(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:
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:
Indicate by check mark if the registrant
is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.
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.
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.
Indicate by check mark whether the
registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be
submitted and posted pursuant to Rule 405 of Regulation S-T (232.405 of this chapter) during the preceding 12 months (or for such
shorter period that the registrant was required to submit and post such files).
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.
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:
If “Other” has been
checked in response to the previous question, indicate by check mark which financial statement item the registrant has elected
to follow:
If this is an annual report, indicate
by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
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.
We are a global provider
of (i) proprietary application development and business process integration platforms; (ii) selected packaged vertical software
solutions; and (iii) as well as a vendor of software services and 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, support services and supplemental
outsourcing services. In addition, we offer a variety of proprietary comprehensive packaged software solutions through certain
of our subsidiaries for (i) revenue management and monetization solutions in mobile, wireline, broadband and mobile virtual network
operator/enabler, or MVNO/E; (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; (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; (iv) comprehensive systems for managing broadcast channels in the area of TV broadcast management through
cloud-based on-demand service or on-premise solutions; and (vi) 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 allows 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.
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 1,699 employees and operate through a network of over
3,000 independent software vendors, who we refer to as Magic Software Providers, or MSPs, and hundreds of system integrators, distributors,
resellers, and consulting and OEM partners. Thousands of enterprises in approximately 50 countries use our products and services.
These software solutions
enable our customers to improve their business performance and return on investment by supporting the cost-effective and rapid
delivery and integration of business applications, systems and databases. Using our products, 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 smartphones and tablets, 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
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, Magic xpi and AppBuilder projects, and assuring successful operation of the platforms once installed.
In addition, we provide
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 all of 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. All references in this annual report to “dollars” or “$” are to U.S.
dollars and all references in this annual report to “NIS” are to New Israeli Shekels.
We have obtained trademark
registrations for Magic® in the United States, Canada, Israel, the Netherlands (Benelux), Switzerland, Thailand and the United
Kingdom. All other trademarks and trade names appearing in this annual report are owned by their respective holders.
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.
|
|
ITEM 1.
|
IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS
|
Not applicable.
|
|
ITEM 2.
|
OFFER
STATISTICS AND
EXPECTED
TIMETABLE
|
Not applicable.
|
|
A.
|
Selected
Financial Data
|
The following table presents
selected consolidated financial data as of the dates and for each of the periods indicated. The selected consolidated financial
data set forth below should be read in conjunction with and are qualified entirely by reference to Item 5. “Operating and
Financial Review and Prospects” and our consolidated financial statements and notes thereto included elsewhere in this annual
report.
We have derived the following
consolidated income statement data for the years ended December 31, 2014, 2015 and 2016 and the consolidated balance sheet data
as of December 31, 2015 and 2016 from our audited consolidated financial statements and notes included elsewhere in this annual
report. We have derived the consolidated income statement data for the year ended December 31, 2012 and 2013 and the consolidated
balance sheet data as of December 31, 2012, 2013 and 2014 from our audited consolidated financial statements that are not included
in this annual report.
Income Statement Data:
|
|
|
Year ended December 31,
|
|
|
|
|
2012
|
|
|
2013
|
|
|
2014
|
|
|
2015
|
|
|
2016
|
|
|
|
|
(
U.S. dollars in thousands, except per share data)
|
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Software
|
|
$
|
23,684
|
|
|
$
|
23,254
|
|
|
$
|
25,351
|
|
|
$
|
21,598
|
|
|
$
|
19,215
|
|
|
Maintenance and technical support
|
|
|
22,384
|
|
|
|
22,685
|
|
|
|
22,780
|
|
|
|
22,908
|
|
|
|
25,631
|
|
|
Consulting services
|
|
|
80,312
|
|
|
|
99,019
|
|
|
|
116,173
|
|
|
|
131,524
|
|
|
|
156,800
|
|
|
Total revenues
|
|
|
126,380
|
|
|
|
144,958
|
|
|
|
164,304
|
|
|
|
176,030
|
|
|
|
201,646
|
|
|
Cost of revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Software
|
|
|
7,439
|
|
|
|
6,648
|
|
|
|
7,646
|
|
|
|
7,836
|
|
|
|
8,674
|
|
|
Maintenance and technical support
|
|
|
3,238
|
|
|
|
2,949
|
|
|
|
2,921
|
|
|
|
2,466
|
|
|
|
2,952
|
|
|
Consulting services
|
|
|
62,716
|
|
|
|
76,296
|
|
|
|
89,160
|
|
|
|
102,919
|
|
|
|
121,756
|
|
|
Total cost of revenues
|
|
|
73,393
|
|
|
|
85,893
|
|
|
|
99,727
|
|
|
|
113,221
|
|
|
|
133,382
|
|
|
Gross profit
|
|
|
52,987
|
|
|
|
59,065
|
|
|
|
64,577
|
|
|
|
62,809
|
|
|
|
68,264
|
|
|
Operating costs and expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Research and development, net
|
|
|
2,947
|
|
|
|
3,706
|
|
|
|
4,750
|
|
|
|
4,888
|
|
|
|
5,839
|
|
|
Selling and marketing
|
|
|
22,990
|
|
|
|
23,066
|
|
|
|
24,580
|
|
|
|
23,062
|
|
|
|
23,776
|
|
|
General and administrative
|
|
|
10,642
|
|
|
|
13,166
|
|
|
|
14,521
|
|
|
|
13,425
|
|
|
|
17,562
|
|
|
Operating income
|
|
|
16,408
|
|
|
|
19,127
|
|
|
|
20,726
|
|
|
|
21,434
|
|
|
|
21,087
|
|
|
Financial income (expense), net
|
|
|
10
|
|
|
|
(684
|
)
|
|
|
(1,786
|
)
|
|
|
(685
|
)
|
|
|
(430
|
)
|
|
Other income (expense), net
|
|
|
136
|
|
|
|
(12
|
)
|
|
|
(67
|
)
|
|
|
8
|
|
|
|
-
|
|
|
Income before taxes on income
|
|
|
16,554
|
|
|
|
18,431
|
|
|
|
18,873
|
|
|
|
20,757
|
|
|
|
20,657
|
|
|
Tax benefit (taxes on income)
|
|
|
(94
|
)
|
|
|
(1,575
|
)
|
|
|
(2,307
|
)
|
|
|
(3,681
|
)
|
|
|
(3,949
|
)
|
|
Net income
|
|
$
|
16,460
|
|
|
$
|
16,856
|
|
|
$
|
16,566
|
|
|
$
|
17,076
|
|
|
$
|
16,708
|
|
|
Change in redeemable non-controlling interests
|
|
|
184
|
|
|
|
546
|
|
|
|
425
|
|
|
|
639
|
|
|
|
4,520
|
|
|
Net income attributable to non-controlling interests
|
|
|
93
|
|
|
|
430
|
|
|
|
621
|
|
|
|
239
|
|
|
|
281
|
|
|
Net income attributable to Magic’s Shareholders
|
|
|
16,183
|
|
|
|
15,880
|
|
|
|
15,520
|
|
|
|
16,198
|
|
|
|
11,907
|
|
|
Basic earnings per share
|
|
$
|
0.44
|
|
|
$
|
0.43
|
|
|
$
|
0.36
|
|
|
$
|
0.37
|
|
|
$
|
0.27
|
|
|
Diluted earnings per share
|
|
$
|
0.44
|
|
|
$
|
0.43
|
|
|
$
|
0.36
|
|
|
$
|
0.36
|
|
|
$
|
0.27
|
|
|
Shares used to compute basic earnings per share
|
|
|
36,502
|
|
|
|
36,835
|
|
|
|
44,172
|
|
|
|
44,248
|
|
|
|
44,347
|
|
|
Shares used to compute diluted earnings per share
|
|
|
37,108
|
|
|
|
37,294
|
|
|
|
43,305
|
|
|
|
44,452
|
|
|
|
44,516
|
|
|
Dividends
|
|
|
3,661
|
|
|
|
7,723
|
|
|
|
8,681
|
|
|
|
7,788
|
|
|
|
7,761
|
|
|
Cash dividend declared per ordinary share
|
|
$
|
0.10
|
|
|
$
|
0.21
|
|
|
$
|
0.22
|
|
|
$
|
0.18
|
|
|
$
|
0.18
|
|
Balance Sheet Data:
|
|
|
December 31,
|
|
|
|
|
2012
|
|
|
2013
|
|
|
2014
|
|
|
2015
|
|
|
2016
|
|
|
|
|
(U.S. dollars in thousands)
|
|
|
Working capital
|
|
$
|
44,205
|
|
|
$
|
45,171
|
|
|
$
|
103,049
|
|
|
$
|
106,945
|
|
|
$
|
113,668
|
|
|
Cash, cash equivalents, short term deposits and marketable securities
|
|
|
38,634
|
|
|
|
35,988
|
|
|
|
84,430
|
|
|
|
76,684
|
|
|
|
87,822
|
|
|
Total assets
|
|
|
152,954
|
|
|
|
167,003
|
|
|
|
224,184
|
|
|
|
239,846
|
|
|
|
316,399
|
|
|
Total equity
|
|
|
118,361
|
|
|
|
129,131
|
|
|
|
187,724
|
|
|
|
193,106
|
|
|
|
196,641
|
|
Dividend Policy
Our Board
of Directors’ dividend policy is to distribute dividends of up to 50% of our annual distributable profits each year, subject
to any applicable law. 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.
Dividends:
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 U.S. $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.
|
|
B.
|
Capitalization
and Indebtedness
|
Not applicable.
|
|
C.
|
Reasons
for the Offer and Use of Proceeds
|
Not applicable.
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
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 platforms, integration products 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 and AppBuilder 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
they 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 software 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 products 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.
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.
|
In addition, if release
dates of any future products or enhancements are delayed or if they fail to achieve market acceptance when released, our business,
financial condition and results of operations could be adversely affected.
Adapting to evolving
technologies can require substantial financial investments, distract management and adversely affect the demand for our existing
products and services.
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.
Unfavorable national
and global economic conditions could adversely affect our business, operating results and financial condition.
During periods of slowing
economic activity our customers may reduce their demand for our products, technology and professional services, which would reduce
our sales, and our business, operating results and financial condition may be adversely affected. Economies throughout the world
currently face a number of challenges, including threatened sovereign defaults, credit downgrades, restricted credit for businesses
and consumers and potentially falling demand for a variety of products and services. Notwithstanding the improving economic conditions
in some of our markets, many companies are still cutting back expenditures or delaying plans to add additional personnel or systems.
These developments, or
the perception that any of them could occur, or any further worsening of the global economic condition could result in longer sales
cycles, slower adoption of new technologies and increased price competition for our products and services. We could also be exposed
to credit risk and payment delinquencies on our accounts receivable, which are not covered by collateral. Any of these events would
likely harm our business, operating results and financial condition.
We are exposed
to general 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.
Downturns
in the business climate for telecom companies have in the past 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 the recent worldwide recession may reduce our revenues and profitability. In addition, the
government of Israel has experienced significant delays in the approval of its annual budget in recent years. 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.
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. In addition, 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:
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a customer’s financial difficulties;
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a change in a customer’s strategic priorities;
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a customer’s demand for price reductions; and
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a decision by a customer to utilize its in-house IT capacity or work with our competitors.
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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 impact 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 a number of firm fixed-price contracts. If our initial cost estimates are incorrect, we can lose money 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.
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 impacts 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 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 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 increase in the future, both
with respect to our technology, applications and professional 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.
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.
Some of our existing
and potential competitors are larger companies, have substantially greater resources than us, including financial, technological,
marketing, skilled human resources and distribution capabilities, and enjoy greater market recognition than us. We may not be able
to differentiate our products and services from those of our competitors, offer our products as part of integrated systems or solutions
to the same extent as our competitors, or successfully develop or introduce new products that are more cost-effective, or offer
better performance than our competitors. Failure to do so could adversely affect our business, financial condition and results
of operations.
We 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.
We consider it a significant
part of our business strategy to pursue acquisitions and other initiatives in order to expand our product or services offerings
or otherwise enhance our market position and strategic strengths. In the past six years we made numerous acquisitions, including:
(i) in 2010, our distributor in South Africa, Magix Integration (Proprietary) Ltd., or Magix Integration, which specializes in
the software integration and application development of our platforms as well as the support of large-scale and complex systems
in the public and financial sectors in South Africa; (ii) in, 2011 the AppBuilder activity of BluePhoenix Solutions Ltd., or AppBuilder,
a development platform for managing, maintaining, and reusing business applications required by large-scale enterprises; (iii)
in 2011, Complete Business Solutions Ltd., a system integrator and a Business Partner of SAP; (iv) in 2012, Comm-IT Group, a software
and systems development house that specializes in providing advanced IT, embedded software, and communications services and solutions,
project and product consultation, installation and implementation of databases and software integration; (v) in 2013, Dario Solutions
IT Ltd., a provider of software integration and software solutions for large and mid-range customers in Israel and Microsoft Gold
Level Partner; (vi) in 2013, Valinor Ltd., a Microsoft Certified Partner and a Oracle Gold Level Partner that specializes in project
and product consultation, and the installation and implementation of databases; (vii) in, 2013, the enterprise division of AllStates
Technical Services, LLC, a U.S.-based full-service provider of consulting and outsourcing solutions for IT, engineering and telecom
personnel; (viii) 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;
(ix) 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; (x) in 2015, Comblack IT Ltd, an Israeli-based company specializing in software professional services and
outsource services for mainframes and complex large-scale environments; (xi) 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; (xii) in 2016, Roshtov Software Industries Ltd, an Israeli-based software company that is a local Israeli
market leader in patient medical record information systems; and (xiii) in 2016, Shavit Software (2009) Ltd., an Israeli-based
company specializing in software professional and outsource services.
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:
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Difficulties in integrating the operations, systems, technologies, products, and personnel of the
acquired businesses or enterprises;
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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;
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Integrating financial forecasting and controls, procedures and reporting cycles;
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Potential difficulties in completing projects associated with in-process research and development;
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Difficulties in entering markets in which we have no or limited direct prior experience and where
competitors in such markets have stronger market positions;
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Insufficient revenue to offset increased expenses associated with acquisitions; and
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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.
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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 1,006 as of December 31, 2012 to approximately 1,699 as of December 31, 2016 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:
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Recruiting, training and retaining skilled technical, marketing and management personnel;
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Maintaining high quality standards;
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Preserving our corporate culture, values and entrepreneurial environment;
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Developing and improving our internal administrative infrastructure, particularly our financial,
operational, communications and other internal controls; and
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Maintaining high levels of customer satisfaction.
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The rapid execution necessary
to exploit the market for our business model requires an effective planning and management process. Our systems, procedures or
controls may not be adequate to support the growth in our operations, and our management may not be able to achieve the rapid execution
necessary to exploit the market for our business model. Our future operating results will also depend on our ability to expand
our development, sales and marketing organizations. If we are unable to manage growth effectively, our profitability will likely
decline.
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:
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The size and timing of orders;
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The high level of competition that we encounter;
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The timing of our products introductions or enhancements or those of our competitors or of providers
of complementary products;
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Market acceptance of our new products, applications and services;
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The purchasing patterns and budget cycles of our customers and end-users;
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The mix of product sales;
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Exchange rate fluctuations;
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General economic conditions; and
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The integration of newly acquired businesses.
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Our customers ordinarily
require the delivery of our products 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 twenty four 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.
The majority of
revenues of two of our principal IT professional services subsidiaries and of our recently acquired Roshtov subsidiary are dependent
upon a small number of key customers. Therefore a significant decrease in revenues from such customers could adversely affect our
business, results of operations and financial condition.
We depend on repeat product
and professional services revenues from a certain base of existing customers. Our five largest customers accounted for, in the
aggregate, 26% and 18% of our revenues in the years ended December 31, 2015 and 2016, respectively. If these existing customers
decide not to continue utilizing our professional services, not to renew their existing engagements, or not to continue using
our products, or decide to significantly decrease their total spend with us, it may adversely affect our business, results of operations
and financial condition. While one of these five customers is under a long term contract until December 31, 2020, under their master
services agreements, the other customers may terminate their agreements with us upon only a 30-day notice without any penalty.
The increasing
amount of intangible assets and goodwill recorded on our balance sheet may lead to significant impairment charges in the future.
We regularly review our
long-lived assets, including identifiable intangible assets and goodwill, for impairment. Goodwill and indefinite life intangible
assets are subject to impairment review at least annually. Other long-lived assets are reviewed when there is an indication that
impairment may have occurred. The amount of goodwill and identifiable intangible assets on our consolidated balance sheet has increased
significantly from $74.0 million as of December 31, 2012 to approximately $147.2 million as of December 31, 2016 as a result of
our acquisitions, and may increase further following future acquisitions. 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 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 also upon our ability to attract and retain qualified computer professionals
to serve as temporary IT personnel. Competition for the limited number of qualified professionals with a working knowledge of certain
sophisticated computer languages is intense. We compete for technical personnel with other providers of technical IT
consulting and outsourcing services, systems integrators, providers of outsourcing services, computer systems consultants, customers
and, to a lesser extent, temporary personnel agencies. A shortage of, and significant competition for software professionals with
the skills and experience necessary to perform the 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.
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 and AppBuilder) use our technology to develop and sell solutions to their customers
(ISVs) and also through system integrators. The ISVs then sell the applications they develop on the Magic xpa or AppBuilder 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.
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 which could adversely affect our business, results of operations and financial
condition.
While our principal executive
offices are located in Israel, 82%, 79% and 71% of our sales in the years ended December 31, 2014, 2015 and 2016, 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:
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Limitations and disruptions resulting from the imposition of government controls;
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Compliance with a wide variety of foreign regulatory standards;
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Compliance with the U.S. Foreign Corrupt Practices Act of 1977, as amended, or FCPA, particularly
in emerging market countries;
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Import and export license requirements, tariffs, taxes and other trade barriers;
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Political, social and economic instability abroad, terrorist attacks and security concerns in general.;
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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;
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Increased financial accounting and reporting requirements and complexities;
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Weaker protection of intellectual property rights in some countries;
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Greater difficulty in safeguarding intellectual property;
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Increased management, travel, infrastructure and legal compliance costs associated with having
multiple international operations;
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Longer payment cycles and difficulties in enforcing contracts and collecting accounts receivable;
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The need to localize our products and licensing programs for international customers;
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As we continue to expand
our business globally, our success will depend, to a large extent, 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.
Currency exchange
rate fluctuations in the markets in which we conduct business could adversely affect our business, results of operations and financial
condition.
Our financial statements
are stated in U.S. dollars, our functional currency. However, in the years ended December 31, 2014, 2015 and 2016, approximately
50%, 47% and 50% of our revenues, respectively, were derived from sales outside the United States, particularly Europe, Japan and
Asia-Pacific, Israel, the United Kingdom 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 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.
Breaches of network
or information technology security, natural disasters or terrorist attacks could have an adverse effect on our business.
Cyber-attacks or other
breaches of network or IT security, natural disasters, terrorist acts or acts of war may cause equipment failures or disrupt our
systems and operations. We may be subject to attempts to breach the security of our networks and IT infrastructure through cyber-attack,
malware, computer viruses and other means of unauthorized access. While we maintain insurance coverage for some of these events,
the potential liabilities associated with these events could exceed the insurance coverage we maintain. Our inability to operate
our facilities as a result of such events, even for a limited period of time, may result in significant expenses or loss of market
share to other competitors for our application platforms as well as in the process and business integration technologies and IT
services market. In addition, a failure to protect the privacy of customer and employee confidential data against breaches of network
or IT security could result in damage to our reputation. To date, we have not been subject to cyber-attacks or other cyber incidents
which, individually or in the aggregate, resulted in a material impact to our operations or financial condition.
Maintaining the security
of our products, computers and networks is a critical issue for us and our customers. Security researchers, criminal hackers and
other third parties regularly develop new techniques to penetrate computer and network security measures. In addition, hackers
also develop and deploy viruses, worms and other malicious software programs, some of which may be specifically designed to attack
our products, systems, computers or networks. Additionally, outside parties may attempt to fraudulently induce our employees or
users of our products to disclose sensitive information in order to gain access to our data or our customers’ data. These
potential breaches of our security measures and the accidental loss, inadvertent disclosure or unauthorized dissemination of proprietary
information or sensitive, personal or confidential data about us, our employees or our customers, including the potential loss
or disclosure of such information or data as a result of hacking, fraud, trickery or other forms of deception, could expose us,
our employees, our customers or the individuals affected to a risk of loss or misuse of this information, result in litigation
and potential liability or fines for us, damage our brand and reputation or otherwise harm our business.
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.
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, it is possible that 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. Also, 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.
Our products have
a lengthy sales cycle which could adversely affect our revenues.
The typical sales cycle
for our solutions is lengthy and unpredictable, requires pre-purchase evaluation by a significant number of persons in our customers’
organizations, and often involves a significant operational decision by our customers as they typically use our technologies to
develop and deploy as well as to integrate applications that are critical to their businesses. Our sales efforts involve educating
our customers and industry analysts 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. As a result, the licensing and implementation
of our technologies generally involves a significant commitment of attention and resources by prospective customers. Because of
the long approval process that typically accompanies strategic initiatives or capital expenditures by companies, our sales process
is often delayed, with little or no control over any delays encountered by us. Our sales cycle, which generally ranges from three
to eighteen 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.
Our products may
contain defects that may be costly to correct, delay their market acceptance and expose us to difficulties in the collection of
receivables and to litigation.
Despite our regular quality
assurance testing, as well as testing performed by our partners and end-users who participate in our beta-testing programs, errors
may be found in our software products or in applications developed with our technology. This risk is exacerbated by the fact that
a significant percentage of the applications developed with our technology were and are likely to continue to be developed by our
ISVs, system integrators and enterprises over which we exercise no supervision or control. If defects are discovered, we may not
be able to successfully correct them in a timely manner or at all. Defects and failures in our products could result in a loss
of, or delay in, market acceptance of our products, as well as difficulties in the collection of receivables and litigation, and
could damage our reputation.
Our standard license
agreement with our customers contains provisions designed to limit our exposure to potential product liability claims that may
not be effective or enforceable under the laws of some jurisdictions. Also, the professional liability insurance that we maintain
may not be sufficient against potential claims. Accordingly, we could fail to realize revenues and suffer damage to our reputation
as a result of, or in defense of, a substantial claim.
Our proprietary
technology and packaged software solutions are difficult to protect and unauthorized use of our proprietary technology by third
parties may impair our ability to compete effectively.
Our success and ability
to compete depend in large part upon our ability to protect our proprietary technology. We rely on a combination of trade secret
and copyright laws and confidentiality, non-disclosure and assignment-of-inventions agreements to protect our proprietary technology.
We do not have any patents. Our policy is to require employees and consultants to execute confidentiality and non-compete agreements
upon the commencement of their relationships with us. These measures may not be adequate to protect our technology from third-party
infringement, and our competitors might independently develop technologies that are substantially equivalent or superior to ours.
Additionally, our products may be sold in foreign countries that provide less protection for intellectual property rights than
that provided under U.S. or Israeli laws.
Third parties have
in the past, and may in the future, claim that we infringe upon their intellectual property rights and could harm our business.
From time to time third
parties have in the past, and may in the future, assert infringement claims against us or claim that we have violated a patent
or infringed upon a copyright, trademark or other proprietary right belonging to them. Intellectual property litigation is expensive
and any court ruling against us or infringement claim, even one without merit, could result in the expenditure of significant financial
and managerial resources to defend any such claims, which will adversely affect our financial condition and results of operations.
We 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
which could harm our business, results of operations and financial condition.
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.
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 controlling
shareholders, Formula Systems (1985) Ltd., and Asseco Poland S.A beneficially own approximately 47.3% of our outstanding ordinary
shares and therefore assert 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 20,962,734 or 47.3%, of our outstanding ordinary shares as of December 31, 2016. Asseco Poland S.A., or Asseco,
a Polish company listed on Warsaw Stock Exchange, owns 46.3% of the outstanding shares of Formula Systems. Although transactions
between us and our controlling shareholders are subject to special approvals under Israeli, Formula and Asseco may exercises 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:
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The composition of our
board of directors, which has the authority to direct our business and to appoint and remove our officers;
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Approving or rejecting
a merger, consolidation or other business combination;
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Raising future capital;
and
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Amending our Articles,
which govern the rights attached to our ordinary shares.
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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.
Certain of our
credit facility agreements with banks and other financial institutions are subject to a number of restrictive covenants which,
if breached, could result in acceleration of our obligation to repay our debt.
In the context of our
engagements with banks and other financial institutions for receiving various credit facilities, we have undertaken to maintain
a number of conditions and limitations on the manner in which we can operate our business, including a negative pledge and limitations
on our ability to distribute dividends. These credit facilities agreements also contain various financial covenants which 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 which 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.
See Note 12 to our consolidated financial statements for additional information on liabilities to banks and other financial institutions.
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 in our ordinary shares on these markets is made in
different currencies (U.S. dollars on the NASDAQ Global Select Market and NIS on the TASE) and at different times (resulting from
different time zones, different trading days and different public holidays in the United States and Israel). Consequently, the
trading prices of our ordinary shares on these two markets may differ. Any decrease in the trading price of our ordinary shares
on one of these markets could cause a decrease in the trading price of our ordinary shares on the other market.
The trading volume
of our shares has been low in the past and may be low in the future, which reduces liquidity for our shareholders, and may furthermore
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.
In the past, securities
class action litigation has often been brought against registrants following periods of volatility in the market price of their
securities. We may in the future be the target of similar litigation. Securities litigation could result in substantial costs and
divert management’s attention and resources.
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.
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.
We may in the future be classified as
a passive foreign investment company, or PFIC, which will subject our U.S. investors to adverse tax rules.
For U.S. federal income
tax purposes, we will generally be classified as a PFIC for any taxable year in which either: (i) 75% or more of our gross income
is passive income or (ii) at least 50% of the average quarterly value of our assets for the taxable year produce or are held for
the production of passive income. Based on certain estimates of our gross income and gross assets and the nature of our business,
we do not expect that we will be classified as a PFIC for the taxable year ending December 31, 2016. There can be no assurance
that we will not be considered a PFIC for any future taxable year. If we were determined to be a PFIC for U.S. federal income tax
purposes, highly complex rules would apply to U.S. holders owning our ordinary shares and such U.S. holders could suffer adverse
U.S. tax consequences. Accordingly, you are urged to consult your tax advisors regarding the application of such rules. U.S. residents
should carefully read Item 10E. “Additional Information - Taxation - United States Federal Income Tax Consequences”
for a more complete discussion of the U.S. federal income tax risks related to owning and disposing of our ordinary shares.
Risks Related to Our Location in Israel
Political, economic
and military instability in Israel may disrupt our operations and negatively affect our business condition, harm our results of
operations and adversely affect our share price.
We are 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.
In
recent years, there have been hostilities between Israel and Hezbollah in Lebanon and Hamas in the Gaza strip, both of which resulted
in rockets being fired into Israel causing casualties and disruption of economic activities. In addition, Israel faces threats
from more distant neighbors, in particular, Iran.
Also, since 2011, riots and uprisings in several countries in the Middle
East and neighboring regions have led to severe political instability in several neighboring states and to a decline in the regional
security situation. Such instability may affect the local and global economy, could negatively affect business conditions and,
therefore, could adversely affect our operations. To date, these matters have not had any material effect on our business and results
of operations; however, the regional security situation and worldwide perceptions of it are outside our control and there can be
no assurance that these matters will not negatively affect our business, financial condition and results of operations in the future.
Furthermore, there are
a number of countries, primarily in the Middle East, as well as Malaysia and Indonesia, that restrict business with Israel or Israeli
companies, and we are precluded from marketing our products to these countries. Restrictive laws or policies directed towards Israel
or Israeli businesses may have an adverse impact on our operations, our financial results or the expansion of our business.
Our results of
operations may be adversely affected by the obligation of our personnel to perform military service.
Many of our executive
officers and employees in Israel are obligated to perform annual reserve duty in the Israeli Defense Forces and may be called for
active duty under emergency circumstances at any time. If a military conflict or war arises, these individuals could be required
to serve in the military for extended periods of time. Our operations could be disrupted by the absence for a significant period
of one or more of our executive officers or key employees or a significant number of other employees due to military service. Any
disruption in our operations could adversely affect our business.
We currently have
the ability to benefit from government tax benefits, which may be cancelled or reduced in the future.
We are currently eligible
to
receive 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, 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.
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INFORMATION ON THE COMPANY
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A.
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History
and Development of the Company
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Corporate details
Our legal and commercial
name is Magic Software Enterprises Ltd., and 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 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, 2012
In December 2011, we
acquired the AppBuilder activity of BluePhoenix Solutions Ltd., a leading provider of value-driven legacy IT modernization solutions
for $12.7 million. 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.
In July 2012, we acquired
an 80% interest in Comm-IT Group, which includes CommIT Technology Solutions Ltd., CommIT Software Ltd. and CommIT Embedded Ltd,
for a total consideration of $9.0 million. This group is an Israel-based software and systems development house that specializes
in a broad range of advanced IT and communications services and solutions with proven experience and successful implementation
of many projects in a variety of advanced technologies in the U.S., Europe and Israel. In 2015, following the exercise of options
provided as part of Comm-IT’s stock based compensation plan to key employees, our interest in Comm-IT was diluted to 77.7%.
We and certain other shareholders hold mutual put and call options, for their 18% interest in the group.
In May 2013, our subsidiary,
CommIT Technology Solutions Ltd., acquired two Israeli companies, Dario Solutions IT Ltd. and Valinor Ltd. Dario, a Microsoft Gold
Level Partner, provides integration services with respect to Microsoft products and provides software integration and advanced
IT solutions for large and mid-range customers in Israel, for a total consideration of $3.6 million. Dario’s customers include
Israeli governmental offices, the Israeli defense forces, banks, insurance companies, telecom and construction companies and hi-tech
firms. Dario specializes in virtualization and private cloud, server based computing, storage area networks, multiple user system
management and mobile solutions. Valinor specializes in project and product consultation, installation and implementation of databases
and employs a wide range of information system architects, including data base system architects, or DBAs, who have expertise in
database management. Valinor assists its customers in finding creative and effective solutions, including development, conversion,
upgrade and installation of complex database systems that handle large amounts of information. As a Microsoft Certified
Partner and an Oracle Gold Level Partner, Valinor collaborates with both of these major software providers and is involved in different
projects in Israel and internationally. Valinor’s DBA employees assist Microsoft in developing SQL Server based databases
and provide database consultations for strategic partners. Valinor customers include Israeli governmental offices, the Israeli
defense forces, banks, insurance companies, communications companies and hi-tech firms.
In
November 2013, we acquired the enterprise division of Allstates Technical Services, LLC, a U.S.-based full-service provider of
consulting and outsourcing solutions for IT, Engineering and Telecom personnel from KBR, Inc, for a total consideration of $11.0
million. (NYSE: KBR). This division, now known as AllStates Consulting Services LLC,
brings
a strong reputation and an experienced growth-focused management team serving some of the world’s leading telecom and technology
companies. The acquisition of the enterprise division of Allstates Technical Services, LLC broadens our existing U.S. footprint
and adds leading Fortune 500 companies to our customer base. We believe that this acquisition will become an important contributor
to our future growth.
On March 5, 2014, we
completed a follow-on public offering of 6,900,000 of our ordinary shares including 900,000 shares sold pursuant to the underwriters’
exercise of their over-allotment option, at a price to the public of $8.50 per share.
In
October 2014, we acquired 100% of Formula Telecom Solutions Ltd., or FTS, an Israeli based software vendor, for a total consideration
of $5.8 million. FTS specializes in the development, sale, service and support of business support systems, or BSS, including convergent
charging, billing, customer management, policy control and payment software solutions for the telecommunications, content, Machine
to Machine/Internet of Things or M2M/IoT, payment and other industries. FTS has a track record of proven experience and successful
implementation of many projects in Western and Eastern Europe, Asia and Africa.
In April 2015, we acquired
a 70% interest in Comblack IT Ltd., for a total consideration of $1.8 million, with an option to increase our interest to 100%.
Comblack IT Ltd. is an Israeli-based company that specializes in software professional and outsourcing management services for
mainframes and complex large-scale environments.
In June, 2015 we acquired
a 70% interest in Infinigy Solutions LLC, a U.S.-based services company focused on expanding the development and implementation
of technical solutions throughout the telecommunications industry with offices over the U.S., providing nationwide coverage and
support for wireless engineering, deployment services, surveying, environmental service and project management, for a total consideration
of $6.5 million.
In June 2016, we acquired
a 60% equity interest, with the option to acquire the remaining 40% of the equity in the future, in Roshtov Software Industries
Ltd., or Roshtov, an Israeli company. Roshtov is the developer of the Clicks development platform, which is used in the design and
management of patient-file oriented software solutions for managed care and large-scale healthcare providers. The aggregate purchase
price for the 60% interest was approximately $20.6 million and we have the option to acquire the remaining 40% of the equity in
Roshtov in the future based on the same valuation.
In October 2016, we acquired
a 100% equity interest in Shavit Software (2009) Ltd., or Shavit, an Israeli company, for a total consideration of $6.8 million,
of which $ 4,698,000 was paid upon closing, $ 1,633,000 (measured based on present value) was allocated to deferred payment which
due in 2018 and $ 504,000 is contingent upon the acquired business meeting certain operational targets in 2017, 2018 and 2019. Shavit
specializes in software professional and outsource management services.
Our fixed assets
capital expenditures for the years ended December 31, 2014, 2015 and 2016 were approximately $1.0 million, $1.1 million and $0.8
million, respectively. These expenditures were principally for network equipment and computer hardware, as well as for
furniture, office equipment and leasehold improvements.
We are a global provider
of (i) proprietary application development and business process integration platforms, (ii) selected packaged vertical software
solutions, and (iii) as well as 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.
In the aggregate, we
have approximately 1,699 employees and operate through a network of over 3,000 independent software vendors 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 software technology platforms
Throughout its history,
Magic has 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 product; and the second is our application
integration product, 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.
Our software technology
platforms consist of:
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Magic xpa Application Platform - a proprietary application platform for developing and deploying business applications.
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AppBuilder Application Platform - a proprietary application platform for building, deploying, and maintaining high-end, mainframe-grade
business applications.
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Magic xpi Integration Platform - a proprietary platform for application integration
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Our vertical software packages
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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.
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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.
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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. Hermes software 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.
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HR Pulse –
Offered by our Pilat NAI, Inc. and Pilat Europe Ltd. subsidiaries, is a
proprietary SaaS tool that enables the creation of customizable HCM solutions quickly and affordably. Designed to enable users
to complete tasks in the fewest key strokes, Pulse also provides the ability to link legacy systems into unified reporting portals.
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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 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:
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Coretech Consulting Group LLC
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AllStates Consulting Services LLC
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Infinigy Solutions LLC Group
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Partnerships
and Alliances:
We continue to build
on our existing strategic partnerships that include Oracle, JD Edwards, SAP, Salesforce.com, IBM, SugarCRM and Microsoft to enhance
our mobile and integration 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.
In July 2015, Magic was
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, Magic received
the SugarCRM’s global ISV Partner Award for best engagement and teaming with fellow partners across the SugarCRM partner
ecosystem.
In March, 2017 Magic
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, Magic Software 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
Magic is an Oracle Platinum
Partner, holds Oracle Validated Integration status, is a SAP Channel Gold Partner, holds SAP Certified Integration status, is IBM
Server Proven, and is 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.
Industry Overview
Gartner, Inc., or Gartner,
a leading research and advisory firm providing information technology related insight, reports that the global enterprise information
technology market is expected to exceed $3.46 trillion in 2017 (Gartner, Forecast: IT Spending, Worldwide, 4Q16 Update, January
2017). The market consists of five primary components, including telecommunication services, IT services, devices, software and
data center systems. The IT services segment represented $900 billion (26.7%) of the overall IT spending in 2016, and 27.1% of
the total expected market opportunity in 2017. The software segment represented $333 billion (9.9%) of the overall IT spending
in 2016, and 10.2% of the total expected market opportunity in 2017. Gartner also reports that ongoing spending to support digitalization
initiatives in areas such as bimodal IT and customer experience underlies strength in application markets (Gartner Forecast Alerts:
IT Spending, Worldwide, 4Q16 Update).
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 enterprise application
development software market consists of several application development sub-segments and includes large dominant players such as
IBM, Microsoft, Oracle, Salesforce.com, HP, CA Technologies and Compuware as well as a large number of highly specialized vendors,
with focused capabilities for specific vertical markets. While application development for traditional platforms is a well-established
and mature market which is expected to grow globally from $8.7 billion in 2015 to $9.7 billion in 2019 (Gartner, Enterprise Software
Markets, Worldwide, 2012 – 2019, 4Q15 Update, December 2015), emerging mobile applications, systems and devices are transforming
the application development space rapidly. According to Strategy Analytics: the mobile enterprise business applications market
will top $73.7 billion in 2016 and grow to $128.2 billion by 2022 (Strategy Analytics: Global Mobile Enterprise Business Applications
Revenue Forecast 2016-2022, November 2016). Huge backlogs of enterprise app development work and growing demand for apps mean IT
departments need new approaches to decentralize and accelerate app development and delivery. (Gartner, Predicts 2017: Mobile Apps
and Their Delivery). High demand for mobile and business apps, together with shortage and expense of skilled programmers, has led
to a growing market for low-code/ no-code development platforms. Forrester states the market is growing because more Application
Development and Delivery (AD&D) professionals see these products as a way to deliver applications to win, serve, and retain
customers. AD&D pros are gaining confidence that low-code development platforms can support fast delivery of even large, complex,
and reliable customer solutions. (The Forrester Wave™: Low-Code Development Platforms, Q2 2016). According to Gartner, by
2020, the average medium to large enterprise will have adopted at least three rapid, high productivity development products supporting
enterprise and citizen development. (Gartner, Market Guide for Rapid Mobile App Development Tools, September 2016).
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:
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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.
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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.
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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.
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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.
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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.
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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.
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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. Gartner: How to Mitigate the Growing Mobility Skills Gap, September 2016).
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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 and Magic xpi provide MSPs with the ability to rapidly build integrated applications in a more productive manner,
deploy them in multiple modes and architectures as needed, lower IT maintenance costs and speed time-to-market. Our solutions are
comprehensive and industry proven. These technologies can be applied to the entire software development market, from the implementation
of micro-vertical solutions, through tactical application 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 and Magic xpi, software vendors and enterprise customers can experience
unprecedented cost savings through fast and easy implementation and reduced project risk.
Our software technology
solutions include application platforms for developing and deploying specialized and high-end large-scale business applications
and an integration platform that allows 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 independent software vendors, or 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 or 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:
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Simplicity – the use of code-free/low code development tools instead of hard coding and multiple programming languages;
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Business focus – the use of pre-compiled business logic and components eliminates repetitive, low level technical and
coding tasks;
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Comprehensiveness – the use of a comprehensive development and deployment platform offers a full end-to-end development,
deployment and integration capability;
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Automation of mundane tasks - to accelerate development and maintenance and reduce risk; and
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Interoperability - to support business logic across multiple hardware and software platforms, operating systems and geographies.
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We offer two complementary
application platforms that address the wide spectrum of composite applications, Magic xpa and AppBuilder. Our Magic xpi integration
platform delivers fast and simple integration and orchestration of business processes and applications. We gained 56 new Magic
xpi direct customers in 2016. We also have an increasing number of customers that use both our Magic xpa and Magic xpi platforms
to develop and deploy mobile apps quickly and easily. Some of our new engagements in 2016 included:
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Moose Toys, a world-leading toymaker specializing in electronic toys, began using the Magic xpi
Integration Platform to handle most of its integration needs, including complex EDI integrations with leading global retail customers
in the U.S. and Australia.
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ZF Lemförder SA (South Africa), part of the German ZF Group of companies, implemented the
Magic xpi Integration Platform to migrate between ERP systems and to automate the exchange of data between its local production
control system and its corporate SAP ERP system.
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Suntory Beverage & Food Europe (Suntory Group), a leading supplier of soft-drinks beverages
(including Orangina, Schweppes, Champomy, Pulco, Oasis, and more) in Europe and part of the Suntory Group, has deployed Magic xpi
as the central enterprise application integration (EAI) solution for its business units in France, Spain, Belgium, Poland and the
United Kingdom.
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Ortam-Malibu, a leading Israeli construction firm, specializing in the design, engineering and
implementation of complex public, residential and infrastructure projects, deployed a new mobile project management application
using the Magic xpa Application Platform.
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Merit Service Solutions, a leader in facilities maintenance, transformed the way it works with
its local snow removal contractors by deploying a mobile app that leverages digital capabilities to increase operational efficiency,
expedite billing and improve customer service. The app is powered by our Enterprise Mobility Solution.
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Mundipharma Deutschland (Mundipharma), a leading German pharmaceutical company, selected our Enterprise
Mobility Solution to deploy a variety of enterprise mobile apps.
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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.
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.
On October 15, 2013,
we announced the availability of new offline capabilities for Magic xpa and the launch of our Enterprise Mobility Solution that
provides businesses with a holistic solution to address their critical enterprise mobility requirements. Our Enterprise Mobility
Solution combines our enhanced application and integration platforms, and new mobile-oriented professional services. Our Enterprise
Mobility Solution provides everything businesses need to deliver successful enterprise-grade business apps including: (i) secure
and reliable access to real-time enterprise data; (ii) seamless natural user experiences enabled by native apps that can take full
advantage of embedded device capabilities and third-party add-ons; (iii) fast time-to-market; (iv) full security at data, user,
device and application levels; and (v), comprehensive management capabilities. We also offer professional services for every stage
in the mobile app lifecycle. We believe that by offering a comprehensive solution, we can increase the attractiveness and competitiveness
of our Enterprise Mobility Solution to enterprises looking to deploy mobile applications.
In
July 2014, we released Magic xpa Application Platform 2.5 with new features and enhancements to allow for fast and easy enterprise
mobility application creation and improved user experience along with the brand-new Magic Mobile Accelerator Framework, which includes
a set of pre-built, reusable and customizable components for a wide variety of popular mobile application features, including user
interface and display, navigation, graphs and charting, location services, synchronization, and device and application auditing.
Designed to work together under the same framework, accelerator components enable Magic developers to create attractive, functional
mobile applications, faster and with less effort than before.
In May 2015, we released Magic xpa 3.0, an
improved version of our application platform including high performance In-Memory Data Grid architecture, an enhanced Visual Studio-based
development environment, powerful new mobile development capabilities and support for Big Data and Fast Data by enabling users
to stream application data to an in-memory space.
In March 2016, we released
Magic xpa version 3.1 of our Magic xpa Application Platform, incorporating feedback from the field to bring our customers additional
value in terms of simplifying app modernization, accelerating enterprise mobile app development and maximizing end user adoption.
This release included end user customization capabilities, an enhanced UI, and a new Upgrade Manager.
In November 2016, we
released Magic xpa version 3.2. The Magic xpa 3.2 release included new Windows 10 mobile client and iOS 10 support for expanded
mobile options; UX and productivity improvements; a Web Services Gateway providing support for n-tiered application architecture;
a new Compare and Merge Tool; improvements to the Upgrade Manager utility and additional backward compatibility features.
During 2016, Magic xpa
was listed in three of Gartner’s Market Guide Reports for: Rapid Mobile App Development Tools; Application Platforms and
High Productivity Development Tools. In addition, Magic xpa was listed in Forrester’s Vendor Landscape, “The Fractured
Fertile Terrain of Low Code Application Platforms.
AppBuilder Application Platform
AppBuilder, a platform
we acquired in December 2011, is a development environment used for managing, maintaining and reusing complicated applications
needed by large businesses. It provides the infrastructure for enterprises worldwide, across several industries, with applications
running millions of transactions daily on legacy systems. Enterprises using AppBuilder can build, deploy and maintain large-scale
custom-built business applications for years without being dependent on any particular technology. The AppBuilder deployment environments
include IBM mainframe, Unix, Linux and Windows. AppBuilder is intended to increase productivity and agility in the creation and
deployment of enterprise class computing.
AppBuilder follows the 4GL development paradigm
to help enterprises focus on the business needs and definition and overlook technical hurdles. AppBuilder developers define the
business roles and prior to deployment the code is generated from the development environment to the required run time environment.
Several large MSPs have utilized AppBuilder to build state of the art applications that are deployed through many large customers.
AppBuilder implements
a model driven architecture approach to application development. It provides the ability to design an application at the business
modeling level and generate forward to an application. AppBuilder has a platform-independent, business-rules language that enables
generation to multiple platforms. It is possible to generate the client part of an application as Java and the server part as COBOL.
As businesses change, the server part can be generated as Java without changing the application logic. Only a simple configuration
option needs to be changed.
AppBuilder contains everything
a development environment needs to create any type of simple or complex business application with platform-independent functionality,
including:
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System administration security controls for scope and permissions;
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Migration, testing, and deployment functions;
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Architecture-independent development;
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An integrated toolset for designing, developing, and deploying applications;
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Object-based components managed from host, server, or client repositories;
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Support for Java/J2EE, COBOL, C#, and C programming languages;
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An efficient, cross-platform code generation facility;
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Ready-to-use business logic and libraries;
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A remote prepare facility for mainframe development;
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Multiple language user interface support; and
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In April 2015, 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, 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.
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.
In January 2013, our
Magic xpi Integration Platform received the CIO Choice 2013 Honor and Recognition Title for Enterprise Application Integration
Software. The highly competitive CIO Choice program recognizes worldwide vendors that use innovative technology to deliver competitive
advantages and enable business growth.
On
October 31, 2013, we announced major enhancements with the release of our Magic xpi version 4.0 Integration Platform, which included
the adoption of an In-Memory Data Grid, or IMDG, architecture and new off-the-shelf certified adapters optimized for Sugar CRM,
Sage ERP and SYSPRO applications. With core enterprise systems in place, organizations of all sizes are looking to business process
integration and automation to increase operational efficiency, competitiveness and innovation. Our new IMDG-based architecture
offers: (i) cost-effective elastic scalability, (ii) built-in clustering and failover capabilities
(the
capability to switch to a redundant or standby computer server, system, hardware component or network upon a failure) that support
enterprise needs for business continuity, and (iii) faster processing and increased transaction loads spurred by new mobile, cloud
and big data use cases. Our expanded library of off-the-shelf adapters, which includes native adapters for Oracle JD Edwards Enterprise
One, JD Edwards World, SAP, IBM Lotus Notes, Microsoft Dynamics, Microsoft SharePoint and Salesforce, along with over 60 built-in
technology adapters, facilitates use in a broad range of integration scenarios, meeting the needs of a wide range of potential
customers and increasing return on investment.
In
December 2014, we released version 4.1 of our Magic xpi Integration Platform, incorporating feedback from the field to bring our
customers additional value in terms of redundancy, reliability, stability, performance, and monitoring. For example, users are
now able to define an alternate host for the server to work with if the main host is unavailable or if the startup procedure on
the main host fails. We also added a new mechanism to rebalance the Space partitions so that the primary partition and its
backup will not run on the same machine when they are deployed on a clustered environment.
In addition, we released/updated
the following connectors:
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SugarCRM upgrade to API V10
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Google calendar – API upgrade
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In
2015, Magic xpi was awarded the Integrate 2015 award for Top Innovator for Integration Middleware.
In
June 2016, we released version 4.5 of our Magic xpi Integration Platform, designed to make digital transformation and
IoT projects easier. Magic xpi 4.5 included a fresh Microsoft® Visual Studio®-based UI with enhanced productivity features,
expanded out-of-the-box connectivity including an MQTT adapter, and a Connector Builder that lets users quickly build their own
full-featured reusable connectors. Magic xpi 4.5 had expanded connectivity capabilities and robust in-memory computing architecture
to help the execution of business-critical digital transformation and IOT projects.
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:
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, used 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 providers 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 software solutions 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, two of which account for 77% of the Israeli market. Clicks serves two of Israel’s largest healthcare service providers
since the early 1990’s: Maccabi Healthcare Services and Clalit.
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;
|
|
|
·
|
Broadband and multi-play billing;
|
|
|
·
|
Mobile money solutions;
|
|
|
·
|
E-commerce and M-commerce solutions;
|
|
|
·
|
Payments and mobile payments solutions;
|
|
|
·
|
Smart revenue sharing and partner management solutions and
|
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.
In 2016, industry analyst firm Frost
& Sullivan’s Stratecast practice named FTS as a key monetization innovation enabler for communication service providers.
This is because FTS Leap™ solutions enable the monetization of complex value chains, supporting the revenue management needs
of content providers, telematics, IoT, and financial service providers, among others.
HR Pulse
Now in its 10
th
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 HCM SaaS Solutions that provides a menu of templates that can be used to affordably and expeditiously create customized
HCM solutions for companies. The HR Pulse platform promotes the building and implementation of solutions that address broader
business challenges as well. Such offerings include 360 degree feedback, employee surveys, leadership and management development,
coaching and job evaluation.
Hermes
Hermes
Air Cargo Management System is a proprietary, state-of-the-art, packaged software solution for managing air cargo ground handling.
Hermes software 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. Hermes recently supplemented its offering with the Hermes Business Intelligence (HBI) solution,
adding unprecedented data analysis capabilities and management-decision support tools.
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, WFS (FRA), Luxair and Pactl among their customers.
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 technology and to develop new applications.
We believe that our future success depends upon our ability to maintain our technological leadership, to enhance our existing products
and to introduce new commercially viable products addressing the needs of our customers on a timely basis. We also intend to support
emerging technologies as they are introduced in the same way we have supported new technologies in the past. We will continue to
devote a significant portion of our resources to research and development. We believe that internal development of our technology
is the most effective means of achieving our strategic objective of providing an extensive, integrated and feature-rich development
technology. For significant version release see “Magic’s Software Solutions” discussed above.
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 and Enterprise Mobility 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.
|
With more than 250 experts
and more than 500 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, as well as supplemental outsourcing services. Our wholly-owned subsidiaries, Fusion Solutions LLC, Xsell
Resources Inc., Allstates Consulting Services LLC, 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:
|
|
|
Year ended December 31,
|
|
|
|
|
2014
|
|
|
2015
|
|
|
2016
|
|
|
|
|
(
in thousands
)
|
|
|
Software sales
|
|
$
|
25,351
|
|
|
$
|
21,598
|
|
|
$
|
19,215
|
|
|
Maintenance and technical support
|
|
|
22,780
|
|
|
|
22,908
|
|
|
|
25,631
|
|
|
Consulting services
|
|
|
116,173
|
|
|
|
131,524
|
|
|
|
156,800
|
|
|
Total revenues
|
|
$
|
164,304
|
|
|
$
|
176,030
|
|
|
$
|
201,646
|
|
|
|
|
Year ended December 31,
|
|
|
|
|
2014
|
|
|
2015
|
|
|
2016
|
|
|
|
|
(
in thousands
)
|
|
|
Israel
|
|
$
|
29,198
|
|
|
$
|
36,401
|
|
|
$
|
58,079
|
|
|
Europe
|
|
|
37,409
|
|
|
|
29,084
|
|
|
|
23,642
|
|
|
United States.
|
|
|
82,470
|
|
|
|
92,577
|
|
|
|
100,470
|
|
|
Japan
|
|
|
11,299
|
|
|
|
10,092
|
|
|
|
11,226
|
|
|
Other
|
|
|
3,928
|
|
|
|
7,876
|
|
|
|
8,229
|
|
|
Total revenues
|
|
$
|
164,304
|
|
|
$
|
176,030
|
|
|
$
|
201,646
|
|
Our Magic xpa, Magic
xpi 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.
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
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
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 is mostly sold through indirect channels and through our ecosystem business relationships, but we have some direct
customers with integration needs.
As of December 31, 2016,
we had approximately 133 sales personnel including a team of sales engineers who provide pre-sale technical support, presentations
and demonstrations in order to support our sales force.
Indirect Sales
.
We maintain an indirect sales channel, 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.
Among our activities, we focus on online 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 Marketo 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 SaaS 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.
With Magic xpa, we compete
in the application platform, SOA architecture and enterprise mobility markets. Among our current competitors are Kony, IBM,
Microsoft, Adobe, Oracle, SAP Sybase, OutSystems and Pegasystems. With Magic xpi, we compete in the integration platform market.
Among our current competitors are IBM, Informatica, TIBCO, MuleSoft, Jitterbit, Talend and Software AG.
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.
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.
Intellectual
Property
We do not hold any patents
and rely upon a combination of copyright, trademark, trade secret laws and contractual restrictions to protect our rights in our
software products. Our policy has been to pursue copyright protection for our software and related documentation and trademark
registration of our product names. Also, our key employees and independent contractors and distributors are required to sign non-disclosure
and secrecy agreements.
We provide our products
to customers under a non-exclusive, non-transferable license. Usually, we have not required end-users of our products to sign license
agreements. Generally, a “shrink wrap” license agreement is included in the product packaging, which explains that
by opening the package seal, the user is agreeing to the terms contained therein. It is uncertain whether license agreements of
this type are legally enforceable in all of the countries in which the software is marketed.
Our trademark rights
include rights associated with our use of our trademarks and rights obtained by registration of our trademarks. We have obtained
trademark registrations in South Africa, Canada, China, Israel, the Netherlands (Benelux), Switzerland, Thailand, Japan, the United
Kingdom and the United States
.
The initial terms of the registration of our trademarks range from 10 to 20 years and are
renewable thereafter. Our use and registration of our trademarks do not ensure that we have superior rights to others that may
have registered or used identical or related marks on related goods or services. We have registered a copyright for our software
in the United States and Japan. Also, we have registered copyrights for some of our manuals in the United States and have acquired
an International Standard Book Number (ISBN) for some of our manuals. Our copyrights expire 70 years from date of first publication.
We do not believe that
patent laws are a significant source of protection for our products since the software industry is characterized by rapid technological
changes, the policing of unauthorized use of software is a difficult task and software piracy is expected to continue to be a persistent
problem for the packaged software industry. As there can be no assurance that the above-mentioned means of legal protection will
be effective against piracy of our products, and since policing unauthorized use of software is difficult, software piracy can
be expected to be a persistent potential problem.
We believe that because
of the rapid pace of technological change in the software industry, the legal protections for our products are less significant
factors in our success than the knowledge, ability and experience of our employees, the frequency of product enhancements and the
timeliness and quality of our support services.
|
|
C.
|
Organizational
Structure
|
Asseco, a Polish company
listed on the Warsaw Stock Exchange, has a 46.3% interest in our controlling shareholder, Formula Systems (1985) Ltd., an Israeli
publicly-traded company (NASDAQ: FORTY). As of March 31, 2017, Formula Systems beneficially owned 47.26% of our outstanding ordinary
shares. Formula Systems is an international holding company principally engaged, through its subsidiaries and affiliates, in providing
IT software consulting services, developing proprietary software products and producing computer-based solutions.
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, 2016:
|
Subsidiary Name
|
|
Country of
Incorporation
|
|
Ownership
Percentage
|
|
|
Magic Software Japan K.K
|
|
Japan
|
|
|
100
|
%
|
|
Magic Software Enterprises Inc.
|
|
Delaware
|
|
|
100
|
%
|
|
Magic Software Enterprises (UK) Ltd.
|
|
United Kingdom
|
|
|
100
|
%
|
|
Hermes Logistics Technologies Limited
|
|
United Kingdom
|
|
|
100
|
%
|
|
Magic Software Enterprises Spain Ltd
|
|
Spain
|
|
|
100
|
%
|
|
Coretech Consulting Group, Inc.
|
|
Pennsylvania
|
|
|
100
|
%
|
|
Coretech Consulting Group LLC
|
|
Delaware
|
|
|
100
|
%
|
|
Magic Software Enterprises (Israel) Ltd
|
|
Israel
|
|
|
100
|
%
|
|
Magic Software Enterprises Netherlands B.V.
|
|
Netherlands
|
|
|
100
|
%
|
|
Magic Software Enterprises France
|
|
France
|
|
|
100
|
%
|
|
Magic Beheer B.V.
|
|
Netherlands
|
|
|
100
|
%
|
|
Magic Benelux B.V.
|
|
Netherlands
|
|
|
100
|
%
|
|
Magic Software Enterprises GMBH
|
|
Germany
|
|
|
100
|
%
|
|
Magic Software Enterprises India Pvt. Ltd
|
|
India
|
|
|
100
|
%
|
|
Subsidiary Name
|
|
Country of
Incorporation
|
|
Ownership
Percentage
|
|
|
Onyx Magyarorszag Szsoftverhaz
|
|
Hungary
|
|
|
100
|
%
|
|
Fusion Solutions LLC.
|
|
Delaware
|
|
|
100
|
%
|
|
Fusion Technical Solutions LLC.
|
|
Delaware
|
|
|
49
|
%
|
|
Xsell Resources Inc.
|
|
Pennsylvania
|
|
|
100
|
%
|
|
Magix Integration (Proprietary) Ltd
|
|
South Africa
|
|
|
100
|
%
|
|
Complete Business Solutions Ltd
|
|
Israel
|
|
|
100
|
%
|
|
Datamind Technologies Ltd
|
|
Israel
|
|
|
80
|
%
|
|
AppBuilder Solutions Ltd
|
|
United Kingdom
|
|
|
100
|
%
|
|
CommIT Technology Solutions Ltd
|
|
Israel
|
|
|
77.8
|
%
|
|
CommIT Software Ltd (shares held by Comm-IT Technology Solutions Ltd.)
|
|
Israel
|
|
|
100
|
%
|
|
CommIT Embedded Ltd (shares held by Comm-IT Technology Solutions Ltd.)
|
|
Israel
|
|
|
75
|
%
|
|
Valinor Ltd. (shares held by Comm-IT Technology Solutions Ltd.)
|
|
Israel
|
|
|
100
|
%
|
|
Dario Solutions IT Ltd (shares held by Comm-IT Technology Solutions Ltd.)
|
|
Israel
|
|
|
100
|
%
|
|
Quickode Ltd (shares held by Comm-IT Technology Solutions Ltd.)
|
|
Israel
|
|
|
100
|
%
|
|
Twingo Ltd (shares held by Comm-IT Technology Solutions Ltd.)
|
|
Israel
|
|
|
60
|
%
|
|
Roshtov Software Industries Ltd
|
|
Israel
|
|
|
60
|
%
|
|
Pilat Europe Ltd.
|
|
United Kingdom
|
|
|
100
|
%
|
|
Pilat (North America), Inc.
|
|
New Jersey
|
|
|
100
|
%
|
|
F.T.S. - Formula Telecom Solutions Ltd.
|
|
Israel
|
|
|
100
|
%
|
|
FTS Bulgaria Ltd. (FTS Global Ltd.)
|
|
Bulgaria
|
|
|
100
|
%
|
|
BridgeQuest Labs, Inc..
|
|
North Carolina
|
|
|
100
|
%
|
|
BridgeQuest, Inc.
|
|
North Carolina
|
|
|
100
|
%
|
|
Allstates Consulting Services LLC
|
|
Delaware
|
|
|
100
|
%
|
|
Comblack IT Ltd…
|
|
Israel
|
|
|
70
|
%
|
|
Yes-IT Ltd. (shares held by Comblack IT Ltd)
|
|
Israel
|
|
|
100
|
%
|
|
Shavit Software (2009) Ltd. (shares held by Comblack Ltd)
|
|
Israel
|
|
|
100
|
%
|
|
Infinigy (UK) Holdings Limited
|
|
United Kingdom
|
|
|
100
|
%
|
|
Infinigy (US) Holding Inc
|
|
Georgia
|
|
|
100
|
%
|
|
Infinigy Solutions LLC.
|
|
Georgia
|
|
|
70
|
%
|
|
Infinigy Engineering LLP (shares held by Infinigy Solutions LLC.).
|
|
Georgia
|
|
|
99.9
|
%
|
|
|
D.
|
Property, Plants and Equipment
|
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 pay an aggregate annual rent of $0.4 million for the facilities
under a lease agreement expiring in December 2017
.
We have an option to terminate
the lease upon six months prior written notice.
Our subsidiaries lease
office space in Laguna Hills, California; King of Prussia, Pennsylvania; Dallas, Texas; 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 $1.8 million in the year ended December 31, 2016.
|
|
ITEM 4 A.
|
UNRESOLVED STAFF COMMENTS
|
Not applicable.
|
|
ITEM 5.
|
OPERATING AND FINANCIAL REVIEW AND PROSPECTS
|
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 36 active wholly-owned subsidiaries in the United States, Europe, Asia, South Africa and Israel. Of such subsidiaries,
20 are engaged in developing, marketing and supporting vertical applications, as well as in selling and supporting our products,
and 16 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 refer to these MSPs as Magic service providers,
or MSPs. We also provide maintenance and technical support as well as professional services to our enterprise customers and to
MSPs. In addition, we sell our Magic xpi technology for business integration to 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.
Strategy 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.”
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 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 handlers, healthcare 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 four 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 for our principal IT professional services subsidiary
We depend on repeat product
and professional services revenues from a certain base of existing customers. Our five largest customers accounted for, in the
aggregate, 26% and 18% of our revenues in the years ended December 31, 2015 and 2016, respectively. If these existing customers
decide not to continue utilizing our professional services, not to renew their existing engagements, or 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 long term contract until December 31, 2020, under their master
services agreements, the other customers may terminate their agreements with us upon only a 30-day notice without any penalty.
Revenue Mix
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.
We may encounter
difficulties in realizing the potential financial or strategic benefits of recent and future business acquisitions.
It is a part of our business
strategy to pursue acquisitions and other initiatives in order to expand our product offerings or services or otherwise enhance
our market position and strategic strengths. In 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. Therefore, fluctuations in the value
of the currencies in which we do business relative to the U.S. dollar may adversely affect our business, results of operations
and financial condition. The depreciation of such other currencies in relation to the U.S. dollar has the effect of reducing the
U.S. dollar value of any of our liabilities which are payable in those other currencies (unless such costs or payables are linked
to the U.S. dollar). Such depreciation also has the effect of decreasing the U.S. dollar value of any asset that is denominated
in such other currencies or receivables payable in such other currencies (unless such receivables are linked to the U.S. dollar).
In addition, the U.S. dollar value of revenues and expenses denominated in such other currencies would increase. Conversely, the
appreciation of any currency in relation to the U.S. dollar has the effect of increasing the U.S. dollar value of any unlinked
assets and the U.S. dollar amounts of any unlinked liabilities and increasing the U.S. dollar value of revenues and expenses denominated
in other currencies.
In addition, while we
incur a portion of our costs in NIS, the U.S. dollar cost of our operations in Israel is influenced by the extent to which any
increase in the rate of inflation in Israel is (or is not) offset, or is offset on a lagging basis, by a devaluation of the NIS
in relation to the U.S. dollar.
Because exchange rates
between the NIS, euro, Japanese Yen and the British pound and the U.S. dollar fluctuate continuously, exchange rate fluctuations
and especially larger periodic devaluations will have an impact on our profitability and period-to-period comparisons of our results.
We cannot assure you that in the future our results of operations may not be adversely affected by currency fluctuations.
The following table sets
forth for the periods indicated, depreciation or appreciation of the U.S. dollar against the most important currencies for our
business and the Israeli consumer price index:
|
|
|
Year Ended December 31,
|
|
|
|
|
2012
|
|
|
2013
|
|
|
2014
|
|
|
2015
|
|
|
2016
|
|
|
New Israeli Shekel
|
|
|
2.3
|
%
|
|
|
7.0
|
%
|
|
|
(12
|
)%
|
|
|
(0.3
|
)%
|
|
|
(1.5
|
)%
|
|
Euro
|
|
|
2.0
|
%
|
|
|
4.3
|
%
|
|
|
(11.5
|
)%
|
|
|
(10.4
|
)%
|
|
|
3.5
|
%
|
|
Japanese Yen
|
|
|
(11.2
|
)%
|
|
|
(22.1
|
)%
|
|
|
(14.9
|
)%
|
|
|
(0.8
|
)%
|
|
|
(2.8
|
)%
|
|
British Pound
|
|
|
4.6
|
%
|
|
|
1.9
|
%
|
|
|
(5.5
|
)%
|
|
|
(4.9
|
)%
|
|
|
20.6
|
%
|
|
Israeli Consumer Price Index
|
|
|
1.6
|
%
|
|
|
1.8
|
%
|
|
|
(0.2
|
)%
|
|
|
(1.0
|
)%
|
|
|
(0.2
|
)%
|
Segments
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,
2014, 2015 and 2016.
|
|
|
Software services
|
|
|
IT professional
services
|
|
|
Unallocated
expense
|
|
|
Total
|
|
|
|
|
(U.S. dollars in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2014
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
$
|
69,861
|
|
|
$
|
94,443
|
|
|
$
|
-
|
|
|
$
|
164,304
|
|
|
Expenses
|
|
|
54,464
|
|
|
|
84,873
|
|
|
|
4,241
|
|
|
|
143,578
|
|
|
Operating income (loss)
|
|
$
|
15,397
|
|
|
$
|
9,570
|
|
|
$
|
(4,241
|
)
|
|
$
|
20,726
|
|
|
EBITDA
|
|
$
|
17,195
|
|
|
$
|
11,833
|
|
|
$
|
(3,975
|
)
|
|
$
|
25,053
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2015
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
$
|
67,271
|
|
|
$
|
108,759
|
|
|
$
|
-
|
|
|
$
|
176,030
|
|
|
Expenses
|
|
|
52,963
|
|
|
|
98,384
|
|
|
|
3,249
|
|
|
|
154,596
|
|
|
Operating income (loss)
|
|
$
|
14,308
|
|
|
$
|
10,375
|
|
|
$
|
(3,249
|
)
|
|
$
|
21,434
|
|
|
EBITDA
|
|
$
|
17,023
|
|
|
$
|
13,417
|
|
|
$
|
(2,968
|
)
|
|
$
|
27,472
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
$
|
70,834
|
|
|
$
|
130,812
|
|
|
$
|
-
|
|
|
$
|
201,646
|
|
|
Expenses
|
|
|
58,549
|
|
|
|
118,663
|
|
|
|
3,347
|
|
|
|
180,559
|
|
|
Operating income (loss)
|
|
$
|
12,285
|
|
|
$
|
12,149
|
|
|
$
|
(3,347
|
)
|
|
$
|
21,087
|
|
|
EBITDA
|
|
$
|
15,592
|
|
|
$
|
15,918
|
|
|
$
|
(2,887
|
)
|
|
$
|
28,623
|
|
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 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:
|
|
|
Year ended December 31,
|
|
|
|
|
2014
|
|
|
2015
|
|
|
2016
|
|
|
|
|
(U.S. dollars in thousands)
|
|
|
Gross research and development costs
|
|
$
|
9,017
|
|
|
$
|
8,735
|
|
|
$
|
10,063
|
|
|
Less capitalized software development costs
|
|
|
(4,267
|
)
|
|
|
(3,847
|
)
|
|
|
(4,224
|
)
|
|
Research and development expenses, net
|
|
$
|
4,750
|
|
|
$
|
4,888
|
|
|
$
|
5,839
|
|
Selling and Marketing
Expenses
.
Selling and marketing expenses consist primarily of salaries and related expenses for sales and marketing
personnel, sales commissions, marketing programs and campaigns, website related expenses, public relations, on-line advertising,
industry analyst relations, promotional materials, travel expenses and conferences and trade shows exhibit expenses, as well as
amortization of acquired customer relationships 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 foreign
currency translation adjustments.
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,
|
|
|
|
|
2014
|
|
|
2015
|
|
|
2016
|
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Software
|
|
|
15.5
|
%
|
|
|
12.3
|
%
|
|
|
9.5
|
%
|
|
Maintenance and technical support
|
|
|
13.9
|
|
|
|
13.0
|
|
|
|
12.7
|
|
|
Consulting services
|
|
|
70.6
|
|
|
|
74.7
|
|
|
|
77.8
|
|
|
Total revenues
|
|
|
100.0
|
%
|
|
|
100.0
|
%
|
|
|
100.0
|
%
|
|
Cost of revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Software
|
|
|
4.7
|
|
|
|
4.5
|
|
|
|
4.3
|
|
|
Maintenance and technical support
|
|
|
1.8
|
|
|
|
1.4
|
|
|
|
1.5
|
|
|
Consulting services
|
|
|
54.2
|
|
|
|
58.4
|
|
|
|
60.3
|
|
|
Total cost of revenues
|
|
|
60.7
|
|
|
|
64.3
|
|
|
|
66.1
|
|
|
|
|
Year ended December 31,
|
|
|
|
|
2014
|
|
|
2015
|
|
|
2016
|
|
|
Gross profit
|
|
|
39.3
|
|
|
|
35.7
|
|
|
|
33.9
|
|
|
Operating costs and expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Research and development, net
|
|
|
2.9
|
|
|
|
2.8
|
|
|
|
2.9
|
|
|
Selling and marketing,
|
|
|
15.0
|
|
|
|
13.1
|
|
|
|
11.8
|
|
|
General and administrative
|
|
|
8.8
|
|
|
|
7.6
|
|
|
|
8.7
|
|
|
Total operating expenses, net
|
|
|
26.7
|
|
|
|
23.5
|
|
|
|
23.4
|
|
|
Operating income
|
|
|
12.6
|
|
|
|
12.2
|
|
|
|
10.5
|
|
|
Financial expenses, net
|
|
|
1.1
|
|
|
|
0.4
|
|
|
|
0.2
|
|
|
Income before taxes on income
|
|
|
11.5
|
|
|
|
11.8
|
|
|
|
10.3
|
|
|
Tax benefit (taxes on income)
|
|
|
(1.4
|
)
|
|
|
(2.1
|
)
|
|
|
(2.0
|
)
|
|
Net income attributable to non-controlling interests
|
|
|
(0.7
|
)
|
|
|
(0.5
|
)
|
|
|
(2.4
|
)
|
|
Net income attributable to Magic’s shareholders
|
|
|
9.4
|
|
|
|
9.2
|
|
|
|
5.9
|
|
Year Ended December 31, 2016 Compared
With Year Ended December 31, 2015
Revenues
.
Revenues in 2016 increased by 15% from $176.0 million in 2015 to $201.6 million in 2016.
Revenues from the software
services business segment increased by 5%, from $67.3 million in 2015 to $70.8 million in 2016, primarily attributable to (i) increased
demand for our software complimentary services, mainly in Japan, the U.S., Germany and Israel amounting to $3.0 million and (ii)
the consolidation for the first time of Roshtov Software Industries Ltd. (consolidated during the second half of 2016) which was
offset by a decrease in sales of licenses primarily resulting from software renewal lifecycle among some of our AppBuilder’s
larger enterprise customers, which were not due for renewal this year of, having a net impact of $0.5 million.
Revenues from the IT
professional services business segment increased by 20% from $108.8 million in 2015 to $130.8 million in 2016, primarily attributable
to (i) increased demand for our professional services offerings of Comblack IT Ltd and Infinigy Solutions LLC in addition to the
inclusion of Infinigy for the full year (consolidated during the second half of 2015) and (ii) consolidation for the first time
of Shavit Software (2009) Ltd. (consolidated as of November 2016), Twingo Ltd., (consolidated as of August 2016) and Quickcode
Ltd., (consolidated as of February 2016) offset primarily by continued decline in our U.S. IT professional services provided to
Ericsson from $12.9 million in 2015 to $7.6 million in 2016, due to the successful completion of number of projects at Ericsson.
Revenues from sales of
technology software licenses decreased by 18% from $15.6 million in 2015 to $12.8 million in 2016. The decrease in sales of licenses
was solely attributable to software renewal lifecycle among some of our AppBuilder’s larger enterprise customers, which were
not due for renewal this year.
Revenues from sales of
proprietary packaged and third party software solutions increased by 7% from $6.0 million in 2015 to $6.5 million in 2016.
Revenues from maintenance
and technical support increased by 12% from $22.9 million in 2015 to $25.6 million in 2016. The increase in maintenance and technical
support revenues in 2016 was primarily attributable to consolidation for the first time of Roshtov Software Industries Ltd. (consolidated
during the second half of 2016).
Revenues from IT consulting
services increased by 19% from $131.5 million in 2015 to $156.8 million in 2016. The increase was primarily attributable to (i)
increased demand for our professional services offerings of Comblack IT Ltd and Infinigy Solutions LLC in addition to the inclusion
of Infinigy for the full year (consolidated during the second half of 2015) and (ii) consolidation for the first time of Shavit
Software (2009) Ltd. (consolidated as of November 2016), Twingo Ltd., (consolidated as of August 2016) and Quickcode Ltd., (consolidated
as of February 2016) offset by continued decline in professional services provided to Ericsson from $12.9 million in 2015 to $7.6
million in 2016, due to the successful completion of number of projects at Ericsson.
The following table presents
our revenues by geographical market for the years ended December 31, 2015 and 2016:
|
|
|
Year ended December 31,
|
|
|
|
|
2015
|
|
|
2016
|
|
|
|
|
(in thousands)
|
|
|
Israel
|
|
$
|
36,401
|
|
|
$
|
58,079
|
|
|
Europe
|
|
|
29,084
|
|
|
|
23,642
|
|
|
United States
|
|
|
92,577
|
|
|
|
100,470
|
|
|
Japan
|
|
|
10,092
|
|
|
|
11,226
|
|
|
Other
|
|
|
7,876
|
|
|
|
8,229
|
|
|
Total revenues
|
|
$
|
176,030
|
|
|
$
|
201,646
|
|
Cost of Revenues
.
Cost of revenues increased by
18
% from $
113.2
million in 2015 to $
133.4
million in 2016.
Cost of revenues for
software increased from $7.8 million in 2015 to $8.7 million in 2016. The increase in cost of revenues for licenses was attributable
to the increase in amortization costs of acquired software, Clicks (acquired during the second half of 2016) and due to change
in mix of software revenues between proprietary software to third party.
Cost of revenues for
maintenance and technical support increased by
20
% from $2.5 million in 2015 to $
3.0
million in 2016, primarily due to the consolidation for the first time of Roshtov Software Industries Ltd.
Cost of revenues for
IT consulting services increased by 18% from $102.9 million in 2015 to $121.8 million in 2016. The increase in cost of revenues
for IT consulting services was primarily attributable to (i) the inclusion of Infinigy for the full year (consolidated during the
second half of 2015) and (ii) consolidation for the first time of Shavit Software (2009) Ltd. (consolidated as of November 2016),
Twingo Ltd., (consolidated as of August 2016) and Quickcode Ltd., (consolidated as of February 2016), with the remaining increase
being consistent with the increase in revenues from IT consulting services, though offset by continued decline in our U.S. IT professional
services provided to Ericsson. Cost of revenues for the years ended December 31, 2015 and 2016 include $31,000 and $15,000, respectively,
of stock-based compensation recorded under ASC 718.
Gross Margin
.
Gross margin in 2016 was 34% compared to gross margin of
36
% in 2015. The decrease
in gross margin was primarily attributable to the decrease in sales of our software licenses, primarily attributable to the software
renewal lifecycle among some of our larger enterprise customers, which were not due for renewal this year and by the increase in
sales of IT professional services carrying a lower gross margin compared to gross margin attributable to sales of proprietary software.
Research and Development
Expenses, Net
. Gross research and development costs increased by 15% from $8.7 million in 2015 to $10.1 million in 2016.
Net research and development costs increased by 19% from $4.9 million in 2015 to $5.8 million in 2016. In 2016, we capitalized
$4.2 million of software development costs compared to $3.8 million in 2015. Net research and development costs as a percentage
of revenues was 2.9% in 2016 compared to 2.8% in 2015. The increase in gross research and development costs in 2016 is primarily
attributable to the consolidation for the first time of Roshtov Software Industries Ltd., accounting for $0.5 million with the
remaining increase resulted from an additional investment in our research and development activity. Research and development costs
for the years ended December 31, 2015 and 2016 include $48,000 and $17,000, respectively, of stock-based compensation recorded
under ASC 718.
Selling and Marketing
Expenses
.
Selling and marketing expenses increased by 3% from $23.1 million in 2015 to $23.8 million in 2016. Selling
and marketing expenses as a percentage of revenues decreased from 13.1% in 2015 to 11.8% in 2016. The increase in selling and marketing
costs is primarily attributable to (i) amortization expenses of acquired customer relationships recorded as a result of business
combinations in 2016 amounting to $5.3 million compared to $3.5 million in 2015, and (ii) acquisitions of subsidiaries consolidated
for the first time in 2016 and to acquisitions completed during 2015 and consolidated for the entire year for the first time in
2016 amounting to $0.7 million, offset by a decrease in our payroll expenses in our U.S. IT professional services amounting to $1.6
million. The decrease in selling and marketing expenses as a percentage of revenues is primarily due to the change in the mix of
our revenues resulting in an increase in revenues from professional services, despite the absolute increase in selling and marketing
expenses as detailed above. Selling and marketing expenses for the years ended December 31, 2015 and 2016 include $136,000 and
$71,000, respectively, of stock-based compensation recorded under ASC 718.
General and Administrative
Expenses
. General and administrative expenses increased by
31
% from $13.4
million in 2015 to $
17.6
million in 2016. General and administrative expenses as a
percentage of revenues increased from 7.6% in 2015 to 8.7% in 2016. The increase in general and administrative expenses is primarily
attributable to: (i) acquisitions of subsidiaries consolidated for the first time in 2016 and to acquisitions completed during
2015 and consolidated for the entire year for the first time in 2016 amounting to $2.8 million; and (ii) valuation of contingent
liabilities in acquired subsidiaries amounting to $0.5 million; and (iii) an increase in headcount of general and administrative
employees from 113 in 2015 to 122 in 2016. General and administrative expenses for the years ended December 31, 2015 and 2016 include
$
18,000
and $
49,000
, respectively, of
stock-based compensation recorded under ASC 718.
Financial Expenses,
Net
. We recorded net financial expenses of $0.7 million in 2015 and $0.4 million in 2016. The decrease in net financial
expenses between 2015 and 2016 was primarily attributable to (i) decrease in the impact of the devaluation of the Euro, Japanese
Yen and New Israeli Shekel against the U.S. Dollar, which negatively impacted our cash and other working capital balances denominated
in these currencies in 2015 by $0.7 million, offset by (i) valuation of contingent liabilities in acquired subsidiaries amounting
to $0.2 million, and (ii) increase in interest expenses on loans of $0.2 million.
Taxes on Income
.
We recorded taxes on income
of $3.7 million in 2015 compared to $3.9 million in 2016. Our taxes on income in 2015 and 2016
were primarily attributable to current taxes recorded by our subsidiaries in Japan, Europe and Israel. Our 2016 tax expenses were
positively impacted by the decrease in our deferred tax liabilities recorded following the approval by the Israeli Parliament to
reduce corporate income tax rate to 24% (instead of 25%) effective from January 1, 2017 and to 23% effective from January 1, 2018.
Net Income Attributable
to Our Shareholders
.
Our net income decreased from $16.2 million in 2015 to $11.9 million in 2016, primarily attributable
to (i) an increase in net income attributable to redeemable non-controlling interests from $0.6 million in 2015 to $4.5 million
in 2016, and (ii) an increase in operating expenses of $5.8 million, which was offset by an increase in gross profit of $5.5 million.
Year Ended December 31, 2015 Compared
With Year Ended December 31, 2014
Revenues
.
Revenues in 2015 increased by 7.1% from $164.3 million in 2014 to $176.0 million in 2015. Revenues from the software services
business segment decreased by 3.7%, from $69.9 million in 2014 to $67.3 million in 2015, primarily attributable to the negative
impact of the devaluation of the Euro and Japanese Yen against the U.S. dollar by $4.6 million and $1.4 million, respectively,
which was partially offset by the (i) inclusion for the full year of FTS’s results of operations (which was acquired in October
2014), and (ii) increased demand for our software solutions products and related services. Revenues from the IT professional services
business segment increased by 15.2% from $94.4 million in 2014 to $108.8 million in 2015, primarily attributable to the (i) consolidation
for the first time of Comblack IT Ltd (acquired in April 2015) and Infinigy Solutions LLC (acquired in June 2015), and (ii) increased
demand for our professional services offerings.
Revenues from sales of
software licenses decreased by 15% from $18.4 million in 2014 to $15.6 million in 2015. The decrease in sales of licenses was primarily
attributable to the devaluation of the Euro and Japanese Yen against the U.S. dollar, having a negative impact of approximately
$0.8 million and $1.2 million, respectively.
Revenues from sales of
proprietary packaged and third party software solutions decreased by 14% from $7.0 million in 2014 to $6.0 million in 2015. The
decrease in sales of proprietary packaged and third party software solutions was primarily attributable to the (i) devaluation
of the New Israeli Shekel, Japanese Yen and British Pound against the U.S. dollar, having a negative impact of approximately $0.6
million, and (ii) decrease in sales of proprietary packaged software licenses.
Revenues from maintenance
and technical support remained relatively constant, totaling $22.8 million in 2014 and $22.9 million in 2015. The increase in maintenance
and technical support revenues in 2015 was primarily attributable to the full year consolidation of FTS (acquired in October 2014),
offset mainly due to the devaluation of the Euro against the U.S. dollar, having a negative impact of approximately $1.5 million.
Revenues from IT consulting
services increased by 13% from $116.2 million in 2014 to $131.5 million in 2015. The increase was primarily attributable to the
consolidation for the first time of Comblack IT Ltd and Infinigy Solutions LLC, accounting for 67% of the growth (the remaining
33% resulted from existing activity), which increase was partially offset by the devaluation of the New Israeli Shekel, Euro and
Japanese Yen having a negative impact of approximately $4.9 million.
The following table presents
our revenues by geographical market for the years ended December 31, 2014 and 2015:
|
|
|
Year ended December 31,
|
|
|
|
|
2014
|
|
|
2015
|
|
|
|
|
(in thousands)
|
|
|
Israel
|
|
$
|
29,198
|
|
|
$
|
36,401
|
|
|
Europe
|
|
|
37,409
|
|
|
|
29,084
|
|
|
United States
|
|
|
82,470
|
|
|
|
92,577
|
|
|
Japan
|
|
|
11,299
|
|
|
|
10,092
|
|
|
Other
|
|
|
3,928
|
|
|
|
7,876
|
|
|
Total revenues
|
|
$
|
164,304
|
|
|
$
|
176,030
|
|
Cost of Revenues
.
Cost of revenues increased by
14
% from $99.7 million in 2014 to $
113.2
million in 2015. Cost of revenues for licenses increased from $
4.6
million in 2014
to $5.1 million in 2015. The increase in cost of revenues for licenses was primarily attributable to the increase in amortization
of capitalized and acquired software costs from $4.3 million in 2014 to $4.8 million in 2015. Cost of revenues for packaged software
solutions decreased by
11
% from $3.1 million in 2014 to $
2.7
million in 2015, primarily due to the devaluation of the New Israeli Shekel, Japanese Yen and British Pound against the U.S. dollar,
with the remaining decrease being consistent with the decrease in revenues of proprietary packaged and third party software solutions.
Cost of revenues for
maintenance and technical support decreased by
16
% from $2.9 million in 2014 to $
2.5
million in 2015, primarily due to the devaluation of the Euro, New Israeli Shekel and Japanese Yen against the U.S. dollar.
Cost of revenues for
IT consulting services increased by 15% from $89.2 million in 2014 to $102.9 million in 2015. The increase in cost of revenues
for IT consulting services was primarily attributable to (i) the consolidation for the first time of Comblack IT Ltd and Infinigy
Solutions LLC, and (ii) increase in amortization of capitalized and acquired intangible assets costs (backlog) from $0 million
in 2014 to $0.7 million in 2015, with the remaining increase being consistent with the increase in revenues from IT consulting
services. Cost of revenues for the years ended December 31, 2014 and 2015 include $30,000 and $31,000, respectively, of stock-based
compensation recorded under ASC 718.
Gross Margin
.
Gross margin in 2015 was 36% compared to gross margin of
39
% in 2014. The decrease
in gross margin resulted primarily from the increase in sales of IT professional services and third party software solutions, which
have a lower gross margin, compared to the increase in sales of our proprietary software products, which have a higher gross margin,
together with (i) devaluation of the Euro and Japanese Yen against the U.S. dollar, which had a negative impact of $0.8 million
and $1.2 million, respectively, reducing our license sales of our proprietary software products denominated in Euro and Japanese
Yen and (ii) increase in amortization of capitalized and acquired software costs from $4.3 million in 2014 to $5.5 million in 2015.
Research and Development
Expenses, Net
. Gross research and development costs decreased by 3% from $9.0 million in 2014 to $8.7 million in 2015.
Net research and development expenses increased by 3% from $4.7 million in 2014 to $4.9 million in 2015. In 2015, we capitalized
$3.8 million of software development costs compared to $4.3 million in 2014. Net research and development costs as a percentage
of revenues was 2.8% in 2015 compared to 2.9% in 2014. The decrease in research and development costs in 2015 is primarily attributable
to the devaluation of the New Israeli Shekel and Russian ruble against the U.S. dollar which had a positive impact of $0.6 million
and to cost savings initiatives made in our research and development departments, offset by the full year consolidation of FTS
which was acquired during October 2014. Research and development expenses for the years ended December 31, 2014 and 2015 include
$29,000 and $48,000, respectively, of stock-based compensation recorded under ASC 718.
Selling and Marketing
Expenses
.
Selling and marketing expenses decreased by 6% from $24.6 million in 2014 to $23.1 million in 2015. Selling
and marketing expenses as a percentage of revenues decreased from 15% in 2014 to 13.1% in 2015. The decrease in selling and marketing
costs is primarily attributable to (i) stock-based compensation expenses recorded in 2014 totaling $1.2 million following the grant
of stock based compensation in Comm-IT, and (ii) the devaluation of the Japanese Yen, Euro and New Israeli Shekel against the U.S.
dollar which had a positive impact of $0.6 million, offset by the consolidation for the first time of Comblack IT Ltd, and Infinigy
Solutions LLC and the full year of the selling and marketing costs of FTS which was acquired in October 2014. The decrease in selling
and marketing expenses as a percentage of revenues is primarily due to the change in the mix of our revenues resulting in an increase
in revenues from professional services mainly from transactions denominated in U.S. dollars versus the decrease in selling and
marketing expenses as detailed above. Selling and marketing expenses for the years ended December 31, 2014 and 2015 include $220,000
and $
136,000
, respectively, of stock-based compensation recorded under ASC 718.
General and Administrative
Expenses
. General and administrative expenses decreased by
8
% from $14.5 million
in 2014 to $
13.4
million in 2015. General and administrative expenses as a percentage
of revenues decreased from
8.8
% in 2014 to 7.6% in 2015. The decrease in general and
administrative expenses is primarily attributable to: (i) arbitration expenses recorded in 2014 amounting to $1.6 million compared
to $0.3 million in 2015; and (ii) stock-based compensation expenses in 2014 amounting to $1.2 million recorded in one of our subsidiaries
following stock-based compensation granted to its chief executive officer. Offsetting the above increase in costs were: (i) acquisitions
of subsidiaries consolidated for the first time in 2015 and acquisition consolidated for the entire year for the first time in
2015 amounting to $1.1 million; and (ii) an increase in headcount of general and administrative employees from 95 in 2014 to 113
in 2015. General and administrative expenses for the years ended December 31, 2014 and 2015 include $1,280,000 and $
18,000
,
respectively, of stock-based compensation recorded under ASC 718.
Financial Expenses,
Net
. We recorded net financial expenses of $1.8 million in 2014 and $0.7 million in 2015. The decrease in net financial
expenses between 2014 and 2015 was primarily attributable to: the (i) decrease in the impact of the devaluation of the Euro, Japanese
Yen and New Israeli Shekel against the U.S. Dollar, which negatively impacted our cash and other working capital balances denominated
in these currencies by $0.7 million, and (ii) increase in interest income of $0.3 million.
Taxes on Income
.
We recorded taxes on income
of $2.3 million in 2014 compared to $3.7 million in 2015. Our taxes on income in 2014 and 2015
were primarily attributable to current taxes recorded by our subsidiaries in Japan, Europe and Israel and to the decrease of our
deferred tax assets recorded with respect to utilization of carry-forward tax losses.
Net Income Attributable
to Our Shareholders
.
Our net income increased from $15.5 million in 2014 to $16.2 million in 2015, primarily due
to (i) decrease in selling and marketing expenses of $1.5 million (ii) decrease in general and administrative expenses of $1.1
million, and (iii) decrease in financial expenses, net of $1.1 million, which was offset by (i) decrease in gross profit of $1.8
million, and (ii) increase in taxes on income of $1.4 million.
|
|
B.
|
Liquidity and Capital
Resources
|
Historically, 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) and 2010 (approximately $20.3 million) and research and development and
marketing grants primarily from the Government of Israel. In addition, we have also financed our operations through short-term
loans, long-term loans and borrowings under available credit facilities.
In December 2010, we
raised approximately $20.3 million, net of issuance expenses, in a private placement to institutional investors in the United States
and abroad. We issued an aggregate of 3,287,616 ordinary shares at a price of $6.50 per share in the offering. Certain of the purchasers
also received warrants to purchase up to an aggregate of 1,134,231 ordinary shares at an exercise price of $8.26 per share (later
adjusted to $7.75). The warrants had a term of three years and were exercisable beginning six months after the date of issuance.
330,000 warrants were exercised into 3,140 ordinary shares based on the offering cashless exercise mechanisms. All
remaining warrants not exercised were forfeited on June 23, 2014.
In March 2014, we raised
approximately $54.7 million, net of issuance expenses, in a public offering of 6,900,000 ordinary shares, including 900,000 shares
sold pursuant to the underwriters’ exercise of their over-allotment option, at a price to the public of $8.50 per share.
In November 2016, we
obtained a NIS 120 million (approximately $31.4 million) loan linked to the New Israel shekel from an Israeli institution. We intend
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, 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.
|
We will 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,
2016, we were in full compliance with the financial covenants of the loan.
As of December 31, 2016,
we had approximately $
87.8
million in cash and cash equivalents and available-for-sale
marketable securities, with net working capital of approximately $
113.7
million and
long term debts to banks and others of approximately $29.8 million compared to approximately $
76.7
million in cash and cash equivalents and available-for-sale marketable securities, with working capital of approximately $
106.9
million and long term debts to banks and others of approximately $3.3 million, as of December 31, 2015. The increase in
cash and cash equivalents and available-for-sale marketable securities is primarily attributable to the loan obtained in November
2016 amounting to approximately $
31.5
million
,
offset mainly due to cash paid in connection with our acquisitions during 2016, settlement of contingent consideration payments
relating to acquisition in previous years and cash dividend distribution.
As of December 31, 2016
and 2015, our long-term and short-term debt amounted to $29.8 million and $5.6 million, respectively. We believe that our cash
and cash equivalents (including available-for-sale marketable securities), in conjunction with cash generated from operations,
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 either Level 1 or Level 2 investments,
as measured under ASC 820, “Fair Value Measurements and Disclosures,” as these vendors either provide a quoted market
price in an active market or use observable inputs.
Cash Flows
The following table summarizes our cash flows
for the periods presented:
|
|
|
Year ended December 31,
|
|
|
|
|
2014
|
|
|
2015
|
|
|
2016
|
|
|
|
|
(
U.S. dollars in thousands
)
|
|
|
Net income from operations
|
|
$
|
16,566
|
|
|
$
|
17,076
|
|
|
$
|
16,708
|
|
|
Adjustments to reconcile net income to net cash provided by operating activities:
|
|
|
1,628
|
|
|
|
2,542
|
|
|
|
11,247
|
|
|
Net cash provided by operating activities
|
|
|
18,194
|
|
|
|
19,618
|
|
|
|
27,955
|
|
|
Net cash used in investing activities
|
|
|
(26,061
|
)
|
|
|
(16,632
|
)
|
|
|
(35,982
|
)
|
|
Net cash provided by (used in) financing activities
|
|
|
46,318
|
|
|
|
(11,935
|
)
|
|
|
22,190
|
|
|
Effect of exchange rate changes on cash and cash equivalents
|
|
|
(1,070
|
)
|
|
|
(1,378
|
)
|
|
|
(1,037
|
)
|
|
Increase (decrease) in cash and cash equivalents from operations
|
|
|
37,381
|
|
|
|
(10,327
|
)
|
|
|
13,126
|
|
Net cash provided by
operating activities was $28.0 million for the year ended December 31, 2016, compared to $19.6 million and $18.2 million for the
years ended December 31, 2015 and 2014, respectively. Net cash provided by operations in 2016 consists primarily of $16.7 million
of net income adjusted for non-cash activities, including $11.6 million of depreciation and amortization expenses, a $0.2 million
of stock compensation expenses, a $1.4 million increase in trade payables, and a $0.3 million of amortization of marketable securities
premium, and a $1.6 million increase in accrued expenses and other accounts payable offset by a $1.0 million change in deferred
income taxes, net, a $0.2 million decrease in deferred revenues, and a $2.6 million increase in trade receivables, net. Net cash
provided by operations in 2015 consists primarily of $17.1 million of net income adjusted for non-cash activities, including $9.9
million of depreciation and amortization expenses, a $0.2 million change in deferred income taxes, net, a $0.7 million increase
in deferred revenues, a $0.2 million of stock compensation expenses, a $1.9 million increase in trade payables, and a $0.2 million
of amortization of marketable securities premium, offset by a $0.2 million decrease in accrued expenses and other accounts payable,
a $1.7 million increase in other long term and short term accounts receivable and prepaid expenses, and a $8.8 million increase
in trade receivables, net. Net cash provided by operations in 2014 consists primarily of $16.6 million of net income adjusted
for non-cash activities, including $8.7 million of depreciation and amortization expenses, a $1.2 million change in deferred income
taxes, net, a $0.2 million increase in deferred revenues, and $1.6 million of stock compensation expenses, offset by a $0.3 million
decrease in accrued expenses and other accounts payable, a $0.3 million decrease in trade payables and a $9.4 million increase
in trade receivables, net.
Net cash used in investing
activities was approximately $36.0 million for the year ended December 31, 2016, compared to net cash used in investing activities
of approximately $16.6 million for the year ended December 31, 2015 and net cash used in investing activities of approximately
$26.1 million for the year ended December 31, 2014. Net cash used in investing activities in 2016 is primarily attributable to
$9.4 million investment in marketable securities, $31.4 million used in business combinations, $0.8 million used primarily to
purchase network equipment and computer hardware, as well as for furniture, office equipment and leasehold improvements, $4.2
million of capitalized software development costs, and $1.2 million short-term loan to a related-party, offset by, $8.5 million
provided by short-term bank deposits, and $2.6 million provided by proceeds from maturity of marketable securities. Net cash used
in investing activities in 2015 is primarily attributable to $5.2 million investment in marketable securities, $9.2 million used
in business combinations, $1.1 million used to purchase property and equipment and $3.8 million of capitalized software development
costs, offset by $2.7 million provided by short-term bank deposits. Net cash used in investing activities in 2014 is primarily
attributable to $11.4 million investment in marketable securities, net, $9.4 million used in business combinations, $1.0 million
used to purchase property and equipment and $4.3 million of capitalized software development costs.
Net cash provided
by financing activities was approximately $
22.2
million for the year ended
December 31, 2016, primarily attributable to a long-term loan received from a financial institution in an amount of $31.4 million,
and an increase in short-term credit of $0.9 million, offset by dividend distributions of $7.8 million, dividend paid to
non-controlling and redeemable non-controlling interests of $2.0 million and purchase of non-controlling interest of $0.4
million. Net cash used in financing activities was approximately $
11.9
million
for the year ended December 31, 2015, primarily attributable to dividend distributions of $7.8 million, decrease in
short-term credit of $2.8 million, and purchase of non-controlling interests of $1.3 million partially offset by $0.4 million
received from the exercise of employee options. Net cash provided by financing activities was approximately $
46.3
million
for the year ended December 31, 2014, primarily attributable to our issuance of shares in a follow-on public offering in the
net amount of $54.7 million offset by dividend distributions of $
8.7
million.
Dividends
We have paid dividends
since October 2012 consistent with our Board of Directors’ dividend policy to distribute a dividend of up to 50% of our annual
distributable profits each year, 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. Since 2012 until December 31, 2016 we declared in the aggregate cash dividends of approximately $0.876 per share ($35.8
million in the aggregate). 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.
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 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. We sell our products primarily through direct
sales force and indirectly through distributors and value added resellers.
We account for our software
sales in accordance with ASC 985-605. Software license revenue is recognized when persuasive evidence of an arrangement exists,
delivery has occurred, the vendor’s fee is fixed or determinable, no further obligation exists and collectability is probable.
As required by ASC 985-605,
“Software Revenue Recognition,” or ASC 985-605, we determine the value of the software component of our multiple-element
arrangements using the residual method when vendor specific objective evidence, or VSOE, of fair value exists for the undelivered
elements of the support and maintenance agreements. VSOE is based on the price charged when an element is sold separately or renewed.
Under the residual method, the fair value of the undelivered elements is deferred and the remaining portion of the arrangement
fee is allocated to the delivered elements and is recognized as revenue. Maintenance and support revenue included in multiple element
arrangements is deferred and recognized on a straight-line basis over the term of the maintenance and support agreement.
Our revenues from maintenance
and support are derived from annual maintenance contracts providing for unspecified upgrades for new versions and enhancements
on a when-and-if-available basis for an annual fee. The right for an unspecified upgrade for new versions and enhancements on a
when-and-if-available basis do not specify the features, functionality and release date of future product enhancements for the
customer to know what will be made available and the general timeframe in which it will be delivered.
Maintenance and support
revenue included in multiple element arrangements is deferred and recognized on a straight-line basis over the term of the maintenance
and support agreement.
We generally do not grant
a right of return to our customers. When a right of return exists, we defer revenue until the right of return expires, at which
time revenue is recognized provided that all other revenue recognition criteria are met.
Revenue from professional
services both related to software and IT professional services businesses consists of billable hours for services provided and
is recognized as the services are rendered.
Arrangements that include
professional services bundled with licensed software and other software related elements, are evaluated to determine whether those
services are essential to the functionality of other elements of the arrangement. When services are considered essential to the
software, revenues under the arrangement are recognized using contract accounting based on ASC 605-35, “Construction-Type
and Production-Type Contracts,” or ASC 605-35, on a percentage of completion method based on inputs measures. Provisions
for estimated losses on uncompleted contracts are made in the period in which such losses are first determined, in the amount of
the estimated loss for the entire contract. During the years ended December 31, 2014, 2015 and 2016, no such estimated losses were
identified.
When professional services
are not considered essential to the functionality of other elements of the arrangement, revenue allocable to the consulting services
is recognized as the services are performed, using the VSOE fair value. In most cases, we have determined that the services are
not considered essential to the functionality of other elements of the arrangement.
Deferred revenue includes
unearned amounts received under maintenance and support contracts, and amounts received from customers but not yet recognized as
revenues.
Revenue from third-party
sales is recorded at a gross or net amount according to certain indicators. The application of these indicators for gross and net
reporting of revenue depends on the relative facts and circumstances of each sale and requires significant judgment.
Research and development costs
Research and development
costs incurred in the process of software development before establishment of technological feasibility are charged to expenses
as incurred. Costs incurred subsequent to the establishment of technological feasibility are capitalized according to the principles
set forth in ASC 985-20, “Costs of Software to be Sold, Leased or Marketed.”
We establish technological
feasibility upon completion of a detailed program design or working model.
Research and development
costs incurred in the process of developing product enhancements are generally charged to expenses as incurred.
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
(between 4-5 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, 2014, 2015 and 2016, 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.
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.
Management makes estimates
of fair value based upon assumptions it believes to be reasonable. These estimates are based on historical experience and information
obtained from the management of the acquired businesses and relevant market and industry data and are, inherently, uncertain. Critical
estimates made in valuing certain of the intangible assets include, among other things, the following: (i) future expected cash
flows from license sales, maintenance agreements, customer contracts and acquired developed technologies and patents; (ii) expected
costs to develop the in-process research and development into commercially viable products and estimated cash flows from the projects
when completed; (iii) the acquired company’s brand and market position as well as assumptions about the period of time the
acquired brand will continue to be used in the combined company’s product portfolio; and (iv) discount rates. Unanticipated
events and circumstances may occur which may affect the accuracy or validity of such assumptions, estimates or actual results.
Changes to these estimates, relating to circumstances that existed at the acquisition date, are recorded as an adjustment to goodwill
during the purchase price allocation period (generally within one year of the acquisition date) and as operating expenses, if otherwise.
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.
Goodwill
As a result of our acquisitions,
our goodwill represents the excess of the purchase price in a business combination over the fair value of net tangible and intangible
assets acquired.
Goodwill was allocated
to the reporting segments at acquisition. We follow ASC 350, “Intangibles – Goodwill and Other,” or ASC 350,
and perform our goodwill annual impairment test for each of our reporting units at December 31 of each year, or more often if indicators
of impairment are present.
As required by ASC 350,
we first conduct an initial qualitative assessment of the likelihood of impairment may be performed. If this step 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, we then compare the fair value of each reporting unit to its carrying value of net assets allocated
to the reporting unit (’step 1’). If the fair value exceeds the carrying value of the reporting unit net assets, goodwill
is considered not impaired, and no further testing is required. If the carrying value exceeds the fair value of the reporting unit,
then the implied fair value of goodwill is determined by subtracting the fair value of all the identifiable net assets from the
fair value of the reporting unit. An impairment loss is recorded for the excess, if any, of the carrying value of goodwill over
its implied fair value (’step 2’).
As required by ASC 820,
“Fair Value Measurements and disclosures,” or ASC 820, we apply assumptions that market place participants would consider
in determining the fair value of each reporting unit.
We performed annual impairment
tests during the fourth quarter in each of the years ended December 31, 2014, 2015 and 2016 and did not identify any impairment
losses.
Impairment of long-lived assets
and intangible assets subject to amortization
We review our long-lived
assets for impairment in accordance with ASC 360, “Property, Plant and Equipment,” or ASC 360, whenever events or changes
in circumstances indicate that the carrying value of an asset may not be recoverable. Recoverability of assets to be held and used
is measured by a comparison of the carrying amount of an asset to the future undiscounted cash flows expected to be generated by
the assets. If such assets are considered to be impaired, the impairment to be recognized is measured by the amount by which the
carrying value of the assets exceeds the fair value of the assets.
As required by ASC 820,
“Fair Value Measurements and disclosures” we apply assumptions that marketplace participants would consider in determining
the fair value of long-lived assets (or asset groups).
Intangible assets with
finite lives are comprised of distribution rights, acquired technology, customer relationships, backlog and non-compete agreements
and are amortized over their economic useful life using a method of amortization that reflects the pattern in which the economic
benefits of the intangible assets are consumed or otherwise used up. Distribution rights, acquired technology and non-compete agreements
were amortized on a straight line basis and customer relationships and backlog were amortized on an accelerated method basis over
a period between 3.5 and 15 years based on the customer relationships identified.
During the years ended
December 31, 2014, 2015 and 2016, no impairment indicators were identified.
Marketable Securities
We account for investments
in marketable securities in accordance with ASC 320 “Investments – Debt and Equity Securities,” or ASC 320. Our
management determines the appropriate classification of its investments in marketable debt and equity securities at the time of
purchase and reevaluates such determinations at each balance sheet date. Our marketable securities consist mainly of debt securities
which are designated as available-for-sale and are stated at fair value, with unrealized gains and losses reported in accumulated
other comprehensive income (loss), a separate component of shareholders’ equity. Realized gains and losses on sales of investments,
as determined on a specific identification basis, are included in financial income, net, together with accretion (amortization)
of discount (premium), and interest or dividends.
We recognize an impairment
charge when a decline in the fair value of an investment that falls below its cost basis is determined to be other-than-temporary.
Declines in fair value
of available-for-sale equity securities that are considered other-than-temporary, based on criteria described in SAB Topic 5M,
“Other Than Temporary Impairment of Certain Investments in Equity Securities,” are charged to earnings (based on the
entire difference between fair value and amortized cost). Factors considered in making such a determination include the duration
and severity of the impairment, the financial condition and near-term prospects of the issuer, and the intent and ability of the
company to retain its investment for a period of time sufficient to allow for any anticipated recovery in market value.
For declines in value
of debt securities we apply an amendment to ASC 320. Under the amended impairment model, an other-than-temporary impairment loss
is deemed to exist and recognized in earnings if management intends to sell or if it is more likely than not that it will be required
to sell, a debt security, before recovery of its amortized cost basis. If the criteria mentioned above, does not exist, we evaluate
the collectability of the security in order to determine if the security is other than temporary impaired.
For debt securities that
are deemed other-than-temporary impaired, the amount of impairment recognized in the statement of operations is limited to the
amount related to “credit losses” (the difference between the amortized cost of the security and the present value
of the cash flows expected to be collected), while impairment related to other factors is recognized in other comprehensive income.
We did not record any
impairment of marketable securities during the years ended December 31, 2014, 2015 and 2016.
Stock-based Compensation
We account for stock-based
compensation in accordance with ASC 718 “Compensation – Stock Compensation,” or ASC 718. ASC 718 requires registrants
to estimate the fair value of equity-based payment awards on the date of grant using an option-pricing model. The value of the
portion of the award that is ultimately expected to vest is recognized as an expense over the requisite service periods in our
consolidated statement of income. We recognize compensation expenses for the value of our awards, which have graded vesting based
on the accelerated method over the requisite service period of each of the awards, net of estimated forfeitures. To measure and
recognize compensation expense for share-based awards we use the Binomial option-pricing model. The Binomial model for option pricing
requires a number of assumptions, of which the most significant are the suboptimal exercise factor and expected stock price volatility.
The suboptimal exercise factor is estimated based on employees’ historical option exercise behavior.
The suboptimal exercise
factor is the ratio by which the stock price must increase over the exercise price before employees are expected to exercise their
stock options. Expected volatility is based upon actual historical stock price movements and was calculated as of the grant dates
for different periods, since the Binomial model can be used for different expected volatilities for different periods. The risk-free
interest rate is based on the yield from U.S. Treasury zero-coupon bonds with an equivalent term to the contractual term of the
options. Prior to September 2012, we did not have any foreseeable plans to pay dividends and therefore used an expected dividend
yield of zero in our past years option pricing models. In September 2012, our management adopted a dividend distribution policy
according to which we will distribute in each year a dividend of up to 50% of our annual distributable profits. Therefore, we will
use an expected dividend yield for our future grants. The expected term of options granted is derived from the output of the option
valuation model and represents the period of time that options granted are expected to be outstanding. Estimated forfeitures are
based on actual historical pre-vesting forfeitures. For awards with performance conditions, compensation cost is recognized over
the requisite service period if it is ‘probable’ that the performance conditions will be satisfied, as defined in ASC 450-20-20,
“Loss Contingencies.”
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.
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.
Accounting for income tax
We account for income
taxes in accordance with ASC 740, “Income Taxes,” or ASC740. ASC 740 prescribes the use of the “asset and liability”
method whereby deferred tax asset and liability account balances are determined based on differences between financial reporting
and tax bases of assets and liabilities and are measured using the enacted tax rates and laws that will be in effect when the differences
are expected to reverse. We provide a valuation allowance, if necessary, to reduce deferred tax assets to their estimated realizable
value. Deferred tax assets and liabilities are classified as 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.
We utilize a two-step
approach in recognizing and measuring uncertain tax positions accounted for in accordance with ASC 740. Under the first step we
evaluate a tax position taken or expected to be taken in a tax return by determining if the weight of available evidence indicates
that it is more likely than not that, based on technical merits, the tax position will be sustained on audit, including resolution
of any related appeals or litigation processes. The second step is to measure the tax benefit as the largest amount that is more
than 50% likely to be realized upon ultimate settlement with the tax authorities. We have accrued interest and penalties related
to unrecognized tax benefits in our provisions for income taxes. The total amount of gross unrecognized tax benefits (tax on income)
for the years ended December 31, 2014, 2015 and 2016 were $156,000, $(324,000) and $(159,000), respectively.
Recently Issued Accounting Standards
In May 2014, the FASB
issued Accounting Standards Update No. 2014-09, Revenue from Contracts with Customers (Topic 606) (ASU 2014-09), which amends the
existing accounting standards for revenue recognition. In August 2015, the FASB issued ASU No. 2015-14, Revenue from Contracts
with Customers (Topic 606): Deferral of the Effective Date, which delays the effective date of ASU 2014-09 by one year. The FASB
also agreed to allow entities to choose to adopt the standard as of the original effective date. The new revenue recognition standard
will be effective in the first quarter of 2018, with the option to adopt it in the first quarter of 2017. The Company anticipates
adopting the new standard effective January 1, 2018. The new standard also permits two methods of adoption: retrospectively to
each prior reporting period presented (full retrospective method), or retrospectively with the cumulative effect of initially applying
the guidance recognized at the date of initial application (the modified retrospective method). We preliminarily anticipate to
adopt the standard using the modified retrospective method. However, we continue to evaluate the impact of the standard on our
consolidated financial statements and related disclosures and the adoption method is subject to change.
In February 2016, the
FASB issued ASU 2016-02, “Leases” (Topic 842), whereby, lessees will be required to recognize for all leases at the
commencement date a lease liability, which is a lessee’s obligation to make lease payments arising from a lease, measured
on a discounted basis; and a right-of-use asset, which is an asset that represents the lessee’s right to use, or control
the use of, a specified asset for the lease term. Under the new guidance, lessor accounting is largely unchanged. A modified retrospective
transition approach for leases existing at, or entered into after, the beginning of the earliest comparative period presented in
the financial statements must be applied. The modified retrospective approach would not require any transition accounting for leases
that expired before the earliest comparative period presented. Companies may not apply a full retrospective transition approach.
ASU 2016-02 is effective for annual and interim periods beginning after December 15, 2018. Early application is permitted. We are
evaluating the potential impact of this pronouncement.
In March 2016, the FASB
issued ASU 2016-09, Compensation – Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting
(“ASU 2016-09”). ASU 2016-09 simplifies several aspects of the accounting for employee share-based payment transactions,
including the accounting for income taxes, forfeitures, and statutory tax withholding requirements, as well as classification in
the statement of cash flows. ASU 2016-09 is effective for fiscal years, and interim periods within those years, beginning after
December 15, 2016. We do not expect that this new guidance will have a material impact on our consolidated financial statements.
In April 2016, the FASB
issued ASU 2016-10, “Revenue from Contracts with Customers (Topic 606): Identifying Performance Obligations and Licensing”
(“ASU 2016-10”), which clarifies the following two aspects of Topic 606: (a) identifying performance obligations; and
(b) the licensing implementation guidance. The amendments do not change the core principle of the guidance in Topic 606. The new
guidance is effective for annual periods beginning after December 15, 2017, including interim periods within those annual periods,
which will be our interim period beginning January 1, 2018. Early adoption is permitted only as of annual reporting periods beginning
after December 15, 2016, including interim reporting periods with that reporting period. We are evaluating the impact of this standard.
In November 2016, the
FASB issued Accounting Standards Update No. 2016-18, Statement of Cash Flows (Topic 230): Restricted Cash (ASU 2016-18), which
requires companies to include amounts generally described as restricted cash and restricted cash equivalents in cash and cash equivalents
when reconciling beginning-of-period and end-of-period total amounts shown on the statement of cash flows. This guidance will be
effective for us in the first quarter of 2018 and early adoption is permitted. We do not expect that this new guidance will have
a material impact on our consolidated financial statements.
|
|
C.
|
Research and Development
|
Our research and development
and support personnel work closely with our customers and prospective customers to determine their requirements and to design enhancements
and new releases to meet their needs. We periodically release enhancements and upgrades to our core products. In the years ended
December 31, 2016, 2015 and 2014, we invested $10.1 million, $8.7 million and $9.0 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, 2016,
we employed 206 employees in research and development activities, of which 96 persons were located in Israel, 69 persons in India,
28 persons in Russia, 9 persons in Japan, 3 persons in United Kingdom and 1 person in South Africa. 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.”
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, 2016 and the effect we expect them to have on our liquidity and cash flow
in future periods.
|
Contractual Obligations
|
|
Payments due by period
|
|
|
|
|
|
|
|
Total
|
|
|
less than
1 year
|
|
|
1-3 years
|
|
|
3-5 years
|
|
|
5-7 years
|
|
|
Operating lease obligations
|
|
$
|
4,274,000
|
|
|
$
|
2,133,000
|
|
|
$
|
2,141,000
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
Liabilities due to acquisition activities
|
|
|
9,857,000
|
|
|
|
6,478,000
|
|
|
|
379,000
|
|
|
|
-
|
|
|
|
-
|
|
|
Severance payments, net*
|
|
|
3,443,000
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
Uncertainties in income taxes (ASC 740) **
|
|
|
825,000
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
Short and Long term debt
|
|
|
35,401,000
|
|
|
|
5,645,000
|
|
|
|
8,917,000
|
|
|
|
11,922,000
|
|
|
|
8,917,000
|
|
|
Total contractual obligations
|
|
$
|
53,800,000
|
|
|
$
|
14,256,000
|
|
|
$
|
11,437,000
|
|
|
$
|
11,922,000
|
|
|
$
|
8,917,000
|
|
*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.
|
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
|
|
Age
|
|
Position
|
|
Guy Bernstein
|
|
49
|
|
Chief Executive Officer and Director
|
|
Sagi Schliesser
(1)
|
|
45
|
|
External Director
|
|
Ron Ettlinger
(1)
|
|
50
|
|
External Director
|
|
Naamit Salomon
|
|
52
|
|
Director
|
|
Yehezkel Zeira
(1)
|
|
73
|
|
Director
|
|
Asaf Berenstin
|
|
39
|
|
Chief Financial Officer
|
|
Udi Ertel
|
|
57
|
|
President, Software Solutions division
|
|
Amit Birk
|
|
46
|
|
Vice President, Mergers and Acquisitions, General Counsel and Corporate Secretary
|
|
Arik Kilman
|
|
64
|
|
President, AppBuilder Software Solutions division
|
|
Yakov Tsaroya
|
|
47
|
|
Chief Executive Officer of Coretech Consulting Services and Fusion Solutions
|
|
Uzi Yaari
|
|
43
|
|
Chief Executive Officer of Complete Business Solutions
|
|
Arik Faingold
|
|
40
|
|
President, Integration Solutions division
|
|
Yuval Baruch
|
|
50
|
|
Chief Executive Officer of Hermes Logistics
|
|
Hanan Shahaf
|
|
65
|
|
Chief Executive Officer of Roshtov Software Industries Ltd,
|
(1) Member of our Audit and Compensation
Committees
Messrs. Guy Bernstein
and Yehezkel Zeira and Ms. Naamit Salomon were re-elected at our 2016 annual general meeting of shareholders to serve as directors
until our 2017 annual general meeting of shareholders. Mr. Sagi Schliesser is serving as an external director pursuant to the provisions
of the Israeli Companies Law for an initial three-year term ending November 22, 2018. Mr. Ron Ettlinger is serving as an external
director pursuant to the provisions of the Israeli Companies Law for an initial three-year term ending December 21, 2017.
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.
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.
Yehezkel Zeira
has served as a director of our company since December 2005 and is a member of our audit committee. Mr. Zeira has served as
an independent IT consultant since 2001. From 2000 to 2001, Mr. Zeira served as executive vice president international of Ness
Technologies Inc., and from 1970 to 2000, Mr. Zeira served in various positions at Advanced Technology Ltd., including as chief
executive officer, a position which he assumed in 1982. Mr. Zeira was also a lecturer at Ben Gurion University Faculty of Engineering.
Mr. Zeira holds a B.Sc. degree in Industrial Engineering and an M.Sc. degree in Operations Research, both from the Technion - Israel
Institute of Technology and has participated in the Harvard Business School program for management development.
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.
Udi Ertel
has served as president of Software Solutions division since 2013. Prior to that and from January 2011, Mr. Ertel served as vice
president, sales and distribution, responsible for our sales and business activities in South Africa, Hungary and was responsible
for distribution in the Asia Pacific region, East Europe and the Mediterranean basin. Mr. Ertel joined our company in 2004, initially
serving as the chief executive officer of our Israeli subsidiary, Magic Software Enterprises (Israel) Ltd., and from January 2009
as our vice president, global services and operations. Before joining our company, Mr. Ertel served for nine years as the chief
executive officer of Complot (83) Ltd. Mr. Ertel holds a B.Sc. degree in Computer Science and Mathematics and completed his studies
towards an M.B.A. degree (without thesis), both from Tel Aviv University in Israel.
Amit Birk
has served as our vice president, mergers and acquisitions, general counsel and corporate secretary since May 1999. From 1997 to
1998, Mr. Birk was an associate at Avital Dromi & Co., a leading law firm in Tel Aviv, Israel. Since November 2007, Mr. Birk
serves as an external director of BGI Investment (1961) Ltd., an Israeli public company. Mr. Birk holds an 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.
Arik
Kilman
has served as 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).
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, 2016.
|
|
|
Salaries, fees,
commissions and
bonuses
|
|
|
Pension, retirement
and similar benefits
|
|
|
All directors and executive officers as a group (14 persons)
|
|
$
|
3,158,351
|
|
|
$
|
108,531
|
|
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.
The
table below reflects the compensation granted to our five most highly compensated officers during or with respect to the year ended
December 31, 2016. All amounts reported in the table reflect the cost to our company, as recognized in our financial
statements
for the year ended December 31, 2016.
2016
Summary Compensation Table
|
Name and Position
|
|
Salary
|
|
|
Bonus
(1)
|
|
|
Equity Based
Compensation
(2)
|
|
|
All Other
Compensation
(3)
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Arik Kilman,
President, AppBuilder Solutions Division
|
|
$
|
231,125
|
|
|
$
|
458,910
|
|
|
$
|
0
|
|
|
$
|
0
|
|
|
$
|
690,035
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Yakov Tsaroya, President, Coretech Consulting Group LLC
|
|
$
|
145,000
|
|
|
$
|
460,000
|
|
|
$
|
0
|
|
|
$
|
8,250
|
|
|
$
|
613,250
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Udi Ertel, President, Software Division
|
|
$
|
199,425
|
|
|
$
|
83,493
|
|
|
$
|
18,335
|
|
|
$
|
39,823
|
|
|
$
|
341,076
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Arik Faingold, President, Integration Solutions division
|
|
$
|
251,261
|
|
|
$
|
134,371
|
|
|
$
|
0
|
|
|
$
|
0
|
|
|
$
|
385,632
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Yuval Baruch, Chief Executive Officer of Hermes Logistics Technologies (HLT)
|
|
$
|
203,514
|
|
|
$
|
85,177
|
|
|
$
|
0
|
|
|
$
|
0
|
|
|
$
|
288,691
|
|
|
|
(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, 2016, we paid to each of our outside and independent directors an annual fee of approximately $
17,851
and a per-meeting attendance fee of approximately $
664
. 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, 2016,
our directors and executive officers as a group, then consisting of 14 persons, held options to purchase an aggregate of 207,250
ordinary shares, at exercise prices ranging from $0.95 to $5.83 per share. Of such options, options to purchase 20,000 ordinary
shares expire in 2018, options to purchase 66,000 ordinary shares expire in 2020, options to purchase 90,000 ordinary shares expire
in 2021 and options to purchase 31,250 ordinary shares expire in 2023. 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.”
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
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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.
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
year 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.
Independent Directors
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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. Yehezkel Zeira qualifies as an independent director under the SEC, NASDAQ and Israeli Companies Law requirements.
Committees of the Board of Directors
Audit Committee
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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 Zeira, each of whom satisfies the respective “independence”
requirements of the SEC and NASDAQ. We also comply with Israeli law requirements for audit committee members. 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
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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.
In December 2014, the
compensation policy for our directors and officers was approved by our shareholders.
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 our external directors, Messrs. Ettlinger,
Schliesser and Zeira.
Internal Auditor
The Israeli Companies
Law also requires the board of directors of a public company to appoint an internal auditor proposed by the audit committee. A
person who does not satisfy the Israeli Companies Law’s independence requirements may not be appointed as an internal auditor.
The role of the internal
auditor is to examine, among other things, the compliance of the company’s conduct with applicable law and orderly business
practice. Our internal auditor complies with the requirements of the Israeli Companies Law. Mr. Eyal Weizman currently serves as
our internal auditor.
Directors’ Service Contracts
There are no arrangements
or understandings between us and any of our subsidiaries, on the one hand, and any of our directors, on the other hand, providing
for benefits upon termination of their employment or service as directors of our company or any of our subsidiaries.
Approval of Related Party Transactions
Under Israeli Law
Fiduciary Duties of Office Holders
The Israeli Companies
Law codifies the fiduciary duties that “office holders,” including directors and executive officers, owe to a company.
An “office holder” is defined in the Israeli Companies Law as a 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.
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, 2016, we sold approximately $4.0 million of services to affiliate companies of Formula Systems. In 2016, we also purchased
from those affiliated companies approximately $0.1 million of hardware and software. We also provided Formula Systems cash management,
accounting and bookkeeping services for total consideration of $0.1 million.
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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:
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With respect to an office holder who is not the general manager, a director, a controlling shareholder
or a relative of the controlling shareholder:
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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.
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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.
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With respect to a company’s general manager (generally the equivalent of a CEO):
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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.
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In the event the transaction is not in accordance with the compensation policy – the approval
process and requirements are the same as the approval process for such a transaction with an office holder who is not the general
manager, a controlling shareholder or a relative of the controlling shareholder.
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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.
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With respect to a director who is not a controlling shareholder or a relative of the controlling
shareholder:
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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.
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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).
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With respect to a controlling shareholder or a relative of a controlling shareholder:
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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.
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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).
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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.
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:
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A financial liability imposed on the office holder in favor of another person by any judgment,
including a settlement or an arbitrator’s award approved by a court;
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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;
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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
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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.
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In accordance with the
Israeli Companies Law, a company’s articles of association may permit the company to:
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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
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Retroactively indemnify an office holder of the company.
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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:
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A breach of his or her duty of care to the company or to another person;
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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
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A financial liability imposed upon the office holder in favor of another person.
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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.
Our articles of association
allow us to insure our office holders to the fullest extent permitted by law. At our 2011 annual general meeting, our shareholders
approved a framework agreement of terms and conditions for the renewal, extension or replacement, from time to time, for a period
of up to three years from December 14, 2011, of our directors’ and officers’ liability insurance policy for all directors
and officers of the company and its subsidiaries, who may serve from time to time (including a director who may be deemed a controlling
shareholder, within the meaning of the Israeli Companies Law), according to which (i) the annual aggregate premium of the new policy
may not exceed 25% of the previous year’s aggregate premium; (ii) the coverage limit per claim and in the aggregate under
the new policy may not exceed an amount representing an increase of 25% in any year, as compared to the previous year’s aggregate
coverage limit; and (iii) the terms of any new policy must be identical with respect to all of our officers and directors (including
officers and directors who may be deemed controlling shareholders, within the meaning of the Israeli Companies Law). No
further approval by our shareholders will be required in connection with any renewal, extension or purchase of any new policy entered
into in compliance with the foregoing terms and conditions of the framework agreement.
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:
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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;
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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;
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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. We currently maintain a directors’ and officers’ liability insurance policy with a per-claim
and aggregate coverage limit of $20 million, including legal costs incurred world-wide.
The following table presents
the number of our employees categorized by geographic location as of December 31, 2014, 2015 and 2016:
|
|
|
Year ended December 31,
|
|
|
|
|
2014
|
|
|
2015
|
|
|
2016
|
|
|
Israel
|
|
|
395
|
|
|
|
451
|
|
|
|
843
|
|
|
Asia
|
|
|
111
|
|
|
|
117
|
|
|
|
122
|
|
|
North America
|
|
|
524
|
|
|
|
492
|
|
|
|
597
|
|
|
South Africa
|
|
|
30
|
|
|
|
12
|
|
|
|
10
|
|
|
Europe
|
|
|
121
|
|
|
|
131
|
|
|
|
127
|
|
|
Total
|
|
|
1,181
|
|
|
|
1,203
|
|
|
|
1,699
|
|
The following table presents
the number of our employees categorized by activity as of December 31, 2014, 2015 and 2016:
|
|
|
Year ended December 31,
|
|
|
|
|
2014
|
|
|
2015
|
|
|
2016
|
|
|
Technical support and consulting
|
|
|
808
|
|
|
|
811
|
|
|
|
1,238
|
|
|
Research and development
|
|
|
173
|
|
|
|
174
|
|
|
|
206
|
|
|
Marketing and sales
|
|
|
129
|
|
|
|
121
|
|
|
|
133
|
|
|
Operations and administrations
|
|
|
71
|
|
|
|
97
|
|
|
|
122
|
|
|
Total
|
|
|
1,181
|
|
|
|
1,203
|
|
|
|
1,699
|
|
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.
Beneficial Ownership of Executive Officers
and Directors
The following table sets
forth certain information as of
March 31
, 2017 regarding the beneficial ownership
by each of our directors and executive officers:
|
Name
|
|
Number of Ordinary Shares
Beneficially Owned
(1)
|
|
|
Percentage of
Ownership
(2)
|
|
|
Guy Bernstein
|
|
|
150,000
|
|
|
|
*
|
|
|
Asaf Berenstin
(3)
|
|
|
80,000
|
|
|
|
*
|
|
|
Udi Ertel
(4)
|
|
|
46,250
|
|
|
|
*
|
|
|
Ron Ettlinger
|
|
|
—
|
|
|
|
—
|
|
|
Naamit Salomon
(5)
|
|
|
6,000
|
|
|
|
*
|
|
|
Sagi Schliesser
|
|
|
—
|
|
|
|
—
|
|
|
Yehezkel Zeira
|
|
|
—
|
|
|
|
—
|
|
|
Amit Birk
(6)
|
|
|
129,062
|
|
|
|
*
|
|
|
Arik Faingold
|
|
|
—
|
|
|
|
—
|
|
|
Yuval Baruch
|
|
|
—
|
|
|
|
—
|
|
|
Arik Kilman
|
|
|
—
|
|
|
|
—
|
|
|
Yakov Tsaroya
(7)
|
|
|
40,000
|
|
|
|
*
|
|
* Less
than 1%
|
|
(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
44,486,236
ordinary
shares issued and outstanding as of March 31, 2017.
|
|
|
(3)
|
Includes 70,000 currently exercisable options granted under our 2007 Stock Option Plan, having
an exercise price ranging from $0.86 to $3.74 per share that expire in 2021 at the latest and 10,000 ordinary shares.
|
|
|
(4)
|
These are exercisable options granted under our 2007 Stock Option Plan, having an exercise price
of $3.74 to $5.74 per share, with expiration dates through 2023.
|
|
|
(5)
|
Includes 6,000 currently exercisable options granted under our 2007 Stock Option Plan, having an
exercise price of $2.0 per share, with expiration dates through 2020.
|
|
|
(6)
|
Includes 30,000 exercisable options granted under our 2007 Stock Option Plan, having an exercise
price of $2.0 per share that expire in 2021 and 99,062 ordinary shares.
|
|
|
(7)
|
Includes 40,000 currently exercisable options granted under our 2007 Stock Option Plan, having
an exercise price of $2.0 per share, with expiration dates through 2020.
|
Stock-Based
Compensation Plans
2000 Stock Option Plan
In 2000, we adopted our 2000
Employee Stock Option Plan, or the 2000 Plan, which terminated in November 2010. No award of options can be made under this plan
after such date. An option may not be exercisable after the expiration of ten years from the date of its award, except that in
case of an incentive stock option made to a 10% owner (as such term is defined in the 2000 Plan), such option may not be exercisable
after the expiration of five years from its date of award. No option may be exercised after the expiration of its term. Options
are not assignable or transferable by the optionee, other than by will or the laws of descent and distribution, and may be exercised
during the lifetime of the optionee only by the optionee or his guardian or legal representative; provided, however, that during
the optionee’s lifetime, the optionee may, with the consent of the Option Committee transfer without consideration all or
any portion of his options to members of the optionee’s immediate family, a trust established for the exclusive benefit of
members of the optionee’s immediate family, or a limited liability company in which all members are members of the optionee’s
immediate family.
During 2016, options to purchase
an aggregate of 5,000 ordinary shares were exercised under the 2000 Plan at an average exercise price of $2.35 per share and options
to purchase 69,000 ordinary shares remained outstanding.
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.
In September 2013, our shareholders
approved to increase the number of ordinary shares available for issuance under the 2007 Stock Option Plan by an additional 1,000,000
shares.
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 whereas the 2007 Plan will expire on August 1, 2027. As of December 31, 2016, an aggregate
of 1,000,000 ordinary shares are available for future grants under the Plan.
The 2007 Plan will terminate
upon the earliest of (i) the expiration of its ten year period, or (ii) the termination of all outstanding awards in connection
with a corporate transaction, or (iii) in connection with, and as a result of, any other relevant event, including the 2007 Plan’s
termination by the Board of Directors.
Under the 2007 Plan, the
option committee shall have full discretionary authority to grant or, when so restricted by applicable law, recommend the Board
of Directors to grant, pursuant to the terms of the 2007 Plan, options and restricted shares and restricted share units to those
individuals who are eligible to receive awards under the 2007 Plan.
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.
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.
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 2016, options to purchase
an aggregate of 15,550 ordinary shares were exercised under the 2007 Plan at an average exercise price of $1.90 per share and options
to purchase 404,367 ordinary shares remained outstanding. As of December 31, 2016, our executive officers and directors as a group,
consisting of 14 persons, held options to purchase 207,250 ordinary shares under the 2007 Plan, having an average exercise price
of $3.70 per share.
|
ITEM 7.
|
MAJOR
SHAREHOLDERS AND RELATED PARTY TRANSACTIONS
|
Formula Systems, an Israeli
company traded on the NASDAQ Global Select Market and the TASE, holds 20,962,734 or 47.26% of our outstanding ordinary shares.
Formula Systems is controlled by Asseco, a Polish company listed on the Warsaw Stock Exchange, which holds 46.3% of the ordinary
shares of Formula Systems. Accordingly, Asseco ultimately controls our company.
The following table sets
forth as of
April 25, 2017
certain information regarding the beneficial ownership
by all shareholders known to us to own beneficially 5.0% or more of our ordinary shares:
|
Name
|
|
Number of
Ordinary Shares
Beneficially
Owned
(1)
|
|
|
Percentage of
Ownership
(2)
|
|
|
Formula Systems (1985) Ltd.
(3)
|
|
|
20,962,734
|
|
|
|
47.12
|
%
|
|
Asseco Poland S.A.
(3)
|
|
|
20,962,734
|
|
|
|
47.12
|
%
|
|
|
(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
44,486,236
ordinary shares issued and outstanding
as of March 31, 2017.
|
|
|
(3)
|
Asseco owned 46.36% of the outstanding shares of Formula Systems based on the Schedule 13D filed
by Asseco with the SEC on December 6, 2010. As such, Asseco may be deemed to be the beneficial owner of the aggregate 20,962,734
ordinary shares held directly by Formula Systems. The address of Formula Systems is 5 Haplada Street, Or-Yehuda, Israel. The address
of Asseco is 35-322 Rzeszow, ul. Olchowa 14, Poland.
|
Significant Changes in the Ownership of Major
Shareholders
On March 14, 2016, Formula
Systems filed a Schedule 13D/A with the SEC reflecting ownership of 20,867,734 of our ordinary shares. According to the Schedule
13D/A, from March 11, 2014 through March 8, 2016, Formula Systems purchased an aggregate of 1,007,690 of our ordinary shares in
open market transactions, for an aggregate purchase price of $6,395,137 increasing its ownership interest in our shares to 47.1%.
On March 11, 2014, Formula
Systems filed a Schedule 13D/A with the SEC reflecting ownership of 19,860,044 of our ordinary shares. According to the Schedule
13D/A, from September 2012 through April 2013, Formula Systems purchased an aggregate of 110,000 of our ordinary shares in open
market transactions increasing its ownership interest in our shares to 52.2%. On March 5, 2014, we completed a follow-on public
offering of 6,900,000 of our ordinary shares at a price to the public of $8.50 per share. Formula Systems purchased 700,000
of the 6,900,000 ordinary shares issued in the offering. As a result of the issuance of our ordinary shares, Formula Systems’
percentage interest in our company decreased from 51.6% to 45.0%.
On February 8, 2017,
Yelin
Lapidot Holdings Management Ltd.
jointly with Messrs. Dov Yelin and Yair Lapidot, filed a Schedule 13G/A with the SEC reflecting
ownership of
1,790,284
, or 4.04% of our ordinary shares as of December 31, 2016. On
February 3, 2015,
Yelin Lapidot Holdings Management Ltd.
jointly with Messrs. Dov
Yelin and Yair Lapidot, filed a Schedule 13G/A with the SEC reflecting ownership of
2,400,005
,
or 5.41% of our ordinary shares as of December 31, 2015. On October 12, 2015,
Yelin Lapidot
Holdings Management Ltd.
jointly with Messrs. Dov Yelin and Yair Lapidot filed a Schedule 13G with the SEC reflecting ownership
of
2,208,957
, or 5.01% of our ordinary shares.
On January 19, 2016, Denver
Investment Advisors LLC filed a Schedule 13G/A with the SEC reflecting ownership of 1,978,159, or 4.46% of our ordinary shares
as of December 31, 2015
.
On February 17,
2015, Denver Investment Advisors LLC filed a Schedule 13G/A with the SEC, reflecting ownership of 5,944,821, or 13.46% of our ordinary
shares. On August 11, 2014, Denver Investment Advisors LLC filed a Schedule 13G with the SEC reflecting ownership of 4,436,012
of our ordinary shares, or 10.05% of our ordinary shares.
Major Shareholders Voting Rights
Our major shareholders do not have different voting
rights.
Record Holders
Based on a review of the
information provided to us by our U.S. transfer agent, as of
April 25
, 2017, there
were
62
record holders, of which 50 record holders holding approximately
99.96
%
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
99.92
% 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 August 2009, an Israeli software company and
one of its owners initiated an arbitration proceeding against us and one of our subsidiaries, claiming an alleged breach of a non-disclosure
agreement between the parties (the “First Arbitration”). The software company sought damages in the amount of approximately
NIS 52 million (approximately $13.4 million). The arbitrator rendered his decision in January 2015 and determined that we should
pay damages in the amount of $2.4 million. Our financial results of operations of 2014 included a net impact of $1.6 million resulting
from the arbitration expenses.
In September 2016, the same
software company filed a lawsuit for the sum of NIS 34,106,000 against us and one of our subsidiaries, in the context of the First
Arbitration. In the lawsuit, it claims that warning letters that we have sent to its clients in Israel and abroad, warning the
clients against the possibility that the conversion procedure offered by the software company may amount to an infringement of
our copyrights (the “Warning Letters”) may have caused them irreparable damages resulting from the loss profit of potential
business transactions. The lawsuit is based on the decision given in the First Arbitration, in which it was decided that the Warning
Letters constituted a breach of a non-disclosure agreement signed between the parties and awarded certain damages to the software
company.
The software company claims
that the First Arbitration awarded them damages for only the years 2009 and 2010, and they are allowed to sue for damages relating
to the years 2011 through 2016 in separate proceedings. On January 23, 2017, we filed our statement of defense, maintaining, on
various grounds, that the new lawsuit must be dismissed. The plaintiffs filed their response on April 2, 2017. In view of the nature
of the claims, both factual and legal, that were raised in the proceedings, the likelihood of an expert-based ruling and given
the preliminary stage of the proceeding, it is impossible at this stage to properly evaluate the prospect of the lawsuit being
successful.
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. 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 company may distribute dividends out of its profits provided that there is no reasonable concern that such dividend
distribution will prevent the company from paying all its current and foreseeable obligations, as they become due. Notwithstanding
the foregoing, dividends may be paid with the approval of a court, provided that there is no reasonable concern that such dividend
distribution will prevent the company from satisfying its current and foreseeable obligations, as they become due. Profits, for
purposes of the Israeli Companies Law, means the greater of retained earnings or earnings accumulated during the preceding two
years, after deducting previous distributions that were not deducted from the surpluses.
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.
Except as otherwise disclosed in this annual report,
no significant change has occurred since December 31, 2016.
|
ITEM 9.
|
THE OFFER AND LISTING
|
|
|
A.
|
Offer
and Listing Details
|
Annual Stock Information
The following table sets
forth, for each of the years indicated, the range of high ask and low bid prices of our ordinary shares on the NASDAQ Global Select
Market and the TASE:
|
|
|
NASDAQ
|
|
|
TASE*
|
|
|
|
|
High
|
|
|
Low
|
|
|
High
|
|
|
Low
|
|
|
Year
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2012
|
|
$
|
7.32
|
|
|
$
|
3.76
|
|
|
$
|
7.42
|
|
|
$
|
3.94
|
|
|
2013
|
|
$
|
7.18
|
|
|
$
|
4.53
|
|
|
$
|
7.06
|
|
|
$
|
4.73
|
|
|
2014
|
|
$
|
9.60
|
|
|
$
|
5.94
|
|
|
$
|
9.30
|
|
|
$
|
6.40
|
|
|
2015
|
|
$
|
7.04
|
|
|
$
|
5.26
|
|
|
$
|
7.26
|
|
|
$
|
5.29
|
|
|
2016
|
|
$
|
7.89
|
|
|
$
|
5.29
|
|
|
$
|
7.79
|
|
|
$
|
5.35
|
|
* The U.S. dollar price of
shares on the TASE is determined by dividing the price of an ordinary share in NIS by the representative exchange rate of the NIS
against the U.S. dollar on the same date.
Quarterly Stock Information
The following table sets
forth, for each of the financial quarters in the two most recent financial years, the range of high ask and low bid prices of our
ordinary shares on the NASDAQ Global Select Market and the TASE:
|
|
|
NASDAQ
|
|
|
TASE*
|
|
|
|
|
High
|
|
|
Low
|
|
|
High
|
|
|
Low
|
|
|
2015
|
|
|
|
|
|
|
|
|
|
|
|
|
|
First Quarter
|
|
$
|
7.04
|
|
|
$
|
5.42
|
|
|
$
|
7.15
|
|
|
$
|
5.47
|
|
|
Second Quarter
|
|
$
|
7.00
|
|
|
$
|
6.36
|
|
|
$
|
6.94
|
|
|
$
|
6.28
|
|
|
Third Quarter
|
|
$
|
6.93
|
|
|
$
|
5.42
|
|
|
$
|
6.96
|
|
|
$
|
5.51
|
|
|
Fourth Quarter
|
|
$
|
5.84
|
|
|
$
|
5.26
|
|
|
$
|
5.93
|
|
|
$
|
5.30
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
First Quarter
|
|
$
|
7.12
|
|
|
$
|
5.29
|
|
|
$
|
7.05
|
|
|
$
|
5.25
|
|
|
Second Quarter
|
|
$
|
6.98
|
|
|
$
|
6.39
|
|
|
$
|
7.00
|
|
|
$
|
6.38
|
|
|
Third Quarter
|
|
$
|
7.89
|
|
|
$
|
6.60
|
|
|
$
|
7.86
|
|
|
$
|
6.69
|
|
|
Fourth Quarter
|
|
$
|
7.50
|
|
|
$
|
6.67
|
|
|
$
|
7.49
|
|
|
$
|
6.84
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2017
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
First Quarter
|
|
$
|
8.05
|
|
|
$
|
6.75
|
|
|
$
|
7.82
|
|
|
$
|
6.93
|
|
|
Second Quarter (through April 21, 2017)
|
|
$
|
8.15
|
|
|
$
|
7.53
|
|
|
$
|
8.13
|
|
|
$
|
7.63
|
|
* The U.S. dollar price of
shares on the TASE is determined by dividing the price of an ordinary share in NIS by the representative exchange rate of the NIS
against the U.S. dollar on the same date.
Monthly Stock Information
The following table sets
forth, for the most recent six months, the range of high ask and low bid prices of our ordinary shares on the NASDAQ Global Select
Market and the TASE:
|
|
|
NASDAQ
|
|
|
TASE*
|
|
|
|
|
High
|
|
|
Low
|
|
|
High
|
|
|
Low
|
|
|
October 2016
|
|
$
|
7.40
|
|
|
$
|
7.05
|
|
|
$
|
7.51
|
|
|
$
|
7.03
|
|
|
November 2016
|
|
$
|
7.50
|
|
|
$
|
7.00
|
|
|
$
|
7.45
|
|
|
$
|
7.15
|
|
|
December 2016
|
|
$
|
7.35
|
|
|
$
|
6.67
|
|
|
$
|
7.35
|
|
|
$
|
6.84
|
|
|
January 2017
|
|
$
|
7.10
|
|
|
$
|
6.75
|
|
|
$
|
7.18
|
|
|
$
|
6.78
|
|
|
February 2017
|
|
$
|
7.80
|
|
|
$
|
7.00
|
|
|
$
|
7.81
|
|
|
$
|
7.18
|
|
|
March 2017
|
|
$
|
8.05
|
|
|
$
|
7.65
|
|
|
$
|
8.00
|
|
|
$
|
7.74
|
|
|
April 2017 (through April 21, 2017)
|
|
$
|
8.15
|
|
|
$
|
7.53
|
|
|
$
|
8.13
|
|
|
$
|
7.63
|
|
* The U.S. dollar price of shares on the TASE
is determined by dividing the price of an ordinary share in NIS by the representative exchange rate of the NIS against the U.S.
dollar on the same date.
Not applicable.
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.
Not applicable.
Not applicable.
Not applicable.
|
ITEM 10.
|
ADDITIONAL INFORMATION
|
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
Our authorized share capital
consists of 50,000,000 ordinary shares of a nominal value of NIS 0.1 each. All outstanding ordinary shares are validly issued,
fully paid and non-assessable. The rights attached to the ordinary shares are as follows:
Dividend rights
.
Holders of our ordinary shares are entitled to the full amount of any cash or share dividend subsequently declared. The board of
directors may declare interim dividends and propose the final dividend with respect to any fiscal year only out of the retained
earnings, in accordance with the provisions of the Israeli Companies Law. See “Item 8A. Financial Information – Consolidated
and Other Financial Information – Dividend Distributions Policy.” All unclaimed dividends or other monies payable in
respect of a share may be invested or otherwise made use of by the Board of Directors for our benefit until claimed. Any dividend
unclaimed after a period of three years from the date of declaration of such dividend will be forfeited and will revert to us;
provided, however, that the Board of Directors may, at its discretion, cause us to pay any such dividend to a person who would
have been entitled thereto had the same not reverted to us. We are not obligated to pay interest or linkage differentials on an
unclaimed dividend.
Voting rights
.
Holders of ordinary shares have one vote for each ordinary share held on all matters submitted to a vote of shareholders. Such
voting rights may be affected by the grant of any special voting rights to the holders of a class of shares with preferential rights
that may be authorized in the future 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). See “Item 7A. Major Shareholders and Related Party Transactions – Major Shareholders.”
For information regarding the election of external directors, see “Item 6C. Directors, Senior Management and Employees –
Board Practices — Election of Directors.”
Rights to share in
the company’s profits
.
Our shareholders have the right to share in our profits distributed as a dividend and
any other permitted distribution. See this Item 10B. “Additional Information – Memorandum and Articles of Association
– Rights Attached to Shares – Dividend Rights.”
Rights to share in
surplus in the event of liquidation
.
In the event of our liquidation, after satisfaction of liabilities to creditors,
our assets will be distributed to the holders of ordinary shares in proportion to the nominal value of their holdings. This right
may be affected by the grant of preferential dividend or distribution rights to the holders of a class of shares with preferential
rights that may be authorized in the future
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.
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.
Limitations on the Rights to Own Securities
in Our Company
Neither our memorandum of
association or our articles of association nor the laws of the State of Israel restrict in any way the ownership or voting of shares
by non-residents, except with respect to subjects of countries which are in a state of war with Israel.
Provisions Restricting Change in Control
of Our Company
See Item 6C. “Provisions
Restricting Change in Control of Our Company” and Item 6C “Directors, Senior Management and Employees – Board
Practices – Approval of Related Party Transactions Under Israeli Law.”
While we have numerous
contracts with customers, resellers, distributors and landlords, we do not deem any such individual contract to be material contracts
which are not in the ordinary course of our business.
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.
The following is a discussion
of Israeli and United States tax consequences material to our shareholders. To the extent that the discussion is based on new tax
legislation which has not been subject to judicial or administrative interpretation, we cannot assure you that the views expressed
in the discussion will be accepted by the appropriate tax authorities or the courts. The discussion is not intended, and should
not be construed, as legal or professional tax advice and is not exhaustive of all possible tax considerations.
Holders of our ordinary shares
should consult their own tax advisors as to the United States, Israeli or other tax consequences of the purchase, ownership and
disposition of ordinary shares, including, in particular, the effect of any foreign, state or local taxes.
Israeli
Tax Considerations
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. In 2016, the corporate tax rate was 25% (in 2017 the corporate tax rate is
24% and as of 2018 the corporate tax rate will be 23%). However, the effective tax rate payable by a company that generates income
from an Approved Enterprise or a Preferred Enterprise, as further discussed below, may be considerably lower. In addition, Israeli
companies are currently subject to regular corporate tax rate on their capital gains.
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, a Benefitted Enterprise or a Preferred Enterprise, is entitled to benefits as discussed
below. These benefits may include cash grants from the Israeli government and tax benefits, based upon, among other things, the
geographic location in Israel of the facility in which the investment is made. In order to qualify for these incentives, an Approved
Enterprise, a Benefitted Enterprise or a Preferred Enterprise 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 for Approved Enterprises approved
before April 1, 2005
Under the Investment Law
prior to the 2005 Amendment, a company that wished to receive benefits on its investment program that is implemented in accordance
with the provisions of the Investment Law (referred to as an Approved Enterprise), had to receive an approval from the Israeli
Authority for Investments and Development of the Industry and Economy (referred to as the Investment Center). Each certificate
of approval for an Approved Enterprise relates to a specific investment program, delineated both by the financial scope of the
investment, including sources of funds, and by the physical characteristics of the facility or other assets.
An Approved Enterprise may
elect to forego any entitlement to the cash grants otherwise available under the Investment Law and, instead, participate in an
alternative benefits program. Under the alternative benefits program, a company’s undistributed income derived from an Approved
Enterprise will be exempt from corporate tax for a period of between two and ten years from the first year of taxable income, depending
on the geographic location within Israel of the Approved Enterprise, and a reduced corporate tax rate of between 10% to 25% for
the remainder of the benefits period, depending on the level of foreign investment in the company in each year, as detailed below.
The benefits period under Approved Enterprise status is limited to 12 years from the year in which the production commenced
(as determined by the Investment Center), or 14 years from the year of receipt of the approval as an Approved Enterprise,
whichever ends earlier. If a company has more than one Approved Enterprise program or if only a portion of its capital investments
are approved, its effective tax rate is the result of a weighted combination of the applicable rates. The tax benefits available
under any certificate of approval relate only to taxable income attributable to the specific program and are contingent upon meeting
the criteria set out in the certificate of approval. Income derived from activity that is not integral to the activity of the Approved
Enterprise will not enjoy tax benefits.
A company that has an Approved
Enterprise program is eligible for further tax benefits, if it qualifies as a Foreign Investors’ Company, or FIC. An FIC
eligible for benefits is essentially a company with a level of foreign investment, as defined in the Investment Law, of more than
25%. The level of foreign investment is measured as the percentage of rights in the company (in terms of shares, rights to profits,
voting and appointment of directors), and of combined share and loan capital, that are owned, directly or indirectly, by persons
who are not residents of Israel. The determination as to whether or not a company qualifies as an FIC is made on an annual basis.
An FIC that has an Approved Enterprise program will be eligible for an extension of the period during which it is entitled to tax
benefits under its Approved Enterprise status (so that the benefits period may be up to ten years) and for further tax benefits
if the level of foreign investment is 49% or more. If a company that has an Approved Enterprise program is a wholly owned subsidiary
of another company, then the percentage of foreign investment is determined based on the percentage of foreign investment in the
parent company.
The corporate tax rates and
related levels of foreign investments with respect to an FIC that has an Approved Enterprise program are set forth in the following
table:
|
Percentage of non-Israeli ownership
|
|
Corporate Tax Rate
|
|
|
|
|
|
|
|
Over 25% but less than 49%
|
|
|
25
|
%
|
|
49% or more but less than 74%
|
|
|
20
|
%
|
|
74% or more but less than 90%
|
|
|
15
|
%
|
|
90% or more
|
|
|
10
|
%
|
A company that has elected
to participate in the alternative benefits program and that subsequently pays a dividend out of the income derived from the portion
of its facilities that have been granted Approved Enterprise status during the tax exemption period will be subject to tax in respect
of the amount of dividend distributed (grossed up to reflect such pre-tax income that it would have had to earn in order to distribute
the dividend) at the corporate tax rate that would have been otherwise applicable if such income had not been tax-exempted under
the alternative benefits program. This rate generally ranges from 10% to 25%, depending on the level of foreign investment in the
company in each year as explained above.
In addition, dividends paid
out of income attributed to an Approved Enterprise (or out of dividends received from a company whose income is attributed to an
Approved Enterprise) are generally subject to withholding tax at the rate of 15%, or at a lower rate provided under an applicable
tax treaty (subject to the receipt in advance of a valid certificate from the Israel Tax Authority allowing for a reduced tax rate).
The 15% tax rate is limited to dividends and distributions out of income derived during the benefits period and actually paid at
any time up to 12 years thereafter. After this period, the withholding tax is applied at a rate of up to 30%, or at a lower rate
under an applicable tax treaty (subject to the receipt in advance of a valid certificate from the Israel Tax Authority allowing
for a reduced tax rate). In the case of an FIC, the 12-year limitation on reduced withholding tax on dividends does not apply.
The Investment Law also provides
that an Approved Enterprise is entitled to accelerated depreciation on its property and equipment that are included in an approved
investment program in the first five years of using the equipment. This benefit is an incentive granted by the Israeli government
regardless of whether the alternative benefits program is elected.
The benefits available to
an Approved Enterprise are subject to the fulfillment of conditions stipulated in the Investment Law and its regulations and the
criteria in the specific certificate of approval with respect thereto, as described above. If a company does not meet these conditions,
it would be required to refund the amount of tax benefits, adjusted to the Israeli consumer price index and interest, or other
monetary penalty.
Tax benefits under the 2011 Amendment that
became effective on January 1, 2011
The 2011 Amendment canceled
the availability of the benefits granted in accordance with the provisions of the Investment Law prior to 2011 and, instead, introduced
new benefits for income generated by a “Preferred Company” through its Preferred Enterprise (as such terms are defined
in the Investment Law) as of January 1, 2011. A Preferred Company is defined as either (i) a company incorporated in Israel which
is not wholly owned by a governmental entity or (ii) a limited partnership that (a) was registered under the Israeli Partnerships
Ordinance and (b) all of its limited partners are companies incorporated in Israel, but not all of them are governmental entities;
which has, among other things, Preferred Enterprise status and is controlled and managed from Israel. Pursuant to the 2011 Amendment,
a Preferred Company is entitled to a reduced corporate tax rate of 15% with respect to its preferred income attributed to its Preferred
Enterprise in 2011 and 2012, unless the Preferred Enterprise 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 Preferred Enterprise 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 Preferred Enterprise’ (as such term is defined in
the Investment Law) would be entitled, during a benefits period of 10 years, to further reduced tax rates of 8%, or 5% if the Special
Preferred Enterprise is located in a certain development zone. As of January 1, 2017, the definition for ’Special Preferred
Enterprise’ includes less stringent conditions.
Dividends paid out of preferred
income attributed to a Preferred Enterprise or to a Special Preferred Enterprise are generally subject to withholding tax at source
at the rate of 20% or such lower rate as may be provided in an applicable tax treaty (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). In 2017 to 2019,
dividends paid out of preferred income attributed to a Special Preferred Enterprise, directly to a foreign parent company, are
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 Approved Enterprise, which chose to receive grants, before the 2011 Amendment became effective, will remain
subject to the provisions of the Investment Law as in effect on the date of such approval, and subject to certain conditions; and
(ii) the terms and benefits included in any certificate of approval that was granted to an Approved Enterprise, that had participated
in an alternative benefits program, before the 2011 Amendment became effective, will remain subject to the provisions of the Investment
Law as in effect on the date of such approval, provided that certain conditions are met. We and one of our Israeli subsidiaries
have elected to apply the new incentives regime under the Amendment to our industrial activity in Israel starting in 2014.
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, subject
to the publication of regulations expected to be released before March 31, 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 “Preferred Technology Enterprise” and will
thereby enjoy a reduced corporate tax rate of 12% on income that qualifies as “Preferred Technology Income”, as defined
in the Investment Law. The tax rate is further reduced to 7.5% for a Preferred Technology Enterprise 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 (referred to as NATI).
The 2017 Amendment further
provides that a technology company satisfying certain conditions will qualify as a “Special Preferred Technology Enterprise”
and will thereby enjoy a reduced corporate tax rate of 6% on “Preferred Technology Income” regardless of the company’s
geographic location within Israel. In addition, a Special Preferred Technology Enterprise 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 an Israeli company or acquired from a foreign company on or after January
1, 2017, and the sale received prior approval from NATI. A Special Preferred Technology Enterprise 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.
Dividends distributed by
a Preferred Technology Enterprise or a Special Preferred Technology Enterprise, paid out of Preferred Technology Income, are subject
to withholding tax at source at the rate of 20%, and if distributed to a foreign company and other conditions are met, the withholding
tax rate will be 4%.
We are examining the impact
of the 2017 Amendment and the degree to which we will qualify as a Preferred Technology Enterprise or Special Preferred Technology
Enterprise, and the amount of Preferred Technology Income that we may have, or other benefits that we may receive, from the 2017
Amendment.
Tax Benefits and Grants for Research and
Development
Israeli tax law allows, under
certain conditions, a tax deduction in the year incurred for expenditures (including capital expenditures) in scientific research
and development projects if the expenditures are approved by the relevant Israeli government ministry (determined by the field
of research) and the research and development is for the promotion of the enterprise and is carried out by or on behalf of the
company seeking such deduction. Expenditures not so approved are deductible over a three-year period. However, expenditures made
out of proceeds made available to us through government grants are not deductible according to Israeli law.
Law for the Encouragement of Industry (Taxes),
1969
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. An “Industrial Enterprise”
is defined as an enterprise whose major activity, in a given tax year, is industrial production.
An Industrial Company is
entitled to certain tax benefits, including:
|
|
·
|
Deduction of the cost of the purchases of patents, or the right to use a patent or know-how used
for the development or promotion of the Industrial Enterprise, over an eight year period commencing on the year in which such rights
were first exercised;
|
|
|
·
|
The right to elect, under certain conditions, to file a consolidated tax return together with Israeli
Industrial Companies controlled by it; and
|
|
|
·
|
Accelerated depreciation rates on equipment and buildings.
|
Eligibility for benefits
under the Industry Encouragement Law is not subject to receipt of prior approval from any governmental authority.
We believe that certain of
our Israeli 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.
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.
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.
Israeli Resident Shareholders
As of January 1, 2006,
the tax rate applicable to Real Capital Gain derived by Israeli individuals from the sale of shares which had been purchased on
or after January 1, 2003, whether or not listed on a stock exchange, is 20%, unless such shareholder claims a deduction for interest
and linkage differences expenses in connection with the purchase and holding of such shares, in which case the gain will generally
be taxed at a rate of 25%. Additionally, if such shareholder is considered a Substantial Shareholder (i.e., a person who holds,
directly or indirectly, alone or together with another, 10% or more of any of the company’s “means of control”
(including, among other things, the right to receive profits of the company, voting rights, the right to receive the company’s
liquidation proceeds and the right to appoint a director)) at the time of sale or at any time during the preceding 12-month period,
such gain will be taxed at the rate of 25%. Individual shareholders dealing in securities in Israel are taxed at their marginal
tax rates applicable to business income (up to 48% in 2016).
Notwithstanding the foregoing,
pursuant to the Law for Change in the Tax Burden (Legislative Amendments) (Taxes), 2011, the capital gain tax rate applicable to
individuals was raised from 20% to 25% from 2012 and onwards (or from 25% to 30% if the selling individual shareholder is a Substantial
Shareholder at any time during the 12-month period preceding the sale and/or claims a deduction for interest and linkage differences
expenses in connection with the purchase and holding of such shares). With respect to assets (not shares that are listed on a stock
exchange) purchased on or after January 1, 2003, the portion of the gain generated from the date of acquisition until December
31, 2011 will be subject to the previous capital gain tax rates (20% or 25%) and the portion of the gain generated from January
1, 2012 until the date of sale will be subject to the new tax rates (25% or 30%).
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 regular corporate tax rate was 25% in 2016, in 2017
the corporate tax rate is 24%, and as of 2018 the corporate tax rate will be 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 (25% in 2016, 24% in 2017 and 23% in 2018 and thereafter) if generated
by a company, or at the rate of 25% (for assets other than shares that are listed on stock exchange – 20% for the portion
of the gain generated up to December 31, 2011) or 30% (for any asset other than shares that are listed on stock exchange –
25% with respect to the portion of the gain generated up to December 31, 2011), if generated by an individual from the sale of
an asset purchased on or after January 1, 2003. Individual and corporate shareholders dealing in securities in Israel are taxed
at the tax rates applicable to business income (a corporate tax rate for a corporation and a marginal tax rate of up to 48% for
an individual in 2016).
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.
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; or (iii) the
capital gain arising from such sale are attributable to a permanent establishment of the shareholder which is maintained in Israel.
In each case, the sale, exchange or disposition of such shares would be subject to Israeli tax, to the extent applicable; however,
under the U.S.-Israel Treaty, a U.S. resident would be permitted to claim a credit for the Israeli tax against the U.S. federal
income tax imposed with respect to the sale, exchange or disposition, subject to the limitations in U.S. laws applicable to foreign
tax credits. The U.S-Israel Treaty does not provide such credit against any U.S. state or local taxes.
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.
Israeli Tax on Dividend Income
Israeli Resident Shareholders
Israeli residents who are
individuals are generally subject to Israeli income tax for dividends paid on our ordinary shares (other than bonus shares or share
dividends) at 25%, or 30% if the recipient of such dividend is a Substantial Shareholder at the time of distribution or at any
time during the preceding 12-month period. However, dividends distributed from taxable income accrued during the benefits period
of an Approved Enterprise or 20% with respect to Preferred Enterprise, if the dividend is distributed during the tax benefits period
under the Investment Law or within 12 years after such period. An average rate will be set in case the dividend is distributed
from mixed types of income (regular and Approved/ 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 Approved Enterprise 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.
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 ordinary shares, like
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 Approved
Enterprise or 20% with respect to Preferred Enterprise. Such dividends are generally subject to Israeli withholding tax at a rate
of 25% so long as the shares are registered with a Nominee Company (whether the recipient is a Substantial Shareholder or not),
and 15% if the dividend is distributed from income attributed to an Approved Enterprise or 20% if the dividend is distributed from
income attributed to a Preferred Enterprise, 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 Approved Enterprise, that are paid to a U.S. corporation holding at least 10% or more of our outstanding voting capital
from the start of the tax year preceding the distribution of the dividend through (and including) the distribution of the dividend,
is 12.5%, provided that no more than 25% of our gross income for such preceding year consists of certain types of dividends and
interest. Notwithstanding the foregoing, dividends distributed from income attributed to an Approved Enterprise are subject to
a withholding tax rate of 15% for such a U.S. corporation shareholder, provided that the condition related to our gross income
for the previous year (as set forth in the previous sentence) is met. If the dividend is attributable partly to income derived
from an Approved Enterprise, or a Preferred Enterprise, and partly to other sources of income, the withholding rate will be a blended
rate reflecting the relative portions of the two types of income. U.S. residents who are subject to Israeli withholding tax on a
dividend may be entitled to a credit or deduction for U.S. federal income tax purposes in the amount of the taxes withheld, subject
to detailed rules contained in United States tax legislation.
A non-Israeli resident who
receives dividends from which tax was withheld is generally exempt from the obligation to file tax returns in Israel with respect
to such income, provided that (i) such income was not generated from business conducted in Israel by the taxpayer, and (ii) the
taxpayer has no other taxable sources of income in Israel with respect to which a tax return is required to be filed.
Excess Tax
Individuals who are subject
to tax in Israel are also subject to an additional tax at a rate of 2% on annual income exceeding NIS 803,520 for 2016 (and as
of 2017, the additional tax will be at a rate of 3% on annual income exceeding NIS 640,000), which amount is linked to the annual
change in the Israeli consumer price index, including, but not limited to, dividends, interest and capital gain.
United
States Federal Income Tax Considerations
The following is a description of the material
U.S. federal income tax consequences of the acquisition, ownership and disposition of our ordinary shares. This description addresses
only the U.S. federal income tax considerations that are relevant to U.S. Holders (as defined below) who hold our ordinary shares
as capital assets. This summary is based on the U.S. Internal Revenue Code of 1986, as amended, or the Code, Treasury regulations
promulgated thereunder, judicial and administrative interpretations thereof, and the U.S.-Israel Tax Treaty, or the Treaty, all
as in effect on the date hereof and all of which are subject to change either prospectively or retroactively. There can be no assurance
that the U.S. Internal Revenue Service, or the IRS, will not take a different position concerning the tax consequences of the acquisition,
ownership and disposition of our ordinary shares or that such a position would not be sustained. This description does not address
all tax considerations that may be relevant with respect to an investment in our ordinary shares. This description does not account
for the specific circumstances of any particular investor, such as:
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financial institutions,
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certain insurance companies,
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investors liable for alternative minimum tax,
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tax-exempt organizations,
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non-resident aliens of the United States or taxpayers whose functional currency is not the U.S. dollar,
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persons who hold the ordinary shares through partnerships or other pass-through entities,
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persons who acquire their ordinary shares through the exercise or cancellation of employee stock options or otherwise as compensation
for services,
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investors that actually or constructively own 10% or more of our shares by vote or value, and
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investors holding ordinary shares as part of a straddle, appreciated financial position, a hedging transaction or conversion
transaction.
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If a partnership or an entity treated as a partnership
for U.S. federal income tax purposes owns ordinary shares, the U.S. federal income tax treatment of a partner in such a partnership
will generally depend upon the status of the partner and the activities of the partnership. A partnership that owns ordinary shares
and the partners in such partnership should consult their tax advisors about the U.S. federal income tax consequences of holding
and disposing of ordinary shares.
This summary does not address the effect of any
U.S. federal taxation (such as estate and gift tax) other than U.S. federal income taxation. In addition, this summary does not
include any discussion of state, local or non-U.S. taxation. You are urged to consult your tax advisors regarding the non-U.S.
and U.S. federal, state and local tax consequences of an investment in ordinary shares.
For purposes of this summary, a U.S. Holder is:
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an individual who is a citizen or, for U.S. federal income tax purposes, a resident of the United States;
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a corporation or other entity taxable as a corporation created or organized in or under the laws of the United States or any
political subdivision thereof;
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an estate whose income is subject to U.S. federal income tax regardless of its source; or
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a trust that (a) is subject to the primary supervision of a court within the United States and the control of one or more U.S.
persons or (b) has a valid election in effect under applicable U.S. Treasury regulations to be treated as a U.S. person.
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Taxation of Dividends
Subject to the discussion
below, under the heading “Passive Foreign Investment Companies,” the gross amount of any distributions received with
respect to ordinary shares, including the amount of any Israeli taxes withheld therefrom, will constitute dividends for U.S. federal
income tax purposes to the extent of our current and accumulated earnings and profits, as determined for U.S. federal income tax
purposes. You will be required to include this amount of dividends in gross income as ordinary income. Distributions in excess
of our current and accumulated earnings and profits will be treated as a non-taxable return of capital to the extent of your tax
basis in the ordinary shares and any amount in excess of your tax basis will be treated as gain from the sale of ordinary shares.
See “Disposition of Ordinary Shares” below for a discussion of the taxation of capital gains. Our dividends will not
qualify for the dividends-received deduction generally available to corporations under section 243 of the Code.
Dividends that we pay in
NIS, including the amount of any Israeli taxes withheld therefrom, will be included in your income in a U.S. dollar amount calculated
by reference to the exchange rate in effect on the day such dividends are received. A U.S. Holder who receives payment in NIS and
converts NIS into U.S. dollars at an exchange rate other than the rate in effect on such day may have a foreign currency exchange
gain or loss that would be treated as ordinary income or loss. U.S. Holders should consult their own tax advisors concerning the
U.S. tax consequences of acquiring, holding and disposing of NIS.
Subject to complex limitations,
any Israeli withholding tax imposed on such dividends will be a foreign income tax eligible for credit against a U.S. Holder’s
U.S. federal income tax liability (or, alternatively, for deduction against income in determining such tax liability). The limitations
set forth in the Code include computational rules under which foreign tax credits allowable with respect to specific classes of
income cannot exceed the U.S. federal income taxes otherwise payable with respect to each such class of income. Dividends generally
will be treated as foreign-source passive category income for U.S. foreign tax credit purposes. Further, there are special rules
for computing the foreign tax credit limitation of a taxpayer who receives dividends subject to a reduced tax rate, see discussion
below. A U.S. Holder will be denied a foreign tax credit with respect to Israeli income tax withheld from dividends received on
the ordinary shares to the extent such U.S. Holder has not held the ordinary shares for at least 16 days of the 31-day period beginning
on the date which is 15 days before the ex-dividend date or to the extent such U.S. Holder is under an obligation to make related
payments with respect to substantially similar or related property. Any days during which a U.S. Holder has substantially diminished
its risk of loss on the ordinary shares are not counted toward meeting the 16-day holding period required by the Code. The rules
relating to the determination of the foreign tax credit are complex. You should consult with your tax advisors to determine whether
and to what extent you would be entitled to this credit.
Subject to certain limitations,
including the 3.8% net investment tax discussed below, “qualified dividend income” received by a non-corporate U.S.
Holder will be subject to tax at a reduced maximum tax rate of 20%. Distributions taxable as dividends paid on the ordinary shares
should qualify for the 20% rate, provided that either: (i) we are entitled to benefits under the Treaty) or (ii) the ordinary shares
are readily tradable on an established securities market in the United States and certain other requirements are met. We believe
that we are entitled to benefits under the Treaty and that the ordinary shares currently are readily tradable on an established
securities market in the United States. However, no assurance can be given that the ordinary shares will remain readily tradable.
The rate reduction does not apply unless certain holding period requirements are satisfied. With respect to the ordinary shares,
the U.S. Holder must have held such shares for at least 61 days during the 121-day period beginning 60 days before the ex-dividend
date. The rate reduction also does not apply to dividends received from a PFIC, see discussion below, or in respect of certain
hedged positions or in certain other situations. The legislation enacting the reduced tax rate on qualified dividends contains
special rules for computing the foreign tax credit limitation of a taxpayer who receives dividends subject to the reduced tax rate.
U.S. Holders of ordinary shares should consult their own tax advisors regarding the effect of these rules in their particular circumstances.
Additional Tax on Investment Income
In addition to the income taxes described above,
U.S. Holders that are individuals, estates or trusts and whose income exceeds certain thresholds will be subject to a 3.8% Medicare
contribution tax on net investment income, which includes dividends and capital gains.
Disposition of Ordinary Shares
Subject to the discussion
below under “Passive Foreign Investment Companies,” 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 effective maximum long-term capital
gains rate is 20% for individuals with annual taxable income over $400,000. 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.
In the case of a cash basis U.S. Holder who receives
NIS in connection with the sale or disposition of ordinary shares, the amount realized will be based on the U.S. dollar value of
the NIS received with respect to the ordinary shares as determined on the settlement date of such exchange. A U.S. Holder who receives
payment in NIS and converts NIS into United States dollars at a conversion rate other than the rate in effect on the settlement
date may have a foreign currency exchange gain or loss that would be treated as ordinary income or loss.
An accrual basis U.S. Holder may elect the same
treatment required of cash basis taxpayers with respect to a sale or disposition of ordinary shares, provided that the election
is applied consistently from year to year. Such election may not be changed without the consent of the Internal Revenue Service,
or the IRS. In the event that an accrual basis U.S. Holder does not elect to be treated as a cash basis taxpayer (pursuant to the
Treasury regulations applicable to foreign currency transactions), such U.S. Holder may have a foreign currency gain or loss for
U.S. federal income tax purposes because of differences between the U.S. dollar value of the currency received prevailing on the
trade date and the settlement date. Any such currency gain or loss would be treated as ordinary income or loss and would be in
addition to the gain or loss, if any, recognized by such U.S. Holder on the sale or disposition of such ordinary shares.
Passive Foreign Investment Companies
If we were to be classified
as a PFIC in any taxable year, a U.S. Holder would be subject to special rules generally intended to reduce or eliminate any benefits
from the deferral of U.S. federal income tax that a U.S. Holder could otherwise derive from investing in a non-U.S. company that
does not distribute all of its earnings on a current basis. We will be considered a PFIC, for any taxable year in which either
(i) 75% or more of our gross income is passive income or (ii) at least 50% of the average value of all of our assets for the taxable
year produce or are held for the production of passive income. For this purpose, passive income generally includes dividends, interest,
royalties, rents, annuities and the excess of gains over losses from the disposition of assets that produce passive income. Included
in the calculation of our income and assets is our proportionate share of the income and assets of each corporation in which we
own, directly or indirectly, at least a 25% interest, by value. If we were determined to be a PFIC for U.S. federal income tax
purposes, unfavorable and highly complex rules would apply to U.S. Holders owning ordinary shares directly or indirectly. Accordingly,
you are urged to consult your tax advisors regarding the application of such rules.
Based on our current and
projected income, assets and activities, we believe that we are not currently a PFIC, nor do we expect to become a PFIC in the
foreseeable future. However, because the determination of whether we are a PFIC is based upon the composition of our income and
assets, and our market capitalization, from time to time, there can be no assurance that we will not become a PFIC for any future
taxable year.
If we are treated as a PFIC
for any taxable year, dividends would not qualify for the reduced tax rate on qualified dividend income, discussed above, and,
unless you elect either to treat your investment in ordinary shares as an investment in a “qualified electing fund,”
by making a “QEF election” or to “mark-to-market” your ordinary shares, as described below,
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you would be required to allocate income recognized upon receiving certain dividends or gain recognized
upon the disposition of ordinary shares ratably over your holding period for such ordinary shares,
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the amount allocated to the current taxable year, and to any taxable years in your holding period
prior to the first day in which we were treated as a PFIC will be treated as ordinary income, and
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the amount allocated to each prior taxable year during which we are considered a PFIC would be
subject to tax at the highest individual or corporate tax rate, as the case may be, and an interest charge would be imposed with
respect to the resulting tax liability allocated to each such year.
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If we were a PFIC for any
taxable year during which a U.S. Holder holds our ordinary shares and any of our non-U.S. subsidiaries is also a PFIC, such U.S.
Holder would generally be treated as owning a proportionate amount (by value) of the underlying shares of each such non-U.S. subsidiary
classified as a PFIC for purposes of the application of these rules. U.S. Holders are urged to consult their tax advisers regarding
the application of the PFIC rules to any of our subsidiaries.
If we are a PFIC for any
taxable year during which a U.S. Holder holds our ordinary shares, then instead of being subject to the tax and interest charge
rules discussed above, a U.S. Holder may make an election to include gain on the stock of a PFIC as ordinary income under a mark-to-market
method, provided that such ordinary shares are “regularly traded” on a “qualified exchange.” In general,
our ordinary shares will be treated such as “regularly traded” for a given calendar year if more than a
de minimis
quantity of our ordinary shares are traded on a qualified exchange on at least 15 days during each calendar quarter of such calendar
year. Our ordinary shares are listed on the Tel Aviv Stock Exchange and the NASDAQ Global Select Market. However, no assurance
can be given that our ordinary shares will be regularly traded on a qualified exchange for purposes of the mark-to-market election.
In addition, because a mark-to-market election cannot be made for any lower-tier PFICs that we may own, a U.S. Holder may continue
to be subject to the PFIC rules with respect to such holder’s indirect interest in any investments held by us that are treated
as an equity interest in a PFIC for U.S. federal income tax purposes.
If you elect to “mark
to market” your ordinary shares, you will generally include in income, in each year in which we are considered a PFIC, any
excess of the fair market value of the ordinary shares at the close of each tax year over your adjusted basis in the ordinary shares.
If the fair market value of the ordinary shares had depreciated below your adjusted basis at the close of the tax year, you may
generally deduct the excess of the adjusted basis of the ordinary shares over its fair market value at that time. However, such
deductions would generally be limited to the net mark-to-market gains, if any, that you included in income with respect to such
ordinary shares in prior years. A U.S. Holder’s adjusted tax basis in the ordinary shares will be increased by the amount
of any income inclusion and decreased by the amount of any deductions under the mark-to-market rules. Income recognized and deductions
allowed under the mark-to-market provisions, as well as any gain or loss on the disposition of ordinary shares with respect to
which the mark-to-market election is made in a year in which we are classified as a PFIC, is treated as ordinary income or loss
(except that loss on a disposition of ordinary shares is treated as capital loss to the extent the loss exceeds the net mark-to-market
gains, if any, that you included in income with respect to such ordinary shares in prior years). Gain or loss from the disposition
of ordinary shares (as to which a mark-to-market election was made) in a year in which we are no longer classified as a PFIC, will
be capital gain or loss.
If a U.S. Holder owns our
ordinary shares during any year in which we are a PFIC, the U.S. Holder generally must file an IRS Form 8621 with respect to the
company, generally with the U.S. Holder’s federal income tax return for that year. U.S. Holders should consult their tax
advisers regarding whether we are a PFIC and the potential application of the PFIC rules.
Backup Withholding and Information Reporting
Payments in respect of our ordinary shares may
be subject to information reporting to the IRS and to U.S. backup withholding tax at the rate (currently) of 28%. Backup withholding
will not apply, however, if you (i) are a corporation or fall within certain exempt categories, and demonstrate the fact when so
required, or (ii) furnish a correct taxpayer identification number and make any other required certification.
Backup withholding is not an additional tax. Amounts
withheld under the backup withholding rules may be credited against a U.S. Holder’s U.S. tax liability. A U.S. Holder may
obtain a refund of any excess amounts withheld under the backup withholding rules by filing the appropriate claim for refund with
the IRS.
U.S. 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 thresholds (as determined under rules in Treasury regulations) and that are required to file a U.S. federal
income tax return generally will be required to file an information report with respect to those assets with their tax returns.
IRS Form 8938 has been issued for that purpose. “Specified foreign financial assets” include any financial accounts
maintained by foreign financial institutions, foreign stocks held directly, and interests in foreign estates, foreign pension plans
or foreign deferred compensation plans.
Under those rules, our ordinary shares, whether
owned directly or through a financial institution, estate or pension or deferred compensation plan, would be “specified foreign
financial assets”. Under Treasury regulations, the reporting obligation applies to certain U.S. entities that hold, directly
or indirectly, specified foreign financial assets. Penalties can apply if there is a failure to satisfy this reporting obligation.
A U.S. Holder is urged to consult his tax adviser regarding its reporting obligation.
U.S. Holders that transfer more than $100,000
to us within a twelve-month period, through direct purchase of ordinary shares or otherwise, generally will be required to file
IRS Form 926. Substantial penalties may be imposed upon a U.S. Holder that fails to comply. Each U.S. Holder should consult its
own tax advisor about the obligation to file IRS Form 926.
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.
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Dividends
and Paying Agents
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Not applicable.
Not applicable.
We are subject to certain
of the reporting requirements of the Exchange Act, as applicable to “foreign private issuers” as defined in Rule 3b-4
under the Exchange Act. As a foreign private issuer, we are exempt from certain provisions of the Exchange Act. Accordingly, our
proxy solicitations are not subject to the disclosure and procedural requirements of Regulation 14A under the Exchange Act, and
transactions in our equity securities by our officers and directors are exempt from reporting and the “short-swing”
profit recovery provisions contained in Section 16 of the Exchange Act. In addition, we are not required under the Exchange Act
to file periodic reports and financial statements as frequently or as promptly as U.S. companies whose securities are registered
under the Exchange Act. However, we file with the SEC an annual report on Form 20-F containing financial statements audited by
an independent accounting firm. We also submit to the SEC reports on Form 6-K containing (among other things) press releases and
unaudited financial information. We post our annual report on Form 20-F on our website (
www.magicsoftware.com
) promptly
following the filing of our annual report with the SEC. The information on our website is not incorporated by reference into this
annual report.
This annual report and the
exhibits thereto and any other document we file pursuant to the Exchange Act may be inspected without charge and copied at prescribed
rates at the SEC public reference room at 100 F Street, N.E., Room 1580, Washington, D.C. 20549. You may obtain information on
the operation of the SEC’s public reference room in Washington, D.C. by calling the SEC at 1-800-SEC-0330. The Exchange Act
file number for our SEC filings is 000-19415.
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.
As of December 31, 2016,
we had approximately $75.3 million in cash and cash equivalents and short term bank deposits and $12.5 million in marketable securities.
Our marketable securities include investments in commercial and government bonds and foreign banks and equity funds. As of such
date our marketable securities portfolio was composed primarily of governmental and commercial bonds bearing average annual interest
rates of approximately 3.8%, with average maturities of 1.5 years and maximum maturities of 3.0 years. The performance of the capital
markets affects the values of the funds we hold in marketable securities. These assets are subject to market fluctuations, such
as the declines experienced in 2008 and the first six months of 2009. In such case, the fair value of our investments may decline.
As of December 31, 2016, net unrealized gains in our marketable securities portfolio totaled $40,000 (forty thousand 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, except in Israel, where our
sales are denominated in U.S. dollars and our expenses are denominated in NIS. Because our financial results are reported in U.S.
dollars, our results of operations may be adversely impacted by fluctuations in the rates of exchange between the U.S. dollar and
such other currencies as the financial results of our foreign subsidiaries are converted into U.S. dollars in consolidation. Our
earnings are predominantly affected by fluctuations in the value of the U.S. dollar as compared to the NIS, as well as the value
of the U.S. dollar as compared to the euro, Japanese Yen and British Pound.
We measure and record non-monetary
accounts in our balance sheet (principally fixed assets and prepaid expenses) in U.S. dollars. For this measurement, we use the
U.S. dollar value in effect at the date that the asset or liability was initially recorded in our balance sheet (the date of the
transaction).
In 2016, we entered into
forward and option contracts to hedge the fair value of assets and liabilities denominated in NIS, euro and Japanese Yen. As of
December 31, 2016, we did not have any outstanding forward contracts. The net gains recognized in “financial income, net”
during 2016 were $4.
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 2016 would have resulted in a decrease in the U.S. dollar reporting value of our operating
income of $2.2 million for that year, while a decrease of 10% in the value of the NIS relative to the U.S. dollar in 2016 would
have resulted in an increase in the U.S. dollar reporting value of our operating income of $2.0 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 2016 would have resulted
in an increase in the U.S. dollar reporting value of our operating income of $0.6 million, $0.3 million and $0.1 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
2016 would have resulted in a decrease in the U.S. dollar reporting value of our operating income of $0.6 million, $0.2 million
and $0.1 million, respectively, for that year.
Equity Price Risk
As of December 31, 2016,
we had $
12.5
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 $
1.3 million.
|
ITEM 12.
|
DESCRIPTION
OF SECURITIES OTHER THAN EQUITY SECURITIES
|
Not applicable.
The accompanying notes are an integral
part of the consolidated financial statements.
The accompanying notes are an integral
part of the consolidated financial statements.
The accompanying notes are an integral
part of the consolidated financial statements.
The accompanying notes are an integral
part of the consolidated financial statements.
The accompanying notes are an integral
part of the consolidated financial statements.
The accompanying notes are an integral
part of the consolidated financial statements.
The accompanying notes are an integral
part of the consolidated financial statements.
The accompanying notes are an integral
part of the consolidated financial statements.
|
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|
U.S. dollars in thousands (except
share and per share data)
Magic Software
Enterprises Ltd., an Israeli company, and its subsidiaries (“the Group” or “the Company”) is a global provider
of software platforms and professional services that accelerate the planning, development, deployment and integration of on-premise,
mobile and cloud business applications (“the Magic Technology”). 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 19
for further details). The principal markets of the Group are United States, Europe, Israel and Japan (see Note 19).
For information
about the Company’s holdings in subsidiaries and affiliates, see Appendix A to the consolidated financial statements.
|
|
NOTE 2:-
|
SIGNIFICANT ACCOUNTING POLICIES
|
The consolidated
financial statements have been prepared in accordance with United States Generally Accepted Accounting Principles (“U.S. GAAP”),
applied on a consistent basis, as follows:
Use
of estimates
The preparation
of the consolidated financial statements in conformity with U.S. generally accepted accounting principles requires management to
make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. The Company’s
management believes that the estimates, judgments and assumptions used are reasonable based upon information available at the time
they are made. Actual results could differ from those estimates. The most significant assumptions are employed in estimates used
in determining values of goodwill and identifiable intangible assets and their subsequent impairment analysis, redeemable non-controlling
interests, revenue recognition, tax assets and tax positions, legal contingencies, research and development capitalization, contingent
consideration related to acquisitions and stock-based compensation costs.
Financial
statements in United States dollars
A substantial
portion of the revenues and expenses of the Company and certain of its subsidiaries is generated in U.S. dollars (“dollar”).
The Company’s management believes that the dollar is the currency of the primary economic environment in which the Company and
certain of its subsidiaries operate. Thus, the functional and reporting currency of the Company and certain of its subsidiaries
is the dollar.
MAGIC SOFTWARE ENTERPRISES LTD.
AND ITS SUBSIDIARIES
|
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|
U.S. dollars in thousands (except
share and per share data)
|
|
NOTE 2:-
|
SIGNIFICANT ACCOUNTING POLICIES (Cont.)
|
Accordingly,
monetary accounts maintained in currencies other than the dollar are remeasured into dollars in accordance with the Financial Accounting
Standards Board (“FASB) Accounting Standards Codification (“ASC”) 830, “Foreign Currency Matters”. All
transaction gains and losses of the remeasurement of monetary balance sheet items are reflected in the statements of income as
financial income or expenses, as appropriate.
For those
foreign subsidiaries whose functional currency is not the dollar, all balance sheet amounts have been translated using the exchange
rates in effect at each balance sheet date. Statement of income amounts have been translated using the average exchange rate prevailing
during each year. Such translation adjustments are reported as a component of other comprehensive income (loss) in equity.
Principles
of consolidation
The consolidated
financial statements include the accounts of the Company and its 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”.
The following
table provides a reconciliation of the redeemable non-controlling interests:
|
January 1, 2016
|
|
$
|
5,745
|
|
|
Net income attributable to redeemable non-controlling interest
|
|
|
2,258
|
|
|
Change in redeemable non-controlling interest to redemption value
|
|
|
2,262
|
|
|
Increase in redeemable non-controlling interest as part of acquisitions
|
|
|
15,779
|
|
|
Increase in redeemable non-controlling interest due to change in ownership
in subsidiaries
|
|
|
292
|
|
|
Dividend in redeemable non-controlling interest
|
|
|
(29
|
)
|
|
Foreign currency translation adjustments
|
|
|
(309
|
)
|
|
|
|
|
|
|
|
December 31, 2016
|
|
$
|
25,998
|
|
MAGIC SOFTWARE ENTERPRISES LTD.
AND ITS SUBSIDIARIES
|
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|
U.S. dollars in thousands (except
share and per share data)
|
|
NOTE 2:-
|
SIGNIFICANT ACCOUNTING POLICIES (Cont.)
|
Cash
and cash equivalents
Cash and cash
equivalents are short-term highly liquid investments that are readily convertible to cash with original maturities of three months
or less, at the date acquired.
Cash and cash
equivalents include amounts held primarily in NIS, U.S. dollars, 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 receivables.
Marketable
securities
The Company accounts for
investments in marketable securities in accordance with ASC No. 320, “Investments – Debt and Equity Securities”.
Management determines the appropriate classification of its investments at the time of purchase and reevaluates such determinations
at each balance sheet date. The Company classifies all of its marketable securities as available for sale. 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, 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 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.
MAGIC SOFTWARE ENTERPRISES LTD.
AND ITS SUBSIDIARIES
|
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|
U.S. dollars in thousands (except
share and per share data)
|
|
NOTE 2:-
|
SIGNIFICANT ACCOUNTING POLICIES (Cont.)
|
Property
and equipment, net
Property
and equipment are stated at cost, net of accumulated depreciation. Depreciation is calculated by the straight-line method over
the estimated useful lives of the assets, at the following annual rates:
|
|
Years
|
|
|
|
|
Computers and peripheral equipment
|
3
|
|
Office furniture and equipment
|
7 - 15 (mainly 7)
|
|
Motor vehicles
|
7
|
|
Software
|
3 – 5 (mainly 5)
|
|
Leasehold improvements
|
Over the shorter of the lease term or useful economic life
|
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,
measured at their fair values as of that date. As required by ASC 820, “Fair Value Measurements and Disclosures” the
Company applies assumptions that marketplace participants would consider in determining the fair value of assets acquired, liabilities
assumed, non-controlling interest and redeemable non-controlling interest in the acquiree at the acquisition date. Any excess of
the fair value of net assets acquired over purchase price and any subsequent changes in estimated contingencies are to be recorded
in earnings. 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, 2014, 2015 and 2016 the Company recorded $ 131, $ 22 and $ 828, with respect to changes in the
fair value of contingent consideration liability, respectively.
MAGIC SOFTWARE ENTERPRISES LTD.
AND ITS SUBSIDIARIES
|
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|
U.S. dollars in thousands (except
share and per share data)
|
|
NOTE 2:-
|
SIGNIFICANT ACCOUNTING POLICIES (Cont.)
|
Research
and development costs
Research
and development costs incurred in the process of software development before establishment of technological feasibility are charged
to expenses as incurred. Costs incurred subsequent to the establishment of technological feasibility are capitalized according
to the principles set forth in ASC 985-20, “Costs of Software to be Sold, Leased or Marketed”.
The Company
and its subsidiaries establish technological feasibility upon completion of a detailed program design or working model.
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 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 (between 4-5 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, 2014, 2015 and 2016, 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.
MAGIC SOFTWARE ENTERPRISES LTD.
AND ITS SUBSIDIARIES
|
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|
U.S. dollars in thousands (except
share and per share data)
|
|
NOTE 2:-
|
SIGNIFICANT ACCOUNTING POLICIES (Cont.)
|
Long-Lived
Assets
The Company’s
long-lived, non-current assets are comprised mainly of goodwill, identifiable intangible assets and property, plants and equipment.
Impairment
of long-lived assets and intangible assets subject to amortization
The Company’s
long-lived assets are reviewed for impairment in accordance with ASC 360, “Property, Plant and Equipment” whenever events
or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets to be
held and used is measured by a comparison of the carrying amount of an asset to the future undiscounted cash flows expected to
be generated by the assets. If such assets are considered to be impaired, the impairment to be recognized is measured by the amount
by which the carrying amount of the assets exceeds the fair value of the assets.
As required by ASC 820, “Fair
Value Measurements and Disclosures” the Company applies assumptions that marketplace participants would consider in determining
the fair value of long-lived assets (or asset groups).
Intangible
assets with finite lives are amortized over their economic useful life using a method of amortization that reflects the pattern
in which the economic benefits of the intangible assets are consumed or otherwise used up. Acquired technology and non-compete
were amortized on a straight line basis and customer relationships and backlog were amortized on an accelerated method basis over
a period between 3.5 - 15 years based on the intangible assets identified.
During
the years ended December 31, 2014, 2015 and 2016, no impairment indicators were 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, 2016, 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. The goodwill impairment
test is performed according to the following principles:
An initial
qualitative assessment of the likelihood of impairment may be performed. If this step 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 quantitative impairment test is performed.
MAGIC SOFTWARE ENTERPRISES LTD.
AND ITS SUBSIDIARIES
|
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|
U.S. dollars in thousands (except
share and per share data)
|
|
NOTE 2:-
|
SIGNIFICANT ACCOUNTING POLICIES (Cont.)
|
In step
one of the impairment test, the Company compares the fair value of the reporting units to the carrying value of net assets allocated
to the reporting units. If the fair value of the reporting unit exceeds the carrying value of the net assets allocated to that
unit, goodwill is not impaired, and no further testing is required. Otherwise, the Company must perform the second step of the
impairment test to measure the amount of the impairment.
In the
second step, the reporting unit’s fair value is allocated to all the assets and liabilities of the reporting unit, including
any unrecognized intangible assets, in a hypothetical analysis that simulates the business combination principles to derive an
implied goodwill value. If the implied fair value of the reporting unit’s goodwill is less than its carrying value, the difference
is recorded as impairment.
The Company
performed an annual impairment tests as of December 31, of each of 2014, 2015 and 2016 and did not identify any impairment losses
(see Note 9).
Revenue
recognition
The Company
derives its revenues from licensing the rights to use software (proprietary and non-proprietary), provision of related professional
services, maintenance and technical support as well as from other software and IT professional services. The Company sells its
products and services primarily through its direct sales force and indirectly through distributors and value added resellers.
The Company
accounts for its software sales in accordance with ASC 985-605, “Software Revenue Recognition”. Software license revenue
is recognized when persuasive evidence of an arrangement exists, delivery has occurred, the vendor’s fee is fixed or determinable,
no further obligation exists and collectability is probable.
Maintenance
and support includes annual maintenance contracts providing for unspecified upgrades for new versions and enhancements on a when-and-if-available
basis for an annual fee. The right for an unspecified upgrade for new versions and enhancements on a when-and-if-available basis
do not specify the features, functionality and release date of future product enhancements for the customer to know what will be
made available and the general timeframe in which it will be delivered.
Maintenance
and support revenue included in multiple element arrangements is deferred and recognized on a straight-line basis over the term
of the maintenance and support agreement.
As required
by ASC 985-605, the Company allocates revenues to the software component of its multiple-element arrangements using the residual
method when vendor specific objective evidence (“VSOE”) of fair value exists for the undelivered elements of the support
and maintenance agreements. VSOE is based on the price charged when an element is sold separately or renewed. Under the residual
method, the fair value of the undelivered elements is deferred and the remaining portion of the arrangement fee is allocated to
the delivered elements and is recognized as revenue.
MAGIC SOFTWARE ENTERPRISES LTD.
AND ITS SUBSIDIARIES
|
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|
U.S. dollars in thousands (except share and per share
data)
|
|
NOTE 2:-
|
SIGNIFICANT ACCOUNTING POLICIES (Cont.)
|
The Company
generally does not grant a right of return to its customers. When a right of return exists, the Company defers revenue until the
right of return expires, at which time revenue is recognized provided that all other revenue recognition criteria are met.
Revenue from professional
services related to both software and the IT professional services businesses consists of billable hours for services provided
and is recognized as the services are rendered.
Arrangements
that include professional services bundled with licensed software and other software related elements, are evaluated to determine
whether those services are essential to the functionality of other elements of the arrangement. When services are considered essential
to the software, revenues under the arrangement are recognized using contract accounting based on ASC 605-35, “Construction-Type
and Production-Type Contracts”, on a percentage of completion method based on inputs measures. Provisions for estimated losses
on uncompleted contracts are made in the period in which such losses are first determined, in the amount of the estimated loss
for the entire contract. During the years ended December 31, 2014, 2015 and 2016, no such estimated losses were identified.
When professional
services are not considered essential to the functionality of other elements of the arrangement, revenue allocable to the services
is recognized as the services are performed, using VSOE of fair value. In most cases, the Company has determined that the services
are not considered essential to the functionality of other elements of the arrangement.
Deferred
revenues include unearned amounts received under maintenance and support (mainly) and services contracts, and amounts received
from customers but not yet recognized as revenues.
Revenue
from third-party sales is recorded at a gross or net amount according to certain indicators. The application of these indicators
for gross and net reporting of revenue depends on the relative facts and circumstances of each sale and requires significant judgment.
Severance
pay
The Company’s and its Israeli
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 by an accrual.
MAGIC SOFTWARE ENTERPRISES LTD.
AND ITS SUBSIDIARIES
|
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|
U.S. dollars in thousands (except share and per share
data)
|
|
NOTE 2:-
|
SIGNIFICANT ACCOUNTING POLICIES (Cont.)
|
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.
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.
Severance
expenses for the years ended December 31, 2014, 2015 and 2016 amounted to approximately $ 1,673, $ 1,626 and $ 2,248,
respectively.
Advertising
expenses
Advertising
expenses are charged to selling and marketing expenses, as incurred. Advertising expenses for the years ended December 31, 2014,
2015 and 2016 amounted to $ 466, $ 377 and $ 423, respectively.
Income
taxes
The Company
and its subsidiaries account for income taxes in accordance with ASC 740, “Income Taxes”. The ASC prescribes the use
of the liability method whereby deferred tax asset and liability account balances are determined based on differences between financial
reporting and tax bases of assets and liabilities and are measured using the enacted tax rates and laws that will be in effect
when the differences are expected to reverse. The Company and its subsidiaries provide a valuation allowance, if necessary, to
reduce deferred tax assets to their estimated realizable value. Deferred tax assets and liabilities are classified as non-current.
MAGIC SOFTWARE ENTERPRISES LTD.
AND ITS SUBSIDIARIES
|
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|
U.S. dollars in thousands (except share and per share
data)
|
|
NOTE 2:-
|
SIGNIFICANT ACCOUNTING POLICIES (Cont.)
|
The Company
utilizes a two-step approach for recognizing and measuring uncertain tax positions accounted for in accordance with an amendment
of ASC 740 “Income Taxes.” Under the first step the Company evaluates a tax position taken or expected to be taken in
a tax return by determining if the weight of available evidence indicates that it is more likely than not that, based on its technical
merits, the tax position will be sustained on audit, including resolution of any related appeals or litigation processes. The
second step is to measure the tax benefit as the largest amount that is more than 50% likely to be realized upon ultimate settlement
with the tax authorities. The Company accrued interest and penalties related to unrecognized tax benefits in its provisions for
income taxes.
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 35,010, 66,646 and 21,998 for the years ended December 31, 2014, 2015 and 2016, respectively.
Stock-based
compensation
The Company
accounts for stock-based compensation in accordance with ASC 718, “Compensation - Stock Compensation” which requires
companies to estimate the fair value of equity-based payment awards on the date of grant using an option-pricing model. The value
of the portion of the award that is ultimately expected to vest is recognized as an expense over the requisite service periods
in the Company’s consolidated statement of income.
The Company
recognizes compensation expenses for the value of its awards, which have graded vesting based on the accelerated method over the
requisite service period of each of the awards, net of estimated forfeitures.
The Company
measures and recognizes compensation expense for share-based awards based on estimated fair values on the date of grant using the
Binomial option-pricing model (“the Binomial model”). The Binomial model for option pricing requires a number of assumptions,
of which
the most significant are the suboptimal exercise factor
and expected stock price volatility. The suboptimal exercise factor is estimated based on employees’ historical option exercise
behavior.
MAGIC SOFTWARE ENTERPRISES LTD.
AND ITS SUBSIDIARIES
|
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|
U.S. dollars in thousands (except share and per share
data)
|
|
NOTE 2:-
|
SIGNIFICANT ACCOUNTING POLICIES (Cont.)
|
The suboptimal
exercise factor is the ratio by which the stock price must increase over the exercise price before employees are expected to exercise
their stock options. Expected volatility is based upon actual historical stock price movements and was calculated as of the grant
dates for different periods, since the Binomial model can be used for different expected volatilities for different periods. The
risk-free interest rate is based on the yield from U.S. Treasury zero-coupon bonds with an equivalent term to the contractual term
of the options. Prior to 2012, the Company did not anticipate that it would pay dividends and therefore used an expected dividend
yield of zero in its past years option pricing models. In September 2012, the Company adopted a dividend distribution policy according
to which it will distribute in each year a dividend of up to 50% of its annual distributable profits.
The expected
term of options granted is derived from the output of the option valuation model and represents the period of time that options
granted are expected to be outstanding. Estimated forfeitures are based on actual historical pre-vesting forfeitures.
For awards
with performance conditions, compensation cost is recognized over the requisite service period if it is ‘probable’ that the performance
conditions will be satisfied, as defined in ASC 450-20-20, “Loss Contingencies”.
No grants
were made to employees and directors in 2016 and 2015.
During
the years ended December 31, 2014, 2015 and 2016, the Company recognized stock-based compensation expense related to employee stock
options in the amount of $ 1,557 , $ 234 and $ 152, respectively, as follows:
|
|
|
Year ended December 31,
|
|
|
|
|
2014
|
|
|
2015
|
|
|
2016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of revenue
|
|
$
|
30
|
|
|
$
|
31
|
|
|
$
|
15
|
|
|
Research and development
|
|
|
29
|
|
|
|
48
|
|
|
|
17
|
|
|
Selling and marketing
|
|
|
220
|
|
|
|
137
|
|
|
|
71
|
|
|
General and administrative
|
|
|
1,278
|
|
|
|
18
|
|
|
|
49
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total stock-based compensation expense
|
|
$
|
1,557
|
|
|
$
|
234
|
|
|
$
|
152
|
|
Concentrations
of credit risk
Financial
instruments that potentially subject the Company and its subsidiaries to concentration of credit risk consist principally of cash
and cash equivalents, short-term deposits, marketable securities, trade receivables and foreign currency derivative contracts.
MAGIC SOFTWARE ENTERPRISES LTD.
AND ITS SUBSIDIARIES
|
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|
U.S. dollars in thousands (except share and per share
data)
|
|
NOTE 2:-
|
SIGNIFICANT ACCOUNTING POLICIES (Cont.)
|
The Company’s
cash and cash equivalents and short-term deposits are invested primarily in deposits with major banks worldwide, mainly in the
United States and Israel, however, such cash and cash equivalents and short-term deposits in the United States may be in excess
of insured limits and are not insured in other jurisdictions. The Company believes that such institutions are of high rating and
therefore bear low risk.
The Company’s
marketable securities include investments in commercial and government bonds and foreign banks. The Company’s marketable securities
are considered to be highly liquid and have a high credit standing (also refer to Note 4). In addition, management considered its
portfolios in foreign banks to be well-diversified.
Trade receivables of the Company and its subsidiaries are derived from sales to customers located primarily
in the United States, Europe, Israel and Japan. The Company performs ongoing credit evaluations of its customers and excluding
2013 has not experienced any material losses to date. 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, 2014, 2015 and 2016 was $ 735, $ 346 and $ 437, respectively.
From time to time the Company
enters into foreign exchange forward contracts intended to protect against the changes in value of forecasted non-dollar currency
cash flows related to salary and related expenses. These derivative instruments are designed to offset the Company’s non-dollar
currency exposure (see “Derivative instruments” below).
Fair
value measurements
The Company
accounts for certain assets and liabilities at fair value under ASC 820, “Fair Value Measurements and Disclosures”. Fair
value is an exit price, representing the amount that would be received to sell an asset or paid to transfer a liability in an orderly
transaction between market participants. As such, fair value is a market-based measurement that should be determined based on assumptions
that market participants would use in pricing an asset or a liability. As a basis for considering such assumptions, ASC 820 establishes
a three-tier value hierarchy, which prioritizes the inputs used in the valuation methodologies in measuring fair value:
|
|
Level 1 -
|
Observable inputs that reflect quoted prices (unadjusted)
for identical assets or liabilities in active markets;
|
|
|
Level 2 -
|
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;
|
MAGIC SOFTWARE ENTERPRISES LTD.
AND ITS SUBSIDIARIES
|
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|
U.S. dollars in thousands (except share and per share
data)
|
|
NOTE 2:-
|
SIGNIFICANT ACCOUNTING POLICIES (Cont.)
|
|
|
Level 3 -
|
Unobservable inputs which are supported by little or no
market activity;
|
The fair
value hierarchy also requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when
measuring fair value. The Company categorized each of its fair value measurements in one of these three levels of hierarchy. Assets
and liabilities measured at fair value on a recurring basis are comprised of marketable securities, foreign currency forward contracts
and contingent consideration of acquisitions (see Note 5).
The carrying
amounts reported in the balance sheet for cash and cash equivalents, short term bank deposits, trade receivables, other accounts
receivable, short-term bank credit, trade payables and other accounts payable approximate their fair values due to the short-term
maturities of such instruments.
Comprehensive
income (loss)
The Company
accounts for comprehensive income (loss) in accordance with ASC 220, “Comprehensive Income.” This Statement establishes
standards for the reporting and display of comprehensive income and its components in a full set of general purpose financial statements.
Comprehensive income (loss) generally represents all changes in equity during the period except those resulting from investments
by, or distributions to, shareholders. The Company determined that its items of other comprehensive income (loss) relate to gain
and loss on foreign currency translation adjustments, unrealized gain and loss on derivative instruments designated as hedges and
unrealized gain and loss on available-for-sale marketable securities.
Derivative
instruments
A material portion of the
Company’s revenues, expenses and earnings is exposed to changes in foreign exchange rates. Depending on market conditions, foreign
exchange risk is also managed through the use of derivative financial instruments. These financial instruments serve to protect
net income against the impact of the translation into U.S. dollars of certain foreign exchange-denominated transactions. The derivative
instruments hedge or offset exposures to Euro, Japanese Yen and NIS exchange rate fluctuations.
ASC 815, “Derivatives
and Hedging,” requires companies to recognize all of their derivative instruments as either assets or liabilities in their
balance sheet at fair value. Derivative instruments that are designated and qualify as hedges of forecasted transactions (i.e.,
cash flow hedges) are carried at fair value with the effective portion of a derivative’s gain or loss recorded in other comprehensive
income and subsequently recognized in earnings in the same period or periods in which the hedged forecasted transaction affects
earnings. For derivative instruments that are not designated and qualified as hedging instruments, the gains or losses on the derivative
instruments are recognized in current earnings during the period of the change in fair values.
MAGIC SOFTWARE ENTERPRISES LTD.
AND ITS SUBSIDIARIES
|
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|
U.S. dollars in thousands (except share and per share
data)
|
|
NOTE 2:-
|
SIGNIFICANT ACCOUNTING POLICIES (Cont.)
|
The derivative instruments
used by the Company are designed to reduce the market risk associated with the exposure of its underlying transactions to fluctuations
in currency exchange rates.
The Company
occasionally has instituted a foreign currency cash flow hedging program in order to hedge against the risk of overall changes
in future cash flows. This program mainly relates to hedging portions of the Group forecasted expenses denominated in NIS with
currency forwards contracts and put and call options. These forward and option contracts are designated as cash flow hedges.
For derivative
instruments that are designated and qualify as a cash flow hedge (i.e., hedging the exposure to variability in expected future
cash flows that is attributable to a particular risk), the effective portion of the gain or loss on the derivative instrument is
reported as a component of other comprehensive income and reclassified into earnings in the same period or periods during which
the hedged transaction affects earnings. The remaining gain or loss on the derivative instrument in excess of the cumulative change
in the present value of future cash flows of the hedged item, if any, is recognized in current earnings during the period of change.
For derivative
instruments not designated as hedging instruments, the gain or loss is recognized in current earnings during the period of change.
The notional principal of
foreign exchange contracts to purchase NIS with U.S. dollars was $ 1,736 as of December 31, 2014.
At December 31, 2015
and 2016, the Company did not have any cash flow hedges.
The following
table present gains and losses of related hedged items:
|
|
|
Statements
|
|
Gain
recognized in the
statements of income
|
|
|
|
|
of
|
|
Year ended December 31,
|
|
|
|
|
income item
|
|
2014
|
|
|
2015
|
|
|
2016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivatives not designated as hedging:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign exchange forward contracts
|
|
“Financial income, net”
|
|
|
24
|
|
|
|
69
|
|
|
|
4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total derivatives
|
|
|
|
$
|
24
|
|
|
$
|
69
|
|
|
$
|
4
|
|
MAGIC SOFTWARE ENTERPRISES LTD.
AND ITS SUBSIDIARIES
|
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|
U.S. dollars in thousands (except share and per share
data)
|
|
NOTE 2:-
|
SIGNIFICANT ACCOUNTING POLICIES (Cont.)
|
Recently
Issued Accounting Pronouncement:
In May
2014, the FASB issued Accounting Standards Update No. 2014-09, Revenue from Contracts with Customers (Topic 606) (ASU 2014-09),
which amends the existing accounting standards for revenue recognition. In August 2015, the FASB issued ASU No. 2015-14, Revenue
from Contracts with Customers (Topic 606): Deferral of the Effective Date, which delays the effective date of ASU 2014-09 by one
year. The FASB also agreed to allow entities to choose to adopt the standard as of the original effective date. The new revenue
recognition standard will be effective in the first quarter of 2018, with the option to adopt it in the first quarter of 2017.
The Company anticipates adopting the new standard effective January 1, 2018. The new standard also permits two methods of adoption:
retrospectively to each prior reporting period presented (full retrospective method), or retrospectively with the cumulative effect
of initially applying the guidance recognized at the date of initial application (the modified retrospective method). The Company
preliminarily anticipates adopting the standard using the modified retrospective method. However, the Company is continuing to
evaluate the impact of the standard on its consolidated financial statements and related disclosures and the adoption method is
subject to change.
In April
2016, the FASB issued ASU 2016-10, “Revenue from Contracts with Customers (Topic 606): Identifying Performance Obligations
and Licensing” (“ASU 2016-10”), which clarifies the following two aspects of Topic 606: (a) identifying performance
obligations; and (b) the licensing implementation guidance. The amendments do not change the core principle of the guidance in
Topic 606. The new guidance is effective for annual periods beginning after December 15, 2017, including interim periods within
those annual periods, which will be our interim period beginning January 1, 2018. Early adoption is permitted only as of annual
reporting periods beginning after December 15, 2016, including interim reporting periods with that reporting period. The Company
is evaluating the impact of this standard.
In February
2016, the FASB issued ASU 2016-02, “Leases” (Topic 842), whereby, lessees will be required to recognize for all leases
at the commencement date a lease liability, which is a lessee’s obligation to make lease payments arising from a lease, measured
on a discounted basis; and a right-of-use asset, which is an asset that represents the lessee’s right to use, or control
the use of, a specified asset for the lease term. Under the new guidance, lessor accounting is largely unchanged. A modified retrospective
transition approach for leases existing at, or entered into after, the beginning of the earliest comparative period presented in
the financial statements must be applied. The modified retrospective approach would not require any transition accounting for leases
that expired before the earliest comparative period presented. Companies may not apply a full retrospective transition approach.
ASU 2016-02 is effective for annual and interim periods beginning after December 15, 2018. Early application is permitted. The
Company is evaluating the potential impact of this pronouncement.
In 2016,
the FASB issued ASU 2016-09, Compensation – Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment
Accounting (“ASU 2016-09”). ASU 2016-09 simplifies several aspects of the accounting for employee share-based payment
transactions, including the accounting for income taxes, forfeitures, and statutory tax withholding requirements, as well as classification
in the statement of cash flows. ASU 2016-09 is effective for fiscal years, and interim periods within those years, beginning after
December 15, 2016.
MAGIC SOFTWARE ENTERPRISES LTD.
AND ITS SUBSIDIARIES
|
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|
U.S. dollars in thousands (except share and per share
data)
|
|
NOTE 2:-
|
SIGNIFICANT ACCOUNTING POLICIES (Cont.)
|
The Company does not expect that this new guidance will have a material impact on the Company’s consolidated
financial statements.
In November
2016, the FASB issued Accounting Standards Update No. 2016-18, Statement of Cash Flows (Topic 230): Restricted Cash (ASU 2016-18),
which requires companies to include amounts generally described as restricted cash and restricted cash equivalents in cash and
cash equivalents when reconciling beginning-of-period and end-of-period total amounts shown on the statement of cash flows. This
guidance will be effective for us in the first quarter of 2018 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.
In January
2017, the FASB issued ASU 2017-04 “Intangibles - Goodwill and Other (Topic 350): Simplifying the Accounting for Goodwill Impairment”
(ASU 2017-04). ASU 2017-04 eliminates Step 2 of the goodwill impairment test, which requires the calculation of the implied fair
value of goodwill by assigning the fair value of a reporting unit to all of its assets and liabilities as if that reporting unit
had been acquired in a business combination. Instead, an entity will compare the fair value of a reporting unit with its carrying
amount and recognize an impairment charge for the amount by which the carrying amount exceeds the reporting unit’s fair value.
ASU 2017-04 is effective for annual or any interim goodwill impairment tests in fiscal years beginning after December 15, 2019.
The Company is currently evaluating the effect that this guidance will have on its consolidated financial statements.
In
January 2017, the FASB issued ASU 2017-01 “Business Combinations (Topic 805): Clarifying the Definition of a Business”
(ASU 2017-04), which provides a more robust framework to use in determining when a set of assets and activities is a business.
Because the current definition of a business is interpreted broadly and can be difficult to apply, stakeholders indicated that
analyzing transactions is inefficient and costly and that the definition does not permit the use of reasonable judgment. ASU 2017-04
provides more consistency in applying the guidance, reduces the costs of application, and makes the definition of a business more
operable. This update is effective for annual and interim periods beginning after December 15, 2018. The Company expects no material
impact on its consolidated financial statements.
In August
2016, FASB issued ASU 2016-15, “Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments.”
This update will make eight targeted changes to how cash receipts and cash payments are presented and classified in the statement
of cash flows. The update is effective for fiscal years beginning after December 15, 2017. The new standard will require adoption
on a retrospective basis unless it is impracticable to apply, in which case it would be required to apply the amendments prospectively
as of the earliest date practicable. The Company is currently evaluating the effect of this update on its financial statements
and related disclosures.
MAGIC SOFTWARE ENTERPRISES LTD.
AND ITS SUBSIDIARIES
|
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|
U.S. dollars in thousands (except share and per share
data)
|
|
NOTE 3:-
|
BUSINESS COMBINATION, SIGNIFICANT TRANSACTION AND SALE
OF BUSINESS
|
|
|
a.
|
On October 1, 2014 the Company acquired the entire share interests in Formula Telecom Solutions Ltd. (FTS),
an Israel-based software vendor, for a total consideration of $5,800. FTS specializes in the development, sale, service and support
of Business Support Systems (BSS), including convergent charging, billing, customer management, policy control and payment software
solutions for the telecommunications industry. The acquisition was accounted for by the purchase method.
|
The results
of operations were included in the consolidated financial statements of the Company commencing October 1, 2014.
The following
table summarizes the estimated fair values of the assets acquired and liabilities at the date of acquisition:
|
Net Assets
|
|
$
|
(57
|
)
|
|
Intangible assets
|
|
|
2,951
|
|
|
Goodwill
|
|
|
2,906
|
|
|
|
|
|
|
|
|
Total assets acquired
|
|
$
|
5,800
|
|
|
|
b.
|
On April 14, 2015 the Company acquired a 70% interest in Comblack IT Ltd. (“Comblack”), an Israeli-based
company that specializes in software professional and outsourced management services mainly for mainframes and complex large-scale
environments, for a total consideration of $1,821, of which $ 1,523 was paid upon closing and $ 298 which was payable
contingent upon the acquired business meeting certain operational targets in 2015. The Company and the seller hold mutual Call
and Put options respectively for the remaining 30% interest in Comblack. As a result of the Put option, the Company recorded redeemable
non-controlling interest in the amount of $ 989. Acquisition related costs were immaterial. The acquisition was accounted
for by the purchase method.
|
The results
of operations were included in the consolidated financial statements of the Company commencing April 1, 2015.
The following
table summarizes the estimated fair values of the assets acquired and liabilities at the date of acquisition:
|
Net Assets, excluding cash acquired
|
|
$
|
(405
|
)
|
|
Non-controlling interest
|
|
|
(989
|
)
|
|
Intangible assets
|
|
|
1,249
|
|
|
Goodwill
|
|
|
1,966
|
|
|
|
|
|
|
|
|
Total assets acquired net of acquired cash
|
|
$
|
1,821
|
|
In March
2016, the Company paid the seller the remaining contingent payments for meeting 2015 operational targets. As of December 31, 2016,
Comblack redeemable non-controlling interest amount to $ 3,875.
MAGIC SOFTWARE ENTERPRISES LTD.
AND ITS SUBSIDIARIES
|
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|
U.S. dollars in thousands (except share and per share
data)
|
|
NOTE 3:-
|
BUSINESS COMBINATION, SIGNIFICANT TRANSACTION AND SALE
OF BUSINESS (Cont.)
|
|
|
c.
|
On June 30, 2015 the Company acquired a 70% interest in Infinigy Solutions LLC (“Infinigy”),
a US-based services company focused on expanding the development and implementation of technical solutions throughout the telecommunications
industry with offices across the US, providing nationwide coverage and support for wireless engineering, deployment services, surveying,
environmental service and project management, for a total consideration of $6,527, of which $ 5,600 was paid upon closing
and $ 927 is payable contingent upon the acquired business meeting certain operational targets in 2016 and 2017. The Company
and the seller hold mutual Call and Put options respectively for the remaining 30% interest in Infinigy. As a result of the Put
option, the Company recorded redeemable non-controlling interest in the amount of $ 3,590. Acquisition related costs were
immaterial. The acquisition was accounted for by the purchase method.
|
The results
of operations were included in the consolidated financial statements of the Company commencing July 1, 2015.
The following
table summarizes the estimated fair values of the assets acquired and liabilities at the date of acquisition:
|
Net Assets, excluding cash acquired
|
|
$
|
1,182
|
|
|
Non-controlling interest
|
|
|
(3,590
|
)
|
|
Intangible assets
|
|
|
3,675
|
|
|
Goodwill
|
|
|
5,260
|
|
|
|
|
|
|
|
|
Total assets acquired net of acquired cash
|
|
$
|
6,527
|
|
In July
2016, the Company paid the seller $ 534 with respect to the acquired business meeting certain of its 2016 operational targets.
As of December 31, 2016 the contingent payment with respect to the acquired business meeting its 2017 operational target amounted
to $ 685.
As of December
31, 2016, Infinigy redeemable non-controlling interest amount to $ 3,971
|
|
d.
|
On July 11, 2016 the Company acquired a 60% interest in 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 $ 20,550, which was paid upon closing. The purchaser and the seller hold mutual Call and Put options respectively for the remaining
40% interest in Roshtov. As a result of the Put option, the Company recorded redeemable non-controlling interest in the amount
of $ 14,012. Acquisition related costs were immaterial. The acquisition was accounted for by the purchase method.
|
The results
of operations were included in the consolidated financial statements of the Company commencing July 2016.
MAGIC SOFTWARE ENTERPRISES LTD.
AND ITS SUBSIDIARIES
|
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|
U.S. dollars in thousands (except share and per share data)
|
|
NOTE 3:-
|
BUSINESS COMBINATION, SIGNIFICANT TRANSACTION AND SALE
OF BUSINESS (Cont.)
|
The following
table summarizes the provisional estimated fair values of the assets acquired and liabilities at the date of acquisition
(*)
:
|
Net Assets, excluding cash acquired
|
|
$
|
15
|
|
|
Non-controlling interest
|
|
|
(14,012
|
)
|
|
Intangible assets
|
|
|
22,439
|
|
|
Deferred tax liability
|
|
|
(5,610
|
)
|
|
Goodwill
|
|
|
17,718
|
|
|
|
|
|
|
|
|
Total assets acquired net of acquired cash
|
|
$
|
20,550
|
|
|
|
(*)
|
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.
|
As of
December 31, 2016, Roshtov redeemable non-controlling interest amount to $ 14,703.
|
|
e.
|
On October 31, 2016 the Company acquired a 100% interest in Shavit Software (2009) Ltd., an Israeli-based
company that specializes in software professional and outsourced management services, for a total consideration of $ 6,836, of
which $ 4,699 was paid upon closing, $ 1,633 (measured based on present value) was allocated to a deferred payment which is
due in 2018 and $ 504 is contingent upon the acquired business meeting certain operational targets in 2017, 2018 and 2019. The
Company’s management believes the acquisition will broaden its professional service offering to its existing and new customers
in Israeli. Acquisition related costs were immaterial. The acquisition was accounted for by the purchase method.
|
The results
of operations were included in the consolidated financial statements of the Company commencing November 1, 2016.
MAGIC SOFTWARE ENTERPRISES LTD.
AND ITS SUBSIDIARIES
|
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|
U.S. dollars in thousands (except share and per share data)
|
|
NOTE 3:-
|
BUSINESS COMBINATION, SIGNIFICANT TRANSACTION AND SALE
OF BUSINESS (Cont.)
|
The following
table summarizes the provisional estimated fair values of the assets acquired and liabilities at the date of acquisition
(*)
:
|
Net Assets, excluding cash acquired
|
|
$
|
801
|
|
|
Intangible assets
|
|
|
4,215
|
|
|
Deferred tax liability
|
|
|
(1,053
|
)
|
|
Goodwill
|
|
|
2,873
|
|
|
|
|
|
|
|
|
Total assets acquired net of acquired cash
|
|
$
|
6,836
|
|
|
|
(*)
|
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.
|
During the years ended December 31, 2015 and 2016, the Company acquired additional activities whose influence
on the financial statements of the Company was immaterial, for a total consideration of $ 1,892 and $ 8,884, respectively.
In addition, during 2015, the Company increased its ownership interest in Complete Business Solutions from 96.3% to 100% and in
CommIT Embedded Ltd. from 50.1% to 75%, for a total consideration of $ 244 and $ 1,412 (of which $ 356 were paid in January 2016),
respectively.
|
The following
table summarizes the provisional estimated fair values of the assets acquired and liabilities at the date of acquisition
(*)
:
|
Net Assets, excluding cash acquired
|
|
$
|
2,174
|
|
|
Non-controlling interest
|
|
|
(1,209
|
)
|
|
Intangible assets
|
|
|
2,106
|
|
|
Deferred tax liability
|
|
|
(427
|
)
|
|
Goodwill
|
|
|
6,240
|
|
|
|
|
|
|
|
|
Total assets acquired net of acquired cash
|
|
$
|
8,884
|
|
|
|
(*)
|
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.
|
MAGIC SOFTWARE ENTERPRISES LTD.
AND ITS SUBSIDIARIES
|
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|
U.S. dollars in thousands (except share and per share data)
|
|
NOTE 4:-
|
MARKETABLE SECURITIES
|
The Group
invests in marketable debt and equity securities, which are classified as available-for-sale. The following is a summary of marketable
securities:
|
|
|
December
31,
|
|
|
|
|
2015
|
|
|
2016
|
|
|
|
|
Amortized
cost
|
|
|
Unrealized
losses
|
|
|
Unrealized
gains
|
|
|
Market
value
|
|
|
Amortized
cost
|
|
|
Unrealized
losses
|
|
|
Unrealized
gains
|
|
|
Market
value
|
|
|
Available-for-sale:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate
bonds
|
|
$
|
11,666
|
|
|
$
|
(82
|
)
|
|
$
|
-
|
|
|
$
|
11,584
|
|
|
$
|
12,348
|
|
|
$
|
(72
|
)
|
|
$
|
-
|
|
|
$
|
12,276
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity
funds
|
|
|
118
|
|
|
|
-
|
|
|
|
117
|
|
|
|
235
|
|
|
|
118
|
|
|
|
-
|
|
|
|
112
|
|
|
|
230
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
available-for-sale marketable securities
|
|
$
|
11,784
|
|
|
$
|
(82
|
)
|
|
$
|
117
|
|
|
$
|
11,819
|
|
|
$
|
12,466
|
|
|
$
|
(72
|
)
|
|
$
|
112
|
|
|
$
|
12,506
|
|
Marketable
securities with contractual maturities from one to three years and from three to five years are as follows:
|
|
|
Amortized
|
|
|
Unrealized gains
(losses)
|
|
|
Market
|
|
|
|
|
cost
|
|
|
Gains
|
|
|
Losses
|
|
|
value
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Due between one to three years
|
|
$
|
10,624
|
|
|
$
|
-
|
|
|
$
|
(40
|
)
|
|
$
|
10,584
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Due between three to five years
|
|
$
|
1,724
|
|
|
$
|
-
|
|
|
$
|
(32
|
)
|
|
$
|
1,692
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
12,348
|
|
|
$
|
-
|
|
|
$
|
(72
|
)
|
|
$
|
12,276
|
|
The following is the change in the other comprehensive income of available-for-sale securities during 2015:
|
|
|
Other
comprehensive
income (loss)
|
|
|
|
|
|
|
|
Other comprehensive loss from available-for-sale securities as of January 1, 2015
|
|
$
|
(121
|
)
|
|
Unrealized gains from available-for-sale securities
|
|
|
156
|
|
|
Other comprehensive income from available-for-sale securities as of December 31, 2015
|
|
$
|
35
|
|
The following is the change in the other comprehensive income of available-for-sale securities during 2016:
|
|
|
Other
comprehensive
income (loss)
|
|
|
|
|
|
|
|
Other comprehensive income from available-for-sale securities as of January 1, 2016
|
|
$
|
35
|
|
|
Losses reclassified into earnings from marketable securities
|
|
|
16
|
|
|
Unrealized losses from available-for-sale securities
|
|
|
(11
|
)
|
|
Other comprehensive income from available-for-sale securities as of December 31, 2016
|
|
$
|
40
|
|
MAGIC SOFTWARE ENTERPRISES LTD.
AND ITS SUBSIDIARIES
|
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|
U.S. dollars in thousands (except share and per share data)
|
|
NOTE 5:-
|
FAIR VALUE MEASUREMENTS
|
In accordance
with ASC 820, the Company measures its investment in marketable securities and foreign currency derivative contracts at fair value.
Generally marketable securities are classified within Level 1, this is because these assets are valued using quoted prices in active
markets. Foreign currency derivative contracts and certain corporate bonds are classified within Level 2 as the valuation inputs
are based on quoted prices and market observable data of similar instruments.
Contingent
consideration is classified within Level 3. The Company values the Level 3 contingent consideration using discounted cash flow
of the expected future payments, whose inputs include interest rate.
The Company’s
financial assets measured at fair value on a recurring basis, excluding accrued interest components, consisted of the following
types of instruments as of the following dates:
|
|
|
December 31, 2015
|
|
|
|
|
Fair value measurements using input type
|
|
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
Total
|
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate bonds
|
|
$
|
-
|
|
|
$
|
11,584
|
|
|
$
|
-
|
|
|
$
|
11,584
|
|
|
Equity fund
|
|
|
235
|
|
|
|
-
|
|
|
|
-
|
|
|
|
235
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total financial assets
|
|
$
|
235
|
|
|
$
|
11,584
|
|
|
$
|
-
|
|
|
$
|
11,819
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Contingent consideration
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
1,220
|
|
|
$
|
1,220
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total financials liabilities
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
1,220
|
|
|
$
|
1,220
|
|
|
|
|
December 31, 2016
|
|
|
|
|
Fair value measurements using input type
|
|
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
Total
|
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate bonds
|
|
$
|
-
|
|
|
$
|
12,276
|
|
|
$
|
-
|
|
|
$
|
12,276
|
|
|
Equity fund
|
|
|
230
|
|
|
|
-
|
|
|
|
-
|
|
|
|
230
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total financial assets
|
|
$
|
230
|
|
|
$
|
12,276
|
|
|
$
|
-
|
|
|
$
|
12,506
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Contingent consideration
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
3,088
|
|
|
$
|
3,088
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total financials liabilities
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
3,088
|
|
|
$
|
3,088
|
|
MAGIC SOFTWARE ENTERPRISES LTD.
AND ITS SUBSIDIARIES
|
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|
U.S. dollars in thousands (except share and per share data)
|
|
NOTE 5:-
|
FAIR VALUE MEASUREMENTS (Cont.)
|
Fair
value measurements using significant unobservable inputs (Level 3):
|
|
|
December 31,
|
|
|
|
|
2015
|
|
|
2016
|
|
|
|
|
|
|
|
|
|
|
Opening balance
|
|
$
|
382
|
|
|
$
|
1,220
|
|
|
Increase in contingent consideration due to acquisitions
|
|
|
1,048
|
|
|
|
1,868
|
|
|
Payment of contingent consideration
|
|
|
(166
|
)
|
|
|
(883
|
)
|
|
Change in fair value of contingent consideration
|
|
|
3
|
|
|
|
665
|
|
|
Amortization of interest and exchange rate
|
|
|
(47
|
)
|
|
|
218
|
|
|
|
|
|
|
|
|
|
|
|
|
Closing balance
|
|
$
|
1,220
|
|
|
$
|
3,088
|
|
|
|
NOTE 6:-
|
OTHER ACCOUNTS RECEIVABLE AND PREPAID EXPENSES
|
|
|
|
December 31,
|
|
|
|
|
2015
|
|
|
2016
|
|
|
|
|
|
|
|
|
|
|
Prepaid expenses
|
|
$
|
2,132
|
|
|
$
|
2,601
|
|
|
Government authorities
|
|
|
2,317
|
|
|
|
3,426
|
|
|
Related parties
|
|
|
1,022
|
|
|
|
1,603
|
|
|
Other
|
|
|
773
|
|
|
|
857
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
6,244
|
|
|
$
|
8,487
|
|
|
|
NOTE 7:-
|
PROPERTY AND EQUIPMENT
|
|
|
|
December 31,
|
|
|
|
|
2015
|
|
|
2016
|
|
|
Cost:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Leasehold improvements
|
|
$
|
816
|
|
|
$
|
795
|
|
|
Computers and peripheral equipment
|
|
|
13,505
|
|
|
|
14,059
|
|
|
Office furniture and equipment
|
|
|
2,917
|
|
|
|
3,111
|
|
|
Motor vehicles
|
|
|
255
|
|
|
|
1,186
|
|
|
Software
|
|
|
2,851
|
|
|
|
2,970
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
20,344
|
|
|
|
22,121
|
|
|
Accumulated depreciation:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Leasehold improvements
|
|
|
379
|
|
|
|
356
|
|
|
Computers and peripheral equipment
|
|
|
13,040
|
|
|
|
13,518
|
|
|
Office furniture and equipment
|
|
|
2,063
|
|
|
|
2,244
|
|
|
Motor vehicles
|
|
|
140
|
|
|
|
366
|
|
|
Software
|
|
|
2,426
|
|
|
|
2,572
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
18,048
|
|
|
|
19,056
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciated cost
|
|
$
|
2,296
|
|
|
$
|
3,065
|
|
MAGIC SOFTWARE ENTERPRISES LTD.
AND ITS SUBSIDIARIES
|
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|
U.S. dollars in thousands (except share and per share data)
|
|
NOTE 7:-
|
PROPERTY AND
EQUIPMENT (Cont.)
|
Depreciation
expenses amounted to $ 675, $ 792 and $ 893 for the years ended December 31, 2014, 2015 and 2016, respectively.
|
|
NOTE 8:-
|
INTANGIBLE ASSETS
|
|
|
|
December 31,
|
|
|
|
|
2015
|
|
|
2016
|
|
|
Original amounts:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capitalized software costs
|
|
$
|
67,106
|
|
|
$
|
71,349
|
|
|
Customer relationships
|
|
|
31,936
|
|
|
|
53,370
|
|
|
Backlog and non-compete agreement
|
|
|
2,371
|
|
|
|
2,712
|
|
|
Acquired technology
|
|
|
5,075
|
|
|
|
12,375
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
106,488
|
|
|
|
139,806
|
|
|
Accumulated amortization:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capitalized software costs
|
|
|
53,096
|
|
|
|
57,286
|
|
|
Customer relationships
|
|
|
16,336
|
|
|
|
21,684
|
|
|
Backlog and non-compete agreement
|
|
|
2,039
|
|
|
|
2,260
|
|
|
Acquired technology
|
|
|
1,442
|
|
|
|
2,396
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
72,913
|
|
|
|
83,626
|
|
|
|
|
|
|
|
|
|
|
|
|
Intangible assets, net
|
|
$
|
33,575
|
|
|
$
|
56,180
|
|
|
|
b.
|
Amortization expenses amounted to $ 7,919, $ 9,093 and $ 10,715 for the years ended
December 31, 2014, 2015 and 2016, respectively.
|
|
|
c.
|
The estimated future amortization expense of intangible assets as of December 31, 2016 is as follows:
|
|
2017
|
|
$
|
11,843
|
|
|
2018
|
|
|
9,844
|
|
|
2019
|
|
|
8,110
|
|
|
2020
|
|
|
6,691
|
|
|
2021
|
|
|
5,118
|
|
|
2022 and thereafter
|
|
|
14,574
|
|
|
|
|
|
|
|
|
|
|
$
|
56,180
|
|
MAGIC SOFTWARE ENTERPRISES LTD.
AND ITS SUBSIDIARIES
|
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|
U.S. dollars in thousands (except share and per share data)
Changes
in the carrying amount of goodwill for the years ended December 31, 2015 and 2016 according to the Company’s reporting units are
as follows (see also 16):
|
|
|
IT
professional
services
|
|
|
Software
services
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of January 1, 2015
|
|
$
|
26,589
|
|
|
$
|
28,901
|
|
|
$
|
55,490
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Business combination
|
|
|
7,594
|
|
|
|
492
|
|
|
|
8,086
|
|
|
Classifications
|
|
|
-
|
|
|
|
(90
|
)
|
|
|
(90
|
)
|
|
Foreign currency translation adjustments
|
|
|
(33
|
)
|
|
|
(145
|
)
|
|
|
(178
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2015
|
|
$
|
34,150
|
|
|
$
|
29,158
|
|
|
$
|
63,308
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Business combination
|
|
|
9,113
|
|
|
|
17,717
|
|
|
|
26,830
|
|
|
Classifications
|
|
|
389
|
|
|
|
-
|
|
|
|
389
|
|
|
Foreign currency translation adjustments
|
|
|
222
|
|
|
|
253
|
|
|
|
475
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2016
|
|
$
|
43,874
|
|
|
$
|
47,128
|
|
|
$
|
91,002
|
|
The Company performed an
annual impairment tests as of December 31, of each of 2014, 2015 and 2016 and did not identify any impairment losses (see Note
2).
|
|
NOTE 10:-
|
SHORT TERM DEBT
|
|
|
|
|
|
Interest
|
|
|
|
|
|
|
|
Linkage
|
|
rate
|
|
|
December 31,
|
|
|
|
|
basis
|
|
%
|
|
|
2015
|
|
|
2016
|
|
|
Short-term credit from banks
|
|
USD
|
|
|
3.55
|
|
|
$
|
-
|
|
|
$
|
996
|
|
|
Short-term loans from banks
|
|
NIS
|
|
|
1.6-1.75
|
|
|
|
-
|
|
|
|
155
|
|
|
Other
|
|
|
|
|
|
|
|
|
13
|
|
|
|
36
|
|
|
Current maturities of long-term loans from financial institution
|
|
NIS
|
|
|
2.6
|
|
|
|
-
|
|
|
|
4,458
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
13
|
|
|
|
5,645
|
|
|
|
NOTE 11:-
|
ACCRUED EXPENSES AND OTHER ACCOUNTS PAYABLE
|
|
|
|
December 31,
|
|
|
|
|
2015
|
|
|
2016
|
|
|
|
|
|
|
|
|
|
|
Employees and payroll accruals
|
|
$
|
8,105
|
|
|
$
|
11,245
|
|
|
Accrued expenses
|
|
|
4,204
|
|
|
|
4,955
|
|
|
Government authorities
|
|
|
2,978
|
|
|
|
2,871
|
|
|
Other
|
|
|
1,423
|
|
|
|
1,219
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
16,710
|
|
|
$
|
20,290
|
|
MAGIC SOFTWARE ENTERPRISES LTD.
AND ITS SUBSIDIARIES
|
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|
U.S. dollars in thousands (except share and per share data)
|
|
|
Linkage
|
|
Interest
|
|
|
December 31,
|
|
|
|
|
basis
|
|
rate
|
|
|
2015
|
|
|
2016
|
|
|
|
|
|
|
%
|
|
|
|
|
|
|
|
|
Loan from banks and other
|
|
NIS
|
|
|
1.6-5
|
|
|
$
|
787
|
|
|
$
|
31,714
|
(1)
|
|
Dividend payable to redeemable
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
non-controlling interest
|
|
NIS
|
|
|
|
|
|
|
2,294
|
|
|
|
2,341
|
|
|
Other long term debt
|
|
|
|
|
|
|
|
|
176
|
|
|
|
159
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
3,257
|
|
|
$
|
34,214
|
|
|
Current maturities
|
|
NIS
|
|
|
2.6
|
|
|
|
|
|
|
|
(4,458
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,257
|
|
|
|
29,756
|
|
|
|
(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 financial statements, as described:
|
|
a.
|
The Company’s equity shall not be lower than $ 100,000 at all times.
|
|
|
b.
|
The Company’s cash and cash equivalent and marketable securities available for sales shall not be
less than $ 10,000.
|
|
|
c.
|
The ratio of the Company’s total financial debts to 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.
|
|
|
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, 2016, the Company was in compliance with the financial covenants.
|
|
NOTE 13:-
|
TAXES ON INCOME
|
|
|
1.
|
Corporate tax rate in Israel:
|
Taxable
income of Israeli companies is subject to tax at the rate of 26.5% in 2014 and 2015, and 25% in 2016.
In December
2016, the Israeli Parliament approved the 2016 Amendment which reduced the corporate income tax rate to 24% (instead of 25%) effective
from January 1, 2017 and to 23% effective from January 1, 2018.
MAGIC SOFTWARE ENTERPRISES LTD.
AND ITS SUBSIDIARIES
|
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|
U.S. dollars in thousands (except share and per share data)
|
|
NOTE 13:-
|
TAXES ON INCOME (Cont.)
|
|
|
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, the benefit tracks in the Investment Law were modified
and a flat tax rate of 16% applies to the Company’s entire preferred income. The profits of these “Industrial Companies”
will be freely distributable as dividends, subject to a withholding tax of 25% (on distribution commencing January 1, 2015) or
lower, under an applicable tax treaty.
The Company
and 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 2014.
On December
29, 2016 a new legislation amended was enacted to the Investment Law, effective as of January 1, 2017,
as
part of the Economic Efficiency Law
(the “2017 Amendment”). Under the 2017 Amendment a new status of “Preferred
Technology Enterprise” was introduced to the Investment Law. Under the 2017 amendment, a Preferred Technology Enterprise
which is located in areas other than Development Zone A will be subject to tax at a rate of 12% on profits derived from intellectual
property. The implementation of the 2017 Amendment is subject to regulations to be promulgated by the Finance Minister by March
31, 2017. As such regulations have not yet been promulgated and as the definitive criteria to determine the tax benefits have not
yet been established, it cannot be concluded that the legislation with respect to Technological Preferred Enterprises had been
enacted or substantively enacted as of that date. Accordingly, the above changes in the tax rates were not taken into account in
the computation of deferred taxes as of December 31, 2016. Under the transition provisions of the new legislation, the Company
may decide to irrevocably implement the new law while waiving benefits provided under the current law or to remain subject to the
current law. The Company is examining the impact of the 2017 Amendment and the degree to which it will qualify as a Preferred Technology
Enterprise and the amount of Preferred Technology Income that we may have, or other benefits that the Company may receive, from
the 2017 Amendment.
|
|
3.
|
The Company’s Israeli entities have received final tax assessments for their Israeli tax return
filings through the year 2012.
|
MAGIC SOFTWARE ENTERPRISES LTD.
AND ITS SUBSIDIARIES
|
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|
U.S. dollars in thousands (except share and per share data)
|
|
NOTE 13:-
|
TAXES ON INCOME (Cont.)
|
|
|
4.
|
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 some 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.
|
|
b.
|
Non-Israeli subsidiaries:
|
Non-Israeli subsidiaries
are taxed according to the tax laws in their respective domiciles of residence. If earnings are distributed to Israel in the form
of dividends or otherwise, the Company may be subject to additional Israeli income taxes (subject to an adjustment for foreign
tax credits) and foreign withholding tax rates.
The amount of the Company
cash and cash equivalents that are currently held outside of Israel that would be subject to income taxes if distributed as dividends
is $ 18,312. 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.
|
|
c.
|
Net operating loss carryforwards:
|
As of December
31, 2016, three Israeli subsidiaries of the Company had operating loss carryforwards of $ 13,371 (mainly Formula Telecom Solutions
Ltd. (“FTS”) which account for $ 10,535), which can be carried forward and 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 $ 3,812 as of December 31, 2016,
to offset against future taxable income.
MAGIC SOFTWARE ENTERPRISES LTD.
AND ITS SUBSIDIARIES
|
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|
U.S. dollars in thousands (except share and per share data)
|
|
NOTE 13:-
|
TAXES ON INCOME (Cont.)
|
|
|
d.
|
Income before taxes on income:
|
|
|
|
Year ended December 31,
|
|
|
|
|
2014
|
|
|
2015
|
|
|
2016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Domestic
|
|
$
|
14,690
|
|
|
$
|
18,350
|
|
|
$
|
15,334
|
|
|
Foreign
|
|
|
4,183
|
|
|
|
2,407
|
|
|
|
5,323
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
18,873
|
|
|
$
|
20,757
|
|
|
$
|
20,657
|
|
Taxes
on income (tax benefit) consist of the following:
|
|
|
Year ended December 31,
|
|
|
|
|
2014
|
|
|
2015
|
|
|
2016
|
|
|
Current:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Domestic
|
|
$
|
241
|
|
|
$
|
3,466
|
|
|
$
|
2,919
|
|
|
Foreign
|
|
|
689
|
|
|
|
880
|
|
|
|
1,863
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
930
|
|
|
|
4,346
|
|
|
|
4,782
|
|
|
Deferred taxes:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Domestic
|
|
|
2,575
|
|
|
|
(500
|
)
|
|
|
(666
|
)
|
|
Foreign
|
|
|
(1,198
|
)
|
|
|
(165
|
)
|
|
|
(167
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,377
|
|
|
|
(665
|
)
|
|
|
(833
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Taxes on income
|
|
$
|
2,307
|
|
|
$
|
3,681
|
|
|
$
|
3,949
|
|
|
|
f.
|
Deferred tax assets and liabilities:
|
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:
|
|
|
December 31,
|
|
|
|
|
2015
|
|
|
2016
|
|
|
|
|
|
|
|
|
|
|
Net operating loss carryforwards
|
|
$
|
5,104
|
|
|
$
|
3,838
|
|
|
Allowances, reserves and intangible assets
|
|
|
1,826
|
|
|
|
1,943
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred tax assets before valuation allowance
|
|
|
6,930
|
|
|
|
5,781
|
|
|
Less - valuation allowance
|
|
|
(4,107
|
)
|
|
|
(2,233
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Deferred tax assets, net
|
|
$
|
2,823
|
|
|
$
|
3,548
|
|
MAGIC SOFTWARE ENTERPRISES LTD.
AND ITS SUBSIDIARIES
|
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|
U.S. dollars in thousands (except share and per share data)
|
|
NOTE 13:-
|
TAXES ON INCOME (Cont.)
|
|
|
|
December 31,
|
|
|
|
|
2015
|
|
|
2016
|
|
|
|
|
|
|
|
|
|
|
Long-term tax assets
|
|
$
|
2,823
|
|
|
$
|
3,548
|
|
|
Long-term tax liabilities
|
|
|
(5,726
|
)
|
|
|
(12,494
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Net deferred tax liabilities
|
|
$
|
(2,903
|
)
|
|
$
|
(8,946
|
)
|
Deferred tax liabilities are
in respect of acquired intangible assets and capitalized software costs.
|
|
g.
|
Reconciliation of the theoretical tax expense to the actual tax expense:
|
Reconciling
items between the 2014, 2015 and 2016 statutory tax rate (26.5%, 26.5% and 25%, respectively) of the Company and the effective
tax rate is presented in the following table:
|
|
|
Year ended December 31,
|
|
|
|
|
2014
|
|
|
2015
|
|
|
2016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before taxes, as reported in the consolidated statements of income
|
|
$
|
18,873
|
|
|
$
|
20,757
|
|
|
$
|
20,657
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Statutory tax rate
|
|
|
26.5
|
%
|
|
|
26.5
|
%
|
|
|
25
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Theoretical tax expenses on the above amount at the Israeli statutory tax rate
|
|
$
|
5,001
|
|
|
$
|
5,501
|
|
|
$
|
5,164
|
|
|
Tax adjustment in respect of different tax rates
|
|
|
80
|
|
|
|
(923
|
)
|
|
|
(1,214
|
)
|
|
Deferred taxes on losses for which full valuation allowance was provided in the past
|
|
|
236
|
|
|
|
131
|
|
|
|
(455
|
)
|
|
Tax-deductible costs, not included in the accounting costs
|
|
|
-
|
|
|
|
(733
|
)
|
|
|
(342
|
)
|
|
Tax benefits in respect of prior years, net
|
|
|
(516
|
)
|
|
|
(133
|
)
|
|
|
1,262
|
|
|
Nondeductible expenses
|
|
|
82
|
|
|
|
177
|
|
|
|
(232
|
)
|
|
Uncertain tax position and other differences
|
|
|
(2,576
|
)
|
|
|
(339
|
)
|
|
|
(234
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income tax
|
|
$
|
2,307
|
|
|
$
|
3,681
|
|
|
$
|
3,949
|
|
MAGIC SOFTWARE ENTERPRISES LTD.
AND ITS SUBSIDIARIES
|
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|
U.S. dollars in thousands (except share and per share data)
|
|
NOTE 13:-
|
TAXES ON INCOME (Cont.)
|
|
|
h.
|
The Company applies ASC 740, “Income Taxes” with regards to tax uncertainties. During
the year ended December 31, 2014, the Company recorded $ 156 of tax income, and $ 324 and $ 159 of tax expenses recorded during
the years ended December, 31, 2015 and 2016 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, 2014
|
|
$
|
498
|
|
|
|
|
|
|
|
|
Decrease in tax positions taken in prior years
|
|
|
(156
|
)
|
|
|
|
|
|
|
|
Gross unrecognized tax benefits at December 31, 2014
|
|
|
342
|
|
|
|
|
|
|
|
|
Increase in tax positions taken in prior years
|
|
|
469
|
|
|
|
|
|
|
|
|
Decrease in tax positions taken in prior years
|
|
|
(145
|
)
|
|
|
|
|
|
|
|
Gross unrecognized tax benefits at December 31, 2015
|
|
|
666
|
|
|
|
|
|
|
|
|
Increase in tax positions taken in prior years
|
|
|
159
|
|
|
|
|
|
|
|
|
Decrease in tax positions taken in prior years
|
|
|
-
|
|
|
|
|
|
|
|
|
Gross unrecognized tax benefits at December 31, 2016
|
|
$
|
825
|
|
As of
December 31, 2016, the entire amount of unrecognized tax benefit could affect the Company’s income tax provision and the effective
tax rate.
|
|
a.
|
The Ordinary shares of the Company are listed on the NASDAQ Global Select Market in the United
States and are traded on the Tel-Aviv Stock Exchange in Israel.
|
|
|
b.
|
Issuance of ordinary shares:
|
On March
5, 2014, the Company issued in a secondary public offering 6,903,141 Ordinary shares at a price of $ 8.5 per share. Total
net proceeds from the issuance amounted to $ 54,726.
MAGIC SOFTWARE ENTERPRISES LTD.
AND ITS SUBSIDIARIES
|
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|
U.S. dollars in thousands (except share and per share data)
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, 2016, an aggregate of 1,000,000 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, 2016 and changes during the year ended December 31, 2016 are
as follows:
|
|
|
Number
of options
|
|
|
Weighted
average
exercise
price
|
|
|
Weighted
average
remaining
contractual
term
(in years)
|
|
|
Aggregate
intrinsic
value
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at January 1, 2016
|
|
|
493,917
|
|
|
$
|
4.47
|
|
|
|
5.99
|
|
|
$
|
523
|
|
|
Granted
|
|
|
-
|
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
(20,550
|
)
|
|
$
|
2.01
|
|
|
|
|
|
|
|
|
|
|
Forfeited
|
|
|
-
|
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at December 31, 2016
|
|
|
473,367
|
|
|
$
|
4.58
|
|
|
|
5.10
|
|
|
$
|
991
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable at December 31, 2016
|
|
|
342,742
|
|
|
$
|
3.80
|
|
|
|
4.36
|
|
|
$
|
983
|
|
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, 2016. 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, 2014, 2015 and 2016 was $
741, $ 210 and $ 112, respectively. As of December 31, 2016, there was $ 60 of unrecognized compensation cost related to non-vested
share-based compensation arrangements granted under the Plans. This cost is expected to be recognized over a period of approximately
three years.
MAGIC SOFTWARE ENTERPRISES LTD.
AND ITS SUBSIDIARIES
|
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|
U.S. dollars in thousands (except share and per share data)
The options
outstanding as of December 31, 2016, have been separated into ranges of exercise price categories, as follows:
|
Exercise price
|
|
Options
outstanding
|
|
|
Weighted
average
remaining
contractual life
(years)
|
|
|
Weighted
average
exercise price
|
|
|
Options
exercisable
|
|
|
Weighted
average
exercise price
of exercisable
options
|
|
|
In $
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
0-1
|
|
|
1,075
|
|
|
|
2.24
|
|
|
$
|
-
|
|
|
|
1,075
|
|
|
$
|
-
|
|
|
1.01-2
|
|
|
20,000
|
|
|
|
1.98
|
|
|
$
|
1.12
|
|
|
|
20,000
|
|
|
$
|
1.12
|
|
|
2.01-3
|
|
|
106,667
|
|
|
|
2.69
|
|
|
$
|
2.31
|
|
|
|
106,667
|
|
|
$
|
2.31
|
|
|
3.01-4
|
|
|
165,625
|
|
|
|
4.77
|
|
|
$
|
4.00
|
|
|
|
165,625
|
|
|
$
|
4.00
|
|
|
4.01-5
|
|
|
-
|
|
|
|
-
|
|
|
$
|
-
|
|
|
|
-
|
|
|
$
|
-
|
|
|
5.01-6
|
|
|
75,000
|
|
|
|
6.61
|
|
|
$
|
6.00
|
|
|
|
-
|
|
|
$
|
-
|
|
|
6.01-7
|
|
|
50,000
|
|
|
|
7.87
|
|
|
$
|
6.89
|
|
|
|
21,875
|
|
|
$
|
6.89
|
|
|
7.01-8
|
|
|
-
|
|
|
|
-
|
|
|
$
|
-
|
|
|
|
-
|
|
|
$
|
-
|
|
|
8.01-9
|
|
|
55,000
|
|
|
|
7.35
|
|
|
$
|
8.01
|
|
|
|
27,500
|
|
|
$
|
8.01
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
473,367
|
|
|
|
5.10
|
|
|
$
|
4.58
|
|
|
|
342,742
|
|
|
$
|
3.80
|
|
|
|
d.
|
Accumulated other comprehensive income (loss):
|
|
|
|
December 31,
|
|
|
|
|
2014
|
|
|
2015
|
|
|
2016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated realized and unrealized gain on available-for-sale securities, net
|
|
$
|
(121
|
)
|
|
$
|
35
|
|
|
$
|
40
|
|
|
Accumulated foreign currency translation adjustments
|
|
|
(5,243
|
)
|
|
|
(6,756
|
)
|
|
|
(7,494
|
)
|
|
Accumulated unrealized gain (loss) on derivative instruments, net
|
|
|
17
|
|
|
|
26
|
|
|
|
26
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other comprehensive income (loss)
|
|
$
|
(5,347
|
)
|
|
$
|
(6,695
|
)
|
|
$
|
(7,428
|
)
|
|
|
e.
|
On September 4, 2012, the Company’s Board of Directors adopted a dividend distribution policy, subject
to any applicable law. According to this policy, each year the Company will distribute a dividend of up to 50% of its annual distributable
profits. It is possible that the Board of Directors will decide, subject to the conditions stated above, to declare additional
dividend distributions. The Company’s Board of Directors may at its discretion and at any time, change, the rate of dividend distributions
and/or not to distribute a dividend, whether as a result of a one-time decision or a change in policy, all at its discretion.
|
MAGIC SOFTWARE ENTERPRISES LTD.
AND ITS SUBSIDIARIES
|
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|
U.S. dollars in thousands (except share and per share data)
In respect
to the policy mentioned above, from September 10, 2012 through August 12, 2013 the Company declared accumulated cash dividend distributions
of $ 0.31 per share ($ 11,448 in the aggregate). On February 18, 2014, the Company declared a dividend distribution of $ 0.12
per share ($ 4,468 in the aggregate). On August 19, 2014 the Company declared a dividend distribution of $ 0.095 per share
($ 4,195 in the aggregate) which was paid on September 4, 2014. On February 5, 2015, the Company 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, the Company 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, the Company 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, the Company declared a dividend distribution of $ 0.085 per share ($ 3,770 in the aggregate)
which was paid on September 22, 2016. Subsequent to the balance sheet date, on February 22, 2017, the Company declared a dividend
distribution of $ 0.085 per share ($ 3,774 in the aggregate, see also Note 20).
|
|
f.
|
On November 2014, a subsidiary of the Company granted to one of its executive officers, options exercisable
for 1,167 Ordinary shares in the subsidiary that are exercisable if the subsidiary meets certain operational financial results.
The exercise price of the options was NIS 1 per share. Total fair value of the grant was calculated based on the subsidiary’s
fair value on the grant date and totaled NIS 5,910 thousand (NIS 5 thousand per share). On October 2015, the options were
exercised and 1,167 Ordinary shares of the subsidiary were issued.
|
|
|
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 $574, $1,638 and $3,950, in aggregate for the years
ended December 31, 2014, 2015 and 2016, respectively and acquired services and hardware amounting to approximately $245, $231 and
$102 for the years ended December 31, 2014, 2015 and 2016, respectively.
|
|
|
|
As of December 31, 2016, the Company had trade payables balances due to its related parties in amount
of approximately $107. In addition, as of December 31, 2016, the Company had trade and other receivables balances due from its
related parties in amount of approximately $1,909.
|
MAGIC SOFTWARE ENTERPRISES LTD.
AND ITS SUBSIDIARIES
|
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|
U.S. dollars in thousands (except share and per share data)
|
|
NOTE 16:-
|
SELECTED STATEMENTS OF INCOME DATA
|
|
|
a.
|
Research and development costs, net:
|
|
|
|
Year ended December 31,
|
|
|
|
|
2014
|
|
|
2015
|
|
|
2016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total costs
|
|
$
|
9,017
|
|
|
$
|
8,735
|
|
|
$
|
10,063
|
|
|
Less - capitalized software costs
|
|
|
(4,267
|
)
|
|
|
(3,847
|
)
|
|
|
(4,224
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Research and development, net
|
|
$
|
4,750
|
|
|
$
|
4,888
|
|
|
$
|
5,839
|
|
|
|
b.
|
Financial income (expenses), net:
|
|
Bank charges offset by interest from
short term deposits
|
|
$
|
(156
|
)
|
|
$
|
64
|
|
|
$
|
(199
|
)
|
|
Interest expenses related to liabilities in
connection with acquisitions
|
|
|
(152
|
)
|
|
|
-
|
|
|
|
(257
|
)
|
|
Interest income from marketable securities, net of
amortization of premium on marketable securities
|
|
|
91
|
|
|
|
231
|
|
|
|
240
|
|
|
Loss arising from foreign
currency translation and other
|
|
|
(1,569
|
)
|
|
|
(980
|
)
|
|
|
(214
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financial income(expenses), net
|
|
$
|
(1,786
|
)
|
|
$
|
(685
|
)
|
|
$
|
(430
|
)
|
|
|
NOTE 17:-
|
COMMITMENTS AND CONTINGENCIES
|
Certain
of the motor vehicles, facilities and equipment of the Company and its subsidiaries are rented under long-term operating lease
agreements. Future minimum lease commitments under non-cancelable operating leases as of December 31, 2016, are as follows:
|
2017
|
|
$
|
2,133
|
|
|
2018
|
|
|
1,179
|
|
|
2019
|
|
|
639
|
|
|
2020 and thereafter
|
|
|
323
|
|
|
|
|
|
|
|
|
|
|
$
|
4,274
|
|
Rent expenses
for the years ended December 31, 2014, 2015 and 2016 were approximately $ 1,736, $ 2,045 and $ 2,204, respectively.
The Company
leases motor vehicles under a cancelable lease agreement. The Company has an option to be released from this lease agreement, which
may result in penalties of up to $ 74.
MAGIC SOFTWARE ENTERPRISES LTD.
AND ITS SUBSIDIARIES
|
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|
U.S. dollars in thousands (except share and per share data)
|
|
NOTE 17:-
|
COMMITMENTS AND CONTINGENCIES (Cont.)
|
The Company
and its subsidiaries currently occupy approximately 160,760 square feet of space based on a lease agreements as of December 31,
2016. The Group has diverse liability for the lease agreements varying from six months to five years.
As of
December 31, 2016, the aggregated amount of lease commitment in all locations mentioned above is approximately $ 3,920.
|
|
b.
|
Guarantees and Collaterals:
|
As of December 31, 2016, the
Company has provided performance bank guarantees in the amount of $586 as security for the performance of various contracts with
customers. As of December 31, 2016, the Company has restricted bank deposits of $ 261 in favor of the issuing banks.
As of
December 31, 2016, the Company has restricted bank deposits of $ 255 in favor of various contracts with customers.
|
|
c.
|
From time to time, the Company
and/or its subsidiaries are subject to legal, administrative and regulatory proceedings,
claims, demands and investigations in the ordinary course of business, including claims
with respect to intellectual property, contracts, employment and other matters. The Company
accrues a liability when it is both probable that a liability has been incurred and the
amount of the loss can be reasonably estimated. Significant judgment is required in both
the determination of probability and the determination as to whether a loss is reasonably
estimable. These accruals are reviewed and adjusted to reflect the impact of negotiations,
settlements, rulings, advice of legal counsel and other information and events pertaining
to a particular matter.
|
Lawsuits
have been brought against the Company in the ordinary course of business. The Company intends to defend itself vigorously against
those lawsuits.
|
|
d.
|
In August 2009, an Israeli
software company and one of its owners initiated an arbitration proceeding against the Company and one of its subsidiaries, claiming
an alleged breach of a non-disclosure agreement between the parties (the “First Arbitration”). The software company
sought damages in the amount of approximately NIS 52 million (approximately $13.4 million). The arbitrator rendered his decision
in January 2015 and determined the damages that the Company should pay the plaintiffs an amount of $2.3 million. Our financial
results of operations of 2014 included a net impact of $1.6 million resulting from the arbitration expenses.
|
MAGIC SOFTWARE ENTERPRISES LTD.
AND ITS SUBSIDIARIES
|
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
|
U.S. dollars in thousands (except share and per share data)
|
|
NOTE 17:-
|
COMMITMENTS
AND CONTINGENCIES (Cont.)
|
In September 2016, the same software company filed a lawsuit for the sum of NIS 34,106,000 against the Company and one of its subsidiaries, in the context of the First Arbitration. In the lawsuit, the software company claims that warning letters that the Company has sent to its clients in Israel and abroad, warning the 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”) may have caused it irreparable damages resulting from the loss profit of potential business transactions. The lawsuit is based on the decision given in the First Arbitration, in which it was decided that the Warning Letters constituted a breach of a non-disclosure agreement signed between the parties and awarded certain damages to the software company.
The software company claims that the First Arbitration awarded it damages for only the years 2009 and 2010, and they are allowed to sue for damages relating to the years 2011 through 2016 in separate proceedings. On January 23, 2017, the Company filed its statement of defense, maintaining, on various grounds, that the new lawsuit must be dismissed. The plaintiffs filed their response on April 2, 2017. In view of the nature of the claims, both factual and legal, that were raised in the proceedings, the likelihood of an expert-based ruling and given the preliminary stage of the proceeding, it is impossible at this stage to properly evaluate the prospect of the lawsuit being successful.
In
addition to the above mentioned legal proceedings, the Company is also involved in various legal proceedings arising in the normal
course of its business. Based upon the advice of counsel, the Company does not believe that the ultimate resolution of these matters
will have a material adverse effect on the Company’s consolidated financial position, results of operations or cash flows.
|
|
NOTE 18:-
|
NET EARNINGS
PER SHARE
|
The following
table sets forth the computation of basic and diluted net earnings per share:
|
|
|
Year ended December 31,
|
|
|
|
|
2014
|
|
|
2015
|
|
|
2016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Numerator for basic and diluted earnings per share - net income available to Magic shareholders
|
|
$
|
15,520
|
|
|
$
|
16,198
|
|
|
$
|
11,907
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average Ordinary shares outstanding:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator for basic net earnings per share
|
|
|
43,287,523
|
|
|
|
44,247,556
|
|
|
|
44,347,083
|
|
|
Effect of dilutive securities
|
|
|
17,291
|
|
|
|
204,510
|
|
|
|
168,953
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator for diluted net earnings per share
|
|
|
43,304,814
|
|
|
|
44,452,066
|
|
|
|
44,516,036
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic earnings per share
|
|
$
|
0.36
|
|
|
$
|
0.37
|
|
|
$
|
0.27
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted earnings per share
|
|
$
|
0.36
|
|
|
$
|
0.36
|
|
|
$
|
0.27
|
|
MAGIC SOFTWARE ENTERPRISES LTD.
AND ITS SUBSIDIARIES
|
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|
U.S. dollars in thousands (except share and per share data)
|
|
NOTE 19:-
|
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:
|
|
|
|
Software
services
|
|
|
IT
professional
services
|
|
|
Unallocated
expense
|
|
|
Total
|
|
|
2014
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
$
|
69,861
|
|
|
$
|
94,443
|
|
|
$
|
-
|
|
|
$
|
164,304
|
|
|
Expenses
|
|
|
54,464
|
|
|
|
84,873
|
|
|
|
4,241
|
|
|
|
143,578
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment operating income (loss)
|
|
$
|
15,397
|
|
|
$
|
9,570
|
|
|
$
|
(4,241
|
)
|
|
$
|
20,726
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
$
|
6,065
|
|
|
$
|
2,263
|
|
|
$
|
266
|
|
|
$
|
8,594
|
|
MAGIC SOFTWARE ENTERPRISES LTD.
AND ITS SUBSIDIARIES
|
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|
U.S. dollars in thousands (except share and per share data)
|
|
NOTE 19:-
|
SEGMENT GEOGRAPHICAL INFORMATION AND MAJOR CUSTOMERS (Cont.)
|
|
|
|
Software
services
|
|
|
IT
professional
services
|
|
|
Unallocated
expense
|
|
|
Total
|
|
|
2015
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
$
|
67,271
|
|
|
$
|
108,759
|
|
|
$
|
-
|
|
|
$
|
176,030
|
|
|
Expenses
|
|
|
52,963
|
|
|
|
98,384
|
|
|
|
3,249
|
|
|
|
154,596
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment operating income (loss)
|
|
$
|
14,308
|
|
|
$
|
10,375
|
|
|
$
|
(3,249
|
)
|
|
$
|
21,434
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
$
|
6,562
|
|
|
$
|
3,042
|
|
|
$
|
281
|
|
|
$
|
9,885
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
$
|
70,834
|
|
|
$
|
130,812
|
|
|
$
|
-
|
|
|
$
|
201,646
|
|
|
Expenses
|
|
|
58,847
|
|
|
|
118,414
|
|
|
|
3,298
|
|
|
|
180,559
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment operating income (loss)
|
|
$
|
11,987
|
|
|
$
|
12,398
|
|
|
$
|
(3,298
|
)
|
|
$
|
21,087
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
$
|
7,531
|
|
|
$
|
3,769
|
|
|
$
|
308
|
|
|
$
|
11,608
|
|
|
|
c.
|
The Company’s business is divided into the following geographic areas: Israel, Europe, United States,
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, 2014, 2015 and
2016:
|
|
|
Year ended December 31,
|
|
|
|
|
2014
|
|
|
2015
|
|
|
2016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Israel
|
|
$
|
29,198
|
|
|
$
|
36,401
|
|
|
$
|
58,079
|
|
|
Europe
|
|
|
37,409
|
|
|
|
29,084
|
|
|
|
23,642
|
|
|
United States
|
|
|
82,470
|
|
|
|
92,577
|
|
|
|
100,470
|
|
|
Japan
|
|
|
11,299
|
|
|
|
10,092
|
|
|
|
11,226
|
|
|
Other
|
|
|
3,928
|
|
|
|
7,876
|
|
|
|
8,229
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
164,304
|
|
|
$
|
176,030
|
|
|
$
|
201,646
|
|
MAGIC SOFTWARE ENTERPRISES LTD.
AND ITS SUBSIDIARIES
|
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|
U.S. dollars in thousands (except share and per share data)
|
|
NOTE 19:-
|
SEGMENT GEOGRAPHICAL INFORMATION AND MAJOR CUSTOMERS (Cont.)
|
|
|
d.
|
The Company’s long-lived assets are located as follows:
|
|
|
|
December 31,
|
|
|
|
|
2015
|
|
|
2016
|
|
|
|
|
|
|
|
|
|
|
Israel
|
|
$
|
59,770
|
|
|
$
|
110,213
|
|
|
Europe
|
|
|
1,402
|
|
|
|
1,302
|
|
|
United States
|
|
|
29,990
|
|
|
|
30,777
|
|
|
Japan
|
|
|
4,765
|
|
|
|
4,887
|
|
|
Other
|
|
|
3,253
|
|
|
|
3,068
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
99,180
|
|
|
$
|
150,247
|
|
|
|
e.
|
The Company does not allocate its assets to its reportable segments; accordingly, asset information
by reportable segments is not presented.
|
|
|
f.
|
In 2014, 2015 and 2016, the Company had one major customer, included in the IT professional services segment,
which accounted for 3%, 11% and 9% of the group revenues, respectively.
|
|
|
NOTE 20:-
|
SUBSEQUENT EVENTS
|
|
|
a.
|
On February 22, 2017, the Company declared a dividend distribution of $ 0.085 per share ($
3,774 in the aggregate) which was paid on April 5, 2017. The dividend distribution relates to the Company’s earnings in the second
half of 2016. In determining the dividend amount, the company’s Board of Directors determined to exclude the impact of the
increase recorded in contingent consideration related to acquisitions and an increase in the value of put options related to redeemable
non-controlling interests in the amount of $ 3,090, both non-cash items.
|
MAGIC SOFTWARE ENTERPRISES LTD.
AND ITS SUBSIDIARIES
|
APPENDIX TO CONSOLIDATED FINANCIAL STATEMENTS
|