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, 2012
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ___________ to ___________ __________
SHELL COMPANY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
Date of event requiring this shell company report
OR
Commission file number: 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................... 36,626,728 (as of December 31, 2012)
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.
Yes No
If this report is an annual or transition report, indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934.
Yes No
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for
the past 90 days.
Yes No
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to
be submitted and posted pursuant to Rule 405 of Regulation S-T (232.405 of this chapter) during the preceding 12 months (or for such shorter period that the
registrant was required to submit and post such files).
Yes No
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of accelerated filer and
large accelerated filer in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer
Accelerated filer
Non-accelerated filer
Indicate by check mark which basis of accounting the registrant has used to prepare the financial statements included in this filing:
U.S. GAAP
International Financial Reporting Standards as
issued by the International Accounting
Standards Board
Other
If “Other” has been checked in response to the previous question, indicate by check mark which financial statement item the registrant has elected to
follow:
Item 17 Item 18
If this is an annual report, indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
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.
Yes No
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, distributors and value added resellers, or VARs, as well as original equipment manufacturers, or OEMs, and consulting
partners in approximately 50 countries. Our offerings provide 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 Magic xpa application platform and our Magic xpi integration platform. 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, or TASE.
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 Untied States generally
accepted accounting principles, or U.S. GAAP. All references in this annual report to “dollars” or “$” are to U.S. dollars and all references in this annual report
to “NIS” are to New Israeli Shekels.
Statements made in this annual report concerning the contents of any contract, agreement or other document are summaries of such contracts,
agreements or documents and are not complete descriptions of all of their terms. If we filed any of these documents as an exhibit to this annual report or to any
previous filling with the Securities and Exchange Commission, or the SEC, you may read the document itself for a complete recitation of its terms.
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, or the Exchange Act, 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
History and Development of the Company
Business Overview
Organizational Structure
Property, Plants and Equipment
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.
UNRESOLVED STAFF COMMENTS
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
Directors and Senior Management
Compensation -
Board Practices
Employees
Share Ownership
Offer and Listing Details
Plan of Distribution
Markets
Selling Shareholders
Dilution
Expenses of the Issue
Major Shareholders
Related Party Transactions
Interests of Experts and Counsel
ii
1
1
1
1
1
2
2
2
14
14
16
30
30
31
31
31
46
49
49
50
50
50
50
53
53
63
64
66
66
67
67
68
68
69
69
69
70
71
71
71
71
71
Share Capital
Memorandum and Articles of Association
Material Contracts
Exchange Controls
Taxation
Dividends and Paying Agents
Statement by Experts
Documents on Display
Subsidiary Information
A.
B.
C.
D.
E.
F.
G.
H.
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
MINE SAFETY DISCLOSURE
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.
ITEM 16H.
PART III
ITEM 17.
ITEM 18.
ITEM 19.
SIGNATURES
FINANCIAL STATEMENTS
FINANCIAL STATEMENTS
EXHIBITS
iii
71
71
74
74
74
84
84
84
85
85
86
86
86
86
87
88
88
88
88
89
89
89
89
90
91
91
91
91
93
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. 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, 2010, 2011 and 2012 and the consolidated
balance sheet data as of December 31, 2011 and 2012 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, 2008 and 2009 and the consolidated balance sheet data as of December
31, 2008, 2009 and 2010 from our audited consolidated financial statements that are not included in this annual report.
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
Operating income
Financial income (expense), net
Other income, net
Income before taxes on income
Tax benefit (taxes on income)
2008
Year ended December 31,
2010
(U.S. dollars in thousands, except share and per share data)
2011
2009
2012
$
$
20,913
14,530
26,537
61,980
$
17,261
13,821
24,268
55,350
20,111 $
14,407
54,060
88,578
$
23,110
16,751
73,467
113,328
23,684
22,384
80,312
126,380
5,388
2,189
18,687
26,264
29,086
1,310
15,308
8,210
1,972
6,230
238
42
6,510
(334)
5,320
2,070
44,058
51,448
37,130
2,072
17,526
8,194
-
9,338
(224)
159
9,273
102
5,771
2,250
59,237
67,258
46,070
2,047
20,147
9,159
-
14,717
221
125
15,063
203
7,439
3,238
62,716
73,393
52,987
2,947
22,990
10,642
-
16,408
10
136
16,554
(94)
4,898
2,263
19,978
27,139
34,841
2,350
17,357
10,867
-
4,267
448
-
4,715
(199)
1
Income after taxes on income
Equity in earnings (losses) of affiliates
Net income
Change in redeemable non-controlling interests
Net income attributable to non-controlling interests
Net income attributable to Magic's Shareholders
Basic earnings per share
Diluted earnings per share
Shares used to compute basic earnings per share
Shares used to compute diluted earnings per share
Dividends
Cash dividend declared per common share
Balance Sheet Data:
$
$
$
2008
Year ended December 31,
2010
(U.S. dollars in thousands, except share and per share data)
2009
2011
4,516
(8)
4,508 $
-
-
4,508
0.14
0.14
31,769
32,032
-
-
$
$
$
6,176
-
6,176 $
-
-
6,176
0.19
0.19
31,899
32,107
15,974
0.50
$
$
9,375
-
9,375 $
-
-
9,375
0.29 $
0.29 $
32,140
32,731
-
-
15,266
-
15,266 $
-
222
15,044
0.41
0.41
32,268
37,046
-
-
$
$
$
2012
16,460
-
16,460
253
24
16,183
0.44
0.44
32,502
37,108
3,661
0.10
Working capital
Cash, cash equivalents, short term deposits and marketable securities
Total assets
Total equity
$
$
33,851
32,588
81,164
66,755
$
28,021
41,868
87,551
57,188
48,815 $
46,542
111,950
88,865
$
36,304
32,122
135,971
105,625
45,156
38,634
152,238
118,117
2008
2009
December 31,
2010
(U.S. dollars in thousands)
2011
2012
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 core product families and services and a decrease in revenues from these products and services would adversely
affect our business, results of operations and financial condition; our future success will be largely dependent on the acceptance of future releases of our
core products and if we are unsuccessful with these efforts, our business, results of operations and financial condition will be adversely affected.
We derive a significant portion of our revenues from sales of application platforms and integration products primarily under our Magic xpa,Magic xpi
and AppBuilder 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 and services would adversely
affect our business, results of operations and financial condition.
Our future success will also be dependent on the continued acceptance of Magic xpa and Magic xpi. The continued acceptance of these products rely in
part on the continued acceptance and growth of the cloud market, including rich internet applications, or RIAs, mobile and software as a service, or SaaS, for
which they are particularly useful and advantageous. We will need to continue to enhance our products and if new versions of such products are not accepted,
our business, results of operations and financial condition may be adversely affected.
Rapid technological changes may adversely affect the market acceptance of our products and services, and our business, results of operations and financial
condition could be adversely affected; adapting to evolving technologies can require substantial financial investments, distract management and adversely
affect the demand for our existing products or services.
We compete in a market that is characterized by rapid technological changes. Other companies are also seeking to offer Internet-related solutions, such
as cloud computing, to generate growth. These companies may develop technological or business model innovations in the markets that we seek to address that
are, or are perceived to be, equivalent or superior to our products. In addition, our customers’ business models may change in ways that we do not anticipate and
these changes could reduce or eliminate our customers’ needs for our products and services. Our operating results depend on our ability to adapt to market
changes and develop and introduce new products and services into existing and emerging markets.
The introduction of new technologies and devices could render existing products and services obsolete and unmarketable and could exert price
pressures on our products and services. Our future success will depend upon our ability to address the increasingly sophisticated needs of our customers by:
•
Supporting existing and emerging hardware, software, databases and networking platforms; and
• Developing and introducing new and enhanced software development technology and applications that keep pace with such technological
developments, emerging new markets and changing customer requirements.
Adapting to evolving technologies can require substantial financial investments, distract management and adversely affect the demand for our existing
products and services. In addition, if release dates of any future products or enhancements are delayed or if they fail to achieve market acceptance when
released, our business, financial condition and results of operations could be adversely affected.
Adapting to evolving technologies may require us to invest a significant amount of resources into the development, integration and marketing of those
technologies. The acceptance and growth of cloud computing and enterprise mobility are examples of rapidly changing technologies that we have adapted and
productized. This adaptation already required us to make a substantial financial investment to develop and implement cloud computing and enterprise mobility
into our software solution models and has required significant attention from our management to refine our business strategies to include the delivery of these
solutions. As the market continues to adopt these new technologies, we expect to continue to make substantial investments in our service solutions and system
integrations related to these changing technologies. Even if we succeed in adapting to a new technology by developing attractive products and services and
successfully bringing them to market, there is no assurance that the new product or service will have a positive impact on our financial performance and could
even result in lower revenue, lower margins and higher costs and therefore could negatively impact our financial performance.
3
We face intense competition in the markets in which we operate. 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 growth of the SaaS market has increased the competition in these areas. We expect that such
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.
We also compete with other companies in the technical IT consulting and staffing services industry. This industry is highly competitive and fragmented
and has low entry barriers. We, through three of our subsidiaries in the United States and three of our subsidiaries in Israel, 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 expect competition to increase, and we may not be able to remain competitive.
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 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.
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 products 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.
4
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. A deferral in the placement and acceptance of any large order from one quarter to another could
adversely affect our results of operations for the prior 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 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 adversely affect our business, operating results and financial condition.
During periods of slowing economic activity our customers may reduce their demand for our products, technology and professional services, which would
reduce our sales, and our business, operating results and financial condition may be adversely affected. Economies throughout the world currently face a number
of challenges, including threatened sovereign defaults, credit downgrades, restricted credit for businesses and consumers and potentially falling demand for a
variety of products and services. Notwithstanding the improving economic conditions in some of our markets, many companies are still cutting back
expenditures or delaying plans to add additional personnel or systems. Any further worsening of the global economic condition 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.
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.
It is a part of our business strategy to pursue acquisitions and other initiatives in order to expand our product offerings or services or otherwise enhance
our market position and strategic strengths. In the past three years we made a number of acquisitions, including: (i) our distributer in South Africa, Magix
Integration (Proprietary) Ltd., or Magix Integration, which 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; (ii) the AppBuilder activity of BluePhoenix Solutions Ltd., or
AppBuilder, a development platform for managing, maintaining, and reusing business applications required by large-scale enterprises; (iii) Complete Business
Solutions Ltd., a software solution provider and a Business Partner of SAP; and (iv) Comm-IT Group, a software and systems development house that
specializes in providing advanced IT and communications services and solutions.
Acquisitions involve numerous risks, including the following:
• Difficulties in integrating the operations, systems, technologies, products, and personnel of the acquired businesses or enterprises;
• Diversion of management’s attention from normal daily operations of the business and the challenges of managing larger and more widespread
operations resulting from acquisitions;
•
Potential difficulties in completing projects associated with in-process research and development;
• 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;
5
•
•
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 companies are inherently risky and subject to many factors outside of our control and no assurance can be given that our
future acquisitions will be successful and will not adversely affect our business, operating results, or financial condition. Failure to manage and successfully
integrate acquisitions could materially harm our business and operating results. Prior acquisitions have resulted in a wide range of outcomes, from successful
introduction of new products and technologies to a failure to do so. Even when an acquired company has previously developed and marketed products, there can
be no assurance that new product enhancements will be made in a timely manner or that pre-acquisition due diligence will have identified all possible issues that
might arise with respect to such products.
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 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%, 25% and 19% of our total revenues in 2010, 2011 and 2012, respectively. We do not know if, or for how much longer, Ericsson
will continue to purchase the IT professional services of such subsidiary. A significant decrease in revenues from Ericsson may adversely affect our business,
results of operations and financial condition.
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 to
their customers, referred to as ISVs or Magic Solution Providers, or MSPs, and also through system integrators. These independent MSPs then sell the
applications they develop on the Magic xpa platform to end-users. In some regions, especially in Asia-Pacific, Eastern Europe, Spain, Italy, South America and
a few countries in the Mediterranean area, we sell our products through regional distributors. 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 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 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.
6
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 other IT professional services. Our software licenses revenues include the sale of third party software licenses, which have a lower gross margin than 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. If the
relative proportion of our revenues from the sale of IT professional services increases as a percentage of our total revenues, our gross profit margins may decline
in the future.
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 our IT professional services is dependent upon our ability to attract and retain qualified computer professionals to serve as temporary IT
personnel. Competition for the limited number of qualified professionals with a working knowledge of certain sophisticated computer languages is intense. We
compete for technical personnel with other providers of technical IT consulting and staffing services, systems integrators, providers of outsourcing services,
computer systems consultants, clients and, to a lesser extent, 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, our ability to maintain and renew existing engagements and obtain new business for our contract IT professional
services operations depends, in large part, on our ability to hire and retain technical personnel with the IT skills that keep pace with continuing changes in
software evolution, industry standards and technologies, and client preferences. Demand for qualified professionals conversant with certain technologies may
outstrip supply as new and additional skills are required to keep pace with evolving computer technology or as competition for technical personnel increases.
Increasing demand for qualified personnel could also result in increased expenses to hire and retain qualified technical personnel and could adversely affect our
profit margins.
Our widespread operations may strain our management, operational and financial resources and could adversely affect 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 may:
•
•
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.
7
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, 95%, 93% and 91% of our sales in 2010, 2011 and 2012, respectively, were generated in
other countries and regions including, but not limited to the United States, Europe, Japan, Asia-Pacific, India and South Africa. Our success in becoming a
stronger competitor in the sale of application platforms and integration solutions is dependent upon our ability to increase our sales in all our markets. 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.
Our international operation 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;
• Difficulties in managing overseas subsidiaries and international operations; and
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.
Breaches of network or information technology security, natural disasters or terrorist attacks could have an adverse effect on our business.
Cyber attacks or other breaches of network or IT security, natural disasters, terrorist acts or acts of war may cause equipment failures or disrupt our
systems and operations. We may be subject to attempts to breach the security of our networks and IT infrastructure through cyber attack, malware, computer
viruses and other means of unauthorized access. While we maintain insurance coverage for some of these events, the potential liabilities associated with these
events could exceed the insurance coverage we maintain. Our inability to operate our facilities as a result of such events, even for a limited period of time, may
result in significant expenses or loss of market share to other competitors for our application platforms as well as in the process and business integration
technologies and IT services market. In addition, a failure to protect the privacy of customer and employee confidential data against breaches of network or IT
security could result in damage to our reputation. A failure to protect the privacy of customer and employee confidential data against breaches of network or IT
security could result in damage to our reputation. To date, we have not been subject to cyber attacks or other cyber incidents which, individually or in the
aggregate, resulted in a material impact to our operations or financial condition.
Maintaining the security of our products, computers and networks is a critical issue for us and our customers. Security researchers, criminal hackers
and other third parties regularly develop new techniques to penetrate computer and network security measures. In addition, hackers also develop and deploy
viruses, worms and other malicious software programs, some of which may be specifically designed to attack our products, systems, computers or networks.
Additionally, outside parties may attempt to fraudulently induce our employees or users of our products to disclose sensitive information in order to gain access
to our data or our customers’ data. These potential breaches of our security measures and the accidental loss, inadvertent disclosure or unauthorized
dissemination of proprietary information or sensitive, personal or confidential data about us, our employees or our customers, including the potential loss or
disclosure of such information or data as a result of hacking, fraud, trickery or other forms of deception, could expose us, our employees, our customers or the
individuals affected to a risk of loss or misuse of this information, result in litigation and potential liability or fines for us, damage our brand and reputation or
otherwise harm our business.
8
Currency exchange rate fluctuations in the markets in which we conduct business could adversely affect our business, results of operations and financial
condition.
Our financial statements are stated in U.S. dollars, our functional currency. However, in 2011 and 2012, over 46% and 49% of our revenues,
respectively, were 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 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 adversely affect 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.
The increasing amount of intangible assets and goodwill recorded on our balance sheet may lead to significant impairment charges in the future.
We regularly review our long-lived assets, including identifiable intangible assets and goodwill, for impairment. Goodwill and indefinite life intangible
assets are subject to impairment review at least annually. Other long-lived assets are reviewed when there is an indication that impairment may have occurred.
The amount of goodwill and identifiable intangible assets on our consolidated balance sheet has increased significantly to $74 million as a result of our
acquisitions, and may increase further following future acquisitions. Impairment testing under U.S. GAAP may lead to further impairment charges in the future.
Any significant impairment charges could have a material adverse effect on our results of operations.
Our products have a lengthy sales cycle which could adversely affect our revenues.
Our customers typically use our technologies to develop and deploy as well as to integrate applications that are critical to their businesses. As a result,
the licensing and implementation of our technologies 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 their market acceptance and expose us to difficulties in the collection of receivables
and to litigation.
Despite our regular quality assurance testing, as well as testing performed 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 system integrators 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.
9
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. Also, the professional liability insurance that we maintain may not be sufficient against
potential claims. Accordingly, we could fail to realize revenues and suffer damage to our reputation as a result of, or in defense of, a substantial claim.
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 and non-compete 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.
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. Intellectual property litigation is expensive and any court ruling against us or
infringement claim, even one without merit, could result in the expenditure of significant financial and managerial resources to defend any such claims, which
will adversely affect 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 an 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 TASE, directly owned 19,160,044 or 52.2%, of our outstanding ordinary shares as of April 5, 2013. 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 external directors). Such
concentration of ownership may have the effect of delaying or preventing an acquisition or a change in control of us.
10
If we are unable to maintain effective internal control over financial reporting in accordance with Section 404 of the Sarbanes-Oxley Act of 2002, the
reliability of our financial statements may be questioned and our share price may suffer.
The Sarbanes-Oxley Act of 2002 imposes certain duties on us and on our executives and directors. To comply with this statute, we are required to
document and test our internal control over financial reporting, and our independent registered public accounting firm must issue an attestation report on our
internal control procedures, and our management is required to assess and issue a report concerning our internal control over financial reporting. Our efforts to
comply with these requirements have resulted in increased general and administrative expenses and a diversion of management time and attention, and we
expect these efforts to require the continued commitment of significant resources. We may identify material weaknesses or significant deficiencies in our
assessments of our internal controls over financial reporting. Failure to maintain effective internal control over financial reporting could result in investigation
or sanctions by regulatory authorities, and could adversely affect our operating results, investor confidence in our reported financial information and the market
price of our ordinary shares.
Risks Related to Our Ordinary Shares
Our share price has been 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. While in 2010 our share price increased by 170%, in 2011 and 2012 our share price dropped by 20% and 7%, 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 SEC and the Israeli Securities Authority;
• Adoption of a dividend policy;
•
•
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
11
• 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.
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.
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 TASE. 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 TASE) 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.
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 may in the future be classified as a passive foreign investment company, or PFIC, which will subject our U.S. investors to adverse tax rules.
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 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.
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 principal executive offices and manufacturing and research and development facilities are located in,
the State of Israel. As a result, political, economic and military conditions affecting Israel directly influence us. Any major hostilities involving Israel, a full or
partial mobilization of the reserve forces of the Israeli army, 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 could adversely affect our business, financial condition and results of operations.
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Since its establishment in 1948, Israel has been involved in a number of armed conflicts with its Arab neighbors and a state of hostility, varying from
time to time in intensity and degree, has continued into 2013. Also, since 2011, riots and uprisings in several countries in the Middle East and neighboring
regions have led to severe political instability in several neighboring states and to a decline in the regional security situation. Such instability may affect the
local and global economy, could negatively affect business conditions and, therefore, could adversely affect our operations. In addition, Iran has threatened to
attack Israel and is widely believed to be developing nuclear weapons. Iran is also believed to have a strong influence among extremist groups in areas that
neighbor Israel, such as Hamas in Gaza and Hezbollah in Lebanon. This situation may potentially escalate in the future to violent events which may affect Israel
and us. To date, these matters have not had any material effect on our business and results of operations; however, the regional security situation and worldwide
perceptions of it are outside our control and there can be no assurance that these matters will not negatively affect us in the future.
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 adversely 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 currently eligible to receive tax benefits under programs of the Government of Israel. In order to maintain our eligibility for these tax benefits,
we must continue to meet specific requirements. If we fail to comply with these requirements in the future, such tax benefits may be cancelled. For more
information about the tax benefit programs see Item 10E “Additional Information – Taxation.”
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 and executive officers 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 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.
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.
13
The rights and responsibilities of our shareholders are 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.
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 Stock Market Rules. Among other things, as a foreign private issuer we may also follow
home country practice with regard to, 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 Stock Market 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% or more interest in the company and
certain acquisitions of the stock or assets of another company. Accordingly, our shareholders may not be afforded the same protection as provided under
NASDAQ’s corporate governance rules. 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 SEC each such requirement that it does not follow
and describe the home country practice followed by the issuer instead of any such requirement.
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 92653. Our website address is
www.magicsoftware.com. The information on our website is not incorporated by reference into this annual report.
14
We develop, market, sell and support Magic xpa, an application platform for developing and deploying business applications, AppBuilder, an
application platform for building, deploying, and maintaining large-scale, custom-built business applications and Magic xpi, a platform for application
integration. We also offer IT professional services in the areas of infrastructure design and delivery, application development, technology planning and
implementation services, communications services and solutions, and supplemental staffing services. The Magic xpa, AppBuilder, and Magic xpi 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 30 years of experience in assisting software and enterprise companies worldwide to produce and integrate their business
applications. Our application platform, Magic xpa, 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 Magic xpi technology for business application integration to customers using specific popular software
applications, such as SAP, Salesforce.com, IBM i (AS/400), Oracle JD Edwards, Microsoft SharePoint or other eco-systems.
On January 17, 2010, we purchased the consulting and staffing services business of a U.S.-based IT services company. The acquired business provides
a comprehensive range of consulting and staffing services for telecom, network communications and the IT industry.
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 Magic xpa and Magic xpi customers worldwide. In
February 2012, MicroStrategy Incorporated was positioned in the ‘Leaders’ Quadrant of the “Gartner 2012 Magic Quadrant for Business Intelligence Platforms
Report.”
Through a two-step acquisition in 2011, we acquired 100% of the shares of our South African distributor, Magix Integration. Magix Integration
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 May 2011, we acquired 95% of Complete Business Solutions Ltd. and 100% of Complete Information Technology Ltd. The companies are
prominent software solution providers and leading Business Partners of SAP with many years of experience in distributing and implementing SAP Business
One ERP Software. We believe that these acquisitions will enable us to expand our offers and leverage our relationships with top tier customers.
In December 2011, we acquired the AppBuilder activity of BluePhoenix Solutions Ltd., a leading provider of value-driven legacy IT modernization
solutions. AppBuilder is a comprehensive application development infrastructure used by many Fortune 1000 enterprises around the world. This premier
enterprise application development environment is a powerful, model-driven tool that enables development teams to build, deploy, and maintain large-scale,
custom-built business applications.
In July 2012, we acquired an 80% interest in Comm-IT Group, which includes CommIT Technology Solutions Ltd., CommIT Software Ltd. and
CommIT Embedded Ltd. This group is a software and systems development house that specializes in providing advanced IT and communications services and
solutions. We and the sellers hold mutual put and call options, respectively, for the remaining 20% interest in the group. We believe that this acquisition will
enable us to expand our professional services offerings and leverage our relationships with top tier customers.
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In 2012, we continued to work closely with IBM as an Advanced Partner in the IBM Partnerworld for Developer Business Partner program and as a
Member Partner of IBM Partnerworld for Software. IBM has awarded us with its ServerProven® certification for our Magic xpa and Magic xpi 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 Magic xpi 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.
Our capital expenditures for the years ended December 31, 2010, 2011 and 2012, were approximately $0.6 million, $0.5 million and $0.5 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 real time 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 Magic xpi.
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 30 years, and we believe that we have one of the
largest installed-base of products employing such technology.
We believe that enterprise mobility is a very important trend that will have a significant impact on IT industry. Organizations that wish to accelerate
their business performance must incorporate enterprise mobility as a fundamental component of their strategic plans. Enterprises will look to seamlessly
mobilize their core activities, integrating back-office and front-end user experiences, so that enterprise mobile users will be able to perform real-time business
tasks from any location at any time using any smartphone (or tablet). With the proliferation of smartphones and mobile platforms that support enterprise
mobility, enterprises need to be able to develop device-independent and future-proof business solutions for fast, simple, and cost-effective mobile deployment.
Cloud computing is another major trend that is changing the way businesses buy IT services. New cloud computing technologies, which deliver
greater agility and more meaningful cost savings to businesses, make hosting even more compelling for a broader market. Mobile, cloud and SaaS are each
becoming a well-established phenomenon in some areas of enterprise IT. These trends are growing into mainstream options for software-based business
solutions and are expected to have an effect on most enterprise IT departments in the next few years. 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.
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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 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 and SaaS. Our technology also provides the option to deploy our
software capabilities in the cloud, hosted in web services cloud computing environment. We believe these capabilities provide organizations with a faster
deployment path and lower total cost of ownership. It also allows developers to stage multiple applications before going live in production.
We address the critical business needs of enterprises 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 Magic xpi and Magic xpa 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 based on the same proven metadata driven and rules-based declarative technology. Metadata platforms consist of pre-compiled and pre-written technical
and administrative functions, which are essentially ready-made business application coding that enables developers to bypass the intensive technical code-
writing stage of application development and integration and move quickly and efficiently to deployment. Through the use of metadata-driven platforms such as
Magic xpa, AppBuilder and Magic xpi, software vendors and enterprise customers can experience unprecedented cost savings through fast and easy
implementation and reduced project risk.
Development communities are facing high complexity, cost and extended pay-back periods in order to deliver cloud, RIAs, mobile and SaaS
applications. Magic xpa and Magic xpi provide ISVs 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 Magic xpi, 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.
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.
17
After the launch of our mobile offering on different operating systems (BlackBerry OS, Windows mobile, iOS and Android), our customers and
partners began to develop mobile applications in different markets and industries. Some recent leading examples of implementations of our mobile offering
include:
• UK-based Cape plc developed a fully certified mobile solution that enables construction site managers to access integrated data from a wide range
of enterprise systems and multiple databases, all on a single screen on their mobile device.
• US-based Dove Tree Canyon Software developed a RIA-based solution for deploying its next-generation warehouse management software over
mobile devices. Having used Magic’s technology to successfully deploy an application on Windows Mobile devices, Dove Tree turned to Magic
xpa to implement decision to support iOS and Android tablets.
•
The Swiss branch of SAGE, a leading vendor of integrated and innovative financial software, mobilize its Prospero suite of financial solutions for
portfolio managers, brokers, traders, and other financial professionals using Magic’s mobile technology.
• WellMark LLC, a US-based manufacturer of liquid and pneumatic controls and valves for the oil and gas industry, developed and deployed iPhone
and iPad mobile business applications that allow users to access pricing, in-house and remote warehouse inventory status, and customer status
information.
•
BKB GrainCo, a South African leader in the trading, storage, and milling of grain commodities, deployed mobile enterprise apps on mobile
devices running on the BlackBerry platform. Its suppliers can now check their accounts at any time and can instantly track stock movements,
contracts, and financial information. Android and iOS versions will follow soon.
• KDDI, a leading Japanese-based telecom company, used Magic technology as the back-end integration engine for its new service connecting
Salesforce.com with Android smartphones.
We continue to enhance our mobile offering with strategic partnerships. During 2012, Magic joined the Samsung Enterprise Alliance Program as a
Silver Partner. The Samsung Enterprise Alliance Program is an enterprise mobility ecosystem targeted to leading independent software vendors and system
integrators providing differentiated and unique solutions that enhance Samsung’s offerings to its enterprise customers. By joining forces this world-leading
smartphone and tablet vendor, each of Magic’s worldwide branches can benefit from Samsung’s global and local sales, marketing, and technical expertise,
positioning us well to penetrate the large and fast-growing enterprise mobility market.
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.
• Automation of mundane tasks - to accelerate development and maintenance and reduce risk; and
18
•
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.
Magic xpa Application Platform
The uniPaaS application platform was released during 2008 as the next generation of eDeveloper. Magic xpa (formerly branded 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.
Magic xpa is a comprehensive RIA platform. It uses a single development paradigm that handles all ends of the application development and
deployment process including client and server partitioning and the inter-communicating layers.
Magic xpa offers customers the power to choose how they deploy their applications, whether full client or web; on-premise or on-demand; in the cloud
or behind the corporate firewall; software or mobile or SaaS; global or local. Our Magic xpa application platform complies with event driven and service
oriented architectural principles. By offering technology transparency, this product allows customers to focus on their business requirements rather than
technological means. The Magic xpa single development paradigm significantly reduces the time and costs associated with the development and deployment of
cloud-based applications, including RIAs, mobile and SaaS. In addition, application owners can leverage their initial investment when moving from full client
mode to cloud mode, and eventually modify these choices as the situation requires. Furthermore, enterprises can use cloud based Magic xpa applications in a
SaaS model and still maintain their databases in the privacy of their own data centers. It also supports most hardware and operating system environments such
as Windows, Unix, Linux and AS/400, as well as multiple databases. In addition, Magic xpa is interoperable with .NET and Java technologies.
Magic xpa can be applied to the full range of software development, from the implementation of micro-vertical solutions, through tactical application
renovation and process automation solutions, to enterprise spanning SOA migrations and composite applications initiatives. Unlike most competing platforms,
we offer a coherent and unified toolset based on 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 May 2011, we launched the Blackberry client of our Magic xpa offering for mobile development and deployment of enterprise applications. In June
2012, we released additional clients for iOS and Android platforms. Our mobile offering successfully addresses even the most complex work flow scenarios,
such as deployment of multiple core enterprise applications across multiple back-end systems, and targets the widest range of smartphones, without
compromising functionality or security. This versatile solution enables smartphone users not only to access a vast array of mobile applications, but also to
perform any business task, such as securely accessing ERP, CRM, or human resource systems, in real-time and from any location, with the user-friendly
experience of their mobile phone.
In July 2011, we released Magic xpa 2.0, which enables developers and enterprises to develop solutions in a highly productive metadata-driven
development environment, while enhancing their software offerings with a rich, engaging, standardized and modern user interface. The Magic xpa 2.0
deployment platform is based on the .NET Framework and enables seamless migration of any legacy Magic application to .NET with minimal effort. Magic xpa
2.0 provides a simple and gradual migration path from Client/Server applications to RIA deployment and provides new and improved RIA deployment features.
It also provides native mobile clients the ability to fully support the development and deployment of mobile applications.
19
Our Magic xpa application platform was acknowledged in Gartner’s 2012 Magic Quadrant for Application Infrastructure for Systematic SOA
Application Projects as an “easy-to-develop platform, with substantial support for various nonfunctional requirements built in, and it is emerging as a highly
capable Cloud enabled application platform (CEAP).”
Magic xpi Integration Platform
The Magic xpi integration platform (formerly branded iBOLT) is a graphical, wizard-based code-free solution delivering fast and simple integration
and orchestration of business processes and applications. Magic xpi allows businesses to more easily view, access, and leverage their mission-critical
information, delivering true enterprise application integration, or EAI, BPM, and SOA infrastructure. Increasing the usability and life span of existing legacy
and other IT systems, Magic xpi allows fast EAI, development and customization of diverse applications, systems and databases, assuring rapid return on
invested capital and time-to-market, increased profitability, and customer satisfaction.
Magic xpi allows the integration and interoperability of diverse solutions, including legacy applications, in a quick and efficient manner. In January
2010, we released Magic xpi 3.2 and since then we have continued to develop the Magic xpi channel. We entered into agreements with additional system
integrators, consultancies and service providers, who acquired Magic xpi skills and offer Magic xpi licenses and related services to their customers. We also
offer special editions of Magic xpi targeted at specific enterprise application vendor ecosystems, such as SAP, Oracle JD Edwards, Microsoft Sharepoint or
Salesforce.com. These special editions contain specific features and pricing tailored for these market sectors.
In January 2013, our Magic xpi Integration Platform received the CIO Choice 2013 Honor and Recognition Title for Enterprise Application Integration
Software. The highly competitive CIO Choice program recognizes worldwide vendors that use innovative technology to deliver competitive advantages and
enable business growth.
AppBuilder Application Platform
AppBuilder, a platform we acquired in December 2011 is a development environment used for managing, maintaining and reusing complicated
applications needed by large businesses. It provides the infrastructure for enterprises worldwide, across several industries, with applications running millions of
transactions daily on legacy systems. Enterprises using AppBuilder can build, deploy and maintain large-scale custom-built business applications for years
without being dependent on any particular technology. The deployment environments include IBM mainframe, Unix, Linux and Windows. AppBuilder is
intended to increase productivity and agility in the creation and deployment of enterprise class computing.
AppBuilder follows the 4GL development paradigm to help enterprises focus on the business needs and definition and overlook technical hurdles.
AppBuilder developers define the business roles and prior to deployment the code is generated from the development environment to the required run time
environment. Several large ISVs have built state of the art applications that are deployed through many customers.
AppBuilder implements a model driven architecture approach to application development. It provides the ability to design an application at the
business modeling level and generate forward to an application. AppBuilder has a platform-independent, business-rules language that enables generation to
multiple platforms. It is possible to generate the client part of an application as Java and the server part as COBOL. As businesses change, the server part can be
generated as Java without changing the application logic. Only a simple configuration option needs to be changed.
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AppBuilder contains everything a development environment needs to create any type of simple or complex business application with platform-
independent functionality, including:
•
System administration security controls for scope and permissions;
• Migration, testing, and deployment functions;
• Architecture-independent development;
• An integrated toolset for designing, developing, and deploying applications;
• Object-based components managed from host, server, or client repositories;
•
Support for Java/J2EE, COBOL, C#, and C programming languages;
• An efficient, cross-platform code generation facility;
•
Ready-to-use business logic and libraries;
• A remote prepare facility for mainframe development;
• Multiple language user interface support; and
• DBCS support.
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.
Magic xpa, 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. Magic xpa offers our customers - ISVs, system integrators and enterprises - the following benefits:
•
•
Faster Time to Market. Magic xpa eliminates the difficulties and costs of developing distinct client and server paradigms and partitioning.
Lower Total Cost of Ownership. When deployment is required Magic xpa 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, Magic xpa gives users the power to choose how they deploy their applications, whether full client
or web, on-premise or on-demand, software or SaaS.
21
•
•
Scalability and Adaptability. Magic xpa enables application owners to move from full client mode to RIAs, mobile and SaaS and back again as
business situations and demands change.
Portability. Magic xpa 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. Magic xpa 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. Magic xpa leverages many years of research and development, including applied customer experience and
feedback.
We believe that Magic xpi offers our customers and partners the following benefits:
•
•
•
Time to Market. Based on our customers’ experience and feedback, we believe that Magic xpi’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. Magic xpi’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. Magic xpi is a comprehensive integration technology stack, guaranteeing powerful and cost-effective integration for any
business scenario.
• Deployment Flexibility. Magic xpi has a significant range of built-in certified and optimized adaptors to maximize the integration flexibility and
intuitive use.
•
Scalability and Adaptability. Magic xpi 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. Magic xpi leverages years of research and development, including applied customer experience and feedback.
Magic xpa stands at the core of the Magic xpi integration suite, from studio to its actual deployment.
Special editions of Magic xpi 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 be recognized as a significant global player 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 (Magic xpa, Magic xpi, AppBuilder and professional
services);
• Utilize connectivity/integration solutions (Magic xpi 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;
22
•
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 Magic xpi integration technology into their product offerings;
Promote Magic xpa (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 Magic xpa to build their applications;
Enlarge` Magic’s global community of developers
Focus our sales efforts on our core products, Magic xpa, Magic xpi and AppBuilder;
Focus our efforts on further building a strong partner base of system integrators, ISVs, distributors, resellers, OEMs, eco-systems partners and
consulting partners of our core technologies.
Product Development
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 2012, our research and development continued to release new capabilities and features for both Magic xpa 2.x and Magic xpi 3.x, and
maintenance releases for uniPaaS 1.9. In addition, in response to market demand, we released in June 2012 our new mobile offering for the development and
deployment of mobile enterprise applications for iOS and Android smartphones and tablets.
Product Related 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 Magic xpa and Magic xpi 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 unspecified upgrades and new versions and enhancements for our
products on a when-and-if-available basis for an annual fee.
23
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.
We offer an online support system for our MSPs, providing them with the ability to instantaneously enter, confirm and track support requests through
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, Magic xpa
and Magic xpi 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.
24
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, Fusion Solutions LLC,
Xsell Resources Inc. and the Comm-IT Group provide advanced 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. Our consulting partners come from a wide range of industries,
including finance, insurance, government, health care, logistics, manufacturing, media, retail and telecommunications. With an experienced team of recruiters in
the telecom and other IT areas and with a substantial and a growing database of telecom talent, we can rapidly respond to a wide range of requirements with
well qualified candidates. Our client list includes major global telecoms, OEMs 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 tables present our revenues by revenue type and
geographical market for the periods indicated:
Software sales
Maintenance and technical support
Consulting services
Total revenues
Israel
Europe
United States.
Japan
Other
Total revenues
$
$
$
$
2010
Year ended December 31,
2011
(In thousands)
$
20,111
14,407
54,060
88,578
$
23,110 $
16,751
73,467
113,328 $
2010
Year ended December 31,
2011
(In thousands)
$
4,405
21,788
48,888
10,806
2,691
88,578
$
7,982 $
24,351
60,727
12,111
8,157
113,328 $
2012
23,684
22,384
80,312
126,380
2012
11,561
29,139
64,591
12,661
8,428
126,380
Our Magic xpa and Magic xpi 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
system integrators 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.
25
Among the thousands of customers running their business systems with our technology are the following
adidas Canada
Adecco Nederland
Agricultural Bank of China
Allstate Life Insurance
ATLAS Grupo Financiero Seguros y
Factory Master
Finanz Informatik
Franken Brunnen
Fujitsu Marketing
Fujitsu-ten, Gakken
Fianzas
AutoScout24
Aviapartner
Auchan
Banco Caminos
Bank Leumi
BNP Paribas
BSkyB
CBIA
CCV
Çelebi Ground Handling Inc.
Club Med
Electra
Ekro
Euroclear
GE Capital
GGD Amsterdam
Groupe Flo
Grupo Inversionistas en
Autotransportes Mexicanos
Hebrew University of Jerusalem
HONDA
Hitachi Systems
Immobilier
ING Commercial Finance Industry
Industrial Bank of Korea
Invitel
ISS
Lekkerland Nederland BV
Menzies (John Menzies plc)
Nagarjuna Fertilizers & Chemicals Ltd.
Sales, Marketing and Distribution
Japan Chamber of Commerce Lloyds Bank
Nespresso
Newrest
NextiraOne
Nintendo
Phoenix Pharma
RDC Datacentrum
Rosenbauer
Staff Development Management Systems (SDMS Ltd)
SECOM Trust Systems
Sodiaal
Stallergenes
Synbra
Tecan
The Himalaya Drug Company
TOA
Total
Temenos
Vinci
Volvo Brazil
We market, sell and support our products through our own local branches and our global marketing department at HQ, as well as through a global
channel-network of ISVs, system integrators, value-added distributors and resellers, and 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 Magic xpa, 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. Magic xpi is mostly sold through indirect
channels and through our ecosystem business relationships, but we have some direct customers with integration needs.
As of December 31, 2012, we had approximately 136 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 Magic xpi, through our ecosystem business relationships, as well as through system
integrators, value added distributors and resellers, OEM partners, as well as consultancies and service providers. We maintain an indirect sales channel for
Magic xpa through ISVs and system integrators, who use our application platform to develop and deploy different applications selling them to their end-user
customers.
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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 44 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 marketing, including a content-rich website translated in 7 foreign languages, social networks communication, search engine
optimization, on-line advertising, public relations, case studies, industry analyst relations, attendance at conferences and trade shows and lead generation
campaigns around key professional white papers and webinars. We conduct distributor and user conferences to update our worldwide affiliates and user base on
our new product offerings, marketing and promotional activities, pricing, good practices, technical information and the like. In 2012, we expanded our
Facebook, Twitter, You Tube channel and Linkedin communities, which now include thousands of loyal and active followers (more than 50,000 LIKES on
facebook).
In light of the increased impact of cloud and enterprise mobility technologies on the IT landscape, in 2011 we initiated a strategic marketing
repositioning initiative that led to a complete rebranding of our products’ look and feel and naming (to emphasize that our products belong to the same
technology stack), messaging as well as a refined definition of our market positioning, value proposition and corporate values. In June 2012, we launched the
new branding after we completed the strategic repositioning and designed a fresh and dynamic new logo, a new Corporate Tagline as well as fully re-written
web site in English and 7 other languages. To expand our community of developers and reach out to new audiences around the world, since January 2011 we
have run an online campaign which offers Magic xpa Single User Edition as a freely downloadable Magic xpa application platform. Magic xpa Single User
Edition is an ideal gateway for new developers who want to join Magic Software’s global community and take advantage of new opportunities as their
businesses grow. Thousands of developers around the world have already downloaded, learned, and used Magic xpa Single User Edition, and we are confident
that this campaign will increase their understanding, awareness and adoption of our application platform.
In 2012, we implemented a new policy for our sales force to improve our sales process efficiency globally and increase the impact of our lead
generation campaigns on the sales results. In addition, we standardized and unified our customer relationship management (CRM) activities on the Salesforce
platform to provide real-time insights into commercial activities, improve the speed and accuracy of work processes and forecasts, and provide personalized
dashboards and reports to enable us to be more proactive and increase business opportunities.
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Magic xpi 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 Magic xpi as a collaboration platform for
the SAP Business One product, an integrated business management solution designed specifically for small and midsize businesses. Our Magic xpi
Special Edition was accepted by the SAP community, and SAP awarded our company 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 Magic xpi 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 Magic xpi Special Edition for SAP R/3 ERP software and
we received SAP’s xAPPS certification. Magic xpi is also certified for SAP All-in-One special edition. In addition to the direct economic impact
of Magic xpi 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 Magic xpi 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. Our technology allows IBM System i users to better utilize the value of their legacy systems and integrate them with different
applications in their organization to maximize the return on their 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 Magic xpi for Salesforce.com to its partners and customers. Since then, we have participated in
Salesforce.com’s regional Success Tours, Tour-de-Force events. In 2008, we launched our Magic xpi for Salesforce.com at Dreamforce Europe
2008, and participated at Dreamforce U.S. where we released the advanced version of Magic xpi 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. In 2011 we continued
participating at different Salesforce.com events: CloudForce London, DreamForce San Francisco and DreamForce Munich.
• Oracle JD Edwards. Since late 2006 we have been actively marketing Magic xpi 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.
• Microsoft SharePoint. On July 11, 2011, we announced at the Microsoft Worldwide Partner Conference in Los Angeles that Microsoft Corp.
partners are now eligible for a SpeedTrack Authorization Program to offer the Magic xpi integration platform for Microsoft SharePoint 2010, JD
Edwards and PeopleSoft. Companies deploying these systems can use Magic Software’s Magic xpi Integration for Microsoft SharePoint 2010 to
share information through their SharePoint 2010 deployment.
Competition
The markets for our Magic xpa and Magic xpi 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. With the extension of our mobile offering
in 2012, we are facing new competitors in this market segment. 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.
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With Magic xpa, we compete in the application platform, SOA architecture and enterprise mobility markets. Among our current competitors are
Cordys, IBM, Microsoft, Adobe, Oracle, Progress Software, SAP Sybase and Antenna Software. In the integration market, we compete with Magic xpi against
Microsoft BizTalk, Informatica, TIBCO, Talend, Pervasive and Software AG. Additional competitors may enter each of our markets at any time. Moreover, our
customers may choose to develop internally the functionality and capabilities our current product line offers them and therefore 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, 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.
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. 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 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.
We do not believe that patent laws are a significant source of protection for our products 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.
29
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
(1985) Ltd., an Israeli company (NASDAQ: FORTY). Formula Systems beneficially owns 52.3% 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 as of December 31, 2012:
Subsidiary 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
Magic Software ERP Ltd (formally CarPro Systems Ltd).
Fusion Solutions, LLC
Xsell Resources Inc.
Magix Integration (Proprietary) Ltd
Complete Business Solutions Ltd
Complete Information Technology Ltd
Appbuilder Solutions UK
CommIT Technology Solutions Ltd
CommIT Software Ltd
CommIT Embedded Ltd (shares held by Comm-IT Technology Solutions Ltd.)
D.
PROPERTY, PLANTS AND EQUIPMENT
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
Israel
Israel
United Kingdom
Israel
Israel
Israel
Ownership
Percentage
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
95%
100%
100%
80%
80%
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 $0.4 million for the facilities under a lease agreement expiring in
December 2014. We have an option to terminate the lease 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 and
Israel. The aggregate annual cost for such facilities was $1.3 million in the year ended December 31, 2012.
30
ITEM 4 A. UNRESOLVED STAFF COMMENTS
Not applicable.
ITEM5.
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 Stock
Market (symbol: MGIC) from our initial public offering in the United States on August 16, 1991 and on January 3, 2011, our shares were transferred to the
NASDAQ Global Select Market. Since November 16, 2000, our ordinary shares have also traded on the TASE, and since December 15, 2011 we are included in
the TASE’s TA-100 Index. We develop market, sell and support application platforms and business and process integration solutions. We have 20 wholly-
owned subsidiaries, incorporated in the United States, Europe, Asia, South Africa and Israel. Our subsidiaries are engaged in developing, marketing and
supporting vertical applications, as well as in selling and supporting our products, and six of our subsidiaries provide advance IT consulting and staffing
services.
Overview
We develop market, sell and support Magic xpa and AppBuilder, both application platforms for software development and deployment, and Magic xpi,
a platform for business integration and BPM. All three platforms: Magic xpa, Magic xpi and AppBuilder 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 many years of experience in assisting software companies and enterprise software companies worldwide to
produce and integrate their business applications. Our application platform, Magic xpa, 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 Magic xpi 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.
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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
We report our results on the basis of two reportable business segments: Software services (which include proprietary and non-proprietary software
technology) and IT professional services, each of which is comprised of two reporting units. The entities included in our company’s IT professional services
business segment are Coretech Consulting Group LLC, Fusion Solutions LLC and Xsell Resources Inc., which are considered as one reporting unit, and Comm-
IT Software, Comm-IT technology solutions and Comm-IT Embedded, which is a separate reporting unit. The reporting units of the proprietary and non-
proprietary software technology segment are comprised of Complete Business Solutions Ltd., Complete Information Technology Ltd. and all of our other
operating subsidiaries. Set forth below is segment information for the years ended December 31, 2010, 2011 and 2012.
2010
Total revenues
Expenses
Operating income (loss)
2011
Total revenues
Expenses
Operating income (loss)
2012
Total revenues
Expenses
Operating income (loss)
General
Software services
IT professional
services
(U.S. dollars in thousands)
Unallocated
expense
Total
$
$
$
$
$
$
46,262 $
36,556
9,706 $
58,137 $
44,086
14,051 $
65,410 $
50,497
14,912 $
42,316 $
39,249
3,067 $
55,191 $
50,468
4,723 $
60,970 $
55,456
5,515 $
- $
3,435
(3,435) $
- $
4,057
(4,057) $
- $
4,019
(4,019) $
88,578
79,240
9,338
113,328
98,611
14,717
126,380
109,972
16,408
Our consolidated financial statements appearing in this annual report have been prepared in U.S. dollars and in accordance with U.S. GAAP.
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 into dollars using the
foreign exchange rate in effect at each 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.
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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 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 (proprietary and non-proprietary), 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 and
value added resellers.
We account for our software sales in accordance with ASC 985-605. 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.
As required by ASC 985-605, “Software Revenue Recognition,” or ASC 985-605, 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. 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.
Our revenues from maintenance and support are derived from annual maintenance contracts providing for unspecified upgrades for new versions and
enhancements on a when-and-if-available basis for an annual fee. The right for an unspecified upgrade for new versions and enhancements on a when-and-if-
available basis do not specify the features, functionality and release date of future product enhancements for the customer to know what will be made available
and the general timeframe in which it will be delivered.
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 both related to software and IT professional services businesses 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,” or ASC 605-35,
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, 2010, 2011 and 2012, no such
estimated losses were identified.
33
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.
Revenue from third-party sales is recorded at a gross or net amount according to certain indicators. The application of these indicators for gross and net
reporting of revenue depends on the relative facts and circumstances of each sale and requires significant judgment.
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.
Research and development costs incurred in the process of developing product enhancements are generally charged to expenses as incurred.
Capitalized software costs are amortized on a product by product basis, by the straight-line method over the estimated useful life of the software
product (between 3 to 5 years). We assess the recoverability of these intangible assets on a regular basis by determining whether the amortization of the assets
over their remaining economic useful lives can be recovered through undiscounted future operating cash flows from the specific software product sold. As of
December 31, 2010, 2011 and 2012, no impairment losses have been identified.
Business Combinations
We account for business combinations under ASC 805 “Business Combinations,” which requires that we allocate the purchase price of acquired
businesses to assets acquired, liabilities assumed, non-controlling interest and redeemable non-controlling interest in the acquiree at the acquisition date,
measured at their fair values as of that date. We expense acquisition-related expenses and restructuring costs as they are incurred. In addition, changes in
valuation allowance related to acquired deferred tax assets and in acquired income tax position are to be recognized in earnings. We engage third-party appraisal
firms to assist management in determining the fair values of certain assets acquired and liabilities assumed. Such valuations require management to make
significant estimates and assumptions, especially with respect to intangible assets.
Management makes estimates of fair value based upon assumptions it believes to be reasonable. These estimates are based on historical experience and
information obtained from the management of the acquired businesses and relevant market and industry data and are, inherently, uncertain. Critical estimates
made in valuing certain of the intangible assets include, among other things, the following: (i) future expected cash flows from license sales, maintenance
agreements, customer contracts and acquired developed technologies and patents; (ii) expected costs to develop the in-process research and development into
commercially viable products and estimated cash flows from the projects when completed; (iii) the acquired company’s brand and market position as well as
assumptions about the period of time the acquired brand will continue to be used in the combined company’s product portfolio; and (iv) discount rates.
Unanticipated events and circumstances may occur which may affect the accuracy or validity of such assumptions, estimates or actual results. Changes to these
estimates, relating to circumstances that existed at the acquisition date, are recorded as an adjustment to goodwill during the purchase price allocation period
(generally within one year of the acquisition date) and as operating expenses, if otherwise.
34
In connection with purchase price allocations, we estimate the fair value of the support obligations assumed in connection with acquisitions. The
estimated fair value of the support obligations is determined utilizing a cost build-up approach. The cost build-up approach determines fair value by estimating
the costs related to fulfilling the obligations plus a normal profit margin. The sum of the costs and operating profit approximates, in theory, the amount that we
would be required to pay a third party to assume the support obligation. See Note 3 to our consolidated financial statements for additional information on
accounting for our recent acquisitions.
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 other things, 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 guidance implements a qualitative approach, based on
which an enterprise should consolidate a VIE if it has both (i) the power to direct the economically significant activities of the entity; and (ii) 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.
A U.S.-based consulting and staffing services business that we acquired through one of our wholly-owned subsidiaries in January 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
As a result of our acquisitions, our goodwill represents the excess of the purchase price in a business combination over the fair value of net tangible and
intangible assets acquired.
Goodwill was allocated to the reporting units of our segments at acquisition. We follow ASC 350, “Intangibles – Goodwill and Other,” or ASC 350,
and perform our goodwill annual impairment test for each of our 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’).
35
As required by ASC 820, “Fair Value Measurements and disclosures,” or ASC 820, we apply assumptions that market place participants would
consider in determining the fair value of each reporting unit.
In September 2011, the FASB issued ASU 2011-08 which amends the rules for testing goodwill for impairment. Under the new rules, an entity has the
option to first assess qualitative factors to determine whether the existence of events or circumstances leads to a determination that it is more likely than not that
the fair value of a reporting unit is less than its carrying amount. If, after assessing the totality of events or circumstances, an entity determines it is not more
likely than not that the fair value of a reporting unit is less than its carrying amount, then performing the two-step impairment test is unnecessary.
We have adopted the provisions of ASU 2011-08 for our annual impairment test as of January 1, 2012. This analysis determines that no indicators of
impairment existed primarily because (i) our market capitalization has consistently exceeded its book value by a sufficient margin, (ii) our overall financial
performance has been stable since its respective acquisitions, and (iii) forecasts of operating income and cash flows generated by each of our reporting units
appear sufficient to support the book values of the net assets of each reporting unit.
We performed annual impairment tests during the fourth quarter in each of the years ended December 31, 2010, 2011 and 2012 and did not identify any
impairment losses, as the fair values of all of our reporting units significantly exceeded their carrying values. Therefore, we currently do not believe that our
reporting units are at risk of impairment.
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,” or ASC 360, 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, 2010, 2011 and 2012, no impairment indicators have been identified.
Intangible assets with finite lives are comprised of distribution rights, acquired technology, customer relationships, backlog and non-compete
agreements and are amortized over their economic 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, acquired technology and non- compete agreements were amortized on a straight line
basis and customer relationships and backlog were amortized on an accelerated method basis over a period between 3.5 and 15 years based on the customer
relationships identified.
Marketable Securities
We account for investments in marketable securities in accordance with ASC 320 “Investments – Debt and Equity Securities,” or ASC 320. 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.
36
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 we apply 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 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.
We did not record any impairment of marketable securities during the years ended December 31, 2010, 2011 and 2012.
Stock-based compensation
We account for stock-based compensation in accordance with ASC 718 “Compensation – Stock Compensation,” or ASC 718. 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 income. We recognize
compensation expenses for the value of our awards, which have graded vesting based on the accelerated method over the requisite service period of each of the
awards, net of estimated forfeitures. 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. Prior to September 2012, we did not have any foreseeable plans to pay dividends
and therefore used an expected dividend yield of zero in our past years option pricing models. In September 2012, our management adopted a dividend
distribution policy according to which we will distribute in each year a dividend of up to 50% of our annual distributable profits. Therefore, we will use an
expected dividend yield for its future grants. 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.”
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Contingencies
From time to time, we are subject to legal, administrative and regulatory proceedings, claims, demands and investigations in the ordinary course of
business, including claims with respect to intellectual property, contracts, employment and other matters. We accrue a liability when it is both probable that a
liability has been incurred and the amount of the loss can be reasonably estimated. Significant judgment is required in both the determination of probability and
the determination as to whether a loss is reasonably estimable. These accruals are reviewed and adjusted to reflect the impact of negotiations, settlements,
rulings, advice of legal counsel and other information and events pertaining to a particular matter.
Fair Value Measurements
We account for certain assets and liabilities at fair value under ASC 820. 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).
Assets and liabilities measured at fair value on a recurring basis are comprised of marketable securities, foreign currency forward contracts and
contingent consideration of acquisitions (See Note 5 to the consolidated financial statements).
The carrying amounts reported in the balance sheet for cash and cash equivalents, short term bank deposits, trade receivables, other accounts
receivable, short-term bank credit, trade payables and other accounts payable approximate their fair values due to the short-term maturities of such instruments.
Accounting for income tax
We account for income taxes in accordance with ASC 740, “Income Taxes,” or ASC740. 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 and liabilities are classified as current or non-current
according to the expected reversal dates.
Taxes that would apply in the event of disposal of investments in subsidiaries have not been taken into account in computing deferred taxes, as it is our
intention to hold these investments, rather than realize them. We do not expect our non-Israeli subsidiaries to distribute taxable dividends in the foreseeable
future, as their earnings are needed to fund their growth while we expect to have sufficient resources in the Israeli companies to fund our cash needs in Israel.
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 (tax on
income) for the years ended December 31, 2010, 2011 and 2012 were $874,000, $724,000 and $(240,000), respectively.
38
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, which include IT consulting and staffing 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; 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;
fluctuation of exchange rates; 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 IT professional 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 personnel expenses of employees engaged in on-going
research and development activities, subcontracting, development tools 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
2010
Year ended December 31
2011
(U.S. dollars in thousands)
2012
$
$
$
5,667
(3,595)
2,072 $
7,269 $
(5,222)
2,047 $
7,916
(4,969)
2,947
Selling and Marketing Expenses. Selling and marketing expenses consist primarily of salaries and related expenses for sales and marketing personnel,
sales commissions, marketing programs and campaigns, website related expenses, public relations, on-line advertising, industry analyst relations, promotional
materials, travel expenses and conferences and trade shows exhibit expenses, as well as amortization of acquired customer relationships.
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 and administrative corporate
expenses.
Financial income (expenses), net. Net financial income (expenses) consists primarily of interest earned on cash equivalents deposits and marketable
securities, bank fees and interest paid on loans received, interest expenses related to liabilities in connection with acquisitions and currency translation
adjustments.
39
Results of Operations
The following table presents selected consolidated statement of operations data for the periods indicated as a percentage of total revenues:
Year ended December 31,
2011
2012
2010
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
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 non-controlling interests
Net income attributable to Magic’s shareholders
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
20.4%
14.8
64.8
100.0%
5.1
2.0
52.3
59.4
40.6
1.8
17.8
8.1
27.7
12.9
0.2
0.1
13.2
0.2
(0.1)
13.3
18.8%
17.7
63.5
100.0%
5.9
2.6
49.6
58.1
41.9
2.3
18.2
8.4
28.9
13.0
-
0.1
13.1
(0.1)
(0.2)
12.8
Year Ended December 31, 2012 Compared With Year Ended December 31, 2011
Revenues. Revenues in 2012 increased by 12% from $113.3 million in 2011 to $126.4 million in 2012. Revenues from the software services business
increased by 12.5% from $58.1 million in 2011 to $65.4 million in 2012. Revenues from the IT professional services business increased by 10.5% from $55.2
million in 2011 to $61.0 million in 2012, primarily due to the acquisition of Comm-IT Group, a software and systems development house that specializes in
providing advanced IT and communications services and solutions, in July 2012.
Revenues from sales of licenses increased by 6% from $17.6 million in 2011 to $18.7 million in 2012. The increase in sales of licenses was mainly due
to the acquisition of the Appbuilder activity in December 2011 as well as the increase in demand for our software in Japan. Revenues from sales of applications
decreased by 11% from $5.6 million in 2011 to $5.0 million in 2012. Revenues from maintenance and technical support increased by 34% from $16.8 million in
2011 to $22.4 million in 2012, primarily as a result of the acquisition of the Appbuilder activity in December 2011. Revenues from IT consulting services
increased by 9% from $73.5 million in 2011 to $80.3 million in 2012, primarily as a result of the acquisition of Comm-IT Group, software and systems
development house in July 2012 as well as an increased demand for our professional services in the U.S.
40
The following table presents our revenues by geographical market for the years ended December 31, 2011 and 2012:
Israel
Europe
United States
Japan
Other
Total revenues
Year ended December 31,
2012
2011
(In thousands)
7,982 $
24,351
60,727
12,111
8,157
113,328 $
11,561
29,139
64,591
12,661
8,428
126,380
$
$
Cost of Revenues. Cost of revenues increased by 9% from $67.3 million in 2011 to $73.4 million in 2012. Cost of revenues for licenses increased by
19% from $3.7 million in 2011 to $4.4 million in 2012. Cost of revenues for applications increased by 46% from $2.1 million in 2011 to $3.0 million in 2012,
mainly due to the acquisition of Complete Business Solutions Ltd. in May 2011. Cost of revenues for maintenance and technical support increased by 44% from
$2.2 million in 2011 to $3.2 million in 2012, mainly due to the acquisition of the Appbuilder activity in December 2011. Cost of revenues for IT consulting
services increased by 6% from $59.2 million in 2011 to $62.7 million in 2012, primarily due to the acquisition of Comm-IT Group software and systems
development house in July 2012. Cost of revenues for the years ended December 31, 2011 and 2012 include $4,000 and $16,000, respectively, of stock-based
compensation recorded under ASC 718.
Gross Profit. Gross profit in 2011 was 41% compared to gross profit of 42% in 2012. The increase in our gross profit margin was mainly due to the
change in the mix of our revenues, primarily resulting from the increase in licenses and maintenance and technical support revenues, which carry higher margins
than our revenues from IT consulting services.
Research and Development Expenses, Net. Gross research and development costs increased by 8% from $7.3 million in 2011 to $7.9 million in 2012.
Net research and development expenses increased by 38% from $2.1 million in 2011 to $2.9 million in 2012. In 2012, we capitalized $5.0 million of software
development costs compared to $5.2 million in 2011. The increase in gross research and development costs is mainly due to research and development costs
related to the Appbuilder activity acquired in December 2011. Net research and development costs as a percentage of revenues was 2.3% in 2012 compared to
1.8% in 2011. Research and development expenses for the years ended December 31, 2011 and 2012 include $54,000 and $114,000, respectively, of stock-
based compensation recorded under ASC 718.
Selling and Marketing Expenses. Selling and marketing expenses increased by 14% from $20.1 million in 2011 to $23.0 million in 2012. Selling and
marketing expenses as a percentage of revenues remained relatively consistent at 18% in both 2012 and 2011. The increase in the absolute amount of selling and
marketing expenses is primarily due to the amortization of intangible assets associated with acquisitions, an increase in sales commissions resulting from the
increase in our revenues, an increase in worldwide selling and marketing activities and expenses relating to our repositioning initiative that led to a complete
rebranding of our products’ look and feel performed in 2012. Selling and marketing expenses for the years ended December 31, 2011 and 2012 include $92,000
and $82,000 respectively, of stock-based compensation recorded under ASC 718.
General and Administrative Expenses. General and administrative expenses increased by 15% from $9.2 million in 2011 to $10.6 million in 2012.
General and administrative expenses as a percentage of revenues increased to 8.4% in 2012 compared to 8% in 2011. The increase in the absolute amount in
general and administrative expenses is primarily due to the acquisitions of subsidiaries consolidated in full for the first time this year offset partly by the
decrease in stock-based compensation. General and administrative expenses for the years ended December 31, 2011 and 2012 include $483,000 and $303,000,
respectively, of stock-based compensation recorded under ASC 718.
41
Other Income, Net. We recorded other income, net of $0.1 million in 2011 and 2012. Other income, net in 2011 and 2012 is attributable to proceeds
from the sale of the assets of CarPro Systems Ltd. in December 2006 recorded on a cash basis.
Financial Income, Net. We recorded financial income, net of $200,000 in 2011 and financial income, net of $10,000 in 2012. Our financial income net
in 2011 was primarily attributed to interest received on bank deposits offset by depreciation of the British pound against the U.S. dollar, which adversely
affected the U.S. dollar value of British pound denominated assets and finance expenses related to acquisition. Our financial income net in 2012 was immaterial.
Tax Benefit (Taxes on Income). We recorded a tax benefit of $0.2 million in 2011 compared to a tax expense of $0.1 million in 2012. The tax benefit in
2011 was derived from a change in a deferred income tax asset recorded with respect to carryforward tax losses in Israel. Our tax expenses in 2012 was derived
from tax expenses paid to tax authorities in Japan and Europe and from the decrease in our deferred income tax assets recorded with respect to carryforward tax
losses.
Net Income attributable to our Shareholders. Our net income increased from $15 million in 2011 to $16.2 million in 2012. The increase in net income
in 2012 is mainly attributable to the acquisition of the Appbuilder activity in December 2011 and the acquisition of the Comm-IT Group in July 2012.
Year Ended December 31, 2011 Compared With Year Ended December 31, 2010
Revenues. Revenues in 2011 increased by 28% from $88.6 million in 2010 to $113.3 million in 2011. Revenues from software services increased by
25% from $46.3 million in 2010 to $58.1 million in 2011, as a result of increased sales of licenses and related professional services mainly in Japan and Europe.
Revenues from IT professional services increased by 30% from $42.3 million in 2010 to $55.2 million in 2011, primarily as a result of increase demand for our
professional services in the U.S.
Revenues from sales of licenses increased by 6% from $16.6 million in 2010 to $17.6 million in 2011. Revenues from sales of applications increased
by 60% from $3.5 million in 2010 to $5.6 million in 2011. The increase in sales of licenses and applications was primarily due to an increase in demand for our
proprietary and non-proprietary software in Japan, Europe and Israel, as well as from the acquisition of Complete Business Solutions Ltd. in May 2011.
Revenues from maintenance and technical support increased by 17% from $14.4 million in 2010 to $16.8 million in 2011, primarily as a result of the increase in
license revenues and the acquisition of Magix Integration, our former distributer in South Africa. Revenues from IT consulting services increased by 36% from
$54.1 million in 2010 to $73.5 million in 2011, primarily as a result of increased demand for our professional services in the U.S, as well as from the acquisition
of Complete Business Solutions Ltd. in May 2011 and the acquisition of Magix Integration, our former distributer in South Africa, in January 2011.
The following table presents our revenues by geographical market for the years ended December 31, 2010 and 2011:
Israel
Europe
United States
Japan
Other
Total revenues
Year ended December 31,
2011
2010
(In thousands)
4,405 $
21,788
48,888
10,806
2,691
88,578 $
7,982
24,351
60,727
12,111
8,157
113,328
$
$
42
Cost of Revenues. Cost of revenues increased by 31% from $51.4 million in 2010 to $67.3 million in 2011. Cost of revenues for licenses remained
constant at $3.7 million in 2010 and 2011. Cost of revenues for applications increased by 31% from $1.6 million in 2010 to $2.1 million in 2011, mainly due to
the increase in application revenues in Japan and Europe. Cost of revenues for maintenance and technical support remained relatively constant in 2010 and
2011, with costs of $2.1 million and $2.2 million, respectively. Cost of revenues for IT consulting services increased by 34% from $44.1 million in 2010 to
$59.2 million in 2011, primarily as a result of increased demand for our professional services in the U.S, as well as from the acquisition of Complete Business
Solutions Ltd., in May 2011 and the acquisition of Magix Integration, our former distributer in South Africa in January 2011. Cost of revenues for the years
ended December 31, 2010 and 2011 include $2,000 and $4,000, respectively, of stock-based compensation recorded under ASC 718.
Gross Profit. Gross profit in 2011 was 41% compared to gross profit of 42% in 2010. The decrease in our gross profit margin was mainly due to the
change in the mix of our revenues, primarily resulting from the increase in IT consulting services revenues, which carry lower margins than our revenues from
licenses and maintenance and technical support.
Research and Development Expenses, Net. Gross research and development costs increased by 28% from $5.7 million in 2010 to $7.3 million in 2011.
Net research and development expenses stayed consistent in 2011 and 2010 with expenses of $2.0 million and $2.1 million, respectively. In 2011, we
capitalized $5.2 million of software development costs compared to $3.6 million in 2010. The increase in gross research and development costs and
capitalization costs is due to an increase in research and development activity in 2011, primarily related to the intensive investment in our mobile and cloud
offerings, as well as the appreciation 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 1.8% in 2011 compared to 2.3% in 2011. Research and development expenses for the years ended December
31, 2010 and 2011 include $61,000 and $54,000, respectively, of stock-based compensation recorded under ASC 718.
Selling and Marketing Expenses. Selling and marketing expenses increased by 15% from $17.5 million in 2010 to $20.1 million in 2011. Selling and
marketing expenses as a percentage of revenues decreased to 18% in 2011 compared to 20% in 2010. The increase in absolute amount in selling and marketing
expenses is primarily due to the amortization of intangible assets associated with acquisitions completed in 2010 and 2011, an increase in sales commissions
resulting from the increase in our revenues and an increase in worldwide selling and marketing activities. Selling and marketing expenses for the years ended
December 31, 2010 and 2011 include $75,000 and $92,000 respectively, of stock-based compensation recorded under ASC 718.
General and Administrative Expenses. General and administrative expenses increased by 12% from $8.2 million in 2010 to $9.2 million in 2011.
General and administrative expenses as a percentage of revenues decreased to 8% in 2011 compared to 9% in 2010. The increase in absolute amount in general
and administrative expenses is primarily due to the acquisitions of subsidiaries consolidated for the first time this year as well as an increase in expenses related
to share based compensation to employees. General and administrative expenses for the years ended December 31, 2010 and 2011 include $162,000 and
$483,000, respectively, of stock-based compensation recorded under ASC 718.
Other Income, Net. We recorded other income, net of $0.2 million in 2010 compared to $0.1 million in 2011. Other income, net in 2010 and 2011 is
attributable to proceeds from the sale of the assets of CarPro Systems Ltd. in December 2006 recorded on a cash basis.
43
Financial Income (Expenses), Net. We had financial expenses, net of $0.2 million in 2010 and financial income, net of $0.2 million in 2011. 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. Our financial expenses, net in 2011 was primarily due to interest received on bank deposits offset
by depreciation of the British pound against the U.S. dollar, which adversely affected the U.S. dollar value of British pound denominated assets and finance
expenses related to acquisition.
Tax Benefit. We recorded a tax benefit of $0.1 million in 2010 compared to a tax benefit of $0.2 million in 2011. The tax benefit in 2010 was derived
primarily 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. The tax benefit in 2011 was derived from a change in a deferred income tax asset recorded with respect to carryforward tax losses
in Israel.
Net Income attributable to our Shareholders. We recorded net income of $15.0 million in 2011 compared to net income of $9.4 million in 2010. The
increase in net income in 2011 is attributable to the increase in our operations, mainly in the Japanese, European and U.S. markets as well as to the contribution
of our most recent acquisition of our South African distributer.
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 adversely affect 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 adversely affected by currency fluctuations.
The following table sets forth for the periods indicated, depreciation or appreciation of the U.S. dollar against the most important currencies for our
business and the Israeli consumer price index:
44
New Israeli Shekel
Euro
Japanese Yen
British Pound
Israeli Consumer Price Index
Conditions in Israel
2008
2009
Year Ended December 31,
2010
2011
2012
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%
(7.1)%
(3.2)%
5.0%
(0.4)%
2.2%
2.3%
2.0%
(11.2)%
4.6%
1.6%
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
An Israeli company is subject to tax on its worldwide income. An Israeli company that is subject to Israeli taxes on the income of its non-Israeli
subsidiaries will receive a credit for income taxes paid by the subsidiary in its country of residence, subject to certain conditions. Israeli tax payers are also
subject to tax on income from a controlled foreign corporation, according to which an Israeli company may become subject to Israeli taxes on certain income of
a non-Israeli subsidiary, if such subsidiary’s primary source of income is passive income (such as interest, dividends, royalties, rental income, or capital gains).
The Israeli corporate tax was 25% in 2010, 24% in 2011 and 25% in 2012 and is scheduled to remain at 25% in 2013 and thereafter. Certain production
and development facilities 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. As of December 31, 2012 the benefit periods under the Law have not yet commenced.
In 2005, an amendment to the Investment Law, or the Amendment, came into effect that has significantly changed the provisions of the Investment
Law. 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.
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.
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, 2012, we did not generate income under the provision of the Amendment.
45
In December 2010, the Knesset passed the Law for Economic Policy for 2011 and 2012 (Amended Legislation), 2011, which, among other things,
include amendment to the Investment Law, effective as of January 1, 2011. According to the amendment, the benefit tracks under the Investment Law were
modified and a uniform tax rate will apply to companies eligible for the "Preferred Enterprise" status. In order to be eligible for preferred enterprise status, a
company must meet minimum requirements to establish that it contributes to the country's economic growth and is a competitive factor for the gross domestic
product. Companies 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 as follows: in peripheral regions (Development Area A) the reduced tax rate is 10% in 2011 and 2012
and is scheduled to be 7% in 2013 and 2014 and 6% starting from 2015. In other regions the tax rate is 15% in 2011 and 2012 and is scheduled to be 12.5% in
2013 and 2014 and 12% starting from 2015. Certain "Special Industrial Companies" that meet certain criteria (somewhat equivalent to the criteria for the
Strategic Investment Track noted above) will enjoy further reduced tax rates of 5% in Zone A and 8% elsewhere. The profits of these Industrial Companies will
be freely distributable as dividends, subject to a 15% withholding tax (or lower, under an applicable tax treaty). Preferred Enterprises in peripheral regions will
be eligible for Investment Center grants, as well as the applicable reduced tax rates.
As of December 31, 2012, our consolidated net operating loss carry-forwards for Israeli tax purposes was approximately $19.6 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, 2012, our subsidiaries in
Europe had estimated total available tax loss carry-forwards of $5.2 million, which may be offset against future taxable income..
As of December 31, 2012, our subsidiaries in the U.S. had estimated total available tax loss carryforwards of $ 3.8 million, which can be carried
forward and offset against taxable income in the future for up to 20 years, from the year the loss was incurred.
We have received final tax assessments through the year 2008 from the Israeli tax authorities.
Recently Issued Accounting Standards
In February 2013, the FASB issued ASU No. 2013-02, "Reporting of Amounts Reclassified out of Accumulated Other Comprehensive Income," or
ASU No. 2013-02. Under ASU 2013-02, an entity is required to provide information about the amounts reclassified out of Accumulated Other Comprehensive
Income, or AOCI, by component. In addition, an entity is required to present, either on the face of the financial statements or in the notes, significant amounts
reclassified out of AOCI by the respective line items of net income, but only if the amount reclassified is required to be reclassified in its entirety in the same
reporting period. For amounts that are not required to be reclassified in their entirety to net income, an entity is required to cross-reference to other disclosures
that provide additional details about those amounts. ASU 2013-02 does not change the current requirements for reporting net income or other comprehensive
income in the financial statements. ASU 2013-02 is effective as of January 1, 2013. Since this standard only impacts presentation and disclosure requirements,
its adoption will not have a material impact on our consolidated results of operations or financial condition.
B.
Liquidity and Capital Resources
Historically, we have financed our operations through income generated by operations, proceeds of 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) and
2010 (approximately $20.3 million) and 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 December 2009, we sold our Israel-based headquarters’ office building for $5.2 million. We recorded a capital gain of $2.0 million as a result of the
transaction in 2009.
46
In January 2010, we purchased a consulting and staffing services business of a U.S.-based IT services company for approximately $13.7 million, of
which the remaining $1.4 million balance of the purchase price was paid in August 2012.
In October 2010, we purchased an 88% interest in Xsell Resources Inc, a U.S.-based consulting and staffing services company for $1.6 million in cash.
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. During 2012, we exercised an existing option to acquire the remaining 12%
interest, as stipulated in the original acquisition agreement, for a total consideration of $0.3 million.
In December 2010, we raised approximately $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 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. Following our dividend distributions declared with record dates of October 2, 2012 and February 25,
2013 and with respect to the warrants issuance agreement, the exercise price was adjusted to from $8.26 per share to $7.86 per share as of April 5, 2013.
In order to strengthen our presence in Southern Africa, in January 2011, we acquired a 51% interest in our South African distributor, Magix
Integration, for a total consideration of up to $1.5 million, and an option to acquire an additional 24% interest at an exercise price of $1.1 million. In April 2011,
we exercised that option and in October 2011 we purchased the remaining 25% interest in Magix Integration for additional consideration of $0.6 million,
thereby completing the acquisition of 100% of the outstanding shares of the company. Out of the total cost of $3.2 million, $2.5 million was paid in 2011 and
$0.7 million was paid in 2012. Magix Integration 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 contributed to our growth and further
strengthened our presence in the region.
In May 2011, we acquired 95% in Complete Business Solutions Ltd. and 100% interest in Complete Information Technology Ltd., both which operate
as software solution providers and Business Partners of SAP, for approximately $5.9 million. The companies are prominent software solution providers and
leading Business Partners of SAP with many years of experience in distributing and implementing SAP Business One ERP Software.
On December 27, 2011, we completed the acquisition of the AppBuilder activity of BluePhoenix Solutions, a leading provider of value-driven legacy
IT modernization solutions, for $12.6 million. During 2012, we paid an additional amount of $ 0.1 million with respect to the acquisition. AppBuilder is a
comprehensive application development infrastructure used by many enterprises around the world. This premier enterprise application development
environment is a powerful, model-driven tool that enables development teams to build, deploy, and maintain large-scale, custom-built business applications.
In July 2012, we acquired an 80% interest in Comm-IT Group, which includes CommIT Technology Solutions Ltd., CommIT Software Ltd. and
CommIT Embedded Ltd., for a total consideration of $9.0 million, of which $5.0 million was paid upon closing and the balance of $4.0 million is to be paid
during the next two years. Out of the $4.0 million balance to be paid, $1.4 million is contingent upon the acquired business meeting certain operational targets in
2012 and 2013. We and the sellers hold mutual put and call options, respectively, for the remaining 20% interest in the group. As a result, we recorded
redeemable non-controlling interest in the amount of $1.9 million. As of December 31, 2012, our liability towards the sellers (with respect to the deferred and
contingent payments) is estimated at $4 million.
47
As of December 31, 2012, we had approximately $38.7 million in cash and cash equivalents and working capital of approximately $45.2 million,
compared to approximately $32.1 million in cash and cash equivalents and working capital of approximately $37.8 million at December 31, 2011. The increase
in cash and cash equivalent is primarily attributable to cash increased from operating activities offset by investing activities resulting from funds paid in
conjunction with our business combination activity.
As of December 31, 2011 and 2012, our long-term and short term debt was less than $25,000.
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 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:
Net income from operations
Adjustments to reconcile net income to net cash provided by operating activities:
Net cash provided by operating activities
Net cash 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 operations
$
2010
Year ended December 31,
2011
(U.S. dollars in thousands)
2012
9,375 $
5,022
14,397
(391)
4,915
390
19,311
$
15,266
28
15,238
(29,828)
(503)
143
(14,950)
16,460
6,488
22,948
(10,426)
(3,425)
(64)
9,033
Net cash provided by operating activities was $23.0 million for the year ended December 31, 2012, compared to $15.2 million and $14.4 million for
the year ended December 31, 2011 and 2010, respectively. Net cash provided by operations in 2012 consists primarily of our ongoing operations and of net
income adjusted for non-cash activities, including depreciation and amortization of our capitalized research and development assets and customer relations and
stock based compensation offset by a decrease in accrued expenses and other accounts payable and deferred revenue. Net cash provided by operations in 2011
consisted consists primarily of our ongoing operations and of net income adjusted for non-cash activities, including depreciation and amortization of our
capitalized research and development assets and customer relations and stock based compensation and an increase in accrued expenses and other accounts
payable and deferred revenue, offset by an increase in trade receivable and deferred income taxes assets. Net cash provided by operations in 2010 consisted
primarily of our ongoing operations 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 used in investing activities was approximately $10.4 million for the year ended December 31, 2012, compared to net cash used in investing
activities of approximately $29.8 million for the year ended December 31, 2011 and net cash provided by investing activities of approximately $0.4 million for
the year ended December 31, 2010. Net cash used in investing activities in 2012 is primarily attributable to $7.6 million used for business combination activity,
which was significantly lower than in 2011, $5.0 million of capitalized software development costs, offset by proceeds of $3.6 million from short-term bank
deposits. Net cash used in investing activities in 2011 is primarily attributable to $23.6 million used for business combination activity, $5.2 million of
capitalized software development costs, offset by $1.6 million received upon the maturity of marketable securities. 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.
48
Net cash used in financing activities was approximately $3.4 million for the year ended December 31, 2012, primarily attributable to our $3.7 million
dividend amount. Net cash used in financing activities was approximately $0.5 million for the year ended December 31, 2011, primarily attributable to $1.4
million used to purchase a non-controlling interest in Magix Integration, offset by $0.9 million in proceeds from the exercise of options by employees. Net cash
for the year ended December 31, 2010 provided by financing activities was approximately $4.9 million, 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.
In October 2012, we paid a cash dividend of $0.10 per share ($3.7 million in the aggregate) to our shareholders of record on October 2, 2012, and in
February 2013, we declared an additional cash dividend of $0.12 per share ($4.4 million in the aggregate) to our shareholders of record on February 25, 2013
that was payable on March 14, 2013. The distributed amounts were consistent with our management dividend policy according to which, subject to any
applicable law, with respect to each year we will distribute a dividend of up to 50% of our annual distributable profits. Our Board of Directors may at its
discretion and at any time, change, whether as a result of a one-time decision or a change in policy, the rate of dividend distributions or decide not to distribute a
dividend, all at its discretion. For information about our dividend policy and distributions see Item 8A “Financial Information - Consolidated Statements and
Other Financial Information.”
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, 2010, 2011 and 2012, we invested $5.7 million, $7.3 million and $7.9 million in research and development, respectively. Research and
development activities take place in our facilities in Israel, India, Russia and Japan.
As of December 31, 2012, we employed 166 employees in research and development activities, of which 71 persons were located in Israel, 61 persons
in India, 30 persons in Russia and 4 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
For information see discussion in Item 4. “Information on the Company-Business Overview-Industry Background and Trends” and Item 5. “Operating
and Financial Review and Prospects - Results of Operations.”
49
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.
F.
TABULAR DISCLOSURE OF CONTRACTUAL OBLIGATIONS
The following table summarizes our minimum contractual obligations as of December 31, 2012 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
2,662,000
5,020,000
894,000
1,685,000
24,000
$
10,285,000
$
less than
1 year
1,569,000 $
3,828,000
-
-
12,000
5,409,000 $
1-3 years
3-5 years
$
891,000
1,192,000
-
-
-
2,083,000
$
202,000
-
-
-
12,000
214,000
*Severance payments relate to accrued severance obligations and notice obligations mainly to our Israeli and U.K. employees as required under Israeli
labor law or personal employment agreements. We are legally required to pay severance upon certain circumstances, primarily upon termination of
employment by our company, retirement or death of the respective employee. Our liability for all of our Israeli employees is fully provided for by
monthly deposits with insurance policies and by an accrual.
** Payment of uncertain tax benefits would result from settlements with taxing authorities. Due to the difficulty in determining the timing of
settlements, this information is not included in the above table. We do not expect to make any significant payments for these uncertain tax positions
within the next 12 months.
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)(3)
Elan Penn (1)(2)(3)
Naamit Salomon
Yehezkel Zeira (1)(3)
(1) Member of our Audit Committee
(2) Member of our Investment Committee
(3) Member of our compensation committee
Age
45
35
49
62
48
69
Position
Chief Executive Officer and Director
Chief Financial Officer
External director
External director
Director
Director
50
Messrs. Guy Bernstein and Yehezkel Zeira and Ms. Naamit Salomon were re-elected at our 2012 annual general meeting of shareholders to serve as
directors until our 2013 annual general meeting of shareholders. Mr. Itiel Efrat was re-elected at our 2012 annual general meeting to serve as an
external director for a third three-year term until November 25, 2015. Mr. Elan Penn is serving as an external director pursuant to the provisions of the
Israeli Companies Law for a third three-year term ending October 10, 2014.
Mr. Guy Bernstein and Mr. Asaf Berenstin are first cousins. Other than such relationship, there are no family relationships among our directors and
senior executives.
Guy Bernstein has served as our 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 the chairman of the board of directors of Sapiens International
Corporation N.V., or Sapiens, and is the chairman of the board of directors of 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 chief financial officer since April 2010. In November 2011, Asaf was appointed as Chief Financial Officer of our
parent company Formula Systems (1985) in addition to his position as chief financial officer of our company. 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 a 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 an M.B.A. degree, both from Tel-Aviv University, and is a
certified public accountant (CPA) in Israel.
Itiel Efrat has served as an external 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 external 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 external director for a third three-year term expiring on October 10, 2014. 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.
51
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
was 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.
The following table lists our other key employees:
Name
Udi Ertel
Amit Birk
Eyal Pfeifel
Oded Lavee
Regev Yativ
Tania Amar
Age
53
42
44
44
44
46
Position
Senior Vice President Global Sales
Vice President, Mergers and Acquisitions, General Counsel and
Corporate Secretary
Chief Technology Officer
Vice President Research and Development
President and Chief Executive Officer Magic Software Enterprises
Inc.
Vice President, Global Marketing
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 M.B.A. degree (without thesis), both from Tel Aviv University in Israel.
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 serves as an external 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 of 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 Ltd. 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 B.A. degree in computer science and East Asian studies from
Tel Aviv University.
52
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 selling Oracle based software and eBusiness solutions
and managed its 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 B.A. degree in Economics and an M.B.A. degree in economics and
finance, both from the University of Paris-Dauphine.
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, 2012.
All directors and executive officers as a group (12 persons)
$
359,000 $
Salaries, fees,
commissions and
bonuses
Pension, retirement
and similar benefits
55,000
During the year ended December 31, 2012, we paid to each of our outside and independent directors an annual fee of approximately $17,000 and a per-
meeting attendance fee of approximately $571. 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, 2012, our directors and executive officers as a group, then consisting of 8 persons, held options to purchase an aggregate of
732,250 ordinary shares, at exercise prices ranging from $0 to $5.95 per share. Of such options, options to purchase 25,000 ordinary shares expire in 2013,
options to purchase 81,000 ordinary shares expire in 2014, options to purchase 31,250 ordinary shares expire in 2017, options to purchase 30,000 ordinary
shares expire in 2018, options to purchase 60,000 ordinary shares expire in 2019, options to purchase 340,000 ordinary shares expire in 2020 and options to
purchase 165,000 ordinary shares expire in 2021. 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.
53
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 external 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 external 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 Stock Market Rules with regard to the nomination process of directors, since we are a
controlled company within the meaning of NASDAQ Stock Market Rule 5615(c)(1). See Item 16G. “Corporate Governance.”
External and Independent Directors
External 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 external directors. No person may be appointed as an external 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 an external 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 external director following the company’s first public offering. In
addition, no person may serve as an external director if the person’s position or other activities create or may create a conflict of interest with the person’s
responsibilities as an external director or may otherwise interfere with the person’s ability to serve as an external director. If, at the time external directors are to
be appointed, all current members of the board of directors are of the same gender, then at least one external director must be of the other gender.
At least one of the external directors must have “accounting and financial expertise” and the other external directors must have “professional
expertise,” as such terms are defined by regulations promulgated under the Israeli Companies Law.
54
The election of the nominee for external director requires the affirmative vote of ( i) the majority of the votes actually cast with respect to such
proposal including at least a majority of the voting power of the non-controlling shareholders (as such term is defined in the Israel Securities Law, 1968) or
those shareholders who do not have a personal interest in approval of the nomination except for a personal interest that is not as a result of the shareholder’s
connections with the controlling shareholder, who are present in person or by proxy and vote on such proposal, or (ii) the majority of the votes cast on such
proposal at the meeting, provided that the total votes cast in opposition to such proposal by the non-controlling shareholders or those shareholders who have a
personal interest in approval of the nomination except for a personal interest that is not as a result of the shareholder’s connections with the controlling
shareholder (as such term is defined in the Israel Securities Law, 1968) does not exceed 2% of all the voting power in the Company.
External directors serve for a three-year term, which may be renewed for two additional three-year periods through 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 external directors for
their initial term (described above); or (ii) one or more shareholders holding 1% or more of the voting rights proposed the nominee, and the nominee is
approved by the majority set forth above.
External 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 external 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. External 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 external director and the audit committee must be comprised of at least three
directors and include all the external directors. An external 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 external 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 Stock Market 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 SEC and NASDAQ.
Pursuant to the Israeli Companies Law, a director may be qualified as an independent director if such director is either (i) an outside director; or (ii) a
director that serves as a board member less than nine years and the audit committee has approved that he or she meets the independence requirements of an
outside director. A majority of the members serving on the audit committee must be independent under the Israeli Companies Law. In addition, 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 SEC 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.
Our board of directors has determined that Mr. Itiel Efrat and Mr. Elan Penn both qualify as independent directors under the SEC and NASDAQ
requirements and as external 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 SEC, NASDAQ and Israeli Companies Law requirements.
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As a controlled company, within the meaning of NASDAQ Stock Market Rule 5615(c)(1), we are exempt from the NASDAQ Stock Market Rules
requirement that a majority of a company’s board of directors qualify as independent directors, within the meaning of the NASDAQ Stock Market Rules. See
Item 16G. “Corporate Governance.”
Committees of the Board of Directors
Audit Committee. Our audit committee, established in accordance with Sections 114-117 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. 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 external directors are serving as members of the audit committee and at least
one of the external 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 Mr. Efrat, Mr. Penn and Mr. Zeira, each of whom satisfies the respective “independence” requirements
of the SEC 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.
Compensation Committee. Effective December 2012, under an amendment to the Companies Law, our Board of Directors is required to appoint a
compensation committee, whose role is to: (i) recommend a compensation policy for office holders and to recommend to the board, once every three years, on
the approval of the continued validity of the compensation policy that was determined for a period exceeding three years; (ii) recommend an update the
compensation policy from time to time and to examine its implementation; (iii) determine whether to approve the terms of service and employment of office
holders that require the committee’s approval; and (iv) exempt a transaction from the requirement of shareholders’ approval. The compensation committee also
has oversight authority over the actual terms of employment of directors and officers and may make recommendations to the board of directors and the
shareholders (where applicable) with respect to deviation from the compensation policy that was adopted by the company.
Under Israeli law, our compensation committee will consist of no less than three members, including all of our outside directors (who must constitute a
majority of the members of the committee), and that the remainder of the members of the compensation committee be directors whose terms of service and
employment were determined pursuant to the applicable regulations. The amendment imposes the same restrictions on the actions and membership in the
compensation committee as are discussed above under “Audit Committee” with respect to, among other things, the requirement that an outside director serve as
the chairman of the committee and the list of persons who may not serve on the committee. We have established a compensation committee that is currently
composed of our outside directors, Mr. Penn, Mr. Efrat and Mr. Zeira, who are eligible under the abovementioned requirement.
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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.
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.
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Approval of Transactions with Office Holders and Controlling Shareholders
Some transactions, actions and arrangements involving an office holder (or a third party in which an office holder has a personal interest) must be
approved by the board of directors and, in some cases, by the audit committee and by the board of directors, and under certain circumstances shareholder
approval may also be required, provided, however, that a transaction that is adverse to the company’s interest may not be approved. 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 have a personal
interest, then the approval of the general meeting of shareholders is also required.
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 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 March 2011, the Knesset adopted Amendment No. 16 to the Israeli Companies Law, or the Amendment, which implements a comprehensive reform
in the corporate governance of Israeli companies. Among other things, the Amendment added to the Israeli Companies Law the requirement that an
engagement with a controlling shareholder, including with an entity controlled by the controlling shareholder or his or her relative, regarding the provision of
services to the company by such person or entity, be approved by the audit committee, the board of directors and a special majority of the shareholders (in that
order). Pursuant to the Amendment, any such engagement that is for a period of more than three years must be approved by the shareholders every three years.
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.
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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.
Approval Process of Terms of Service and Employment of Office Holders
Under the Israeli Companies Law, as revised in Amendment No. 20 that became effective December 20, 2012, or Amendment No. 20, the method of
approval of Terms of Service and Employment of office holders must be approved as follows:
• With respect to an office holder who is not the general manager, a director, a controlling shareholder or a relative of the controlling shareholder:
o
o
In the event the transaction is in accordance with the Compensation Policy – approval (in the following order) of: (i) compensation
committee and (ii) board of directors.
In the event the transaction is not in accordance with the Compensation Policy – approval, in special cases (in the following order),
by the (i) compensation committee, (ii) board of directors and (iii) company’s shareholders, by the “special majority” described
above in connection with the approval of the Compensation Policy. Under these circumstances, the compensation committee and
board of directors are still required to approve the transaction based on the considerations, issues and to include the instructions, set
forth above in connection with the content of the Compensation Policy. In the event the company’s shareholders do not approve the
compensation of the office holder, the compensation committee and board of directors may still approve the transaction, in special
cases and with detailed reasons and after discussion and examining the rejection of the company’s shareholders.
• With respect to a company’s general manager (generally the equivalent of a CEO):
o
o
In the event the transaction is in accordance with the Compensation Policy - approval (in the following order) by the: (i)
compensation committee, (ii) board of directors and (iii) company’s shareholders with the “special majority” described above in
connection with the approval of the Compensation Policy.
In the event the transaction is not in accordance with the Compensation Policy – the approval process and requirements are the same
as the approval process for such a transaction with an office holder who is not the general manager, a controlling shareholder or a
relative of the controlling shareholder.
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o
Amendment No. 20 includes an exception from the shareholder approval requirement in connection with the approval of a
transaction with a general manager candidate, subject to certain conditions. In addition, in the event the company’s shareholders do
not approve the compensation of the general manager, the compensation committee and board of directors may still approve the
transaction, in special cases and with detailed reasons and after discussion and examining the rejection of the company’s
shareholders.
• With respect to a director who is not a controlling shareholder or a relative of the controlling shareholder:
o
o
In the event the transaction is in accordance with the Compensation Policy – approval (in the following order) by the: (i)
compensation committee, (ii) board of directors and (iii) company’s shareholders with a regular majority.
In the event the transaction is not in accordance with the Compensation Policy – the approval process and requirements are the same
as the approval process for such a transaction with an office holder who is not the general manager, a controlling shareholder or a
relative of the controlling shareholder (other than the possibility to approve a transaction that was not approved by the shareholders).
• With respect to a controlling shareholder or a relative of a controlling shareholder:
o
o
In the event the transaction is in accordance with the Compensation Policy - approval (in the following order) by the: (i)
compensation committee, (ii) board of directors and (iii) company’s shareholders with the “special majority” described above in
connection with the approval of the Compensation Policy.
In the event the transaction is not in accordance with the Compensation Policy: the approval process and requirements are the same
as the approval process for such a transaction with an office holder who is not the general manager, a controlling shareholder or a
relative of the controlling shareholder (other than the possibility to approve a transaction that was not approved by the shareholders).
Amendment No. 20 also includes certain transitional provisions that apply to approval of terms of service and employment of office holders prior to the
adoption of a Compensation Policy.
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.
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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.
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 and Indemnification of Office Holders
The Israeli Companies Law and our Articles of Association authorize us, subject to the receipt of requisite corporate approvals, to indemnify and
exempt our directors and officers, subject to certain conditions and limitations. In the past, our Audit Committee, board of directors and shareholders approved
the issuance of indemnification and exculpation letters to all our directors and officers (including directors and officers who could be deemed to be controlling
shareholders, within the meaning of the Israeli Companies Law). In light of the recent amendments to the Israeli Securities Law, our shareholders approved at
our 2011 annual general meeting an amendment to our form of indemnification and exculpation letter to ensure that our directors and officers (including any
director and officer who may be deemed to be a controlling shareholder, within the meaning of the Israeli Companies Law) are afforded protection to the fullest
extent permitted by law as currently in effect. Under the approved form of indemnification and exculpation letter, the total amount of indemnification allowed
may not exceed an amount equal to 25% of our shareholders’ equity in the aggregate, calculated with respect to each of our directors and officers.
The Israeli Companies Law provides that a 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 or indemnify 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. 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:
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• 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, 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.
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.
Our articles of association allow us to insure our office holders to the fullest extent permitted by law. Until its expiration in December 2011, we
maintained a directors’ and officers’ liability insurance policy with liability coverage of up to $20 million per claim and in the aggregate (including legal costs
incurred world-wide) of an annual premium of $39,000. At our 2011 annual general meeting, our shareholders approved a framework agreement of terms and
conditions for the renewal, extension or replacement, from time to time, for a period of up to three years from December 14, 2011, of our directors’ and officers’
liability insurance policy for all directors and officers of the company and its subsidiaries, who may serve from time to time (including a director who may be
deemed a controlling shareholder, within the meaning of the Israeli Companies Law), according to which (i) the annual aggregate premium of the New Policy
may not exceed 25% of the previous year’s aggregate premium; (ii) the coverage limit per claim and in the aggregate under the New Policy may not exceed an
amount representing an increase of 25% in any year, as compared to the previous year’s aggregate coverage limit; and (iii) the terms of any new policy must be
identical with respect to all of our officers and directors (including officers and directors who may be deemed controlling shareholders, within the meaning of
the Israeli Companies Law). No further approval by our shareholders will be required in connection with any renewal, extension or purchase of any new policy
entered into in compliance with the foregoing terms and conditions of the framework agreement.
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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.
D.
EMPLOYEES
The following table presents the number of our employees categorized by geographic location as of December 31:
Israel
Asia
North America
South Africa
Europe
Total
Year ended December 31,
2011
2010
2012
106
99
394
-
79
678
144
97
623
41
73
977
287
105
460
34
120
1,006
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
Year ended December 31,
2011
2010
2012
410
96
107
65
678
689
96
124
69
977
681
136
109
80
1,006
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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 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 April 5, 2013 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)
—
200,000
54,166
—
18,000
—
Percentage of
Ownership (2)
—
*
*
—
—
—
(1)
(2)
(3)
Beneficial ownership is determined in accordance with the rules of the SEC 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 36,692,046 ordinary shares issued and outstanding as of April 5, 2013.
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.
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(4)
Subject to currently exercisable options granted under our 2007 Stock Option Plan, having an exercise price ranging from $0 to $4 per share that
expire in 2018 and 2019.
Stock-Based Compensation Plans
2000 Stock Option Plan
In 2000, we adopted our 2000 Employee Stock Option Plan, or the 2000 Plan, which terminated in November 2010. No award of options can be made
under this plan after such date. 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 2012, options to purchase an aggregate of 108,498 ordinary shares were exercised under the 2000 Plan at an average exercise price of $2.79 per
share. As of December 31, 2012, our executive officers and directors as a group, consisting of 8 persons, held options to purchase 106,000 ordinary shares under
the 2000 Plan, having an average exercise price of $4.68 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 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.
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.
65
In 2012, we increased the amount of ordinary shares reserved for issuance under the 2007 Stock Option Plan by 1,000,000 shares.
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, (i) so
as to preserve or come within any exemptions from liability under any law or the rules and releases promulgated by the SEC, or (ii) if the Board of Directors or
the option committee determines in its discretion that such amendment or alteration either is (a) 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 (b) not reasonably likely to significantly diminish the
benefits provided under such award, or that such diminishment has been or will be adequately compensated.
As of December 31, 2012, options to purchase an aggregate 28,210 ordinary shares were outstanding under the 2007 Plan having an average exercise
price of $0.2 per share. As of December 31, 2011, our executive officers and directors as a group, consisting of 8 persons, held options to purchase 626,250
ordinary shares under the 2007 Plan, having an average exercise price of $2.41 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 TASE, holds 19,160,044 or 52.3% 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 as of April 5, 2013 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)
19,160,044
6,823,602
Percentage of
Ownership (2)
52.2%
50.2%
(1)
Beneficial ownership is determined in accordance with the rules of the SEC 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.
(2)
The percentages shown are based on 36,692,046 ordinary shares issued and outstanding as of April 5, 2013.
66
(3)
Asseco owned 50.2% of the outstanding shares of Formula Systems as of as of April 5, 2013. As such, Asseco may be deemed to be the
beneficial owner of the aggregate 19,160,044 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
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. On September 11, 2012 Formula Systems filed a Schedule 13D/A with the SEC
reflecting ownership of 19,050,044 of our ordinary shares.
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 April 15, 2013, there were approximately 81 record holders, of
which 62 record holders holding approximately 76.5% 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 54.8% of our
outstanding ordinary shares as of such date).
B.
RELATED PARTY TRANSACTIONS
Under the Israeli Companies Law, or the Amendment, an engagement with a controlling shareholder, including with an entity controlled by the
controlling shareholder or his or her relative, regarding the provision of services to the company by such person or entity, must be approved by the audit
committee, the board of directors and a special majority of the shareholders (in that order). Pursuant to the Amendment, any such engagement that is for a
period of more than three years must be approved by the shareholders every three years.
On September 1, 2011 our company signed a non-exclusive distribution agreement with Asseco, our controlling shareholder, according to which
Asseco will have the non-exclusive right to sell our company’s products in Poland. The terms of the agreement are consistent with the standard distribution
agreements that we have entered into from time to time with third party distributors. Our Audit Committee and Board of Directors have determined that the
agreement with Asseco was carried out on an arm’s - length basis. At our 2011 annual general meeting our shareholders approved entry into an agreement with
Asseco to act as our products’ distributer in Poland, as required by the Amendment. As of December 31, 2012 the distribution agreement with Asseco to sell our
company’s products in Poland was terminated.
C.
INTERESTS OF EXPERTS AND COUNSEL
Not applicable.
67
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.
Legal Proceedings
In addition to the below mentioned legal proceedings, we and our subsidiaries are, from time to time, subject to legal, administrative and regulatory
proceedings, claims, demands and investigations in the ordinary course of business, including claims with respect to intellectual property, contracts,
employment and other matters. Based upon the advice of counsel, we do not believe that the ultimate resolution of these matters will materially affect our
consolidated financial position, results of operations or cash flows.
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 488,000 Euros (approximately $643,000). In June 2009, the court rejected the plaintiff’s claims. In
July 2009, the plaintiff filed an appeal. The appeal was dismissed in February 2012.
In August 2009, a software company and one of its owners filed an arbitration proceeding 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 NIS 52 million (approximately
$14 million). The arbitrator determined that both we and our subsidiary breached the non-disclosure agreement, but hearing of testimony and closing summaries
regarding damages have not yet been submitted. In June 2011, the plaintiffs filed a motion to allow them to amend the claim by adding new causes of action and
increasing the damages claimed in the lawsuit by approximately NIS 238 million (approximately $64 million), based on new arguments. Following discussions,
the arbitrator rejected the motion and determined that if the plaintiffs wish to claim the additional damages (and the additional causes of action) they should do
so in a separate legal proceeding. To date, the plaintiffs did not file an additional lawsuit. At this time, given the multiple uncertainties involved and in large part
to the highly speculative nature of the damages sought by the plaintiff and the wide discretion given to the arbitrator in quantifying and awarding damages, we
are unable to estimate the amount of the probable loss, if any, to be recognized. However, we recorded an accrual to cover future related expenses, as estimated
by the Company's legal counsel.
68
Dividend Distributions Policy
In September 2012, our Board of Directors adopted a policy for distributing dividends, under which we will distribute a dividend of up to 50% of our
annual distributable profits each year, subject to any applicable law. It is possible that our Board of Directors will decide, subject to the conditions stated above,
to declare additional dividend distributions. Our Board of Directors may at its discretion and at any time, change, whether as a result of a one-time decision or a
change in policy, the rate of dividend distributions or not to distribute a dividend, at its discretion.
In line with our Board of Directors dividend policy, in October 2012, we paid a cash dividend of $0.10 per share ($3.7 million in the aggregate) to our
shareholders of record on October 2, 2012 and in February 2013 we declared an additional cash dividend of $0.12 per share ($4.4 million in the aggregate) to
our shareholders of record on of February 25, 2013 that was payable on March 14, 2013.
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.
B.
SIGNIFICANT CHANGES
Except as otherwise disclosed in this annual report, no significant change has occurred since December 31, 2012.
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
Select Market (for periods from January 3, 2011) or the NASDAQ Global Market (for periods prior to January 3, 2011) and the TASE:
Year
2008
2009
2010
2011
2012
NASDAQ
TASE*
High
Low
High
Low
$
$
$
$
$
2.38
2.50
8.43
9.74
7.32
$
$
$
$
$
0.94
0.98
1.55
3.91
3.76
$
$
$
$
$
2.47 $
2.38 $
8.11 $
9.55 $
7.42 $
0.91
1.04
1.56
3.95
3.94
* The U.S. dollar price of shares on the TASE 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.
69
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 Select Market (for periods from January 3, 2011) or the NASDAQ Global Market (for periods prior to January 3,
2011) and the TASE:
2011
First Quarter
Second Quarter
Third Quarter
Fourth Quarter
2012
First Quarter
Second Quarter
Third Quarter
Fourth Quarter
2013
First Quarter
Second Quarter (through April 5, 2013)
NASDAQ
TASE*
High
Low
High
Low
$
$
$
$
$
$
$
$
$
$
9.74
7.75
6.45
6.38
7.32
6.60
5.63
4.92
5.58
5.28
$
$
$
$
$
$
$
$
$
$
5.04 $
4.30 $
3.91 $
3.92 $
4.97 $
5.33 $
4.01 $
3.76 $
4.46 $
4.75 $
8.26
7.24
5.21
5.37
7.42
6.65
5.66
4.99
5.42
5.25
$
$
$
$
$
$
$
$
$
$
7.12
4.75
4.36
4.66
4.98
5.47
3.98
3.94
4.53
5.00
* The U.S. dollar price of shares on the TASE 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.
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 TASE:
$
October 2012
$
November 2012
$
December 2012
$
January 2013
$
February 2013
March 2013
$
April 2013 (through April 5, 2013) $
NASDAQ
TASE*
High
Low
High
Low
4.59
4.67
4.92
4.98
5.05
5.58
5.28
$
$
$
$
$
$
$
4.26
3.76
4.25
4.46
4.56
4.62
4.75
$
$
$
$
$
$
$
4.63 $
4.65 $
4.99 $
4.86 $
5.41 $
5.42 $
5.25 $
4.31
3.94
4.43
4.53
4.62
4.65
5.00
* The U.S. dollar price of shares on the TASE 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.
70
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 TASE, and on December 15, 2011 they have been included in the TASE’s TA-100 Index.
D.
SELLING SHAREHOLDERS
E.
F.
Not applicable.
DILUTION
Not applicable.
EXPENSES OF THE ISSUE
Not applicable.
ITEM 10.
ADDITIONAL INFORMATION
A.
SHARE CAPITAL
Not applicable.
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 an exhibit to this Annual Report.
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.”
According to a recent amendment to our articles of association, which was approved at our 2011 annual general meeting of shareholders, and under the
limitations described therein, our board of directors may cause the company to borrow or secure the payment of any sum or sums of money for the purposes of
the company, and set aside any amount out of our profits as a reserve for any purpose.
71
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 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 external 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 external 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 external directors). See “Item 7A. Major Shareholders and Related Party Transactions – Major
Shareholders.” For information regarding the election of external 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.
72
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 “extraordinary general meetings.” In addition, the board must convene an
extraordinary general meeting upon the demand of two of the directors, 25% of the nominated directors, one or more shareholders holding 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.
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.
73
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
While we have numerous contracts with customers, resellers, distributors and landlords, we do not deem any such individual contract to be material
contracts which are not in the ordinary course of our business.
D.
EXCHANGE CONTROLS
Israeli law and regulations do not impose any material foreign exchange restrictions on non-Israeli holders of our ordinary shares.
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
The Israeli corporate tax was 25% in 2010, 24% in 2011 and 25% in 2012 and is scheduled to remain at 25% in 2013 and thereafter.
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.
74
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 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%.
75
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 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.
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In December 2010, the Knesset passed the Law for Economic Policy for 2011 and 2012 (Amended Legislation), 2011, which, among other things,
includes an amendment to the Investment Law, effective as of January 1, 2011. According to the amendment, the benefit tracks under the Investment Law were
modified and a uniform tax rate will apply to companies eligible for the "Preferred Enterprise" status. In order to be eligible for preferred enterprise status, a
company must meet minimum requirements to establish that it contributes to the country's economic growth and is a competitive factor for the gross domestic
product. Companies 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 as follows: in peripheral regions (Development Area A) the reduced tax rate is 10% in 2011 and 2012
and is scheduled to be 7% in 2013 and 2014 and 6% starting from 2015. In other regions the tax rate is 15% in 2011 and 2012 and is scheduled to be 12.5% in
2013 and 2014 and 12% starting from 2015. Preferred Enterprises in peripheral regions will be eligible for Investment Center grants, as well as the applicable
reduced tax rates.
Temporary, partial tax relief for repatriation of exempt income
A recent amendment to the Investment Law, which became effective on November 12, 2012, provides temporary tax relief on the amount of tax which
should have been paid on distributable tax exempt earnings, in order to encourage companies to pay the reduced taxes during the next 12 months. Pursuant to
this amendment, a company may elect by November 11, 2013 to pay a reduced corporate tax rate with respect to undistributed exempt Approved or Privileged
income, accumulated up until December 31, 2011. An election to release a greater amount of the total accumulated exempt earnings will result in a higher relief
from the corporate income tax, reflecting an effective tax rate ranging from 6% to 17.5%, based on our corporate tax rate in the year in which the income was
derived and the amount of “trapped” retained earnings elected to be relieved, without taking into account the 15% dividend withholding tax, which should be
levied only upon actual distribution, if any.
The reduced corporate tax is payable within 30 days of making the election. Following the payment of the reduced corporate taxes, the company will
be entitled to distribute dividends from such income without being required to pay additional corporate taxes with respect to such dividends. The amendment
does not require the actual distribution of the retained earnings, nor does it provide any relief from the dividend withholding tax. A company that has made this
election must make certain qualified investments in Israel over the five year period commencing 2013. A company that has elected to apply the amendment
cannot withdraw from its election.
The Investment Law treats certain payments made by a company from cash resources derived from tax exempt income, as a deemed dividend
distribution event, triggering a corporate tax liability, at the regular Approved or Privileged income tax rates. Such payments include but are not limited to,
repurchase of shares and payments made to substantial shareholders as defined in the Law. The above amendment to the Law stipulated that investments in
subsidiaries including in the form of acquisition of subsidiaries from unrelated party, may be also considered as a deemed dividend distribution event, thus
increasing the risk of triggering a deemed dividend distribution event and therefore a potential tax exposure. The ITA interpretation is that this provision applies
retroactively to investments and acquisitions made prior to the amendment.
We are evaluating the new amendment and temporary provision and their implications on our company.
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.
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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:
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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
Israeli Resident Shareholders
In 2011, an individual was 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.
Pursuant to the Tax Burden Law, the capital gain tax rate applicable to individuals was raised from 20% to 25% from 2012 and onwards (or from 25%
to 30% if the selling individual shareholder is a substantial shareholder at any time during the 12-month period preceding the sale). With respect to assets (not
shares that are listed on a stock exchange) purchased on or after January 1, 2003, the portion of the gain generated from the date of acquisition until December
31, 2011 will be subject to the previous capital gains tax rates (20% or 25%) and the portion of the gain generated from January 1, 2012 until the date of sale
will be subject to the new tax rates (25% and 30%).
Non-Israeli Resident Shareholders
Israeli capital gains tax is imposed on the disposal of capital assets by a non-Israeli resident if such assets are either (i) located in Israel; (ii) shares or
rights to shares in an Israeli resident company; or (iii) represent, directly or indirectly, rights to assets located in Israel, unless a tax treaty between Israel and the
seller’s country of residence provides otherwise. As mentioned above, Real Capital Gain derived by a company is generally subject to tax at the corporate tax
rate (24% in 2011 and 25% in 2012) or, if derived by an individual, at the rate of 20% (25% in 2012), or 25% (30% in 2012), if generated from an asset
purchased on or after January 1, 2003. Individual and corporate shareholders dealing in securities in Israel are taxed at the tax rates applicable to business
income (a corporate tax rate for a corporation and a marginal tax rate of up to 45% for an individual in 2011).
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Shareholders who are non-Israeli residents (individuals and corporations) are generally exempt from Israeli capital gains tax on any gains derived from
the sale, exchange or disposition of shares publicly traded on the TASE or on a recognized stock exchange outside of Israel, provided, among other things, that
(i) such gains are not generated through a permanent establishment that the non-Israeli resident maintains in Israel, (ii) the shares were purchased after being
listed on a recognized stock exchange outside of Israel, and (iii) such shareholders are not subject to the Inflationary Adjustments Law. However, non-Israeli
corporations will not be entitled to the foregoing exemptions if an Israeli resident (a) has a controlling interest of 25% or more in such non-Israeli corporation,
or (b) is the beneficiary of or is entitled to 25% or more of the revenues or profits of such non-Israeli corporation, whether directly or indirectly. Such exemption
is not applicable to a person whose gains from selling or otherwise disposing of the shares are deemed to be business income.
In addition, a sale of securities may be exempt from Israeli capital gains tax under the provisions of an applicable tax treaty. For example, under the
U.S.-Israel Tax Treaty, which we refer to as the U.S-Israel Treaty, the sale, exchange or disposition of shares of an Israeli company by a shareholder who is a
U.S. resident (for purposes of the U.S.-Israel Treaty) holding the shares as a capital asset is exempt from Israeli capital gains tax unless either (i) the shareholder
holds, directly or indirectly, shares representing 10% or more of the voting capital during any part of the 12-month period preceding such sale, exchange or
disposition; (ii) the shareholder, being an individual, has been present in Israel for a period or periods of 183 days or more in the aggregate during the applicable
taxable year; or (iii) the capital gains arising from such sale are attributable to a permanent establishment of the shareholder which is maintained in Israel. In
either case, the sale, exchange or disposition of such shares would be subject to Israeli tax, to the extent applicable; however, under the U.S.-Israel Treaty, a
U.S. resident would be permitted to claim a credit for the Israeli tax against the U.S. federal income tax imposed with respect to the sale, exchange or
disposition, subject to the limitations in U.S. laws applicable to foreign tax credits. The U.S.-Israel Treaty does not provide such credit against any U.S. state or
local taxes.
Payors of consideration for traded securities, like our ordinary shares, including the purchaser, the Israeli stockbroker effectuating the transaction, or
the financial institution through which the sold securities are held, are required, subject to any of the foregoing exemptions and the demonstration of a
shareholder regarding his, her or its foreign residency, to withhold tax upon the sale of publicly traded securities from the consideration or from the Real Capital
Gain derived from such sale, as applicable, at the rate of 25%.
Israeli Tax on Dividend Income
Israeli Resident Shareholders
Israeli residents who are individuals are generally subject to Israeli income tax for dividends paid on our ordinary shares (other than bonus shares or
share dividends) at 20%, or 25% if the recipient of such dividend is a substantial shareholder at the time of distribution or at any time during the preceding 12-
month period. Pursuant to the Tax Burden Law, as of 2012 such tax rate is 25%, or 30% if the dividend recipient is a substantial shareholder at the time of
distribution or at any time during the preceding 12-month period. However, dividends distributed from taxable income accrued during the period of benefit of an
Approved Enterprise, Benefited Enterprise or Preferred Enterprise are subject to withholding tax at the rate of 15%, if the dividend is distributed during the tax
benefit period under the Investment Law or within 12 years after that period. An average rate will be set in case the dividend is distributed from mixed types of
income (regular and Approved/ Benefited/ Preferred income).
Non-Israeli Resident Shareholders
Non-Israeli residents (whether individuals or corporations) are generally subject to Israeli withholding tax on the receipt of dividends paid for publicly
traded shares, like our ordinary shares, at the rate of 20% (25% in 2012, so long as the shares are registered with a Nominee Company) or 15% if the dividend is
distributed from income attributed to our Approved Enterprises, unless a reduced rate is provided under an applicable tax treaty. For example, under the U.S.-
Israel Treaty, the maximum rate of tax withheld in Israel on dividends paid to a holder of our ordinary shares who is a U.S. resident (for purposes of the U.S.-
Israel Treaty) is 25%. However, generally, the maximum rate of withholding tax on dividends that are paid to a U.S. corporation holding at least 10% or more of
our outstanding voting capital from the start of the tax year preceding the distribution of the dividend through (and including) the distribution of the dividend, is
12.5%, provided that no more than 25% of our gross income for such preceding year consists of certain types of dividends and interest. Notwithstanding the
foregoing, dividends distributed from income attributed to an Approved Enterprise, a Benefited Enterprise or a Preferred Enterprise are subject to a withholding
tax rate of 15% for such a U.S. corporation shareholder, provided that the condition related to our gross income for the previous year (as set forth in the previous
sentence) is met. If the dividend is attributable partly to income derived from an Approved Enterprise, a Benefitted Enterprise or a Preferred Enterprise, and
partly to other sources of income, the withholding rate will be a blended rate reflecting the relative portions of the two types of income. U.S. residents who are
subject to Israeli withholding tax on a dividend may be entitled to a credit or deduction for U.S. federal income tax purposes in the amount of the taxes
withheld, subject to detailed rules contained in United States tax legislation.
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A non-Israeli resident who receives dividends from which tax was withheld is generally exempt from the obligation to file tax returns in Israel with
respect to such income, provided that (i) such income was not generated from business conducted in Israel by the taxpayer, and (ii) the taxpayer has no other
taxable sources of income in Israel with respect to which a tax return is required to be filed.
Payors of dividend on our ordinary shares and ADSs, including the Israeli stockbroker effectuating the transaction, or the financial institution through
which the securities are held, are required, subject to any of the foregoing exemptions and the demonstration of a shareholder regarding his, her or its foreign
residency, to withhold tax upon the distribution of dividend at the rate of 25% (for corporations and individuals).
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:
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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.
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This summary does not address the effect of any U.S. federal taxation other than U.S. federal income 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:
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an individual who is a citizen or, for U.S. federal income tax purposes, a resident of the United States;
a corporation or other entity taxable as 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
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.
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Subject to certain limitations, “qualified dividend income” received by a non-corporate U.S. Holder in tax years after December 31, 2012 will be
subject to tax at a reduced maximum tax rate of 20 percent. Distributions taxable as dividends paid on the ordinary shares should qualify for the 20 percent rate
provided that either: (i) we are entitled to benefits under the income tax treaty between the United 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. The legislation enacting the reduced tax rate contains special rules for computing the foreign tax credit
limitation of a taxpayer who receives dividends subject to the reduced tax rate. U.S. Holders of ordinary shares should consult their own tax advisors regarding
the effect of these rules in their particular circumstances.
Additional Tax on Investment Income
In addition to the income taxes described above, U.S. Holders that are individuals, estates or trusts and whose income exceeds certain thresholds will
be subject to a 3.8% Medicare contribution tax on net investment income, which includes dividends and capital gains.
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 generally be 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.
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Passive Foreign Investment Companies
For U.S. federal income tax purposes, we will be considered 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 all of our assets for the taxable year which produce or are held for the production of passive income.
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, you may be required
to file IRS Form 8621 with your tax return, 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,
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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, and
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.
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 loss on a disposition of ordinary shares is
treated as capital loss to the extent the loss exceeds the net mark-to-market gains, if any, that you included in income with respect to such ordinary shares in
prior years). Gain or loss from the disposition of ordinary shares (as to which a mark-to-market election was made) in a year in which we are no longer a PFIC,
will be capital gain or loss.
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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 the rate (currently) of 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. individuals that hold certain specified foreign financial assets, including stock in a foreign corporation, with values in excess of certain thresholds
are required to file Form 8938 with their U.S. Federal income tax return. Such Form requires disclosure of information concerning such foreign assets, including
the value of the assets. Failure to file the form when required is subject to penalties. An exemption from reporting applies to foreign assets held through a U.S.
financial institution, generally including a non-U.S. branch or subsidiary of a U.S. institution and a U.S. branch of a non-US institution. Investors are
encouraged to consult with their own tax advisors regarding the possible application of this disclosure requirement to their investment in ordinary shares.
Any U.S. holder who holds 10% or more in vote or value of our ordinary shares will be subject to certain additional United States information
reporting requirements.
F.
DIVIDENDS AND PAYING AGENTS
Not applicable.
G.
STATEMENT BY EXPERTS
Not applicable.
H.
DOCUMENTS ON DISPLAY
We are subject to certain of the reporting requirements of 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 SEC an annual report on Form 20-F containing financial statements audited by an independent accounting firm. We
also submit to the SEC 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 SEC. 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 SEC public reference room at 100 F Street, N.E., Room 1580, Washington, D.C. 20549. You may obtain information on the operation
of the SEC’s public reference room in Washington, D.C. by calling the SEC at 1-800-SEC-0330. The Exchange Act file number for our SEC filings is 000-
19415.
84
The SEC 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 SEC 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.
As of December 31, 2012, we had approximately $37.8 million in cash and cash equivalents and short term bank deposits and $0.9 million in
marketable securities. Our marketable securities include investments in commercial and government bonds and foreign banks and equity funds. As of such date
our marketable securities portfolio was composed primarily of governmental and commercial bonds bearing average annual interest rates of approximately
5.0%, with average maturities of 1.5 years and maximum maturities of 1.8 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, 2012, net unrealized gain in our marketable securities portfolio totaled $173,000. 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.
85
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 2012, we entered into forward and option contracts to hedge the fair value of assets and liabilities denominated in NIS, Euro and Japanese Yen. As
of December 31, 2012, we had outstanding forward contracts that did not meet the requirement for hedge accounting in the amount of $0.1 million. These
contracts were for a period of up to 12 months. The net gains recognized in “financial income, net” during 2012 were $0.2 million.
During 2012, we entered into forward and option contracts to hedge against the risk of overall changes in future cash flow from mainly payments of
payroll and related expenses denominated in NIS. As of December 31, 2012, we had outstanding forward and option contracts that met the requirement for
hedge accounting, in the amount of $0 million. These contracts met the requirement for cash flow hedge accounting and as such (losses) in the amount of $0
million were recognized when the related expense were incurred and classified in operating expenses during 2012.
Our operating expenses may be affected by fluctuations in the value of the U.S. dollar as it relates to foreign currencies, with NIS, Euro and Japanese
Yen 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 2012 would
have resulted in a decrease in the U.S. dollar reporting value of our operating income of $3.2 million for that year, while a decrease of 10% in the value of the
NIS relative to the U.S. dollar in 2012 would have resulted in an increase in the U.S. dollar reporting value of our operating income of $2.6 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 2012 would have resulted in an increase in the
U.S. dollar reporting value of our operating income of $0.6 million, $0.3 million and $0.3 million, respectively, for that year, while a decrease of 10% in the
value of the Euro, Japanese Yen and British Pound relative to the U.S. dollar in 2012 would have resulted in a decrease in the U.S. dollar reporting value of our
operating income of $0.6 million, $0.3 million and $0.3 million, respectively, for that year.
Equity Price Risk
As of December 31, 2012, we had $0.9 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 $90,000.
ITEM 12.
DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES
Not applicable.
ITEM 13.
DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES
None.
PART II
ITEM 14.
MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USE OF PROCEEDS
Not applicable.
86
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 SEC’s rules and forms, and that such information is accumulated and
communicated to our chief executive officer and chief financial officer to allow timely decisions regarding required disclosure. Our management, including our
chief executive officer and 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 chief executive officer and chief financial
officer 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 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 effect on the financial statements.
Our management assessed the effectiveness of our internal control over financial reporting as of December 31, 2012. 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, 2012, our internal control over financial reporting was effective.
The effectiveness of management’s internal control over financial reporting as of December 31, 2012 has been audited by our company’s independent
registered public accountants, Kost Forer Gabbay & Kasierer, a member of Ernst & Young Global, and their report as of April 24, 2013, herein expresses an
unqualified opinion on our company’s internal control over financial reporting.
Attestation Report of the Registered Public Accounting Firm
Our independent registered public accounting firm has issued an audit report on the effectiveness of our internal control over financial reporting. This
report is included under Item 18.
87
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 external director within the meaning of the Israeli Companies Law, meets the definition
of an audit committee financial expert, as defined by rules of the SEC. 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.
Audit (1)
Audit-related
Tax (3)
Total
Services Rendered
Year Ended December 31,
2011
2012
$
$
$
191,500
12,000(2)
54,700
258,200
$
$
$
210,000
8,000(2)
77,700
295,700
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 2011 and 2012 relate to due diligence services performed in connection with our acquisitions.
(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 SEC, and also
requires the Audit Committee to consider whether proposed services are compatible with the independence of the public accountants.
88
ITEM 16D.
EXEMPTIONS FROM THE LISTING STANDARDS FOR AUDIT COMMITTEES
Not applicable.
ITEM 16E.
PURCHASES OF EQUITY SECURITIES BY THE ISSUER AND AFFILIATED PURCHASERS
We did not purchase any ordinary shares of our company nor did any affiliated purchaser purchase any shares on our behalf during 2012. Although we
do not believe that Formula Systems may be deemed to be an affiliated purchaser as defined in the Exchange Act, according to the Schedule 13D/A Formula
Systems filed with the SEC on September 11, 2012 from December 2008 through September 7, 2012, it purchased an aggregate of 515,292 of our ordinary
shares in open market transactions for an aggregate purchase price of approximately $2,500,000. This brought Formula System’s ownership interest in our
shares to 52.0%.
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 Stock Market Rule 5615(c)(1), since Formula Systems holds more than 50% of our
voting power. Under NASDAQ Stock Market Rule 5615(c)(1), a controlled company is exempt from the following requirements of NASDAQ Stock Market
Rule 5605:
•
•
•
The requirement that the majority of the company’s board of directors qualify as independent directors, as defined under NASDAQ Stock Market
Rules. Instead, we follow Israeli law and practice which requires that we appoint at least two external 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
SEC 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 Israeli law there is a different method of approval of Terms of Service and Employment of office holders. See Item
6C “Directors, Senior Management and Employees – Board Practices.”
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 Stock Market Rules, we may instead elect to follow
Israeli law instead of the foregoing NASDAQ requirements, as described below.
89
NASDAQ Stock Market Rules and Home Country Practice
Under NASDAQ Stock Market 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 Stock Market 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 Stock Market 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.
ITEM 16H. MINE SAFETY DISCLOSURE
Not applicable.
90
PART III
ITEM 17.
FINANCIAL STATEMENTS
Not applicable.
ITEM 18.
FINANCIAL STATEMENTS
Index to Financial Statements
Reports of Independent Registered Public Accounting Firm
Consolidated Balance Sheets
Consolidated Statements of Income
Consolidated Statements of Comprehensive Income
Statements of Changes in Equity
Consolidated Statements of Cash Flows
Notes to Consolidated Financial Statements
Appendix to Consolidated Financial Statements – Details of Subsidiaries and Affiliate
ITEM 19.
EXHIBITS
Index to Exhibits
Exhibit
Description
F-1
F-2 – F-4
F-5 – F-6
F- 7
F-8
F-9
F-10 – F-12
F-13– F-55
F-56
1.1
1.2
2.1
4.1
4.2
4.3
8.1
12.1
12.2
13.1
13.2
15.1
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
Form of Warrant6
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
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
91
15.2
15.3
15.4
15.5
15.6
101.INS*
101.SCH*
101.PRE*
101.CAL*
101.LAB*
101.DEF*
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.)
XBRL Instance Document7
XBRL Taxonomy Extension Schema Document7
XBRL Taxonomy Presentation Linkbase Document7
XBRL Taxonomy Calculation Linkbase Document7
XBRL Taxonomy Label Linkbase Document7
XBRL Taxonomy Extension Definition Linkbase Document7
*
(1)
(2)
(3)
(4)
(5)
(6)
(7)
Pursuant to Rule 406T of Regulation S-T, these interactive data files are deemed not filed or part of a registration statement or prospectus for
purposes of Sections 11 or 12 of the Securities Act of 1933, as amended, are deemed not filed for the purposes of Section 18 of the Securities and
Exchange Act of 1934, as amended, and otherwise are not subject to liability under those sections.
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 an Item to the registrant’s Form 6-K for the month of December 2011, filed on December 7, 2011, 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 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.
To be filed by amendment to this Annual Report on Form 20-F for the year ended December 31, 2012.
92
MAGIC SOFTWARE ENTERPRISES LTD. AND ITS SUBSIDIARIES
CONSOLIDATED FINANCIAL STATEMENTS
AS OF DECEMBER 31, 2012
U.S. DOLLARS IN THOUSANDS
INDEX
Reports of Independent Registered Public Accounting Firm
Consolidated Balance Sheets
Consolidated Statements of Income
Consolidated Statements of Comprehensive Income
Statements of Changes in Shareholders' Equity
Consolidated Statements of Cash Flows
Notes to Consolidated Financial Statements
Appendix to Consolidated Financial Statements - Details of Subsidiaries and Affiliate
- - - - - - - - - - - -
Page
F-2 – F-4
F-5 - F-6
F-7
F-8
F-9
F-10 - F-12
F-13 - F-55
F-56
Kost Forer Gabbay & Kasierer
3 Aminadav St.
Tel-Aviv 6706703, Israel
Tel: 972 (3)6232525
Fax: 972 (3)5622555
www.ey.com
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, 2011 and 2012, and the related consolidated statements of income, comprehensive income, changes in shareholders' equity and cash flows for each of the
three years in the period ended December 31, 2012. 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 6% and 8% as of December 31, 2011 and 2012, respectively, and total revenues of 24%, 17% and 16% for the years ended December 31, 2010, 2011
and 2012, respectively of the related consolidated totals. Those statements were audited by other auditors whose reports have been furnished to us, and our
opinion, insofar as it relates to the amounts included for those subsidiaries, is based solely on the reports of the other auditors.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require
that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits
provide a reasonable basis for our opinion.
In our opinion, based on our audits and the reports of the other auditors, the consolidated financial statements referred to above present fairly, in all
material respects, the consolidated financial position of the Company and its subsidiaries as of December 31, 2011 and 2012, and the related consolidated results
of their operations and their cash flows for each of the three years in the period ended December 31, 2012, in conformity with U.S. generally accepted
accounting principles.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the Company's internal
control over financial reporting as of December 31, 2012, based on criteria established in Internal Control-Integrated Framework issued by the Committee of
Sponsoring Organizations of the Treadway Commission and our report dated XXX, 2013 expressed an unqualified opinion thereon.
Tel-Aviv, Israel
XXX, 2013
/s/ Kost Forer Gabbay & Kasierer
KOST FORER GABBAY & KASIERER
A Member of Ernst & Young Global
F-2
Kost Forer Gabbay & Kasierer
3 Aminadav St.
Tel-Aviv 6706703, Israel
Tel: 972 (3)6232525
Fax: 972 (3)5622555
www.ey.com
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Shareholders and the Board of Directors of
MAGIC SOFTWARE ENTERPRISES LTD.
We have audited Magic Software Enterprises Ltd. ("the Company") internal control over financial reporting as of December 31, 2012, based on criteria
established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission ("the COSO
criteria"). The Company's management is responsible for maintaining effective internal control over financial reporting, and for its assessment of the
effectiveness of internal control over financial reporting included in the accompanying Management's Annual Report on Internal Control Over Financial
Reporting. Our responsibility is to express an opinion on the Company's internal control over financial reporting based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require
that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material
respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing
and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered
necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
A company's internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company's internal control over
financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the
transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of
financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in
accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of
unauthorized acquisition, use, or disposition of the company's assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation
of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance
with the policies or procedures may deteriorate.
In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2012, based on
the COSO criteria.
F-3
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance
sheets of the Company and its subsidiaries as of December 31, 2011 and 2012, and the related consolidated statements of income, comprehensive income,
changes in shareholders' equity and cash flows for each of the three years in the period ended December 31, 2012 and our report dated XXX, 2013 expressed an
unqualified opinion thereon.
Tel-Aviv, Israel
XXX, 2013
/s/ Kost Forer Gabbay & Kasierer
KOST FORER GABBAY & KASIERER
A Member of Ernst & Young Global
F-4
CONSOLIDATED BALANCE SHEETS
U.S. dollars in thousands
ASSETS
CURRENT ASSETS:
MAGIC SOFTWARE ENTERPRISES LTD.
AND ITS SUBSIDIARIES
December 31,
2011
2012
Cash and cash equivalents
Short-term bank deposits
Available-for-sale marketable securities (Note 4)
Trade receivables (net of allowance for doubtful accounts of $ 1,927 and $ 2,103 at December 31, 2011 and 2012,
$
$
28,711
2,170
1,241
respectively)
Other accounts receivable and prepaid expenses (Note 6)
Total current assets
LONG-TERM RECEIVABLES:
Severance pay fund
Other long-term receivables
Total long-term receivables
PROPERTY AND EQUIPMENT, NET (Note 7)
INTANGIBLE ASSETS, NET (Note 8)
GOODWILL (Note 9)
Total assets
The accompanying notes are an integral part of the consolidated financial statements.
F-5
37,744
-
890
28,367
6,696
73,697
351
2,287
2,638
1,898
29,661
44,344
24,946
6,401
63,469
351
3,824
4,175
2,029
27,401
38,897
$
135,971 $
152,238
MAGIC SOFTWARE ENTERPRISES LTD.
AND ITS SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
U.S. dollars in thousands (except share and per share data)
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Trade payables
Accrued expenses and other accounts payable (Note 10)
Deferred tax liability
Deferred revenues
Total current liabilities
ACCRUED SEVERANCE PAY
LONG TERM LIABILITIES:
LIABILITIES DUE TO ACQUISITION ACTIVITIES (Note 3)
COMMITMENTS AND CONTINGENCIES (Note 14)
REDEEMABLE NON-CONTROLLING INTEREST
SHAREHOLDERS' EQUITY (Note 12):
Magic Software Enterprises Shareholders' equity:
Share capital:
Ordinary shares of NIS 0.1 par value - Authorized: 50,000,000 shares at December 31, 2011 and 2012; Issued
and Outstanding: 36,490,020 and 36,626,728 shares at December 31, 2011 and 2012, respectively
Additional paid-in capital
Accumulated other comprehensive loss
Accumulated deficit
Total Magic shareholders' equity
Non-controlling interests
Total shareholders' equity
$
December 31,
2011
2012
$
3,545
15,752
2,509
5,359
27,165
1,087
744
1,350
4,722
17,537
2,355
4,160
28,774
1,245
750
1,192
-
2,160
808
124,616
(19)
(20,249)
105,156
469
811
125,288
(586)
(7,727)
117,786
331
105,625
118,117
Total liabilities, redeemable non-controlling interest and shareholders' equity
$
135,971 $
152,238
The accompanying notes are an integral part of the consolidated financial statements.
F-6
CONSOLIDATED STATEMENTS OF INCOME
U.S. dollars in thousands (except per share data)
Revenues (Note 16):
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 13a)
Selling and marketing
General and administrative
Total operating costs and expenses
Operating income
Financial income (expenses), net (Note 13b)
Other income, net
Income before taxes on income
Taxes on income (tax benefit) (Note 11)
Net income
Change in redeemable non-controlling interests
Net income attributable to non-controlling interests
Net income attributable to Magic Software Enterprises Shareholders
Net earnings per share attributable to Magic Software Enterprises' shareholders (Note 15):
Basic and diluted earnings per share
The accompanying notes are an integral part of the consolidated financial statements.
$
$
F-7
MAGIC SOFTWARE ENTERPRISES LTD.
AND ITS SUBSIDIARIES
2010
Year ended December 31,
2011
2012
$
20,111 $
14,407
54,060
$
23,110
16,751
73,467
23,684
22,384
80,312
88,578
113,328
126,380
5,320
2,070
44,058
5,771
2,250
59,237
51,448
67,258
37,130
46,070
2,072
17,526
8,194
2,047
20,147
9,159
27,792
31,353
9,338
(224)
159
9,273
(102)
9,375
-
-
14,717
221
125
15,063
(203)
15,266
-
222
9,375 $
15,044 $
7,439
3,238
62,716
73,393
52,987
2,947
22,990
10,642
36,579
16,408
10
136
16,554
94
16,460
253
24
16,183
0.29 $
0.41 $
0.44
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
U.S. dollars in thousands (except per share data)
MAGIC SOFTWARE ENTERPRISES LTD.
AND ITS SUBSIDIARIES
2010
Year ended December 31,
2011
2012
Net income
$
9,375 $
15,266 $
16,460
Other comprehensive income (loss), net of tax
Foreign currency translation adjustments, net
Unrealized gain from derivative instruments, net
Unrealized loss from available-for-sale securities, net
Total other comprehensive income (loss), net of tax
Total comprehensive income
Comprehensive income attributable to redeemable non-controlling interests
Comprehensive income attributable to non-controlling interests
416
6
(49)
373
(423)
(23)
(73)
(519)
(621)
29
28
(564)
9,748
14,747
15,896
-
-
-
169
280
27
Comprehensive income attributable to Magic Software Enterprises' shareholders
$
9,748 $
14,578 $
15,643
The accompanying notes are an integral part of the consolidated financial statements.
F-8
MAGIC SOFTWARE ENTERPRISES LTD.
AND ITS SUBSIDIARIES
STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
U.S. dollars in thousands (except per share data)
Share
capital
number
Share
capital
amount
Additional
paid-in
capital
Accumulated
other
comprehensive
income (loss)
Accumulated
deficit
Non
controlling
interests
Total
equity
Balance as of January 1, 2010
Exercise of stock options
Issuance of Ordinary shares and warrants (net of issuance expenses $
31,936,426
685,564
$
$
683
19
101,099
1,320
$
$
74
-
(44,668)
-
$
1,080)
Stock-based compensation expenses
Other comprehensive income
Net income
Balance as of December 31, 2010
Exercise of stock options
Stock-based compensation expenses
Cost related to issuance of Ordinary shares
Non-controlling interest as part of acquisitions
Acquisition of non-controlling interests in Magix (see Note 3)
Other comprehensive income
Net income
Balance as of December 31, 2011
Exercise of stock options
Stock-based compensation expenses
Dividend
Acquisition of non-controlling interests in Xsell (see Note 3)
Other comprehensive income
Net income
3,287,616
-
-
-
35,909,606
580,414
-
-
-
-
-
36,490,020
136,708
-
-
-
-
-
92
-
-
-
794
14
-
-
-
-
-
808
3
-
-
-
-
-
20,198
300
-
-
122,917
861
633
(21)
-
226
-
-
124,616
306
515
-
(149)
-
-
-
-
373
-
447
-
-
-
-
-
(466)
-
(19)
-
-
-
-
(567)
-
-
-
-
9,375
(35,293)
-
-
-
-
-
-
15,044
(20,249)
-
-
(3,661)
-
-
16,183
$
-
-
-
-
-
-
-
-
-
-
1,766
(1,466)
(53)
222
469
-
-
-
(165)
3
24
57,188
1,339
20,290
300
373
9,375
88,865
875
633
(21)
1,766
(1,240)
(519)
15,266
105,625
309
515
(3,661)
(314)
(564)
16,207
Balance as of December 31, 2012
36,626,728
$
811
$
125,288
$
(586) $
(7,727) $
331
$
118,117
The accompanying notes are an integral part of the consolidated financial statements.
F-9
CONSOLIDATED STATEMENTS OF CASH FLOWS
U.S. dollars in thousands
Cash flows from operating activities:
Net income
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization
Interest expenses related to liabilities in connection with acquisitions
Accrued severance pay, net
Loss on sale of property and equipment
Stock-based compensation expenses
Amortization of marketable securities premium, accretion of discount
Loss on sale and maturity of marketable securities
Gain on sale of subsidiary's operation
Decrease (increase) in trade receivables, net
Decrease (increase) in other long term and short term accounts receivable and prepaid
expenses
Increase in trade payables
Increase (decrease) in accrued expenses and other accounts payable
Increase (decrease) in deferred revenues
Change in deferred income taxes, net
MAGIC SOFTWARE ENTERPRISES LTD.
AND ITS SUBSIDIARIES
2010
Year ended December 31,
2011
2012
$
9,375 $
15,266
$
16,460
4,566
173
11
-
300
(17)
3
(146)
(198)
241
26
(288)
(85)
436
5,040
112
143
10
633
(14)
-
(136)
(5,405)
(1,753)
446
953
1,593
(1,650)
7,444
48
8
-
515
-
-
(136)
11
145
780
(2,279)
(1,131)
1,083
Net cash provided by operating activities
14,397
15,238
22,948
The accompanying notes are an integral part of the consolidated financial statements.
F-10
CONSOLIDATED STATEMENTS OF CASH FLOWS
U.S. dollars in thousands
Cash flows from investing activities:
Capitalized software development costs
Purchase of property and equipment
Cash paid in conjunction with acquisitions, net of acquired cash
Proceeds from sale of subsidiary's operation
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 bank deposits
Change in loans to employees and other deposits ,net
Investment in short-term bank deposit
Net cash used in investing activities
Cash flows from financing activities:
Proceeds from exercise of options by employees
Issuance (expense on issuance) of Ordinary shares
Dividend paid
Short-term credit, net
Purchase of non-controlling interest
Repayment of long-term loans
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
Cash and cash equivalents at the beginning of the year
MAGIC SOFTWARE ENTERPRISES LTD.
AND ITS SUBSIDIARIES
2010
Year ended December 31,
2011
2012
(3,595)
(583)
(10,225)
146
414
361
830
(393)
(1,160)
15,077
28
(1,291)
(5,222)
(497)
(23,640)
136
-
-
1,557
-
-
21,974
17
(24,153)
(4,969)
(510)
(7,627)
136
-
-
343
-
-
3,601
(34)
(1,366)
(391)
(29,828)
(10,426)
1,339
20,290
(15,974)
(717)
-
(23)
4,915
390
19,311
24,350
875
(21)
-
20
(1,377)
-
(503)
143
(14,950)
43,661
309
-
(3,661)
14
(87)
-
(3,425)
(64)
9,033
28,711
Cash and cash equivalents at end of the year
$
43,661 $
28,711 $
37,744
The accompanying notes are an integral part of the consolidated financial statements.
F-11
CONSOLIDATED STATEMENTS OF CASH FLOWS
U.S. dollars in thousands
Supplementary information on investing and financing activities not involving cash flows:
Non-cash activities:
Deferred acquisition payment
Contingent acquisition payment
Supplemental disclosure of cash flow activities:
Cash paid during the year for:
Income taxes
Interest
The accompanying notes are an integral part of the consolidated financial statements.
F-12
MAGIC SOFTWARE ENTERPRISES LTD.
AND ITS SUBSIDIARIES
2010
Year ended December 31,
2011
2012
$
$
$
$
4,645 $
- $
414 $
750 $
3,103
1,192
709 $
131 $
1,015 $
1,250
8 $
17
MAGIC SOFTWARE ENTERPRISES LTD.
AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands (except share and per share data)
NOTE 1:- GENERAL
Magic Software Enterprises Ltd. ("the Company"), an Israeli company, and its subsidiaries ("the Group") develop, market, sale and support
software development and deployment technology ("the Magic technology") and software solutions 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. 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. The
Company reports its results on the basis of two reportable business segments: software services (which include proprietary and non-proprietary
software and related services) and IT professional services, each of which is comprised of two reporting units (see Note 16 for further details).
The principal markets of the Group are Europe, United States, Japan and Israel (see Note 16).
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 U.S. generally accepted accounting principles requires management to
make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. The Company's
management believes that the estimates, judgments and assumptions used are reasonable based upon information available at the time they are
made. Actual results could differ from those estimates. The most significant assumptions are employed in estimates used in determining values of
goodwill and identifiable intangible assets and their subsequent impairment analysis, revenue recognition, tax assets and tax positions, legal
contingencies, research and development capitalization 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.
F-13
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands (except share and per share data)
NOTE 2:-
SIGNIFICANT ACCOUNTING POLICIES (Cont.)
MAGIC SOFTWARE ENTERPRISES LTD.
AND ITS SUBSIDIARIES
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.
For those foreign subsidiaries whose functional currency is not the dollar, all balance sheet amounts have been translated using the exchange rates
in effect at each balance sheet date. Statement of income amounts have been translated using the average exchange rate prevailing during each
year. Such translation adjustments are reported as a component of other comprehensive income (loss) in equity.
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.
Changes in the parent's ownership interest in a subsidiary with no change of control are treated as equity transactions, with any difference between
the amount of consideration paid and the change in the carrying amount of the non-controlling interest, recognized in equity.
Non-controlling interests of subsidiaries represent the non-controlling shareholders' share of the total comprehensive income (loss) of the
subsidiaries and fair value of the net assets upon the acquisition of the subsidiaries. The non-controlling interests are presented in equity
separately from the equity attributable to the equity holders of the Company. Redeemable non-controlling interests are classified as mezzanine
equity, separate from permanent equity, on the consolidated balance sheets and measured at each reporting period at the higher of their
redemption amount or the Non controlling interest book value, in accordance with the requirements of ASC 810 "Consolidation" and ASC 480-
10-S99-3A, "Distinguishing Liabilities from Equity".
The following table provides a reconciliation of the redeemable non-controlling interests:
January 1, 2012
Redeemable non-controlling interests (see Note 3f)
Net income attributable to redeemable non-controlling interests
Foreign currency translation adjustments
December 31, 2012
Cash and cash equivalents
$
$
-
1,880
253
27
2,160
Cash and cash equivalents are short-term highly liquid investments that are readily convertible to cash with original maturities of three months or
less, at the date acquired.
F-14
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands (except share and per share data)
NOTE 2:-
SIGNIFICANT ACCOUNTING POLICIES (Cont.)
Short-term deposits and restricted deposits
MAGIC SOFTWARE ENTERPRISES LTD.
AND ITS SUBSIDIARIES
Short-term deposits include deposits with original maturities of more than three months and less than one year. Such deposits are presented at cost
(including accrued interest) which approximates their fair value. Restricted deposits are used to secure certain Group's ongoing projects and are
classified under other receivables.
As of December 31, 2011, short-term deposits were in U.S. dollars and Hungarian Forint and bearing interest at an average annual rate of 2.4%
and 4.4%, respectively. As of December 31, 2012, Short-term deposits amounted to $0. The restricted deposits as of December 31, 2011 and 2012
amounted to $0 and $196, respectively.
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, with unrealized gains and losses reported in accumulated other comprehensive income (loss), as 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.
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, 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 do not exist, the Company evaluates the
collectability of the security in order to determine if the security is other than temporary impaired.
F-15
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands (except share and per share data)
NOTE 2:-
SIGNIFICANT ACCOUNTING POLICIES (Cont.)
MAGIC SOFTWARE ENTERPRISES LTD.
AND ITS SUBSIDIARIES
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 other than temporary impairments
have been recognized in all periods 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:
Computers and peripheral equipment
Office furniture and equipment
Motor vehicles
Software
Leasehold improvements
Business combinations
Years
3
7 - 15 (mainly 7)
7
3 – 5 (mainly 5)
Over the shorter of the lease term or
useful economic life
The Company accounts for business combinations under ASC 805, "Business Combinations". ASC 805 requires recognition of assets acquired,
liabilities assumed, non-controlling interest and redeemable non-controlling interest in the acquiree at the acquisition date, measured at their fair
values as of that date. ASC 805 also requires the fair value of acquired in-process research and development to be recorded as intangibles with
indefinite lives, (until their completion or abandonment), contingent consideration to be recorded on the acquisition date and restructuring and
acquisition-related deal costs of the acquirer to be expensed as incurred. As required by ASC 820, "Fair Value Measurements and disclosures" the
Company applies assumptions that marketplace participants would consider in determining the fair value of assets acquired, liabilities assumed,
non-controlling interest and redeemable non-controlling interest in the acquiree at the acquisition date. Any excess of the fair value of net assets
acquired over purchase price and any subsequent changes in estimated contingencies are to be recorded in earnings. In addition, changes in
valuation allowance related to acquired deferred tax assets and in acquired income tax position are to be recognized in earnings.
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.
F-16
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands (except share and per share data)
NOTE 2:-
SIGNIFICANT ACCOUNTING POLICIES (Cont.)
MAGIC SOFTWARE ENTERPRISES LTD.
AND ITS SUBSIDIARIES
The Company's assessment of whether an entity is a VIE and the determination of the primary beneficiary requires judgment and involves the use
of significant estimates and assumptions. Those include, among others, forecasted cash flows, their respective probabilities and the economic
value of certain preference rights. In addition, such assessment also involves estimates of whether a group entity can finance its current activities,
until it reaches profitability, without additional subordinated financial support.
Effective as of January 1, 2010, the Company applies updated guidance for the consolidation of VIEs. The guidance 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.
One of the Company's U.S. based consulting and staffing services business acquired through one of its wholly owned subsidiaries on January 17,
2010 (see Note 3a) 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.
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 enhancements are generally charged to expenses as incurred.
Capitalized software costs are amortized on a product by product basis by the straight-line method over the estimated useful life of the software
product (between 2-5 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 economical useful life can be recovered through undiscounted future operating cash flows from the
specific software product sold. During the years ended December 31, 2010, 2011 and 2012, no such unrecoverable amounts were identified.
F-17
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands (except share and per share data)
NOTE 2:-
SIGNIFICANT ACCOUNTING POLICIES (Cont.)
MAGIC SOFTWARE ENTERPRISES LTD.
AND ITS SUBSIDIARIES
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.
As required by ASC 820, "Fair Value Measurements and disclosures" the Company applies assumptions that marketplace participants would
consider in determining the fair value of long-lived assets (or asset groups).
Intangible assets with finite lives are amortized over their economic 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, acquired technology and non-compete were
amortized on a straight line basis and customer relationships and backlog were amortized on an accelerated method basis over a period between
3.5 - 15 years based on the intangible assets identified.
During the years ended December 31, 2010, 2011 and 2012, no impairment was identified.
Goodwill
Goodwill represents the excess of the purchase price in a business combination over the fair value of the net tangible and intangible assets
acquired. Under ASC 350,"Intangibles - Goodwill and Other", goodwill is subject to an annual impairment test or more frequently if impairment
indicators are present. Goodwill impairment is deemed to exist if the net book value of a reporting unit exceeds its estimated fair value. As of
December 31, 2012, the Company operates in two operating segments each comprised of two reporting units.
F-18
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands (except share and per share data)
NOTE 2:-
SIGNIFICANT ACCOUNTING POLICIES (Cont.)
MAGIC SOFTWARE ENTERPRISES LTD.
AND ITS SUBSIDIARIES
For the Company's 2010 and 2011 annual impairment tests and as required by ASC 350, the Company compared the fair value of each of its
reporting units to its carrying value ('step 1'). If the fair value exceeded the carrying value of the reporting unit net assets, goodwill is considered
not impaired, and no further testing is required. If the carrying value exceeded 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').
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 2010 and 2011 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, are 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 September 2011, the FASB issued ASU 2011-08 which amends the rules for testing goodwill for impairment. Under the new rules, an entity
has the option to first assess qualitative factors to determine whether the existence of events or circumstances leads to a determination that it is
more likely than not that the fair value of a reporting unit is less than its carrying amount. If, after assessing the totality of events or
circumstances, an entity determines it is not more likely than not that the fair value of a reporting unit is less than its carrying amount, then
performing the two-step impairment test is unnecessary.
The Company adopted the provisions of ASU 2011-08 to each of its reporting units, for its annual impairment test in 2012. This analysis
determines that no indicators of impairment existed primarily because (1) the Company's market capitalization has consistently exceeded its book
value by a sufficient margin, (2) the Company's overall financial performance has been stable since its respective acquisitions, and (3) forecasts of
operating income and cash flows generated by the Company's reporting units appear sufficient to support the book values of the net assets of each
reporting unit.
The Company performed annual impairment tests during the fourth quarter of each of 2010, 2011 and 2012 and did not identify any impairment
losses (see Note 9).
F-19
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands (except share and per 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 software (proprietary and non-proprietary), provision of related professional
services, maintenance and technical support as well as from other IT professional services. The Company sells its products and services primarily
through its direct sales force and indirectly through distributors and value added resellers.
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 includes annual maintenance contracts providing for unspecified upgrades for new versions and enhancements on a
when-and-if-available basis for an annual fee. The right for an unspecified upgrade for new versions and enhancements on a when-and-if-
available basis do not specify the features, functionality and release date of future product enhancements for the customer to know what will be
made available and the general timeframe in which it will be delivered.
Maintenance and support revenue included in multiple element arrangements is deferred and recognized on a straight-line basis over the term of
the maintenance and support agreement.
As required by ASC 985-605, the Company allocates revenues to the software component of its multiple-element arrangements using the residual
method when vendor specific objective evidence ("VSOE") of fair value exists for the undelivered elements of the support and maintenance
agreements. VSOE is based on the price charged when an element is sold separately or renewed. Under the residual method, the fair value of the
undelivered elements is deferred and the remaining portion of the arrangement fee is allocated to the delivered elements and is recognized as
revenue.
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 both related to the software and the IT professional services businesses consists of billable hours for services
provided and is recognized as the services are rendered.
F-20
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands (except share and per share data)
NOTE 2:-
SIGNIFICANT ACCOUNTING POLICIES (Cont.)
MAGIC SOFTWARE ENTERPRISES LTD.
AND ITS SUBSIDIARIES
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, 2010, 2011 and 2012, 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 services
is recognized as the services are performed, using VSOE of 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, support and services contracts, and amounts received from customers
but not yet recognized as revenues.
Revenue from third-party sales is recorded at a gross or net amount according to certain indicators. The application of these indicators for gross
and net reporting of revenue depends on the relative facts and circumstances of each sale and requires significant judgment.
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 based on
the most recent salary of the employees multiplied by the number of years of employment as of the balance sheet date, and are presented on an
undiscounted basis (referred to as the "Shut Down Method"). Employees are entitled to one month's salary for each year of employment or a
portion thereof. The Company's obligation for all of its Israeli employees is fully provided for by monthly deposits with insurance policies and by
an accrual.
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 and are recorded as an asset in the
Company's consolidated balance sheet.
F-21
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands (except share and per share data)
NOTE 2:-
SIGNIFICANT ACCOUNTING POLICIES (Cont.)
MAGIC SOFTWARE ENTERPRISES LTD.
AND ITS SUBSIDIARIES
The Company and its Israeli subsidiary's agreements with most of 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. Further, the related obligation
and amounts deposited on behalf of such obligation are not stated on the balance sheet, as the Company is legally released from obligation to
employees once the deposit amounts have been paid.
Severance expenses for the years ended December 31, 2010, 2011 and 2012 amounted to approximately $ 461, $ 609 and $ 829, respectively.
Advertising expenses
Advertising expenses are charged to selling and marketing expenses, as incurred. Advertising expenses for the years ended December 31, 2010,
2011 and 2012 amounted to $ 320, $ 313 and $ 556, 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
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 and liabilities are classified as current or non-current according to the expected reversal dates.
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.
F-22
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands (except share and per 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 615,838, 550,430 and 669,887 for the years ended December 31, 2010, 2011 and 2012, respectively.
Stock-based compensation
The Company accounts for stock-based compensation in accordance with ASC 718, "Compensation - Stock Compensation" which requires
companies to estimate the fair value of equity-based payment awards on the date of grant using an option-pricing model. The value of the portion
of the award that is ultimately expected to vest is recognized as an expense over the requisite service periods in the Company's consolidated
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. Historically the Company did
not hold any foreseeable plans to pay dividends and therefore used an expected dividend yield of zero in its past years option pricing models. In
September 2012, the Company adopted a dividend distribution policy according to which it will distribute in each year a dividend of up to 50% of
its annual distributable profits. Therefore, the Company will use an expected dividend yield for its future grants.
F-23
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands (except share and per share data)
NOTE 2:-
SIGNIFICANT ACCOUNTING POLICIES (Cont.)
MAGIC SOFTWARE ENTERPRISES LTD.
AND ITS SUBSIDIARIES
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."
During 2012, no options were granted or modified.
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)
2010
0%
61.2% - 62.8%
2.53%-3.71%
9.7%
7.1%
10 years
2.3
3
2011
0%
63.3% - 65.3%
2.1%
8.4%
5.2%
10 years
2.7
3.2
During the years ended December 31, 2010, 2011 and 2012, the Company recognized stock-based compensation expense related to employee
stock options in the amount of $ 300, $ 633 and $ 515, respectively, as follows:
Cost of revenue
Research and development
Selling and marketing
General and administrative
Total stock-based compensation expense
Concentrations of credit risk
Year ended December 31,
2011
2012
2010
$
$
2 $
61
75
162
300 $
$
4
54
92
483
633 $
16
114
82
303
515
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, trade receivables and foreign currency derivative contracts.
F-24
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands (except share and per share data)
NOTE 2:-
SIGNIFICANT ACCOUNTING POLICIES (Cont.)
MAGIC SOFTWARE ENTERPRISES LTD.
AND ITS SUBSIDIARIES
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.
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 (also refer to Note 4).
Trade receivables of the Company and its subsidiaries are derived from sales to customers located primarily in the United States, Europe, Japan,
South Africa 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 expense related to doubtful accounts for the years ended December 31, 2010, 2011 and 2012 was $ 204, $ 136 and $ 420, 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 "Derivative instruments" below).
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;
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;
The fair value hierarchy also requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when
measuring fair value. The Company categorized each of its fair value measurements in one of these three levels of hierarchy.
F-25
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands (except share and per share data)
NOTE 2:-
SIGNIFICANT ACCOUNTING POLICIES (Cont.)
MAGIC SOFTWARE ENTERPRISES LTD.
AND ITS SUBSIDIARIES
Assets and liabilities measured at fair value on a recurring basis are comprised of marketable securities, foreign currency forward contracts and
contingent consideration of acquisitions (see Note 5).
The carrying amounts reported in the balance sheet for cash and cash equivalents, short term bank deposits, trade receivables, other accounts
receivable, short-term bank credit, trade payables and other accounts payable approximate their fair values due to the short-term maturities of such
instruments.
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 is also managed through the use of derivative financial instruments. These financial instruments serve to protect
net income against the impact of the translation into U.S. dollars of certain foreign exchange-denominated transactions. The derivative
instruments hedge or offset exposures to Euro, Japanese Yen and NIS exchange rate fluctuations.
ASC 815, "Derivatives and Hedging," requires companies to recognize all of their derivative instruments as either assets or liabilities in 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.
F-26
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands (except share and per share data)
NOTE 2:-
SIGNIFICANT ACCOUNTING POLICIES (Cont.)
MAGIC SOFTWARE ENTERPRISES LTD.
AND ITS SUBSIDIARIES
The Company has instituted a foreign currency cash flow hedging program in order to hedge against the risk of overall changes in future cash
flows. The Company hedges portions of its forecasted expenses denominated in NIS with currency forwards contracts and put and call options.
These forward and option contracts are designated as cash flow hedges.
For derivative instruments that are designated and qualify as a cash flow hedge (i.e., hedging the exposure to variability in expected future cash
flows that is attributable to a particular risk), the effective portion of the gain or loss on the derivative instrument is reported as a component of
other comprehensive income and reclassified into earnings in the same period or periods during which the hedged transaction affects earnings.
The remaining gain or loss on the derivative instrument in excess of the cumulative change in the present value of future cash flows of the hedged
item, if any, is recognized in current earnings during the period of change.
For derivative instruments not designated as hedging instruments, the gain or loss is recognized in current earnings during the period of change.
The notional principal of foreign exchange contracts to purchase NIS with U.S. dollars was $ 2,591 and $ 519 as of December 31, 2011 and 2012,
respectively. The notional principal of foreign exchange contracts to purchase U.S. dollars with Euros was $ 506 as of December 31, 2011 and $ 0
as of December 31, 2012, respectively. The notional principal of foreign exchange contracts to purchase U.S. dollars with Japanese Yen was none
as of December 31, 2011 and $ 1,276 as of December 31, 2012, respectively.
At December 31, 2012, the effective portion of the Company's cash flow hedges before tax effect was $ 16, all of which is expected to be
reclassified from accumulated other comprehensive income to operating expenses within the next 12 months.
The following tables present fair value amounts and gains and losses of derivative instruments and related hedged items:
Fair values of derivative instruments
Assets
December 31,
Balance sheet item
2011
2012
Assets
Derivatives not designated as hedging
Cash flow hedging:
Foreign exchange option contracts
Liabilities
Cash flow hedging:
Foreign exchange option contracts
"Other accounts receivable and
prepaid expenses"
" Other accounts receivable and
prepaid expenses"
"Accrued expenses and other
accounts payable "
Total derivatives
$
F-27
$
54
$
-
(12)
42 $
140
16
-
156
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands (except share and per share data)
NOTE 2:-
SIGNIFICANT ACCOUNTING POLICIES (Cont.)
MAGIC SOFTWARE ENTERPRISES LTD.
AND ITS SUBSIDIARIES
Loss
recognized
in other
comprehensive
income
2012
(Effective
portion)
Statements
of
income item
2010
Gain (loss)
recognized in the
statements of income
Year ended December 31,
2011
2012
29
"Operating
expenses"
$
(55) $
63
$
-
"Financial
expenses,
net"
4
59
$
(51) $
122 $
245
245
Cash flow hedging:
Foreign exchange forward and option contracts
Derivatives not designated as hedging:
Foreign exchange forward contracts
Total derivatives
Reclassification
Certain amounts in prior years' financial statements have been reclassified to conform with the current year's presentation (see Note 3).
Impact of recently issued accounting standards
In February 2013, the FASB issued ASU No. 2013-02, "Reporting of Amounts Reclassified out of Accumulated Other Comprehensive Income."
Under ASU 2013-02, an entity is required to provide information about the amounts reclassified out of Accumulated Other Comprehensive
Income ("AOCI") by component. In addition, an entity is required to present, either on the face of the financial statements or in the notes,
significant amounts reclassified out of AOCI by the respective line items of net income, but only if the amount reclassified is required to be
reclassified in its entirety in the same reporting period. For amounts that are not required to be reclassified in their entirety to net income, an entity
is required to cross-reference to other disclosures that provide additional details about those amounts. ASU 2013-02 does not change the current
requirements for reporting net income or other comprehensive income in the financial statements. ASU 2013-02 is effective for the Company on
January 1, 2013. Since this standard only impacts presentation and disclosure requirements, its adoption did not have a material impact on the
Company's consolidated results of operations or financial condition.
F-28
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands (except share and per share data)
NOTE 3:-
BUSINESS COMBINATION, SIGNIFICANT TRANSACTION AND SALE OF BUSINESS
MAGIC SOFTWARE ENTERPRISES LTD.
AND ITS SUBSIDIARIES
a.
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 $ 13,684, of which $ 8,625 was paid upon closing and the remaining contingent payment of $ 5,400 has been paid as of
December 31, 2012.
In accordance with ASC 805-30-35-1 the Company re-measured 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 was amortized using the
interest method during the relevant period into financial expenses. As a result, since the acquisition the Company recorded financial
expenses of $ 173, $ 112 and $ 48 during 2010, 2011 and 2012, respectively.
The acquired business provides a comprehensive range of consulting and staffing services for the telecom, network communications and
the information technology industry.
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.
The following table summarizes the estimated fair values of the assets acquired and liabilities assumed:
Working capital, including deferred tax liability
Fixed assets
Goodwill
Customer relationships
Total assets acquired
Liabilities due to acquisition activities
Net assets acquired
F-29
$
3,926
54
4,831
4,873
13,684
5,059
$
8,625
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands (except share and per share data)
NOTE 3:-
BUSINESS COMBINATION, SIGNIFICANT TRANSACTION AND SALE OF BUSINESS (Cont.)
MAGIC SOFTWARE ENTERPRISES LTD.
AND ITS SUBSIDIARIES
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 $ 4,873 of the purchase price was allocated to customer relationships, as described above. The Company amortizes its
intangible assets over periods ranging from 4-15 years, based on two types of customer relationships identified.
b.
On October 31, 2010, the Company purchased an 88% interest in Xsell Resources Inc, a consulting and staffing services company
including a put and call option provided to the seller and to the Company, respectively, allowing to increase its holdings to 100%. The
option price is calculated based on a multiple of gross profit. 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 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 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, which was completed in 2011.
The following table summarizes the estimated fair values of the assets acquired and liabilities assumed:
Net liabilities
Non-controlling interest
Goodwill
Customer relationships
Total assets acquired
$
$
(908)
(165)
1,988
685
1,600
Identifiable intangible assets, including customer relationships, were valued using a variation of the income approach known as the "Multi-
Period Excess Earnings Approach." This method utilized a forecast of expected cash inflows, cash outflows and contributory charges for
economic returns on tangible and intangible assets employed.
An amount of $ 685 of the purchase price was allocated to customer relationships, as described above. The Company amortizes its
intangible assets over a period of 6 years, based on the identified customer relationships.
F-30
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands (except share and per share data)
NOTE 3:- BUSINESS COMBINATION, SIGNIFICANT TRANSACTION AND SALE OF BUSINESS (Cont.)
MAGIC SOFTWARE ENTERPRISES LTD.
AND ITS SUBSIDIARIES
During 2012, the Company exercised its call option and acquired the remaining 12% interest thereby completing the acquisition of 100%
of the shares for an additional consideration of $ 314. As a result, the Company adjusted the non-controlling interest related to the
acquisition that was initially recorded at the date of acquisition by an aggregate amount of $ 165, and a related adjustment to additional
paid-in capital of $ 149.
c.
On January 1, 2011, the Company acquired a 51% ownership interest in its South African distributor, Magix Integration (Proprietary) Ltd.,
("Magix Integration") for total consideration of up to $ 1,560 based on achievement by Magix Integration of certain performance targets
for 2011, and an option to increase its holdings by 24% to 75% in total with a fair value of $ (807). The Company made an advance
payment in cash as of December 2010 of $1,160 on account of this acquisition. Magix Integration specializes in the software integration
and application development of the Company's 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 this acquisition will contribute to the Company's growth and presence in the
region. Acquisition related costs were immaterial.
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 1, 2011.
The following table summarizes the estimated fair values of the assets acquired and liabilities assumed:
Fixed assets
Non-controlling interest
Deferred tax liability
Goodwill
Customer relationships
Total assets acquired
Liabilities due to acquisition activities
$
8
(1,323)
(437)
2,159
1,560
1,967
(807)
Net assets acquired
$
1,160
Identifiable intangible assets, including customer relationship were valued using a variation of the income approach. This method utilized a
forecast of expected cash inflows, cash outflows and contributory charges for economic returns on tangible and intangible assets employed.
An amount of $ 1,560 of the purchase price was allocated to customer relationships, as described above. The Company amortizes its
intangible assets over a period of ten years, based on the customer relationships identified.
F-31
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands (except share and per share data)
NOTE 3:- BUSINESS COMBINATION, SIGNIFICANT TRANSACTION AND SALE OF BUSINESS (Cont.)
MAGIC SOFTWARE ENTERPRISES LTD.
AND ITS SUBSIDIARIES
On April 1, 2011, the Company exercised its option to acquire the 24% in Magix Integration as stipulated in the original acquisition
agreement for $ 1,105. On October 1, 2011, the Company purchased additional shares in Magix Integration, thereby completing the
acquisition of 100% of the shares in Magix Integration for an additional consideration of up to $ 587 based on achievement by Magix
Integration of certain performance targets through 2012. As a result, the Company adjusted the non-controlling interest related to Magix
Integration that was initially recorded at the date of acquisition and income attributed to the Magix Integration non-controlling interest up-
to the exercise of the option and additional purchase by an aggregate of $ 1,466, and a related adjustment to additional paid in capital of
$ 226.
d.
In May 2011, the Company acquired a 95% interest in Complete Business Solutions Ltd, and a 100% interest in Complete Information
Technology Ltd., The companies are prominent software solution providers and leading Business Partners of SAP with many years of
experience in distributing and implementing SAP Business One ERP Software. The Company paid a cash purchase price of $ 5,967.
The Company believes that the acquisition of this business will enable it to expand its offers and leverage its relationships with top tier
customers. Acquisition related costs were immaterial.
The acquisition was accounted for by the purchase method. The results of operations were included in the consolidated financial
statements of the Company commencing May 2011.
The following table summarizes the estimated fair values of the assets acquired and liabilities assumed:
Net assets
Non-controlling interest
Intangible assets
Deferred tax liability
Goodwill
Net assets acquired
$
$
572
(262)
2,359
(589)
3,887
5,967
*)
In the 2011 financial statements, the Company included provisional amounts of the estimated fair values of the tangible and
intangible assets. In 2012, the Company completed the valuation of the tangible and intangible assets. As a result, the main
adjustments recorded in the fair value of the tangible and intangible assets and liabilities at the purchase date were increase in
goodwill of $ 480 and recognition of deferred tax liability of $ 589. Adjustments recorded in profit and loss were immaterial.
Identifiable intangible assets, including customer relationship were valued using a variation of the income approach. This method utilized a
forecast of expected cash inflows, cash outflows and contributory charges for economic returns on tangible and intangible assets employed.
F-32
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands (except share and per share data)
NOTE 3:-
BUSINESS COMBINATION, SIGNIFICANT TRANSACTION AND SALE OF BUSINESS (Cont.)
MAGIC SOFTWARE ENTERPRISES LTD.
AND ITS SUBSIDIARIES
Amounts of $ 1,930 and $ 429 of the purchase price were allocated to customer relationships and the non-compete agreement, respectively.
The Company amortizes the customer relationships and non-compete agreement over periods of 4-10 years and 8 years, respectively.
e.
On December 27, 2011, the Company completed the acquisition of the AppBuilder activity of BluePhoenix Solutions ("AppBuilder"), a
leading provider of value-driven legacy IT modernization solutions, for $ 12,565. During 2012, the Company paid an additional amount of
$ 140 with respect to the acquisition. AppBuilder is a comprehensive application development infrastructure used by many enterprises
around the world. This premier enterprise application development environment is a powerful, model-driven tool that enables development
teams to build, deploy, and maintain large-scale, custom-built business applications. The Company believes the acquisition will broaden its
product portfolio and strengthens the presence in numerous global markets. Acquisition related costs were immaterial.
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 1, 2012.
The following table summarizes the estimated fair values of the assets acquired and liabilities assumed:
Net liabilities
Intangible assets
Goodwill
Net assets acquired
$
(3,248)
7,251
8,702
$
12,705
*)
In the 2011 financial statements the Company included provisional amounts of the estimated fair values of the tangible and
intangible assets. In 2012, the Company completed the valuation of the tangible and intangible assets. As a result, the main
adjustments recorded in the fair value of the tangible and intangible assets and liabilities at the purchase date were increase in
intangible assets of $ 1,465 and increase in deferred revenues of $ 1,348. Adjustments recorded in profit and loss were immaterial.
Identifiable intangible assets, including customer relationship were valued using a variation of the income approach. This method utilized a
forecast of expected cash inflows, cash outflows and contributory charges for economic returns on tangible and intangible assets employed.
Amounts of $ 4,430, $ 2,138 and $ 683 of the purchase price were allocated to customer relationships, developed technology and backlog,
respectively. The Company amortizes the customer relationships, backlog and acquired technology over periods of 15 years, 15 years and
3.5 years, respectively.
F-33
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands (except share and per share data)
NOTE 3:-
BUSINESS COMBINATION, SIGNIFICANT TRANSACTION AND SALE OF BUSINESS (Cont.)
MAGIC SOFTWARE ENTERPRISES LTD.
AND ITS SUBSIDIARIES
f.
In July 2012, the Company acquired an 80% interest in Comm-IT Group, (including "Comm-IT Technology Solutions" and "Comm-IT
Software"), a software and systems development house that specializes in providing advanced IT and communications services and
solutions, for a total consideration of $ 9,021, of which $ 4,990 was paid upon closing and the remaining $ 4,031 is to be paid during the
next two years, of which, $ 1,414 is contingent upon the acquired business meeting certain operational targets in 2012 and 2013, and
$ 2,617 in deferred payments. The Purchaser and the seller hold mutual Call and Put options respectively for the remaining 20% interest in
the group. As a result of the Put option, the Company recorded redeemable non-controlling interest in the amount of $ 1,880.
As of December 31, 2012 the Company's liability towards the sellers is estimated at $ 4,042. The Company believes that the acquisition of
this business will enable it to expand its professional services offering and leverage its relationships with top tier customers. Acquisition
related costs were immaterial.
In accordance with ASC 805-30-35-1, the Company re-measures the contingent consideration based on the fair value at each reporting date
until the contingency is resolved or the payment is made, while the changes in fair value are recognized in earnings in the financial
expenses using the interest method over the period. The contingent payment was recorded at present value and was amortized using the
interest method during the relevant period into financial expenses.
The acquisition was accounted for by the purchase method. The results of operations were included in the consolidated financial statements
of the Company commencing July 1, 2012.
The following table summarizes the estimated fair values of the assets acquired and liabilities assumed:
Net assets
Non-controlling interest
Intangible assets *)
Goodwill *)
Net assets acquired
$
1,219
(1,880)
3,873
5,809
$
9,021
*)
The estimated fair values of the tangible and intangible assets are provisional and are based on information that was available as of
the acquisition date to estimate the fair value of these amounts. The Company believes the information provides a reasonable basis
for estimating the fair values of these amounts, but is waiting for additional information necessary to finalize those fair values.
Therefore, provisional measurements of fair value reflected are subject to change. The Company expects to finalize the tangible and
intangible assets valuation and complete the acquisition accounting as soon as practicable as but no later than the measurement
period.
F-34
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands (except share and per share data)
NOTE 3:-
BUSINESS COMBINATION, SIGNIFICANT TRANSACTION AND SALE OF BUSINESS (Cont.)
MAGIC SOFTWARE ENTERPRISES LTD.
AND ITS SUBSIDIARIES
Below are certain unaudited pro forma combined statements of income data for the year ended December 31, 2011 and 2012, respectively,
as if the acquisition in Note 3f had occurred at January 1, 2011, after giving effect to purchase accounting adjustments, including
amortization of intangible assets. This pro forma financial information is not necessarily indicative of the combined results that would have
been attained had the acquisition taken place at the beginning of 2011, nor is it necessarily indicative of future results.
Total revenues
Net income attributable to Magic Software Enterprises shareholders
Earnings per share
Basic
Diluted
NOTE 4:- MARKETABLE SECURITIES
Year ended December 31,
2011
2012
Unaudited
$
$
$
$
122,873 $
15,668 $
132,251
16,225
0.43 $
0.42 $
0.44
0.44
The Group invests in marketable debt and equity securities, which are classified as available-for-sale. The following is a summary of marketable
securities:
2011
December 31,
Amortized
cost
Unrealized
losses
Unrealized
gains
Market
value
Amortized
cost
2012
Unrealized
losses
Unrealized
gains
Market
value
Available-for-sale:
Governmental bonds
Commercial bonds
Equity funds
$
$
407
571
118
$
-
-
-
$
28
67
50
$
435
638
168
$
407
192
118
$
-
-
-
$
20
45
108
427
237
226
Total available-for-sale marketable securities
$
1,096
$
-
$
145
$
1,241
$
717
$
-
$
173
$
890
F-35
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands (except share and per share data)
NOTE 4:- MARKETABLE SECURITIES (Cont.)
MAGIC SOFTWARE ENTERPRISES LTD.
AND ITS SUBSIDIARIES
The amortized costs of available-for-sale debt securities at December 31, 2012, by contractual maturities, are shown below:
Due in one year or less
Due between one year to five years
Amortized
cost
$
$
$
-
599
599 $
Gross unrealized
gains (losses)
Gains
Losses
-
$
65
65 $
Estimated
fair value
$
-
-
- $
-
664
664
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 2011:
Other
comprehensive
income
Other comprehensive income from available-for-sale securities as of January 1, 2011
$
Reclassification to earnings of realized gain from available-for-sale securities
Unrealized loss from available-for-sale securities
Other comprehensive income from available-for-sale securities as of December 31, 2011
$
218
(20)
(53)
145
The following is the change in the other comprehensive income of available-for-sale securities during 2012:
Other
comprehensive
income
Other comprehensive income from available-for-sale securities as of January 1, 2012
$
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, 2012
$
145
-
28
173
F-36
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands (except share and per share data)
NOTE 5:-
FAIR VALUE MEASUREMENTS
MAGIC SOFTWARE ENTERPRISES LTD.
AND ITS SUBSIDIARIES
In accordance with ASC 820, the Company measures its investment in marketable securities and foreign currency derivative contracts at fair
value. Generally marketable securities are classified within Level 1, this is because these assets are valued using quoted prices in active markets.
Foreign currency derivative contracts and certain corporate bonds are classified within Level 2 as the valuation inputs are based on quoted prices
and market observable data of similar instruments.
Contingent consideration is classified within Level 3. The Company values the Level 3 contingent consideration using discounted cash flow of the
expected future payments, whose inputs include interest rate.
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
Foreign currency derivative contracts
Total financial assets
Liabilities:
Contingent consideration
Total financials liabilities
Assets:
Government bonds
Corporate bonds
Equity fund
Foreign currency derivative contracts
Total financial assets
Liabilities:
Contingent consideration
Total financials liabilities
December 31, 2011
Fair value measurements using input type
Level 1
Level 2
Level 3
Total
$
435
-
168
-
603 $
- $
- $
$
-
638
-
42
680 $
- $
- $
$
-
-
-
-
- $
1,046 $
1,046 $
December 31, 2012
Fair value measurements using input type
Level 1
Level 2
Level 3
Total
$
427
-
226
-
653 $
- $
- $
$
-
237
-
156
393 $
- $
- $
$
-
-
-
-
- $
1,942 $
1,942 $
F-37
435
638
168
42
1,283
1,046
1,046
427
237
226
156
1,046
1,942
1,942
$
$
$
$
$
$
$
$
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands (except share and per share data)
NOTE 5:-
FAIR VALUE MEASUREMENTS (Cont.)
Fair value measurements using significant unobservable inputs (Level 3):
Opening balance
Increase in contingent consideration
Decrease in contingent consideration due to settlement
Amortization of interest
Closing balance
NOTE 6:- OTHER ACCOUNTS RECEIVABLE AND PREPAID EXPENSES
Short-term lease deposits
Prepaid expenses
Government authorities
Deferred tax assets, net
Restricted deposits
Other
NOTE 7:-
PROPERTY AND EQUIPMENT
Cost:
Leasehold improvements
Computers and peripheral equipment
Office furniture and equipment
Motor vehicles
Software
Accumulated depreciation:
Leasehold improvements
Computers and peripheral equipment
Office furniture and equipment
Motor vehicles
Software
MAGIC SOFTWARE ENTERPRISES LTD.
AND ITS SUBSIDIARIES
December 31,
2011
2012
$
$
480
750
(225)
41
$
1,046 $
December 31,
2011
2012
$
$
817
427
3,073
1,878
-
206
$
6,401 $
December 31,
2011
2012
$
$
472
9,396
1,790
243
2,469
1,046
1,192
(315)
19
1,942
615
1,039
2,313
2,522
163
44
6,696
470
9,826
1,875
244
2,479
14,370
14,894
205
9,103
1,250
97
1,686
12,341
242
9,420
1,435
124
1,775
12,996
1,898
Depreciated cost
$
2,029 $
Depreciation expenses amounted to $ 626, $ 630 and $ 757 for the years ended December 31, 2010, 2011 and 2012, respectively.
F-38
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands (except share and per share data)
NOTE 8:-
INTANGIBLE ASSETS
a.
Intangible assets:
Original amounts:
Capitalized software costs
Customer relationships
Backlog and non-compete agreement
Acquired technology
Accumulated amortization:
Capitalized software costs
Customer relationships
Backlog and non-compete agreement
Acquired technology
MAGIC SOFTWARE ENTERPRISES LTD.
AND ITS SUBSIDIARIES
$
December 31,
2011
2012
$
49,723
15,435
1,112
2,138
68,408
37,370
3,606
31
-
41,007
54,599
19,405
1,112
2,138
77,254
41,191
5,756
472
174
47,593
Intangible assets, net
$
27,401 $
29,661
Amortization expenses amounted to $ 3,940, $ 4,410 and $ 6,687 for the years ended December 31, 2010, 2011 and 2012, respectively.
The estimated future amortization expense of intangible assets as of December 31, 2012 is as follows:
b.
c.
2013
2014
2015
2016
2017
2018 and thereafter
6,947
5,537
4,905
3,899
2,335
6,038
$
29,661
F-39
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands (except share and per share data)
NOTE 9:- GOODWILL
MAGIC SOFTWARE ENTERPRISES LTD.
AND ITS SUBSIDIARIES
Changes in the carrying amount of goodwill for the years ended December 31, 2011 and 2012 according to the Company's reporting units are as
follows:
IT
professional
services
Software
services
Total
As of January 1, 2011
$
12,428 $
12,196
$
24,624
Business combination
Adjustments due to finalized purchase price allocation
Foreign currency translation adjustments
As of December 31, 2011
Business combination
Additional consideration in conjunction with acquisitions
Foreign currency translation adjustments
-
(520)
-
14,245
363
185
11,908
26,989
5,809
-
-
-
140
(502)
14,245
(157)
185
38,897
5,809
140
(502)
As of December 31, 2012
$
17,717 $
26,627 $
44,344
In 2010 and 2011, the Company determined the fair value of each reporting unit using the income approach. The material assumptions used for
the income approach for years 2010 and 2011 were four years of projected net cash flows, a discount rate of 14%-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. In 2012, the Company adopted the provisions of ASU 2011-08 and performed a qualitative test for each of its reporting units. Since
there were no indicators for impairment, a quantitative test was not performed.
The Company performed annual impairment tests during the fourth quarter of 2012 and did not identify any impairment losses (see Note 2).
F-40
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands (except share and per share data)
NOTE 10:- ACCRUED EXPENSES AND OTHER ACCOUNTS PAYABLE
Employees and payroll accruals
Accrued expenses
Deferred and contingent payments related to acquisitions
Government authorities
Other
NOTE 11:- TAXES ON INCOME
a.
Israeli taxation:
1.
Corporate tax rate in Israel:
MAGIC SOFTWARE ENTERPRISES LTD.
AND ITS SUBSIDIARIES
December 31,
2011
2012
$
$
6,228
1,865
2,325
3,177
2,157
7,073
1,917
3,828
2,175
2,544
$
15,752 $
17,537
Taxable income of Israeli companies is subject to tax at the rate of 25% in 2010, 24% in 2011 and 25% in 2012 and onwards.
2.
Tax benefits under the Israeli 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 including tax exemptions and reduced tax rates. Income not eligible
for Approved Enterprise benefits is taxed at regular rates.
In the event of distribution of dividends from the said tax-exempt income, the amount distributed will be subject to corporate tax at
the rate ordinarily applicable to the Approved Enterprise's income. The tax-exempt income attributable to the benefit period of the
Approved Enterprise programs mentioned above can be distributed to shareholders without subjecting the Company to taxes, only
upon the complete liquidation of the applicable Israeli subsidiary.
The benefit periods under the Law have not yet commenced.
The entitlement to the above benefits is conditional upon the fulfilling of the conditions stipulated by the Laws and regulations.
Should they fail to meet such requirements in the future, income attributable to its Approved Enterprise programs could be subject
to the statutory Israeli corporate tax rate and they could be required to refund a portion of the tax benefits already received, with
respect to such programs. As of December 31, 2012, management believes that the Company's Israeli subsidiaries are in compliance
with all the conditions required by the Law.
F-41
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands (except share and per share data)
NOTE 11:- TAXES ON INCOME (Cont.)
MAGIC SOFTWARE ENTERPRISES LTD.
AND ITS SUBSIDIARIES
3.
4.
Effective January 1, 2011, the Knesset enacted the Law for Economic Policy for 2011 and 2012 (Amended Legislation), and among
other things, amended the Law, ("the Amendment"). According to the Amendment, the benefit tracks in the Investment Law were
modified and a flat tax rate applies to the Company's entire preferred income. The Company will be able to opt to apply (the waiver
is non-recourse) the Amendment and from then on it will be subject to the amended tax rates as follows: 2011 and 2012 - 15%,
2013 and 2014 - 12.5% and in 2015 and thereafter - 12%. As of December 31, 2012, the Company has not applied for this
amendment.
The Company's Israeli entities have received final tax assessments for their Israeli tax return filings through the year 2008.
Tax benefits under the Law for the Encouragement of Industry (Taxes), 1969:
The Company qualifies as an Industrial Company within the meaning of the Law for the Encouragement of Industry (Taxes), 1969
(the "Industrial Encouragement Law"). The Industrial Encouragement Law defines an "Industrial Company" as a company that is
resident in Israel and that derives at least 90% of its income in any tax year, other than income from defense loans, capital gains,
interest and dividends, from an enterprise whose major activity in a given tax year is industrial production. Under the Industrial
Encouragement Law, the Company is entitled to amortization of the cost of purchased know-how and patents over an eight-year
period for tax purposes as well as accelerated depreciation rates on equipment and buildings.
Eligibility for the benefits under the Industrial Encouragement Law is not subject to receipt of prior approval from any
governmental authority.
b.
Non-Israeli 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.
c.
Net operating loss carryforwards:
As of December 31, 2012, the Company and its Israeli subsidiaries had operating loss carryforwards of $ 19,596, which can be carried
forward and offset against taxable income in the future for an indefinite period.
F-42
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands (except share and per share data)
NOTE 11:- TAXES ON INCOME (Cont.)
MAGIC SOFTWARE ENTERPRISES LTD.
AND ITS SUBSIDIARIES
The Company's subsidiaries in Europe had estimated total available tax loss carryforwards of $ 5,199 as of December 31, 2012, to offset
against future taxable income.
The Company's subsidiaries in the U.S. had estimated total available tax loss carryforwards of $ 3,835 as of December 31, 2012, which can
be carried forward and offset against taxable income for a period of up to 20 years, from the year the loss was incurred.
Utilization of U.S. net operating losses may be subject to substantial annual limitations due to the "change in ownership" provisions
("annual limitations") of the Internal Revenue Code of 1986 and similar state provisions. The annual limitation may result in the expiration
of net operating losses before utilization.
d.
Income before taxes on income:
Domestic
Foreign
e.
Taxes on income:
Taxes on income (tax benefit) consist of the following:
Current:
Domestic
Foreign
Deferred taxes:
Domestic
Foreign
Year ended December 31,
2011
2010
2012
$
$
4,288 $
4,985
$
7,197
7,866
10,462
6,092
9,273 $
15,063 $
16,554
Year ended December 31,
2011
2010
2012
$
446 $
1,234
$
447
1,000
(1,291)
302
1,680
1,447
(989)
(2,681)
899
(1,800)
150
414
669
(1,782)
(1,650)
1,083
Taxes on income (tax benefit)
$
(102) $
(203) $
94
F-43
APPENDIX TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands (except share and per share data)
NOTE 11:- TAXES ON INCOME (Cont.)
f.
Deferred tax assets and liabilities:
MAGIC SOFTWARE ENTERPRISES LTD.
AND ITS SUBSIDIARIES
Deferred 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
Allowances, reserves and intangible assets
Deferred tax assets before valuation allowance
Less - valuation allowance
Deferred tax assets
Capitalized software costs
Deferred tax assets, net
December 31,
2011
2012
$
8,403
$
993
9,396
(2,891)
6,505
(1,575)
5,938
809
6,747
(888)
5,859
(1,772)
$
4,930 $
4,087
Both current deferred tax liabilities and long term deferred tax liabilities are in respect of acquired intangible assets.
Current tax assets
Non-current tax assets
Deferred tax assets
December 31,
2011
2012
$
$
$
1,877
3,053
2,522
1,565
4,930 $
4,087
Current taxes are included under other accounts receivable and prepaid expenses and non-current tax assets are included under other long
term receivables.
Significant components of the Company and its subsidiaries deferred tax liability are as follows:
Current liabilities
Non-current liabilities
Net deferred tax liabilities
F-44
December 31,
2011
2012
$
$
(2,509) $
(735)
(2,355)
(738)
(3,244) $
(3,093)
APPENDIX TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands (except share and per share data)
NOTE 11:- TAXES ON INCOME (Cont.)
g.
Reconciliation of the theoretical tax expense to the actual tax expense:
MAGIC SOFTWARE ENTERPRISES LTD.
AND ITS SUBSIDIARIES
Reconciling items between the 2010, 2011 and 2012 statutory tax rate (25%, 24% and 25%, respectively) of the Company and the effective
tax rate is presented in the following table:
Income before taxes, as reported in the consolidated statements of income
$
9,273
$
15,063
$
16,554
Year ended December 31,
2011
2012
2010
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
Tax benefits in respect of prior years, net
Nondeductible expenses
Uncertain tax position and other differences
Income tax (tax benefit)
25%
24%
25%
$
2,318
525
3,615
866
$
4,139
444
(1,663)
(2,676)
318
181
895
(37)
(4,429)
(73)
40
651
(2,003)
(1,126)
*) 20
(185) **) (2,031)
$
(102) $
(203) $
94
*)
**)
In 2012, the Company reversed its writeoff of tax prepayment advances from prior years since the Company believes the utilization
of the prepayments is more-likely-than not in the near future.
This amount is mainly comprised of tax provisions reversal due to statute of limitation of prior years' tax assessments amounting to
$1,270.
F-45
MAGIC SOFTWARE ENTERPRISES LTD.
AND ITS SUBSIDIARIES
APPENDIX TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands (except share and per share data)
NOTE 11:- TAXES ON INCOME (Cont.)
h.
The Company applies ASC 740, "Income Taxes" with regards to tax uncertainties. During the years ended December 31, 2010, 2011 and
2012, the Company recorded $ 874, $ 727 and $(240) of tax expenses (income), respectively, as a result of this application.
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, 2011
$
1,194
Increase in tax positions taken in the year
Gross unrecognized tax positions at December 31, 2011
Increase in tax positions taken in prior years
Decrease in tax positions taken in prior years
710
1,904
270
(489)
Gross unrecognized tax benefits at December 31, 2012
$
1,685
The Company recognizes interest and penalties related to unrecognized tax benefits in taxes on income. During the years ended December
31, 2011 and 2012, the Company recorded $ 17 and $ (21), respectively, for interest and penalties expenses (income) related to uncertain
tax positions. The liability for unrecognized tax benefits included accrued interest and penalties of $ 76 and $ 55 at December 31, 2011 and
2012, respectively.
As of December 31, 2012, the entire amount of unrecognized tax benefit could affect the Company's income tax provision and the effective
tax rate.
NOTE 12:- SHAREHOLDERS' EQUITY
a.
b.
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.
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. Following the Company's dividend distribution and in respect to warrants issuance
agreement, exercise price was adjusted to $ 8.07 per share as of December 31, 2012.
F-46
APPENDIX TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands (except share and per share data)
NOTE 12:- SHAREHOLDERS' EQUITY (Cont.)
c.
Stock Option Plans:
MAGIC SOFTWARE ENTERPRISES LTD.
AND ITS SUBSIDIARIES
Under the Company's 2007 Stock Option Plan, as amended ("the Plan"), options may be granted to employees, officers, directors and
consultants of the Company and its subsidiaries. Pursuant to the 2007 Stock Option Plan, the Company reserved for issuance 1,500,000
ordinary shares. In 2012, the Company increased the amount of ordinary shares reserved for issuance by additional 1,000,000 ordinary
shares in connection with the 2007 Stock Option Plan (mentioned above). As of December 31, 2012, an aggregate of 1,227,415 ordinary
shares of the Company are still available for future grants under the Plan. Each option granted under the Plan is exercisable for a period of
ten years from the date of the grant of the option. The 2007 Plan will expire on August 1, 2017.
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 3-4 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, 2012 and changes during the year ended December 31, 2012
are as follows:
Outstanding at January 1, 2012
Granted
Exercised
Forfeited
Outstanding at December 31, 2012
Exercisable at December 31, 2012
Vested and expected to vest at December 31, 2012
Weighted
average
remaining
contractual
term
(in years)
Weighted
average
exercise
price
Aggregate
intrinsic
value
2.31
-
2.53
2.13
2.74
2.54
2.70
6.46
$
3,416
5.87 $
4.86 $
5.77 $
2,298
1,738
2,261
Number
of options
1,355,879
-
$
(136,708) $
(61,786) $
1,157,385 $
791,797 $
1,117,531 $
F-47
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands (except share and per share data)
NOTE 12:- SHAREHOLDERS' EQUITY (Cont.)
MAGIC SOFTWARE ENTERPRISES LTD.
AND ITS SUBSIDIARIES
The weighted-average grant-date fair value of options granted during the years ended December 31, 2010 and 2011 was $ 1.88 and $ 4,
respectively. During 2012, no options were granted. 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, 2012. 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, 2010, 2011 and 2012 was $ 1,895, $ 2,197 and $ 572, respectively. As of December 31, 2012, there was $ 341 of
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 three years.
The following table represents the employee option activity whose vesting is contingent upon meeting various departmental and
Company's wide performance goals (including revenue growth and net gain index), as of December 31, 2012. These options have been
included in the above table on employee option activity:
Weighted
average
exercise
price
Number
of options
Weighted
average
remaining
contractual
term
(in years)
Aggregate
intrinsic
value
Outstanding at January 1, 2012
Outstanding at December 31, 2012
Exercisable at December 31, 2012
139,250 $
1.44
6.55 $
139,250 $
1.44
5.55 $
114,250 $
1.51
5.45 $
Vested and expected to vest at December 31, 2012
138,905 $
1.44
5.55 $
519
454
364
452
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.
F-48
APPENDIX TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands (except share and per share data)
NOTE 12:- SHAREHOLDERS' EQUITY (Cont.)
The options outstanding as of December 31, 2012, have been separated into ranges of exercise price categories, as follows:
MAGIC SOFTWARE ENTERPRISES LTD.
AND ITS SUBSIDIARIES
Exercise price
Weighted
average
remaining
contractual life
(years)
Options
outstanding
Weighted
average
exercise price
Options
exercisable
Weighted
average
exercise price
of exercisable
options
In $
0-1
1.01-2
2.01-3
3.01-4
4.01-5
5.01-6
e.
Accumulated other comprehensive income:
67,913
273,798
286,334
447,090
57,250
25,000
5.02 $
5.07 $
6.74 $
6.81 $
1.01 $
1.21 $
0.17
1.40
2.29
3.89
4.06
5.95
50,413 $
236,298 $
216,996 $
205,840 $
57,250 $
25,000 $
1,157,385
5.87 $
2.74
791,797 $
0.23
1.42
2.29
3.83
4.06
5.95
2.54
2010
December 31,
2011
2012
Accumulated realized and unrealized gain on available-for-sale securities, net
Accumulated foreign currency translation adjustments
Unrealized gain (loss) on derivative instruments, net
$
218 $
218
11
$
145
(152)
(12)
173
(776)
17
Total other comprehensive income
$
447 $
(19) $
(586)
f.
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.
On September 4, 2012, the Company's Board of Directors adopted a dividend distribution policy, subject to any applicable law. According
to this policy, each year the Company will distribute a dividend of up to 50% of its annual distributable profits. It is possible that the Board
of Directors will decide, subject to the conditions stated above, to declare additional dividend distributions. The Company's Board of
Directors may at its discretion and at any time, change, whether as a result of a one-time decision or a change in policy, the rate of dividend
distributions and/or not to distribute a dividend, all at its discretion. In respect to the policy mentioned above, on September 10, 2012 and
on February 14, 2013 , the Company declared a dividend distribution of $ 0.10 per share ($ 3,661 in the aggregate) and $ 0.12 per share ($
4,397 in the aggregate) which were paid on October 17, 2012 and on March 14, 2013, respectively.
F-49
APPENDIX TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands (except share and per share data)
NOTE 13:- SELECTED STATEMENTS OF INCOME DATA
a.
Research and development costs, net:
Total costs
Less - capitalized software costs
Research and development, net
b.
Financial income (expenses), net:
Interest income net of bank charges
Interest expenses related to liabilities in connection with acquisitions
Interest income from debt instruments
Loss arising from foreign currency translation and other
Financial income(expenses), net
NOTE 14:- COMMITMENTS AND CONTINGENCIES
a.
Lease commitments:
MAGIC SOFTWARE ENTERPRISES LTD.
AND ITS SUBSIDIARIES
Year ended December 31,
2011
2012
2010
$
5,667 $
(3,595)
7,269
(5,222)
$
7,916
(4,969)
$
2,072 $
2,047 $
2,947
$
24 $
(173)
96
(171)
$
397
(112)
67
(131)
$
(224) $
221 $
20
(48)
49
(11)
10
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, 2012, are as follows:
2013
2014
2015
2016 and thereafter
$
921
579
312
202
$
2,014
Rent expenses for the years ended December 31, 2010, 2011 and 2012 were approximately $ 1,487, $ 1,733 and $ 1,701, respectively.
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 $ 371.
The Company currently occupies approximately 43,170 square feet of space based on a lease agreement expiring in December, 2014. The
Company has an option to terminate the lease agreement in Israel and India upon six months prior written notice.
F-50
APPENDIX TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands (except share and per share data)
NOTE 14:- COMMITMENTS AND CONTINGENCIES (Cont.)
MAGIC SOFTWARE ENTERPRISES LTD.
AND ITS SUBSIDIARIES
The aggregated amount of lease commitment for the next 6 months in Israel and India mentioned above is approximately $ 277.
b.
Guarantees:
The Company and certain of its subsidiaries have provided three of their clients with performance bank guarantees totaling $ 163, which
are linked to the New Israeli Shekels, all of which will be terminated during 2013.
c.
From time to time, the Company and/or its subsidiaries are subject to legal, administrative and regulatory proceedings, claims, demands
and investigations in the ordinary course of business, including claims with respect to intellectual property, contracts, employment and
other matters. The Company accrues a liability when it is both probable that a liability has been incurred and the amount of the loss can be
reasonably estimated. Significant judgment is required in both the determination of probability and the determination as to whether a loss
is reasonably estimable. These accruals are reviewed and adjusted to reflect the impact of negotiations, settlements, rulings, advice of legal
counsel and other information and events pertaining to a particular matter.
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 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 $ 643). In June
2009, the court rejected the plaintiff's claims. In July 2009, the plaintiff filed an appeal. The appeal was dismissed in February 2012.
In August 2009, a software company and one of its owners filed an arbitration proceeding 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 approximately NIS 52 million (approximately $ 13,930). The arbitrator determined that both the Company and the
subsidiary breached the non-disclosure agreement, but closing summaries regarding damages have not yet been submitted.
In June 2011, the plaintiffs filed a motion to allow them to amend the claim by adding new causes of action and increasing the
damages claimed in the lawsuit by approximately additional NIS 238 million (approximately $ 63,755) based on new arguments.
Following discussions, the arbitrator rejected the motion and determined that if the plaintiffs wish to claim the additional damages
(and the additional causes of action) they should do so in a separate legal proceeding. To date the plaintiffs did not file an additional
lawsuit.
F-51
APPENDIX TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands (except share and per share data)
NOTE 14:- COMMITMENTS AND CONTINGENCIES (Cont.)
MAGIC SOFTWARE ENTERPRISES LTD.
AND ITS SUBSIDIARIES
At this time, given the multiple uncertainties involved and in large part to the highly speculative nature of the damages sought by
the plaintiff, which leaves a wide discretion to the arbitrator in quantifying and awarding the damages, the Company is unable to
estimate the amount of the probable loss, if any, to be recognized. However, the Company recorded an accrual to cover future
related expenses, as estimated by the Company's legal counsel.
3.
4.
In February 2010, a U.S. based 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. In July
2011, the Company entered into a settlement agreement with the plaintiff according to which it paid a lump sum to the plaintiff for
future maintenance and support until 2018, subject to a complete release of all claims.
In addition to the above mentioned legal proceedings, the Company is also involved in various legal proceedings arising in the
normal course of its business. Based upon the advice of counsel, the Company does not believe that the ultimate resolution of these
matters will have a material adverse effect on the Company's consolidated financial position, results of operations or cash flows.
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, 2012, the remaining contingent obligation of the Company amounted to $ 188. No expense was recorded in years 2010,
2011 and 2012 for royalties payment.
F-52
APPENDIX TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands (except share and per share data)
NOTE 15:- NET EARNINGS PER SHARE
The following table sets forth the computation of basic and diluted net earnings per share:
MAGIC SOFTWARE ENTERPRISES LTD.
AND ITS SUBSIDIARIES
Year ended December 31,
2011
2012
2010
Numerator for basic and diluted earnings per share - net income available to Magic
shareholders
$
9,375 $
15,044 $
16,183
Weighted average ordinary shares outstanding:
Denominator for basic net earnings per share
Effect of dilutive securities
Denominator for diluted net earnings per share
Basic and diluted earnings per share
32,139,686 36,267,739
591,360
777,968
36,502,264
605,406
32,731,046 37,045,707 37,107,670
$
0.29 $
0.41 $
0.44
NOTE 16:- SEGMENT GEOGRAPHICAL INFORMATION AND MAJOR CUSTOMERS
a.
The Company reports its results on the basis of two reportable business segments: software services (which include proprietary and none
proprietary software technology) and IT professional services, each of which is comprised of two reporting units. The entities included in
the Company's IT professional services business segment are Coretech Consulting Group LLC, Fusion Solutions LLC and Xsell Resources
Inc which are considered as one reporting unit and Comm-IT Software, Comm-IT Technology Solutions and Comm-IT Embedded, which
is a separate reporting unit. The reporting unit of the proprietary and none proprietary software technology segment is comprised of
Complete Business Solutions Ltd., Complete Information Technology and all of the Company's other subsidiaries in each of the respective
years.
The Company evaluates segment performance based on revenues and operating income 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.
Software services
The Company develops markets, sells and supports a proprietary and none proprietary application platform, software applications, business
and process integration solutions and related services.
F-53
APPENDIX TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands (except share and per share data)
NOTE 16:- SEGMENT GEOGRAPHICAL INFORMATION AND MAJOR CUSTOMERS (Cont.)
IT professional services
MAGIC SOFTWARE ENTERPRISES LTD.
AND ITS SUBSIDIARIES
The Company offers advanced and flexible IT services in the areas of infrastructure design and delivery, application development,
technology planning and implementation services, communications services and solutions, 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:
2010
Total revenues
Expenses
Segment operating income (loss)
Depreciation and amortization
2011
Total revenues
Expenses
Segment operating income (loss)
Depreciation and amortization
2012
Total revenues
Expenses
Segment operating income (loss)
Depreciation and amortization
Software
services
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
Software
services
IT
professional
services
Unallocated
expense
Total
$
$
$
$
$
$
58,137 $
44,086
55,191 $
50,468
- $ 113,328
98,611
4,057
14,051 $
4,723 $
(4,057) $
14,717
3,837 $
853 $
350 $
5,040
65,410 $
50,497
60,970 $
55,456
- $ 126,380
109,972
4,019
14,913 $
5,514 $
(4,019) $
16,408
5,937 $
1,182 $
344 $
7,463
F-54
APPENDIX TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands (except share and per share data)
NOTE 16:- SEGMENT GEOGRAPHICAL INFORMATION AND MAJOR CUSTOMERS (Cont.)
MAGIC SOFTWARE ENTERPRISES LTD.
AND ITS SUBSIDIARIES
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.
The following table presents total revenues classified according to geographical destination for the years ended December 31, 2010, 2011
and 2012:
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,
2011
2012
2010
$
4,405 $
21,788
48,888
10,806
2,691
$
7,982
24,351
60,727
12,111
8,157
11,561
29,139
64,591
12,661
8,428
$
88,578 $
113,328 $
126,380
December 31,
2011
2012
$
$
39,567
1,836
16,225
6,804
3,895
48,452
2,171
15,459
6,164
3,657
$
68,327 $
75,903
e.
f.
The Company does not allocate its assets to its reportable segments; accordingly, asset information by reportable segments is not
presented.
In 2010, 2011 and 2012, the Company had one customer, included in the IT professional services segment, which accounted for 29%, 25%
and 19% of the group revenues, respectively.
NOTE 17:- SUBSEQUENT EVENTS
On February 14, 2013, the Company declared a dividend distribution of $ 0.12 per share ($ 4,397 in the aggregate) which was paid on March 14,
2013. The dividend distribution relates to the Company's earnings in the second half of 2012.
F-55
APPENDIX TO CONSOLIDATED FINANCIAL STATEMENTS
Details of the percentage of control of the share capital and voting rights of subsidiaries and an affiliate as of December 31, 2012:
DETAILS OF SUBSIDIARIES AND AFFILIATE
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 .
Magic Software Ltd.
Magix Integration (Proprietary) Ltd
Appbuilder Solutions Ltd
Complete Information Technology Ltd
Complete Business Solutions Ltd
Comm-IT Technology Solutions Ltd
Comm-IT Software Ltd
Comm-IT Embedded Ltd (shares held by Comm-IT Technology Solutions Ltd.)
- - - - - - - - - - - -
F-56
Percentage of ownership
and control
%
Place of incorporation
Japan
100
100 U.S.A.
100 U.K.
100 U.K.
100
Spain
100 U.S.A
100 U.S.A
100 U.S.A
100 U.S.A
100
Israel
100 Netherlands
100
France
100 Netherlands
100 Netherlands
100 Germany
100
100 Hungary
100
100
100 U.K.
Israel
100
Israel
95
Israel
80
Israel
80
Israel
51
Israel
South Africa
India
37 Broadhurst Gardens, London NW6 3QT
To the Board of Directors and Shareholders
Magic Software Enterprises (UK) Limited
Levy Cohen & Co.
Registered Auditors
Tel: 020 - 7624 2251 Fax: 020 - 7372 2328
E - mail: lc@levy-cohen.co.uk
We have audited the accompanying balance sheet of Magic Software Enterprises (UK) Limited (the “Company”) as of December 31, 2012 and 2011, and
the related profit and loss account and changes in shareholders’ equity for each of the three years in the period ended December 31, 2012. 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, 2012 and 2011, and the related profit and loss account and changes in shareholders’ equity for each of the three years in the period ended
December 31, 2012, 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-57
January 30, 2013
37 Broadhurst Gardens, London NW6 3QT
To the Board of Directors and Shareholders
Hermes Logistics Technologies Limited
Levy Cohen & Co.
Registered Auditors
Tel: 020 - 7624 2251 Fax: 020 - 7372 2328
E - mail: lc@levy-cohen.co.uk
We have audited the accompanying balance sheet of Hermes Logistics Technologies Limited (the “Company”) as of December 31, 2012 and 2011, and
the related profit and loss account and changes in shareholders’ equity for each of the three years in the period ended December 31, 2012. 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, 2012 and 2011, and the related profit and loss account and changes in shareholders’ equity for each of the three years in the period ended
December 31, 2012, 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-58
February 8, 2013
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, 2011 and 2012, and the related
statements of operations and cash flows for each of the three years in the period ended December 31, 2012. 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, 2011 and 2012, and the related statements of operations and cash flows for each of the three years in the period ended December 31, 2012 in conformity
with accounting principles generally accepted in the United States of America.
Tokyo, Japan
January 30, 2013
/s/ KDA Audit Corporation
KDA Audit Corporation
F-59
Magic Benelux B.V.
Independent 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, including 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 31, 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-60
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 l 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,
Drs. L.K. Hoogendoorn RA MGA
F-61
To the Board of Directors and Shareholders of
Magic (Onyx) Magyarország Szoftverház K ft.
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-62
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: Chief Executive Officer
Dated: April 24, 2013
93
List of Subsidiaries and Affiliates of the Registrant
Exhibit 8.1
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 as of December 31, 2012:
Subsidiary 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
Magic Software ERP Ltd (formally CarPro Systems Ltd).
Fusion Solutions, LLC
Xsell Resources Inc.
Magix Integration (Proprietary) Ltd
Complete Business Solutions Ltd
Complete Information Technology Ltd
Appbuilder Solutions UK
CommIT Technology Solutions Ltd
CommIT Software Ltd
CommIT Embedded Ltd (shares held by Comm-IT Technology Solutions 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
Israel
Israel
United Kingdom
Israel
Israel
Israel
Ownership
Percentage
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
95%
100%
100%
80%
80%
51%
Exhibit 12.1
CERTIFICATION OF CHIEF EXECUTIVE OFFICER
Pursuant to Rule 13a-14(a) under the Securities Exchange Act of 1934, as amended.
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: April 24, 2013
* 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*
Chief Executive Officer
Exhibit 12.2
CERTIFICATION OF CHIEF FINANCIAL OFFICER
Pursuant to Rule 13a-14(a) under the Securities Exchange Act of 1934, as amended.
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: April 24, 2013
*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*
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, 2012 as
filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Guy Bernstein, Chief Executive Officer of the Company, certify,
pursuant to 18 U.S.C. § 1350, as adopted pursuant to § 906 of the Sarbanes-Oxley Act of 2002, that:
(1) 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.
/s/Guy Bernstein
Guy Bernstein*
Chief Executive Officer
April 24, 2013
* The originally executed copy of this Certification will be maintained at the Company’s offices and will be made available for inspection upon
request.
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, 2012 as
filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Asaf Berenstin, Chief Financial Officer of the Company, certify,
pursuant to 18 U.S.C. § 1350, as adopted pursuant to § 906 of the Sarbanes-Oxley Act of 2002, that:
(1) 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.
/s/Asaf Berenstin
Asaf Berenstin*
Chief Financial Officer
April 24, 2013
* The originally executed copy of this Certification will be maintained at the Company’s offices and will be made available for inspection upon
request.
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 reports dated April 24, 2013 with respect to the consolidated financial statements of the
Company and its subsidiaries and the effectiveness of the internal control over financial reporting of the Company and its subsidiaries included in this Annual
Report on Form 20-F for the year ended December 31, 2012.
Exhibit 15.1
/s/Kost Forer Gabbay & Kasierer
KOST FORER GABBAY & KASIERER
A Member of Ernst & Young Global
Tel Aviv, Israel
April 24, 2013
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 January 30, 2013, with respect to the financial statements of Magic Software Enterprises UK
Limited as of December 31, 2012 which report appears in the Annual Report on Form 20-F of Magic Software Enterprises Ltd. for the year ended December 31,
2012.
Yours sincerely,
LEVY COHEN & CO.
/s/Levy Cohen & Co.
Registered Auditors and Certified
Public Accountants
April 22, 2013
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 8 February 2013, with respect to the financial statements of Hermes Logistics Technologies
Limited as of December 31, 2012, which report appears in the Annual Report on Form 20-F of Magic Software Enterprises Ltd. for the year ended December
31, 2012.
Yours sincerely,
LEVY COHEN & CO.
/s/Levy Cohen & Co.
Registered Auditors and Certified
Public Accountants
April 22, 2013
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 30, 2013 with respect to the financial statements of Magic Software Japan K.K. as of
December 31, 2012, which report appears in the Annual Report on Form 20-F of Magic Software Enterprises Ltd. for the year ended December 31, 2012.
/s/KDA Audit Corporation
KDA Audit Corporation
Registered Auditors
Tokyo, Japan
April 22, 2013
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, April 22, 2013
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, 2012.
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, 2012.
Exhibit 15.6
/s/ Mária Négyessy
Mária Négyessy
Registered Auditors
Budapest
April 22, 2013