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, 2019
OR
☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the transition period from __________to ___________
OR
☐ 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
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 6021805, Israel
(Address of principal executive offices)
Amit Birk; +972 (3) 538 9322; abirk@magicsoftware.com
5 Haplada Street, Or Yehuda 6021805, 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
Trading Symbol(s)
MGIC
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:48,939,538 Ordinary Shares
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities
Act.
Yes ☐ No ☒
If this report is an annual or transition report, indicate by check mark if the registrant is not required to file reports
pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934.
Yes ☐ No ☒
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of
the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Yes ☒ No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be
submitted 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 such files).
Yes ☒ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer,
or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” and “emerging
growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer: ☐ Accelerated filer: ☒
Non-accelerated filer: ☐
Emerging growth company
☐
If an emerging growth company that prepares its financial statements in accordance with U.S. GAAP, indicate by
check mark if the registrant has elected not to use the extended transition period for complying with any new or
revised financial accounting standards† provided pursuant to Section 13(a) of the Exchange Act. ☐
† The term “new or revised financial accounting standard” refers to any update issued by the Financial Accounting
Standards Board to its Accounting Standards Codification after April 5, 2012.
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
☐ Other by the International Accounting Standards Board
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).
Yes ☐ No ☒
This annual report on Form 20-F is incorporated by reference into the registrant’s Registration Statements on Form
S-8, File Nos. 333-113552, 333-132221 and 333-149553.
EXPLANATORY NOTE
We have filed this annual report on Form 20-F in reliance on the 45-day extension provided by an order issued by
SEC under Section 36 of the Exchange Act Modifying Exemptions From the Reporting and Proxy Delivery
Requirements for Public Companies, dated March 25, 2020 (Release No. 34-88465) (the “Order”).
On April 30, 2020, we filed a Report on Form 6-K to indicate our intention to rely on the Order for such extension.
Consistent with our statements made in the Form 6-K, we were unable to file the Original Form 20-F by April 30,
2020 because COVID-19 has caused severe disruptions in travel and transportation and limited access to our
facilities resulting in limited support from our staff. We have been following the recommendations of local
government and health authorities to minimize exposure risk for our employees. The disruptions delayed our ability
to complete our annual review and prepare the Annual Report by April 30, 2020.
INTRODUCTION
We are a global provider of: (i) proprietary application development and business process integration platforms; (ii)
selected packaged vertical software solutions; as well as (iii) software services and Information Technologies (“IT”)
outsourcing software services. Our software technology is used by customers to develop, deploy and integrate on-
premise, mobile and cloud-based business applications quickly and cost effectively. In addition, our technology
enables enterprises to accelerate the process of delivering business solutions that meet current and future needs and
allow customers to dramatically improve their business performance and return on investment. With respect to
software services and IT outsourcing services, we offer a vast portfolio of professional services in the areas of
infrastructure design and delivery, application development, technology consulting planning and implementation
services, integration projects, project management, software testing and quality assurance, engineering consulting
(including supervision of engineering projects), support services, cloud computing for deployment of highly
available and massively-scalable applications and API’s and supplemental outsourcing services, all according to the
specific needs of the customer, and in accordance with the professional expertise required in each case. In addition,
we offer a variety of proprietary comprehensive packaged software solutions through certain of our subsidiaries for
(i) enterprise-wide and fully integrated medical platform )“Clicks”), specializing in the design and management of
patient-file oriented software solutions for managed care and large-scale health care providers. This platform aims to
allow providers to securely access an individual’s electronic health record at the point of care, and it organizes and
proactively delivers information with potentially real time feedback to meet the specific needs of physicians, nurses,
laboratory technicians, pharmacists, front- and back-office professionals and consumers; (ii) enterprise management
systems for both hubs and traditional air cargo ground handling operations from physical handling and cargo
documentation through customs, seamless electronic data interchange, or EDI communications, dangerous goods,
special handling, track and trace, security to billing (“Hermes”); (iii) enterprise human capital management, or
HCM, solutions, to facilitate the collection, analysis and interpretation of quality data about people, their jobs and
their performance, to enhance HCM decision making (“HR Pulse”); (iv) revenue management and monetization
solutions in mobile, wireline, broadband and mobile virtual network operator/enabler, or MVNO/E (“Leap”); and (v)
comprehensive systems for managing broadcast channels in the area of TV broadcast management through cloud-
based on-demand service or on-premise solutions;
Based on our technological capabilities, our software solutions enable customers to respond to rapidly-evolving
market needs and regulatory changes, while improving the efficiency of their core operations. We have
approximately 2,640 employees and operate through a network of over 3,000 independent software vendors, or
ISVs, who we refer to as Magic Software Providers, or MSPs, and hundreds of system integrators, distributors,
resellers, and consulting and OEM partners. Thousands of enterprises in approximately 50 countries use our
products and services.
Our application development and business process integration platforms consist of:
● Magic xpa – a proprietary application platform for developing and deploying business applications.
● AppBuilder – a proprietary application platform for building, deploying, and maintaining high-end,
mainframe-grade business applications.
● Magic xpi – a proprietary platform for application integration.
● Magic xpc – hybrid integration platform as a service (iPaaS).
● Magic SmartUX - a proprietary low-code enterprise mobile development application platform for citizen
to professional developers to rapidly design, build, analyze, and run cross-platform mobile business
applications.
● FactoryEye - a proprietary high performance, low-code, flexible, hybrid platform for manufacturers based
on existing infrastructure enabling real-time virtualizations of all production data and advanced analytics
(based on machine learning) for improved productivity and competitive advantage.
These software solutions enable our customers to improve their business performance and return on investment by
supporting cost-effective and rapid delivery integration of business applications, systems and databases. Using our
products and our specialists, enterprises and MSPs can achieve fast time-to-market by rapidly building integrated
solutions and deploy them in multiple environments while leveraging existing IT resources. In addition, our software
solutions are scalable and platform-agnostic, enabling our customers to build software applications by specifying
their business logic requirements in a high-level language rather than in computer code, and to benefit from
seamless platform upgrades and cross-platform functionality without the need to re-write their applications. Our
platforms also support the development of mobile applications that can be deployed on a variety of mobile devices,
and in a cloud environment. In addition, we continuously evolve our platforms to include the latest technologies to
meet the demands of our customers and the markets in which they operate.
We sell our platforms and software services globally through a broad channel network, including our own direct
sales representatives and offices, independent country distributors, MSPs that use our technology to develop and sell
solutions to their customers, and system integrators. We also offer software maintenance, support, training and
consulting services to supplement with our products, thus aiding in the successful implementation of Magic xpa,
AppBuilder, Magic xpi, Magic xpc, Magic Smart UX and FactoryEye projects, and assuring successful operation of
the platforms once installed.
Our vertical packaged software solutions include:
● Clicks – a proprietary comprehensive core software solution for medical record information management
system, used in the design and management of patient-files for managed care and large-scale healthcare
providers. The platform is connected to each provider’s clinical, administrative and financial data base
system, residing at the provider’s central computer, and allows immediate analysis of complex data with
potentially real-time feedback to meet the specific needs of physicians, nurses, laboratory technicians,
pharmacists, front- and back-office professionals and consumers.
● Leap™ – a proprietary comprehensive core software solution for Business Support Systems, or BSS,
including convergent charging, billing, customer management, policy control, mobile money and payment
software solutions for the telecommunications, content, Machine to Machine/Internet of Things or
M2M/IoT, payment and other industries.
● Hermes Solution – Hermes Air Cargo Management System is a proprietary, state-of-the-art, packaged
software solution for managing air cargo ground handling. Our Hermes Solution covers all aspects of cargo
handling, from physical handling and cargo documentation through customs, seamless EDI
communications, dangerous goods and special handling, tracking and tracing, security and billing.
Customers benefit through faster processing and more accurate billing, reporting and ultimately enhanced
revenue. the system also features the Hermes Business Intelligence (HBI) solution, adding unprecedented
data analysis capabilities and management-decision support tools. The Hermes Solution is delivered on a
licensed or fully hosted basis.
● HR Pulse – A customizable single-tenant SaaS tool that helps organizations to monitor employee
performance, progress and potential through a menu of templates that can create new HCM solutions,
complement existing processes, and/or integrate with legacy HR systems already in use by organizations.
● MBS Solution – a proprietary comprehensive core system for TV broadcast management for use in
managing broadcast channels.
In addition, we provide on an increasingly global basis a broad range of advanced software professional services and
IT outsourcing services in the areas of infrastructure design and delivery, end-to-end application development,
technology planning and implementation services, as well as outsourcing services to a wide variety of companies,
including Fortune 1000 companies. The technical personnel we provide generally supplement in-house capabilities
of our customers. We have extensive and proven experience with virtually all types of telecom infrastructure
technologies in wireless and wire-line as well as in the areas of infrastructure design and delivery, application
development, project management, technology planning and implementation services.
We have substantial experience in end-to-end development of high-end software solutions, beginning with
collection and analysis of system requirements, continuing with architecture specifications and setup, to software
implementation, component integration and testing. From concept to implementation, from application of the ideas
of startups requiring the early development of an application or a device, to somewhat larger, more established
enterprises, vendors or system houses who need our team of experts to take full responsibility for the development
of their systems and products. With our ability to draw on our pool of resources, comprised of hundreds of highly
trained, skilled, educated and flexible engineers, we adhere to timelines and budget and work in full transparency
with our customers every step of the way to create a tailor-made and cost-effective solution to answer our
customers’ unique needs.
Our consolidated financial statements appearing in this annual report are prepared in U.S. dollars and in accordance
with United States generally accepted accounting principles, or U.S. GAAP.
We have obtained trademark registrations for SmartUX® in the United States and 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.
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.
Definitions
In this annual report, unless the context otherwise requires:
● References to “Magic,” the “Company,” the “Registrant,” “our company,” “us,” “we” and “our” refer to
Magic Software Enterprises Ltd. and its consolidated subsidiaries;
● References to “our shares,” “Ordinary Shares” and similar expressions refer to Magic’s Ordinary Shares,
par value NIS 0. 1 per share;
● References to “dollars”, “U.S. dollars”, “U.S. $” and “$” are to United States Dollars;
● References to “Euro” or “€” are to the Euro, the official currency of the Eurozone in the European Union;
● References to “shekels” and “NIS” are to New Israeli Shekels, the Israeli currency;
● References to the “Articles” are to our Amended Articles of Association, as currently in effect;
● References to the “Securities Act” are to the Securities Act of 1933, as amended;
● References to the “Exchange Act” are to the Securities Exchange Act of 1934, as amended;
● References to “NASDAQ” are to the NASDAQ Stock Market;
● References to the “TASE” are to the Tel Aviv Stock Exchange; and
● References to the “SEC” are to the United States Securities and Exchange Commission.
Cautionary Note Regarding Forward-Looking Statements
Certain matters discussed in this annual report are forward-looking statements within the meaning of Section 27A
of the Securities Act, Section 21E of the Exchange Act and the safe harbor provisions of the U.S. Private Securities
Litigation Reform Act of 1995, that are based on our beliefs and assumptions as well as information currently
available to us. Such forward-looking statements may be identified by the use of the words “anticipate,” “believe,”
“estimate,”, “expect,” “may,” “will,” “plan” and similar expressions. Such statements reflect our current views
with respect to future events and are subject to certain risks and uncertainties. There are important factors that
could cause our actual results, levels of activity, performance or achievements to differ materially from the results,
levels of activity, performance or achievements expressed or implied by the forward-looking statements, including,
but not limited to:
● the COVID-19 (coronavirus) pandemic, which may last longer than expected and materially adversely
affect our results of operations;
● the degree of our success in our plans to leverage our global footprint to grow our sales;
● the degree of our success in integrating the companies that we have acquired through the implementation of
our M&A growth strategy;
● the lengthy development cycles for our solutions, which may frustrate our ability to realize revenues and/or
profits from our potential new solutions;
● our lengthy and complex sales cycles, which do not always result in the realization of revenues;
● the degree of our success in retaining our existing customers or competing effectively for greater market
share;
● difficulties in successfully planning and managing changes in the size of our operations;
● the frequency of long-term, large, complex projects that we perform from time to time that involve complex
estimates of project costs and profit margins, which sometimes change mid-stream;
● the challenges and potential liability that heightened privacy laws and regulations pose to our business;
● the occasional disputes with clients, which may adversely impact our results of operations and our
reputation;
● various intellectual property issues related to our business;
● potential unanticipated product vulnerabilities or cybersecurity breaches of our or our customers’ systems;
● risks related to industries, such as the banking, healthcare, defense and the telecom, in which certain of our
clients operate;
● risks associated with our global sales and operations, such as changes in regulatory requirements, wide-
spread viruses and epidemics like the recent novel coronavirus outbreak, or fluctuations in currency
exchange rates; and
● risks related to our principal location in Israel.
While we believe such forward-looking statements are based on reasonable assumptions, should one or more of the
underlying assumptions prove incorrect, or these risks or uncertainties materialize, our actual results may differ
materially from those expressed or implied by the forward-looking statements. Please read the risks discussed in
Item 3 – “Key Information” under the caption “Risk Factors” and cautionary statements appearing elsewhere in
this annual report in order to review conditions that we believe could cause actual results to differ materially from
those contemplated by the forward-looking statements.
You should not rely upon forward-looking statements as predictions of future events. Although we believe that the
expectations reflected in the forward-looking statements are reasonable, we cannot guarantee that future results,
levels of activity, performance and events and circumstances reflected in the forward-looking statements will be
achieved or will occur. Except as required by law, we undertake no obligation to update publicly any forward-
looking statements for any reason after the date of this annual report, to conform these statements to actual results
or to changes in our expectations
TABLE OF CONTENTS
IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS
ITEM 1.
ITEM 2. OFFER STATISTICS AND EXPECTED TIMETABLE
ITEM 3. KEY INFORMATION
A. Selected Financial Data
B. Capitalization and Indebtedness
C. Reasons for the Offer and Use of Proceeds
D. Risk Factors
ITEM 4.
INFORMATION ON THE COMPANY
A. History and Development of the Company
B. Business Overview
C. Organizational Structure
D. Property, Plants and Equipment
ITEM 4 A. UNRESOLVED STAFF COMMENTS
ITEM 5. OPERATING AND FINANCIAL REVIEW AND PROSPECTS
A. Operating Results
B. Liquidity and Capital Resources
C. Research and Development
D. Trend Information
E. Off-Balance Sheet Arrangements
F. Tabular Disclosure of Contractual Obligations
ITEM 6. DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES
A. Directors and Senior Management
B. Compensation
C. Board Practices
D. Employees
E. Share Ownership
ITEM 7. MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS
A. Major Shareholders
B. Related Party Transactions
C. Interests of Experts and Counsel
FINANCIAL INFORMATION
ITEM 8.
A. Consolidated Statements and Other Financial Information
B. Significant Changes
ITEM 9.
THE OFFER AND LISTING
A. Offer and Listing Details
B. Plan of Distribution
C. Markets
D. Selling Shareholders
E. Dilution
F. Expenses of the Issue
i
1
1
1
1
2
2
3
23
23
23
45
46
46
47
47
54
64
65
65
65
66
66
68
70
78
79
81
81
83
83
83
83
85
85
85
85
85
85
86
86
ITEM 10. ADDITIONAL INFORMATION
A. Share Capital
B. Memorandum and Articles of Association
C. Material Contracts
D. Exchange Controls
E. Taxation
F. Dividends and Paying Agents
G. Statement by Experts
H. Documents on Display
I. Subsidiary Information
ITEM 11. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS
ITEM 12. DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES
ITEM 13. DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES
ITEM 14. MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USE
OF PROCEEDS
ITEM 15. CONTROLS AND PROCEDURES
ITEM 16. RESERVED
ITEM 16A.AUDIT COMMITTEE FINANCIAL EXPERT
ITEM 16B.CODE OF ETHICS
ITEM 16C.PRINCIPAL ACCOUNTANT FEES AND SERVICES
ITEM 16D.EXEMPTIONS FROM THE LISTING STANDARDS FOR AUDIT COMMITTEES
ITEM 16E. PURCHASES OF EQUITY SECURITIES BY THE ISSUER AND AFFILIATED
PURCHASERS
ITEM 16F. CHANGES IN REGISTRANT’S CERTIFYING ACCOUNTANT
ITEM 16G.CORPORATE GOVERNANCE
ITEM 16H.MINE SAFETY DISCLOSURE
ITEM 17. FINANCIAL STATEMENTS
ITEM 18. FINANCIAL STATEMENTS
ITEM 19. EXHIBITS
S I G N A T U R E S
ii
86
86
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87
98
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101
101
101
101
101
102
102
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103
103
104
105
PART I
ITEM 1.
IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS
Not applicable.
ITEM 2.
OFFER STATISTICS AND EXPECTED TIMETABLE
Not applicable.
ITEM 3.
KEY INFORMATION
A.
SELECTED FINANCIAL DATA
The following table summarizes certain selected consolidated financial data for the periods and as of the dates
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 derived the following consolidated statement of income data for the years ended December 31, 2017, 2018 and
2019 and the consolidated balance sheet data as of December 31, 2018 and 2019 from our audited consolidated
financial statements included elsewhere in this annual report. The selected consolidated statement of income data for
the year ended December 31, 2015 and 2016 and the consolidated balance sheet data as of December 31, 2015, 2016
and 2017 are derived from our audited consolidated financial statements not included in this annual report. Our
historical consolidated financial statements are prepared in accordance with U.S. generally accepted accounting
principles, or U.S. GAAP, and presented in U.S. dollars.
Statement of Income 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
Operating income
Financial income (expense), net
Other income (expense), net
Income before taxes on income
2019
2018
Year ended December 31,
2017
(U.S. dollars in thousands)
2016
2015
$
28,084 $
30,996
266,550
21,644 $
30,386
206,110
$ 325,630 $ 284,375 $ 258,140
25,454 $
30,951
227,970
19,626 $
25,885
156,135
201,646
21,598
22,908
131,524
176,030
10,220
4,167
209,114
223,501
102,129
9,960
4,120
181,477
195,557
88,818
9,564
3,888
161,709
175,161
82,979
8,674
2,952
121,756
133,382
68,264
7,836
2,466
102,919
113,221
62,809
8,239
30,454
29,784
33,652
(1,180)
-
32,472
5,696
27,197
24,227
31,698
(149)
-
31,847
6,942
27,244
22,837
25,956
(1,711)
-
24,245
5,839
23,776
17,562
21,087
(430)
-
20,657
4,888
23,062
13,425
21,434
(685)
8
20,757
Taxes on income
Net income
(6,874)
25,598 $
(7,071)
24,776 $
(6,331)
17,914 $
(3,949)
16,708 $
(3,681)
17,076
$
Change in redeemable non-controlling
interests
Net income attributable to non-controlling
interests
Net income attributable to Magic’s
Shareholders
Basic earnings per share (1)
Diluted earnings per share
Shares used to compute basic earnings per
share (2) (3)
Shares used to compute diluted earnings per
share
Dividends
Cash dividend declared per ordinary share(1)
$
$
$
3,111
3,383
1,536
2,258
2,221
1,510
936
281
639
239
20,266
0.26 $
0.26 $
19,883
0.39 $
0.39 $
15,442
0.35 $
0.35 $
14,169
0.27 $
0.27 $
16,198
0.37
0.36
48,896
46,665
44,436
44,347
44,248
48,994
14,963
0.31 $
46,797
13,348
0.29 $
44,597
9,554
0.22 $
44,516
7,761
0.18 $
44,452
7,788
0.18
1
Balance Sheet Data:
Working capital
Cash, cash equivalents, short term deposits
and marketable securities
Total assets
Total equity
2019
December 31,
2017
(U.S. dollars in thousands)
$ 138,167 $ 158,301 $ 122,403 $ 113,668 $ 106,945
2016
2018
2015
95,511
404,606
264,697
113,920
362,285
248,369
90,946
342,539
213,563
87,822
316,399
196,641
76,684
239,846
193,106
(1) On February 5, 2015, we declared a dividend distribution of $0.081 per share ($3,582 in the aggregate) which
was paid on March 11, 2015. On August 12, 2015, we declared a dividend distribution of $0.095 per share ($
4,204 in the aggregate) which was paid on September 10, 2015. On February 21, 2016, we declared a dividend
distribution of $0.09 per share ($3,991 in the aggregate) which was paid on March 17, 2016. On August 14,
2016, we declared a dividend distribution of $0.085 per share ($3,770 in the aggregate) which was paid on
September 22, 2016. On February 22, 2017, we declared a dividend distribution of $0.085 per share ($3,774 in
the aggregate) which was paid on April 5, 2017. On August 13, 2017, we declared a dividend distribution of
$0.13 per share ($5,779 in the aggregate) which was paid on September 13, 2017. On February 28, 2018, we
declared a dividend distribution of $0.13 per share ($5,785 in the aggregate) which was paid on March 26,
2018. On August 8, 2018, we declared a dividend distribution of $0.155 per share ($7,563 in the aggregate)
which was paid on September 5, 2018. On March 4, 2019, we declared a dividend distribution of $0.15 per
share ($7,335 in the aggregate) which was paid on March 25, 2019. On August 13, 2019, we declared a
dividend distribution of $ 0.156 per share ($7,628 in the aggregate) which was paid on September 12, 2019.
(2) On July 12, 2018, we completed a private placement of 3,150,559 of our Ordinary Shares to several leading
Israeli institutional investors and 1,117,734 Ordinary Shares to our principal shareholder, Formula Systems
(1985) Ltd., under the same terms based on a price of $8.20 per share.
Dividend Policy
Our Board of Directors’ dividend policy was amended on August 9, 2017 to distribute dividends of up to 75% of our
annual distributable profits each year (previously 50% of our annual distributable profits), subject to any applicable
law. We have paid dividends since 2012. Our Board of Directors may in its discretion and at any time, whether as a
result of a one-time decision or a change in policy, change the rate of dividend distributions or decide not to
distribute a dividend.
B.
CAPITALIZATION AND INDEBTEDNESS
Not applicable.
C.
REASONS FOR THE OFFER AND USE OF PROCEEDS
Not applicable.
2
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.
Risks Related to Our Business and Our Industry
The current novel strain of coronavirus (COVID-19) and any other pandemic, epidemic or outbreak of an
infectious disease may adversely affect our business.
If a pandemic, epidemic or outbreak of an infectious disease occurs especially in the United States and in Israel or
elsewhere, our business may be adversely affected. In December 2019, COVID-19 was identified in Wuhan, China.
This virus continues to spread globally and as of April 2020, has spread to over 100 countries, including in the
United States and Israel. The spread of COVID-19 has resulted in the World Health Organization declaring the
outbreak of COVID-19 as a “pandemic” having a significant impact on global economic activity with governments
around the world having closed office spaces, public transportation and schools and imposing quarantines and
restrictions on travel and mass gatherings to slow the spread of the virus. The Government of Israel now requires all
travelers arriving in Israel to remain in home quarantine until 14 days have passed since the date of entry into Israel.
Non-Israeli residents will be required to prove they have the means to self-quarantine before being allowed entry
into Israel. In addition, gatherings of 10 or more people in one place have been restricted, schools have been closed
and employees are being asked to work remotely. Prolonged economic uncertainties or downturns could trigger a
global recession that could materially adversely affect our business.
We currently anticipate that the COVID-19 outbreak will have a negative effect on our operations. The restrictions
imposed as a result of the outbreak are likely to cause operating difficulties, and is likely to have a negative impact
on our ability to generate revenues causing order cancellations, delays and the inability of certain of our sales and
support teams to travel and/or meet with customers or provide on-site services. Our business depends on our current
and prospective customers’ ability and willingness to invest money in IT systems and services, which in turn is
dependent upon their overall economic health. Negative economic conditions in the global economy or certain
regions especially in the United States and Israel, including conditions resulting from financial and credit market
fluctuations, could cause a decrease in corporate spending on products and services that we sell. Wide-spread
viruses and epidemics like the recent novel coronavirus outbreak, could also negatively affect our customers’
spending on our products and services. In 2019, 49% of our revenues were generated from North America, 38% of
our revenues generated from Israel, and 13% from the rest of the world. Negative economic conditions may cause
customers in general to reduce their IT spending. Customers may delay or cancel projects, choose to focus on in-
house development efforts or seek to lower their costs by renegotiating maintenance and support agreements.
Additionally, customers may be more likely to make late payments in worsening economic conditions, which could
require us to increase our collection efforts and require us to incur additional associated costs to collect expected
revenues. To the extent purchases of licenses for our software are perceived by customers and potential customers to
be discretionary, our revenues may be disproportionately affected by delays or reductions in general IT spending.
The extent to which COVID-19 impacts our business will depend on future developments, which are highly
uncertain and cannot be predicted, including new information which may emerge concerning the severity of
COVID-19 and the actions to contain COVID-19 or treat its impact, among others.
The implementation of our M&A growth strategy, which requires the integration of our multiple acquired
companies and their respective businesses, operations and employees with our own, involves significant risks,
and the failure to integrate successfully may adversely affect our future results.
In the past decade we have completed more the 25 acquisitions. Most recently, in the second quarter of 2019, we
acquired both NetEffects Inc and Powwow Inc after having acquired OnTarget Group Inc in the first quarter of
2019. These acquisitions are part of our integrated M&A growth strategy, which is centered on three key factors:
growing our customer base, expanding geographically and adding complementary solutions and services to our
portfolio— all while we seek to ensure our continued high quality of services and product delivery. Any failure to
successfully integrate the business, operations and employees of our acquired companies, or to otherwise realize the
anticipated benefits of these acquisitions, could harm our results of operations. Our ability to realize these benefits
will depend on the timely integration and consolidation of organizations, operations, facilities, procedures, policies
and technologies, and the harmonization of differences in the business cultures between these companies and their
personnel. Integration of these businesses will be complex and time consuming, will involve additional expense and
could disrupt our business and divert management’s attention from ongoing business concerns. The challenges
involved in integrating NetEffects, Powwow, OnTarget Group and other former acquisitions include:
● Preserving customer, supplier and other important relationships
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● Integrating complex, core products and services that we acquire with our existing products and services
● Integrating financial forecasting and controls, procedures and reporting cycles
● Combining and integrating information technology, or IT, systems
● Integrating employees and related HR systems and benefits, maintaining employee morale and retaining
key employees
● Potential confusion that we may have in our dealings with customers and prospective customers as to the
products we are offering to them and potential overlap among those products
The benefits we expect to realize from these acquisitions are, necessarily, based on projections and assumptions
about the combined businesses of our company, and assume, among other things, the successful integration of these
acquired entities into our business and operations. Our projections and assumptions concerning our acquisitions may
be inaccurate, however, and we may not successfully integrate the acquired companies and our operations in a
timely manner, or at all. We may also be exposed to unexpected contingencies or liabilities of the acquired
companies. If we do not realize the anticipated benefits of these transactions, our growth strategy and future
profitability could be adversely affected.
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.
A significant part of our business strategy is to pursue acquisitions and other initiatives based on strategy centered
on three key factors: growing our customer base, expanding geographically and adding complementary solutions to
our portfolio— all while we seek to ensure our continued high quality of services and product delivery. In the past
five years we made numerous acquisitions, including: (i) in 2014, Datamind, a system integrator of user-driven
Business Intelligence (“BI”) solutions (mainly QlikView and Qlik Sense) that enable customers to make better,
faster and more informed business decisions, wherever they are; (ii) in 2014, Formula Telecom Solutions Ltd., an
Israeli based global proprietary software vendor that specializes in the development, sale, service and support of
business support systems, including convergent charging, billing, customer management, policy control and
payment software solutions for the telecommunications, content, Machine to Machine/Internet of Things, or
M2M/IoT, payment and other industries; (iii) in 2015, Comblack IT Ltd, an Israeli-based company specializing in
software professional services and outsource services for mainframes and complex large-scale environments; (iv) in
2015, Infinigy Solutions LLC, a U.S.-based services company focused on expanding the development and
implementation of technical solutions which delivers design-driven turnkey solutions, combining Architecture and
Engineering, or A&E design project management and general contracting competencies, across the wireless
communications industry; (v) in 2016, Roshtov Software Industries Ltd, an Israeli-based software company that is a
local Israeli market leader in patient medical record information systems; (vi) in 2016, Shavit Software (2009) Ltd.,
an Israeli-based company specializing in software professional and outsource services; (vii) in late December 2017,
Futurewave Systems, Inc., a U.S.-based full-service provider of consulting and outsourcing solutions for IT
personnel; and (viii) in 2019, a San Francisco based, PowWow Inc., creator of SmartUX, a low-code development
platform for mobilizing and modernizing enterprise business applications.
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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. In the future, we may seek to acquire or make strategic investments in
complementary businesses, technologies, services or products, or enter into strategic partnerships or alliances with
third parties in order to expand our business. Failure to manage and successfully integrate such 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 technologies and professional services to a failure to do so. Even when
an acquired company has previously developed and marketed products, there can be no assurance that new product
enhancements will be made in a timely manner or that pre-acquisition due diligence will have identified all possible
issues that might arise with respect to such products. If we acquire other businesses, we may face difficulties,
including:
● 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;
● Integrating financial forecasting and controls, procedures and reporting cycles;
● 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;
● 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.
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 product families and
service offerings 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 and integration platforms and vertical
software solutions and from related professional services, software maintenance and technical support as well as
from other IT professional services, which include IT consulting and outsourcing 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 and new software service offerings. A decrease in revenues
from our principal products and services would adversely affect our business, results of operations and financial
condition.
Our future success depends in part on the continued acceptance of our application platforms and integration products
primarily under our Magic xpa, Magic xpi, AppBuilder Magic xpc, FactoryEye and Magic SmartUX brands and our
vertical packaged software solutions, primarily Clicks, Leap™, the Hermes solution and HR Pulse. The continued
acceptance of these platforms and software solutions will be dependent 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 certain of them are particularly useful and advantageous. We will need to continue to enhance our
products to meet evolving requirements 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.
We compete in a market that is characterized by rapid technological changes. Other companies are also seeking to
offer integration solutions, low-code development solutions, enterprise mobility solutions, internet-related solutions,
such as cloud computing, and complementary services to generate growth. These companies may develop
technological or business model innovations or offer services in the markets that we seek to address that are, or are
perceived to be, equivalent or superior to our software solutions and services. 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.
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The introduction of new technologies and devices could render existing products and services obsolete and
unmarketable and could exert price pressures on our products and services. Our future success will depend upon our
ability to address the increasingly sophisticated needs of our customers by:
● Supporting existing and emerging hardware, software, databases and networking platforms; and
● Developing and introducing new and enhanced software development technology and applications that
keeps pace with such technological developments, emerging new product 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.
Because our solutions are complex and require rigorous testing, development cycles can be lengthy, taking us up to
two years to develop and introduce new, enhanced or modified solutions. Moreover, development projects can be
technically challenging and expensive. The nature of these development cycles may cause us to experience delays
between the time we incur expenses associated with research and development and the time we generate revenues, if
any, from such expenses. In addition, adapting to evolving technologies may require us to invest a significant
amount of resources, time and attention into the development, integration, support and marketing of those
technologies. The acceptance and growth of cloud computing and enterprise mobility are examples of rapidly
changing technologies, which we have adapted into our products, packaged software solution and software service
offerings. This 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 software solutions,
system integrations and professional services related to these changing technologies. Even if we succeed in adapting
to a new technology by developing attractive products and services and successfully bringing them to market, there
is no assurance that the new product or service will have a positive impact on our financial performance and could
even result in lower revenue, lower margins and higher costs and therefore could negatively impact our financial
performance. If release dates of any future products or enhancements are delayed our business, financial condition
and results of operations could be adversely affected.
Our products have a lengthy sales cycle that could adversely affect our revenues.
The typical sales cycle for our solutions and services is lengthy and unpredictable, sometimes requires pre-purchase
evaluation by a significant number of persons in our customers’ organizations, and often involves a significant
operational decision by our customers as they typically use our software solutions and services to develop and
deploy as well as to integrate applications that are critical to their businesses. Our sales efforts involve educating our
customers and consultants about the use and benefits of our solutions, including the technical capabilities of our
solutions and the efficiencies achievable by organizations deploying our solutions.. 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, which generally ranges
from three to twelve months, can be further extended for sales made through third party distributors. We spend
substantial time, effort and money in our sales efforts without any assurance that such efforts will produce any sales.
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If we fail to attract and retain highly skilled IT professionals, we may not have the necessary resources to
properly staff projects and competition for such professionals may adversely affect our business, results of
operations and financial condition.
Our success depends largely on the contributions of our employees and our ability to attract and retain qualified
personnel, including technology, consulting, engineering, marketing and management professionals and 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 outsourcing
services, systems integrators, providers of outsourcing services, computer systems consultants, customers and, to a
lesser extent, temporary personnel agencies, and competition may be amplified by evolving restrictions on
immigration, travel, or availability of visas for skilled technology workers. A shortage of, and significant
competition for software professionals with the skills and experience necessary to perform the required services,
may require us to forego projects for lack of resources and may adversely affect our business, results of operations
and financial condition. In addition, our ability to maintain and renew existing engagements and obtain new business
for our contract IT professional services operations depends, in large part, on our ability to hire and retain technical
personnel with the IT skills that keep pace with continuing changes in software evolution, industry standards and
technologies, and customer preferences. Demand for qualified professionals conversant with certain technologies
may exceed 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
If existing customers are not satisfied with our solutions and services and either do not make subsequent
purchases from us or do not continue using such solutions and services, or if our relationships with our largest
customers are impaired, our revenue could be negatively affected.
We depend heavily on repeat software and service revenues from our base of existing customers. Two of our
customers accounted for 18.2% and 15.8% of our revenues in the years ended December 31, 2018 and 2019,
respectively and five of our customers accounted for 25.9% and 23.3% of our revenues in the years ended December
31, 2018 and 2019, respectively. If our existing customers are not satisfied with our solutions and services, they may
not enter into new project contracts with us or continue using our services. A significant decline in our revenue
stream from existing customers, including due to termination of agreement(s), would have a material adverse effect
on our business, results of operations and financial condition.
If we fail to meet our customers’ performance expectations, our reputation may be harmed, causing us to lose
customers or exposing us to legal liability.
Our ability to attract and retain customers depends to a large extent on our relationships with our customers and our
reputation for high quality solutions, professional services and integrity. As a result, if a customer is not satisfied
with our services or solutions, including those of subcontractors we engage, our reputation may be damaged. Our
failure to meet these goals or a customer’s expectations may result in a less profitable or an unprofitable
engagement. Moreover, if we fail to meet our customers’ expectations, we may lose customers and be subject to
legal liability, particularly if such failure adversely affects our customers’ businesses.
In addition, a portion of our projects may be considered critical to the operations of our customers’ businesses. Our
exposure to legal liability may be increased in the case of contracts in which we become more involved in our
customers’ operations. While we typically strive to include provisions designed to limit our exposure to legal claims
relating to our services and the solutions we develop, these provisions may not adequately protect us or may not be
enforceable in all cases. The general liability insurance coverage that we maintain, including coverage for errors and
omissions, is subject to important exclusions and limitations. We cannot be certain that this coverage will continue
to be available on reasonable terms or will be available in sufficient amounts to cover one or more large claims, or
that the insurer will not disclaim coverage as to any future claim. A successful assertion of one or more large claims
against us that exceeds our available insurance coverage or changes in our insurance policies, including premium
increases or the imposition of large deductible or co-insurance requirements, could adversely affect our profitability.
If our customers terminate contracted projects or choose not to retain us for additional projects, our revenues
and profitability may be negatively affected.
Our IT professional services customers typically retain us on a non-exclusive basis. Many of our customer contracts,
including those that are on a fixed price and timeframe basis, can be terminated by the customer with or without
cause upon 90 days’ notice or less, and generally without termination-related penalties. Additionally, our contracts
with customers are typically limited to discrete projects without any commitment to a specific volume of business or
future work and may involve multiple stages. Furthermore, the increased breadth of our service offerings may result
in larger and more complex projects for our customers that require us to devote resources to more thoroughly
understand their operations. Despite these efforts, our customers may choose not to retain us for additional stages or
may cancel or delay planned or existing engagements due to any number of factors, including:
● a customer’s financial difficulties;
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● a change in a customer’s strategic priorities;
● a customer’s demand for price reductions; and
● a decision by a customer to utilize its in-house IT capacity or work with our competitors.
These potential terminations, cancellations or delays in planned or existing engagements could make it difficult for
us to use our personnel efficiently and may negatively affect our revenues and profitability.
We enter from time to time into fixed-price contracts that could subject us to losses in the event we fail to
properly estimate our costs.
We enter from time to time into firm fixed-price contracts where our delivery requirements sometimes span more
than one year. If our initial cost estimates are incorrect, it may cause losses on these contracts. Because many of
these contracts involve new technologies and applications, unforeseen events, such as technological difficulties and
other cost overruns, can result in the contract pricing becoming less favorable or even unprofitable to us and have an
adverse impact on our financial results.
Similarly, delays in implementation projects (whether fixed price or not) may affect our revenue and cause our
operating results to vary widely. Payment terms are generally based on periodic payments or on the achievement of
milestones. Any delays in payment or in the achievement of milestones may have a material adverse effect on our
results of operations, financial position or cash flows.
For non-fixed price contracts, we generally provide our customers with up-front estimates regarding the duration,
budget and costs associated with the implementation of our services. However, we may not meet those upfront
estimates and/or the expectations of our customers, which could lead to a dispute with a client.
If our technical support or professional services are not satisfactory to our customers, they may not renew their
maintenance and support agreements or buy future products, which could adversely affect our future results of
operations.
Our business relies on our customers’ satisfaction with the technical support and professional services we provide to
support our products. If we fail to provide technical support services that are responsive, satisfy our customers’
expectations and resolve issues that they encounter with our products and services, then they may elect not to
purchase or renew annual maintenance and support contracts and they may choose not to purchase additional
products and services from us. Accordingly, our failure to provide satisfactory technical support or professional
services could lead our customers not to renew their agreements with us or renew on terms less favorable to us, and
therefore have a material and adverse effect on our business and results of operations.
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 development platforms, business integration and
business process management, or BPM, tools, and in the applications, mobile solutions, vertical solutions and
professional services markets in which we operate. The growth of the cloud computing market has increased the
competition in these areas. We expect that such competition will continue to increase in the future with respect to
our technology, applications and professional services that we currently offer and applications, and with respect to
our services that we and other vendors are developing. Increased competition, direct and indirect, could adversely
affect our business, financial condition and results of operations.
As we also compete with other companies in the technical IT consulting and outsourcing services industry, this
industry is highly competitive and fragmented and has low entry barriers. We compete for potential customers 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.
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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.
Other 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. Economic challenges may develop, including threatened sovereign defaults, credit
downgrades, restricted credit for businesses and consumers and potentially falling demand for a variety of products
and services. These developments, or the perception that any of them could occur, 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. In particular, there is currently significant uncertainty about the future relationship between the U.S. and
various other countries, with respect to trade policies, treaties, government regulations, and tariffs. For example, the
recent imposition of tariffs and/or changes in tariffs on various products by the U.S. and other countries, including
China and Canada, have introduced greater uncertainty with respect to trade policies and government regulations
affecting trade between the U.S. and other countries, and new and/or increased tariffs have subjected, and may in the
future subject, us to additional costs and expenditure of resources. Major developments in trade relations, including
the imposition of new or increased tariffs by the U.S. and/or other countries, and any emerging nationalist trends in
specific countries could alter the trade environment and consumer purchasing behavior which, in turn, could have a
material effect on our financial condition and results of operations. While the U.S. and China recently signed a
“phase one” trade deal on January 15, 2020 to reduce planned increases to tariffs, concerns over the stability of
bilateral trade relations remain. In addition, the UK’s exit from the European Union on January 31, 2020, known
as Brexit, and the ongoing negotiations of the future trading relationship between the UK and the European Union
during the transition period set to end December 31, 2020 have yet to provide clarity on what the outcome will be
for the UK or Europe. Changes related to Brexit could subject us to heightened risks in that region, including
disruptions to trade and free movement of goods, services and people to and from the UK, disruptions to the
workforce of our business partners, increased foreign exchange volatility with respect to the British pound and
additional legal, political and economic uncertainty. If these actions impacting our international distribution and
sales channels result in increased costs for us or our international partners, such changes could result in higher costs
to us, adversely affecting our operations, particularly as we expand our international presence.
If global economic and market conditions, or economic conditions in the United States, Europe or Asia or other key
markets, remain uncertain or weaken, our business, operating results and financial condition may be adversely
affected.
We are exposed to economic and market conditions that impact the communications industry.
We provide packaged software and software services to service providers in the telecom industry, and our business
may therefore be highly dependent upon conditions in that industry. Developments in the telecom industry, such as
the impact of global economic conditions, industry consolidation, emergence of new competitors, commoditization
of voice, video and data services and changes in the regulatory environment, at times have had, and could continue
to have, a material adverse effect on our existing or potential customers. In the past, these conditions reduced the
high growth rates that the communications industry had previously experienced and caused the market value,
financial results and prospects and capital spending levels of many telecom companies to decline or degrade.
Industry consolidation involving our customers may place us at risk of losing business to the incumbent provider to
one of the parties to the consolidation or to new competitors. During previous economic downturns, the telecom
industry experienced significant financial pressures that caused many in the industry to cut expenses and limit
investment in capital intensive projects and, in some cases, led to restructurings and bankruptcies. Continuing
uncertainty as to economic recovery in recent years may have adverse consequences for our customers and our
business.
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Downturns in the business climate for telecom companies have previously resulted in slower customer buying
decisions and price pressures that adversely affected our ability to generate revenue. Adverse market conditions may
have a negative impact on our business by decreasing our new customer engagements and the size of initial
spending commitments under those engagements, as well as decreasing the level of discretionary spending by
existing customers. In addition, a slowdown in buying decisions may extend our sales cycle period and may limit
our ability to forecast our flow of new contracts. If such adverse business conditions arise in the future, our business
may be harmed.
As some of our revenues are derived from the Israeli government sector, a reduction of government spending in
Israel on IT services may reduce our revenues and profitability; and any delay in the annual budget approval
process may negatively impact our cash flows.
We perform work for a wide range of Israeli governmental agencies and related subcontractors. Any reduction in
total Israeli government spending for political or economic reasons (such as in the case of COVID-19) may reduce
our revenues and profitability. In addition, the government of Israel has experienced significant delays in the
approval of its annual budget in recent years. Such delays in the future could negatively affect our cash flows by
delaying the receipt of payments from the government of Israel for services performed.
The increasing amount of identifiable intangible assets and goodwill recorded on our balance sheet may lead to
significant impairment charges in the future.
The amount of goodwill and identifiable intangible assets on our consolidated balance sheet has increased
significantly from approximately $88 million as of December 31, 2014 to $169 million as of December 31, 2019
because of our acquisitions and may increase further following future acquisitions. 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. Impairment testing under U.S. GAAP, subject to downturns in
our operating results and financial condition, may lead to impairment charges in the future. Any significant
impairment charges could have a material adverse effect on our results of operations.
If we fail to manage our growth, our business could be disrupted and our profitability will likely decline.
We have experienced rapid growth during recent years, through both acquisitions and organically. The number of
our employees over the last five years increased from 1,181 as of December 31, 2014 to 2,642 as of December 31,
2019 and may increase further as we aim to enhance our businesses. This increase may significantly strain our
management and other operational and financial resources. In particular, continued headcount growth increases the
integration challenges involved in:
● Recruiting, training and retaining skilled technical, marketing and management personnel;
● Maintaining high quality standards;
● Preserving our corporate culture, values and entrepreneurial environment;
● Developing and improving our internal administrative infrastructure, particularly our financial, operational,
communications and other internal controls; and
● Maintaining high levels of customer satisfaction;
The rapid execution necessary to exploit the market for our business model requires an effective planning and
management process. Our systems, procedures or controls may not be adequate to support the growth in our
operations, and our management may not be able to achieve the rapid execution necessary to exploit the market for
our business model. Our future operating results will also depend on our ability to expand our development, sales
and marketing organizations. If we are unable to manage growth effectively, our profitability will likely decline.
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;
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● 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;
● Fluctuations in currency exchange rates;
● General economic conditions; and
● The integration of newly acquired businesses.
Our customers ordinarily require the delivery of our license software solutions promptly after we accept their orders.
With the exception of contracts for services and packaged software solution projects, which normally would extend
between nine to eighteen months, 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 or from one year to another could adversely affect our results of operations for the respective quarter or
year. Our customers sometimes require an acceptance test for services and packaged software solutions projects we
provide and as a result, we may have a significant backlog of orders arising from those services and projects. 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 or year 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 period 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.
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 and packaged software solutions through our own direct sales representatives and offices, as
well as through third parties that in the case of our development platforms (Magic xpa, AppBuilder and Magic
SmartUX) use our technology to develop and sell solutions to their customers (ISVs) and through system
integrators. The ISVs then sell the applications they develop on the Magic xpa, AppBuilder or Magic SmartUX
application platforms to end-users. In some regions, especially in Asia and Asia-Pacific, Central and Eastern Europe,
Spain, Italy, South America, Africa and a few countries in the Mediterranean area, we also sell our products and
packaged software solutions through a broad distribution and sales network, including independent regional
distributers. We are dependent upon the acceptance of our products by our ISVs and 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 competitive products. Our ISVs may
stop using our technology to develop and sell solutions to end-users. Similarly, our 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 a decline in the number of ISVs utilizing our technology and by changes in the financial
condition, business, marketing strategies, local and global economic conditions, or results of our independent
distributors. 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.
11
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. In recent years the decline in our gross margin was affected
by the change in 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 IT professional and outsourcing services. Our software licenses
revenues also include the sale of third-party software licenses, which have a lower gross margin than sales of our
proprietary 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 continues to increase as a percentage of our total revenues, our gross profit margins may continue to decline
in the future.
Our success depends in part upon the senior members of our management and research and development teams,
and our inability to attract and retain them or attract suitable replacements could have a negative effect on our
ability to operate our business.
We are dependent on the senior members of our management and research and development teams. We do not
maintain key man life insurance for any of the senior members of our management and research and development
teams. Competition for senior management in our industry is intense, and we may not be able to retain our senior
management personnel or attract and retain new senior management personnel in the future. The loss of one or more
members of our senior management and research and development teams could have a negative effect on our ability
to attract and retain customers, execute our business strategy and otherwise operate our business, which could
reduce our revenues, increase our expenses and reduce our profitability.
We may encounter difficulties with our international operations and sales that could adversely affect our
business, results of operations and financial condition.
While our principal executive offices are located in Israel, 64%, 63% and 62% of our sales in the years ended
December 31, 2017, 2018 and 2019, respectively, were generated in other regions and countries including, but not
limited to the Americas, Europe, Japan, Asia-Pacific, India, and Africa. Our success in becoming a stronger
competitor in the sale of development application platforms, integration solutions, packaged software solutions and
professional services 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 current international operation and our plans to further expand our international operations subjects us to many
risks inherent to international business activities, including:
● Limitations and disruptions resulting from the imposition of government controls;
● Compliance with a wide variety of foreign regulatory standards;
● Compliance with the U.S. Foreign Corrupt Practices Act of 1977, as amended, or FCPA, particularly in
emerging market countries;
● Import and export license requirements, tariffs, taxes and other trade barriers;
● Political, social and economic instability abroad, terrorist attacks and security concerns in general. For
example, our operations in India may be adversely affected by future political and other events in the
region;
● Trade restrictions;
● Changes in tariffs;
● Increased exposure to fluctuations in foreign currency exchange rates;
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● Complexity in our tax planning, and increased exposure to changes in tax regulations in various
jurisdictions in which we operate, which could adversely affect our operating results and limit our ability to
conduct effective tax planning;
● Increased financial accounting and reporting requirements and complexities;
● Weaker protection of intellectual property rights in some countries;
● Greater difficulty in safeguarding intellectual property;
● Increased management, travel, infrastructure and legal compliance costs associated with having multiple
international operations;
● Longer payment cycles and difficulties in enforcing contracts and collecting accounts receivable;
● The need to localize our products and licensing programs for international customers;
● Lack of familiarity with and unexpected changes in foreign regulatory requirements;
● The burden of complying with a wide variety of foreign laws and legal standards;
● The potential worsening of the coronavirus outbreak on a global scale, which may cause customers to
cancel projects with us, prevent potential future opportunities for our business and harm our ability to
maintain a healthy workforce that can implement our services and solutions offerings; and
● Multiple and possibly overlapping tax regimes.
As we continue to expand our business globally, our success will depend, largely, on our ability to anticipate and
effectively manage these and other risks associated with our international operations. Any of these risks could harm
our international operations and reduce our international sales, adversely affecting our business, results of
operations, financial condition and growth prospects.
Our international operations expose us to risks associated with fluctuations in currency exchange rates that
could adversely affect our business.
Our financial statements are stated in U.S. dollars, our functional currency. However, in the years ended December
31, 2017, 2018 and 2019, approximately 52%, 52% and 51% of our revenues, respectively, were derived from sales
outside the United States, particularly, Israel, Europe, Japan and Asia-Pacific, and Africa. We also maintain
substantial non-U.S. dollar balances of assets, including cash and accounts receivable, and liabilities, including
accounts payable and debts to banks and financial institutions. Similarly, a significant portion of our expenses,
primarily salaries, related personnel expenses, subcontractors expenses, interest expenses and the leases of our
offices and related administrative expenses, were incurred outside the United States. Therefore, fluctuations in the
value of the currencies in which we do business relative to the U.S. dollar, primarily NIS, euros and Japanese yen,
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 engage in any currency-hedging transactions intended to
reduce the effect of fluctuations of foreign currency exchange rates on our financial position and results of
operations, there can be no assurance that any such hedging transactions will materially reduce the effect of
fluctuation in foreign currency exchange rates on such results. In addition, if for any reason exchange or price
controls or other restrictions on the conversion of foreign currencies were imposed, our financial position and results
of operations could be adversely affected.
13
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
because of such events, even for a limited period, 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. 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 our customers and us.
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. These risks are persistent and likely will increase as we continue to
grow our cloud offerings and services and store and process increasingly large amounts of our customers’
confidential information and data. We also may acquire companies, products, services and technologies and inherit
such risks when we integrate these acquisitions within our company. Further, as regulatory focus on privacy issues
continues to increase and become more complex, these potential risks to our business will intensify. Changes in laws
or regulations associated with the enhanced protection of certain types of sensitive data could greatly increase our
cost of providing our products and services
Regulation of the internet and telecommunications, privacy and data security may adversely affect sales of our
products and result in increased compliance costs.
As internet commerce continues to evolve, increasing regulation by federal, state or foreign agencies and industry
groups becomes more likely. For example, we believe increased regulation is likely with respect to the solicitation,
collection, processing or use of personal, financial and consumer information as regulatory authorities around the
world are considering a number of legislative and regulatory proposals concerning data protection, privacy and data
security. In addition, the interpretation and application of consumer and data protection laws and industry standards
in the United States, Europe and elsewhere are often uncertain and in flux.
Many jurisdictions continue to consider the need for greater regulation or reform to the existing regulatory
framework. In the U.S., all 50 states have now passed laws to regulate the actions that a business must take in the
event of a data breach, such as prompt disclosure and notification to affected users and regulatory authorities. In
addition to the data breach notification laws, some states have also enacted statutes and rules requiring businesses to
reasonably protect certain types of personal information they hold or to otherwise comply with certain specified data
security requirements for personal information. The U.S. federal and state governments will likely continue to
consider the need for greater regulation aimed at restricting certain uses of personal data for targeted advertising.
Additionally, California recently enacted the California Consumer Privacy Act, or CCPA, it creates new individual
privacy rights for consumers (as that word is broadly defined in the law) and places increased privacy and security
obligations on entities handling personal data of consumers or households. The CCPA, which went into effect on
January 1, 2020, requires covered companies to provide new disclosures to California consumers, and provides such
consumers new ways to opt-out of certain sales of personal information. The CCPA provides for civil penalties for
violations, as well as a private right of action for data breaches that is expected to increase data breach litigation.
The CCPA may increase our compliance costs and potential liability. Some observers have noted that the CCPA
could mark the beginning of a trend toward more stringent privacy legislation in the U.S., which could increase our
potential liability and adversely affect our business.
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In particular, our European activities are subject to the European Union General Data Protection Regulation, or
GDPR, which create additional compliance requirements for us. GDPR broadens the scope of personal privacy laws
to protect the rights of European Union citizens and requires organizations to report on data breaches within 72
hours and be bound by more stringent rules for obtaining the consent of individuals on how their data can be used.
GDPR took effect on May 25, 2018 and non-compliance may expose entities such as our company to significant
fines or other regulatory claims. While we have invested in, and intend to continue to invest in, reasonably necessary
resources to comply with these new standards, to the extent that we fail to adequately comply, that failure could
have an adverse effect on our business, financial conditions, results of operations and cash flows.
In China, the PRC Cybersecurity Law, which became effective in June 2017, leaves substantial uncertainty as to the
circumstances and standard under which the law would apply and violations would be found.
The application of existing laws to cloud-based solutions is particularly uncertain and cloud-based solutions may be
subject to further regulation, the impact of which cannot be fully understood at this time. Moreover, these laws may
be interpreted and applied in a manner that is inconsistent with our data and privacy practices. If so, in addition to
the possibility of fines, this could result in an order requiring that we change our data and privacy practices, which
could have an adverse effect on our business and results of operations. Complying with these various laws could
cause us to incur substantial costs or require us to change our business practices in a manner adverse to our business.
In addition, any new regulation, or interpretation of existing regulation, imposing greater fees or taxes on internet-
based services, or restricting information exchange over the Web, could result in a decline in the use and adversely
affect sales of our products and our results of operations.
Errors or defects in our software solutions could inevitably arise and would harm our profitability and our
reputation with customers, and could even give rise to claims against us.
The quality of our solutions, including new, modified or enhanced versions thereof, is critical to our success. Since
our software solutions are complex, they may contain errors that cannot be detected at any point in their testing
phase. While we continually test our solutions for errors or defects and work with customers to identify and correct
them, errors in our technology may be found in the future. Testing for errors or defects is complicated because it is
difficult to simulate the breadth of operating systems, user applications and computing environments that our
customers use, and our solutions themselves are increasingly complex. Errors or defects in our technology have
resulted in terminated work orders and could result in delayed or lost revenue, diversion of development resources
and increased services, termination of work orders, damage to our brand and warranty and insurance costs in the
future. In addition, time-consuming implementations may also increase the number of services personnel we must
allocate to each customer, thereby increasing our costs and adversely affecting our business, results of operations
and financial condition.
In addition, since our customers rely on our solutions to operate, monitor and improve the performance of their
business processes, they are sensitive to potential disruptions that may be caused by the use of, or any defects in, our
software. As a result, we may be subject to claims for damages related to software errors in the future. Liability
claims could require us to spend significant time and money in litigation or to pay significant damages. Regardless
of whether we prevail, diversion of key employees’ time and attention from our business, the incurrence of
substantial expenses and potential damage to our reputation might result. While the terms of our sales contracts
typically limit our exposure to potential liability claims and we carry errors and omissions insurance against such
claims, there can be no assurance that such insurance will continue to be available on acceptable terms, if at all, or
that such insurance will provide us with adequate protection against any such claims. A significant liability claim
against us could have a material adverse effect on our business, results of operations and financial position. 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. In addition, 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.
Third parties have in the past, and may in the future, claim that we infringe upon their intellectual property
rights and such claims could harm our business.
The software industry is characterized by the existence of a large number of patents and frequent claims and related
litigation regarding patents and other intellectual property rights. In particular, leading companies in the software
industry own large numbers of patents, copyrights, trademarks and trade secrets, which they may use to assert
claims against us. From time to time, third parties, including certain of these leading companies, may assert patent,
copyright, trademark or other intellectual property claims against us, our customers and partners, and those from
whom we license technology and intellectual property.
15
Although we believe that our products and services do not infringe upon the intellectual property rights of third
parties, we cannot assure you that third parties will not assert infringement or misappropriation claims against us
with respect to current or future products or services, or that any such assertions will not require us to enter into
royalty arrangements or result in costly litigation, or result in us being unable to use certain intellectual property. We
cannot assure you that we are not infringing or otherwise violating any third-party intellectual property rights.
Infringement assertions from third parties may involve patent holding companies or other patent owners who have
no relevant product revenues, and therefore our own issued and pending patents may provide little or no deterrence
to these patent owners in bringing intellectual property rights claims against us.
Any intellectual property infringement or misappropriation claim or assertion against us, our customers or partners,
and those from whom we license technology and intellectual property could have a material adverse effect on our
business, financial condition, reputation and competitive position regardless of the validity or outcome. If we are
forced to defend against any infringement or misappropriation claims, whether they are with or without merit, are
settled out of court, or are determined in our favor, we may be required to expend significant time and financial
resources on the defense of such claims. Furthermore, an adverse outcome of a dispute may require us to pay
damages, potentially including treble damages and attorneys’ fees, if we are found to have willfully infringed on a
party’s intellectual property; cease making, licensing or using our products or services that are alleged to infringe or
misappropriate the intellectual property of others; expend additional development resources to redesign our products
or services; enter into potentially unfavorable royalty or license agreements in order to obtain the right to use
necessary technologies or works; and to indemnify our partners, customers, and other third parties. Royalty or
licensing agreements, if required or desirable, may be unavailable on terms acceptable to us, or at all, and may
require significant royalty payments and other expenditures. Any of these events could seriously harm our business,
results of operations and financial condition. In addition, any lawsuits regarding intellectual property rights,
regardless of their success, could be expensive to resolve and divert the time and attention of our management and
technical personnel.
Although we apply measures to protect our intellectual property rights and our source code, there can be no
assurance that the measures that we employ to do so will be successful.
In accordance with industry practice, since we have no registered patents on our software solution technologies, we
rely on a combination of contractual provisions and intellectual property law to protect our proprietary technology.
We believe that due to the dynamic nature of the computer and software industries, copyright protection is less
significant than factors such as the knowledge and experience of our management and personnel, the frequency of
product enhancements and the timeliness and quality of our support services. We seek to protect the source code of
our products as trade secret information and as unpublished copyright works. We also rely on security and copy
protection features in our proprietary software. We distribute our products under software license agreements that
grant customers a personal, non-transferable license to use our products and contain terms and conditions
prohibiting the unauthorized reproduction or transfer of our products. In addition, while we attempt to protect trade
secrets and other proprietary information through non-disclosure agreements with employees, consultants and
distributors, not all of our employees have signed invention assignment agreements. Although we intend to protect
our rights vigorously, there can be no assurance that these measures will be successful. Our failure to protect our
rights, or the improper use of our products by others without licensing them from us could have a material adverse
effect on our results of operations and financial condition.
Our customers and we rely on technology and intellectual property of third-parties, the loss of which could limit
the functionality of our products and disrupt our business.
We use technology and intellectual property licensed from unaffiliated third-parties in certain of our products, and
we may license additional third-party technology and intellectual property in the future. Any errors or defects in this
third-party technology and intellectual property could result in errors that could harm our brand and business. In
addition, licensed technology and intellectual property may not continue to be available on commercially reasonable
terms, or at all. The loss of the right to license and distribute this third-party technology could limit the functionality
of our products and might require us to redesign our products.
16
Further, although we believe that there are currently adequate replacements for the third-party technology and
intellectual property we presently use and distribute, the loss of our right to use any of this technology and
intellectual property could result in delays in producing or delivering affected products until equivalent technology
or intellectual property is identified, licensed or otherwise procured, and integrated. Our business would be disrupted
if any technology and intellectual property we license from others or functional equivalents of this software were
either no longer available to us or no longer offered to us on commercially reasonable terms. In either case, we
would be required either to attempt to redesign our products to function with technology and intellectual property
available from other parties or to develop these components ourselves, which would result in increased costs and
could result in delays in product sales and the release of new product offerings. Alternatively, we might be forced to
limit the features available in affected products. Any of these results could harm our business and impact our results
of operations.
We could be required to provide the source code of our products to our customers.
Some of our customers have the right to require the source code of our products to be deposited into a source code
escrow. Under certain circumstances, our source code could be released to our customers. The conditions triggering
the release of our source code vary by customer. A release of our source code would give our customers access to
our trade secrets and other proprietary and confidential information that could harm our business, results of
operations and financial condition. A few of our customers have the right to use the source code of some of our
products based on the license agreements signed with such clients (mostly with respect to older versions of our
solutions), although such use is limited for specific matters and cases, these clients are exposed to some of our trade
secrets and other proprietary and confidential information which could harm us.
Some of our services and technologies may use “open source” software, which may restrict how we use or
distribute our services or require that we release the source code of certain products subject to those licenses.
Some of our services and technologies may incorporate software licensed under so-called “open source” licenses,
including, but not limited to, the GNU General Public License and the GNU Lesser General Public License. In
addition to risks related to license requirements, usage of open source software can lead to greater risks than use of
third-party commercial software, as open source licensors generally do not provide warranties or controls on origin
of the software. Additionally, open source licenses typically require that source code subject to the license be made
available to the public and that any modifications or derivative works to open source software continue to be
licensed under open source licenses. These open source licenses typically mandate that proprietary software, when
combined in specific ways with open source software, become subject to the open source license. If we combine our
proprietary software with open source software, we could be required to release the source code of our proprietary
software.
We take steps to ensure that our proprietary software is not combined with, and does not incorporate, open source
software in ways that would require our proprietary software to be subject to an open source license. However, few
courts have interpreted open source licenses, and the manner in which these licenses may be interpreted and
enforced is therefore subject to some uncertainty. Additionally, we rely on multiple software programmers to design
our proprietary technologies, and although we take steps to prevent our programmers from including open source
software in the technologies and software code that they design, write and modify, we do not exercise complete
control over the development efforts of our programmers and we cannot be certain that our programmers have not
incorporated open source software into our proprietary products and technologies or that they will not do so in the
future. In the event that portions of our proprietary technology are determined to be subject to an open source
license, we could be required to publicly release the affected portions of our source code, re-engineer all or a portion
of our technologies, or otherwise be limited in the licensing of our technologies, each of which could reduce or
eliminate the value of our services and technologies and materially and adversely affect our business, results of
operations and prospects.
Any unauthorized, and potentially improper, actions of our personnel could adversely affect our business,
operating results and financial condition.
The recognition of our revenue depends on, among other things, the terms negotiated in our contracts with our
customers. Our personnel may act outside of their authority and negotiate additional terms without our knowledge.
We have implemented policies to help prevent and discourage such conduct, but there can be no assurance that such
policies will be followed. For instance, in the event that our sales personnel negotiate terms that do not appear in the
contract and of which we are unaware, whether such additional terms are written or verbal, we could be prevented
from recognizing revenue in accordance with our plans. Furthermore, depending on when we learn of unauthorized
actions and the size of the transactions involved, we may have to restate revenue for a previously reported period,
which would seriously harm our business, operating results and financial condition.
17
Under applicable employment laws, we may not be able to enforce covenants not to compete and therefore may
be unable to prevent our competitors from benefiting from the expertise of some of our former employees.
We generally enter into non-competition agreements with our employees. These agreements prohibit our employees
from competing directly with us or working for our competitors or clients for a limited period after they cease
working for us. We may be unable to enforce these agreements under the laws of the jurisdictions in which our
employees work and it may be difficult for us to restrict our competitors from benefiting from the expertise that our
former employees or consultants developed while working for us. For example, Israeli courts have required
employers seeking to enforce non-compete undertakings of a former employee to demonstrate that the competitive
activities of the former employee will harm one of a limited number of material interests of the employer that have
been recognized by the courts, such as the secrecy of a company’s confidential commercial information or the
protection of its intellectual property. If we cannot demonstrate that such interests will be harmed, we may be unable
to prevent our competitors from benefiting from the expertise of our former employees or consultants and our ability
to remain competitive may be diminished.
Our business may be materially affected by changes to fiscal and tax policies. Potentially negative or unexpected
tax consequences of these policies, or the uncertainty surrounding their potential effects, could adversely affect
our results of operations and share price.
As a multinational corporation, we are subject to income taxes, withholding taxes and indirect taxes in numerous
jurisdictions worldwide. Significant judgment and management attention and resources are required in evaluating
our tax positions and our worldwide provision for taxes. In the ordinary course of business, there are many activities
and transactions for which the ultimate tax determination is uncertain. In addition, our tax obligations and effective
tax rates could be adversely affected by changes in the relevant tax, accounting, and other laws, regulations,
principles and interpretations. This may include recognizing tax losses or lower than anticipated earnings in
jurisdictions where we have lower statutory rates and higher than anticipated earnings in jurisdictions where we
have higher statutory rates, changes in foreign currency exchange rates, or changes in the valuation of our deferred
tax assets and liabilities.
We may be audited in various jurisdictions, and such jurisdictions may assess additional taxes against us. If we
experience unfavorable results from one or more such tax audits, there could be an adverse effect on our tax rate and
therefore on our net income. Although we believe our tax estimates are reasonable, the final determination of any
tax audits or litigation could be materially different from our historical tax provisions and accruals, which could
have a material adverse effect on our operating results or cash flows in the period or periods for which a
determination is made. Additionally, we are subject to transfer pricing rules and regulations, including those relating
to the flow of funds between us and our affiliates, which are designed to ensure that appropriate levels of income are
reported in each jurisdiction in which we operate.
Certain of our credit facility agreements with banks and other financial institutions are subject to a number of
restrictive covenants that, if breached, could result in acceleration of our obligation to repay our debt.
In the context of our engagements with banks and other financial institutions for receiving various credit facilities,
we have undertaken to maintain a number of conditions and limitations on the manner in which we can operate our
business, including a negative pledge and limitations on our ability to distribute dividends. These credit facilities
agreements also contain various financial covenants that require us to maintain certain financial ratios related to
shareholders’ equity, total rate of financial liabilities and minimum outstanding balance of total cash and short-term
investments. These limitations and covenants may force us to pursue less than optimal business strategies or forego
business arrangements that could have been financially advantageous to us and, by extension, to our shareholders. A
breach of the restrictive covenants could result in the acceleration of our obligations to repay our debt. As of
December 31, 2019, we were in compliance with all of our financial covenants to banks and other financial
institutions. See Note 12 to our consolidated financial statements for additional information on liabilities to banks
and other financial institutions.
18
If we are unable to maintain effective internal control over financial reporting in accordance with Sections 302
and 404(a) 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 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 of 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.
There is relatively limited trading volume for our shares, which reduces liquidity for our shareholders, and may
cause the share price to be volatile, all of which may lead to losses by investors.
There has historically been limited trading volume in our Ordinary Shares, both on the NASDAQ Global Select
Market and the TASE, which results in reduced liquidity for our shareholders. As a further result of the limited
volume, our Ordinary Shares have experienced significant market price volatility in the past and may experience
significant market price and volume fluctuations in the future, in response to factors such as announcements of
developments related to our business, announcements by competitors, quarterly fluctuations in our financial results
and general conditions in the industry in which we compete.
We are a foreign private issuer under the rules and regulations of the SEC and are therefore exempt from a
number of rules under the Exchange Act and are permitted to file less information with the SEC than a domestic
U.S. reporting company, which reduces the level and amount of disclosure that you receive.
As a foreign private issuer under the Exchange Act, we are exempt from certain rules under the Exchange Act,
including the proxy rules, which impose certain disclosure and procedural requirements for proxy solicitations.
Moreover, we are not required to file periodic reports and financial statements with the SEC as frequently or as
promptly as domestic U.S. companies with securities registered under the Exchange Act; and are not required to
comply with Regulation FD, which imposes certain restrictions on the selective disclosure of material information.
In addition, our officers, directors and principal shareholders are exempt from the reporting and “short-swing” profit
recovery provisions of Section 16 of the Exchange Act and the rules under the Exchange Act with respect to their
purchases and sales of our Ordinary Shares. Accordingly, you receive less information about our company than you
would receive about a domestic U.S. company, and are afforded less protection under the U.S. federal securities
laws than you would be afforded in holding securities of a domestic U.S. company.
19
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. In
addition, as foreign private issuer, we are not required to file quarterly reviewed financial statements. 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.
Our controlling shareholder, Formula Systems (1985) Ltd., beneficially owns approximately 45.34% of our
outstanding Ordinary Shares and therefore has a controlling influence over matters requiring shareholder
approval, which could delay or prevent a change of control that may benefit our public shareholders.
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 22,187,977 or 45.34%, of our outstanding Ordinary
Shares as of December 31, 2019. Asseco Poland S.A., or Asseco, a Polish company listed on Warsaw Stock
Exchange, owns 25.35% of the outstanding shares of Formula Systems as of December 31, 2019. Guy Bernstein,
our Chief Executive Officer who is also the Chief Executive Officer of Formula Systems, owns 12.89% of the
outstanding shares of Formula Systems, as of December 31, 2019. In addition, on October 4, 2017 Asseco entered
into a shareholders agreement with Mr. Bernstein, under which agreement Asseco has been granted an irrecoverable
proxy to vote an additional 1,971,973 Ordinary Shares of Formula, thereby effectively giving Asseco beneficial
ownership (voting power) over an aggregate of 38.50% of Formula’s outstanding ordinary share. Therefore, based
on the foregoing beneficial ownership by each of Formula and Asseco, each of Formula and Asseco may be deemed
to directly or indirectly (as appropriate) control us.
Although transactions between us and our controlling shareholders are subject to special approvals under Israeli law,
Formula and Asseco may exercise their controlling influence over our operations and business strategy and use their
sufficient voting power to control the outcome of various matters requiring shareholder approval. These matters may
include:
● The composition of our board of directors, which has the authority to direct our business and to appoint and
remove our officers;
● Approving or rejecting a merger, consolidation or other business combination;
● Raising future capital; and
● Amending our Articles, which govern the rights attached to our Ordinary Shares.
This concentration of ownership of our Ordinary Shares could delay or prevent proxy contests, mergers, tender
offers, open-market purchase programs or other purchases of our Ordinary Shares that might otherwise give one the
opportunity to realize a premium over the then-prevailing market price of our Ordinary Shares. This concentration of
ownership may also adversely affect our share price.
20
Our U.S. shareholders may suffer adverse tax consequences if we are classified as a passive foreign investment
company or as a “controlled foreign corporation.”
Generally, if for any taxable year 75% or more of our gross income is passive income, or at least 50% of the average
quarterly value of our assets (which may be measured in part by the market value of our Ordinary Shares, which is
subject to change) are held for the production of, or produce, passive income, we would be characterized as a
passive foreign investment company, or PFIC, for U.S. federal income tax purposes under the Code. Based on our
gross income and gross assets, and the nature of our business, we believe that we were not classified as a PFIC for
the taxable year ended December 31, 2019. Because PFIC status is determined annually based on our income, assets
and activities for the entire taxable year, it is not possible to determine whether we will be characterized as a PFIC
for the taxable year ending December 31, 2020, or for any subsequent year, until we finalize our financial statements
for that year. Furthermore, because the value of our gross assets is likely to be determined in large part by reference
to our market capitalization, a decline in the value of our Ordinary Shares may result in our becoming a PFIC.
Accordingly, there can be no assurance that we will not be considered a PFIC for any taxable year. Our
characterization as a PFIC could result in material adverse tax consequences for you if you are a U.S. investor,
including having gains realized on the sale of our Ordinary Shares treated as ordinary income, rather than a capital
gain, the loss of the preferential rate applicable to dividends received on our Ordinary Shares by individuals who are
U.S. holders, and having interest charges apply to distributions by us and the proceeds of share sales. Certain
elections exist that may alleviate some of the adverse consequences of PFIC status and would result in an alternative
treatment (such as mark-to-market treatment) of our Ordinary Shares. Prospective U.S. investors should consult their
own tax advisers regarding the potential application of the PFIC rules to them. Prospective U.S. investors should
refer to “Item 10.E. Taxation—U.S. Federal Income Tax Considerations” for discussion of additional U.S. income
tax considerations applicable to them based on our treatment as a PFIC.
Certain U.S. holders of our Ordinary Shares may suffer adverse tax consequences if we or any of our non-U.S.
subsidiaries are characterized as a “controlled foreign corporation”, or a CFC, under Section 957(a) of the Code.
Certain changes to the CFC constructive ownership rules under Section 958(b) of the Code introduced by the TCJA
may cause one or more of our non-U.S. subsidiaries to be treated as CFCs, may also impact our CFC status, and may
affect holders of our Ordinary Shares that are United States shareholders. Generally, for U.S. shareholders that own
10% or more of the combined vote or combined value of our Ordinary Shares, this may result in negative U.S.
federal income tax consequences and these shareholders may be subject to certain reporting requirements with the
U.S. Internal Revenue Service. Any such 10% U.S. shareholder should consult its own tax advisors regarding the
U.S. tax consequences of acquiring, owning, or disposing our Ordinary Shares and the impact of the TCJA,
especially the changes to the rules relating to CFCs.
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 organized under the laws of the State of Israel, and our principal executive offices and manufacturing and
research and development facilities are located in 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.
Conflicts in North Africa and the Middle East, including in Egypt and Syria that border Israel, have resulted in
continued political uncertainty and violence in the region. Efforts to improve Israel’s relationship with the
Palestinian Authority have failed to result in a permanent solution, and there have been numerous periods of
hostility in recent years. In addition, relations between Israel and Iran continue to be seriously strained, especially
with regard to Iran’s nuclear program. Such instability may affect the economy, could negatively affect business
conditions and, therefore, could adversely affect our operations. To date, these matters have not had any material
effect on our business and results of operations; however, the regional security situation and worldwide perceptions
of it are outside our control and there can be no assurance that these matters will not negatively affect our business,
financial condition and results of operations in the future.
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.
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We currently have the ability to benefit from certain government tax benefits, which may be cancelled or reduced
in the future.
We are currently eligible to receive certain 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.
Service and enforcement of legal process on us and our directors and officers may be difficult to obtain.
We are organized 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.
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 organized 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, compensation policy, 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.
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ITEM 4.
INFORMATION ON THE COMPANY
A.
HISTORY AND DEVELOPMENT OF THE COMPANY
Corporate details
Our legal and commercial name is Magic Software Enterprises Ltd. We were organized and registered in Israel on
February 10, 1983 and began operations in 1986. We are a public limited liability company and operate under the
provisions of the state of Israel. Our Ordinary Shares have been listed on the NASDAQ Global Stock Market
(symbol: MGIC) since our initial public offering in the United States on August 16, 1991. 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 Tel Aviv Stock Exchange, or the TASE, and since December 15, 2011, our shares have been
included in the TASE’s TA-125 Index.
Capital Expenditures and Divestitures since January 1, 2017
In late December 2017, we acquired a 100% equity interest in Futurewave Systems, Inc., a U.S. based full-service
provider of consulting and outsourcing solutions for IT personnel, for a total consideration of $3.0 million.
On July 12, 2018, we issued 4,268,293 ordinary shares at a price of $8.20 per share for a total of $34.6 million net of
issuance expenses. 3,150,559 of the shares were issued to Israeli institutional investors and 1,117,734 shares were
issued to our controlling shareholder, Formula Systems (1985) Ltd.
On February 28, 2019, we acquired a 100% equity interest in OnTarget Group Inc. (“OnTarget”), a U.S. based full-
services provider of software development services, for a total consideration of $ 12,456 of which $ 6,000 was paid
upon closing and the remaining amount constitutes a contingent payment depending on the future operating results
achieved by OnTarget between 2019 and 2022.
On April 1, 2019 we acquired a 100% equity interest in PowWow Inc (“PowWow”), creator of SmartUX™, a
leading Low-Code development platform for mobilizing and modernizing enterprise business applications, for a
total consideration of $8.4 million, out of which $2 million constitutes a contingent payment depending on the future
revenues achieved by PowWow between 2020 and 2023.
On June 30, 2019, we acquired a 100% equity interest in NetEffects Inc (“NetEffects”), a U.S. based full-services
company, specializes in IT staffing and recruiting, for a total consideration of $ 12,500, of which $ 9,400 was paid
upon closing and the remaining $ 3,100 will be paid in three installments following the first, second and third year
anniversary.
Our fixed assets capital expenditures for the years ended December 31, 2017, 2018 and 2019 were approximately
$1.4 million, $0.9 million and $1.4 million, respectively. These expenditures were principally for network
equipment and computer hardware, as well as for vehicles, furniture, office equipment and leasehold improvements.
B.
BUSINESS OVERVIEW
We are a global provider of: (i) proprietary application development and business process integration platforms, (ii)
selected packaged vertical software solutions, as well as (iii) a vendor of software services and IT outsourcing
software services. We report our results on the basis of two reportable business segments: software solutions (which
include proprietary and non-proprietary software technology, maintenance and support and complementary services)
and IT professional services.
Our software solutions are used by customers to develop, deploy and integrate on-premise, mobile and cloud-based
business applications quickly and cost effectively. In addition, our technology enables enterprises to accelerate the
process of delivering business solutions that meet current and future needs and allow customers to dramatically
improve their business performance and return on investment. We also provide selected verticals with a complete
software solution.
We and our subsidiaries employ approximately 2,642 persons and operate through a network of over 3,000
independent software vendors, who we refer to as Magic Software Providers, or MSP’s, and hundreds of system
integrators, distributors, resellers, and consulting and OEM partners. Thousands of enterprises in approximately 50
countries use our products and services.
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Our software technology platforms
Throughout our history, we have traditionally maintained two major lines of products, one is our application
development platform, which today is known as Magic xpa Application Platform, an evolution of our original
metadata-based development platform; and the second is our application integration platform, Magic xpi Integration
Platform, originally introduced in 2003 under the name iBOLT. In December 2011, we acquired the AppBuilder
development platform 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 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. On
April 2019, we acquired the SmartUX development platform of PowWow Inc., a leading Low-Code enterprise
mobile development application platform for citizen to professional developers to rapidly design, build, analyze, and
run cross-platform mobile business applications.
Our software technology platforms consist of:
o Magic xpa Application Platform - a proprietary application platform for developing and deploying
Client Server/Mobile/Web business applications.
o AppBuilder Application Platform - a proprietary application platform for building, deploying, and
maintaining high-end, mainframe-grade business applications.
o Magic xpi Integration Platform - a proprietary platform for application integration
o Magic xpc Integration Platform - hybrid integration platform as a service (iPaaS).
o Magic SmartUX - a proprietary low-code enterprise mobile development application platform for
citizen to professional developers to rapidly design, build, analyze, and run cross-platform mobile
business applications.
FactoryEye - a proprietary high performance, low-code, flexible, hybrid platform for
manufacturers based on existing infrastructure enabling real-time virtualizations of all production
data and advanced analytics (based on machine learning) for improved productivity and
competitive advantage.
o
Our vertical software packages
o Clicks™ – offered by our Roshtov subsidiary, is a proprietary comprehensive core software
solution for medical record information management systems, used in the design and management
of patient-file for managed care and large-scale healthcare providers. The platform is connected to
each provider clinical, administrative and financial data base system, residing at the provider’s
central computer, and allows immediate analysis of complex data with potentially real-time
feedback to meet the specific needs of physicians, nurses, laboratory technicians, pharmacists,
front- and back-office professionals and consumers.
o Leap™ – offered by our FTS subsidiary, is a proprietary comprehensive core software solution
for BSS, including convergent charging, billing, customer management, policy control, mobile
money and payment software solutions for the telecommunications, content, Machine to Machine/
Internet of Things or M2M/IoT, payment and other industries.
o Hermes Solution – offered by our Hermes Logistics Technologies Ltd. subsidiary, the Hermes
Air Cargo Management System is a proprietary, state-of-the-art, packaged software solution for
managing air cargo ground handling. Our Hermes Solution covers all aspects of cargo handling,
from physical handling and cargo documentation through customs, seamless EDI communications,
dangerous goods and special handling, tracking and tracing, security and billing. Customers
benefit through faster processing and more accurate billing, reporting and ultimately enhanced
revenue. The Hermes Solution is delivered on a licensed or fully hosted basis. Hermes recently
supplemented its offering with the Hermes Business Intelligence (HBI) solution, adding
unprecedented data analysis capabilities and management-decision support tools.
o HR Pulse – Offered by our Pilat NAI, Inc. and Pilat Europe Ltd. subsidiaries, Pulse (now in its
10th release) is a proprietary tool for the creation of customizable HCM solutions quickly and
affordably. It has been used by Pilat to create products, such as Pilat Frist and Pilat Professional,
that provide “out of the box” SaaS solutions for organizations that implement Continuous
Performance and/or Talent Management.
o MBS Solution – offered by our Complete Business Solutions Ltd. subsidiary, is a proprietary
comprehensive core system for managing TV broadcast channels.
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Our professional software and IT services
Our software professional services offerings include a vast portfolio of professional services in the areas of
infrastructure design and delivery, application development, technology consulting planning and implementation
services, support services, DevOps (Development& Operations), Mobile, Big Data and Analytical BI, M/F, cloud
computing for deployment of highly available and massively-scalable applications and APIs and supplemental IT
outsourcing services to a wide variety of companies, including Fortune 1000 companies. The technical personnel we
provide generally supplement in-house capabilities of our customers. We have extensive and proven experience with
virtually all types of telecom infrastructure technologies in wireless and wire-line as well as in the areas of
infrastructure design and delivery, application development, project management, technology planning and
implementation services.
We have substantial experience in end-to-end development of high-end software solutions, beginning with
collection and analysis of system requirements, continuing with architecture specifications and setup, to software
implementation, component integration and testing. From concept to implementation, from application of the ideas
of startups requiring the early development of an application or a device, to somewhat larger, more established
enterprises, vendors or system houses who need our team of experts to take full responsibility for the development
of their systems and products. With our ability to draw on our pool of resources, comprised of hundreds of highly
trained, skilled, educated and flexible engineers, we adhere to timelines and budget and work in full transparency
with our customers every step of the way to create a tailor-made and cost-effective solution to answer all of our
customers’ unique needs.
Our IT services subsidiaries consist of:
● Coretech Consulting Group LLC
● Fusion Solutions LLC
● Xsell Resources Inc.
● AllStates Consulting Services LLC
● Futurewave Systems, Inc.
● NetEffects, Inc.
● CommIT Group
● Comblack Ltd
● Infinigy Solutions
● Shavit Software Ltd.
● OnTarget Group Inc
Partnerships and Alliances:
We continue to build on our existing strategic partnerships that include Oracle, JD Edwards, SAP, Salesforce.com,
Microsoft, IBM and SugarCRM to enhance our mobile, integration and cloud offerings.
In September 2013, we initiated a technology partnership with GigaSpaces Technologies, a pioneer provider of In-
Memory Computing technology for deployment, management and scaling of mission-critical applications. By
combining our technologies, we assist our customers in becoming cloud-ready and enjoying the benefits of high
performance, scalability and availability that can be achieved with in-memory computing technology, all with a
seamless migration effort and virtually no learning curve. Since the announcement, we have implemented IMDG
architecture in our Magic xpi Integration Platform.
In October 2013, we partnered with Sugar CRM, a growing cloud and on-premise CRM ecosystem, and Sage, a
popular provider of ERP and other business systems to small and medium business, enabling us to provide pre-built
connectors for quick and reliable integration with these applications.
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In July 2015, we were recognized as “Salesforce Ecosystem Champion of the Year for France” for the Magic xpi
Integration Platform with its pre-built and certified Salesforce adapter. In giving this award, Salesforce said their
“growth is possible through the commitment to exceptional solutions and customer satisfaction provided by
Salesforce partners like Magic Software.”
Also in July 2015, our Valinor subsidiary was recognized as the 2015 Microsoft Country Partner of the Year for
Israel. The Microsoft Country Partner of the Year Awards honor partners at the country level that have demonstrated
business excellence in delivering Microsoft solutions to multiple customers over the past year. This award
recognizes Valinor as succeeding in effective engagement with its local Microsoft office while showcasing
innovation and business impact, driving customer satisfaction, and winning new customers.
In 2016, we received the SugarCRM’s global ISV Partner Award for best engagement and teaming with fellow
partners across the SugarCRM partner ecosystem.
In March 2017, we became a certified technology partner in the Technology Alliance Program for ServiceMax, a
GE Digital company, the leader in cloud-based field service management solutions. As a result of this partnership,
we launched a prebuilt, certified ServiceMax connector for our Magic xpi integration platform. This dedicated
connector enables real-time business process integration between ServiceMax and other enterprise software, such as
ERP systems, enabling ServiceMax customers to streamline field service processes, eliminate duplicate data entry,
and increase productivity.
In March 2018, following an extension of our partnership with Salesforce, we included new features in our
Magic xpi 4.7 to make the integration between Salesforce and other systems even easier. By collaborating with
Salesforce, we are significantly expanding our partners’ network and maximizing our service offering to customers
around the world, enabling them to better serve their customers via all channels by connecting to back-office ERP
and finance applications, and streamlining business processes across numerous applications. We have reached the
status of Salesforce Premier ISV partner, showing our high competence expert level, ensuring that all of our
customers enterprise software is faultlessly integrated.
We are an Oracle Platinum Partner holding an Oracle Validated Integration status, a SAP Channel Gold Partner
holding SAP Certified Integration status, an IBM Server Proven, and a SYSPRO business partner, among others.
We appear on the Salesforce AppExchange and are a featured partner on SugarCRM’s Sugar Exchange,
marketplaces for apps provided by partners. We continue to update and strengthen our relationships with these major
IT partners by attending partner events and by updating and certifying our Magic xpi connectors for each specific
ecosystem.
In December 2018 we achieved Microsoft Gold Competency and have maintained this elite status since then. Gold
Competency is Microsoft’s highest level of partner certification reserved for the top one percent of Microsoft elite
partners worldwide who have demonstrated expertise and proven skills with a particular Microsoft technology or
service. In addition to that, we earned the Co-Sell Ready Status as a member in the Microsoft One Commercial
Partner (OCP) Program, Magic xpi, which maps data, automates business processes and connects apps, databases,
APIs with built-in Microsoft connectors, and Magic xpc, a 100% cloud-native, microservices-based integration
platform are available on the Microsoft AppSource app store and are listed on the Microsoft Azure Marketplace.
In May 2020, our CommIT Group, achieved AmazonAWS SaaS Competency status. AWS SaaS Competency is
designated to help customers find top AWS consulting partners with deep specialization and experience in designing
and building software-as-a-service solutions on AWS. Organizations are interested in software that is easy to use,
implement, and operate. They are looking to reduce time-to-value and obtain access to innovative product features
and flexible software procurement on a consumption or contractual basis. AWS SaaS Competency Partners follow
Amazon Web Services (AWS) best practices for designing and building SaaS solutions through their professional
services practices. To qualify for the AWS SaaS Competency designation, organizations have undergone rigorous
technical validation by AWS Partner Solutions Architects and demonstrated proven customer success. In recent
years, Comm-IT has successfully led, developed and produced many SaaS solutions on AWS for companies across
many business sectors, including high-tech and startups, industrial and retail, and insurance and finance. Comm-IT’s
unique, flexible R&D model, which provides complete flexibility in determining the mix of experts, allows for full
control of budgets and schedules throughout the development project. In this framework, We accompany our clients
in their digital journey and in their entry into the SaaS world, providing design and build services for application
environments or migration services for applications from existing models to cloud SaaS models. These processes
require software architecture, construction, and software development from both Digital and SaaS, all of which take
into account performance aspects, information security, scalability, infrastructure monitoring, customer experience
and billing. Achieving AWS SaaS Competency status allows us to expand our business offering and even
accompany the organizational change for customers who are in the process of transitioning to SaaS.
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Industry Overview
In recent years, the number of available enterprise applications has grown significantly which has led information
system complexity within many organizations to a level that has obstructed business progress and evolution, reduced
business agility and led to significantly higher costs. We believe this complexity will continue to increase in the
future. Although it is not unusual for organizations to operate multiple applications, systems and platforms that were
created utilizing disparate programming languages, the complexity of these environments typically reduces an
organization’s operating flexibility, hinders decision-making processes and leads to costly inefficiencies and
redundancies. When organizations seek to swiftly change, update and upgrade IT assets to support new business
processes or to cope with changes in business and regulatory environments, they often find that the introduction and
integration of new or upgraded business applications is more complex than expected, requires significant
implementation resources, takes a long time to implement and is costly. The proliferation of smartphones and
mobile platforms necessitates device-independent and future-proof business solutions for fast, simple, and cost-
effective mobile deployment. In addition, new cloud computing technologies present enterprises with an opportunity
to realize greater agility and meaningful cost savings to businesses, creating a growing need for further changes to
enterprises’ IT applications and systems.
The pace of digital transformation is also accelerating at companies all around the world. Customers are increasingly
demanding an all-digital experience from the companies they do business with. They seek instant gratification
through real-time updates or instant customer service without having to talk to or wait for other human beings.
Employees are also pushing for a more digital experience in their workplaces. The confluence of these internal and
external forces is causing companies of all sizes to put digital transformation goals at the top of the agenda. It is
becoming clearer that companies will need to embrace and prioritize the creation of a digital operating environment
to gain a competitive edge and be able to recruit and maintain a talented employee base.
Manual coding and application development is a complex and time-consuming process with an end result that is not
guaranteed. The process requires constant iteration as bugs are discovered and new features are integrated. In
addition, the communication gap and general disconnect between developers and end-users are critical shortcomings
of manual coding that results in business applications that are less than ideally designed. Many of these problems
can be addressed by low-code and no-code development platforms. The enterprise application development software
market consists of several application development sub-segments and includes large dominant players such as IBM,
Microsoft, Oracle, Salesforce, HP, CA Technologies and Compuware as well as a large number of highly
specialized vendors, with focused capabilities for specific vertical markets. Huge backlogs of enterprise app
development work and growing demand for apps coupled with shortage and expense of skilled programmers, is
increasingly leading enterprises to turn to low-code/no-code application development platforms that democratize the
development process and give business users the ability to develop applications themselves with minimal or no
assistance from IT. Through the adoption of business applications, these business users are increasingly looking for
ways to automate manual workflows and become more efficient and effective by reallocating their time to solving
more complex business problems. Even IT resources and developers are using low-code development tools to
increase their development speed and reduce backlog. a growing market for low-code/no-code development
platforms.
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Although the market for low-code development platforms is not new by any means, it has certainly started to gain
more traction over the past couple of years and is expected to continue its strong growth due to continued demand
for applications and a shortage of skilled developers. Low-code development is a natural evolution of rising
abstraction levels in application development, which will eventually lead to viable cross-enterprise, highly scalable
citizen development and composition of applications. According to the Low-Code Development Platform Market
Research Report published by Prescient & Strategic Intelligence in August 2019, the market for low-code
development platforms was valued at $5.6 billion in 2018 and is expected to grow at a 45% compound annual
growth rate to $52.3 billion in 2024. Based on Gartner’s, Magic Quadrant for Enterprise Low Code Application
Platforms, 8 August 2019, by 2024 low-code application platforms will be responsible for more than 65 percent of
all application development activity and three-quarters of large enterprises will be using at least four low-code
development tools for both IT application development and citizen development initiatives. Forester, in their Q1
2019 report on low-code platforms expects low-code market to represent $21 billion in spending by 2022. The
increasing need of digitalization and maturity of agile DevOps practices are expected to enhance the use of low-code
development platform market across the globe. Web application is considered as a face of an organization and by
using the low-code development platform organizations can roll out user-defined web-based applications quickly.
Instead of writing the programming language for the development of web-based applications, employees with less
development experience can also create sophisticated applications. For those who has relevant experience, this
platform can ease out the daily work chores and can even help them create more custom web-based applications by
integrating already existing digital ecosystems. North America has the presence of several prominent market players
delivering low-code development platform and services to all end users in the region. The US and Canada both have
strong economic conditions and are expected to be major contributors to the growth of the low-code development
platform market. The geographical presence, significant research and development (R&D) activities, partnerships,
and acquisitions and mergers are the major factors for the deployment of low-code development platform and
services.
The IT services segment of the market is comprised of a broad array of specific segments such as infrastructure
design and delivery, application development, technology consulting planning and implementation services, support
services and supplemental outsourcing services. In addition, IT professional services include quality assurance,
product engineering services and process consulting. The IT services segment is also undergoing a profound
transition, with some key trends that have accelerated recently. Growing demand for mobile and cloud-based
applications as well as Big Data solutions also entails more complex IT development and integration projects which
management and implementation require a higher level of expertise, In addition, the typical software-based projects
of IT consulting have been gradually shifting towards software and technology-driven solutions that can be
embedded into clients’ systems, providing ongoing engagement services. This transition has been accentuated by an
underlying change in IT services sourcing processes: the need for a faster go-to-market process as well as
constrained resources in IT departments is resulting in greater influence by specific business units on the purchasing
decision as opposed to the traditional sourcing process. The traditional outsourcing business model of capacity on
demand is also transitioning towards a model of capability on demand. Information technology service buyers are
increasingly looking at outcome-driven managed services with a tighter integration between software, service and
infrastructure.
We have identified the following trends that are relevant to the markets we operate in:
● Increasingly complex business integration: In recent years, enterprises operate multiple applications and
platforms, using various programming languages, resulting in complex enterprise information systems.
Such systems and the ability to swiftly change, update, and upgrade them to support new business
processes are crucial to the enterprise’s ability to cope with changes in the business, economic and
regulatory environment. However, the introduction and integration of new business applications is
complex, requires significant time and human resources and entails significant and often unpredicted costs.
Therefore, enterprises are in need of solutions that will facilitate the rapid and seamless deployment of
business applications.
● Reusing IT assets/enterprise applications: In an increasingly dynamic technology, business and
economic environment, organizations face mounting pressure to continue to leverage their large IT
investments in enterprise applications, such as ERP and CRM, while increasing their ability to change
business processes and support new ones. Tools to support lightweight yet rapid, iterative and modular
development methodologies, reusable architectures and application life-cycle management are primary
drivers for spending on application development worldwide.
● Enterprise mobility: With the proliferation of smartphones and mobile platforms that support enterprise
mobility, enterprise users now expect instant access to real-time information, a rich user experience,
seamless integration with various enterprise systems and support to multiple mobile devices. As such,
enterprises need to be able to develop device-independent and robust business solutions for fast and cost-
effective mobile deployment.
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● Cloud, Platform-as-a-Service and Software-as-a-Service: Cloud, Platform-as-a-Service (PaaS) and
Software-as-a-Service (SaaS) are each becoming a well-established phenomenon in some areas of
enterprise IT. Cloud-hosted applications continue to grow as alternatives to internally managed systems as
they deliver greater agility and meaningful cost savings to businesses. In addition, fast time-to-deployment,
low cost-of-entry, and adoption of pay-as-you-go models drive growing adoption of SaaS applications. In
turn, SaaS applications enable the rapid construction, deployment and management of some custom-built
applications accessed as a service in the cloud. With more SaaS deployments, the need for integration tools
that bridge the cloud apps with on-premise application increases.
● Big Data: The amount of digital information that is being generated by enterprises each year, across a
number of diverse data sources and formats, is growing rapidly. Enterprises are required to retain, process
and analyze data to attain meaningful insights and gain competitive advantages, and therefore require
versatile and flexible tools in order to quickly and reliably process these increasingly large amounts of data.
● IT Consulting: The typical software-based projects of IT consulting have been gradually shifting towards
software and technology-driven solutions that can be embedded into clients’ systems, providing ongoing
engagement services.
● Sourcing processes: The need for a faster go-to-market process as well as constrained resources in IT
departments is resulting in greater influence by specific business units on the purchasing decision as
opposed to the traditional sourcing process. The traditional outsourcing business model of capacity on
demand is also transitioning towards a model of capability on demand. Information technology service
buyers are increasingly looking at outcome-driven managed services with a tighter integration between
software, service and infrastructure.
● Mobility & IT skills shortage: Growth in mobility skills demand is outpacing organizations’ ability to
keep up, resulting in mobile strategists facing a skills shortage across the entire mobility ecosystem, with
mobile application development skills in greatest demand. Poor availability of skilled staff is driving
mobile strategists to outsource many functions across the mobility ecosystem, including application
development and testing services. The increasing mobility skills gap will force mobile strategists to use a
multifaceted application development and delivery approach.
Magic’s Software Solutions
Our software solutions enable enterprises to accelerate the planning, development, deployment and integration of
on-premise, mobile and cloud business applications that can be rapidly customized to meet current and future needs.
Our software solutions and complementary professional services empower customers to dramatically improve their
business performance and return on investment by enabling the cost-effective and rapid delivery, integration and
mobilization of business applications, systems and databases. Our technology and solutions are especially in demand
when time-to-market considerations are critical, budgets are tight, and integration is required with multiple
platforms or applications, databases or existing systems and business processes, as well as for RIA and SaaS
applications. Our technology also provides the option to deploy our software capabilities in the cloud, hosted in a
web services cloud computing environment. We believe these capabilities provide organizations with a faster
deployment path and lower total cost of ownership. Our technology also allows developers to stage multiple
applications before going live in production.
Development communities are facing high complexity, cost and extended pay-back periods in order to deliver cloud,
RIAs, mobile and SaaS applications. Magic xpa, AppBuilder, Magic SmartUX, Magic xpi and Magic xpc provide
MSPs with the ability to rapidly build integrated applications in a more productive manner, deploy them in multiple
modes and architectures as needed, lower IT maintenance costs and speed time-to-market. Our solutions are
comprehensive and industry proven. These technologies can be applied to the entire software development market,
from the implementation of micro-vertical solutions, through tactical application modernization and process
automation solutions, to enterprise spanning service-oriented architecture, or 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. Our low-code, 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, concentrate on building the correct logic for their apps and move quickly and
efficiently to deployment. Through the use of metadata-driven platforms such as Magic xpa, AppBuilder, Magic
SmartUX, Magic xpi and Magic xpc, software vendors and enterprise customers can experience unprecedented cost
savings through fast and easy implementation and reduced project risk.
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Our software technology solutions include application platforms for developing and deploying specialized and high-
end large-scale business applications and integration platforms that allow the integration and interoperability of
diverse solutions, applications and systems in a quick and efficient manner. These solutions enable our customers to
improve their business performance and return on investment by supporting the affordable and rapid delivery and
integration of business applications, systems and databases. Using our software solutions, enterprises and ISVs can
accelerate time-to-market by rapidly building integrated solutions, deploying them in multiple environments while
leveraging existing IT resources. In addition, our solutions are scalable and platform-agnostic, enabling our
customers to build solutions by specifying their business logic requirements in a commonly used language rather
than in computer code, and to benefit from seamless platform upgrades and cross-platform functionality without the
need to re-write applications. Our technology also enables future-proof protection and supports current market
trends such as the development of mobile applications that can be deployed on a variety of smartphones and tablets,
and cloud environments. In addition, we also offer a variety of vertical-targeted products that are focused on the
needs and requirements of specific growing markets. Certain of these products were developed utilizing our
application development platform.
We sell our solutions globally through our own direct sales representatives and offices and through a broad sales
distribution network, including independent country distributors, independent service vendors that use our
technology to develop and sell solutions to their customers, and system integrators. We also offer software
maintenance, support, training, and consulting services in connection with our products, thus aiding the successful
implementation of projects and assuring successful operation of the platforms once installed. We sell our integration
solutions to customers using specific popular software applications, such as SAP, Salesforce.com, IBM i (AS/400),
Oracle JD Edwards, Microsoft SharePoint, Microsoft Dynamics, SugarCRM and other eco-systems. As such, we
enjoy a well-diversified client base across geographies and industries including oil & gas companies,
telecommunications groups, financial institutions, healthcare providers, industrial companies, public institutions and
international agencies.
The underlying principles and purpose of our technology are to provide:
● Simplicity – the use of code-free/low code development tools instead of hard coding and multiple
programming languages to solve critical and complex challenges;
● 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
● Interoperability – to support business logic across multiple hardware and software platforms,
operating systems and geographies.
We offer three complementary application platforms that address the wide spectrum of composite applications,
Magic xpa, Magic SmartUX and AppBuilder. Our Magic xpi integration platform and Magic xpc iPaaS solution
delivers fast and simple integration and orchestration of business processes and applications. We gained over 350
new customers in 2019 operating in a wide variety of industries, including financial services, life sciences,
government, telecommunications, energy and manufacturing.
Magic xpa Application Platform
Magic xpa Application Platform, our metadata driven application platform, provides a simple, low code and cost-
effective development and deployment environment that lets organizations and MSPs quickly create user-friendly,
enterprise-grade, multi-channel mobile and desktop business app that employ the latest advanced functionalities and
technologies. The Magic xpa Application Platform, formerly named uniPaaS, was first released in 2008 and is an
evolution of our original eDeveloper product, a graphical, rules-based and event-driven framework that offered a
pre-compiled engine for database business tasks and a wide variety of generic runtime services and functions which
was released in 2001.
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We have continually enhanced our Magic xpa application platform to respond to major market trends such as the
growing demand for cloud-based offerings including Rich Internet Applications (RIA), mobile applications and
SaaS. Accordingly, we have added new functionalities and extensions to our application platform, with the objective
of enabling the development of RIA, SaaS, mobile and cloud-enabled applications. SaaS is a business and technical
model for delivering software applications, similar to a phone or cable TV model, in which the software applications
are installed and hosted in dedicated data centers and users subscribe to these centers and use the applications over
an internet connection. This model requires the ability to deliver RIA. 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 modify these choices as the situation requires. Enterprises can use cloud-based Magic xpa applications in a SaaS
model and still maintain their databases in the privacy of their own data centers. It also supports most hardware and
operating system environments such as Windows, Unix, Linux and AS/400, as well as multiple databases and is
interoperable with .NET and Java technologies.
Magic xpa can be applied to the full range of software development, from the implementation of micro-vertical
solutions, through tactical application modernization 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 increased cost
savings through fast and easy implementation and reduced project risk.
Magic xpa enables organizations to differentiate themselves from their competition through software-enabled digital
transformation. With our platform, organizations can rapidly and easily design, build and implement powerful,
enterprise-grade custom applications through our intuitive, visual interface, with little or no coding required. Our
Solution ensures that applications developed on our platform can be immediately and natively deployed across a full
range of mobile and desktop devices with no additional customization, including desktop web browsers, tablets and
mobile phones. We also enable organizations to easily modify and enhance applications and automatically
disseminate these updates across device types to ensure that all users benefit from the most up-to-date functionality.
Key benefits of our platform include:
● Powerful applications to solve critical and complex challenges. At the core of our platform is an
advanced engine that enables the modeling, modification and management of complex processes and
business rules. Our heritage provides us with this differentiated understanding of complex processes, and
we have incorporated that expertise into our platform to enable the development of powerful applications.
Organizations have used our platform to launch new business lines, build large procurement systems,
manage retail store layouts, conduct predictive maintenance on field equipment and manage trading
platforms, among a range of other use cases.
● Rapid and simple innovation through our powerful platform. Our platform employs a low-code,
intuitive, visual interface and pre-built development modules that reduce the time required to build
powerful and unique applications. Our platform automates the creation of forms, data flows, records,
reports and other software elements that would otherwise need to be manually coded or configured. This
functionality greatly reduces the iterative development process, allowing for real-time application
optimization and ultimately shortening the time from idea to deployment. In turn, organizations can better
leverage scarce and costly developer talent to accomplish more digital transformation objectives.
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● Build once, deploy everywhere. Our technology allows developers to build an application once and use it
everywhere with the consistency of experience and optimal performance levels that users expect.
Applications developed on our platform can be immediately and natively deployed across a full range of
mobile and desktop devices with no additional customization, including desktop web browsers, tablets and
mobile phones.
● Deployment flexibility to serve customer needs. Our platform can be installed in any cloud or on-
premises, with organizations able to access the same functionality and data sources in all cases. Our
flexible deployment model also preserves a seamless path to future cloud deployments for organizations
initially choosing on-premises for their most sensitive workloads.
Our approach to digital transformation goes beyond simply enabling organizations to build custom applications fast.
We empower decision makers to reimagine their products, services, processes and customer interactions with
software by removing much of the complexity and many of the challenges associated with traditional approaches to
software development. Because we make application development easy, organizations can build specific and
competitively differentiated functionality into applications to deliver enhanced user experiences and streamlined
business operations.
In February 2018, we released Magic xpa 3.3 with a more seamless and easier integration with Java, similar to the
already existing integration with .NET, making the Magic xpa platform even more robust. Along with that, we
provided a new WS provider mechanism, built on Apache Axis2, enhancing our current WCF based capabilities.
In April 2018 and for the third consecutive year, Magic Software’s Magic xpa application development platform
gained top market share in license sales in the Japanese market. According to the “Market Research for Next
Generation Extra-Rapid Development Tools in 2018” published by MIC Research Institute Ltd., the Magic xpa
Application Platform grew 2% achieving a 41% share of the Japanese market.
In August 2018, we released Magic xpa 4.0 with its new Angular-based Web application framework that provides
developers and Angular developers with the power to develop device-agnostic and feature-packed Web applications.
Magic xpa 4.0 decouples the business logic from the presentation of the apps providing developers with the
flexibility to use the Angular open-source platform with industry-standard state-of-the-art technologies, including
HTML5, CSS, and JavaScript for designer-quality screens, while benefiting from the productivity, security, and
scalability capabilities provided by our low-code development platform.
In addition, we further modernized our Integrated Development Environment (IDE) by moving toward a full-fledged
Visual Studio-based studio, offering our users an even more intuitive and user-friendly experience.
Our 2019 roadmap includes the release of a 64-bit edition of Magic xpa, featuring a full 64-bit runtime engine for
Windows and Linux.
During 2018, Magic xpa was listed in Gartner’s Market Guide for Application Platforms report. In addition, Magic
xpa was listed in the Forrester Wave™ for Mobile Low-Code Development Platforms.
AppBuilder Application Platform
AppBuilder, a platform we acquired in December 2011, is a proprietary development environment used for
managing, maintaining and reusing complicated applications needed by large businesses. It provides the
infrastructure for enterprises worldwide, across several industries, with applications running millions of transactions
daily on legacy systems. Enterprises using AppBuilder can build, deploy and maintain large-scale custom-built
business applications for years without being dependent on any particular technology. The AppBuilder deployment
environments include IBM mainframe, Unix, Linux and Windows. AppBuilder is intended to increase productivity
and agility in the creation and deployment of enterprise class computing.
AppBuilder follows the 4GL development paradigm to help enterprises focus on the business needs and definition
and overlook technical hurdles. AppBuilder developers define the business roles and prior to deployment the code is
generated from the development environment to the required run time environment. Several large MSPs have
utilized AppBuilder to build state of the art applications that are deployed through many large customers.
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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.
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.
In April 2016, AppBuilder launched a next-generation HTML5 development tool. AppBuilderHTML5 enables
AppBuilder enterprise customers to easily turn their large-scale client/server business applications into fully
functional browser-based apps.
During 2016, AppBuilder launched the next generation of its group repository tool, the Versioned Group Repository
(VGRE). AppBuilder VGRE is aimed at mid-size development projects, runs on Microsoft Windows Server
platform and enables AppBuilder enterprise customers to parallel support for multiple application releases, called
branches, and access to the full history of individual objects. This includes comparisons as well as version
manipulation features like merge. VGRE is an extension to the existing repository portfolio with full backward
compatibility including well known features like impact analysis, security, upload/download, migrations, rebuilds,
remote preparation and others.
Magic xpi Integration Platform
Our Magic xpi integration platform (an evolution of our original and formerly branded iBOLT platform, launched in
2003) is a graphical, wizard-based code-free solution delivering fast and simple integration and orchestration of
business processes and applications. Magic xpi allows businesses to more easily view, access, and leverage their
mission-critical information, delivering true enterprise application integration, or EAI, business process
management, or BPM, and SOA infrastructure. Increasing the usability and life span of existing legacy and other IT
systems, Magic xpi allows fast EAI, development and customization of diverse applications, systems and databases,
assuring rapid return on invested capital and time-to-market, increased profitability and customer satisfaction.
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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 with optimized and certified connectors for specific enterprise application
vendor ecosystems, such as SAP, Oracle JD Edwards, Microsoft SharePoint and Salesforce.com. These special
editions contain specific features and pricing tailored for these market sectors.
Our heritage as a veteran player in the integration market provides us with a differentiated understanding and ability
to automate complex processes, and we have incorporated that expertise into our platform to enable the development
of powerful business software. Magic xpi can leverage a complete stack of automation technologies, applying the
right automation approach for each specific use case.
Key benefits of our platform include:
● Business Process Management. At the core of our platform is an advanced engine that enables the
modeling, modification and management of complex processes. This engine enables orchestration of any
business workflow.
● Decision Rules. Appian includes a declarative environment for defining and executing business logic or
rules. These rules can be highly complex and can be applied within the Appian platform to many use cases,
ranging from automated decision making to user experience personalization.
● Seamless integration with existing systems and data. In contrast to typical enterprise software, our platform
does not require that data reside within it in order to enable robust data analysis and cross-department and
cross-application insight. Our platform seamlessly integrates with many of the most popular enterprise
software applications and data repositories and can be used within many legacy environments. For
example, organizations frequently use our platform to extend the life and enhance the functionality of
legacy systems of record, such as those used for enterprise resource planning, human capital management
and customer relationship management, by building new applications that enhance the functionality of
those systems and by leveraging the data within those systems to further optimize and automate operations.
● Deployment flexibility to serve customer needs. Our platform can be installed in any cloud or on-
premises, with organizations able to access the same functionality and data sources in all cases. Our
flexible deployment model also preserves a seamless path to future cloud deployments for organizations
initially choosing on-premises for their most sensitive workloads.
In the aggregate, these core capabilities enable Magic to automate and govern end-to-end processes. Magic
complements these automation technologies with related features like process reporting, analytics and management,
which make it simple for organizations to quickly improve and upgrade their automations as business needs change.
In March 2017, we released Magic xpi version 4.6 with enhancements including a New ServiceMax connector for
quick and easy connectivity with ServiceMax, a New OData client connector for easy connectivity to ecosystems
exposing services via this open standardized protocol, a SAP Business One connector verified for SAP Business
One HANA and support for additional services and new and improved functionalities to our existing MS Dynamics
CRM connector.
In August 2017, our Magic xpi integration platform was recognized by the analyst firm Ovum as a well-positioned
integration platform that is a good option for small-and medium-size enterprises. In addition, Magic xpi was listed in
2017 in 10 Gartner reports including three Market Guides for Application Integration Platforms, HIP-Enabling
Technologies and IoT Integration.
In March 2018, we released Magic xpi version 4.7 with a new OData Provider connector, Active Directory
Federation Services (ADFS) support for the SharePoint Online (MOSS) connector, ability to write new connectors
based on Magic xpa Application Platform’s runtime technology and multiple features to improve programming
productivity, such as visual indicators of data flow status and an enhanced monitor to provide an even more accurate
bird’s eye view of all running projects.
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In October 2018, we announced that Magic xpi Integration Platform 4 achieved SAP-certified integration with SAP
S/4HANA, enabling our customers to optimize business processes through automation across leading ERP, CRM,
finance, and other enterprise systems using a single platform.
In February 2019, we released Magic xpi version 4.9 with a new REST client connector, ODATA connector
enhancements, inherent UPSERT support in the data mapper, and built-in cloud support.
In August 2019, we released Magic xpi version 4.11, enabling access to remote connectors residing at another site,
without the need for a VPN (aka ‘Local Agent’ capability). In addition, in the beginning of 2020 we released the
major released Magic xpi 4.12, which includes 64-bit support for our Run-Time engine as-well as integration with
one of the industry’s API management solutions suites. During 2019, we also released additional features pursuant
to customer requests.
In 2020, we plan to enhance the above Local Agent capability with more functionality, add additional connectors
(e.g., OPC for manufacturing) and invest more resources in the overall product stability. In addition, we plan to
continue to expand our product offering with additional features, per customer requests.
Powerful applications to solve critical and complex challenges. At the core of our platform is an advanced engine
that enables the modeling, modification and management of complex processes and business rules. Our heritage as a
business process management, or BPM, company provides us with this differentiated understanding of complex
processes, and we have incorporated that expertise into our platform to enable the development of powerful
applications. Organizations have used our platform to launch new business lines and build large procurement
systems.
Magic xpc Integration Platform
In November 2017, we announced the expansion of our integration offering with the launch of Magic xpc, a hybrid
integration platform as a service (IPaaS), which enable customers to accelerate digital transformation on the cloud,
on-premises or on both.
Magic xpc is powered by its out-of-the-box integration connectors for mainstream business applications, databases,
protocols and tools for building custom integrations. Magic’s iPaaS platform was built using node.JS and docker
technology. Magic xpc users can monitor their integration flows and create and manage alerts from a single
interface. Built on top of open-source components with no cloud vendor lock-in, Magic xpc is available on both
public and private cloud platforms including, Amazon Web Services, Azure, and Google Cloud.
Magic SmartUX
Magic SmartUX, a platform we acquired in April 2019, is a low-code development platform for mobilizing and
modernizing enterprise business application designed for citizen to professional developers to rapidly design, build,
analyze, and run cross-platform mobile business applications.
The Magic SmartUX platform addresses the three biggest challenges enterprises are facing in the road to Digital
Transformation:
● Multi-platform: end client devices are abundant and diverse, we provide an omni-channel solution.
● Many Systems of Record: over the years enterprise adopted (home grown and third party) solutions that
scattered the business flow over many different system, Magic SmartUX enable the enterprise to expose
complex business flows to modern technology with now changes and overhead to the existing working
applications.
● Talent Gap: Mobile and integration are the hardest skillsets for IT orgs to find, with the Magic SmartUX
platform addressing Citizens Developers, we allow any intern tech savvy individual to deliver complex and
robust Mobile business application.
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FactoryEye
On May 2019 we launched the releases of FactoryEye, a proprietary high performance, low-code, flexible, hybrid
platform built specially for manufacturers based on existing infrastructure enabling real-time virtualizations of all
production data and advanced analytics (based on machine learning) for improved productivity and competitive
advantage. We have hundreds of manufacturing customers, and drew on over 35 years of manufacturing experience
to develop FactoryEye. The product’s intuitive and user friendly dashboards empowers manufacturers by providing
all the analysis they need in order to make faster and smarter decisions based on real time data and analytics. This
translates into improved productivity, faster delivery times, and better control over the manufacturing processes,
leading to increased customer satisfaction and higher profit margins. FactoryEye offers dozens of prebuilt
connectors to a range of enterprise applications and MRP systems, such as SAP, JD Edwards, and Infor, as well as
MES, CRM, and PLM systems.
The addition of FactoryEye to our software portfolio allows us to provide our new and existing manufacturing
clients, with a comprehensive Industry 4.0 solution and aligns with our strategy of enhancing our portfolio with
enterprise grade technologies. It also complements our recent acquisition of the low code platform SmartUX for
cross platform application. Combining acquisitions with ongoing enhancements to core products enables us to
further accelerate our growth by becoming a strong player in the digital transformation and Industry 4.0 revolutions.
Since its launch, we made a targeted effort to reach mid-sized manufacturers who are looking to improve the
efficiency of their factories. Our goal is to position FactoryEye as a solution that offers more than mere factory floor
visibility through IIoT connectivity, while remaining more cost effective and customizable than offerings from “Tier
1” companies. To that end, We have created a new website for FactoryEye which will launch by the end of the first
half of 2020, as well as blogs, whitepapers, e-books and email campaigns to spread awareness of this new offering
and benefits for mid-sized manufacturers.
In addition, we continue to market our application and integration products. These products continue to provide
value and convenience for our customers as low code options to integrate their disparate systems.
Vertical software solutions
Clicks™
Our Roshtov subsidiary has approximately three decades of proven experience based on its proprietary
comprehensive core software solution for medical record information management systems, using in the design and
management of patient-file for managed care and large-scale healthcare providers. The platform, which can be
tailor-made to the specific needs of the healthcare provider, is connected to the clinical, administrative and financial
data base system, residing at the provider’s central computer, and allows immediate analysis of complex data with
potentially real-time feedback to meet the specific needs of physicians, nurses, laboratory technicians, pharmacists,
front- and back-office professionals and consumers.
All of our clients that buy or subscribe to our Clicks software solution also enter into software support agreements
with us for maintenance and support of their medical record management systems. In addition to immediate software
support in the event of problems, these agreements allow clients to access new releases covered by support
agreements. In addition, each client has 12-hour access, six days a week (6 hours on Friday) to the applicable call-
center support teams.
We employ a team of 30 research and development specialists that together with our clients create a future where the
health care system works to improve the well-being of individuals and communities. Roshtov’s proven ability to
innovate has led to what we believe to be an industry leading architectures and a breadth and depth of solutions and
services.
There are four healthcare service providers in Israel, of which, Maccabi Healthcare Services and Clalit, which are
the two largest healthcare providers in Israel accounting for 77% of the Israeli market, have been our customers
since the early 1990’s.
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Leap™
Our FTS subsidiary has over 20 years of BSS experience, based on dozens of projects delivered to customers
worldwide. We implement revenue management and monetization solutions in mobile, wireline, broadband,
MVNO/E, payments, e-commerce, M2M / Internet of Things, mobile money, cable, cloud and content markets
under the brand name of Leap™. Our Leap™ solutions lower the total cost of ownership (TCO) for telecom, content
and payment service providers.
FTS works with telecommunications, content and payment service providers globally to help them manage complex
transactions and relationships with greater flexibility and independence. Analyzing transactions from a business
standpoint, FTS offers end-to-end and add-on telecom billing, charging, policy control and payments solutions to
customers worldwide, and services both growing and major providers.
FTS targets mid to lower level tier service providers, supporting their BSS needs with end-to-end, turnkey billing
and other BSS projects. In addition, FTS offers upper-tiers of service providers with BSS and monetization solutions
for specific needs, including policy control and charging solutions, M2M billing, billing for content services,
MVNE/MVNO billing, mobile money software solutions, payment and mobile financial services solutions and
others.
Our Leap™ offering is comprised of:
Leap™ BCCF (Business Control and Charging Function) – a proprietary packaged software solution which serves
as the underlying foundation of our Leap™ products and solutions. Leap BCCF enables service providers to handle
the aspects of event processing, from defining the system’s business logic, through importing events and formatting,
to charging and executing business rules. With Leap BCCF, new services are deployed on the fly, and strategic
business rules are formulated more easily, ensuring real-time responses to both service and customer-related events
and providing a baseline for policy control.
Leap™ Billing 6.3 – a convergent charging, billing and customer care solution that realizes substantial reductions in
OPEX and CAPEX while increasing customer satisfaction and retention. Leap Billing software’s flexibility and ease
of use enables the service providers’ billing platform to work more at the speed of marketing by offering new
marketing plans or services in a rapid time-to-market.
Leap™ Policy Control - Leap Policy Control is an integrated charging and policy control solution (a full PCC
solution based on PCRF & online/offline charging). Compliant with the 3GPP’s Diameter policy control standard,
Leap Policy Control provides traffic and subscriber management strategies. Leap Policy Control gives operators the
power to monitor usage in real time and, using fully configurable business rules, define how they manage network
resources, applications, and subscribers – in real time – while generating revenue from personalized mobile
applications, content and services. Leap Policy Control can be implemented as a stand-alone solution or as part of a
larger BSS project implementation.
FTS Express™ - FTS express™ is an all-in-one software appliance for online charging, billing, AAA, balance
management, customer care, policy control and interconnect, designed for entry-level operations of MVNOs, LTE,
VoIP, ISP, broadband, IPTV and more.
The following is a sample of the monetization solutions offered by FTS:
● End-to-end, turnkey billing and customer care solutions;
● Convergent, online charging and billing;
● Policy control and charging;
● MVNO/E billing;
● Billing for content;
● Interconnect billing;
● M2M / IoT billing;
● Broadband and multi-play billing;
● Mobile money solutions;
37
● E-commerce and M-commerce solutions;
● Payments and mobile payments solutions;
● Smart revenue sharing and partner management solutions; and
● Billing service bureau.
FTS’s solutions are delivered via cloud, on-premises or in a fully managed-services mode and are backed by our
Israel and Bulgaria-based experienced professional services support team.
HR Pulse
Now in its 10th release, HR Pulse is a proprietary platform that creates and customizes software applications for
HCM, with the goal to combine technology with effective processes, to facilitate the collection, analysis and
interpretation of quality data about people, their jobs and their performance, to enhance HCM decision making,
resulting in increased organizational efficiency and effectiveness. HR Pulse addresses four distinct functional areas
with the ability to also work as one consolidated system:
● Performance and goal management:
● Development management;
● Talent management and succession planning; and
● Compensation and merit review.
Our offering includes customizable “out of the box” HCM SaaS Solutions, such as Pilat Frist and Pilat Professional,
that provides a menu of templates that can be used to affordably and expeditiously create customized HCM solutions
for companies. The HR Pulse platform promotes the building and implementation of solutions that address broader
business challenges as well. Such offerings include 360-degree feedback, employee surveys, leadership and
management development, coaching and job evaluation.
Hermes
Hermes has been developing and evolving cargo management systems for the air cargo industry since 2002. Hermes
Air Cargo Management System is a proprietary, state-of-the-art, packaged software solution for managing air cargo
ground handling. Our Hermes Solution covers all aspects of cargo handling, from physical handling and cargo
documentation through customs, seamless EDI communications, dangerous goods and special handling, tracking
and tracing, security and billing. Over the last 10 years Hermes systems have been implemented in over 70
terminals on five continents, providing efficient and accurate handling of more than 5 million tons of freight
annually. Customers benefit through faster processing and more accurate billing, reporting and ultimately enhanced
revenue. Customers include independent ground handlers, airlines with a cargo arm, hubs belonging to an
individual airline or those catering to a number of airlines transiting cargo to additional destinations. The Hermes
Solution is delivered on a licensed or fully hosted basis.
Our Value Proposition
Hermes systems are built with the specific needs of air cargo handlers and airlines in mind and are amongst the most
versatile and sophisticated around. Hermes Solutions are focused on maximizing customer profits by streamlining
ground handling processes and employing built-in best practices to reduce handling errors. Hermes team of cargo
experts carry out a full business analysis, listen to our customers’ requirements, suggest additional functionality and
work with them to deliver an air cargo management solution that is streamlined around their processes and
customized to their needs. Hermes works with everyone from smaller cargo handlers to large airlines all over the
world and counts Menzies Aviation, WFS (FRA), Luxair, Etihad Airport Services and Frankfurt Cargo Services
among their customers.
38
Strategy
Our goal is to continue our profitable and cash generative growth within our software solutions and professional
services markets. We plan to achieve this goal by focusing on the following principles:
● Expand sales to existing customers. We intend to capitalize on the opportunity to more effectively cross-
sell solutions and services across our existing customer base. In addition to selling complementary software
solutions to customers that already use our development application solutions or packaged software
solutions, we believe our strong customer, MSP and partner relationships and execution track record
position us to successfully grow our revenues by delivering complementary development and integration
tools from our product offering to our existing IT services customers and by delivering IT services to our
existing application development customer base.
● Capitalize on opportunities created by new technological trends. We believe that emerging industry
trends such as mobile applications, cloud applications, SaaS and big data will require our enterprise
customers and partners to continue and upgrade existing systems and to integrate their current
infrastructure with new mobile and cloud applications or with new big data management solutions. We
intend to market the capabilities of our software solutions and professional services offerings to customers
that are currently impacted or will potentially be impacted by the increased complexity resulting from these
trends. For instance, we intend to promote Magic xpa through Rich Internet Applications (RIAs).
● Grow our customer base through new offerings. We plan to grow our business by attracting new ISV
enterprise customers with new technology offerings and new professional services through our already
established expertise in the areas of mobile technologies and projects, cloud applications, SaaS and Big
Data solutions, and integration solutions. Due to our track record in these industry segments, we believe we
are well positioned to develop and offer new application development and integration solutions that will
enable us to attract new customers. In addition, we believe our familiarity with these verticals will allow us
to differentiate our IT services offering and grow our market share in this vertical as well.
● Provide new solutions to new ecosystems. We expect the same industry trends of mobile, cloud, SaaS and
big data to lead to the creation of additional enterprise applications ecosystems. We intend to continue to
develop new solutions that will allow us to form new partnerships, which in turn will grow our revenues.
We also intend to focus on recruiting OEM partners that will incorporate our Magic xpi integration
technology into their product offerings.
● Acquire complementary businesses. As part of our growth strategy, we will continue to seek and evaluate
opportunities to grow through acquisitions of companies and operations with complementary software
solutions, technologies and related intellectual property, packaged software solutions, augmenting
integration and services capabilities, additional distribution channels or market share. We have a strict
acquisition policy pursuant to which we only pursue acquisitions in cases we identify as having a clear
business opportunity and a clear path to revenue growth. In addition, we only pursue acquisitions which we
believe entail low integration and operational risk as a result of our internal familiarity with the target or the
industry in which it operates, through our network of MSPs, system integrators, distributors, resellers, and
consulting and OEM partners. We intend to balance any investments in such acquisitions with investments
in our existing business and our policy of returning value to shareholders in the form of dividends.
Product Development
We place considerable emphasis on research and development in order to improve and expand the functionality of
our technologies 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. For significant version release see “Magic’s Software Solutions” discussed
above.
39
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 generating both additional revenues and ensuring successful implementation of Magic xpa,
Appbuilder, Magic xpi Magic xpc, SmartUX and FactoryEye 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.
Customer 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 online support systems for our MSPs and end users, providing them with the ability to instantaneously
enter, confirm and track support requests through the Internet. These systems support MSPs and end-users
worldwide. As part of this online support, we offer Support Knowledge Base tools 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 and packaged software solutions. We
develop courses, pertaining to our principal products and provide trainer and student guidebooks. Course materials
are available both in traditional, classroom courses and as web-based training modules, which can be downloaded
and studied at the student’s own pace and location. The courses and course materials are designed to accelerate the
learning process, using an intensive technical curriculum in an atmosphere conducive to productive training.
IT Services
Background
Our IT services offerings consist of a variety of professional services that can be grouped into integration and other
IT services. Our integration services include:
● Infrastructure analysis, design and delivery - management of complex, tailor-made projects and telecom
infrastructure projects in wireless and wire-line as well as IT consulting services, mainly for the defense
and public sectors.
● Technology consulting and implementation services - planning and execution of end-to-end, large-scale,
complex solutions in networking, cyber security, command & control and high performance transaction
systems.
● Application development - We specialize in end-to-end projects that feature an array of technologies,
from development and implementation of concepts for startups to overall responsibility for the
development of systems for large enterprises. Our development services include development of on-
premise, mobile and cloud applications as well as Embedded and real time software development.
40
With more than 1,700 experts and hundreds of projects gone live in a variety of advanced technologies in the U.S.,
Europe and Israel, we have developed significant expertise and accumulated vast experience in integration projects.
Such projects are typically more complex and require a high level of industry knowledge and highly skilled
professionals. Our integration expertise, as well as our global reach allows us to deliver comprehensive, value added
services to our customers. Our IT services customers include major global telecoms, OEMs and engineering, furnish
and installation service companies.
Strategic Consulting and Outsourcing Services
We provide a broad range of IT consulting services in the areas of infrastructure design and delivery, application
development, technology planning and implementation services, cloud computing, as well as supplemental
outsourcing services. Our wholly-owned subsidiaries, Fusion Solutions LLC, Xsell Resources Inc., Allstates
Consulting Services LLC, Futurewave Systems, Inc., NetEffects, Inc, OnTarget Group, Inc, the Comm-IT Group,
Infinigy Solutions LLC., Comblack Ltd. and Shavit Software (2009) Ltd. provide advanced IT consulting and
outsourcing services to a wide variety of companies including Fortune 1000 companies. Our technical personnel
generally supplement the in-house capabilities of our customers. Our approach is to make available a broad range of
technical personnel to meet the requirements of our customers rather than focusing on specific specialized areas. We
have extensive knowledge of and have worked with virtually all types of wireless and wireline telecom
infrastructure technologies as well as in the areas of infrastructure design and delivery, application development,
project management, technology planning and implementation services. 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 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 customer list includes major global telecoms, OEMs and engineering, furnish and installation
service companies. We have built long-term relationships with our customers 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 customers’ 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:
2019
Year ended December 31,
2018
(in thousands)
2017
Software sales
Maintenance and technical support
Consulting services
Total revenues
Israel
Europe
United States.
Japan
Other
Total revenues
$
28,084 $
30,996
266,550
21,644
30,386
206,110
$ 325,630 $ 284,375 $ 258,140
25,454 $
30,951
227,970
2019
Year ended December 31,
2018
(in thousands)
2017
$ 124,523 $ 103,850 $
28,257
137,066
9,797
5,405
91,917
26,635
123,113
9,253
7,222
$ 325,630 $ 284,375 $ 258,140
25,788
158,095
12,499
4,725
Our Magic xpa, Magic xpi, Magic xpc, Magic SmartUX, FactoryEye, and AppBuilder technologies are used by a
wide variety of developers, integrators and solution providers, that can generally be divided into two sectors (i) those
performing in-house development (corporate IT departments), and (ii) MSPs, including large system integrators and
smaller independent developers, and 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 customers, typically within a vertical industry sector or a horizontal business
function.
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Among the thousands of customers running their business systems with our technology are the following:
ABB Group
Able B.V.
ADD
Adidas Canada
Adecco Nederland
Agricultural Bank of China
Allstate Life Insurance
ATLAS Grupo Financiero
Seguros y Fianzas
Auchan
AutoScout24
Axesor Powers
Bank Leumi
BNP Paribas
Boston Medical Center
CBIA
Çelebi Ground Handling Inc.
Centric
Christie Digital
Club Med
Coca Cola
Crane & Co.
Datenlotsen
Eco-Emballages
Electra
Export-Import Bank of Thailand
Ekro
Euroclear
Farm Mutual Reinsurance Plan
Finanz Informatik
Fiskars
Franken Brunnen
Fujitsu Marketing
Fujitsu-Ten
Fukushima Bank
Gakken
GE Capital
GGD Amsterdam
Grange Company
Groupe Flo
Grupo Inversionistas en
Autotransportes Mexicanos
Guardian Life Insurance
Hebrew University of Jerusalem
Hitachi Systems
IDF
ING Commercial Finance BV
ISS
Japan Chamber of Commerce
Korea Development Bank (KDB)
Lekkerland Nederland BV
Lloyds Bank
L’Occitane
Loxam
MatrixCare
Mahindra & Mahindra
Moose Toys
Morgan Advanced Materials
Mundipharma
Nagarjuna Fertilizers & Chemicals
Ltd.
Nespresso
NextiraOne
NHS Trust
Nihon UNISYS
Nintendo
Orangina Schweppes
Pacific Steel & Recycling
Parrot
Petzl
PGG Wrightson
PTT
QboCel Mexico
Rosenbauer
Segafredo France
Sennheiser
Sony DADC
Staff Development Management
Systems (SDMS Ltd)
SECOM Trust Systems
Sodiaal
Stallergenes
State of Washington Courts
Sterling Crane
Sun Life Insurance
Synbra Holding BV
Telenet Belgium
TelOne Zimbabwe
The Himalaya Drug Company
TOA
TOTO
UPS
Valeo services
Veolia Waters
Viparis
Vishay Intertechnology
Vodafone Iceland
Volvo Brazil
WellMark
Worldwide Flight Services (WFS)
ZF Lemforder
Sales, Marketing and Distribution
We market, sell and support our products through our own global offices and marketing department, as well as
through a broad global channel-network of MSPs, system integrators, value-added distributors and resellers, and
OEM and consulting partners. Our sales force is based in our regional offices in the United States, Japan, Germany,
United Kingdom, Netherlands, France, Hungary, South Africa, India and Israel, and through regional distributors
elsewhere. Our sales network is present in about 50 countries worldwide.
Direct Sales. For Magic xpa and AppBuilder, our direct sales force pursues software solution providers and
enterprise accounts. 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, FacrotyEye and Magic xpc are mostly
sold through indirect channels and through our ecosystem business relationships, but we have some direct customers
with integration needs.
As of December 31, 2019, we employed approximately 158 sales and marketing personnel including, a team of sales
engineers who provide pre-sale technical support, presentations and demonstrations in order to support our sales
force.
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Indirect Sales. We maintain an indirect sales channel, 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 MSPs and system integrators, who
use our application and integration platforms to develop and deploy different applications for sale to their end-user
customers.
Distributors. In general, we distribute our products through regional non-exclusive distributors in those countries
where we do not have a sales office. A regional 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 customer 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 and to promote sales. Among our activities, we focus both on both outbound and inbound
marketing, including a content-rich website available in eight foreign languages, social networks communication,
search engine optimization, on-line advertising, lead generation campaigns, public relations, case studies, blogs,
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, best practices,
technical information and other information.
In light of the increased impact of cloud and enterprise mobility technologies on the IT landscape, in 2011 we
commenced a strategic marketing repositioning initiative that led to a complete rebranding of certain of our
products’ look, 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 seven other languages. To expand
our community of developers and reach out to new audiences around the world, we run an ongoing introductory
campaign, which offers Magic xpa Single User Edition as a freely downloadable product. 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
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.
We use the Salesforce.com CRM platform and the Hubsopt marketing automation tool globally to connect all our
lead generation campaigns with our sales pipeline management. We have aligned all our local offices to work
according to the same global sales and marketing processes. We have also used our own Magic xpi Integration
Platform to automate processes between our Salesforce and SAP systems to increase efficiency.
Competition
The markets for our Enterprise Mobility Solution, and Magic xpa and Magic xpi platforms are characterized by
rapidly changing technology, evolving industry standards, frequent new product introductions, mergers and
acquisitions, and rapidly changing customer requirements. These markets are therefore highly competitive, and we
expect competition to continue to intensify. The growth of the cloud adoption and mobile markets increases the
competition in these areas. 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 our direct competitors and other players.
43
With Magic xpa, we compete in the low-code application platform, SOA architecture and enterprise mobility
markets. Among our current competitors are OutSystems, Appien, Mendix, Kony, Microsoft, and Pegasystems.
With Magic xpi, we compete in the integration platform market. Among our current competitors are IBM,
Informatica, TIBCO, MuleSoft, Jitterbit, Talend, Dell–Boomi, Scribe and Software AG.
More and more enterprises prefer to integrate their applications using integration platform as a service (iPaaS)
technology and for this purpose we launched our new Magic xpc, a hybrid iPaaS solution.
There are several similar products in the market utilizing the model driven architecture, or MDA, approach utilized
by AppBuilder. The market for this type of platform is highly competitive. Companies such as CA and IBM have
tools that compete directly with AppBuilder. Furthermore, new development paradigms have become very popular
in IT software development and developers today have many alternatives.
As our market grows, we expect that it will attract more highly specialized vendors as well as larger vendors that
may continue to acquire or bundle their products more effectively. The principal competitive factors in our market
include:
● platform features, reliability, performance and effectiveness;
● ease of use and speed;
● platform extensibility and ability to integrate with other technology infrastructures;
● deployment flexibility;
● robustness of professional services and customer support;
● price and total cost of ownership;
● strength of platform security and adherence to industry standards and certifications; and
● strength of sales and marketing efforts.
We believe we generally compete favorably with our competitors with respect to the features, security and
performance of our platform, the ease of integration of our applications and the relatively low total cost of
ownership of our applications. However, many of our competitors have substantially greater financial, technical and
other resources, greater name recognition, larger sales and marketing budgets, broader distribution, more diversified
product lines and larger and more mature intellectual property portfolios.
The telecom BSS domain in which we operate through our FTS subsidiary is a highly competitive market in which
we compete based on product quality, service quality, timeliness in delivery and pricing. Within the global billing,
charging and policy control market, FTS principally competes against global IT providers and the in-house IT
departments of telecommunications operators. Among the competitors focused on this market are Amdocs, Ericsson,
Comverse, NetCracker Technology, CSG Systems, Redknee Solutions and Oracle Communications.
There are also a number of smaller or regional telecom BSS competitors who compete on a regional or domestic
market level. These tend to be smaller players, and may include companies such as Comarch, Mind CTI, Tecnotree,
Cerillion, Openet and Elitcore, among others.
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 technological advantages, time to market and worldwide sales and distribution network.
We believe that the principal competitive factors affecting the market for our products include developer
productivity, rapid results, product functionality, performance, reliability, scalability, 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.
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Intellectual Property
In accordance with industry practice, since we have no registered patents on our software solution technologies, we
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. In addition, 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.
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 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.
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. In addition, 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.
C.
Organizational Structure
The following table sets forth the legal name, location and country or state of incorporation and percentage
ownership of our subsidiaries as of December 31, 2019:
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
Fusion Solutions LLC.
Fusion Technical Solutions LLC.
Xsell Resources Inc.
Ownership
Country of
Incorporation
Percentage
Japan
Delaware
United Kingdom
United Kingdom
Spain
Pennsylvania
Delaware
Delaware
Delaware
Pennsylvania
100%
100%
100%
100%
100%
100%
100%
100%
49%
100%
Magic Software Enterprises (Israel) Ltd
Magic Software Enterprises Netherlands B.V.
Magic Software Enterprises France
Magic Beheer B.V.
Magic Benelux B.V.
45
Israel
Netherlands
France
Netherlands
Netherlands
100%
100%
100%
100%
100%
Subsidiary Name
Magic Software Enterprises GMBH
Magic Software Enterprises India Pvt. Ltd
Onyx Magyarorszag Szsoftverhaz
Magix Integration (Proprietary) Ltd
AppBuilder Solutions Ltd
Complete Business Solutions Ltd
Datamind Technologies Ltd
CommIT Technology Solutions Ltd
CommIT Software Ltd (shares held by Comm-IT Technology Solutions Ltd.)
CommIT Embedded Ltd (shares held by Comm-IT Technology Solutions Ltd.)
Valinor Ltd. (shares held by Comm-IT Technology Solutions Ltd.)
Dario Solutions IT Ltd (shares held by Comm-IT Technology Solutions Ltd.)
Quickode Ltd (shares held by Comm-IT Technology Solutions Ltd.)
Twingo Ltd (shares held by Comm-IT Technology Solutions Ltd.)
Pilat Europe Ltd.
Pilat (North America), Inc.
Roshtov Software Industries Ltd
BridgeQuest Labs, Inc..
BridgeQuest, Inc.
Allstates Consulting Services LLC
F.T.S. - Formula Telecom Solutions Ltd.
FTS Bulgaria Ltd. (FTS Global Ltd.)
Comblack IT Ltd
Yes-IT Ltd. (shares held by Comblack IT Ltd)
Shavit Software (2009) Ltd. (shares held by Comblack Ltd)
Infinigy (UK) Holdings Limited
Infinigy (US) Holding Inc
Infinigy Solutions LLC.
Infinigy Engineering LLP (shares held by Infinigy Solutions LLC.).
Skysoft Solutions Ltd.
Futurewave Systems, Inc.
OnTarget Group, Inc
NetEffects, Inc.
PowWow Inc.
BA Microwaves Ltd.
D.
PROPERTY, PLANTS AND EQUIPMENT
Ownership
Country of
Incorporation
Percentage
Germany
India
Hungary
South Africa
United Kingdom
Israel
Israel
Israel
Israel
Israel
Israel
Israel
Israel
Israel
United Kingdom
New Jersey
Israel
North Carolina
North Carolina
Delaware
Israel
Bulgaria
Israel
Israel
Israel
United Kingdom
Georgia
Georgia
Georgia
Israel
Georgia
North Carolina
Missouri
California
Israel
100%
100%
100%
100%
100%
100%
80%
77.8%
100%
75%
100%
100%
100%
60%
100%
100%
60%
100%
100%
100%
100%
100%
70%
100%
100%
100%
100%
70%
99.9%
75%
100%
100%
100%
100%
56.67%
Our headquarters and principal administrative, finance, sales, marketing and research and development office is
located in a 23,841 square foot office facility that we lease in Or Yehuda, Israel, a suburb of Tel Aviv. We paid $0.4
million in annual rent for the Or Yehuda facilities under a lease agreement expiring in April 2020.
Our subsidiaries lease office space in Laguna Hills, California; King of Prussia, Pennsylvania; Dallas, Texas;
Houston, Texas; New Jersey; Atlanta, Georgia; Paris, France; Munich, Germany; Pune, India; Bangalore, India;
Tokyo, Japan; Budapest, Hungary; Houten, the Netherlands; Johannesburg, South Africa; Bracknell, the United
Kingdom; Saint Petersburg, Russia and various locations in Israel. The aggregate annual cost for such facilities was
$3.0 million in the year ended December 31, 2019.
ITEM 4A. UNRESOLVED STAFF COMMENTS
Not applicable.
46
ITEM 5.
OPERATING AND FINANCIAL REVIEW AND PROSPECTS
A.
OPERATING RESULTS
The following discussion of our results of operations should be read together with our consolidated financial
statements and the related notes, which appear elsewhere in this annual report. The following discussion contains
forward-looking statements that reflect our current plans, estimates and beliefs and involve risks and uncertainties.
Our actual results may differ materially from those discussed in the forward-looking statements. Factors that could
cause or contribute to such differences include those discussed below and elsewhere in this annual report.
Background
We were organized under the laws of Israel on February 10, 1983 and began operations in 1986. Our Ordinary
Shares have been listed on the NASDAQ Stock Market (symbol: MGIC) since our initial public offering in the
United States on August 16, 1991. 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 Tel Aviv Stock Exchange, or the
TASE, and since December 15, 2011, our shares have been included in the TASE’s TA-125 Index.
Overview
We develop market, sell and support application platforms, business and process integration and selected vertical
comprehensive software solutions packages. We have 40 active wholly-owned subsidiaries in the United States,
Israel Europe, Asia and South Africa. Of such subsidiaries, 21 are engaged in developing, marketing and supporting
vertical applications, as well as in selling and supporting our products, and 19 subsidiaries specialize in providing
broad range of IT consulting and outsourcing services in the areas of infrastructure design and delivery, application
development, technology planning and implementation services, as well as supplemental outsourcing services.
As an IT technology innovator, we have many years of experience in assisting software companies and enterprises
worldwide to produce and integrate their business applications. Our application platforms, Magic xpa and
AppBuilder, are used by thousands of enterprises and MSPs to develop solutions for their users and customers in
approximately 50 countries. 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 and magic xpc technologies for business
integration to enterprises using specific popular software applications, such as SAP, Salesforce.com, IBM i
(AS/400) or Oracle JD Edwards and other business applications. We refer to these vendor-centered market sectors as
ecosystems.
Vision and Focus Areas
Our vision of how the industry will evolve is being driven by the change in enterprise mobility, cloud computing
and Big Data. We believe that our technology and vast services 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 continues. 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.
Key Factors Affecting our Business
Our operations and the operating metrics discussed below have been and will likely continue to be affected by
certain key factors as well as certain historical events and actions. The key factors affecting our business and results
of operations include among others, dependence on a limited number of core product families, selected vertical
software solutions and services, competition, ability to realize benefits from business acquisitions, dependence on a
key customer for a significant percentage of our revenues and changes in the mix of revenues generated by different
revenue elements affect our gross margins and profitability. For further discussion of the factors affecting our results
of operations, see “Risk Factors.”
47
Dependence on a limited number of core product families and services
We derive a significant portion of our revenues from sales of application and integration platforms primarily under
our Magic xpa, Magic xpi, Magic xpc, Magic SmartUX and AppBuilder brands and from related professional
services, software maintenance and technical support as well as from packaged software solutions in several
business verticals (mainly human recourses, cargo handling, patient medical records and billing), and from other IT
professional services, which include IT consulting and outsourcing 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.
Competition
We compete with other companies in the areas of application platforms, business integration and business process
management, and in the applications and services markets in which we operate. The growth of the SaaS and
Enterprise Mobility market has increased the competition in these areas. We expect that such competition will
continue to 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 outsourcing services industry. This
industry is highly competitive and fragmented and has low entry barriers. We, through five of our subsidiaries in the
United States and five of our subsidiaries in Israel, compete for potential customers 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.
Dependence on key customers
We depend on repeat product and professional services revenues from a certain base of existing customers. Our two
largest customers accounted for 18.2% and 15.8% of our revenues in the years ended December 31, 2018 and 2019,
respectively and our five largest customers accounted for 25.9% and 23.3% of our revenues in the years ended
December 31, 2018 and 2019, respectively. If these existing customers decide not to continue utilizing our
professional services, not to renew their existing engagements, not to continue using our products, or decide to
significantly decrease their total expenditures with us, it may adversely affect our business, results of operations and
financial condition. While one of these five customers is under a contract until December 31, 2027, under their
master services agreements, the other customers may terminate their agreements with us upon only a 30-days’ notice
and without any penalty.
Revenue Mix
We derive our revenues from the sale of proprietary and third-party software licenses, related professional services,
maintenance and technical support as well as from other IT professional services. In recent years the decline in our
gross margin was primarily affected by the change in proportion of our revenues generated from the sale of each of
those elements of our revenues. Our revenues from the sale of our proprietary software licenses, related professional
services, maintenance and technical support have higher gross margins than our revenues from third party software
licenses and IT professional and outsourcing services. 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 continues to increase as a percentage of our total revenues, our gross profit
margins may continue to decline in the future.
48
We may encounter difficulties in realizing the potential financial or strategic benefits of recent and future
business acquisitions.
A significant part of our business strategy is to pursue acquisitions and other initiatives based on strategy centered
on three key factors: growing our customer base, expanding geographically and adding complementary solutions to
our portfolio— all while we seek to ensure our continued high quality of services and product delivery. As such, in
recent years we made numerous of acquisitions. 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. In the future, we may
seek to acquire or make strategic investments in complementary businesses, technologies, services or products, or
enter into strategic partnerships or alliances with third parties in the future in order to expand our business. Failure to
manage and successfully integrate acquisitions could materially harm our business and operating results. Prior
acquisitions have resulted in a wide range of outcomes, from successful introduction of new products and
technologies to a failure to do so. Even when an acquired company has previously developed and marketed
products, there can be no assurance that new product enhancements will be made in a timely manner or that pre-
acquisition due diligence will have identified all possible issues that might arise with respect to such products.
If we acquire another business, we may face difficulties, including:
● 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;
● 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.
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 and debts to banks and financial institutions. 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 decrease. 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.
49
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:
2019
Year Ended December 31,
2017
2016
2018
New Israeli Shekel
Euro
Japanese Yen
British Pound
Israeli Consumer Price Index
Segments
(7.8)%
2.0%
(1.2)%
(3.1)%
0.6%
8.1%
4.6%
(2.4)%
5.6%
0.8%
(9.8)%
(12.2)%
(3.8)%
(9)%
0.4%
(1.5)%
3.5%
(2.8)%
20.6%
(0.2)%
2015
(0.3)%
(10.4)%
(0.8)%
(4.9)%
(1.0)%
We report our results on the basis of two reportable business segments: software services (which include proprietary
and non-proprietary software technology and complementary services) and IT professional services. Set forth below
is segment information for the years ended December 31, 2017, 2018 and 2019.
2017
Total revenues
Expenses
Operating income (loss)
Depreciation, amortization and stock-based compensation
expenses
Capitalized software development costs
EBITDA
2018
Total revenues
Expenses
Operating income (loss)
Depreciation, amortization and stock-based compensation
expenses
Capitalized software development costs
EBITDA
2019
Total revenues
Expenses
Operating income (loss)
IT professional
Unallocated
Software
services
services
expense
(U.S. dollars in thousands)
Total
$
$
$
$
$
$
$
$
77,100 $
63,649
13,451 $
9,242
(3,771)
18,922 $
81,332 $
63,902
17,430 $
8,727
(3,666)
22,491 $
181,040 $
164,558
16,482 $
- $ 258,140
3,977 232,184
25,956
(3,977) $
4,100
-
20,582 $
347
-
(3,630) $
13,689
(3,771)
35,874
203,043 $
183,985
19,058 $
- $ 284,375
4,790 252,677
31,698
(4,790) $
3,611
-
22,669 $
420
-
(4,370) $
12,758
(3,666)
40,790
86,140 $
71,825
14,315 $
239,490 $
216,842
22,648 $
- $ 325,630
3,311 291,978
33,652
(3,311) $
Depreciation, amortization and stock-based compensation
expenses
8,799
5,059
241
14,099
Capitalized software development costs
EBITDA
(4,143)
19,383 $
$
-
28,330 $
-
(2,903) $
(4,143)
44,823
50
Explanation of Key Income Statement Items
Revenues. Revenues are derived from sales of software licenses (proprietary and non-proprietary), related
professional services, maintenance and technical support and other IT professional services, which include, cloud
computing and IT consulting and outsourcing 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 and acquired software costs. Cost of revenues
for maintenance and technical support and professional services consists primarily of personnel expenses,
subcontracting and other related costs. Cost of revenues for software sales is affected by changes in the mix of
products 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
$
$
2017
2019
Year ended December 31,
2018
(U.S. dollars in thousands)
12,382 $
(4,143)
8,239 $
9,362 $
(3,666)
5,696 $
10,713
(3,771)
6,942
Selling and Marketing Expenses. Selling and marketing expenses consist primarily of salaries and related expenses
for sales and marketing personnel, sales commissions, third party royalties, 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 recorded as a result of business combinations.
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, legal
expenses, 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 impact of foreign currency exchange rates fluctuations.
51
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,
2018
2017
2019
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
Income before taxes on income
Tax on income
Net income attributable to redeemable non-controlling interests
Net income attributable to non-controlling interests
Net income attributable to Magic’s shareholders
8.6%
9.5
81.9
100.0%
9.0%
10.8
80.2
100.0%
8.4%
11.8
79.8
100.0%
3.1
1.3
64.2
68.6
31.4
2.5
9.4
9.2
21.1
10.3
(0.3)
10.0
(2.1)
(1.0)
(0.7)
6.2
3.5
1.4
63.9
68.8
31.2
2.0
9.6
8.5
20.1
11.1
0.1
11.2
(2.5)
(1.2)
(0.5)
7.0
3.7
1.5
62.7
67.9
32.1
2.7
10.6
8.8
22.1
10.1
(0.7)
9.4
(2.5)
(0.6)
(0.4)
6.0
Year Ended December 31, 2019 Compared with Year Ended December 31, 2018
Revenues. Revenues in 2019 increased by 15% from $284.4 million in 2018 to $325.6 million in 2019.
Revenues from the software services business segment increased by 6%, from $81.3 million in 2018 to $86.1
million in 2019.
Revenues from the IT professional services business segment increased by 18% from $203.0 million in 2018 to
$239.5 million in 2019, primarily attributable to the inclusion of OnTarget and NetEffects revenues after their
acquisition.
Revenues from sales of proprietary technology software licenses decreased by 3% from $17.0 million in 2018 to
$16.4 million in 2019.
Revenues from sales of proprietary packaged and third party software solutions increased by 37% from $8.5 million
in 2018 to $11.6 million in 2019, primarily attributable to strong demand for our Hermes Air Cargo Management
System and for our Magic xpi and FactoryEye integration platforms.
Revenues from maintenance and technical support remained stagnant at $31.0 million in 2019 compared to 2018.
Revenues from IT consulting services increased by 17% from $228.0 million in 2018 to $266.6 million in 2019. The
increase was primarily attributable to the inclusion of OnTarget and NetEffects revenues after their acquisition.
52
The following table summarizes our revenues by geographical market for the years ended December 31, 2018 and
2019:
United States
Israel
Europe
Japan
Other
Total revenues
Year ended December
31,
2019
2018
(U.S. dollars in
thousands)
$ 158,095 $ 137,066
103,850
28,257
9,797
5,405
$ 325,630 $ 284,375
124,523
25,788
12,499
4,725
Cost of Revenues. Cost of revenues increased by 14% from $195.6 million in 2018 to $223.5 million in 2019.
Cost of revenues for software increased by 3% from $10.0 million in 2018 to $10.2 million in 2019.
Cost of revenues for maintenance and technical support increased by 1% from $4.1 million in 2018 to $4.2 million
in 2019.
Cost of revenues for IT consulting services increased by 15% from $181.5 million in 2018 to $209.1 million in
2019. The increase in cost of revenues for IT consulting services is consistent with the increase in revenues from the
same segment. Cost of revenues for the years ended December 31, 2018 and 2019 include $2,000 and $0,
respectively, of stock-based compensation recorded under ASC 718.
Gross Margin. Gross margin remained stagnant at 31% in 2019 compared to 2018.
Research and Development Expenses, Net. Gross research and development costs increased by 32% from $9.4
million in 2018 to $12.3 million in 2019. Net research and development costs increased by 45% from $5.7 million in
2018 to $8.2 million in 2019. In 2019, we capitalized $4.1 million of software development costs compared to $3.7
million in 2018. Net research and development costs as a percentage of revenues was 2.5% in 2019 compared to
2.0% in 2018. Gross (net) research and development costs as a percentage of revenues of our software services
business segment was approximately 14% (10%) in 2019 compared to approximately 12% (7%) in 2018. The
increase in our absolute gross and net research and development costs in 2019 is primarily due to our investments in
Magic SmartUX, Magic xpi and FactoryEye. Research and development costs for the years ended December 31,
2018 and 2019 include $4,000 and $0, respectively, of stock-based compensation recorded under ASC 718.
Selling and Marketing Expenses. Selling and marketing expenses increased by 12% from $27.2 million in 2018 to
$30.5 million in 2019. Selling and marketing expenses as a percentage of revenues remained relatively stable at
9.6% in 2018 versus 9.4% in 2019. Selling and marketing expenses for the years ended December 31, 2018 and
2019 include $4,000 and $74,000, respectively, of stock-based compensation recorded under ASC 718.
General and Administrative Expenses. General and administrative expenses increased by 23% from $24.2 million
in 2018 to $29.8 million in 2019. General and administrative expenses as a percentage of revenues increased from
8.5% in 2018 to 9.1% in 2019. The increase in general and administrative expenses is primarily attributable to the
inclusion of OnTarget and NetEffects result of operation commencing on their acquisition date. General and
administrative expenses for the year ended December 31, 2018 includes $184,000 of stock-based compensation
recorded under ASC 718.
Financial Expenses, Net. We recorded net financial income of $0.1 million in 2018 and net financial expenses of
$1.2 million in 2019. The change in net financial expenses (income) between 2018 and 2019 was primarily
attributable to the revaluation of the NIS in relation to the U.S. dollar on our NIS denominated debt to financial
institution.
Taxes on Income. We recorded taxes on income of $7.1 million in 2018 compared to $6.9 million in 2019.
53
Net Income Attributable to Our Shareholders. Our net income increased from $19.9 million in 2018 to $20.3
million in 2019, primarily attributable to (i) an increase in gross profit of $13.3 million, (ii) a decrease in net income
attributable to redeemable non-controlling interests of $0.3 million, and (iii) a decrease in taxes on income of $0.2
million, which was offset by (i) an increase in operating costs of $11.4 million, (ii) an increase in financial expenses,
net of $1.3 million, and (iii) an increase in net income attributable to non-controlling interests of $0.7 million.
Year Ended December 31, 2018 Compared with Year Ended December 31, 2017
Please see Item 5A of our Form 20-F for the Year ended December 31, 2018 filed on April 30, 2019 for this
comparison.
B. LIQUIDITY AND CAPITAL RESOURCES
To date, we have financed our operations through income generated by operations, proceeds from our public
offerings in 1991 (approximately $8.5 million), 1996 (approximately $5.0 million), 2000 (approximately $79.6
million) and 2014 (approximately $54.7 million), private equity investments in 1998 (approximately $12.2 million),
2010 (approximately $20.3 million) and 2018 (approximately $34.6 million), loans 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, long-term loans and borrowings under available credit facilities.
In November 2016, we obtained a NIS 120 million loan linked to the New Israel Shekel from an Israeli financial
institution. We intended to use the proceeds from this loan for our general corporate purposes, which may include
the funding of our working capital needs and the funding of potential acquisitions. The principal amount of the loan
is payable in seven equal annual payments with the final payment due on November 2, 2023 and bears a fixed
interest rate of 2.60% per annum, payable in two semi-annually payments. The loan, which may be prepaid under
certain circumstances (in any event for not less than NIS 5.0 million and thereon for amounts which are a multiple of
NIS 5.0 million), is subject to various financial covenants which mainly consist of the following:
a. Our equity will not be lower than $100 million (one hundred million U.S. Dollars) at all times;.
b. Our cash and cash equivalent and marketable securities available for sales will not be less than $10
million (ten million U.S. Dollars);
c. The ratio of our total financial debts to total assets will not exceed 50%;
d. The ratio of our total financial debts less cash, short-term deposits and short-term marketable securities
to the annual EBITDA will not exceed 3.25 to 1;
e. Cross default, including following an immediate repayment initiated in relation to other financial
indebtedness in an amount that exceeds $5 million;
f.
g.
Suspension of trading of the debentures on the TASE over a period of 60 days, or the delisting of the
debentures from the TASE;
If there is a change in control without consent of the lender (a change of control is deemed to occur if
Formula ceases to be the controlling shareholder of our company, whether directly or indirectly.
Formula will be considered a controlling shareholder for so long as it continues to hold at least 30% of
the means of control of our company (within the meaning of the Israeli Securities Law) and there is no
other person or entity holding a higher percentage. To the extent that Formula holds such controlling
interest jointly with others, it will be deemed to remain our controlling shareholder if it maintains the
highest percentage ownership among such other shareholders);
h. The existence and continuation of a bankruptcy event involving our company, or the liquidation of our
company or writing off of our assets;
i.
There has been a material adverse change in the business of our company compared to the position of
our company shortly before the issuance of the loan and there is a material concern that we will not be
able to pay our obligations under the loan agreement on time; and
j.
Failure to comply with the negative pledge covenant.
54
To date, we are in full compliance with the financial covenants of the loan.
On July 12, 2018, we issued 4,268,293 ordinary shares at a price of $8.20 per share for a total of $34.6 million net of
issuance expenses. The shares were issued to Israeli institutional investors and to our controlling shareholder,
Formula Systems (1985) Ltd.
As of December 31, 2019, we had $95.5 million in cash and cash equivalents and available-for-sale marketable
securities, with net working capital of approximately $138.2 million and long term debts to banks and others of
approximately $15.5 million compared to $113.9 million in cash and cash equivalents and available-for-sale
marketable securities, with net working capital of $158.3 million and long term debts to banks and others of $19.4
million, as of December 31, 2018.
As of December 31, 2018 and 2019, our long-term and short-term debt amounted to $28.0 million and $22.6 million,
respectively and our redeemable non-controlling interests as of December 31, 2018 and 2019 amounted to $27.2
million and $21.9 million, respectively.
Based on our current operating forecast, we believe that our cash and cash equivalents (including available-for-sale
marketable securities and existing working capital), will be sufficient to meet our cash requirements for working
capital and capital expenditures for at least the next 12 months. We assume that our 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, payments of loans 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 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
2019
Year ended December 31,
2018
(U.S. dollars in thousands)
25,598 $
24,776 $
2017
17,914
20,350
45,948
(15,440)
(36,980)
1,261
(5,211)
(726)
24,050
(19,554)
8,426
(1,872)
11,050
7,594
25,508
(7,316)
(19,414)
1,984
762
Net cash provided by operating activities was $45.9 million for the year ended December 31, 2019, compared to
$24.1 million and $25.5 million for the years ended December 31, 2018 and 2017, respectively.
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Net cash provided by operations in 2019 consisted primarily of $25.6 million of net income adjusted for non-cash
activities, including $14.0 million of depreciation and amortization expenses, $0.1 million of stock compensation
expenses, a $6.5 million decrease in trade receivables, net, a $9.6 million decrease in other long term and short term
accounts receivable and prepaid expenses, a $0.1 million of amortization of marketable securities premium, a $2.9
million increase in deferred revenues, and a $1.9 million increase in value of loans which are denominated in NIS as
a result of the appreciation of the NIS in relation to the U.S. dollar, offset by a $1.9 million change in deferred taxes,
net, a $5.3 million decrease in trade payables, and a $7.7 million decrease in accrued expenses and other accounts
payable.
Net cash provided by operations in 2018 consisted primarily of $24.8 million of net income adjusted for non-cash
activities, including $12.6 million of depreciation and amortization expenses, $0.2 million of stock compensation
expenses, a $2.2 million increase in trade payables, a $0.2 million of amortization of marketable securities premium,
a $1.8 million increase in accrued expenses and other accounts payable, a $0.4 million decrease in deferred
revenues, and a $2.1 million decrease in value of loans which are denominated in NIS as a result of the devaluation
of the NIS in relation to the U.S. dollar, offset by a $0.5 million change in deferred taxes, net, a $4.4 million increase
in in other long term and short term accounts receivable and prepaid expenses, and a $11.4 million increase in trade
receivables, net.
Net cash provided by operations in 2017 consisted primarily of $17.9 million of net income adjusted for non-cash
activities, including $13.6 million of depreciation and amortization expenses, a $0.1 million of stock compensation
expenses, a $3.6 million increase in trade payables, a $0.2 million of amortization of marketable securities premium,
a $4.4 million increase in accrued expenses and other accounts payable, a $1.2 million increase in deferred revenues,
and a $3.2 million increase in value of loans which are denominated in NIS as a result of the appreciation of the NIS
in relation to the U.S. dollar, offset by a $1.1 million change in deferred taxes, net, a $1.8 million increase in in other
long term and short term accounts receivable and prepaid expenses, and a $15.8 million increase in trade
receivables, net.
Net cash used in investing activities was approximately $15.4 million for the year ended December 31, 2019,
compared to net cash used in investing activities of approximately $19.6 million for the year ended December 31,
2018 and net cash used in investing activities of approximately $7.3 million for the year ended December 31, 2017.
Net cash used in investing activities in 2019 is primarily attributable to $10.0 million investment in short-term bank
deposits, $0.7 investment in long-term bank deposits, $22.6 million used in business combinations, $1.4 million
used to purchase property and equipment and $4.1 million of capitalized software development costs, offset by $3.4
million provided by proceeds from maturity of marketable securities.
Net cash used in investing activities in 2018 is primarily attributable to $16.9 million investment in short-term bank
deposits, $0.9 investment in long-term bank deposits, $1.2 million used in business combinations, $0.9 million used
to purchase property and equipment and $3.7 million of capitalized software development costs, offset by $4 million
provided by proceeds from maturity of marketable securities.
Net cash used in investing activities in 2017 is primarily attributable to $5.8 million investment in marketable
securities, $1.8 million paid in connection with business combinations, $1.4 million used primarily to purchase
network equipment and computer hardware, as well as for furniture, office equipment and leasehold improvements,
and $3.8 million of capitalized software development costs, offset by, $1.2 million repayment of short-term loan by
a related-party, and $4.2 million provided by proceeds from maturity of marketable securities.
Net cash used in financing activities was approximately $37.0 million for the year ended December 31, 2019,
primarily attributable to dividend distributions of $15.0 million, dividends paid to non-controlling interests of $0.5
million, dividends paid to redeemable non-controlling interests of $3.4 million, purchase of redeemable non-
controlling interests of $5.6 million, and repayment of short-term and long-term loans of $13.6 million, which were
offset by issuance of $0.1 million of ordinary shares, $0.1 million received from the exercise of employee options,
and short-term and long-term loans received of $0.9 million.
Net cash provided by financing activities was approximately $8.4 million for the year ended December 31, 2018,
primarily attributable to the issuance of $34.6 million of ordinary shares and $0.3 million received from the exercise
of employee options, which were offset by $3.1 million used in business combinations, dividend distributions of
$13.5 million, dividends paid to redeemable non-controlling interests of $2.7 million, decrease in short-term credit
of $0.4 million and repayment of long-term loans of $6.6 million.
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Net cash used in financing activities was approximately $19.4 million for the year ended December 31, 2017,
primarily attributable to dividend distributions of $9.4 million, dividend paid to non-controlling and redeemable
non-controlling interests of $5.9 million, repayment of long-term loans of $8.2 million and $5.1 million used in
business combinations, offset by a $8.5 million long-term loan received and $0.6 million received from the exercise
of employee options.
Dividends
We have paid dividends since September 2012 consistent with our Board of Directors’ dividend policy. On August
2017, our Board of Directors amended our dividend distribution policy, whereas, each year we distribute a dividend
of up to 75% of our annual distributable profits (previously 50%), subject to applicable law. 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.
For information about our dividend policy and distributions, see Item 8A. “Financial Information - Consolidated
Statements and Other Financial Information.”
General
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 currencies other than the U.S. dollar 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.
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 implemented the provisions of Accounting Standards Codification (“ASC”) Topic 606, Revenue from Contracts
with Customers (“ASC 606”). See Note 19 to our financial statements included in this annual report for further
disclosures required under ASC 606.
Revenues are recognized when control of the promised goods or services are transferred to the customers, in an
amount that reflects the consideration that we expect to receive in exchange for those goods or services.
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We determine revenue recognition through the following steps:
● identification of the contract with a customer;
● identification of the performance obligations in the contract;
● determination of the transaction price;
● allocation of the transaction price to the performance obligations in the contract; and
● recognition of revenue when, or as, we satisfy a performance obligation.
Certain of our contracts with customers contain multiple performance obligations. For these contracts, we account
for individual performance obligations separately if they are distinct.
We derive our revenues from licensing the rights to use our software (proprietary and non-proprietary), provision of
related professional services, maintenance and technical support as well as from other software and IT professional
services (either fixed price or based on time and materials). We sell our products primarily through direct sales force
and indirectly through distributors and value added resellers.
Under ASC 606, an entity recognizes revenue when or as it satisfies a performance obligation by transferring
software license or software services to the customer, either at a point in time or over time. We recognize our
revenues from software sales at a point in time upon delivery of a software license. The software license is
considered a distinct performance obligation, as the customer can benefit from the software on its own. Revenues
from contracts that involve significant customization to customer-specific specifications are performance obligations
the we generally account for as performance obligations satisfied over time. The underlying deliverable is owned
and controlled by the customer and does not create an asset with an alternative use to us. We recognize revenue of
such contracts over time using cost inputs, which recognize revenue and gross profit as work is performed based on
a ratio between actual costs incurred compared to the total estimated costs for the contract, to measure progress
toward completion of its performance obligations, which is similar to the method prior to the adoption of ASC 606.
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, 2017,
2018 and 2019, no material estimated losses were identified. In addition, we provide professional services that do
not involve significant customization to customer-specific specifications. For contracts that do not involve
significant customization to customer-specific specifications (typically staffing or consulting services) revenue is
recognized as the services are performed, either on a straight-line basis or based on the hours of services that were
provided to the customer, in accordance with the terms of the contracts.
Our revenues from post contract 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 consider the post contract support performance
obligation as a distinct performance obligation that is satisfied over time, and recognized on a straight-line basis
over the contractual period.
Revenue from professional services both related to software and IT professional services businesses consists of
either fixed price or Time and Materials (T&M), and are considered performance obligations that are satisfied over
time, and revenues are recognized as the services are provided.
The transaction price is allocated to the separate performance obligations on a relative standalone selling price basis.
Standalone selling prices of software license are estimated using the residual approach, due to the lack of selling
software licenses on a standalone basis, or the fact Company sells the license to different customers for a broad
range of amounts. Standalone selling prices of services are determined by considering several external and internal
factors including, but not limited to, transactions where the specific performance obligation is sold separately.
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.
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Deferred revenues include unearned amounts received under maintenance and support (mainly) and amounts
received from customers for which revenues have not yet been recognized.
Revenue from third-party sales is recorded at a gross or net amount according to certain indicators. The application
of these indicators for gross and net reporting of revenue depends on the relative facts and circumstances of each
sale and requires significant judgment.
We pay commissions to sales and marketing and certain management personnel based on their attainment of certain
predetermined sales or profit goals. Sales commissions are considered incremental costs of obtaining a contract with
a customer and are deferred and amortized. We capitalize and amortize incremental costs of obtaining a contract,
such as certain sales commission costs, on a systematic basis that is consistent with the transfer to the customer of
the performance obligations to which the asset relates. We generally expense sales commissions as they are incurred
when the amortization period would have been less than one year. In addition, generally, sales commission which
are paid upon contract renewal are commensurate with the initial commissions as the renewal amounts are
substantially identical to the initial commission costs. During the year ended December 31, 2019, no costs were
capitalized.
We do not assess whether a contract has a significant financing component if the expectation at contract inception is
such that the period between payment by the customer and the transfer of the promised goods or services to the
customer will be one year or less.
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.
ASC 985-20-35 requires that a product be amortized when the product is available for general release to customers.
We consider a product to be available for general release to customers when we complete the internal validation of
the product that is necessary to establish that the product meets its design specifications including functions,
features, and technical performance requirements. Internal validation includes the completion of coding,
documentation and testing that ensure bugs are reduced to a minimum. The internal validation of the product takes
place a few weeks before the product is made available to the market. In certain instances, we enter into a short pre-
release stage, during which the product is made available to a selected number of customers as a beta program for
their own review and familiarization. Subsequently, the release is made generally available to customers from our
download area. Once a product is considered available for general release to customers, the capitalization of costs
ceases and amortization of such costs to “cost of sales” begins.
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 (approximately 5 years, due to their high rates of acceptance, the
continued reliance on these products by existing customers, and the demand for such products from prospective
customers, all of which validate our expectations) which provides greater amortization expense compared to the
revenue-curve method.
We assess the recoverability of these intangible assets on a regular basis by assessing the net realizable value of
these intangible assets based on the estimated future gross revenues from each product reduced by the estimated
future costs of completing and disposing of it, including the estimated costs of performing maintenance and
customer support over its remaining economical useful life using internally generated projections of future revenues
generated by the products, cost of completion of products and cost of delivery to customers over its remaining
economical useful life. During the years ended December 31, 2017, 2018 and 2019, no such unrecoverable amounts
were identified.
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Research and development costs incurred in the process of developing product enhancements are generally charged
to expenses as incurred.
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 any excess of the fair value of net assets acquired over purchase price and any subsequent changes
in estimated contingencies 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.
We make estimates of fair value based upon assumptions and judgments a marketplace participant would consider
and which we believe 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.
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.
During the years ended December 31, 2017, 2018 and 2019 we recorded $0.3 million, $(0.1) million and $0.3
million, with respect to changes in the fair value of contingent consideration liability, respectively.
Goodwill
As a result of our acquisitions, our goodwill represents the excess of the consideration paid or transferred plus the
fair value of contingent consideration and any non-controlling interest in the acquiree at the acquisition date over the
fair values of the identifiable net 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, 2019,
we operate in four reporting units within its operating segments.
ASC 350 allows an entity to first assess qualitative factors to determine whether it is necessary to perform the two-
step quantitative goodwill impairment test. If the qualitative assessment does not result in a more likely than not
indication of impairment, no further impairment testing is required. If it does result in a more likely than not
indication of impairment, the two-step impairment test is performed. Alternatively, ASC 350 permits an entity to
bypass the qualitative assessment for any reporting unit and proceed directly to performing the first step of the
goodwill impairment test.
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The provisions of ASC 350 require that the quantitative two-step impairment test will be performed on goodwill at
the level of the reporting units. In the first step, or “Step one”, we compare the fair value of each reporting unit to its
carrying value. If the fair value exceeds the carrying value of the net assets, goodwill is considered not impaired, and
we are not required to perform further testing. If the carrying value of the net assets exceeds the fair value, then we
must perform the second step, or “Step two”, of the impairment test in order to determine the implied fair value of
goodwill. To determine the fair value used in Step one, we use discounted cash flows. If and when we are required
to perform a Step two analysis, determining the fair value of its net assets and its off-balance sheet intangibles, then
we would be required to make judgments that involve the use of significant estimates and assumptions.
We determine the fair value of each reporting unit by using the income approach, which utilizes a discounted cash
flow model, as it believes that this approach best approximates the reporting unit’s fair value. Judgments and
assumptions related to revenue, operating income, future short-term and long-term growth rates, weighted average
cost of capital, interest, capital expenditures, cash flows, and market conditions are inherent in developing the
discounted cash flow model. We consider 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,
we may be required to record impairment charges for its goodwill.
We performed annual impairment tests during the fourth quarter in each of the years ended December 31, 2017,
2018 and 2019 and did not identify any impairment losses. See Note 9 to our financial statements included in this
annual report for further disclosures required under ASC 350.
Impairment of long-lived assets, right of use assets and intangible assets subject to amortization
We review our long-lived assets to be held or used, including right of use assets and intangible assets that are subject
to amortization 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.
As required by ASC 820, “Fair Value Measurements and disclosures” we apply assumptions, judgments and
estimates that marketplace participants would consider in determining the fair value of long-lived assets (or asset
groups).
Intangible assets with finite lives are comprised of distribution rights, acquired technology, 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 1 and 15 years based on the customer relationships identified.
During the years ended December 31, 2017, 2018 and 2019, no impairment indicators were identified.
Marketable Securities
We account for all our investments in marketable securities in accordance with ASC 320 “Investments – Debt and
Equity Securities,” or ASC 320. Our marketable securities consist solely 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. Other debt securities are held as trading
securities and are measured at fair value through profit or loss.
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.
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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 in the value of marketable securities during the years ended December 31, 2017,
2018 and 2019.
Stock-based Compensation
We account for stock-based compensation in accordance with ASC 718 “Compensation – Stock Compensation,” or
ASC 718 which 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 such as volatility, dividend yield rate, and risk-free interest rate and
also allows for the use of dynamic assumptions and considers the contractual term of the option, the probability that
the option will be exercised prior to the end of its contractual life, and the probability of termination or retirement of
the option holder in computing the value of the option.
The fair value of each option granted using the Binomial model, was estimated on the date of grant with the
following assumptions: expected volatility was 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 was based on the yield from U.S. Treasury zero-coupon
bonds with an equivalent term to the contractual term of the options. The expected term of options granted was
derived from the output of the option valuation model and represented the period of time that options granted were
expected to be outstanding. Estimated forfeitures were based on actual historical pre-vesting forfeitures. Since
dividend payments are applied to reduce the exercise price of the option, the effect of the dividend protection was
reflected by using an expected dividend assumption of zero.
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.
During the years ended December 31, 2017, 2018 and 2019, we recognized stock-based compensation expense
related to employee stock options in the amount of $0.1 million, $0.2 million, and $0.1 million, respectively
No grants were made to employees or directors in 2017 or in 2019.
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.
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Principles of Consolidation
The consolidated financial statements include the accounts of the Company and its 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 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.”
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.
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Income Tax
We account for income taxes in accordance with ASC 740, “Income Taxes,” or ASC 740. 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 non-current.
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.
Our 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 tax rates.
Neither Israeli income taxes, foreign withholding taxes nor deferred income taxes were provided in relation to
undistributed earnings of the non-Israeli subsidiaries. This is because we intend to permanently reinvest
undistributed earnings in the foreign subsidiaries in which those earnings arose. If these earnings were distributed in
the form of dividends or otherwise, we would be subject to additional Israeli income taxes (subject to an adjustment
for foreign tax credits) and non-Israeli withholding taxes.
The amount of cash and cash equivalents that are currently held outside of Israel that would be subject to income
taxes if distributed as dividends is $12.4 million. However, a determination of the amount of the unrecognized
deferred tax liability for temporary difference related to those undistributed earnings of foreign subsidiaries is not
practicable due to the complexity of the structure of our group of subsidiaries for tax purposes and the difficulty of
projecting the amount of future tax liability.
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.
Recently Issued Accounting Standards
For a description of recently issued and recently adopted accounting standards, see Note 2 to our consolidated
financial statements appearing elsewhere in this annual report.
C.
RESEARCH AND DEVELOPMENT
Our research and development and support personnel work closely with our customers, our prospective customers
and relevant market analysts to determine our requirements and to design enhancements and new releases to meet
market needs. We periodically release enhancements and upgrades to our core products. In the years ended
December 31, 2019, 2018 and 2017, we invested $12.3 million, $9.4 million and $10.7 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, 2019, we employed 212 employees in research and development activities, of which 80 persons
were located in Israel, 111 persons in India, 15 persons in Russia, 5 persons in Japan (when measured on a full time
basis) and 1 person in the US. 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.”
64
D.
TREND INFORMATION
For information see discussion in Item 4. “Information on the Company-Business Overview-Industry Background
and Trends” and Item 5. “Operating and Financial Review and Prospects - Results of Operations.”
E.
OFF-BALANCE SHEET ARRANGEMENTS
We are not a party to any off-balance sheet arrangements. In addition, we have no unconsolidated special purpose
financing or partnership entities that are likely to create material contingent obligations.
F.
TABULAR DISCLOSURE OF CONTRACTUAL OBLIGATIONS
The following table summarizes our minimum contractual obligations as of December 31, 2019 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) **
Short and Long term debt
Total contractual obligations
Payments due by period
less than
1 year
1-3 years
over
3 years
Total
$18,464,000 $ 3,198,000 $ 4,744,000 $10,522,000
-
14,677,000 3,638,000 11,039,000
-
-
-
4,770,000
2,175,000
-
-
-
22,619,000 7,077,000 10,582,000 4,960,000
$62,705,000 $13,913,000 $26,365,000 $15,482,000
*
Severance payments relate to accrued severance obligations and notice obligations mainly to our Israeli
employees as required under Israeli labor law or personal employment agreements. We are legally required to
pay severance upon certain circumstances, primarily upon termination of employment by our company,
retirement or death of the respective employee. Our liability for all of our Israeli employees is fully provided for
by monthly deposits with insurance policies and by an accrual.
** 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.
65
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
Sagi Schliesser (1)
Ron Ettlinger (1)
Naamit Salomon
Avi Zakay(1)
Asaf Berenstin
Amit Birk
Arik Kilman
Yakov Tsaroya
Uzi Yaari
Arik Faingold
Yuval Baruch
Hanan Shahaf
Yuval Lavi
Age
52
48
53
55
41
42
49
67
50
46
43
53
68
51
Position
Chief Executive Officer and Director
External Director
External Director
Director
Director
Chief Financial Officer
Vice President, Mergers and Acquisitions, General Counsel and Corporate
Secretary
Chairman, Software Solutions division
Chief Executive Officer of Coretech Consulting Services and Fusion Solutions
Chief Executivee Officer of Complete Business Solutions
President, Integration Solutions division
Chief Executive Officer of Hermes Logistics
Chief Executive Officer of Roshtov Software Industries Ltd
Vice President Technology and innovation of Software Solutions division
(1) Member of our Audit and Compensation Committees
Messrs. Guy Bernstein, Avi Zakay and Ms. Naamit Salomon were re-elected as directors at our 2019 annual general
meeting of shareholders to serve as directors until our 2020 annual general meeting of shareholders.
Messrs. Sagi Schliesser and Ron Ettlinger are serving as external directors pursuant to the provisions of the Israeli
Companies Law for their second three-year terms.
On October 2019, Mr. Udi Ertel, our former President of the Software Solutions division, ceased to serve in such
capacity.
Mr. Guy Bernstein and Mr. Asaf Berenstin are first cousins. Mr. Arik Faingold is the brother of Mr. Idan Faingold
who is an executive officer of the Comm-IT Group and the two brothers are the owners of the 13.6% minority
interest in that company. Other than such relationships, 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 and 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 senior manager at Kost Forer Gabbay & Kasierer, a member of Ernst & Young
Global, 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.
66
Sagi Schliesser has served as an external director of our company since November 2015 and is a member of our
audit committee. Mr. Schliesser has been the co-founder and chief executive officer of TabTale, a creator of
innovative games, interactive books and educational apps since 2010. Prior to founding TabTale, Mr. Schliesser was
the CTO of Sapiens International Corporation (NASDAQ and TASE: SPNS), managing Sapiens Technologies.
Previously Mr. Schliesser served for seven years as VP of R&D and CTO of IDIT Technologies Ltd., a global
provider of insurance software solutions. Before that Mr. Schliesser was one of the founders of WWCOM, a B2B
enablement software startup. Mr. Schliesser holds a B.Sc. degree with honors in Computer Science and Psychology
from Tel Aviv University, as well as a Master’s degree in Computer Science from the Interdisciplinary Center in
Herzliya and an M.B.A. degree with honors in Business Psychology from Hamaslool Ha’akademi Shel Hamichlala
Leminhal.
Ron Ettlinger has served as a director of our company since December 2014 and is a member of our audit
committee. Mr. Ettlinger is the founder and has been the chief executive officer of “Nippon Europe Israel Ltd.,” a
leading provider of car multimedia advanced systems, since October 2000. Prior to that, Mr. Ettlinger was the owner
and general manager of Universal Ltd., a car service. Mr. Ettlinger is the founder and since July 2014 has served as
chief executive officer of Nippon Lights Ltd., a leading provider of LED lights and panels. Mr. Ettlinger holds a
B.A. degree in Business, with a major in finance and marketing from Tel-Aviv College of Management.
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 also 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 LL.M. degree from Bar-Ilan University.
Avi Zakay has served as director of our company since February 2018. Mr. Zakay has been the sales manager of the
Volkswagen dealership and showroom in Rishon Letzion (Champion Motors) since 2014. In 2013, he served as the
sales manager of the showroom of Mitsubishi Motors in Netanya, and from 2007 to 2013, he served as a sales
manager of BMW and Mercedes-Benz in Tel Aviv. Mr. Zakay holds a B.A. degree in Business Administration and
studied for an M.B.A. degree, both from Michlala Le-minhal College in Tel-Aviv.
Asaf Berenstin has served as our chief financial officer since April 2010. In November 2011, Mr. Berenstin was
appointed as Chief Financial Officer of our parent company Formula Systems (1985) Ltd. 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. Mr. Berenstin also serves as a director of Michpal Micro Computers (1983) Ltd., a director at TSG IT
Advanced Systems Ltd., and is a director at InSync staffing, all of them are subsidiaries of Formula Systems. 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 PriceWaterhouseCoopers. Mr. Berenstin holds a B.A. degree in Accounting
and Economics and an M.B.A. degree, both from Tel Aviv University, and is a certified public accountant (CPA) in
Israel.
Yuval Lavi has served as Vice President Technology and Innovation since 2017. Prior to that and from April 2013,
Mr. Lavi served as vice president, Corporate Professional Services & Support,. Mr. Lavi joined our company in
2013,. Before joining our company, Mr. Lavi served for 18 years as the Chief Technology Officer and joint founder
of Kopel Reem Ltd.
Amit Birk has served as our vice president, mergers and acquisitions, general counsel and corporate secretary since
May 1999. Since November 2019, Mr Birk also serves as Chief Executive Officer of Unique Software Industries Ltd
(a subsidiary of Formula Systems). 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 LL.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.
67
Arik Kilman has served as chairman of our Software Solutions division since January 2017 and president of
AppBuilder Software Solutions division since January 2012, following our acquisition of AppBuilder Solutions Ltd.
at which time he was named Chief Executive Officer of AppBuilder. Prior to joining our company, Mr. Kilman
served as Chief Executive Officer of BluePhoenix Solutions Ltd., the former parent of AppBuilder from May 2003
to January 2009 and from April 2010 to December 2011. Mr. Kilman holds a B.A. degree in Economics and
Computer Science from New York City College of Technology.
Yakov Tsaroya has served as chief executive officer of our subsidiary, CoreTech Consulting Group LLC, since
2006. Mr. Tsaroya has also served as Chief Executive Officer of Fusion Solution LLC and Xsell Resources Inc.
since our acquisition of these companies in 2010. Mr. Tsaroya holds a B.A. degree in Accounting and Finance from
the College of Administration in Israel and is a certified public accountant (CPA) in Israel.
Uzi Yaari joined Complete Business Solutions as CEO in 2015 after spending seven years as CEO at leading ERP
implementer, Intentia Advanced Solutions. Having served in various positions during his 15 years at Intentia, Uzi
brings a rich history of ERP experience and expertise in various ERP ecosystems and in various countries having
lead many ERP projects both in the country and abroad. Uzi is an industrial engineer.
Arik Faingold has served as president of our Integration Solutions division since July 2012. Mr. Faingold has served
as chairman of Comm-IT Group since 2009. Mr. Faingold was General Manager of Open TV Israel, part of OpenTV
Global, from 2003 to 2009. Mr. Faingold served as Co-founder and CTO of Betting Corp from 1999 to 2003. Mr.
Faingold holds a B.A. degree in Computer Science from the Interdisciplinary Center in Herzliya and an M.B.A.
from Tel Aviv University.
Yuval Baruch has served as an officer of our company since his appointment in September 2012 as the chief
executive officer of Hermes Logistics Technologies (HLT). Mr. Baruch has also served as the chief executive
officer of Pilat HR solutions since April 2013. Mr. Baruch was chief executive officer of J.R. Holdings &
Development from November 2007 to January 2012. Mr. Baruch has served as an external director of Matrix IT, a
publicly traded company in Israel, since 2011. Between 2004 and 2008 Mr. Baruch launched, managed and divested
a chain of fitness centers in Israel. Mr. Baruch holds a B.A. degree in Marketing and Finance from The College of
Management in Israel and an M.B.A. degree from the Stanford Graduate School of Business.
Hanan Shahaf became an officer of our company in July 2016, as part of the Roshtov Software Industries Ltd.
acquisition. Mr. Shahaf was one of Roshtov’s founders in 1989 and has served as its Chief Executive Officer and a
director since its inception. He also served as a director and chairman on several private companies’ boards. Mr.
Shahaf holds a B.sc in Industrial engineering and Management and an M.B.A. from Northwestern University
(Kellogg School of Management) and Tel Aviv university (Recanati Graduate School of BA).
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, 2019.
All directors and executive officers as a group (15 persons)
Salaries,
fees,
commissions
and bonuses
$ 4,316,218 $
Pension,
retirement
and similar
benefits
74,804
For so long as we qualify as a foreign private issuer, we are not required to comply with the proxy rules applicable
to U.S. domestic companies, including the requirement to disclose information concerning the amount and type of
compensation paid to our chief executive officer, chief financial officer and the three other most highly compensated
executive officers, rather than on an aggregate basis. Nevertheless, a recent amendment to the regulations
promulgated under the Israeli Companies Law requires us to disclose the annual compensation of our five most
highly compensated officers on an individual basis, rather than on an aggregate basis, as was previously permitted
for Israeli public companies listed overseas. Under the Companies Law regulations, this disclosure is required to be
included in the annual proxy statement for our annual meeting of shareholders each year, which we furnish to the
SEC under cover of a Report of Foreign Private Issuer on Form 6-K. Because of that disclosure requirement under
Israeli law, we are also including such information in this annual report, pursuant to the disclosure requirements of
Form 20-F.
68
The table below reflects the compensation granted to our five most highly compensated officers during or with
respect to the year ended December 31, 2019. All amounts reported in the table reflect the cost to our company, as
recognized in our financial statements for the year ended December 31, 2019.
2019 Summary Compensation Table
Name and Position
Arik Kilman, Chairman, Software Group
Yakov Tsaroya, President, Coretech
Salary Bonus (1)
403,984 320,000
Equity Based
Compensation(2)
262,508
All Other
Compensation(3) Total
Consulting Group LLC
275,000 535,000
Arik Faingold, President, Integration
Solutions division
Udi Ertel, President, Software Division
Hanan Shahaf, Chief Executive Officer of
Roshtov Software Industries Ltd
345,709 181,672
-
353,486
287,738
-
-
-
-
-
- 986,492
9,000 819,000
- 527,381
- 353,486
13,340 301,078
(1) Amounts reported in this column represent annual incentive bonuses granted to the covered executives based on
performance-metric based formulas set forth in their respective employment agreements.
(2) Amounts reported in this column represent the grant date fair value computed in accordance with accounting
guidance for share-based compensation.
(3) Amounts reported in this column include personal benefits and perquisites, including those mandated by
applicable law. Such benefits and perquisites may include, to the extent applicable to the respective covered
executive, payments, contributions and/or allocations for savings funds (e.g., Managers Life Insurance Policy),
education funds (referred to in Hebrew as “keren hishtalmut”), pension, severance, vacation, car or car
allowance, medical insurances and benefits, risk insurance (e.g., life insurance or work disability insurance),
telephone expense reimbursement, convalescence or recreation pay, relocation reimbursement, payments for
social security, and other personal benefits and perquisites consistent with our company’s guidelines. All
amounts reported in the table represent incremental cost to our company.
During the year ended December 31, 2019, we paid to each of our outside and independent directors an annual fee
of $20,005 and a per-meeting attendance fee of $750. 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, 2019, our directors and executive officers as a group, then consisting of 14 persons, held
options to purchase an aggregate of 100,000 ordinary shares, at exercise prices ranging from $1.28 to $3.02 per
share. Of such options, options to purchase 40,000 ordinary shares expire in 2020 and options to purchase 60,000
ordinary shares expire in 2021. All such options were granted under our 2007 Incentive Compensation Plan. See
Item 6E “Directors, Senior Management and Employees - Share Ownership - Stock-Based Compensation Plans.”
69
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.
Election of Directors
Our articles of association provide for a board of directors consisting of no less than three and no more than eleven
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.
External and Independent Directors
External Directors. The Israeli Companies Law requires companies organized 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 is a relative of the controlling shareholder of the
company or 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 the controlling shareholder of the company or the controlling shareholder’s relative
or any entity controlled by the company or by the controlling shareholder of the company. If the company does not
have a controlling shareholder or a person or entity which holds 25% of the total voting rights of the company, an
external director may also not have an affiliation with chairman of the board, the chief executive officer, beneficial
owner of 5% or more of the issued shares or the voting power of the company and the most senior executive officer
of the company in the finance field. The term “affiliation” includes an employment relationship, a business or
professional relationship maintained on a regular basis (other than negligible relationships), 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. In addition, a director in a company may not be appointed as an external director in another
company if at that time, a director of the other company serves as an external director in the first company.
Moreover, a person may not be appointed as an external director, if he or she is employed by the Israeli Securities
Authority or by Tel-Aviv Stock Exchange. If, at the time external directors are to be appointed, all current members
of the board of directors which are not the controlling shareholders of the company or their relatives are of the same
gender, then at least one external director must be of the other gender.
70
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.
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 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 (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. However, in accordance with the Israeli Companies Law regulations,
external directors of a public company whose shares are traded on the NASDAQ may be appointed for additional
periods of three-year each provided that the audit committee and the board of directors have approved that, given the
external director’s expertise and contribution to the board and committee meetings, such appointment is for the
company’s benefit and provided further that the nomination to additional periods of three-year terms is approved
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 of the votes actually cast with respect to such proposal and all of the following
conditions are met: (a) the majority of votes does not include the votes of the controlling shareholder or votes of
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 and (b) the total votes cast in favor of such
proposal by the non-controlling shareholders or those shareholders who do not have a personal interest in the
approval of the nomination except for a personal interest that is not as a result of the shareholder’s connections with
the controlling shareholder exceed 2% of all the voting power in the company.
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 that may exercise a responsibility of the board of directors must include at
least one external director. 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 years from termination of office, we may not engage an external director, or his or her spouse
or child 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.
71
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 external 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 external 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. We have not included such a provision in our
articles of association. 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.
Our board of directors has determined that Mr. Sagi Schliesser and Mr. Ron Ettlinger 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. Avi Zakay qualifies as an independent director
under the SEC, NASDAQ and Israeli Companies Law requirements.
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. The audit committee is
also required to determine whether any action is material and whether any transaction is an extraordinary transaction
or non-negligible transaction, for the purpose of approving such action or transaction as required by the Israeli
Companies 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 is currently composed of Messrs. Ettlinger, Schliesser and Zakay, each of whom satisfies the
respective “independence” requirements of the SEC and NASDAQ. We also comply with Israeli law requirements
for audit committee members. Our board of directors has determined that Mr. Ettlinger qualifies as a financial
expert. The audit committee meets at least once each quarter.
Compensation Committee. In accordance with the Israeli Companies Law, we have 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 in
accordance with the provisions of the Israeli companies Law. 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 the Israeli Companies Law, a compensation committee must consist of no less than three members, including
all of the external directors (who must constitute a majority of the members of the committee), and the remainder of
the members of the compensation committee must be directors whose terms of service and employment were
determined pursuant to the applicable regulations. The same restrictions on the actions and membership in the audit
committee as discussed above under “Audit Committee,” including the requirement that an external director serve as
the chairman of the committee and the list of persons who may not serve on the committee, also apply to the
compensation committee. We have established a compensation committee that is currently composed of Messrs.
Ettlinger, Schliesser and Zakay.
72
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. Alkalay Monarov 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 chief executive officer,
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 a director 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.
73
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 or the
compensation committee and by the board of directors, and under certain circumstances shareholder approval may
also be required, provided, however, that such transactions are for the benefit of the company. Subject to certain
exceptions. a person who has a personal interest in the approval of a transaction by the audit committee or the
Board, may not be present and take part in the voting. An officer or a director who has a personal interest, may be
present at the meeting for the purpose of presenting the transaction if the chairman of the audit committee or the
Board, as relevant, has determined that the presence of the officer or director is required. A director may be present
and vote at the meetings of the audit committee and Board if the majority of the directors have a personal interest in
the approval of the transaction. In such case, the transaction also requires approval by the general meeting. 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 Companies Law provides for certain procedural constraints on a public company entering into a transaction in
which a controlling shareholder and other interested parties have a personal interest. More specifically, Section 275
of the Companies Law provides that an extraordinary transaction (which is defined as a transaction that is either not
in a company’s ordinary course of business; or a transaction that is not undertaken in market conditions; or a
transaction that is likely to substantially influence the profitability of a company, its property or liabilities) between
a public company and its controlling shareholder, or an extraordinary transaction of a public company with a third
party in which the controlling shareholder has a personal interest, including a transaction of a public company with a
controlling shareholder, directly or indirectly, for the receipt of services therefrom (and including a transaction
concerning the compensation arrangement of a controlling shareholder in its capacity as an employee or office
holder of the company) (a “Controlling Party Transaction”), requires the approval of the audit committee (and with
respect to a transaction concerning the compensation arrangement – the compensation committee), the board of
directors and the general meeting of shareholders, provided however that the majority approving the transaction
shall include at least one half of the votes of shareholders who do not have a personal interest in the transaction and
are participating in the vote, or that the aggregate number of votes against the approval of the transaction, voted by
shareholders who do not have such personal interest do not exceed 2% of the entire voting rights in the company.
Section 275 of the Companies Law further provides that if the term of the Controlling Party Transaction extends
beyond three years, the above approvals are required once every three years. However, if such transaction does not
relate to a compensation arrangement, then the audit committee may approve the transaction for a longer duration,
provided that the audit committee determines that such duration is reasonable under the circumstances. In
accordance with the Israeli Companies law the audit committee is responsible to determine that Controlling Party
Transactions shall be subject to a competitive procedure or other similar procedure before such transactions are
approved.
During the year ended December 31, 2019, we sold approximately $3.0 million of services to affiliated companies
of Formula Systems. In 2019, we also purchased from those affiliated companies approximately $0.2 million of
hardware, software and services. We also provided Formula Systems cash management, accounting and
bookkeeping services for total consideration of $0.2 million.
Approval Process of Terms of Service and Employment of Office Holders
Under the Israeli Companies Law, 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
In the event the transaction is in accordance with the compensation policy of the company –
approval (in the following order) of: (i) compensation committee and (ii) board of directors.
74
o
In the event the transaction is not in accordance with the compensation policy of the company –
approval, in special cases (in the following order), by the (i) compensation committee, (ii) board of
directors and (iii) company’s shareholders, by a simple majority, provided that such majority shall
include (i) at least one half of the votes of shareholders who are participating in the vote and are
not controlling shareholders or do not have a personal interest regarding the approval of the
compensation policy, or (ii) the aggregate number of the opposing votes, voted by shareholders
who do not have such personal interest or are not controlling shareholders, do not exceed two
percent (2%) of the entire voting rights in the company (the “Special Majority”). Under these
circumstances, the compensation committee and board of directors are required to approve the
transaction based on certain considerations and include certain instructions in connection with 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 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.
The Israeli Companies Law 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
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.
o
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).
In accordance with the Israeli Companies Law, the audit committee is responsible to determine that Controlling
Party Transactions shall be subject to a competitive procedure or other similar procedure before such transactions
are approved.
75
Provisions Restricting Change in Control of Our Company
Tender Offer. In certain circumstances, 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 25% or more of the voting rights in the
company (unless there is already a 25% or greater shareholder of the company) or more than 45% of the voting
rights in the company (unless there is already a shareholder that holds more than 45% of the voting rights in the
company). If, as a result of an acquisition, the acquirer would hold more than 90% of a company’s shares or voting
rights, the acquisition must be made by means of a tender offer for all of the shares. A purchase by a tender offer is
subject to additional requirements as specified in the Israeli Law and regulations promulgated thereunder.
Merger. The Israeli Companies Law generally requires that a merger be approved by the board of directors and by
the general meeting of the shareholders. Upon the request of any creditor of a merging company, a court may delay
or prevent the merger if it concludes that there is a reasonable concern that, as a result of the merger, the surviving
company will be unable to satisfy its obligations. In addition, a merger may generally not be completed unless at
least (i) 50 days have passed since the filing of the merger proposal with the Israeli Registrar of Companies, and (ii)
30 days have passed since the merger was approved by the shareholders of each of the merging companies. The
approval of merger by the company is also subject to additional approval requirements as specified in the Israeli
Companies Law and regulations promulgated thereunder.
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. Most
recently, in November 2011 our shareholders approved a 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 an Israeli company may not exculpate an office holder from liability for a
breach of the duty of loyalty of the office holder. The company may, however, approve an office holder’s act
performed in breach of the duty of loyalty, provided that the office holder acted in good faith, the act or its approval
does not harm the company and the office holder discloses the nature of his or her personal interest in the act and all
material facts and documents a reasonable time before discussion of the approval. An Israeli company may
exculpate an office holder in advance from liability to the company, in whole or in part, for a breach of duty of care,
but only if a provision authorizing such exculpation is inserted in its articles of association. An Israeli company may
also not exculpate a director for liability arising out of a prohibited dividend or distribution to shareholders.
The Israeli Companies Law provides that a company may, if permitted by its articles of association, indemnify an
office holder for acts or omissions performed by the office holder in such capacity for:
● A financial liability imposed on the office holder in favor of another person by any judgment, including a
settlement or an arbitrator’s award approved by a court;
● Reasonable litigation expenses, including attorney’s fees, actually incurred by the office holder as a result
of an investigation or proceeding instituted against him or her by a competent authority, provided that such
investigation or proceeding concluded without the filing of an indictment against the office holder or the
imposition of any financial liability instead 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 instead of
criminal proceedings with respect to a criminal offense that does not require proof of criminal intent;
76
● 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; and
● Expenses, including reasonable litigation expenses and legal fees, incurred by such office holder as a result
of a proceeding instituted against him in relation to (A) infringements that may result in imposition of
financial sanction pursuant to the provisions of Chapter H’3 under the Israeli Securities Law or (B)
administrative infringements pursuant to the provisions of Chapter H’4 under the Israeli Securities Law or
(C) infringements pursuant to the provisions of Chapter I’1 under the Israeli Securities Law; and (e)
payments to an injured party of infringement under Section 52ND(a)(1)(a) of the Israeli Securities Law.
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.
Subject to the provisions of the Israeli Companies Law and the Israeli Securities Law, a company may also enter
into a contract to insure an office holder for (A) expenses, including reasonable litigation expenses and legal fees,
incurred by the office holder as a result of a proceeding instituted against such office holder in relation to (1)
infringements that may impose financial sanction pursuant to the provisions of Chapter H’3 under the Israeli
Securities Law or (2) administrative infringements pursuant to the provisions of Chapter H’4 under the Israeli
Securities Law or (3) infringements pursuant to the provisions of Chapter I’1 under the Israeli Securities Law and
(B) payments made to the injured parties of such infringement under Section 52ND(a)(1)(a) of the Israeli Securities
Law.
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;
77
● 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, civil fine, financial sanction 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 compensation 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.
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.
The current coverage of our directors’ and officers’ liability insurance policy is up to a maximum of $40.0 million
both per incident and in the aggregate, plus $10.0 million of Side A DIC coverage for which we paid in 2019 an
annual premium of approximately $67,000. We expect that our annual premium in 2020 will increase to
approximately $425,500 in 2020.
D.
EMPLOYEES
The following table presents the number of our employees categorized by geographic location as of December 31,
2017, 2018 and 2019:
Year ended December 31,
2018
2017
2019
Israel
Asia
North America
South Africa
Europe
Total
1,133
186
1,194
14
115
2,642
999
164
933
14
116
2,226
921
139
861
16
115
2,052
The following table presents the number of our employees categorized by activity as of December 31, 2017, 2018
and 2019:
Year ended December 31,
2018
2017
2019
Technical support and consulting
Research and development
Marketing and sales
Operations and administrations
Total
2,126
212
158
146
2,642
1,761
198
140
127
2,226
1,615
181
117
139
2,052
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.
78
E.
SHARE OWNERSHIP
Beneficial Ownership of Executive Officers and Directors
The following table sets forth certain information as of March 31, 2020 regarding the beneficial ownership by each
of our directors and executive officers:
Name
Guy Bernstein
Asaf Berenstin (3)
Ron Ettlinger
Naamit Salomon
Sagi Schliesser
Avi Zakay
Amit Birk (4)
Arik Faingold
Yuval Baruch
Arik Kilman
Yakov Tsaroya(5)
Yuval Lavi
*
Less than 1%
Number of
Ordinary
Shares
Beneficiall
y Owned (1)
150,000
76,450
--
--
--
--
129,062
--
--
36,360
20,000
--
Percentage
of
Ownership
(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 48,977,055 Ordinary Shares issued and outstanding as of March 31, 2020.
(3) Includes 40,000 currently exercisable options granted under our 2007 Stock Option Plan, having an exercise
price ranging from $1.69 to $3.02 per share that expire in 2021 at the latest and 36,450 Ordinary Shares.
(4) Includes 30,000 currently exercisable options granted under our 2007 Stock Option Plan, having an exercise
price of $3.02 per share that expire in 2021 and 99,062 Ordinary Shares.
(5) Includes 20,000 Ordinary Shares.
Stock-Based Compensation Plans
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 or 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.
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In September 2013, our shareholders approved a 1,000,000 share increase in the number of Ordinary Shares
available for issuance under the 2007 Stock Option Plan.
On December 31, 2015 our board of directors increased the amount of Ordinary Shares reserved for issuance by an
additional 250,000 Ordinary Shares and extended the plan by 10 years until August 1, 2027. As of December 31,
2019, an aggregate of 932,500 Ordinary Shares are available for future grants under the Plan.
The 2007 Plan will terminate upon the earliest of: (i) August 31, 2027; (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.
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.
Under the 2007 Plan in the event of any reclassification, recapitalization, merger or consolidation, reorganization,
stock dividend, cash dividend, distribution of subscription rights or other distribution in securities of the Company,
stock split or reverse stock split, combination or exchange of shares, repurchase of shares, or other similar change in
corporate structure, that proportionally apply to all of our Ordinary Shares, we, shall substitute or adjust, as
applicable, the number, class and kind of securities which may be delivered under Section 4.1; the number, class and
kind, and/or price (such as the Option Price of Options) of securities subject to outstanding awards; and other value
determinations applicable to outstanding awards, as determined by our Board of Directors, in order to prevent
dilution or enlargement of participants’ rights under the 2007 Plan; provided, however, that the number of Ordinary
Shares subject to any award shall always be a whole number. The Board of Directors shall also make appropriate
adjustments and modifications, in the terms of any outstanding awards to reflect such changes in our share capital,
including modifications of performance goals and changes in the length of performance periods, if applicable.
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.
During 2019, options to purchase an aggregate of 78,500 Ordinary Shares were exercised under the 2007 Plan at an
average exercise price of $2.47 per share and options to purchase 119,767 Ordinary Shares remained outstanding.
As of December 31, 2019, our executive officers and directors as a group, consisting of 14 persons, held options to
purchase 100,000 Ordinary Shares under the 2007 Plan, having an exercise price ranging from $1.69 to $3.02 per
share.
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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
22,296,354 or 45.52% of our outstanding Ordinary Shares. Formula Systems is controlled by Asseco, a Polish
company listed on the Warsaw Stock Exchange, which holds 25.60% of the Ordinary Shares of Formula Systems.
Guy Bernstein owns 12.89% of the outstanding shares of Formula Systems. In addition, on October 4, 2017 Asseco
entered into a shareholders agreement with Mr. Bernstein, under which agreement Asseco has been g ranted an
irrecoverable proxy to vote an additional 1,971,973 Ordinary Shares of Formula, thereby effectively giving Asseco
beneficial ownership (voting power) over an aggregate of 38.50% of Formula’s outstanding ordinary share.
Therefore, based on the foregoing beneficial ownership by each of Formula and Asseco, each of Formula and
Asseco may be deemed to directly or indirectly (as appropriate) control us.
The following table sets forth as of March 31, 2020 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)
Harel Insurance (4)
Clal Insurance Enterprises Holdings Ltd (5)
Yelin Lapidot (6)
The Phoenix Holdings Ltd (7)
Number of
Ordinary
Shares
Beneficially
Owned(1)
22,296,354
4,564,903
4,144,717
2,972,929
2,224,827
Percentage
of
Ownership
(2)
45.52%
9.32%
8.47%
6.07%
4.54%
(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 48,977,055 Ordinary Shares issued and outstanding as of March 31, 2020.
(3) Asseco owns 25.60% of the outstanding shares of Formula. As such, Asseco may be deemed to be the
beneficial owner of the aggregate 22,296,354 Ordinary Shares held directly by Formula Systems. Guy Bernstein
owns 12.89% of the outstanding shares of Formula Systems. In addition, on October 4, 2017 Asseco entered
into a shareholders agreement with Mr. Bernstein, under which agreement Asseco has been granted an
irrecoverable proxy to vote an additional 1,971,973 Ordinary Shares of Formula, thereby effectively giving
Asseco beneficial ownership (voting power) over an aggregate of 38.50% of Formula’s outstanding ordinary
shares. Therefore, based on the foregoing beneficial ownership by each of Formula and Asseco, each of
Formula and Asseco may be deemed to directly or indirectly (as appropriate) control us. The address of Asseco
is 35-322 Rzeszow, ul. Olchowa 14, Poland.
(4) Based on written notification received from Harel Insurance Investments & Financial Services Ltd on March
31, 2020, subsequent to Amendment No.1 to Schedule 13G filed on January 23 2020. Such Ordinary shares are
held by members of the public through, among others, provident funds and/or mutual funds and/or pension
funds and/or insurance policies and/or exchange traded funds, which are managed by subsidiaries of the
Reporting Person, each of which subsidiaries operates under independent management and makes independent
voting and investment decisions. Harel Insurance Investments & Financial Services Ltd. is an Israeli public
company, with a principal business address at Harel House; 3 Aba Hillel Street; Ramat Gan 52118, Israel.
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(5) Based on Amendment No.2 to Schedule 13G filed on February 10, 2020, by Clal Insurance Enterprises
Holdings Ltd. Of the 4,144,717 Ordinary Shares held as of December 31,2019 and reported by such shareholder
(i) 127,788 Ordinary Shares are beneficially held for its own account; and (ii) 4,016,929 are held for members
of the public through, among others, provident funds and/or pension funds and/or insurance policies, which are
managed by subsidiaries of Clal, which subsidiaries operate under independent management and make
independent voting and investment decisions. Clal Insurance Enterprises Holdings Ltd is an Israeli public
company, with a principal business address at 36 Raul Wallenberg St., Tel Aviv 66180, Israel.
(6) Based on Amendment No.3 to Schedule 13G filed on January 27, 2020. Of the 2,972,929 Ordinary Shares
reported by such shareholder as of December 31, 2019, (i) 1,917,929 Ordinary Shares beneficially owned by
mutual funds managed by Yelin Lapidot Mutual Funds Management Ltd. and (ii) 1,055,000 Ordinary Shares
(representing 2.16% of the total Ordinary Shares outstanding) beneficially owned by provident funds managed
by Yelin Lapidot Provident Funds Management Ltd. The Ordinary Shares beneficially owned by Yelin are held
by provident funds managed by Yelin Lapidot Provident Funds Management Ltd., or Yelin Provident, and/or
mutual funds managed by Yelin Lapidot Mutual Funds Management Ltd., or Yelin Mutual. Each of Yelin
Provident and Yelin Mutual is a wholly-owned subsidiary of Yelin Holdings. Messrs. Dov Yelin and Yair
Lapidot each own 24.38% of the share capital and 25% of the voting rights of Yelin Holdings, and are
responsible for the day-to-day management of Yelin Holdings. The Ordinary Shares beneficially owned are
held for the benefit of the members of the provident funds and the mutual funds. Each of Messrs. Yelin and
Lapidot, Yelin Holdings, Yelin Provident and Yelin Mutual disclaims beneficial ownership of the subject
Ordinary Shares. The address of Yalin is 50 Dizengoff Street, Dizengoff Center, Gate 3, Top Tower, 13th floor,
Tel Aviv 64332, Israel.
(7) Based on Amendment No.3 to Schedule 13G filed on February 18, 2020, by The Phoenix Holdings Ltd. The
filing persons are Itshak Sharon (Tshuva), Delek Group Ltd. and The Phoenix Holdings Ltd. The securities are
beneficially owned by various direct or indirect, majority or wholly-owned subsidiaries of Phoenix Holdings.
The address of Phoenix Holdings is Derech Hashalom 53, Givataim, 53454, Israel.
Significant Changes in the Ownership of Major Shareholders
In July 2018, Formula participated in our private placement (together with other institutional investors) and reported
on July 30, 2018 on Schedule 13D/A that it holds 22,080,468 Ordinary Shares reflecting ownership of 45.2%.
In the past three years, Yelin Lapidot Holdings Management Ltd. jointly with Messrs. Dov Yelin and Yair Lapidot,
filed several Schedules 13G with the SEC reflecting their level of investment in our company. A Schedule 13G filed
with the SEC on January 27, 2020, reflected an ownership of 2,972,929, or 6.08% of our Ordinary Shares.
Based on a Schedule 13G filed on January 29, 2019, Harel Insurance Investments & Financial Services Ltd. held
2,728,908 or 5.58% of our Ordinary Shares. Based on written notification received from Harel Insurance
Investments & Financial Services Ltd on March 31, 2020, subsequent to Amendment No.1 to Schedule 13G filed
filed on January 23, 2020, Harel Insurance Investments & Financial Services Ltd. holds 4,564,903 or 9.32% of our
Ordinary Shares.
In January 2018, Clal first filed a Schedule 13G with the SEC reflecting ownership of 2,276,349 or 5.2% of our
Ordinary Shares. A Schedule 13G filed with the SEC on February 14, 2019, reflected an increase in ownership to
3,630,149, or 7.43% of our Ordinary Shares. A Schedule 13G filed with the SEC on February 10, 2020, reflected an
increase in ownership to 4,144,717, or 8.5% of our Ordinary Shares.
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In the past three years, Phoenix Holdings, filed several Schedules 13G with the SEC reflecting their level of
investment in our company. As indicated in a Schedule 13G filed with the SEC on February 18, 2020, Phoenix
Holdings holds 2,224,827 or 4.5% of our ordinary shares, and as such ceased to be a major shareholder of the
Company.
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 January 1, 2020, there were 55
record holders, of which 44 record holders holding approximately 96.5% 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 96.5% of our outstanding Ordinary Shares as of such date).
B.
RELATED PARTY TRANSACTIONS
For information about related party transactions see “Item 6C. Directors, Senior Management and Employees –
Board Practices - Approval of Related Party Transactions Under Israeli Law.”
C.
INTERESTS OF EXPERTS AND COUNSEL
Not applicable.
ITEM 8.
FINANCIAL INFORMATION
A.
CONSOLIDATED STATEMENTS AND OTHER FINANCIAL INFORMATION
See the consolidated financial statements, including the notes thereto, included in Item 18.
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 September 2016, an Israeli software company, that was previously involved in an arbitration proceeding with us
in 2015 and won damages from us for $2.4 million, filed a lawsuit seeking damages of NIS 34,106,000 against us
and one of our subsidiaries. This lawsuit was filed as part of an arbitration proceeding. In the lawsuit, the software
company claimed that warning letters that we sent to its clients in Israel and abroad, warning those clients against
the possibility that the conversion procedure offered by the software company may amount to an infringement of our
copyrights (the “Warning Letters”), as well as other alleged actions, have caused the software company damages
resulting from loss of potential business. The lawsuit is based on rulings given in the 2015 arbitration proceeding in
which it was allegedly ruled that the Warning Letters constituted a breach of a non-disclosure agreement (NDA)
signed between the parties.
We rejected the claims by the Israeli software company and moved to dismiss the lawsuit entirely. At this point, all
the relevant motions have been filed and all witnesses deposed including submission of legal summaries. We are
unable to make a reasonably reliable estimate of our chances of successfully defending this lawsuit.
In February 2018, Comm-IT Ltd., a subsidiary of our company, commenced an action against a customer for
payment of an overdue amount in the Supreme Court of the State of New York, New York County. This action was
settled in 2019 for an immaterial amount, and in October 2019 the parties filed a stipulation of discontinuance with
the court.
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Dividend Distribution 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. On
August 2019, our Board of Directors amended our dividend distribution policy, whereas, each year we will
distribute a dividend of up to 75% of our annual distributable profit. 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.
According to the Israeli Companies Law, a registrant 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.
Since the adoption of our dividend policy, the following dividends have been paid:
In September 2012, we declared a cash dividend of $0.10 per share ($3.7 million in the aggregate) that was paid on
October 17, 2012.
In February 2013 we declared a cash dividend of $0.12 per share ($4.4 million in the aggregate) that was paid on
March 14, 2013.
In August 2013, we declared a cash dividend of $0.09 per share ($3.4 million in the aggregate) that was paid on
September 3, 2013.
In February 2014, we declared a cash dividend of $0.12 per share ($4.5 million in the aggregate) that was paid on
March 14, 2014.
In September 2014, we declared a cash dividend in the amount of US $0.095 per share ($4.2 million in the
aggregate) that was paid on September 4, 2014.
In February 2015, we declared a cash dividend in the amount of US $0.081 per share ($3.6 million in the aggregate),
that was paid on March 11, 2015.
In August 2015, we declared a cash dividend in the amount of $0.095 per share ($4.2 million in the aggregate) that
was paid on September 10, 2015.
In February 2016, we declared a cash dividend in the amount of $0.09 per share ($4.0 million in the aggregate) that
was paid on March 17, 2016.
In August 2016, we declared a cash dividend in the amount of $0.085 per share ($3.8 million in the aggregate) that
was paid on September 22, 2016.
In February 2017, we declared a cash dividend in the amount of $0.085 per share ($3.8 million in the aggregate) that
was paid on April 5, 2017.
In August 2017, we declared a cash dividend in the amount of $0.13 per share ($5.8 million in the aggregate) that
was paid on September 13, 2017.
In February 2018, we declared a cash dividend in the amount of $0.13 per share ($5.8 million in the aggregate) that
was paid on March 26, 2018.
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In August 2018, we declared a cash dividend in the amount of $0.155 per share ($7.6 million in the aggregate) that
was paid on September 5, 2018.
In March 2019, we declared a cash dividend in the amount of $0.15 per share ($7.3 million in the aggregate) that
was paid on March 25, 2019.
In August 2019, we declared a cash dividend in the amount of $0.156 per share ($7.6 million in the aggregate) that
was paid on September 12, 2019.
B.
SIGNIFICANT CHANGES
On January 1, 2020, we acquired additional 20.05% of its subsidiary, Roshtov Software Industries Ltd (“Roshtov”),
an Israeli-based software company that is a market leader in Israel in patient record information systems, for a total
cash consideration of approximately $ 15,000,000, which was paid upon closing. Subsequent to the share purchase,
we hold 80.05% of Roshtov.
We and Roshtov hold mutual call and put options respectively for the remaining 19.95% interest in Roshtov.
On April 15, 2020, we acquired an additional 10.17% of our subsidiary Comblack IT Ltd. (“Comblack”), an Israeli-
based company that specializes in software professional and outsource management services for mainframes and
complex large-scale environments, for a total cash consideration of approximately $ 3,600,000, of which an amount
of $ 3,000,000 was paid upon closing and the remaining will be paid over a period of up to 18 months.
In addition to the cash consideration, we have in place a contingent consideration mechanism according to which an
additional amount may be paid in the event of Comblack meeting certain income. If Comblack will not meet these
milestones it will be required to pay back part of the cash consideration. Subsequent to the share purchase, we hold
an 80.2% stake in the Comblack. Comblack holds a put option in respect to its remaining 19.8% holding.
ITEM 9.
THE OFFER AND LISTING
A.
OFFER AND LISTING DETAILS
Our ordinary shares are traded on the NASDAQ Global Select Market under the ticker symbol “MGIC”.
B.
PLAN OF DISTRIBUTION
Not applicable.
C.
MARKETS
Our Ordinary Shares were listed on the NASDAQ Global Market (symbol: MGIC) from our initial public offering
in the United States on August 16, 1991 until January 3, 2011, at which date the listing of our Ordinary Shares was
transferred to the NASDAQ Global Select Market. Since November 16, 2000, our Ordinary Shares have also traded
on the TASE, and on December 15, 2011 they have been included in the TASE’s TA-125 Index.
D.
SELLING SHAREHOLDERS
Not applicable.
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E.
DILUTION
Not applicable.
F.
EXPENSES OF THE ISSUE
Not applicable.
ITEM 10. ADDITIONAL INFORMATION
A.
SHARE CAPITAL
Not applicable.
B.
MEMORANDUM AND ARTICLES OF ASSOCIATION
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
According to our articles of association, 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.
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
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 or 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 holding at least 5% of the voting power in the company.
Please refer to Exhibit 2.2 for Items 10.B.3, B.4, B.6, B.7, B.8, B.9 and B.10.
C.
MATERIAL CONTRACTS
While we have numerous contracts with customers, resellers, distributors and property owners, we do not deem any
such individual contract to be material contracts that are not in the ordinary course of our business.
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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 that has not been subject to judicial or administrative
interpretation, we cannot assure you that the views expressed in the discussion will be accepted by the appropriate
tax authorities or the courts. The 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
Tax regulations have a material impact on our business, particularly in Israel where we have our headquarters. 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
Generally, Israeli companies are subject to corporate tax on their taxable income. As of 2018 the corporate tax rate is
23%. However, the effective tax rate payable by a company that derives income from an AE, BE, PFE or a PTE, in
each case, as defined and further discussed below, may be considerably lower. See “Law for the Encouragement of
Capital Investments” in this Item 5.A below. In addition, Israeli companies are currently subject to regular corporate
tax rate on their capital gains.
Besides being subject to the general corporate tax rules in Israel, certain of our Israeli subsidiaries have also, from
time to time, applied for and received certain grants and tax benefits from, and participate in, programs sponsored by
the Government of Israel, as described below.
Law for the Encouragement of Industry (Taxes), 1969
The Law for the Encouragement of Industry (Taxes), 5729-1969 (the “Industry Encouragement Law”) provides
several tax benefits for an “Industrial Company.” Pursuant to the Industry Encouragement Law, a company qualifies
as an Industrial Company if it is an Israeli resident company which was incorporated in Israel and at least 90% of its
income in any tax year (other than income from certain government loans) is generated from an “Industrial
Enterprise” that it owns and is located in Israel or in the “Area,” in accordance with the definition under Section 3A
of the Israeli Income Tax Ordinance (New Version) 1961, or the Ordinance. An “Industrial Enterprise” is defined as
an enterprise whose major activity, in a given tax year, is industrial production.
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An Industrial Company is entitled to certain corporate tax benefits, including:
Amortization of the cost of the purchases of patents, or the right to use a patent or know-how used for the
development or promotion of the Industrial Enterprise, over an eight-year period commencing on the year
in which such rights were first exercised;
The right to elect, under certain conditions, to file a consolidated tax return together with Israeli Industrial
Companies controlled by it; and
Expenses related to a public offering are deductible in equal amounts over three years beginning from the
year of the offering.
Eligibility for benefits under the Industry Encouragement Law is not subject to receipt of prior approval from any
governmental authority.
We believe that certain of our Israeli subsidiaries currently qualify as Industrial Companies within the definition
under the Industry Encouragement Law. We cannot assure you that they will continue to qualify as Industrial
Companies or that the benefits described above will be available in the future.
Law for the Encouragement of Capital Investments, 5719-1959
The Law for the Encouragement of Capital Investments, 5719-1959, or the Investment Law, provides certain
incentives for capital investments in a production facility (or other eligible assets). Generally, an investment
program that is implemented in accordance with the provisions of the Investment Law, referred to as an Approved
Enterprise, or AE, a Benefitted Enterprise, or BE, or a Preferred Enterprise, or PFE, or a Preferred Technological
Enterprise, or PTE, or a Special Preferred Technological Enterprise, or SPFE is entitled to benefits as discussed
below. These benefits may include cash grants from the Israeli government and tax benefits, based upon, among
other things, the geographic location in Israel of the facility in which the investment is made. In order to qualify for
these incentives, an AE, BE, PFE, PTE or SPFE is required to comply with the requirements of the Investment Law.
The Investment Law has been amended several times over the recent years, with the three most significant changes
effective as of April 1, 2005 (referred to as the 2005 Amendment), as of January 1, 2011 (referred to as the 2011
Amendment) and as of January 1, 2017 (referred to as the 2017 Amendment). Pursuant to the 2005 Amendment, tax
benefits granted in accordance with the provisions of the Investment Law prior to its revision by the 2005
Amendment remain in force but any benefits granted subsequently are subject to the provisions of the amended
Investment Law. Similarly, the 2011 Amendment introduced new benefits instead of the benefits granted in
accordance with the provisions of the Investment Law prior to the 2011 Amendment. However, companies entitled
to benefits under the Investment Law as in effect up to January 1, 2011 were entitled to choose to continue to enjoy
such benefits, provided that certain conditions are met, or elect instead, irrevocably, to forego such benefits and elect
the benefits of the 2011 Amendment. The 2017 Amendment introduces new benefits for Technological Enterprises,
alongside the existing tax benefits.
Tax benefits under the 2011 Amendment became effective on January 1, 2011
The 2011 Amendment canceled the availability of the benefits granted in accordance with the provisions of the
Investment Law prior to 2011 and, instead, introduced new benefits for income generated by a “Preferred Company”
through its PFE (as such terms are defined in the Investment Law) as of January 1, 2011. A Preferred Company is
defined as either (i) a company incorporated in Israel which is not wholly owned by a governmental entity or (ii) a
limited partnership that (a) was registered under the Israeli Partnerships Ordinance and (b) all of its limited partners
are companies incorporated in Israel, but not all of them are governmental entities; which has, among other things,
PFE status and is controlled and managed from Israel. Pursuant to the 2011 Amendment, a Preferred Company is
entitled to a reduced corporate tax rate of 15% with respect to its preferred income, or PFI, attributed to its PFE in
2011 and 2012, unless the PFE is located in a certain development zone, in which case the rate will be 10%. Such
corporate tax rate was reduced to 12.5% and 7%, respectively, in 2013 and was increased to 16% and 9%,
respectively, in 2014 until 2016. Pursuant to the 2017 Amendment, in 2017 and thereafter, the corporate tax rate for
a PFE that is located in a specified development zone was decreased to 7.5%, while the reduced corporate tax rate
for other development zones remains 16%. Income derived by a Preferred Company from a Special PFE (as such
term is defined in the Investment Law) would be entitled, during a benefits period of 10 years, to further reduced tax
rates of 8%, or 5% if the Special PFE is located in a certain development zone. As of January 1, 2017, the definition
for Special PFE includes less stringent conditions.
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The classification of income generated from the provision of usage rights in know-how or software that were
developed in a PFE, as well as royalty income received with respect to such usage, is subject, as PFE income, to the
issuance of a pre-ruling from the Israel Tax Authority that stipulates that such income is associated with the
productive activity of the PFE in Israel.
Dividends paid out of PFI attributed to a PFE or to a Special PFE are generally subject to withholding tax at source
at the rate of 20% or such lower rate as may be provided in an applicable tax treaty (subject to the receipt in advance
of a valid certificate from the Israel Tax Authority allowing for a reduced tax rate). However, if such dividends are
paid to an Israeli company, no tax is required to be withheld (although, if such dividends are subsequently
distributed to individuals or a non-Israeli company, withholding tax at a rate of 20% or such lower rate as may be
provided in an applicable tax treaty will apply). From 2017 to 2019, dividends paid out of PFI attributed to a PFE,
directly to a foreign parent company, were subject to withholding tax at source at the rate of 5% (temporary
provisions).
The 2011 Amendment also provided transitional provisions to address companies already enjoying current benefits
under the Investment Law. These transitional provisions provide, among other things, that unless an irrevocable
request is made to apply the provisions of the Investment Law as amended in 2011 with respect to income to be
derived as of January 1, 2011: (i) the terms and benefits included in any certificate of approval that was granted to
an AE, which chose to receive grants, before the 2011 Amendment became effective, will remain subject to the
provisions of the Investment Law as in effect on the date of such approval, and subject to certain conditions; and (ii)
the terms and benefits included in any certificate of approval that was granted to an AE, that had participated in an
alternative benefits program, before the 2011 Amendment became effective, will remain subject to the provisions of
the Investment Law as in effect on the date of such approval, provided that certain conditions are met. We and one
of our Israeli subsidiaries have elected to apply the new incentives regime under the Amendment to our industrial
activity under the 2011 Amendment.
New Tax benefits under the 2017 Amendment that became effective on January 1, 2017
The 2017 Amendment was enacted as part of the Economic Efficiency Law that was published on December 29,
2016, and is effective as of January 1, 2017. The 2017 Amendment provides new tax benefits for two types of
Technology Enterprises, as described below, and is in addition to the other existing tax beneficial programs under
the Investment Law.
The 2017 Amendment provides that a technology company satisfying certain conditions will qualify as a PTE, and
will thereby enjoy a reduced corporate tax rate of 12% on income that qualifies as Preferred Technology Income, or
PTI, as defined in the Investment Law. The tax rate is further reduced to 7.5% for a PTE located in development
zone A. In addition, a Preferred Technology Company will enjoy a reduced corporate tax rate of 12% on capital gain
derived from the sale of certain Benefited Intangible Assets (as defined in the Investment Law) to a related foreign
company if the Benefited Intangible Assets were acquired from a foreign company on or after January 1, 2017 for at
least NIS 200 million, and the sale receives prior approval from the National Authority for Technological Innovation
(previously known as the Israeli Office of the Chief Scientist) (referred to as IIA).
The 2017 Amendment further provides that a technology company satisfying certain conditions will qualify as a
Special PTE (an enterprise for which, among others, total consolidated revenues of its parent company and all
subsidiaries is at least NIS 10 billion) and will thereby enjoy a reduced corporate tax rate of 6% on PTI regardless of
the company’s geographic location within Israel. In addition, a Special PTE will enjoy a reduced corporate tax rate
of 6% on capital gain derived from the sale of certain “Benefited Intangible Assets” to a related foreign company if
the Benefited Intangible Assets were either developed by the Special Preferred Technology Enterprise or acquired
from a foreign company on or after January 1, 2017, and the sale received prior approval from IIA. A Special PTE
that acquires Benefited Intangible Assets from a foreign company for more than NIS 500 million will be eligible for
these benefits for at least ten years, subject to certain approvals as specified in the Investment Law.
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Dividends distributed by a PTE or a Special PTE, paid out of PTI, are generally subject to withholding tax at source
at the rate of 20% or such lower rate as may be provided in an applicable tax treaty (subject to the receipt in advance
of a valid certificate from the Israel Tax Authority allowing for a reduced tax rate). However, if such dividends are
paid to an Israeli company, no tax is required to be withheld (although, if such dividends are subsequently
distributed from such Israeli company to individuals or a non-Israeli company, withholding tax at a rate of 20% or
such lower rate as may be provided in an applicable tax treaty will apply). If such dividends are distributed to a
foreign company that holds solely or together with other foreign companies 90% or more in the Israeli company and
other conditions are met, the withholding tax rate will be 4% (or a lower rate under a tax treaty, if applicable, subject
to the receipt in advance of a valid certificate from the Israel Tax Authority allowing for a reduced tax rate).
We examined the impact of the 2017 Amendment and the degree to which we will qualify as a PTE or Special PTE,
and the amount of PTI that we may have, or other benefits that we may receive, from the 2017 Amendment.
Beginning in 2017, part of the Company taxable income in Israel is entitled to a preferred 12% tax rate under the
2017 Amendment.
Tax Benefits for Research and Development
Israeli tax law allows, under certain conditions, a tax deduction for research and development expenditures,
including capital expenditures, for the year in which they are incurred. Such expenditures must relate to scientific
research and development projects, and must be approved by the relevant Israeli government ministry, determined
by the field of research. Furthermore, the research and development must be for the promotion of the company’s
business and carried out by or on behalf of the company seeking such tax deduction. However, the amount of such
deductible expenses is reduced by the sum of any funds received through government grants for the finance of such
scientific research and development projects. Expenditures not so approved by the relevant Israeli government
ministry, but otherwise qualifying for deduction, are deductible over a three-year period.
Israeli Capital Gains Tax
The following is a short summary of the material provisions of the tax environment to which shareholders may be
subject. This summary is based on the current provisions of tax law. To the extent that the discussion is based on
new tax legislation that has not been subject to judicial or administrative interpretation, we cannot assure you that
the views expressed in the discussion will be accepted by the appropriate tax authorities or the courts.
The summary does not address all of the tax consequences that may be relevant to all purchasers of our Ordinary
Shares in light of each purchaser’s particular circumstances and specific tax treatment. For example, the summary
below does not address the tax treatment of residents of Israel and traders in securities who are subject to specific
tax regimes. As individual circumstances may differ, holders of our Ordinary Shares should consult their own tax
adviser as to the United States, Israeli or other tax consequences of the purchase, ownership and disposition of
Ordinary Shares. The following is not intended, and should not be construed, as legal or professional tax advice and
is not exhaustive of all possible tax considerations. Each individual should consult his or her own tax or legal
adviser.
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Tax Consequences Regarding Disposition of Our Ordinary Shares
Overview
Israeli law generally imposes a capital gain tax on the sale of capital assets by residents of Israel, as defined for
Israeli tax purposes, and on the sale of assets located in Israel, including shares of Israeli companies, by both
residents and non-residents of Israel, unless a specific exemption is available or unless a tax treaty between Israel
and the seller’s country of residence provides otherwise. The Ordinance distinguishes between “Real Capital Gain”
and “Inflationary Surplus”. The Inflationary Surplus is a portion of the total capital gain, which is equivalent to the
increase of the relevant asset’s purchase price, which is attributable to the increase in the Israeli consumer price
index or, in certain circumstances, a foreign currency exchange rate, between the date of purchase and the date of
sale. The Real Capital Gain is the excess of the total capital gain over the Inflationary Surplus.
Capital gain
Israeli Resident Shareholders
As of January 1, 2012, the tax rate applicable to Real Capital Gain derived by Israeli individuals from the sale of
shares, whether or not listed on a stock exchange, is 25%, unless such shareholder claims a deduction for interest
and linkage differences expenses in connection with the purchase and holding of such shares, in which case the gain
will generally be taxed at a rate of 30%. However, if such shareholder is considered a Substantial Shareholder (i.e., a
person who holds, directly or indirectly, alone or together with another person who collaborates with such person on
a permanent basis, 10% or more of any of the company’s “means of control” (including, among other things, the
right to receive profits of the company, voting rights, the right to receive the company’s liquidation proceeds and the
right to appoint a director)) at the time of sale or at any time during the preceding 12-month period, such gain will be
taxed at the rate of 30%. Individual shareholders dealing in securities in Israel are taxed at their marginal tax rates
applicable to business income (up to 47% in 2018 and thereafter).
Under current Israeli tax legislation, the tax rate applicable to Real Capital Gain derived by Israeli resident
corporations from the sale of shares of an Israeli company is the general corporate tax rate. As described above, the
corporate tax rate as of 2018 and thereafter is 23%.
Non-Israeli Resident Shareholders
Israeli capital gain tax is imposed on the disposal of capital assets by a non-Israeli resident if such assets are either
(i) located in Israel; (ii) shares or rights to shares in an Israeli resident company; or (iii) represent, directly or
indirectly, rights to assets located in Israel, unless a tax treaty between Israel and the seller’s country of residence
provides otherwise. As mentioned above, Real Capital Gain is generally subject to tax at the corporate tax rate (23%
in 2018 and thereafter) if generated by a company, or at the rate of 25% or 30%, if generated by an individual.
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 47% for an individual in 2018 and
thereafter).
Notwithstanding the foregoing, shareholders who are non-Israeli residents (individuals and corporations) are
generally exempt from Israeli capital gain tax on any gains derived from the sale, exchange or disposition of shares
publicly traded on the Tel Aviv Stock Exchange or on a recognized stock exchange outside of Israel, provided,
among other things, that (i) such gains are not generated through a permanent establishment that the non-Israeli
resident maintains in Israel, (ii) the shares were purchased after being listed on a recognized stock exchange, and
(iii) with respect to shares listed on a recognized stock exchange outside of Israel, such shareholders are not subject
to the Israeli Income Tax Law (Inflationary Adjustments) 5745-1985. However, non-Israeli corporations will not be
entitled to the foregoing exemptions if Israeli residents (a) have a controlling interest of more than 25% in such non-
Israeli corporation, or (b) are the beneficiaries of or are entitled to 25% or more of the revenues or profits of such
non-Israeli corporation, whether directly or indirectly. Such exemption is not applicable to a person whose gains
from selling or otherwise disposing of the shares are deemed to be business income.
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In addition, a sale of shares may be exempt from Israeli capital gain tax under the provisions of an applicable tax
treaty. For example, under the U.S.-Israel Tax Treaty, or 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 gain tax unless either (i) the shareholder holds, directly or
indirectly, shares representing 10% or more of the voting rights during any part of the 12-month period preceding
such sale, exchange or disposition; (ii) the shareholder, if an individual, has been present in Israel for a period or
periods of 183 days or more in the aggregate during the applicable taxable year; (iii) the capital gain arising from
such sale are attributable to a permanent establishment of the shareholder which is maintained in Israel; (iv) the
capital gain arising from such sale, exchange or disposition is attributed to real estate located in Israel; (v) the capital
gain arising from such sale, exchange or disposition is attributed to royalties; or (vi) the shareholder is a U.S.
resident (for purposes of the U.S.-Israel Treaty) and is not holding the shares as a capital asset. In each case, the sale,
exchange or disposition of such shares would be subject to Israeli tax, to the extent applicable; however, under the
U.S.-Israel Treaty, a U.S. resident would be permitted to claim a credit for the Israeli tax against the U.S. federal
income tax imposed with respect to the sale, exchange or disposition, subject to the limitations in U.S. laws
applicable to foreign tax credits. The U.S-Israel Treaty does not provide such credit against any U.S. state or local
taxes.
In some instances where our shareholders may be liable for Israeli tax on the sale of their Ordinary Shares, the
payment of the consideration may be subject to the withholding of Israeli tax at source. Shareholders may be
required to demonstrate that they are exempt from tax on their capital gains in order to avoid withholding at source
at the time of sale. Specifically, in transactions involving a sale of all of the shares of an Israeli resident company, in
the form of a merger or otherwise, the Israel Tax Authority may require from shareholders who are not liable for
Israeli tax to sign declarations in forms specified by this authority or obtain a specific exemption from the Israel Tax
Authority to confirm their status as non-Israeli resident, and, in the absence of such declarations or exemptions, may
require the purchaser of the shares to withhold taxes at source.
Taxes applicable to Dividends
Israeli Resident Shareholders
Israeli 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 25%, or 30% if the recipient of such dividend is a Substantial
Shareholder at the time of distribution or at any time during the preceding 12-month period. However, dividends
distributed from taxable income allocated and accrued during the benefits period of an AE are subject to withholding
tax at the rate of 15% (if the dividend is distributed during the tax benefits period under the Investment Law or
within 12 years after such period, except with respect to an FIC, in which case the 12 year limit does not apply) or
20% with respect to PFE. An average rate will be set in case the dividend is distributed from mixed types of income
(regular and Approved/Beneficiary/ Preferred income).
Israeli resident corporations are generally exempt from Israeli corporate tax for dividends paid on shares of Israeli
resident corporations (like our Ordinary Shares). However, dividends distributed from taxable income accrued
during the benefits period of an AE are subject to withholding tax at the rate of 15%, if the dividend is distributed
during the tax benefits period under the Investment Law or within 12 years after such period.
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Non-Israeli Resident Shareholders
Non-Israeli residents (whether individuals or corporations) are generally subject to Israeli income tax on the receipt
of dividends paid on our Ordinary Shares, at the rate of 25% or 30% (if the dividend recipient is a Substantial
Shareholder at the time of distribution or at any time during the preceding 12-month period) or 15% if the dividend
is distributed from income attributed to our AE or BE, or 20% with respect to PFE. Such dividends are generally
subject to Israeli withholding tax at a rate of 25% so long as the shares are registered with a Nominee Company
(whether the recipient is a Substantial Shareholder or not), and 15% if the dividend is distributed from income
attributed to an AE or BE or 20% if the dividend is distributed from income attributed to a PFE, unless a reduced
rate is provided under an applicable tax treaty (subject to the receipt in advance of a valid certificate from the Israel
Tax Authority allowing for a reduced tax rate). 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, not generated
by our AE or BE, 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 AE or BE 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. The
aforementioned rates will not apply if the dividend income was generated through a permanent establishment of the
U.S. resident which is maintained in Israel. If the dividend is attributable partly to income derived from an AE a BE,
or a PFE, 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. A non-Israeli resident who receives dividends from which
tax was withheld is generally exempt from the obligation to file tax returns in Israel with respect to such income,
provided that (i) such income was not generated from business conducted in Israel by the taxpayer, and (ii) the
taxpayer has no other taxable sources of income in Israel with respect to which a tax return is required to be filed.
Excess Tax
Individuals who are subject to tax in Israel (whether any such individual is an Israeli resident or non-Israeli resident)
are also subject to an additional tax for income exceeding a certain level. For 2017 and onwards, the additional tax is
at a rate of 3% on annual income exceeding NIS 649,560 for 2019 (approximately $0.2 million) which amount is
linked to the annual change in the Israeli consumer price index, including, but not limited to, dividends, interest and
capital gain.
Estate and Gift Tax
Israeli law presently does not impose estate or gift taxes.
UNITED STATES FEDERAL INCOME TAX CONSIDERATIONS
Subject to the limitations described herein, this discussion summarizes certain U.S. federal income tax consequences
of the purchase, ownership and disposition of our Ordinary Shares to a U.S. holder. A U.S. holder is a holder of our
Ordinary Shares who is:
● An individual who is a citizen or resident of the U.S. for U.S. federal income tax purposes
● A corporation (or another entity taxable as a corporation for U.S. federal income tax purposes) created or
organized under the laws of the United States, any political subdivision thereof, or the District of Columbia
● An estate, the income of which may be included in gross income for U.S. federal income tax purposes
regardless of its source
● A trust (i) if, in general, a U.S. court is able to exercise primary supervision over its administration and one
or more U.S. persons have the authority to control all of its substantial decisions or (ii) an electing trust that
was in existence on August 19, 1996 and was treated as a domestic trust on that date
Unless otherwise specifically indicated, this discussion does not consider the U.S. tax consequences to a person that
is not a U.S. holder (which we refer to as a non-U.S. holder) and considers only U.S. holders that will own our
Ordinary Shares as capital assets (generally, for investment).
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This discussion is based on current provisions of the Internal Revenue Code of 1986, as amended, or the Code,
current and proposed Treasury Regulations promulgated under the Code and administrative and judicial
interpretations of the Code, all as currently in effect and all of which are subject to change, possibly with a
retroactive effect. This discussion does not address all aspects of U.S. federal income taxation that may be relevant
to any particular U.S. holder based on the U.S. holder’s particular circumstances. In particular, this discussion does
not address the U.S. federal income tax consequences to U.S. holders who are broker-dealers, insurance companies,
real estate investment trusts, regulated investment companies, grantor trusts, individual retirement and tax-deferred
accounts, certain former citizens or long-term residents of the U.S., tax-exempt organizations, financial institutions,
“financial service entities” or who own, directly, indirectly or constructively, 10% or more of the vote or value of
the our outstanding shares, U.S. holders holding our Ordinary Shares as part of a hedging, straddle or conversion
transaction, U.S. holders whose functional currency is not the U.S. dollar, U.S. holders that acquired our Ordinary
Shares upon the exercise of employee stock options or otherwise as compensation, and U.S holders who are persons
subject to the alternative minimum tax, who may be subject to special rules not discussed below.
Additionally, the tax treatment of persons who are, or hold our Ordinary Shares through a partnership or other pass-
through entity is not considered, nor is the possible application of U.S. federal estate or gift taxes or any aspect of
state, local or non-U.S. tax laws.
Unless otherwise specifically indicated, this discussion does not consider the U.S. tax consequences to a person that
is not a U.S. holder (which we refer to as a non-U.S. holder) and considers only U.S. holders that will own our
Ordinary Shares as capital assets (generally, for investment).
Furthermore, unless otherwise indicated, this discussion assumes that the Company is not, and will not become, a
“passive foreign investment company,” or a PFIC, for U.S. federal income tax purposes. See “—Passive Foreign
Investment Companies” below.
You are advised to consult your tax advisor with respect to the specific U.S. federal, state, local and foreign
tax consequences of purchasing, holding or disposing of our Ordinary Shares.
Taxation of Distributions on Ordinary Shares
Subject to the discussion below under “Tax Consequences if We Are a Passive Foreign Investment Company,” a
distribution paid by us with respect to our Ordinary Shares to a U.S. holder will be treated as dividend income to the
extent that the distribution does not exceed our current and accumulated earnings and profits, as determined for U.S.
federal income tax purposes.
Dividends that are received by U.S. holders that are individuals, estates or trusts generally will be taxed at the rate
applicable to long-term capital gains, provided those dividends meet the requirements of “qualified dividend
income.” The maximum long-term capital gains rate is 20% for individuals with annual taxable income that exceeds
certain thresholds. In addition, under the Patient Protection and Affordable Care Act, higher income taxpayers must
pay an additional 3.8% tax on net investment income to the extent certain threshold amounts of income are
exceeded. See “Tax on Net Investment Income” in this Item below. For this purpose, qualified dividend income
generally includes dividends paid by a foreign corporation if certain holding period and other requirements are met
and either (a) the stock of the foreign corporation with respect to which the dividends are paid is “readily tradable”
on an established securities market in the U.S. (e.g., the NASDAQ Capital Market) or (b) the foreign corporation is
eligible for benefits of a comprehensive income tax treaty with the U.S. which includes an information exchange
program and is determined to be satisfactory by the U.S. Secretary of the Treasury. Dividends that fail to meet such
requirements and dividends received by corporate U.S. holders are taxed at ordinary income rates. No dividend
received by a U.S. holder will be a qualified dividend (i) if the U.S. holder held the Ordinary Share with respect to
which the dividend was paid for less than 61 days during the 121-day period beginning on the date that is 60 days
before the ex-dividend date with respect to such dividend, excluding for this purpose, under the rules of Code
Section 246(c), any period during which the U.S. holder has an option to sell, is under a contractual obligation to
sell, has made (and not closed) a short sale of, is the grantor of a deep-in-the-money or otherwise nonqualified
option to buy, or has otherwise diminished its risk of loss by holding other positions with respect to, such Common
Share (or substantially identical securities); or (ii) to the extent that the U.S. holder is under an obligation (pursuant
to a short sale or otherwise) to make related payments with respect to positions in property substantially similar or
related to the Ordinary Share with respect to which the dividend is paid. If we were to be a “passive foreign
investment company” (as such term is defined in the Code), or PFIC, for any taxable year, dividends paid on our
Ordinary Shares in such year or in the following taxable year would not be qualified dividends. See the discussion
below regarding our PFIC status under “Tax Consequences if We Are a Passive Foreign Investment Company.” In
addition, a non-corporate U.S. holder will be able to take qualified dividend income into account in determining its
deductible investment interest (which is generally limited to its net investment income) only if it elects to do so; in
such case the dividend income will be taxed at ordinary income rates.
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The amount of any distribution which exceeds the amount treated as a dividend will be treated first as a non-taxable
return of capital, reducing the U.S. holder’s tax basis in our Ordinary Shares to the extent thereof, and then as capital
gain from the deemed disposition of the Ordinary Shares. Corporate holders will not be allowed a deduction for
dividends received in respect of the Ordinary Shares.
Distributions of current or accumulated earnings and profits paid in foreign currency to a U.S. holder will be
includible in the income of a U.S. holder in a U.S. dollar amount calculated by reference to the exchange rate on the
day the distribution is received. A U.S. holder that receives a foreign currency distribution and converts the foreign
currency into U.S. dollars subsequent to receipt may have foreign exchange gain or loss based on any appreciation
or depreciation in the value of the foreign currency against the U.S. dollar, which will generally be U.S. source
ordinary income or loss.
Taxation of the Disposition of Common Shares
Subject to the discussion below under “Tax Consequences if We Are a Passive Foreign Investment Company,” upon
the sale, exchange or other disposition of our Ordinary Shares, a U.S. holder will recognize capital gain or loss in an
amount equal to the difference between the amount realized on the disposition and the U.S. holder’s tax basis in our
Ordinary Shares. The gain or loss recognized on the disposition of the Ordinary Shares will be long-term capital
gain or loss if the U.S. holder held the Ordinary Shares for more than one year at the time of the disposition and
would be eligible for a reduced rate of taxation for certain non-corporate U.S. holders. The maximum long-term
capital gains rate is 20% for individuals with annual taxable income that exceeds certain thresholds. In addition,
under the Patient Protection and Affordable Care Act, higher income taxpayers must pay an additional 3.8% tax on
net investment income to the extent certain threshold amounts of income are exceeded. See “Tax on Net Investment
Income” in this Item below. Capital gain from the sale, exchange or other disposition of Ordinary Shares held for
one year or less is short-term capital gain and taxed as ordinary income. Gain or loss recognized by a U.S. holder on
a sale, exchange or other disposition of our Ordinary Shares generally will be treated as U.S. source income or loss.
The deductibility of capital losses is subject to certain limitations.
A U.S. holder that uses the cash method of accounting calculates the dollar value of the proceeds received on the
sale as of the date that the sale settles. However, a U.S. holder that uses the accrual method of accounting is required
to calculate the value of the proceeds of the sale as of the trade date and may therefore realize foreign currency gain
or loss. A U.S. holder that uses the accrual method may avoid realizing foreign currency gain or loss by electing to
use the settlement date to determine the proceeds of sale for purposes of calculating the foreign currency gain or
loss. In addition, a U.S. holder that receives foreign currency upon disposition of its Ordinary Shares and converts
the foreign currency into dollars after the settlement date or trade date (whichever date the U.S. holder is required to
use to calculate the value of the proceeds of sale) may have foreign exchange gain or loss based on any appreciation
or depreciation in the value of the foreign currency against the dollar, which will generally be U.S. source ordinary
income or loss.
Tax Consequences if We Are a Passive Foreign Investment Company
We would be a passive foreign investment company, or PFIC, for a taxable year if either (1) 75% or more of our
gross income in the taxable year is passive income; or (2) the average percentage (by value determined on a
quarterly basis) in a taxable year of our assets that produce, or are held for the production of, passive income is at
least 50%. Passive income for this purpose generally includes, among other things, certain dividends, interest,
royalties, rents and gains from commodities and securities transactions and from the sale or exchange of property
that gives rise to passive income. If we own (directly or indirectly) at least 25% by value of the stock of another
corporation, we would be treated for purposes of the foregoing tests as owning our proportionate share of the other
corporation’s assets and as directly earning our proportionate share of the other corporation’s income. As discussed
below, we believe that we were not a PFIC for 2019.
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If we were a PFIC, each U.S. holder would (unless it made one of the elections discussed below on a timely basis)
be taxable on gain recognized from the disposition of our Ordinary Shares (including gain deemed recognized if our
Ordinary Shares are used as security for a loan) and upon receipt of certain excess distributions (generally,
distributions that exceed 125% of the average amount of distributions in respect to such shares received during the
preceding three taxable years or, if shorter, during the U.S. holder’s holding period prior to the distribution year)
with respect to our Ordinary Shares as if such income had been recognized ratably over the U.S. holder’s holding
period for the shares. The U.S. holder’s income for the current taxable year would include (as ordinary income)
amounts allocated to the current taxable year and to any taxable year prior to the first day of the first taxable year for
which we were a PFIC. Tax would also be computed at the highest ordinary income tax rate in effect for each other
taxable year to which income is allocated, and an interest charge on the tax as so computed would also apply. The
tax liability with respect to the amount allocated to the taxable year prior to the taxable year of the distribution or
disposition cannot be offset by any net operating losses. Additionally, if we were a PFIC, U.S. holders who acquire
our Ordinary Shares from decedents (other than nonresident aliens) would be denied the normally-available step-up
in basis for such shares to fair market value at the date of death and, instead, would have a tax basis in such shares
equal to the lesser of the decedent’s basis or the fair market value of such shares on the decedent’s date of death.
As an alternative to the tax treatment described above, a U.S. holder could elect to treat us as a “qualified electing
fund” (a QEF), in which case the U.S. holder would be taxed, for each taxable year that we are a PFIC, on its pro
rata share of our ordinary earnings and net capital gain (subject to a separate election to defer payment of taxes,
which deferral is subject to an interest charge). Special rules apply if a U.S. holder makes a QEF election after the
first taxable year in its holding period in which we are a PFIC. We have agreed to supply U.S. holders with the
information needed to report income and gain under a QEF election if we were a PFIC. Amounts includable in
income as a result of a QEF election will be determined without regard to our prior year losses or the amount of
cash distributions, if any, received from us. A U.S. holder’s basis in its Ordinary Shares will increase by any amount
included in income and decrease by any amounts not included in income when distributed because such amounts
were previously taxed under the QEF rules. So long as a U.S. holder’s QEF election is in effect with respect to the
entire holding period for its Ordinary Shares, any gain or loss realized by such holder on the disposition of its
Ordinary Shares held as a capital asset generally will be capital gain or loss. Such capital gain or loss ordinarily
would be long-term if such U.S. holder had held such Ordinary Shares for more than one year at the time of the
disposition and would be eligible for a reduced rate of taxation for certain non-corporate U.S. holders. The
maximum long-term capital gains rate is 20% for individuals with annual taxable income that exceeds certain
thresholds. The QEF election is made on a shareholder-by-shareholder basis, applies to all Ordinary Shares held or
subsequently acquired by an electing U.S. holder and can be revoked only with the consent of the IRS. The QEF
election must be made on or before the U.S. holder’s tax return due date, as extended, for the first taxable year to
which the election will apply.
As an alternative to making a QEF election, a U.S. holder of PFIC stock that is “marketable stock” (e.g., “regularly
traded” on the NASDAQ Global Select Market) may, in certain circumstances, avoid certain of the tax
consequences generally applicable to holders of stock in a PFIC by electing to mark the stock to market as of the
beginning of such U.S. holder’s holding period for our Ordinary Shares. Special rules apply if a U.S. holder makes a
mark-to-market election after the first year in its holding period in which we are a PFIC. As a result of such an
election, in any taxable year that we are a PFIC, a U.S. holder would generally be required to report gain or loss to
the extent of the difference between the fair market value of the Ordinary Shares at the end of the taxable year and
such U.S. holder’s tax basis in such shares at that time. Any gain under this computation, and any gain on an actual
disposition of our Ordinary Shares in a taxable year in which we are PFIC, would be treated as ordinary income.
Any loss under this computation, and any loss on an actual disposition of our Ordinary Shares in a taxable year in
which we are PFIC, would be treated as ordinary loss to the extent of the cumulative net-mark-to-market gain
previously included. Any remaining loss from marking our Ordinary Shares to market will not be allowed, and any
remaining loss from an actual disposition of our Ordinary Shares generally would be capital loss. A U.S. holder’s
tax basis in its Ordinary Shares is adjusted annually for any gain or loss recognized under the mark-to-market
election. There can be no assurances that there will be sufficient trading volume with respect to our Ordinary Shares
for the Ordinary Shares to be considered “regularly traded” or that our Ordinary Shares will continue to trade on the
NASDAQ Capital Market. Accordingly, there are no assurances that our Ordinary Shares will be marketable stock
for these purposes. As with a QEF election, a mark-to-market election is made on a shareholder-by-shareholder
basis, applies to all Ordinary Shares held or subsequently acquired by an electing U.S. holder and can only be
revoked with consent of the IRS (except to the extent our Ordinary Shares no longer constitute “marketable stock”).
Based on an analysis of our assets and income, we believe that we were not a PFIC for 2019. We currently expect
that we will not be a PFIC in 2020. The tests for determining PFIC status are applied annually and it is difficult to
make accurate predictions of future income and assets, which are relevant to this determination. Accordingly, there
can be no assurance that we will not become a PFIC in any future taxable years. U.S. holders who hold our Ordinary
Shares during a period when we are a PFIC will be subject to the foregoing rules, even if we cease to be a PFIC,
subject to certain exceptions for U.S. holders who made QEF, mark-to-market or certain other special elections.
U.S. holders are urged to consult their tax advisors about the PFIC rules, including the consequences to them of
making a mark-to-market or QEF election with respect to our Ordinary Shares in the event that we qualify as a
PFIC.
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Non-U.S. holders of Ordinary Shares
Except as provided below, a non-U.S. holder of our Ordinary Shares will not be subject to U.S. federal income or
withholding tax on the receipt of dividends on, or the proceeds from the disposition of, our Ordinary Shares, unless,
in the case of U.S. federal income taxes, that item is effectively connected with the conduct by the non-U.S. holder
of a trade or business in the United States and, in the case of a resident of a country which has an income tax treaty
with the United States, such item is attributable to a permanent establishment in the United States or, in the case of
an individual, a fixed place of business in the United States. In addition, gain recognized on the disposition of our
Ordinary Shares by an individual non-U.S. holder will be subject to tax in the United States if the non-U.S. holder is
present in the United States for 183 days or more in the taxable year of the sale and certain other conditions are met.
Tax on Net Investment Income
A U.S. holder that is an individual or estate, or a trust that does not fall into a special class of trusts that is exempt
from the tax, will be subject to a 3.8% tax on the lesser of (1) the U.S. holder’s “net investment income” for the
relevant taxable year and (2) the excess of the U.S. holder’s modified adjusted gross income for the taxable year
over a certain threshold (which in the case of individuals will be between $125,000 and $250,000, depending on the
individual’s circumstances). A U.S. holder’s net investment income generally will include its dividends on our
Ordinary Shares and net gains from dispositions of our Ordinary Shares, unless those dividends or gains are derived
in the ordinary course of the conduct of trade or business (other than trade or business that consists of certain passive
or trading activities). Net investment income, however, may be reduced by deductions properly allocable to that
income. A U.S. holder that is an individual, estate or trust is urged to consult its tax adviser regarding the
applicability of the Medicare tax to its income and gains in respect of its investment in the Ordinary Shares.
Information Reporting and Backup Withholding
A U.S. holder generally is subject to information reporting and may be subject to backup withholding at a rate of up
to 28% with respect to dividend payments on, or receipt of the proceeds from the disposition of, our Ordinary
Shares. Backup withholding will not apply with respect to payments made to exempt recipients, including
corporations and tax-exempt organizations, or if a U.S. holder provides a correct taxpayer identification number,
certifies that such holder is not subject to backup withholding or otherwise establishes an exemption. Non-U.S.
holders are not subject to information reporting or backup withholding with respect to dividend payments on, or
receipt of the proceeds from the disposition of, our Common Shares in the U.S., or by a U.S. payor or U.S.
middleman, provided that such non-U.S. holder provides a taxpayer identification number, certifies to its foreign
status, or otherwise establishes an exemption. Backup withholding is not an additional tax and may be claimed as a
credit against the U.S. federal income tax liability of a holder, or alternatively, the holder may be eligible for a
refund of any excess amounts withheld under the backup withholding rules, in either case, provided that the required
information is furnished to the IRS.
Information Reporting by Certain U.S. Holders
U.S. citizens and individuals taxable as resident aliens of the United States that own “specified foreign financial
assets” with an aggregate value in a taxable year in excess of certain threshold (as determined under Treasury
regulations) and that are required to file a U.S. federal income tax return generally will be required to file an
information report with respect to those assets with their tax returns. IRS Form 8938 has been issued for that
purpose. “Specified foreign financial assets” include any financial accounts maintained by foreign financial
institutions, foreign stocks held directly, and interests in foreign estates, foreign pension plans or foreign deferred
compensation plans. Under those rules, our Ordinary Shares, whether owned directly or through a financial
institution, estate or pension or deferred compensation plan, would be “specified foreign financial assets”. Under
Treasury regulations, the reporting obligation applies to certain U.S. entities that hold, directly or indirectly,
specified foreign financial assets. Penalties can apply if there is a failure to satisfy this reporting obligation. A U.S.
Holder is urged to consult his tax adviser regarding his reporting obligation.
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The above description is not intended to constitute a complete analysis of all tax consequences relating to
acquisition, ownership and disposition of our ordinary shares. You should consult your tax advisor
concerning the tax consequences of your particular situation.
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.
The Exchange Act file number for our SEC filings is 000-19415.
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 6021805, 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.
98
As of December 31, 2019, we had approximately $88.9 million in cash and cash equivalents and short term bank
deposits and $6.6 million in marketable securities. Our marketable securities include investments in commercial and
government bonds and foreign banks. As of such date our marketable securities portfolio was composed primarily of
governmental and commercial bonds bearing average annual interest rates of approximately 2.9%, with average
maturities of 0.3 years and maximum maturities of 0.6 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. In such case,
the fair value of our investments may decline. As of December 31, 2019, net unrealized profits in our marketable
securities portfolio totaled $1,600 (one thousand and six hundred dollars). 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. Because our financial results are reported in U.S. dollars, our results of
operations may be adversely impacted by fluctuations in the rates of exchange between the U.S. dollar and such
other currencies as the financial results of our foreign subsidiaries are converted into U.S. dollars in consolidation.
Our earnings are predominantly affected by fluctuations in the value of the U.S. dollar as compared to the NIS, as
well as the value of the U.S. dollar as compared to the euro, Japanese Yen and British Pound.
We measure and record non-monetary accounts in our balance sheet (principally fixed assets and prepaid expenses)
in U.S. dollars. For this measurement, we use the U.S. dollar value in effect at the date that the asset or liability was
initially recorded in our balance sheet (the date of the transaction).
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
2019 would have resulted in an increase in the U.S. dollar reporting value of our operating income of $1.5 million
for that year, while a decrease of 10% in the value of the NIS relative to the U.S. dollar in 2019 would have resulted
in a decrease in the U.S. dollar reporting value of our operating income of $1.2 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 2019 would have
resulted in an increase in the U.S. dollar reporting value of our operating income of $0.8 million, $0.4 million and
$0.1 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 2019 would have resulted in a decrease in the U.S. dollar reporting value of our
operating income of $0.7 million, $0.3 million and $0.1 million, respectively, for that year.
Equity Price Risk
As of December 31, 2019, we had $5.5 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 $0.5 million.
ITEM 12. DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES
Not applicable.
99
ITEM 13. DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES
PART II
None.
ITEM 14. MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USE OF
PROCEEDS
Not applicable.
ITEM 15. CONTROLS AND PROCEDURES
Disclosure Controls and Procedures
Our management, including our Chief Executive Officer, and Chief Financial Officer, has evaluated the
effectiveness of our disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) of
the Exchange Act) as of December 31, 2019. Based on such evaluation, the Chief Executive Officer, and the Chief
Financial Officer, have concluded that, as of December 31, 2019, the Company’s disclosure controls and procedures
are effective.
Management’s Annual Report on Internal Control over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over financial reporting,
as such term is defined in Rules 13a-15(f) and 15d-15(f) of the Exchange Act. Our management, including our Chief
Executive Officer and our Chief Financial Officer, conducted an evaluation of the effectiveness of our internal
control over financial reporting based on the framework and criteria established in Internal Control—Integrated
Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) as
of the end of the period covered by this report.
Based on that evaluation, our management has concluded that our internal control over financial reporting was
effective as of December 31, 2019. Notwithstanding the foregoing, there can be no assurance that our internal
control over financial reporting will detect or uncover all failures of persons within the company to comply with our
internal procedures, as all internal control systems, no matter how well designed, have inherent limitations.
Therefore, even those systems determined to be effective may not prevent or detect misstatements.
Our management’s assessment of and conclusion on the effectiveness of internal control over financial reporting did
not include the internal controls of the business of NetEffects, Inc. and OnTarget Group, Inc., that were acquired
during 2019 and included in our 2019 consolidated financial statements and constituted 3% of total and net assets, as
of December 31, 2019 and 10% of revenues for the year then ended.
Attestation Report of the Registered Public Accounting Firm
The attestation report of Kost Forer Gabbay & Kasierer, a member of EY Global, an independent registered
public accounting firm in Israel, on our management’s assessment of our internal control over financial
reporting as of December 31, 2019 is provided on page F-3, as included under Item 18 of this annual report.
Changes in Internal Control over Financial Reporting
Based on the evaluation conducted by our Chief Executive Officer and our Chief Financial Officer pursuant to Rules
13a-15(d) and 15d-15(d) under the Exchange Act, our management has concluded that there was no change in our
internal control over financial reporting that occurred during the year ended December 31, 2019 that materially
affected, or is reasonably likely to materially affect, our internal control over financial reporting.
100
ITEM 16. RESERVED
ITEM 16A. AUDIT COMMITTEE FINANCIAL EXPERT
Our board of directors has determined that Mr. Ettlinger, 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. Ettlinger’s relevant experience, see Item 6A. “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. Written copies are available upon request. If we make any substantive amendment to the code of ethics or
grant any waivers, including any implicit waiver, from a provision of the codes of ethics, we will disclose the nature
of such amendment or waiver on our website.
ITEM 16C. PRINCIPAL ACCOUNTANT FEES AND SERVICES
Independent Registered Public Accounting Firm Fees
The following table sets forth, for each of the years indicated, the fees billed by our principal independent registered
public accounting firm. All of such fees were pre-approved by our Audit Committee.
Services Rendered
Audit (1)
Tax and other (2)
Total
Year Ended December
31,
2019
2018
$ 355,000 $ 361,500
$ 115,000 $ 201,000
$ 470,000 $ 562,500
(1) Audit fees relate to audit services provided for each of the years shown in the table, including fees associated
with the annual audit, the filing of a shelf registration statement, various accounting issues and audit services
provided in connection with other statutory or regulatory filings.
(2) 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.
ITEM 16D. EXEMPTIONS FROM THE LISTING STANDARDS FOR AUDIT COMMITTEES
Not applicable.
ITEM 16E. PURCHASES OF EQUITY SECURITIES BY THE ISSUER AND AFFILIATED
PURCHASERS
None.
101
ITEM 16F. CHANGES IN REGISTRANT’S CERTIFYING ACCOUNTANT
None.
ITEM 16G. CORPORATE GOVERNANCE
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. 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. We
provided NASDAQ with such a letter of non-compliance with respect to:
● The Rule requiring maintaining a majority of independent directors (Rule 5605(b)(1)). Instead, under
Israeli law and practice, we are required to appoint at least two external directors, within the meaning of the
Israeli Companies Law, to our board of directors.
● The Rule requiring that our independent directors have regularly scheduled meetings at which only
independent directors are present (Rule 5605(b)(2)). Instead, we follow Israeli law according to which
independent directors are not required to hold executive sessions.
● The Rule regarding independent director oversight of director nominations process for directors (Rule
5605(e)). Instead, we follow Israeli law and practice according to which our board of directors recommends
directors for election by our shareholders.
● The requirement to obtain shareholder approval for the establishment or amendment of certain equity based
compensation plans (Rule 5635(c)), an issuance that will result in a change of control of the company (Rule
5635(b)), certain transactions other than a public offering involving issuances of a 20% or more interest in
the company (Rule 5635(d)) and certain acquisitions of the stock or assets of another company (Rule
5635(a)). Instead, we follow Israeli law and practice in approving such procedures, according to which
Board approval may suffice in certain circumstances.
ITEM 16H. MINE SAFETY DISCLOSURE
Not applicable.
102
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 Shareholders’ Equity
Consolidated Statements of Cash Flows
Notes to Consolidated Financial Statements
Appendix to Consolidated Financial Statements – Details of Subsidiaries and Affiliate
103
F-1
F-2 – F-4
F-5 – F-6
F- 7
F-8
F-9
F-10 – F-
12
F-13– F-54
F-55– F-56
ITEM 19. EXHIBITS
Index to Exhibits
Exhibit
1.1
1.2
2.1
2.2
4.1
4.2
8.1
12.1
12.2
13.1
13.2
Description
Memorandum of Association of the Registrant1
Articles of Association of the Registrant2
Specimen of Ordinary Share Certificate3
Description of the rights of each class of securities registered under Section 12 of the Securities
Exchange Act of 1934
2000 Employee Stock Option Plan4
2007 Incentive Compensation Plan5
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
Consent of KDA Audit Corporation (relating to Magic Software Japan K.K.)
XBRL Instance Document
15.1
15.2
101.INS
101.SCH XBRL Taxonomy Extension Schema Document
101.PRE
101.CAL
101.LAB
101.DEF
XBRL Taxonomy Presentation Linkbase Document
XBRL Taxonomy Calculation Linkbase Document
XBRL Taxonomy Label Linkbase Document
XBRL Taxonomy Extension Definition Linkbase Document
(1) Filed as Exhibit 3.2 to the registrant’s registration statement on Form F-1, registration number 33-41486, and
incorporated herein by reference.
(2) 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.
(3) Filed as Exhibit 4.1 to the registrant’s registration statement on Form F-1, registration number 33-41486, and
incorporated herein by reference.
(4) 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.
(5) 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.
104
MAGIC SOFTWARE ENTERPRISES LTD.
CONSOLIDATED FINANCIAL STATEMENTS
AS OF DECEMBER 31, 2019
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
Consolidated Statements of Changes in Shareholders’ Equity
Consolidated Statements of Cash Flows
Notes to Consolidated Financial Statements
Page
F-2 – F-4
F-5 – F-6
F-7
F-8
F-9
F-10 – F-12
F-13 – F-54
Appendix to Consolidated Financial Statements - Details of Subsidiaries and Affiliate
F-55 – F-56
- - - - - - - - - - - -
F-1
Kost Forer Gabbay &
Kasierer
144 Menachem Begin St.
Tel-Aviv 6492102, Israel
Tel: +972-3-6232525
Fax: +972-3-5622555
ey.com
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Shareholders and the Board of Directors of
MAGIC SOFTWARE ENTERPRISES LTD.
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of MAGIC SOFTWARE ENTERPRISES
LTD. (“the Company”) as of December 31, 2019 and 2018, 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, 2019, and the related notes (collectively referred to as the “consolidated financial statements”).
In our opinion, based on our audits and the report of other auditors, the consolidated financial statements present
fairly, in all material respects, the financial position of the Company at December 31, 2019 and 2018, and the results
of its operations and its cash flows for each of the three years in the period ended December 31, 2019, in conformity
with U.S. generally accepted accounting principles.
We did not audit the financial statements of Magic Software Japan K.K., a wholly-owned subsidiary, which
reflect total assets of constituting 1% and 1% at December 31, 2019 and 2018, respectively, and total revenues of
4%, 3% and 4% for the years ended December 31, 2019, 2018 and 2017, respectively, of the related consolidated
totals. Those statements were audited by other auditors whose report has been furnished to us, and our opinion,
insofar as it relates to the amounts included for Magic Software Japan K.K., is based solely on the report of the other
auditors.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board
(United States), (PCAOB), the Company’s internal control over financial reporting as of December 31, 2019, based
on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission (2013 framework) and our report dated May 14, 2020 expressed an
unqualified opinion thereon.
Basis for Opinion
These financial statements are the responsibility of the Company’s management. Our responsibility is to
express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm
registered with the PCAOB and are required to be independent with respect to the Company in accordance with the
U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and
the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we
plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material
misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of
material misstatement of the financial statements, whether due to error or fraud, and performing procedures that
respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and
disclosures in the financial statements. Our audits also included evaluating the accounting principles used and
significant estimates made by management, as well as evaluating the overall presentation of the financial statements.
We believe that our audits and the report of other auditors provide a reasonable basis for our opinion.
/s/Kost Forer Gabbay & Kasierer
KOST FORER GABBAY & KASIERER
A Member of Ernst & Young Global
We have served as the Company’s auditor since 1984.
Tel-Aviv, Israel
May 14, 2020
F-2
Kost Forer Gabbay &
Kasierer
144 Menachem Begin St.
Tel-Aviv 6492102, Israel
Tel: +972-3-6232525
Fax: +972-3-5622555
ey.com
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Shareholders and the Board of Directors of
MAGIC SOFTWARE ENTERPRISES LTD.
Opinion on Internal Control over Financial Reporting
We have audited MAGIC SOFTWARE ENTERPRISES LTD.’s (“the Company”) internal control over
financial reporting as of December 31, 2019, based on criteria established in Internal Control-Integrated Framework
issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework) (“the COSO
criteria”). In our opinion, the Company, based on our audit and the report of other auditors, maintained, in all
material respects, effective internal control over financial reporting as of December 31, 2019, based on the COSO
criteria.
We did not examine the effectiveness of internal control over financial reporting of Magic Software Japan
K.K, a wholly owned subsidiary, whose financial statements reflect total assets and revenues constituting 1% and
4%, respectively, of the related consolidated financial statement amounts as of and for the year ended December 31,
2019. The effectiveness of Magic Software Japan K.K.’s internal control over financial reporting was audited by
other auditors whose report has been furnished to us, and our opinion, insofar as it relates to the effectiveness of
Magic Software Japan K.K.’s internal control over financial reporting, is based solely on the report of the other
auditors.
As indicated in the accompanying Management's Report on Internal Control Over Financial Reporting,
management’s assessment of and conclusion on the effectiveness of internal control over financial reporting did not
include the internal controls of the business of NetEffects, Inc. and OnTarget Group, Inc., that were acquired during
2019 and included in the 2019 consolidated financial statements of the Company and constituted 3% of total and net
assets, as of December 31, 2019 and 10% of revenues for the year then ended. Our audit of internal control over
financial reporting of the Company also did not include an evaluation of the internal control over financial reporting
of the business of NetEffects, Inc. and OnTarget Group, Inc.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board
(United States) (PCAOB), the consolidated balance sheets of the Company as of December 31, 2019 and 2018, 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, 2019 and the related notes and our report dated May
14, 2020 expressed an unqualified opinion thereon based on our audit and the report of the other auditors.
Basis for Opinion
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 are a public
accounting firm registered with the PCAOB and are required to be independent with respect to the Company in
accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and
Exchange Commission and the PCAOB.
F-3
We conducted our audit in accordance with the standards of the PCAOB. 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 and the report of other auditors provides a reasonable basis for our opinion.
Definition and Limitations of Internal Control Over Financial Reporting
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.
/s/Kost Forer Gabbay & Kasierer
KOST FORER GABBAY & KASIERER
A Member of Ernst & Young Global
Tel-Aviv, Israel
May 14, 2020
F-4
CONSOLIDATED BALANCE SHEETS
U.S. dollars in thousands
ASSETS
CURRENT ASSETS:
MAGIC SOFTWARE ENTERPRISES LTD.
December 31,
2019
2018
Cash and cash equivalents
Short-term bank deposits
Marketable securities
Trade receivables (net of allowance for doubtful accounts of $ 3,810 and $ 2,992 at
$
81,915 $
6,996
6,600
87,126
16,881
9,913
December 31, 2019 and 2018, respectively)
Other accounts receivable and prepaid expenses
Total current assets
LONG-TERM ASSETS:
Severance pay fund
Deferred tax asset
Operating lease right-of-use assets
Other long-term receivables
PROPERTY AND EQUIPMENT, NET
INTANGIBLE ASSETS, NET
GOODWILL
Total long-term assets
Total assets
96,694
12,845
90,274
7,029
205,050
211,223
4,013
2,188
14,956
5,879
3,284
1,858
-
6,363
3,649
3,072
51,128
41,479
117,743
95,006
199,556
151,062
$ 404,606 $ 362,285
The accompanying notes are an integral part of the consolidated financial statements.
F-5
CONSOLIDATED BALANCE SHEETS
U.S. dollars in thousands (except share data)
LIABILITIES AND EQUITY
CURRENT LIABILITIES:
Short term debt
Trade payables
Accrued expenses and other accounts payable
Current maturities of operating lease liabilities
Liabilities due to acquisition activities
Deferred revenues and customer advances
Total current liabilities
LONG TERM LIABILITIES:
Long-term debt
Long-term operating lease liabilities
Long-term liabilities due to acquisition activities
Deferred tax liability
Accrued severance pay
Total long term liabilities
MAGIC SOFTWARE ENTERPRISES LTD.
December 31,
2019
2018
$
7,079 $
10,990
32,619
3,833
3,638
8,724
8,661
14,036
24,458
-
910
4,857
66,883
52,922
15,540
11,119
8,613
11,069
4,770
19,388
-
94
10,343
3,934
51,111
33,759
COMMITMENTS AND CONTINGENCIES, see Note 16
REDEEMABLE NON-CONTROLLING INTEREST
21,915
27,235
EQUITY:
Magic Software Enterprises equity:
Share capital:
Ordinary shares of NIS 0.1 par value -
Authorized: 50,000,000 shares at December 31, 2019 and 2018; Issued and
Outstanding: 48,939,538 and 48,861,038 shares at December 31, 2019 and 2018,
respectively
Additional paid-in capital
Accumulated other comprehensive income (loss)
Retained earnings
Total equity attributable to Magic Software Enterprises shareholders
Non-controlling interests
Total equity
1,161
218,647
(324)
28,354
1,159
218,400
(6,125)
30,522
247,838
16,859
243,956
4,413
264,697
248,369
Total liabilities, redeemable non-controlling interest and equity
$ 404,606 $ 362,285
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)
MAGIC SOFTWARE ENTERPRISES LTD.
Year ended December 31,
2018
2017
2019
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
$
28,084 $
30,996
266,550
25,454 $
30,951
227,970
21,644
30,386
206,110
325,630
284,375
258,140
10,220
4,167
209,114
9,960
4,120
181,477
9,564
3,888
161,709
223,501
195,557
175,161
102,129
88,818
82,979
8,239
30,454
29,784
5,696
27,197
24,227
6,942
27,244
22,837
Total operating costs and expenses
68,477
57,120
57,023
Operating income
Financial income (expenses), net
Income before taxes on income
Taxes on income
Net income
Net income attributable to redeemable non-controlling interests
Net income attributable to non-controlling interests
33,652
(1,180)
31,698
149
25,956
(1,711)
32,472
6,874
31,847
7,071
24,245
6,331
25,598
3,111
2,221
24,776
3,383
1,510
17,914
1,536
936
Net income attributable to Magic Software Enterprises shareholders
$
20,266 $
19,883 $
15,442
Net earnings per share attributable to Magic Software Enterprises’
shareholders:
Basic and Diluted earnings per share
$
0.26 $
0.39 $
0.35
The accompanying notes are an integral part of the consolidated financial statements.
F-7
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
U.S. dollars in thousands
MAGIC SOFTWARE ENTERPRISES LTD.
Year ended December 31,
2018
2017
2019
Net income
$
25,598 $
24,776 $
17,914
Other comprehensive income (loss), net of tax
Foreign currency translation adjustments, net
Unrealized gains (losses) from available-for-sale securities
Gain reclassified into earnings from marketable securities
8,125
95
(8,217)
(36)
-
10,134
(4)
(94)
Total other comprehensive income (loss), net of tax
8,220
(8,253)
10,036
Total comprehensive income
33,818
16,523
27,950
Comprehensive income attributable to redeemable non-controlling
interests
Comprehensive income attributable to non-controlling interests
5,106
2,645
1,649
1,200
4,007
990
Comprehensive income attributable to Magic Software Enterprises’
shareholders
$
26,067 $
13,674 $
22,953
The accompanying notes are an integral part of the consolidated financial statements.
F-8
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY
U.S. dollars in thousands (except share data)
MAGIC SOFTWARE ENTERPRISES LTD.
Attributable to the Company’s shareholders
Accumulated
other
comprehensiv
e
income (loss)
Retaine
d
earnings
Non-
controllin
g
interests
Total
equity
Number of
Shares
Share
capital
Additional
paid-in
capital
44,355,77
Balance as of January 1, 2017
Exercise of stock options
Stock-based compensation
Redeemable non-controlling
interests reclassification
to non-controlling
interests
Dividend
Other comprehensive
income
Net income
0 1,036
4
-
132,808
-
182,785
582
78
(7,428) 19,825
-
-
-
-
423 196,641
586
78
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
(9,554)
2,440
2,440
(571) (10,125)
7,511
-
- 15,442
54 7,565
936 16,378
Balance as of December 31,
44,488,57
8 1,040
183,445
83 25,713
3,282 213,563
4,268,293
104,167
-
117
2
-
34,452
309
194
-
-
-
-
-
-
- 34,569
311
-
194
-
-
-
-
-
-
-
-
-
-
-
-
-
-
(1,726)
- (13,348)
-
- 19,883
(6,208)
- (1,726)
(69) (13,417)
(310) (6,518)
1,510 21,393
Balance as of December 31,
48,861,03
2018
Exercise of stock options
Stock-based compensation
Acquisition of redeemable
non-controlling interests
Increase in value of put
options of redeemable
non-controlling interests
Acquisition of non-
controlling interests
Redeemable non-controlling
interests reclassification
to non-controlling
interests
8 1,159
2
-
78,500
-
218,400
173
74
(6,125) 30,522
-
-
-
-
4,413 248,369
175
74
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
(911)
-
(911)
-
(6,560)
- (6,560)
-
-
359
359
-
-
9,899
9,899
2017
Issue of share capital, net of
issuance costs of $ 400
Exercise of stock options
Stock-based compensation
Increase in value of put
options of redeemable
non-controlling interests
Dividend
Other comprehensive loss
Net income
Dividend
Other comprehensive
income
Net income
-
-
-
-
-
-
-
-
-
- (14,963)
(457) (15,420)
5,801
-
- 20,266
424
6,225
2,221 22,487
Balance as of December 31,
48,939,53
2019
8 1,161
218,647
(324) 28,354
16,859 264,697
The accompanying notes are an integral part of the consolidated financial statements.
F-9
CONSOLIDATED STATEMENTS OF CASH FLOWS
U.S. dollars in thousands
MAGIC SOFTWARE ENTERPRISES LTD.
Year ended December 31,
2018
2017
2019
Cash flows from operating activities:
Net income
Adjustments to reconcile net income to net cash provided by operating
$
25,598 $
24,776 $
17,914
activities:
Depreciation and amortization
Stock-based compensation
Change in deferred taxes, net
Amortization of marketable securities premium and accretion of
discount
Gains reclassified into earnings from marketable securities
Net change in operating assets and liabilities:
Trade receivables, net
Other long-term and short-term accounts receivable and prepaid
expenses
Trade payables
Exchange rate of loans
Accrued expenses and other accounts payable
Deferred revenues
14,025
74
(1,893)
12,564
194
526
13,611
78
(1,108)
117
-
189
-
218
(94)
6,550
(11,367)
(15,752)
9,594
(5,273)
1,895
(7,673)
2,934
(4,364)
2,203
(2,099)
1,802
(374)
(1,773)
3,604
3,200
4,435
1,175
Net cash provided by operating activities
45,948
24,050
25,508
The accompanying notes are an integral part of the consolidated financial statements.
F-10
CONSOLIDATED STATEMENTS OF CASH FLOWS
U.S. dollars in thousands
MAGIC SOFTWARE ENTERPRISES LTD.
Year ended December 31,
2018
2017
2019
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 maturity and sale of marketable securities
Investment in marketable securities
Investment in long-term bank deposits
Proceeds from (Investment in) short-term bank deposits
Short term loan to a related-party
(4,143)
(1,379)
(22,603)
3,356
-
(714)
10,043
-
(3,666)
(863)
(1,218)
4,000
-
(932)
(16,875)
-
(3,771)
(1,400)
(1,787)
4,225
(5,766)
-
-
1,183
Net cash used in investing activities
(15,440)
(19,554)
(7,316)
Cash flows from financing activities:
Proceeds from exercise of options by employees
Issuance of ordinary shares, net
Dividend paid
Dividend paid to non-controlling interests
Dividend paid to redeemable non-controlling interests
Short-term credit, net
Purchase of redeemable non-controlling interest
Payments of contingent consideration
Short-term and long-term loans received
Repayment of short-term and long-term loans
69
104
(14,963)
(457)
(3,395)
-
(5,592)
-
878
(13,624)
311
34,569
(13,543)
(69)
(2,671)
(437)
-
(3,126)
26
(6,634)
586
-
(9,359)
(571)
(5,312)
-
-
(5,103)
8,535
(8,190)
Net cash provided by (used in) financing activities
(36,980)
8,426
(19,414)
Effect of exchange rate changes on cash and cash equivalents
1,261
(1,872)
1,984
Increase (decrease) in cash and cash equivalents
Cash and cash equivalents at the beginning of the year
(5,211)
87,126
11,050
76,076
762
75,314
Cash and cash equivalents at end of the year
$
81,915 $
87,126 $
76,076
The accompanying notes are an integral part of the consolidated financial statements.
F-11
CONSOLIDATED STATEMENTS OF CASH FLOWS
U.S. dollars in thousands
MAGIC SOFTWARE ENTERPRISES LTD.
Year ended December 31,
2018
2017
2019
Supplementary information on investing and financing activities not
involving cash flows:
Non-cash activities:
Deferred acquisition payment
$
11,209 $
- $
652
Contingent acquisition consideration
$
5,851 $
- $
-
Operating lease, right of use assets
Dividend declared and not yet paid
Dividend declared and not yet paid to redeemable non-controlling
interests
Supplemental disclosure of cash flow activities:
Cash paid (received), net during the year for:
$
$
$
5,949
- $
- $
195
- $
- $
692
Income taxes
Interest
$
6,736 $
5,419 $
5,373
$
(152) $
312 $
572
The accompanying notes are an integral part of the consolidated financial statements.
F-12
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands
NOTE 1:- GENERAL
MAGIC SOFTWARE ENTERPRISES LTD.
MAGIC SOFTWARE ENTERPRISES LTD., an Israeli company (“the Group” or “the Company”), is
a global provider of: (i) proprietary application development and business process integration
platforms that accelerate the planning, development, deployment and integration of on-premise, mobile
and cloud business applications (“the Magic Technology”); (ii) selected packaged vertical software
solutions; and (iii) a vendor of software services and IT outsourcing software services.
Magic Technology enables enterprises to accelerate the process of delivering business solutions that
meet current and future needs and allow customers to dramatically improve their business performance
and return on investment. To complement its software products and to increase its traction with
customers, the Group also offers a complete portfolio of software services in the areas of infrastructure
design and delivery, application development, technology planning and implementation services,
communications services and solutions, and supplemental IT professional outsourcing services. The
Company reports its results on the basis of two reportable business segments: software services (which
include proprietary and non-proprietary software solutions, maintenance and support and related
services) and IT professional services (see Note 18 for further details).
The Company’s principal markets are the United States, Israel, Europe and Japan (see Note 18).
For information about the Company’s holdings in subsidiaries and affiliates, see Appendix 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, unless
otherwise stated:
Use of estimates
The preparation of the consolidated financial statements in conformity with U.S. GAAP requires
management to make estimates, judgments and assumptions. The Company’s management believes
that the estimates, judgments and assumptions used are reasonable based upon information available at
the time they are made. These estimates, judgments and assumptions can affect the reported amounts
of assets and liabilities and disclosure of contingent assets and liabilities at the dates of the financial
statements, and the reported amounts of revenue and expenses during the reporting period. Actual
results could differ from those estimates.
Financial statements in United States dollars
A substantial portion of the revenues and expenses of the Company and of certain 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 certain subsidiaries operate.
Thus, the functional and reporting currency of the Company and certain subsidiaries is the dollar.
F-13
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands
NOTE 2:-
SIGNIFICANT ACCOUNTING POLICIES (Cont.)
MAGIC SOFTWARE ENTERPRISES LTD.
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. Monetary accounts and transactions maintained in dollars are
presented at their original amounts.
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 accumulated other comprehensive income
(loss) in equity.
Principles of consolidation
The consolidated financial statements include the accounts of the Company and its 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 Company’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 for the year
ended December 31, 2019:
January 1, 2019
Net income attributable to redeemable non-controlling interest
Increase in value of put options of redeemable non-controlling interests
Dividend declared to redeemable non-controlling interest
Acquisition of redeemable non-controlling interests
Foreign currency translation adjustments
Redeemable non-controlling interest reclassification to non-controlling interest
December 31, 2019
F-14
$
27,235
3,111
7,471
(3,395)
(4,604)
1,996
(9,899)
$
21,915
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands
NOTE 2:-
SIGNIFICANT ACCOUNTING POLICIES (Cont.)
Cash and cash equivalents
MAGIC SOFTWARE ENTERPRISES LTD.
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 acquisition.
Cash and cash equivalents include amounts held primarily in NIS, dollar, Euro, Japanese Yen and
British Pound.
Short-term deposits and restricted deposits
Short-term deposits include deposits with original maturities of more than three months and less than
one year. Such deposits are presented at cost (including accrued interest) which approximates their fair
value. Restricted deposits are used to secure certain of the Group’s ongoing projects and are classified
under other long-term receivables.
Marketable securities
The Company accounts for all its investments in marketable securities in accordance with ASC No.
320, “Investments – Debt and Equity Securities”. The Company classifies all of its marketable
securities as available for sale and held for trading. Available for sale securities are carried at fair
value, with the unrealized gains and losses, net of tax, reported in “accumulated other comprehensive
income (loss)” in equity. Realized gains and losses on sale of investments are included in “financial
income (expense), net” and are derived using the specific identification method for determining the
cost of securities.
The amortized cost of debt securities is adjusted for amortization of premiums and accretion of
discounts to maturity. Such amortization together with interest on securities is included in “financial
expense (income), net”.
The Company recognizes an impairment charge when a decline in the fair value of its investments in
debt securities below the cost basis of such securities is judged to be other-than-temporary. Factors
considered in making such a determination include the duration and severity of the impairment, the
reason for the decline in value, the potential recovery period and the Company’s intent to sell,
including whether it is more likely than not that the Company will be required to sell the investment
before recovery of cost basis. For securities that are deemed other-than-temporarily impaired, the
amount of impairment is recognized in “net gain (impairment net of gains) on sale of marketable
securities previously impaired” in the statements of income and is limited to the amount related to
credit losses, while impairment related to other factors is recognized in other comprehensive income.
The Company classifies its marketable debt securities as either short-term or long-term based on each
instrument’s underlying contractual maturity date and the Company’s expectations of sales and
redemptions in the following year.
Held for trading securities are measured at fair value through profit or loss.
F-15
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands
NOTE 2:-
SIGNIFICANT ACCOUNTING POLICIES (Cont.)
Property and equipment, net
MAGIC SOFTWARE ENTERPRISES LTD.
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
Years
3 - 5
7 - 15 (mainly 7)
7
3 – 5 (mainly 5)
Leasehold improvements are amortized using the straight-line method over the term of the lease
(including option terms that are deemed to be reasonably assured) or the estimated useful life of the
improvements, whichever is shorter.
Business combinations
The Company accounts for business combinations under ASC 805, “Business Combinations”. ASC
805 requires recognition of assets acquired, liabilities assumed, contingent consideration, non-
controlling interest and redeemable non-controlling interest in the acquiree at the acquisition date, to
be measured at their fair values as of that date. As required by ASC 820, “Fair Value Measurements
and Disclosures” the Company applies assumptions, judgments and estimates 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. Acquisition related costs are expensed to the
statements of income in the period incurred. The cumulative impact of measurement period
adjustments, including the impact to prior periods, is recognized in the reporting period in which the
adjustment is identified.
During the years ended December 31, 2017, 2018 and 2019 the Company recorded $ 300, $ (38) and $
255, with respect to changes in the fair value of contingent consideration liability, respectively.
F-16
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands
NOTE 2:-
SIGNIFICANT ACCOUNTING POLICIES (Cont.)
Research and development costs
MAGIC SOFTWARE ENTERPRISES LTD.
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.
ASC 985-20-35 requires that a product be amortized when the product is available for general release
to customers. The Company considers a product to be available for general release to customers when
the Company completes its internal validation of the product that is necessary to establish that the
product meets its design specifications including functions, features, and technical performance
requirements. Internal validation includes the completion of coding, documentation and testing that
ensure bugs are reduced to a minimum. The internal validation of the product takes place a few weeks
before the product is made available to the market. In certain instances, the Company enters into a
short pre-release stage, during which the product is made available to a selected number of customers
as a beta program for their own review and familiarization. Subsequently, the release is made generally
available to customers from the Company’s download area. Once a product is considered available for
general release to customers, the capitalization of costs ceases and amortization of such costs to “Cost
of revenues” begins.
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 (approximately 5 years, due to their high rates of
acceptance, the continued reliance on these products by existing customers, and the demand for such
products from prospective customers, all of which validate the Company’s expectations) which
provides greater amortization expense compared to the revenue-curve method.
The Company assesses the recoverability of these intangible assets on a regular basis by assessing the
net realizable value of these intangible assets based on the estimated future gross revenues from each
product reduced by the estimated future costs of completing and disposing of it, including the
estimated costs of performing maintenance and customer support over its remaining economical useful
life using internally generated projections of future revenues generated by the products, cost of
completion of products and cost of delivery to customers over its remaining economical useful life.
During the years ended December 31, 2017, 2018 and 2019, no such unrecoverable amounts were
identified.
Research and development costs incurred in the process of developing product enhancements are
generally charged to expenses as incurred.
F-17
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands
NOTE 2:-
SIGNIFICANT ACCOUNTING POLICIES (Cont.)
Leases
MAGIC SOFTWARE ENTERPRISES LTD.
Effective of January 1, 2019, the Company adopted Topic 842, which requires the recognition of lease
assets and lease liabilities by lessees for leases classified as operating leases. Topic 842 is effective for
interim and annual reporting periods beginning after December 15, 2018. In July 2018, the FASB
issued amendments to Topic 842 in ASU 2018-11, which provide a transition election to not restate
comparative periods for the effects of applying the new standard. This transition election permits
entities to change the date of initial application to the beginning of the earliest comparative period
presented, or retrospectively at the beginning of the period of adoption through a cumulative-effect
adjustment. The Company has adopted Topic 842 using the modified retrospective transition approach
by applying the new standard to all leases existing on the date of initial application. Results and
disclosure requirements for reporting periods beginning after January 1, 2019 are presented under
Topic 842, while prior period amounts have not been adjusted and continue to be reported in
accordance with the Company’s historical accounting under Topic 840.
The Company elected the package of practical expedients permitted under the transition guidance,
which allowed the Company to carry forward the historical lease classification, the Company’s
assessment on whether a contract was or contains a lease, and initial direct costs for any leases that
existed prior to January 1, 2019. The Company also elected to keep leases with an initial term of 12
months or less, which do not include an option to renew the lease agreement, off the balance sheet, and
recognize the associated lease payments in the consolidated statements of income on a straight-line
basis over the lease term.
As a result of the adoption of Topic 842 on January 1, 2019, the Company recorded operating lease
right of use (“ROU”) assets and operating lease liabilities of $12,322. The adoption did not impact the
Company’s retained earnings, or prior year consolidated statements of income and statements of cash
flows.
The Company determines if an arrangement is a lease at inception. The Company’s assessment is
based on: (1) whether the contract involves the use of an identified asset, (2) whether the Company
obtains the right to substantially all of the economic benefits from the use of the asset throughout the
period of use, and (3) whether the Company has the right to direct the use of the asset.
Leases are classified as either finance leases or operating leases. A lease is classified as a finance lease
if any one of the following criteria are met: the lease transfers ownership of the asset by the end of the
lease term, the lease contains an option to purchase the asset that is reasonably certain to be exercised,
the lease term is for a major part of the remaining useful life of the asset, the present value of the lease
payments equals or exceeds substantially all of the fair value of the asset, or the underlying asset is of
such a specialized nature that it is expected to have no alternative use to the lessor at the end of lease
term. A lease is classified as an operating lease if it does not meet any one of these criteria. Since all of
the Company’s lease contracts do not meet any one of the criteria above, the Company concluded that
all of its lease contracts should be classified as operating leases.
ROU assets and liabilities are recognized on the commencement date based on the present value of
remaining lease payments over the lease term. For this purpose, the Company considers only payments
that are fixed and determinable at the time of commencement. As most of the Company’s leases do not
provide an implicit rate, the Company uses its incremental borrowing rate (“IBR”) based on the
information available on the commencement date in determining the present value of lease payments.
The Company’s IBR is estimated to approximate the interest rate for collateralized borrowing with
similar terms and payments and in economic environments where the leased asset is located. Certain
leases include options to extend or terminate the lease. The ROU asset also includes any lease
payments made prior to commencement and is recorded net of any lease incentives received.
Moreover, the ROU asset may also include initial direct costs, which are incremental costs of a lease
that would not have been incurred if the lease had not been obtained. The Company uses the long-lived
assets impairment guidance in Accounting Standards Codification (“ASC”) Subtopic 360-10,
“Property, Plant, and Equipment - Overall,” to determine whether a right-of-use asset is impaired, and
if so, the amount of the impairment loss to recognize. An option to extend the lease is considered in
connection with determining the ROU asset and lease liability when it is reasonably certain that the
Company will exercise that option. An option to terminate is considered unless it is reasonably certain
that the Company will not exercise the option.
Offices
The Company leases space for offices in various locations worldwide under operating leases. These
contracts are considered as operating leases presented in ROU assets.
F-18
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands
NOTE 2:-
SIGNIFICANT ACCOUNTING POLICIES (Cont.)
Motor vehicles
MAGIC SOFTWARE ENTERPRISES LTD.
The Company leases motor vehicles. Each leasing contract is generally valid for a term of three years.
These contracts are considered as operating leases presented in ROU assets.
For the vast majority of the Company’s motor vehicle lease agreements, the lease payments include
inconsequential non-lease payments, such as license and registration fees, insurance and maintenance.
As a result, the Company elected to not separate non-lease components from lease components, and
instead, to account for each separate lease component and the non-lease component associated with
that lease component as a single lease component.
Impairment of long-lived assets, right of use assets and intangible assets subject to amortization
The Company’s long-lived assets (assets group) to be held or used, including right of use assets and
intangible assets that are subject to amortization, 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, judgments and estimates that marketplace participants would consider in determining the
fair value of long-lived assets (or asset groups).
During the years ended December 31, 2017, 2018 and 2019, no impairment losses have been
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, 2019, the Company operates in four reporting units within its
operating segments.
Goodwill reflects the excess of the consideration paid or transferred plus the fair value of contingent
consideration and any non-controlling interest in the acquiree at the acquisition date over the fair
values of the identifiable net assets acquired.
ASC 350 allows an entity to first assess qualitative factors to determine whether it is necessary to
perform the two-step quantitative goodwill impairment test. If the qualitative assessment does not
result in a more likely than not indication of impairment, no further impairment testing is required. If it
does result in a more likely than not indication of impairment, the two-step impairment test is
performed. Alternatively, ASC 350 permits an entity to bypass the qualitative assessment for any
reporting unit and proceed directly to performing the first step of the goodwill impairment test.
F-19
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands
NOTE 2:-
SIGNIFICANT ACCOUNTING POLICIES (Cont.)
MAGIC SOFTWARE ENTERPRISES LTD.
The provisions of ASC 350 require that the quantitative two-step impairment test will be performed on
goodwill at the level of the reporting units. In the first step, or “Step one”, the Company compares the
fair value of each reporting unit to its carrying value. If the fair value exceeds the carrying value of the
net assets, goodwill is considered not impaired, and the Company is not required to perform further
testing. If the carrying value of the net assets exceeds the fair value, then the Company must perform
the second step, or “Step two”, of the impairment test in order to determine the implied fair value of
goodwill which requires the Company to make judgments that involve the use of significant estimates
and assumptions.
The Company determines the fair value of each reporting unit by using the income approach, which
utilizes a discounted cash flow model, as it believes that this approach best approximates the reporting
unit’s fair value. Judgments and assumptions related to revenue, operating income, future short-term
and long-term growth rates, weighted average cost of capital, interest, capital expenditures, cash flows,
and market conditions are inherent in developing the discounted cash flow model. The Company
considers 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.
The Company performed an annual impairment test as of December 31, of each of 2017, 2018 and
2019 and did not identify any impairment losses (see Note 9).
Intangible assets
Intangible assets that are not considered to have an indefinite useful life 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. 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 1 - 15 years based on the
intangible assets identified.
Revenue recognition
The Company implements the provisions of Accounting Standards Codification (“ASC”) Topic 606,
Revenue from Contracts with Customers (“ASC 606”). See Note 19 for further disclosures required
under ASC 606.
Revenues are recognized when control of the promised goods or services are transferred to the
customers, in an amount that reflects the consideration that the company expects to receive in
exchange for those goods or services.
The Company determines revenue recognition through the following steps:
● identification of the contract with a customer;
● identification of the performance obligations in the contract;
● determination of the transaction price;
● allocation of the transaction price to the performance obligations in the contract; and
● recognition of revenue when, or as, the Company satisfies a performance obligation.
F-20
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands
NOTE 2:-
SIGNIFICANT ACCOUNTING POLICIES (Cont.)
MAGIC SOFTWARE ENTERPRISES LTD.
The Company enters into contracts that can include various combinations of products, software and
professional services, as detailed below, which are generally capable as being distinct from each other
and accounted for as separate performance obligations.
The Company derives its revenues from licensing the rights to use its software (proprietary and non-
proprietary), provision of related professional services, maintenance and technical support as well as
from other software and IT professional services (either fixed price or based on time and materials).
The Company sells its products primarily through direct sales force and indirectly through distributors
and value added resellers.
Under ASC 606, an entity recognizes revenue when or as it satisfies a performance obligation by
transferring software license or software related services to the customer, either at a point in time or
over time. The company recognizes its revenues from software sales at a point in time upon delivery of
its software license. The software license is considered a distinct performance obligation, as the
customer can benefit from the software on its own. Revenues from contracts that involve significant
customization to customer-specific specifications are performance obligations the Company generally
accounts for as performance obligations satisfied over time. The underlying deliverable is owned and
controlled by the customer, and does not create an asset with an alternative use to the Company. The
Company recognizes revenue of such contracts over time using cost inputs, which recognize revenue
and gross profit as work is performed based on a ratio between actual costs incurred compared to the
total estimated costs for the contract, to measure progress toward completion of its performance
obligations, which is similar to the method prior to the adoption of ASC 606. 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, 2017, 2018
and 2019, no material estimated losses were identified. In addition, the Company provides professional
services that do not involve significant customization to customer-specific specifications. For contracts
that do not involve significant customization to customer-specific specifications (typically staffing or
consulting services) revenue is recognized as the services are performed, either on a straight-line basis
or based on the hours of services that were provided to the customer, in accordance with the terms of
the contracts.
The Company’s revenues from post contract 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. The Company considers the post contract support performance obligation as
a distinct performance obligation that is satisfied over time, and recognized on a straight-line basis
over the contractual period.
Revenue from professional services, both related to software and IT professional services businesses
consists of either fixed price or time and materials, and are considered performance obligations that are
satisfied over time, and revenues are recognized as the services are provided.
The transaction price is allocated to the separate performance obligations on a relative standalone
selling price basis. Standalone selling prices of software licenses are estimated using the residual
approach, due to the lack of selling software licenses on a standalone basis. Standalone selling prices
of services are determined by considering several external and internal factors including, but not
limited to, transactions where the specific performance obligation is sold separately.
F-21
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands
NOTE 2:-
SIGNIFICANT ACCOUNTING POLICIES (Cont.)
MAGIC SOFTWARE ENTERPRISES LTD.
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 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.
The Company pays commissions to sales and marketing and certain management personnel based on
their attainment of certain predetermined sales or profit goals. When sales commissions are considered
incremental costs of obtaining a contract with a customer they are deferred and amortized on a
systematic basis that is consistent with the transfer to the customer of the performance obligations to
which the asset relates. The Company expenses sales commissions as they are incurred when the
amortization period would have been less than one year. In addition, generally, sales commissions
which are paid upon contract renewal are commensurate with the initial commissions as the renewal
amounts are substantially identical to the initial commission costs. During the year ended December
31, 2019, no costs have been capitalized.
The Company does not assess whether a contract has a significant financing component if the
expectation at contract inception is such that the period between payment by the customer and the
transfer of the promised goods or services to the customer will be one year or less.
Accrued severance pay and retirement plans
The Company’s and its Israeli subsidiaries’ 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 severance pay funds and by an accrual.
F-22
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands
NOTE 2:-
SIGNIFICANT ACCOUNTING POLICIES (Cont.)
MAGIC SOFTWARE ENTERPRISES LTD.
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.
The Company and its Israeli subsidiaries’ 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
are payable by the Company or its subsidiaries 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
and its subsidiaries are legally released from their obligations to employees once the deposit amounts
have been paid.
The Group has a number of savings plans in the United States that qualify under Section 401(k) of the
Internal Revenue Code. U.S. employees may contribute up to 100% of their pretax or post-tax salary,
but not more than statutory limits. Matching contributions are discretionary and if made, are up to 3%
of the participants annual contributions. When contributions are granted, they are invested in
proportion to each participant’s voluntary contributions in the investment options provided under the
plan.
Severance expenses for the years ended December 31, 2017, 2018 and 2019 amounted to
approximately $ 3,748, $ 4,052 and $ 4,712, respectively.
Advertising expenses
Advertising expenses are charged to selling and marketing expenses, as incurred. Advertising expenses
for the years ended December 31, 2017, 2018 and 2019 amounted to $ 384, $ 304 and $ 519,
respectively.
Income taxes
The Company accounts for income taxes in accordance with ASC 740, “Income Taxes”. ASC 740
prescribes the use of the “asset and liability” method whereby deferred tax asset and liability account
balances are determined based on differences between financial reporting and tax bases of assets and
liabilities and are measured using the enacted tax rates and laws that will be in effect when the
differences are expected to reverse. The Company provides a valuation allowance, if necessary, to
reduce deferred tax assets to their estimated realizable value. Deferred tax assets and liabilities are
classified as non-current.
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.
F-23
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands
NOTE 2:-
SIGNIFICANT ACCOUNTING POLICIES (Cont.)
MAGIC SOFTWARE ENTERPRISES LTD.
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.
Basic and diluted net earnings per share
Basic net earnings per share are computed based on the weighted average number of ordinary shares
outstanding during each year. Diluted net earnings per share are computed based on the weighted
average number of ordinary shares outstanding during each year, plus dilutive potential 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 2,093 for the years ended December 31, 2017. As of December 31, 2018, and December
31, 2019, there were no outstanding options excluded from the calculations of diluted earnings per
share.
Stock-based compensation
The Company accounts for stock-based compensation in accordance with ASC 718, “Compensation -
Stock Compensation” which requires the measurement and recognition of compensation expense based
on estimated fair values for all share-based payment awards made. ASC 718 requires companies to
estimate the fair value of equity-based payment awards on the date of grant using an option-pricing
model. The value of the portion of the award that is ultimately expected to vest is recognized as an
expense over the requisite service periods in the Company’s consolidated statement of income.
The Company recognizes compensation expenses for the value of its awards, which have graded
vesting based on the accelerated method over the requisite service period of each of the awards, net of
estimated forfeitures.
The Company uses the Binomial option-pricing model (“the Binomial model”) to estimate the fair
value for any options granted. The Binomial model takes into account variables such as volatility,
dividend yield rate, and risk-free interest rate and also allows for the use of dynamic assumptions and
considers the contractual term of the option, the probability that the option will be exercised prior to
the end of its contractual life, and the probability of termination or retirement of the option holder in
computing the value of the option.
F-24
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands
NOTE 2:-
SIGNIFICANT ACCOUNTING POLICIES (Cont.)
MAGIC SOFTWARE ENTERPRISES LTD.
The fair value of each option granted using the Binomial model, was estimated on the date of grant
with the following assumptions: expected volatility was 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 was based on
the yield from U.S. Treasury zero-coupon bonds with an equivalent term to the contractual term of the
options. The expected term of options granted was derived from the output of the option valuation
model and represented the period of time that options granted were expected to be outstanding.
Estimated forfeitures were based on actual historical pre-vesting forfeitures. Since dividend payments
are applied to reduce the exercise price of the option, the effect of the dividend protection was reflected
by using an expected dividend assumption of zero.
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.
No grants were made to employees or directors in 2017 or in 2019.
During the years ended December 31, 2017, 2018 and 2019, the Company recognized stock-based
compensation expense related to employee stock options in the amount of $ 78, $ 194 and $ 74,
respectively, as follows:
Year ended December 31,
2018
2017
2019
Cost of revenues
Research and development, net
Selling and marketing
General and administrative
$
- $
-
74
-
2 $
4
4
184
Total stock-based compensation expense
$
74 $
194 $
7
8
-
63
78
Concentrations of credit risk
Financial instruments that potentially subject the Company to concentration of credit risk consist
principally of cash and cash equivalents, short-term deposits, restricted cash, marketable securities,
trade receivables and foreign currency derivative contracts.
F-25
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands
NOTE 2:-
SIGNIFICANT ACCOUNTING POLICIES (Cont.)
MAGIC SOFTWARE ENTERPRISES LTD.
The Company’s cash and cash equivalents, short-term deposits and restricted cash are invested
primarily in bank 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 since these
deposits may be redeemed upon demand and since such institutions are of high rating they 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 (also refer to Note 4). In addition, management considered its portfolios in foreign
banks to be well-diversified.
The Company’s trade receivables are derived from sales to customers located primarily in the United
States, Israel, Europe and Japan. 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, 2017, 2018 and 2019 was $ 1,164, $ 1,070 and $
958, respectively.
From time to time the Company enters into foreign exchange forward contracts and option 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.
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 -
Includes other inputs that are directly or indirectly observable in the marketplace, other
than quoted prices included in Level 1, such as quoted prices for similar assets or
liabilities in active markets, quoted prices for identical or similar assets or liabilities in
markets with insufficient volume or infrequent transactions, or other inputs that are
observable (model-derived valuations in which significant inputs are observable), or can
be derived principally from or corroborated by observable market data;
Level 3 -
Unobservable inputs which are supported by little or no market activity;
F-26
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands
NOTE 2:-
SIGNIFICANT ACCOUNTING POLICIES (Cont.)
MAGIC SOFTWARE ENTERPRISES LTD.
The fair value hierarchy also requires an entity to maximize the use of observable inputs and minimize
the use of unobservable inputs when measuring fair value. The Company categorized each of its fair
value measurements in one of these three levels of hierarchy. Assets and liabilities measured at fair
value on a recurring basis are comprised of marketable securities, foreign currency forward contracts
and contingent consideration of acquisitions (see Note 5).
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.
Recently adopted accounting pronouncement
On January 1, 2019, the Company adopted Accounting Standards Update (“ASU”) No. 2016-
02, Leases (“Topic 842”), as amended, which supersedes the lease accounting guidance under Topic
840, and generally requires lessees to recognize operating and financing lease liabilities and
corresponding right-of-use (“ROU”) assets on the balance sheet and to provide enhanced disclosures
surrounding the amount, timing and uncertainty of cash flows arising from leasing arrangements. The
Company adopted the new guidance using the modified retrospective transition approach by applying
the new standard to all leases existing on the date of initial application and not restating comparative
periods. The most significant impact was the recognition of ROU assets and lease liabilities for
operating leases. For information regarding the impact of Topic 842 adoption, see Notes 2 and Note
21.
F-27
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands
NOTE 2:-
SIGNIFICANT ACCOUNTING POLICIES (Cont.)
MAGIC SOFTWARE ENTERPRISES LTD.
Recently issued accounting pronouncements and not yet adopted
In June 2016, the FASB Issued ASU 2016-13, Financial Instruments - Credit Losses (Topic 326):
Measurement of Credit Losses on Financial Instruments. The new standard requires financial assets
measured at amortized cost be presented at the net amount expected to be collected, through an
allowance for credit losses that is deducted from the amortized cost basis. The standard will be
effective for the Company beginning January 1, 2020, with early adoption permitted. The Company
does not expect that this new guidance will have a material impact on the Company’s consolidated
financial statements.
In January 2017, the FASB issued ASU 2017-04 (ASU 2017-04): Intangibles-Goodwill and Other
(Topic 350): Simplifying the Test for Goodwill Impairment. ASU 2017-04 eliminates step two of the
goodwill impairment test and specifies that goodwill impairment should be measured by comparing the
fair value of a reporting unit with its carrying amount. Additionally, the amount of goodwill allocated
to each reporting unit with a zero or negative carrying amount of net assets should be disclosed. ASU
2017-04 is effective for annual or interim goodwill impairment tests performed in fiscal years
beginning after December 15, 2019, and early adoption is permitted. The Company does not expect
that this new guidance will have a material impact on the Company’s consolidated financial
statements.
NOTE 3:- BUSINESS COMBINATION, SIGNIFICANT TRANSACTION AND SALE OF BUSINESS
a. On June 30, 2019, the Company acquired a 100% interest in NetEffects Inc (“NetEffects”), a U.S.-
based services company, specializes in IT staffing and recruiting, for a total consideration of $ 12,500,
of which $ 9,400 was paid upon closing and the remaining $ 3,100 will be paid in three installments in
the first, second and third closing day anniversary. Acquisition related costs were immaterial.
Unaudited pro forma condensed results of operations for the years ended December 31, 2018 and 2019
were not presented, since the acquisition is 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 July 1, 2019.
The following table summarizes the estimated fair values of the assets acquired and liabilities at the
date of acquisition:
Net assets, excluding cash acquired
Intangible assets
Goodwill
Total assets acquired net of acquired cash
$
$
91
8,716
3,526
12,333
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’s management believes the information provides a reasonable basis for estimating the
fair values of these amounts, but is waiting for additional information necessary to finalize those fair
values. Therefore, provisional measurements of fair value reflected are subject to change. The
Company expects to finalize the tangible and intangible assets valuation and complete the acquisition
accounting as soon as practicable but no later than the measurement period.
F-28
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands
MAGIC SOFTWARE ENTERPRISES LTD.
NOTE 3:- BUSINESS COMBINATION, SIGNIFICANT TRANSACTION AND SALE OF BUSINESS
(Cont.)
b. On April 1st, 2019 the Company acquired a 100% interest in PowWow Inc (“PowWow”), creator of
SmartUX™, A leading Low-Code Development Platform for Mobilizing and Modernizing Enterprise
Apps, for a total consideration of $8.4 million, out of which $2 million is contingent on future
performance. Acquisition related costs were immaterial. Unaudited pro forma condensed results of
operations for the years ended December 31, 2018 and 2019 were not presented, since the acquisition
is 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 March 1, 2019.
The following table summarizes the estimated fair values of the assets acquired and liabilities at the
date of acquisition
Net assets, excluding cash acquired
Intangible assets
Goodwill
Total assets acquired net of acquired cash
$
$
(1,557)
2,855
7,145
8,443
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’s management believes the information provides a reasonable basis for estimating the
fair values of these amounts, but is waiting for additional information necessary to finalize those fair
values. Therefore, provisional measurements of fair value reflected are subject to change. The
Company expects to finalize the tangible and intangible assets valuation and complete the acquisition
accounting as soon as practicable but no later than the measurement period.
c. On February 28, 2019, the Company acquired a 100% interest in OnTarget Group Inc. (“OnTarget”), a
U.S.-based services company, specializes in outsourcing of software development services, for a total
consideration of $ 12,456 of which $ 6,000 was paid upon closing and the remaining amount
constitutes a deferred payment depending on the future operating results achieved by OnTarget.
Acquisition related costs were immaterial. Unaudited pro forma condensed results of operations for the
years ended December 31, 2018 and 2019 were not presented, since the acquisition is 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 March 1, 2019.
The following table summarizes the estimated fair values of the assets acquired and liabilities at the
date of acquisition:
Net assets, excluding cash acquired
Intangible assets
Goodwill
Total assets acquired net of acquired cash
$
$
(832)
4,908
8,380
12,456
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’s management believes the information provides a reasonable basis for estimating the
fair values of these amounts, but is waiting for additional information necessary to finalize those fair
values. Therefore, provisional measurements of fair value reflected are subject to change. The
Company expects to finalize the tangible and intangible assets valuation and complete the acquisition
accounting as soon as practicable but no later than the measurement period.
On October 1, 2019 the Company acquired additional an 30% of its subsidiary Infinigy Solutions LLC
(“Infinigy”), a U.S.-based services company focused on expanding the development and
implementation of technical solutions which deliver design-driven turnkey solutions, combining
Architecture and Engineering, or A&E design project management and general contracting
competencies, across the wireless communications industry, for a total cash consideration of
approximately $ 4,393, which was paid upon closing. Subsequent to the share purchase the Company
holds 100% of Infinigy.
F-29
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands
NOTE 4:- MARKETABLE SECURITIES
MAGIC SOFTWARE ENTERPRISES LTD.
The Company invests in marketable debt securities, which were classified at fair value through profit
or loss and as available-for-sale securities. The following is a summary of marketable securities:
a. Composition:
Fair value through profit or loss (1)
Available-for-sale
December 31,
2019
2018
$
1,112 $
5,488
1,156
8,757
$
6,600 $
9,913
(1) The Company recognized trading losses in the amount of $ 35 during the year ended December 31, 2019.
b. The following is a summary of marketable securities which are classified as available-for-sale:
December 31,
2019
2018
Amortized
cost
Unrealize
d
losses
Amortized
Unrealized
gains
Market
value
cost
Unrealize
d
losses
Unrealize
d
gains
Market
value
Available-for-sale:
Corporate bonds
$
5,487 $
- $
1 $ 5,488 $
8,851 $
(94) $
- $ 8,757
Marketable securities with contractual maturities within one year and from one to three years are as
follows:
Amortized
cost
Unrealized
Gains
Losses
Market
value
Due within one year
Total
$
$
5,487 $
5,487 $
1 $
1 $
- $
5,488
- $
5,488
As of December 31, 2018 and 2019, management believes the impairments are not other than
temporary and therefore the impairment losses were recorded in accumulated other comprehensive
income (loss).
F-30
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands
NOTE 4:- MARKETABLE SECURITIES (Cont.)
MAGIC SOFTWARE ENTERPRISES LTD.
The following is the change in the other comprehensive income of available-for-sale securities
Other comprehensive income from available-for-sale securities as of January 1, 2018
Unrealized losses from available-for-sale securities
Other comprehensive loss from available-for-sale securities as of December 31, 2018
Unrealized gains from available-for-sale securities
Other comprehensive loss from available-for-sale securities as of December 31, 2019
NOTE 5:- FAIR VALUE MEASUREMENTS
Other
comprehensiv
e
income (loss)
$
$
$
(58)
(36)
(94)
95
1
In accordance with ASC 820, the Company measures its investment in marketable securities at fair
value. Generally equity funds are classified within Level 1, this is because these assets are valued using
quoted prices in active markets. Foreign currency derivative contracts, certain corporate bonds and
convertible 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.
F-31
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands
NOTE 5:- FAIR VALUE MEASUREMENTS (Cont.)
MAGIC SOFTWARE ENTERPRISES LTD.
The Company’s financial assets and liabilities measured at fair value on a recurring basis, consisted of
the following types of instruments:
Assets:
Corporate bonds
Convertible bonds
Total financial assets
Liabilities:
Contingent consideration
Total financials liabilities
Assets:
Corporate bonds
Convertible bonds
Total financial assets
Liabilities:
Contingent consideration
Total financials liabilities
December 31, 2019
Fair value measurements using input type
Level 1 Level 2 Level 3
Total
$
$
$
$
- $
-
5,488 $
1,112
- $
-
5,488
1,112
- $
6,600 $
- $
6,600
- $
- $
- $
5,964 $
5,964
- $
5,964 $
5,964
December 31, 2018
Fair value measurements using input type
Level 1 Level 2 Level 3
Total
$
$
$
$
- $
-
8,757 $
1,156
- $
-
8,757
1,156
- $
9,913 $
- $
9,913
- $
- $
- $
414 $
414
- $
414 $
414
Fair value measurements using significant unobservable inputs (Level 3):
Opening balance
Increase in contingent consideration due to acquisitions
Payment of contingent consideration
Increase in fair value of contingent consideration
Decrease in fair value of contingent consideration
December 31,
2019
2018
$
414 $
5,851
(585)
255
-
1,333
124
(974)
210
(248)
Amortization of interest and exchange rate
Closing balance
29
(31)
$
5,964 $
414
F-32
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands
NOTE 6:- OTHER ACCOUNTS RECEIVABLE AND PREPAID EXPENSES
MAGIC SOFTWARE ENTERPRISES LTD.
Prepaid expenses
Government authorities
Related parties
Other
NOTE 7:- PROPERTY AND EQUIPMENT, NET
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
December 31,
2019
2018
$
4,467 $
5,052
183
3,143
3,712
2,053
303
961
$
12,845 $
7,029
December 31,
2019
2018
$
1,461 $
16,640
4,287
1,170
3,394
981
15,221
3,774
1,217
3,084
26,952
24,277
622
15,702
3,288
598
3,093
470
14,528
2,699
564
2,944
23,303
21,205
Depreciated cost
$
3,649 $
3,072
F-33
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands
NOTE 7:- PROPERTY AND EQUIPMENT, NET (Cont.)
MAGIC SOFTWARE ENTERPRISES LTD.
Depreciation expenses amounted to $ 1,046, $ 1,175 and $ 1,261 for the years ended December 31,
2017, 2018 and 2019, respectively.
NOTE 8:-
INTANGIBLE ASSETS, NET
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
December 31,
2019
2018
$
82,878 $
70,032
2,712
15,867
78,793
54,850
2,712
12,722
171,489
149,077
70,326
40,550
2,712
6,773
66,123
33,578
2,674
5,223
120,361
107,598
Intangible assets, net
$
51,128 $
41,479
b. Amortization expenses amounted to $ 12,565, $ 11,389 and $ 12,764 for the years ended
December 31, 2017, 2018 and 2019, respectively.
c. The estimated future amortization expense of intangible assets as of December 31, 2019 is as
follows:
2020
2021
2022
2023
2024
2025 and thereafter
$
11,910
9,849
7,632
6,174
4,869
10,694
$
51,128
F-34
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands
NOTE 9:- GOODWILL
MAGIC SOFTWARE ENTERPRISES LTD.
Changes in the carrying amount of goodwill for the years ended December 31, 2018 and 2019
according to the Company’s reportable segments are as follows (see also Note 18):
IT
professional
services
Software
services
Total
As of January 1, 2018
$
48,403 $
49,786 $
98,189
Business combination
Measurement period adjustments
Foreign currency translation adjustments
-
(18)
(1,694)
277
-
(1,748)
277
(18)
(3,442)
As of December 31, 2018
$
46,691 $
48,315 $
95,006
Business combination
Measurement period adjustments
Foreign currency translation adjustments
12,691
(785)
1,749
3,382
3,762
1,938
16,073
2,977
3,687
As of December 31, 2019
$
60,346 $
57,397 $ 117,743
The Company performed an annual impairment test as of December 31, of each of 2017, 2018 and
2019 and did not identify any impairment losses (see Note 2).
NOTE 10:- SHORT TERM DEBT
Short-term credit from banks
Short-term credit from banks
Linkage
basis
USD
NIS
Interest
rate
%
U.S Prime -0.2 $
Israeli Prime +
0.8
December 31,
2019
2018
688 $
2,362
868
-
Current maturities of long-term loans from financial
institutions
NIS
2.25 - 3.0
5,523
7,079 $
6,299
8,661
$
F-35
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands
NOTE 11:- ACCRUED EXPENSES AND OTHER ACCOUNTS PAYABLE
MAGIC SOFTWARE ENTERPRISES LTD.
Employees and payroll accruals
Accrued expenses
Government authorities
Other
NOTE 12:- LONG TERM DEBT
Loans from banks and other (1)
Other long term debt
Current maturities
December 31,
2019
2018
$
21,092 $
6,790
4,110
627
16,242
6,219
1,426
571
$
32,619 $
24,458
Interest
rate
%
2.25 - 5
Linkage
basis
NIS
NIS
December 31,
2019
2018
$
$
20,951 $
112
25,572
115
21,063 $
(5,523)
25,687
(6,299)
$
15,540 $
19,388
(1) On November 2016, the Company obtained a loan in the amount of $ 31,356 linked to the New Israel Shekel
from an Israeli financial institution. The principal amount of the loan is payable in seven equal annual
installments with the final payment due on November 2, 2023 and bears a fixed interest rate of 2.60% per
annum, payable in two semi-annual payments.
Under the terms of the loan with the Israeli financial institution, the Company has undertaken to
maintain the following financial covenants, as they will be expressed in its consolidated financial
statements, as described:
a. Total equity attributable to Magic Software Enterprises shareholders shall not be lower than $
100,000 at all times;
b. The Company’s consolidated cash and cash equivalent and marketable securities available for
sales shall not be less than $ 10,000;
c. The ratio of the Company’s consolidated total financial debts to consolidated total assets will not
exceed 50%;
d. The ratio of the Company’s total financial debts less cash, short-term deposits and short-term
marketable securities to the annual EBITDA will not exceed 3.25 to 1; and
e. The Company shall not create any pledge on all of its property and assets in favor of any third
party without the financial institution’s consent.
As of December 31, 2019, the Company was in compliance with the financial covenants.
F-36
MAGIC SOFTWARE ENTERPRISES LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands
NOTE 13:- TAXES ON INCOME
a.
Israeli taxation:
1. Corporate tax rate in Israel:
The Israeli corporate income tax rate was 24% in 2017, and 23% in 2018 and 2019.
2. Tax benefits under the Israeli Law for the Encouragement of Capital Investments, 1959 (“the
Law”):
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, a flat corporate tax rate of 16% was established for exporting
industrial enterprises (over 25%). The reduced tax rate will not be program dependent and will
apply to the “Preferred Enterprise’s” (as such term is defined in the Investment Law) entire
“preferred income”.
The Amendment also prescribes that any dividends distributed to individuals or foreign residents
from the preferred enterprise’s earnings as above will be subject to tax at a rate of 20%.
One of its Israeli subsidiaries have elected to apply the new incentives regime under the
Amendment to their industrial activity in Israel, subject to meeting its requirements, starting in
2011.
New Amendment- Preferred Technology Enterprise
In December 2016, the Israeli Knesset passed Amendment 73 to the Investment Law which
included a number of changes to the Investments Law regimes. Certain changes were scheduled to
come into effect beginning January 1, 2017, provided that regulations are promulgated by the
Finance Ministry to implement the “Nexus Principles” based on OECD guidelines which were
published as part of the Base Erosion and Profit Shifting (BEPS) project. The regulations were
approved on May 1, 2017 and accordingly, these changes have come into effect. Applicable
benefits under the new regime include:
Introduction of a benefit regime for “Preferred Technology Enterprises” granting a 12% tax rate in
central Israel – on income deriving from Intellectual Property, subject to a number of conditions
being fulfilled, including a minimal amount or ratio of annual R&D expenditure and R&D
employees, as well as having at least 25% of annual income derived from exports. A Preferred
Technology Enterprise (“PTE”) is defined as an enterprise which meets the aforementioned
conditions and for which total consolidated revenues of its parent company and all subsidiaries are
less than NIS 10 billion.
F-37
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands
NOTE 13:- TAXES ON INCOME (Cont.)
MAGIC SOFTWARE ENTERPRISES LTD.
A 12% capital gains tax rate on the sale of a preferred intangible asset to a foreign affiliated
enterprise, provided that the asset was initially purchased from a foreign resident at an amount of
NIS 200 million or more.
A withholding tax rate of 20% for dividends paid from PTE income (with an exemption from such
withholding tax applying to dividends paid to an Israeli company). Such rate may be reduced to
4% on dividends paid to a foreign resident company, subject to certain conditions regarding
percentage of foreign ownership of the distributing entity.
In the years 2017 and 2018, part of the Company’s taxable income in Israel was entitled to a
preferred 12% tax rate in the preferred technological enterprise track under Amendment 73 to the
Investment Law.
In 2019 the Company transitioned to the preferred enterprise track entitling it to a preferred 16%
tax rate under Amendment 73 to the Investment Law.
The Company’s Israeli entities have received final tax assessments for their Israeli tax return
filings through the year 2013.
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.
5. Foreign Exchange Regulations:
Under the Foreign Exchange Regulations, the Company and one of its Israeli subsidiaries
calculate their tax liability in U.S. dollars according to certain orders. The tax liability, as
calculated in U.S. dollars is translated into NIS according to the exchange rate as of December 31
of each year.
F-38
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands
NOTE 13:- TAXES ON INCOME (Cont.)
b. Non-Israeli subsidiaries:
MAGIC SOFTWARE ENTERPRISES LTD.
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 tax rates.
Neither Israeli income taxes, foreign withholding taxes nor deferred income taxes were provided
in relation to undistributed earnings of the non-Israeli subsidiaries. This is because the Company
intends to permanently reinvest undistributed earnings in the foreign subsidiaries in which those
earnings arose. If these earnings were distributed in the form of dividends or otherwise, the
Company would be subject to additional Israeli income taxes (subject to an adjustment for foreign
tax credits) and non-Israeli withholding taxes.
The amount of the Company’s cash and cash equivalents that are currently held outside of Israel
that would be subject to income taxes if distributed as dividends is $ 12,426. However, a
determination of the amount of the unrecognized deferred tax liability for temporary difference
related to those undistributed earnings of foreign subsidiaries is not practicable due to the
complexity of the structure of our group of subsidiaries for tax purposes and the difficulty of
projecting the amount of future tax liability.
Tax Reform- United States of America
The U.S. Tax Cuts and Jobs Act of 2017 (“TCJA”) was approved by the U.S. Congress on
December 20, 2017 and signed into law by U.S. President Donald J. Trump on December 22,
2017. This legislation makes complex and significant changes to the U.S. Internal Revenue Code.
Such changes include a reduction in the corporate tax rate and limitations on certain corporate
deductions and credits, among other changes.
The TCJA reduces the U.S. federal corporate income tax rate from 35% to 21% effective January
1, 2018. In addition, the TCJA makes certain changes to the depreciation rules and implements
new limits on the deductibility of certain expenses and deduction.
The Company’s subsidiaries in the United States do not have any foreign subsidiaries and,
therefore, the remaining provisions of the TCJA have no material impact on the Company’s results
of operations.
The Company re-measured its U.S. deferred tax assets and liabilities, based on the rates at which
they are expected to reverse in the future.
F-39
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands
NOTE 13:- TAXES ON INCOME (Cont.)
c. Net operating loss carryforwards:
MAGIC SOFTWARE ENTERPRISES LTD.
As of December 31, 2019, three Israeli subsidiaries of the Company had operating loss
carryforwards of $ 14,053 (mainly F.T.S Formula Telecom Solutions, Ltd. which accounts for $
11,850), which can be carried forward to offset against taxable income in the future for an
indefinite period.
One of the Company’s subsidiaries in England had estimated total available tax loss carryforwards
of $ 3,964 as of December 31, 2019, which can be carried forward to offset against future taxable
income.
d.
Income before taxes on income:
Year ended December 31,
2018
2017
2019
Domestic
Foreign
$
17,806 $
14,666
25,839 $
6,008
19,442
4,803
$
32,472 $
31,847 $
24,245
e. Taxes on income:
Taxes on income (tax benefit) consist of the following:
Year ended December 31,
2018
2017
2019
Current:
Domestic
Foreign
Deferred taxes:
Domestic
Foreign
$
7,266 $
1,636
5,186 $
1,359
5,928
1,511
8,902
6,545
7,439
(1,001)
(1,027)
81
445
(1,160)
52
(2,028)
526
(1,108)
Taxes on income
$
6,874 $
7,071 $
6,331
F-40
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands
NOTE 13:- TAXES ON INCOME (Cont.)
f. Deferred tax assets and liabilities:
MAGIC SOFTWARE ENTERPRISES LTD.
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, net
Long-term tax assets
Long-term tax liabilities
Net deferred tax liabilities
December 31,
2019
2018
$
4,529 $
1,584
3,914
1,361
6,113
(3,925)
5,275
(3,417)
$
2,188 $
1,858
December 31,
2019
2018
$
2,188 $
(11,069)
1,858
(10,343)
$
(8,881) $
(8,485)
Deferred tax liabilities are mainly in respect of certain property and equipment, acquired
intangible assets and capitalized software costs.
The Company has provided valuation allowances in respect of certain deferred tax assets resulting
from operating losses carry forwards and other reserves and allowances due to uncertainty
concerning realization of these deferred tax assets.
F-41
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands
NOTE 13:- TAXES ON INCOME (Cont.)
MAGIC SOFTWARE ENTERPRISES LTD.
g. Reconciliation of the theoretical tax expense to the actual tax expense:
A reconciliation between the theoretical tax expense, assuming all income is taxed at the statutory
tax rate applicable to income for an Israeli company (2017, 2018 and 2019 statutory tax rate 24%,
23% and 23%, respectively), and the actual tax expense as reported in the statements of income is
as follows:
Year ended December 31,
2018
2017
2019
Income before taxes, as reported in the consolidated statements of income $
32,472
$
31,847
$
24,245
Statutory tax rate
23%
23%
24%
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
$
$
7,468
465
$
7,325
(826)
5,819
268
in the past
Tax-deductible costs, not included in the accounting costs
Tax expenses in respect of prior years, net
Non-deductible expenses
Uncertain tax position and other differences
(227)
-
(37)
(795)
(11)
-
(22)
45
560
658
(38)
(488)
70
42
Income tax
$
6,874
$
7,071
$
6,331
F-42
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands
NOTE 13:- TAXES ON INCOME (Cont.)
MAGIC SOFTWARE ENTERPRISES LTD.
h. The Company applies ASC 740, “Income Taxes” with regards to tax uncertainties. During the
years ended December 31, 2017, and 2018 the Company recorded $ 300, $ 1,050 (respectively) of
tax expenses 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 benefits at January 1, 2017
$
Increase in tax positions taken in prior years
Decrease in tax positions taken in prior years
Gross unrecognized tax benefits at December 31, 2017
Increase in tax positions taken in prior years
Decrease in tax positions taken in prior years
Gross unrecognized tax benefits at December 31, 2018
Increase in tax positions taken in prior years
Decrease in tax positions taken in prior years
825
300
-
1,125
1,050
-
2,175
-
-
Gross unrecognized tax benefits at December 31, 2019
$
2,175
Although the Company believes that it has adequately provided for any reasonably foreseeable
outcomes related to tax audits and settlement, there is no assurance that the final tax outcome of its
tax audits will not be different from that which is reflected in the Company’s income tax
provisions. Such differences could have a material effect on the Company’s income tax provision,
cash flow from operating activities and net income in the period in which such determination is
made.
NOTE 14:- EQUITY
a. The Ordinary shares of the Company are listed on the NASDAQ Global Select Market in the
United States and are traded on the Tel-Aviv Stock Exchange in Israel.
F-43
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands
NOTE 14:- EQUITY (Cont.)
b. Stock Option Plans:
MAGIC SOFTWARE ENTERPRISES LTD.
Under the Company’s 2007 Stock Option Plan, as amended (“the 2007 Plan”), options may be
granted to employees, officers, directors and consultants of the Company and its subsidiaries.
Pursuant to the original 2007 Stock Option Plan, the Company reserved 1,500,000 Ordinary shares
for issuance. In 2012, the Company increased the number of Ordinary shares reserved for issuance
under the 2007 Plan by additional 1,000,000 Ordinary shares.
On December 31, 2015 the Company’s Board of Directors increased the amount of Ordinary
shares reserved for issuance under the 2007 Plan by additional 250,000 Ordinary shares and
extended the 2007 Plan by 10 years whereas it will expire on August 1, 2027. As of December 31,
2019, an aggregate of 962,500 Ordinary shares of the Company are available for future grants
under the 2007 Plan. Each option granted under the 2007 Plan is exercisable for a period of ten
years from the date of the grant of the option.
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 2007 Plan.
A summary of employee option activity under the 2007 Plan as of December 31, 2019 and
changes during the year ended December 31, 2019 are as follows:
Weighted
average
exercise
price
Number
of options
Weighted
average
remaining
contractua
l
term
(in years)
Aggregate
intrinsic
value
220,767 $
- $
(78,500) $
(22,500) $
3.83
-
2.47
-
3.81 $
1,684
Outstanding at January 1, 2019
Granted
Exercised
Forfeited
Outstanding at December 31, 2019
119,767 $
2.58
1.37 $
1,171
Exercisable at December 31, 2019
119,767 $
2.58
1.37 $
1,171
F-44
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands
NOTE 14:- EQUITY (Cont.)
MAGIC SOFTWARE ENTERPRISES LTD.
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, 2019. This amount is changed based on the market value of the Company’s
Ordinary shares. Total intrinsic value of options exercised during the years ended December 31,
2017, 2018 and 2019 was $ 502, $ 617 and $ 537, respectively. As of December 31, 2019, there
was no unrecognized compensation cost related to non-vested share-based compensation
arrangements granted under the Plans.
The options outstanding as of December 31, 2019, have been separated into ranges of exercise
price categories, as follows:
Exercise price
In $
1.01-2
3.01-4
5.01-6
Weighted
average
remaining
contractua
l life
(years)
Weighted
average
exercise
price
Options
exercisable
Weighted
average
exercise
price of
exercisable
options
Options
outstanding
40,000
73,517
6,250
0.30 $
1.77 $
3.61 $
1.38
3.02
5.02
40,000 $
73,517 $
6,250 $
1.38
3.02
5.02
119,767
1.37 $
2.58
119,767 $
2.58
c. Accumulated other comprehensive income (loss):
December 31,
2018
2017
2019
Accumulated realized and unrealized gain (loss) on available-for-sale
securities, net
Accumulated foreign currency translation adjustments
Accumulated unrealized gain on derivative instruments, net
$
1 $
(351)
26
(94) $
(6,057)
26
(58)
115
26
Total other comprehensive income (loss)
$
(324) $
(6,125) $
83
d.
F-45
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands
NOTE 14:- EQUITY (Cont.)
MAGIC SOFTWARE ENTERPRISES LTD.
On August 9, 2017, the Company’s Board of Directors decided to amend the dividend distribution
policy announced in 2012. According to the Company’s amended policy, each year the Company
will distribute a dividend of up to 75% of its annual distributable profits. 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 decide not to distribute a dividend,
all at its discretion.
On February 22, 2017, the Company declared a dividend distribution of $ 0.085 per share ($ 3,775
in the aggregate) which was paid on April 5, 2017. On August 13, 2017, the Company declared a
dividend distribution of $ 0.13 per share ($ 5,779 in the aggregate) which was paid on September
13, 2017. On February 28, 2018, the Company declared a dividend distribution of $ 0.13 per share
($ 5,785 in the aggregate) which was paid on March 26, 2018. On August 8, 2018, the Company
declared a dividend distribution of $ 0.155 per share ($ 7,563 in the aggregate) which was paid on
September 5, 2018. On March 4, 2019, the Company declared a dividend distribution of $ 0.15 per
share ($ 7,335 in the aggregate) which was paid on March 25, 2019. On August 13, 2019, the
Company declared a dividend distribution of $ 0.156 per share ($ 7,628 in the aggregate) which
was paid on September 12, 2019.
NOTE 15:- RELATED PARTIES TRANSACTIONS
Agreements with controlling shareholder and its affiliates:
The Company has in effect agreements with affiliated companies pursuant to which the Company has
rendered services amounting to approximately $ 2,511, $ 2,535 and $ 4,300, in aggregate for the years
ended December 31, 2017, 2018 and 2019, respectively and acquired services amounting to
approximately $ 165, $ 309 and $ 224 for the years ended December 31, 2017, 2018 and 2019,
respectively.
As of December 31, 2018 and 2019, the Company had trade and other receivables balances due to its
related parties in amount of approximately $ 601 and $ 648, respectively. In addition, as of December
31, 2018 and 2019, the Company had trade payables balances due from its related parties in amount of
approximately $ 106 and $ 31, respectively.
F-46
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands
NOTE 16:- COMMITMENTS AND CONTINGENCIES
a. Guarantees and Collaterals:
MAGIC SOFTWARE ENTERPRISES LTD.
As of December 31, 2019, the Company has provided performance bank guarantees in the amount
of $805 as security for the performance of various contracts with customers. As of December 31,
2019, the Company has restricted bank deposits of $ 433 in favor of the issuing banks.
b. 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.
In September 2016, an Israeli software company, that was previously involved in an arbitration
proceeding with us in 2015 and won damages from us of $2.4 million, filed a lawsuit seeking
damages of NIS 34,106 against the Company and one its subsidiaries. This lawsuit was filed as
part of an arbitration proceeding. In the lawsuit, the software company claimed that warning
letters that the Company sent to its clients in Israel and abroad, warning those clients against the
possibility that the conversion procedure offered by the software company may amount to an
infringement of the Company’s copyrights (the “Warning Letters”), as well as other alleged
actions, have caused the software company damages resulting from loss of potential business. The
lawsuit is based on rulings given in the 2015 arbitration proceeding in which it was allegedly ruled
that the Warning Letters constituted a breach of a non-disclosure agreement (NDA) signed
between the parties.
The Company rejected the claims by the Israeli software company and moved to dismiss the
lawsuit entirely. At this point, all the relevant motions have been filed and all witnesses deposed
including legal summaries. The Company is unable to make a reasonably reliable estimate of its
chances of successfully defending this lawsuit.
F-47
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands
NOTE 17:- NET EARNINGS PER SHARE
The following table sets forth the computation of basic and diluted net earnings per share:
MAGIC SOFTWARE ENTERPRISES LTD.
Year ended December 31,
2018
2017
2019
Net income attributable to Magic shareholders
Accretion of redeemable non-controlling interests
Net income attributable to Magic shareholders after accretion of
redeemable non-controlling interests
$
$
$
20,266 $
(7,471) $
19,883 $
(1,726) $
15,442
-
12,795 $
18,157 $
15,442
Weighted average Ordinary shares outstanding:
Denominator for basic net earnings per share
Effect of dilutive securities
48,896,16
3 46,665,042 44,435,671
161,548
131,648
97,920
Denominator for diluted net earnings per share
3 46,796,690 44,597,219
48,994,08
Basic and Diluted earnings per share
$
0.26 $
0.39 $
0.35
F-48
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands
MAGIC SOFTWARE ENTERPRISES LTD.
NOTE 18:- 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.
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.
IT professional services
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 outsourcing services.
There are no significant transactions between the two segments.
b. The following is information about reported segment results of operation:
2017
Total revenues
Expenses
Software
services
IT
professional
services
Unallocated
expense
Total
$
77,100 $
63,649
181,040 $
164,558
- $ 258,140
232,184
3,977
Segment operating income (loss)
$
13,451 $
16,482 $
(3,977) $
25,956
Depreciation and amortization
$
9,242 $
4,100 $
269 $
13,611
F-49
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands
MAGIC SOFTWARE ENTERPRISES LTD.
NOTE 18:- SEGMENT GEOGRAPHICAL INFORMATION AND MAJOR CUSTOMERS (Cont.)
2018
Total revenues
Expenses
Software
services
IT
professional
services
Unallocated
expense
Total
$
81,332 $
63,902
203,043 $
183,985
- $ 284,375
252,677
4,790
Segment operating income (loss)
$
17,430 $
19,058 $
(4,790) $
31,698
Depreciation and amortization
$
8,727 $
3,611 $
226 $
12,564
2019
Total revenues
Expenses
$
86,140 $
71,825
239,490 $
216,842
- $ 325,630
291,978
3,311
Segment operating income (loss)
$
14,315 $
22,648 $
(3,311) $
33,652
Depreciation and amortization
$
8,799 $
5,059 $
167 $
14,025
c. The Company’s business is divided into the following geographic areas: United States, Israel,
Europe, Japan and other regions. Total revenues are attributed to geographic areas based on the
location of the customers.
The following table presents total revenues classified according to geographical destination for the
years ended December 31, 2017, 2018 and 2019:
Year ended December 31,
2018
2017
2019
United States
Israel
Europe
Japan
Other
$ 158,095 $ 137,066 $ 123,113
91,917
26,635
9,253
7,222
103,850
28,257
9,797
5,405
124,523
25,788
12,499
4,725
$ 325,630 $ 284,375 $ 258,140
F-50
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands
MAGIC SOFTWARE ENTERPRISES LTD.
NOTE 18:- SEGMENT GEOGRAPHICAL INFORMATION AND MAJOR CUSTOMERS (Cont.)
d. The Company’s long-lived assets are located as follows:
Israel
United States
Japan
Other
Europe
December 31,
2019
2018
$ 108,608 $ 100,206
30,222
5,082
2,800
1,247
68,989
6,406
3,248
3,103
$ 190,354 $ 139,557
e. The Company does not allocate its assets to its reportable segments; accordingly, asset information
by reportable segments is not presented.
f.
In 2017, 2018 and 2019, the Company had one major customer, included in the IT professional
services segment, which accounted for 13%, 13% and 9% of the group revenues, respectively.
NOTE 19:- REVENUE RECOGNITION
The Company adopted ASC 606 on January 1, 2018 for all open contracts at the date of initial
application, and applied the standard using modified retrospective approach, with the cumulative effect
of applying ASC 606 recognized as an adjustment to the opening retained earnings balance. Results for
reporting periods beginning after January 1, 2018 are presented under ASC 606, while prior period
amounts are not adjusted and continue to be reported under the accounting standards in effect for the
prior period.
F-51
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands
NOTE 19:- REVENUE RECOGNITION (Cont.)
MAGIC SOFTWARE ENTERPRISES LTD.
The following table includes estimated revenue expected to be recognized in future periods related to
performance obligations that are unsatisfied or partially unsatisfied at the end of the reporting period
and are part of a contract that has an original expected duration of more than one year:
Software license and related revenues and consulting services
$
6,632 $
Contract balances:
2020
2021
2022 and
thereafter
1,899
1,786 $
The following table provides information about trade receivables, contract assets (unbilled receivables)
and contract liabilities (deferred revenues) from contracts with customers (in thousands):
Trade receivables (net of allowance for doubtful accounts)
Deferred revenues
December 31,
2019
2018
$
$
96,694 $
8,724 $
90,274
4,857
Trade receivable are recorded when the right to consideration becomes unconditional, and an invoice is
issued to the customer.
Billing terms and conditions generally vary by contract type. Amounts are billed as work progresses in
accordance with agreed-upon contractual terms, either at periodic intervals (e.g., monthly or quarterly)
or upon achievement of contractual milestones.
Deferred revenues represent contract liabilities, and include unearned amounts received under
contracts with customers and not yet recognized as revenues.
During the year ended December 31, 2019, the Company recognized $4,857 that was included in
deferred revenues (short-term contract liability) balance at January 1, 2019.
F-52
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands
NOTE 20:- SELECTED STATEMENTS OF INCOME DATA
a. Research and development costs, net:
MAGIC SOFTWARE ENTERPRISES LTD.
Year ended December 31,
2018
2017
2019
Total costs
Less - capitalized software costs
$
12,382 $
(4,143)
9,362 $
(3,666)
10,713
(3,771)
Research and development, net
$
8,239 $
5,696 $
6,942
b. Financial income (expenses), net:
Bank charges and interest from loans offset by interest from short term
deposits
Interest expenses related to liabilities in connection with acquisitions
Interest income from marketable securities, net of amortization of
premium on marketable securities
Gain (loss) arising from foreign currency translation and other
$
(374) $
(11)
(986) $
(4)
(1,124)
(62)
212
(1,007)
284
855
284
(809)
Financial income (expenses), net
$
(1,180) $
149 $
(1,711)
NOTE 21:- LEASES
The Company leases substantially all of its office space and vehicles under operating leases. The
Company’s leases have original lease periods expiring between 2020 and 2028. Some leases include an
option to renew. The Company does not assume renewals in its determination of the lease term unless
the renewals are deemed to be reasonably certain at lease commencement. Lease payments included in
the measurement of the lease liability comprise the following: the fixed non-cancellable lease
payments, payments for optional renewal periods where it is reasonably certain the renewal period will
be exercised, and payments for early termination options unless it is reasonably certain the lease will
not be terminated early.
In November 2019, the Company entered into a lease agreement for new corporate offices of
Comblack IT in Ramat Gan, Israel. The lease expires in April 2025, with an option by the Company to
extend for an additional 5-year term. The Company deemed this option as reasonably certain to be
renewed.
The Company has several leased offices in the United States, with expiry dates varying between 2020
and 2024, with renewal options varying between 2021 and 2030.
Under Topic 842, all leases with durations greater than 12 months, including non-cancellable operating
leases, are now recognized on the balance sheet. The aggregated present value of lease agreements is
recorded as a long-term asset titled ROU asset.
The corresponding lease liabilities are classified between operating lease liabilities which are current
and long-term.
The components of operating lease costs were as follows: Basic rent expenses, management fees,
parking expenses and maintenance costs.
F-53
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands
NOTE 21:- LEASES (Cont.)
MAGIC SOFTWARE ENTERPRISES LTD.
The following is a summary of weighted average remaining lease terms and discount rates for all of the
Company’s operating leases:
Weighted average remaining lease term (years)
Weighted average discount rate
December 31
,
2019
3.55
2.05%
Cash paid for amounts included in the measurement of operating lease liabilities was $3,595 (included
in cash flows from operating activities).
Maturities of lease liabilities are as follows:
2020
2021
2022
2023
2024
2025 and thereafter
Total undiscounted cash flows
Less imputed interest
Present value of lease liabilities
NOTE 22:- SUBSEQUENT EVENTS
$
$
4,407
3,208
2,070
1,586
1,086
3,746
16,103
(1,151)
14,952
On January 1, 2020 the Company increased its equity interest from 60% to 80.05% in Roshtov
Software Industries Ltd (“Roshtov”), an Israeli-based software company and a market leader in Israel
for ambulator patient record information systems, for a total cash consideration of approximately $
15,000, paid upon closing.
The Company and Roshtov two minority shareholders hold a mutual Call and Put options respectively
for the remaining 19.95% interest in Roshtov.
On April 15, 2020 the Company increased its equity interest from 70% to 80.2% in Comblack IT Ltd.
(“Comblack”), an Israeli-based company that specializes in software professional and outsource
management services for mainframes and complex large-scale environments, for a total cash
consideration of approximately $ 3,600, of which an amount of $ 3,000 was paid upon closing and the
remaining will be paid over a period of up to 18 months. The consideration may be subject to further
adjustment (upward or downward) based on Comblack operational performance in 2020 and 2021.
F-54
APPENDIX TO CONSOLIDATED FINANCIAL STATEMENTS
MAGIC SOFTWARE ENTERPRISES LTD.
DETAILS OF SUBSIDIARIES AND AFFILIATE
Details of the percentage of control of the share capital and voting rights of subsidiaries and an affiliate as of
December 31, 2019:
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.
Fusion Technical 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 .
Magix Integration (Proprietary) Ltd.
Appbuilder Solutions Ltd.
Complete Business Solutions Ltd.
DataMind Technologies Ltd.
Comm-IT Technology Solutions Ltd.
Comm-IT Software Ltd. (a subsidiary of Comm-IT Technology Solutions Ltd.)
Comm-IT Embedded Ltd. (a subsidiary of Comm-IT Technology Solutions Ltd.)
Valinor Ltd. (a subsidiary of Comm-IT Technology Solutions Ltd.)
Dario IT Solutions Ltd. (a subsidiary of Comm-IT Technology Solutions Ltd.)
Quickode Ltd. (a subsidiary of Comm-IT Technology Solutions Ltd.)
Twingo Ltd. (a subsidiary of Comm-IT Technology Solutions Ltd.)
Pilat (North America), Inc
Pilat Europe Ltd.
Roshtov Software Industries Ltd.
BridgeQuest Labs, Inc
BridgeQuest, Inc.
Allstates Consulting Services LLC
F.T.S Formula Telecom Solutions, Ltd.
F.T.S Bulgaria Ltd.
Comblack IT Ltd.
Yes-IT Ltd. (a subsidiary of Comblack IT Ltd.)
Percentag
e of
ownership
and
control
%
Place of
incorporation
100 Japan
100 U.S.A.
100 U.K.
100 U.K.
100 Spain
100 U.S.A
100 U.S.A
100 U.S.A
49 U.S.A
100 U.S.A
100 Israel
100 Netherlands
100 France
100 Netherlands
100 Netherlands
100 Germany
100 India
100 Hungary
100 South Africa
100 U.K.
100 Israel
80 Israel
77.8 Israel
100 Israel
75 Israel
100 Israel
100 Israel
100 Israel
60 Israel
100 U.S.A
100 U.K.
60 Israel
100 U.S.A
100 U.S.A
100 U.S.A
100 Israel
100 Bulgaria
70 Israel
100 Israel
F-55
APPENDIX TO CONSOLIDATED FINANCIAL STATEMENTS
MAGIC SOFTWARE ENTERPRISES LTD.
DETAILS OF SUBSIDIARIES AND AFFILIATE (Cont.)
Name of Company
Shavit Software (2009) Ltd. (a subsidiary of Comblack IT Ltd.)
Infinigy (UK) holdings limited
Infinigy (US) holding Inc.
Infinigy Solutions LLC.
Infinigy Engineering LLP (a subsidiary of Infinigy Solutions LLC.)
Skysoft Solutions Ltd.
Futurewave Systems, Inc.
OnTarget Group, Inc
NetEffects, Inc.
PowWow Inc.
BA Microwaves Ltd.
F-56
Percentag
e of
ownership
and
control
%
Place of
incorporation
100 Israel
100 U.K.
100 U.S.A
100 U.S.A
99.9 U.S.A
75 Israel
100 U.S.A
100 U.S.A
100 U.S.A
100 U.S.A
56.67 Israel
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Shareholders of
Magic Software Japan K. K.
Opinion on the Financial Statements
We have audited the accompanying statements of financial position of Magic Software Japan K.K. (the
“Company”) as of December 31, 2018 and 2019, and the related statements of comprehensive income and cash
flows for each of the three years in the period ended December 31, 2019. 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,
2018 and 2019, and the related statements of comprehensive income and cash flows for each of the three years in the
period ended December 31, 2019 in conformity with U.S. generally accepted accounting principles.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight
Board (United States), (PCAOB), the Company’s internal control over financial reporting as of December 31, 2019,
based on Section 404 of the Sarbanes-Oxley Act (“SOA”) and our report dated February 13, 2020 expressed an
unqualified opinion thereon.
Basis for Opinion
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 are a public accounting firm registered
with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S.
federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the
PCAOB.
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, whether due to error or fraud. Our audits
included performing procedures to assess the risks of material misstatement of the financial statements, whether due
to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a
test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included
evaluating the accounting principles used and significant estimates made by management, as well as evaluating the
overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our
opinion.
Tokyo, Japan
February 13, 2020
/s/ KDA Audit Corporation
KDA Audit Corporation
F-57
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Shareholders of
Magic Software Japan K. K.
Opinion on Internal Control over Financial Reporting
We have audited Magic Software Japan K.K.’s (the “Company”) internal control over financial reporting as
of December 31, 2019, based on Section 404 of the Sarbanes-Oxley Act (“SOA”). In our opinion, the Company
maintained, in all material respects, effective internal control over financial reporting as of December 31, 2019,
based on Section 404 of the Sarbanes-Oxley Act (“SOA”).
We also have audited, in accordance with the standards of the Public Company Accounting Oversight
Board (United States), the statements of financial position of the Company as of December 31, 2018 and 2019, and
the related statements of comprehensive income and cash flows for each of the three years in the period ended
December 31, 2019 and our report dated February 13, 2020 expressed unqualified opinion.
Basis for Opinion
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 Assessment of Internal Control over Financial Reporting. Our responsibility is to
express an opinion on the entity’s internal control over financial reporting based on our audit. We are a public
accounting firm registered with the PCAOB and are required to be independent with respect to the Company in
accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and
Exchange Commission and the PCAOB.
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 of internal control over financial reporting included obtaining an understanding of internal
control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the
design and operating effectiveness of internal control based on the assessed risk. Our audit also included performing
such other procedures as we considered necessary in the circumstances. We believe that our audit provides a
reasonable basis for our opinion.
Definition and Limitations of Internal Control Over Financial Reporting
An entity’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 accounting principles generally accepted in the United States of America. An entity’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 entity; (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
entity are being made only in accordance with authorizations of management and directors of the entity; and (3)
provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or
disposition of the entity’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.
Tokyo, Japan
February 13, 2020
/s/ KDA Audit Corporation
KDA Audit Corporation
F-58
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.
S I G N A T U R E S
MAGIC SOFTWARE ENTERPRISES LTD.
By: /s/ Guy Bernstein
Name: Guy Bernstein
Title: Chief Executive Officer
105
Exhibit 2.2
Dated: May 14, 2020
Rights Attached to Shares
Our authorized share capital consists of 60,000,000 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 subject to the provisions of Israeli law.
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).
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.
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 subject to Israeli law.
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.
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.
List of Subsidiaries and Affiliates of the Registrant
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, 2019:
Exhibit 8.1
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
Fusion Solutions LLC.
Fusion Technical 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
Country of
Incorporation
Ownership
Percentage
Japan
Delaware
United Kingdom
United Kingdom
Spain
Pennsylvania
Delaware
Delaware
Delaware
Pennsylvania
Israel
Netherlands
France
Netherlands
Netherlands
Germany
100%
100%
100%
100%
100%
100%
100%
100%
49%
100%
100%
100%
100%
100%
100%
100%
Magic Software Enterprises India Pvt. Ltd
Onyx Magyarorszag Szsoftverhaz
Magix Integration (Proprietary) Ltd
AppBuilder Solutions Ltd
Complete Business Solutions Ltd
Datamind Technologies Ltd
CommIT Technology Solutions Ltd
CommIT Software Ltd (shares held by Comm-IT Technology Solutions Ltd.)
CommIT Embedded Ltd (shares held by Comm-IT Technology Solutions Ltd.)
Valinor Ltd. (shares held by Comm-IT Technology Solutions Ltd.)
Dario Solutions IT Ltd (shares held by Comm-IT Technology Solutions Ltd.)
Quickode Ltd (shares held by Comm-IT Technology Solutions Ltd.)
Twingo Ltd (shares held by Comm-IT Technology Solutions Ltd.)
Pilat Europe Ltd.
Pilat (North America), Inc.
Roshtov Software Industries Ltd
BridgeQuest Labs, Inc.
BridgeQuest, Inc.
Allstates Consulting Services LLC
F.T.S. - Formula Telecom Solutions Ltd
FTS Bulgaria Ltd. (FTS Global Ltd.)
Comblack IT Ltd
Yes-IT Ltd. (shares held by Comblack IT Ltd)
Shavit Software (2009) Ltd. (shares held by Comblack Ltd)
Infinigy (UK) Holdings Limited
Infinigy (US) Holding Inc.
Infinigy Solutions LLC.
Infinigy Engineering LLP (shares held by Infinigy Solutions LLC.)
Skysoft Solutions Ltd.
Futurewave Systems, Inc.
OnTarget Group, Inc.
NetEffects, Inc.
PowWow Inc.
BA Microwaves Ltd.
India
Hungary
South Africa
United Kingdom
Israel
Israel
Israel
Israel
Israel
Israel
Israel
Israel
Israel
United Kingdom
New Jersey
Israel
North Carolina
North Carolina
Delaware
Israel
Bulgaria
Israel
Israel
Israel
United Kingdom
Georgia
Georgia
Georgia
Israel
Georgia
North Carolina
Missouri
California
Israel
100%
100%
100%
100%
100%
80%
77.8%
100%
75%
100%
100%
100%
60%
100%
100%
60%
100%
100%
100%
100%
100%
70%
100%
100%
100%
100%
70%
99.9%
75%
100%
100%
100%
100%
56.67%
Exhibit 12.1
CERTIFICATION OF PRINCIPAL 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: May 14, 2020
/s/Guy Bernstein
Guy Bernstein*
Chief Executive Officer
(Principal Executive Officer)
* The originally executed copy of this Certification will be maintained at the Company’s offices and will be
made available for inspection upon request.
Exhibit 12.2
CERTIFICATION OF PRINCIPAL 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: May 14, 2020
/s/Asaf Berenstin
Asaf Berenstin*
Chief Financial Officer
(Principal Financial Officer)
*The originally executed copy of this Certification will be maintained at the Company’s offices and will be
made available for inspection upon request.
Exhibit 13.1
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Annual Report of Magic Software Enterprises Ltd. (the “Company”) on Form 20-F
for the period ending December 31, 2019 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
(Principal Executive Officer)
May 14, 2020
* The originally executed copy of this Certification will be maintained at the Company’s offices and will be
made available for inspection upon request.
Exhibit 13.2
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Annual Report of Magic Software Enterprises Ltd. (the “Company”) on Form 20-F
for the period ending December 31, 2019 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
(Principal Financial Officer)
May 14, 2020
* 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
Exhibit 15.1
We consent to the incorporation by reference in the Registration Statements on Form S-8 (File No. 333-
113552, 333-132221 and 333-149553), of Magic Software Enterprises Ltd. (“the Company”), of our reports dated
May 14, 2020 with respect to the consolidated financial statements 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, 2019, filed with the Securities and Exchange Commission.
/s/Kost Forer Gabbay & Kasierer
KOST FORER GABBAY & KASIERER
A Member of Ernst & Young Global
Tel Aviv, Israel
May 14, 2020
CONSENT OF INDEPENDENT AUDITORS
OF
Magic Software Japan K.K
Exhibit 15.2
We consent to the incorporation by reference in the Registration Statements on Form S-8 (File Nos. 333-
113552, 333-132221 and 333-149553) of Magic Software Enterprises Ltd., of our report dated February 13, 2020,
with respect to the financial statements of Magic Software Japan K.K. as of December 31, 2019, which report
appears in the Annual Report on Form 20-F of Magic Software Enterprises Ltd. for the year ended December 31,
2019.
/s/ KDA Audit Corporation
KDA Audit Corporation
Registered Auditors
Tokyo, Japan
May 12, 2020