting Group LLC.
Fusion Solutions LLC.
Xsell resources Inc.
Magic Software Enterprises (Israel) Ltd.
Magic Software Enterprises Netherlands B.V.
Magic Software Enterprises France
Magic Beheer B.V.
Magic Benelux B.V.
Magic Software Enterprises GMBH
Magic Software Enterprises India Pvt. Ltd.
Onyx Magyarorszag Szsoftverhaz .
CarPro Systems Ltd.
- - - - - - - - - - - - - -
F-54
Percentage of
ownership and
control
%
Place of
incorporation
100
100
100
100
100
100
100
100
88
100
100
100
100
100
100
100
100
90.48
Japan
U.S.A.
U.K.
U.K.
Spain
U.S.A
U.S.A
U.S.A
U.S.A
Israel
Netherlands
France
Netherlands
Netherlands
Germany
India
Hungary
Israel
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, 2010 and 2009, and the
related profit and loss account and changes in shareholders’ equity for each of the three years in the period ended December 31, 2010. 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, 2010 and 2009, and the related profit and loss account and changes in shareholders’ equity for each of the three years in the period
ended December 31, 2010, 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.
F-55
25 January 2011
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, 2010 and 2009, and the
related profit and loss account and changes in shareholders’ equity for each of the three years in the period ended December 31, 2010. 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, 2010 and 2009, and the related profit and loss account and changes in shareholders’ equity for each of the three years in the period
ended December 31, 2010, 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
25 January 2011
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.
F-56
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, 2010 and 2009, and the related
statements of operations and cash flows for each of the three years in the period ended December 31, 2010. 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,
2010 and 2009, and the related statements of operations and cash flows for each of the three years in the period ended December 31, 2010 in conformity with
accounting principles generally accepted in the United States of America.
Tokyo, Japan
January 28, 2011
/s/ KDA Audit Corporation
KDA Audit Corporation
F-57
Magic Benelux B. V.
Indepedent auditor’s report
Report on the financial statements
We have audited the accompanying financial statements 2010 of Magic Benelux B.V., Houten, which comprise the balance sheet as at December 31, 2010 and
2009, the profit and loss account and the notes, comprising a summary of the accounting policies and other explanatory information for each of the three years in
the period ended December 31, 2010.
Management’s responsibility
Management is responsible for the preparation and fair presentation of these financial statements and for the preparation of the management board report, both in
accordance with U.S. generally accepted accounting principles. Furthermore management is responsible for such internal control as it determines is necessary to
enable the preparation of the financial statements that are free from material misstatement, whether due to fraud or error.
Auditor’s responsibility
Our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit in accordance with standards of the Public
Company Oversight Board (United States). This requires that we comply with ethical requirements and plan and perform the audit to obtain reasonable assurance
about whether the financial statements are free from material misstatement.
An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the financial statements. The procedures selected depend
on the auditor’s judgment, the assessment of the risks of material misstatement of the financial statements, whether due to fraud or error.
In making those risk assessments, the auditor considers internal control relevant to the entity’s preparation and fair presentation of the financial statements in
order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity’s
internal control. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of accounting estimates made by
management, as well as evaluating the overall presentation of the financial statements.
We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion.
Opinion with respect to the financial statements
In our opinion, the financial statements give a true and fair view of the financial position of Magic Benelux B.V. as at December 3!, 2010 and 2009 and of its its
related statements of operations for each of the three years in the period ended December 31, 2010 in conformity with U.S. generally accepted accounting
principles.
F-58
Magic Benelux B.V.
Report on other legal and regulatory requirements
Pursuant to the legal requirement under Section 2:393 sub 5 at e and f of the Dutch Civil Code, we have no deficiencies to report as a result of our examination
whether the management board report, to the extent we can assess, has been prepared in accordance with Part 9 of Book 2 of this Code, and whether the
information as required under Section 2:392 sub 1 at b-h has been annexed. Further we report that the management board report, to the extent we can assess, is
consistent with the financial statements as required by Section 2:391 sub 4 of the Dutch Civil Code.
Dordrecht, January 28, 2011
Verstegen accountants en adviseurs,
/s/ L.K. Hoogendoorn
Drs. L.K. Hoogendoorn RA MGA
F-59
To the Board of Directors and Shareholders of
Magic (Onyx) Magyarország Szoftverház Kft.
We have audited the accompanying balance sheet of Magic (Onyx) Magyarország Szoftverház Kft. (the “Company”) as of December 31, 2010 and 2009,
and the related statements operations, changes in shareholders’ equity and cash flows for each of the three years in the period ended December 31, 2010. 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, 2010 and 2009, and the related statements operations, changes in shareholders’ equity and cash flows for each of the three years in the
period ended December 31, 2010, in conformity with U.S. generally accepted accounting principles.
Budapest, Hungary
January 28, 2011
/s/ Maria Négyessy
Maria Négyessy
Reg. Auditor
F-60
The registrant hereby certifies that it meets all of the requirements for filing on Form 20-F and that it has duly caused and authorized the undersigned to
sign this annual report on its behalf.
SIGNATURES
MAGIC SOFTWARE ENTERPRISES LTD.
By:
/s/Guy Bernstein
Name: Guy Bernstein
Title: Acting Chief Executive Officer
Dated: March 17, 2011
87
The following table sets forth the legal name, location and country of incorporation and percentage ownership of each of the registrant’s subsidiaries and
affiliated companies:
List of Subsidiaries and Affiliates of the Registrant
Exhibit 8.1
Subsidiary/Affiliate Name
Magic Software Japan K.K
Magic Software Enterprises Inc
Magic Software Enterprises (UK) Ltd
Hermes Logistics Technologies Limited
Magic Software Enterprises Spain Ltd
Coretech Consulting Group, Inc
Coretech Consulting Group LLC
Magic Software Enterprises (Israel) Ltd
Magic Software Enterprises Netherlands B.V
Magic Software Enterprises France
Magic Beheer B.V
Magic Benelux B.V
Magic Software Enterprises GMBH
Magic Software Enterprises India Pvt. Ltd
Onyx Magyarorszag Szsoftverhaz
CarPro Systems Ltd
Fusion Solutions, LLC
Xsell Resources Inc.
Magix Integration (Proprietary) Ltd
Country of
Incorporation
Japan
Delaware
United Kingdom
United Kingdom
Spain
Pennsylvania
Delaware
Israel
Netherlands
France
Netherlands
Netherlands
Germany
India
Hungary
Israel
Delaware
Pennsylvania
South Africa
Ownership
Percentage
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
90.48%
100%
88%
51%
CERTIFICATION OF CHIEF EXECUTIVE OFFICER
Pursuant to Rule 13a-14(a) under the Securities Exchange Act of 1934, as amended.
Exhibit 12.1
I, Guy Bernstein, certify that:
1. I have reviewed this annual report on Form 20-F of Magic Software Enterprises Ltd.;
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 company as of, and for, the periods presented in this report;
4. The company’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13(a)-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
company 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 company, 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 company’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 company’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 company’s internal control over financial reporting; and
5. The company’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the
company’s auditors and the audit committee of the company’s board of directors (or persons performing the equivalent function):
(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 company’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 company’s internal control over
financial reporting.
Date: March 17, 2011
* The originally executed copy of this Certification will be maintained at the Company’s offices and will be made available for inspection upon request.
/s/Guy Bernstein
Guy Bernstein*
Acting Chief Executive Officer
CERTIFICATION OF CHIEF FINANCIAL OFFICER
Pursuant to Rule 13a-14(a) under the Securities Exchange Act of 1934, as amended.
Exhibit 12.2
I, Asaf Berenstin, certify that:
1. I have reviewed this annual report on Form 20-F of Magic Software Enterprises Ltd.;
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 company as of, and for, the periods presented in this report;
4. The company’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13(a)-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
company 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 company, 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 company’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 company’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 company’s internal control over financial reporting; and
5. The company’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the
company’s auditors and the audit committee of the company’s board of directors (or persons performing the equivalent function):
(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 company’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 company’s internal control over
financial reporting
Date: March 17, 2011
*The originally executed copy of this Certification will be maintained at the Company’s offices and will be made available for inspection upon request.
/s/Asaf Berenstin
Asaf Berenstin*
Acting Chief Financial Officer
CERTIFICATION 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 Magic Software Enterprises Ltd. (the “Company”) on Form 20-F for the period ending December 31, 2010 as
filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Guy Bernstein, Acting 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) The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
(2) The information contained in the Report fairly presents, in all material respects, the financial condition and result of operations of the Company.
March 17, 2011
* The originally executed copy of this Certification will be maintained at the Company’s offices and will be made available for inspection upon request.
/s/Guy Bernstein
Guy Bernstein*
Acting Chief Executive Officer
CERTIFICATION 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 Magic Software Enterprises Ltd. (the “Company”) on Form 20-F for the period ending December 31, 2010 as
filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Asaf Berenstin, Acting 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) The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
(2) The information contained in the Report fairly presents, in all material respects, the financial condition and result of operations of the Company.
March 17, 2011*
The originally executed copy of this Certification will be maintained at the Company’s offices and will be made available for inspection upon request.
/s/Asaf Berenstin
Asaf Berenstin*
Acting Chief Financial Officer
CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
We consent to the incorporation by reference in the Registration Statements on Form S-8 (File Nos. 333-13270, 333-113552, 333-132221 and 333-
149553) of Magic Software Enterprises Ltd. (the “Company”), of our report dated March 17, 2011 with respect to the consolidated financial statements of the
Company as of December 31, 2010, which report appears in the Company’s Annual Report on Form 20-F for the year ended December 31, 2010.
Exhibit 15.1
/s/Kost Forer Gabbay & Kasierer
KOST FORER GABBAY & KASIERER
A Member of Ernst & Young Global
Tel Aviv, Israel
March 17, 2011
CONSENT OF INDEPENDENT AUDITORS
Exhibit 15.2
We consent to the incorporation by reference in the Registration Statements on Form S-8 (File Nos. 333-13270, 333-113552, 333-132221 and 333-
149553) of Magic Software Enterprises Ltd., of our report dated 25th January 2011, with respect to the financial statements of Magic Software Enterprises UK
Limited as of December 31, 2010 which report appears in the Annual Report on Form 20-F of Magic Software Enterprises Ltd. for the year ended December 31,
2010.
/s/Levy Cohen & Co.
LEVY COHEN & CO.
Registered Auditors
16th March 2011
CONSENT OF INDEPENDENT AUDITORS
Exhibit 15.3
We consent to the incorporation by reference in the Registration Statements on Form S-8 (File Nos. 333-13270, 333-113552, 333-132221 and 333-
149553) of Magic Software Enterprises Ltd., of our report dated 25th January 2011, with respect to the financial statements of Hermes Logistics Technologies
Limited as of December 31, 2010, which report appears in the Annual Report on Form 20-F of Magic Software Enterprises Ltd. for the year ended December 31,
2010.
/s/Levy Cohen & Co.
LEVY COHEN & CO.
Registered Auditors
16th March 2011
CONSENT OF INDEPENDENT AUDITORS
Exhibit 15.4
We consent to the incorporation by reference in the Registration Statements on Form S-8 (File Nos. 333-13270, 333-113552, 333-132221 and 333-
149553) of Magic Software Enterprises Ltd., of our report dated January 28, 2011 with respect to the financial statements of Magic Software Japan K.K. as of
December 31, 2010, which report appears in the Annual Report on Form 20-F of Magic Software Enterprises Ltd. for the year ended December 31, 2010.
/s/KDA Audit Corporation
KDA Audit Corporation
Registered Auditors
Tokyo, Japan
March 16, 2011
CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Exhibit 15.5
To the board of Management of
Magic Benelux B.V.
5 Haplada Street
Or Yehuda
ISRAEL
Dordrecht, March 16, 2011
Re: KH/VK/NS
Dear Sirs,
We consent to the incorporation by reference in the Registration Statements on Form S-8 (File Nos. 333-13270, 333-113552, 333-132221 and 333-149553) of
Magic Software Enterprises Ltd., of our report dated January 28, 2011 with respect to the financial statements of Magic Benelux B.V. as of December 31, 2010,
which report appears in the Annual Report on Form 20-F of Magic Software Enterprises Ltd. for the year ended December 31, 2010.
On behalf of Verstegen accountants en adviseurs,
/s/ Drs L.K. Hoogerdoorn RA MGA
Drs L.K. Hoogerdoorn RA MGA.
CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
We consent to the incorporation by reference in the Registration Statements on Form S-8 (File Nos. 333-13270, 333-113552, 333-132221 and 333-
149553) of Magic Software Enterprises Ltd., of our report dated January 28, 2011 with respect to the financial statements of Magic (Onyx) Magyarország
Szoftverház Kft. as of December 31, 2010, which report appears in the Annual Report on Form 20-F of Magic Software Enterprises Ltd. for the year ended
December 31, 2010.
Exhibit 15.6
/s/ Mária Négyessy
Mária Négyessy
Registered Auditors
Budapest
March 16, 2011