(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; as well as (iii) 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, cloud computing for deployment of highly available and
massively-scalable applications and API’s 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
(“Leap”); (ii) enterprise management systems for both hubs and traditional air cargo ground handling
operations from physical handling and cargo documentation through customs, seamless electronic data interchange, or EDI
communications, dangerous goods, special handling, track and trace, security to billing (“Hermes”); (iii)
enterprise human capital management, or HCM, solutions, to facilitate the collection, analysis and interpretation of quality
data about people, their jobs and their performance, to enhance HCM decision making (“HR Pulse”); (iv)
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 2,000 employees and operate through a network of over
3,000 independent software vendors, or ISVs, who we refer to as Magic Software Providers, or MSPs, and hundreds of system integrators,
distributors, resellers, and consulting and OEM partners. Thousands of enterprises in approximately 50 countries use our products
and services.
Our application development and business
process integration platforms consist of:
These software solutions
enable our customers to improve their business performance and return on investment by supporting cost-effective and rapid delivery
integration of business applications, systems and databases. Using our products, 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, AppBuilder, Magic xpi and Magic xpc 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.
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.
PART I
|
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
summarizes certain selected consolidated financial data for the periods and as of the dates indicated. The selected consolidated
financial data set forth below should be read in conjunction with and are qualified entirely by reference to Item 5. “Operating
and Financial Review and Prospects” and our consolidated financial statements and notes thereto included elsewhere in this
annual report.
We derived the following
consolidated statement of income data for the years ended December 31, 2016, 2017 and 2018 and the consolidated balance sheet
data as of December 31, 2017 and 2018 from our audited consolidated financial statements included elsewhere in this annual report.
The selected consolidated statement of income data for the year ended December 31, 2014 and 2015 and the consolidated balance
sheet data as of December 31, 2014, 2015 and 2016 are derived from our audited consolidated financial statements not included
in this annual report. Our historical consolidated financial statements are prepared in accordance with U.S. generally accepted
accounting principles, or U.S. GAAP, and presented in U.S. dollars.
Statement of Income Data:
|
|
Year ended December 31,
|
|
|
|
2014
|
|
|
2015
|
|
|
2016
|
|
|
2017
|
|
|
2018
|
|
|
|
(
U.S. dollars in thousands, except per share data)
|
|
Revenues:
|
|
|
|
Software
|
|
$
|
25,351
|
|
|
$
|
21,598
|
|
|
$
|
19,626
|
|
|
$
|
21,644
|
|
|
$
|
25,454
|
|
Maintenance and technical support
|
|
|
22,780
|
|
|
|
22,908
|
|
|
|
25,885
|
|
|
|
30,386
|
|
|
|
30,951
|
|
Consulting services
|
|
|
116,173
|
|
|
|
131,524
|
|
|
|
156,135
|
|
|
|
206,110
|
|
|
|
227,970
|
|
Total revenues
|
|
|
164,304
|
|
|
|
176,030
|
|
|
|
201,646
|
|
|
$
|
258,140
|
|
|
$
|
284,375
|
|
Cost of revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Software
|
|
|
7,646
|
|
|
|
7,836
|
|
|
|
8,674
|
|
|
|
9,564
|
|
|
|
9,960
|
|
Maintenance and technical support
|
|
|
2,921
|
|
|
|
2,466
|
|
|
|
2,952
|
|
|
|
3,888
|
|
|
|
4,120
|
|
Consulting services
|
|
|
89,160
|
|
|
|
102,919
|
|
|
|
121,756
|
|
|
|
161,709
|
|
|
|
181,477
|
|
Total cost of revenues
|
|
|
99,727
|
|
|
|
113,221
|
|
|
|
133,382
|
|
|
|
175,161
|
|
|
|
195,557
|
|
Gross profit
|
|
|
64,577
|
|
|
|
62,809
|
|
|
|
68,264
|
|
|
|
82,979
|
|
|
|
88,818
|
|
Operating costs and expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Research and development, net
|
|
|
4,750
|
|
|
|
4,888
|
|
|
|
5,839
|
|
|
|
6,942
|
|
|
|
5,696
|
|
Selling and marketing
|
|
|
24,580
|
|
|
|
23,062
|
|
|
|
23,776
|
|
|
|
27,244
|
|
|
|
27,197
|
|
General and administrative
|
|
|
14,521
|
|
|
|
13,425
|
|
|
|
17,562
|
|
|
|
22,837
|
|
|
|
24,227
|
|
Operating income
|
|
|
20,726
|
|
|
|
21,434
|
|
|
|
21,087
|
|
|
|
25,956
|
|
|
|
31,698
|
|
Financial income (expense), net
|
|
|
(1,786
|
)
|
|
|
(685
|
)
|
|
|
(430
|
)
|
|
|
(1,711
|
)
|
|
|
(149
|
)
|
Other income (expense), net
|
|
|
(67
|
)
|
|
|
8
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Income before taxes on income
|
|
|
18,873
|
|
|
|
20,757
|
|
|
|
20,657
|
|
|
|
24,245
|
|
|
|
31,847
|
|
Taxes on income
|
|
|
(2,307
|
)
|
|
|
(3,681
|
)
|
|
|
(3,949
|
)
|
|
|
(6,331
|
)
|
|
|
(7,071
|
)
|
Net income
|
|
$
|
25,351
|
|
|
$
|
17,076
|
|
|
$
|
16,708
|
|
|
$
|
17,914
|
|
|
$
|
24,776
|
|
Change in redeemable non-controlling interests
|
|
|
425
|
|
|
|
639
|
|
|
|
2,258
|
|
|
|
1,536
|
|
|
|
3,383
|
|
Net income attributable to non-controlling interests
|
|
|
621
|
|
|
|
239
|
|
|
|
281
|
|
|
|
936
|
|
|
|
1,510
|
|
Net income attributable to Magic’s Shareholders
|
|
|
15,520
|
|
|
|
16,198
|
|
|
|
14,169
|
|
|
|
15,442
|
|
|
|
19,883
|
|
Basic earnings per share
(1)
|
|
$
|
0.36
|
|
|
$
|
0.37
|
|
|
$
|
0.27
|
|
|
$
|
0.35
|
|
|
$
|
0.39
|
|
Diluted earnings per share
|
|
$
|
0.36
|
|
|
$
|
0.36
|
|
|
$
|
0.27
|
|
|
$
|
0.35
|
|
|
$
|
0.39
|
|
Shares used to compute basic earnings per share
(2) (3)
|
|
|
44,172
|
|
|
|
44,248
|
|
|
|
44,347
|
|
|
|
44,436
|
|
|
|
46,665
|
|
Shares used to compute diluted earnings per share
|
|
|
43,305
|
|
|
|
44,452
|
|
|
|
44,516
|
|
|
|
44,597
|
|
|
|
46,797
|
|
Dividends
|
|
|
8,681
|
|
|
|
7,788
|
|
|
|
7,761
|
|
|
|
9,554
|
|
|
|
13,348
|
|
Cash dividend declared per ordinary share
(1)
|
|
$
|
0.22
|
|
|
$
|
0.18
|
|
|
$
|
0.18
|
|
|
$
|
0.22
|
|
|
$
|
0.29
|
|
Balance Sheet Data:
|
|
December 31,
|
|
|
|
2014
|
|
|
2015
|
|
|
2016
|
|
|
2017
|
|
|
2018
|
|
|
|
(U.S. dollars in thousands)
|
|
Working capital
|
|
$
|
103,049
|
|
|
$
|
106,945
|
|
|
$
|
113,668
|
|
|
$
|
122,403
|
|
|
$
|
158,301
|
|
Cash, cash equivalents, short term deposits and marketable securities
|
|
|
84,430
|
|
|
|
76,684
|
|
|
|
87,822
|
|
|
|
90,946
|
|
|
|
113,920
|
|
Total assets
|
|
|
224,184
|
|
|
|
239,846
|
|
|
|
316,399
|
|
|
|
342,539
|
|
|
|
362,326
|
|
Total equity
|
|
|
187,724
|
|
|
|
193,106
|
|
|
|
196,641
|
|
|
|
213,563
|
|
|
|
248,369
|
|
|
(1)
|
From September 10, 2012
through September 3, 2013 we declared and paid accumulated cash dividend distributions of $0.31 per share ($11,448 in the aggregate).
On February 18, 2014, we declared a dividend distribution of $0.12 per share ($ 4,468 in the aggregate) which was paid on March
14, 2014. On August 19, 2014 we 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, we declared a dividend distribution of $0.081 per share ($3,582 in the aggregate) which
was paid on March 11, 2015. On August 12, 2015, we declared a dividend distribution of $0.095 per share ($ 4,204 in the aggregate)
which was paid on September 10, 2015. On February 21, 2016, we declared a dividend distribution of $0.09 per share ($3,991 in
the aggregate) which was paid on March 17, 2016. On August 14, 2016, we declared a dividend distribution of $0.085 per share ($3,770
in the aggregate) which was paid on September 22, 2016. On February 22, 2017, we declared a dividend distribution of $0.085 per
share ($3,774 in the aggregate) which was paid on April 5, 2017. On August 13, 2017, we declared a dividend distribution of $0.13
per share ($5,779 in the aggregate) which was paid on September 13, 2017. On February 28, 2018, we declared a dividend distribution
of $0.13 per share ($5,784 in the aggregate) which was paid on March 26, 2018. On August 8, 2018, we declared a dividend distribution
of $0.155 per share ($7,600 in the aggregate) which was paid on September 5, 2018. Subsequent to the balance sheet date, on March
4, 2019, we declared a dividend distribution of $0.15 per share ($7,300 in the aggregate) which was paid on March 25, 2019.
|
|
(2)
|
On March 5, 2014, we
completed a follow-on public offering of 6,900,000 of our Ordinary Shares including 900,000 Ordinary Shares sold pursuant to the
underwriters’ full exercise of their over-allotment option at a price to the public of $8.50 per share pursuant to an underwriting
agreement with Barclays Capital Inc. and William Blair & Company, L.L.C, as representative of certain underwriters.
|
|
(3)
|
On July 12, 2018, we
completed a private placement of 3,150,559 of our Ordinary Shares to several leading Israeli institutional investors and 1,117,734
Ordinary Shares to our principal shareholder, Formula Systems (1985) Ltd., under the same terms based on a price of $8.20 per
share.
|
Dividend Policy
Our
Board of Directors’ dividend policy was amended on August 9, 2017 to distribute dividends of up to 75% of our annual distributable
profits each year (previously 50% of our annual distributable profits), subject to any applicable law. We have paid dividends
since 2012. Our Board of Directors may in its discretion and at any time, whether as a result of a one-time decision or a change
in policy, change the rate of dividend distributions or decide not to distribute a dividend.
|
B.
|
Capitalization and Indebtedness
|
Not applicable.
|
C.
|
Reasons for the Offer
and Use of Proceeds
|
Not applicable.
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 and integration platforms and vertical software solutions and from related professional
services, software maintenance and technical support as well as from other IT professional services, which include IT consulting
and outsourcing services. Our future growth depends heavily on our ability to effectively develop and sell new products developed
by us or acquired from third parties as well as add new features to existing products and new software service offerings. A decrease
in revenues from our principal products and services would adversely affect our business, results of operations and financial
condition.
Our future success depends
in part on the continued acceptance of our application platforms and integration products primarily under our Magic xpa, Magic
xpi, AppBuilder and Magic xpc brands and our vertical packaged software solutions, primarily Clicks, Leap™, the Hermes solution
and HR Pulse. The continued acceptance of these platforms and software solutions will be dependent in part on the continued acceptance
and growth of the cloud market, including rich internet applications, or RIAs, mobile and software as a service, or SaaS, for
which certain of them are particularly useful and advantageous. We will need to continue to enhance our products to meet evolving
requirements and if new versions of such products are not accepted, our business, results of operations and financial condition
may be adversely affected.
Rapid technological
changes may adversely affect the market acceptance of our products and services, and our business, results of operations and financial
condition could be adversely affected.
We compete in a market
that is characterized by rapid technological changes. Other companies are also seeking to offer 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.
If our customers
terminate contracted projects or choose not to retain us for additional projects, our revenues and profitability may be negatively
affected.
Our IT professional
services customers typically retain us on a non-exclusive basis. Many of our customer contracts, including those that are on a
fixed price and timeframe basis, can be terminated by the customer with or without cause upon 90 days’ notice or less, and
generally without termination-related penalties. Additionally, our contracts with customers are typically limited to discrete
projects without any commitment to a specific volume of business or future work and may involve multiple stages. Furthermore,
the increased breadth of our service offerings may result in larger and more complex projects for our customers that require us
to devote resources to more thoroughly understand their operations. Despite these efforts, our customers may choose not to retain
us for additional stages or may cancel or delay planned or existing engagements due to any number of factors, including:
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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 affect our revenues and profitability.
We enter from
time to time into fixed-price contracts that could subject us to losses in the event we fail to properly estimate our
costs.
We enter from time to
time into number of firm fixed-price contracts. If our initial cost estimates are incorrect, it may cause losses on
these contracts. Because many of these contracts involve new technologies and applications, unforeseen events, such as technological
difficulties and other cost overruns, can result in the contract pricing becoming less favorable or even unprofitable to us and
have an adverse impact on our financial results.
If we fail to
meet our customers’ performance expectations, our reputation may be harmed, causing us to lose customers or exposing us
to legal liability.
Our ability to attract
and retain customers depends to a large extent on our relationships with our customers and our reputation for high quality solutions,
professional services and integrity. As a result, if a customer is not satisfied with our services or solutions, including those
of subcontractors we engage, our reputation may be damaged. Our failure to meet these goals or a customer’s expectations
may result in a less profitable or an unprofitable engagement. Moreover, if we fail to meet our customers’ expectations,
we may lose customers and be subject to legal liability, particularly if such failure adversely affects our customers’ businesses.
In addition, a portion
of our projects may be considered critical to the operations of our customers’ businesses. Our exposure to legal liability
may be increased in the case of contracts in which we become more involved in our customers’ operations. While we typically
strive to include provisions designed to limit our exposure to legal claims relating to our services and the solutions we develop,
these provisions may not adequately protect us or may not be enforceable in all cases. The general liability insurance coverage
that we maintain, including coverage for errors and omissions, is subject to important exclusions and limitations. We cannot be
certain that this coverage will continue to be available on reasonable terms or will be available in sufficient amounts to cover
one or more large claims, or that the insurer will not disclaim coverage as to any future claim. A successful assertion of one
or more large claims against us that exceeds our available insurance coverage or changes in our insurance policies, including
premium increases or the imposition of large deductible or co-insurance requirements, could adversely affect our profitability.
If our 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 continue to increase in the
future with respect to our technology, applications and professional services that we currently offer and applications, and with
respect to our services that we and other vendors are developing. Increased competition, direct and indirect, could adversely
affect our business, financial condition and results of operations.
As we also compete with
other companies in the technical IT consulting and outsourcing services industry, this industry is highly competitive and fragmented
and has low entry barriers. We compete for potential customers with providers of outsourcing services, systems integrators, computer
systems consultants, other providers of technical IT consulting services and, to a lesser extent, temporary personnel agencies.
We expect competition to increase, and we may not be able to remain competitive.
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.
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.
The
global and domestic economies continue to face a number of economic challenges
, including threatened sovereign defaults,
credit downgrades, restricted credit for businesses and consumers and potentially falling demand for a variety of products and
services. These developments, or the perception that any of them could occur, could result in longer sales cycles, slower adoption
of new technologies and increased price competition for our products and services. We could also be exposed to credit risk and
payment delinquencies on our accounts receivable, which are not covered by collateral.
We are exposed
to economic and market conditions that impact the communications industry.
We
provide packaged software and software services to service providers in the telecom industry, and our business may therefore be
highly dependent upon conditions in that industry. Developments in the telecom industry, such as the impact of global economic
conditions, industry consolidation, emergence of new competitors, commoditization of voice, video and data services and changes
in the regulatory environment, at times have had, and could continue to have, a material adverse effect on our existing or potential
customers. In the past, these conditions reduced the high growth rates that the communications industry had previously experienced
and caused the market value, financial results and prospects and capital spending levels of many telecom companies to decline
or degrade. Industry consolidation involving our customers may place us at risk of losing business to the incumbent provider to
one of the parties to the consolidation or to new competitors. During previous economic downturns, the telecom industry experienced
significant financial pressures that caused many in the industry to cut expenses and limit investment in capital intensive projects
and, in some cases, led to restructurings and bankruptcies. Continuing uncertainty as to economic recovery in recent years may
have adverse consequences for our customers and our business.
Downturns
in the business climate for telecom companies have previously resulted in slower customer buying decisions and price pressures
that adversely affected our ability to generate revenue. Adverse market conditions may have a negative impact on our business
by decreasing our new customer engagements and the size of initial spending commitments under those engagements, as well as decreasing
the level of discretionary spending by existing customers. In addition, a slowdown in buying decisions may extend our sales cycle
period and may limit our ability to forecast our flow of new contracts. If such adverse business conditions arise in the future,
our business may be harmed.
As some of our
revenues are derived from the Israeli government sector, a reduction of government spending in Israel on IT services may reduce
our revenues and profitability; and any delay in the annual budget approval process may negatively impact our cash flows.
We perform work for
a wide range of Israeli governmental agencies and related subcontractors. Any reduction in total Israeli government spending for
political or economic reasons 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.
We may encounter
difficulties in realizing the potential financial or strategic benefits of recent business acquisitions. We expect to make additional
acquisitions in the future that could disrupt our operations and harm our operating results.
A significant part of
our business strategy is to pursue acquisitions and other initiatives based on strategy centered on three key factors: growing
our customer base, expanding geographically and adding complementary solutions to our portfolio— all while we seek to ensure
our continued high quality of services and product delivery. In the past five years we made numerous acquisitions, including:
(i) in 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; (ii) 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; (iii) 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; (iv) 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; (v) 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; (vi) in 2015, Comblack IT Ltd, an Israeli-based company specializing in software
professional services and outsource services for mainframes and complex large-scale environments; (vii) 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; (viii) in 2016, Roshtov Software Industries Ltd, an Israeli-based software
company that is a local Israeli market leader in patient medical record information systems; (ix) in 2016, Shavit Software (2009)
Ltd., an Israeli-based company specializing in software professional and outsource services; and (x) in late December 2017, Futurewave
Systems, Inc., a U.S.-based full-service provider of consulting and outsourcing solutions for IT personnel.
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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The increasing
amount of intangible assets and goodwill recorded on our balance sheet may lead to significant impairment charges in the future.
The amount of goodwill
and identifiable intangible assets on our consolidated balance sheet has increased significantly from $86.5 million as of December
31, 2013 to approximately $136.5 million as of December 31, 2018 because of our acquisitions, and may increase further following
future acquisitions. We regularly review our long-lived assets, including identifiable intangible assets and goodwill, for impairment.
Goodwill and indefinite life intangible assets are subject to impairment review at least annually. Other long-lived assets are
reviewed when there is an indication that impairment may have occurred. Impairment testing under U.S. GAAP, subject to downturns
in our operating results and financial condition, may lead to impairment charges in the future. Any significant impairment charges
could have a material adverse effect on our results of operations.
If we fail to
manage our growth, our business could be disrupted and our profitability will likely decline.
We have experienced
rapid growth during recent years, through both acquisitions and organically. The number of our employees over the last five years
increased from 1,300 as of December 31, 2013 to approximately 2,226 as of December 31, 2018 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.
If we fail to
attract and retain highly skilled IT professionals, we may not have the necessary resources to properly staff projects and competition
for such professionals may adversely affect our business, results of operations and financial condition.
Our success depends
largely on the contributions of our employees and our ability to attract and retain qualified personnel, including technology,
consulting, engineering, marketing and management professionals and upon our ability to attract and retain qualified computer
professionals to serve as temporary IT personnel. Competition for the limited number of qualified professionals with a working
knowledge of certain sophisticated computer languages is intense. We compete for technical personnel with other providers
of technical IT consulting and outsourcing services, systems integrators, providers of outsourcing services, computer systems
consultants, customers and, to a lesser extent, temporary personnel agencies, and competition may be amplified by evolving restrictions
on immigration, travel, or availability of visas for skilled technology workers. A shortage of, and significant competition for
software professionals with the skills and experience necessary to perform the required services, may require us to forego projects
for lack of resources and may adversely affect our business, results of operations and financial condition. In addition, our ability
to maintain and renew existing engagements and obtain new business for our contract IT professional services operations depends,
in large part, on our ability to hire and retain technical personnel with the IT skills that keep pace with continuing changes
in software evolution, industry standards and technologies, and customer preferences. Demand for qualified professionals conversant
with certain technologies may exceed supply as new and additional skills are required to keep pace with evolving computer technology
or as competition for technical personnel increases. Increasing demand for qualified personnel could also result in increased
expenses to hire and retain qualified technical personnel and could adversely affect our profit margins
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 eighteen months, we usually do not have a backlog of orders
for our products. Consequently, revenues from our products in any quarter depend on orders received and products provided by us
and accepted by the customers in that quarter. A deferral in the placement and acceptance of any large order from one quarter
to another or from one year to another could adversely affect our results of operations for the respective quarter or year. Our
customers sometimes require an acceptance test for services and packaged software solutions projects we provide and as a result,
we may have a significant backlog of orders arising from those services and projects. Our revenues from services depend on orders
received and services provided by us and accepted by our customers in that quarter. If sales in any quarter or year do not increase
correspondingly or if we do not reduce our expenses in response to level or declining revenues in a timely fashion, our financial
results for that period may be adversely affected. For these reasons, quarter-to-quarter comparisons of our results of operations
are not necessarily meaningful and you should not rely on the results of our operations in any particular quarter as an indication
of future performance.
The majority of
revenues of two of our principal IT professional services subsidiaries and of our 2016 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 existing customers. Our five largest customers accounted for, in the aggregate, 27% of our revenues in
each of the years ended December 31, 2017 and 2018, 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. Under
their master services agreements, all five customers may terminate their agreements with us upon only a 30-day notice without
any penalty.
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 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 that could adversely affect our business, results of operations and financial
condition.
While our principal
executive offices are located in Israel, 71%, 64% and 63% of our sales in the years ended December 31, 2016, 2017 and 2018, 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. For example,
our operations in India may be adversely affected by future political and other events
in the region;
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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, largely, on our ability to anticipate and effectively manage these and other risks
associated with our international operations. Any of these risks could harm our international operations and reduce our international
sales, adversely affecting our business, results of operations, financial condition and growth prospects.
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, 2016, 2017 and 2018, approximately
50%, 52% and 52% of our revenues, respectively, were derived from sales outside the United States, particularly, Israel, Europe,
Japan and Asia-Pacific, 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 because of such events, even for a limited period, may result in significant expenses or loss of market share to
other competitors for our application platforms as well as in the process and business integration technologies and IT services
market. In addition, a failure to protect the privacy of customer and employee confidential data against breaches of network or
IT security could result in damage to our reputation. To date, we have not been subject to cyber-attacks or other cyber incidents,
which, individually or in the aggregate, resulted in a material impact to our operations or financial condition.
Maintaining the security
of our products, computers and networks is a critical issue for our customers and us. Security researchers, criminal hackers and
other third parties regularly develop new techniques to penetrate computer and network security measures. In addition, hackers
also develop and deploy viruses, worms and other malicious software programs, some of which may be specifically designed to attack
our products, systems, computers or networks. Additionally, outside parties may attempt to fraudulently induce our employees or
users of our products to disclose sensitive information in order to gain access to our data or our customers’ data. These
potential breaches of our security measures and the accidental loss, inadvertent disclosure or unauthorized dissemination of proprietary
information or sensitive, personal or confidential data about us, our employees or our customers, including the potential loss
or disclosure of such information or data as a result of hacking, fraud, trickery or other forms of deception, could expose us,
our employees, our customers or the individuals affected to a risk of loss or misuse of this information, result in litigation
and potential liability or fines for us, damage our brand and reputation or otherwise harm our business. These risks are persistent
and likely will increase as we continue to grow our cloud offerings and services and store and process increasingly large amounts
of our customers’ confidential information and data. We also may acquire companies, products, services and technologies
and inherit such risks when we integrate these acquisitions within our company. Further, as regulatory focus on privacy issues
continues to increase and become more complex, these potential risks to our business will intensify. Changes in laws or regulations
associated with the enhanced protection of certain types of sensitive data could greatly increase our cost of providing our products
and services
Regulation of
the internet and telecommunications, privacy and data security may adversely affect sales of our products and result in increased
compliance costs.
As internet commerce
continues to evolve, increasing regulation by federal, state or foreign agencies and industry groups becomes more likely. For
example, we believe increased regulation is likely with respect to the solicitation, collection, processing or use of personal,
financial and consumer information as regulatory authorities around the world are considering a number of legislative and regulatory
proposals concerning data protection, privacy and data security. In addition, the interpretation and application of consumer and
data protection laws and industry standards in the United States, Europe and elsewhere are often uncertain and in flux.
In particular, our European
activities are subject to the new European Union General Data Protection Regulation, or GDPR, which create additional compliance
requirements for us. GDPR broadens the scope of personal privacy laws to protect the rights of European Union citizens and requires
organizations to report on data breaches within 72 hours and be bound by more stringent rules for obtaining the consent of individuals
on how their data can be used. GDPR took effect on May 25, 2018 and non-compliance may expose entities such as our company to
significant fines or other regulatory claims. While we have invested in, and intend to continue to invest in, reasonably necessary
resources to comply with these new standards, to the extent that we fail to adequately comply, that failure could have an adverse
effect on our business, financial conditions, results of operations and cash flows.
Furthermore, the application
of existing laws to cloud-based solutions is particularly uncertain and cloud-based solutions may be subject to further regulation,
the impact of which cannot be fully understood at this time. Moreover, these laws may be interpreted and applied in a manner that
is inconsistent with our data and privacy practices. If so, in addition to the possibility of fines, this could result in an order
requiring that we change our data and privacy practices, which could have an adverse effect on our business and results of operations.
Complying with these various laws could cause us to incur substantial costs or require us to change our business practices in
a manner adverse to our business. In addition, any new regulation, or interpretation of existing regulation, imposing greater
fees or taxes on internet-based services, or restricting information exchange over the Web, could result in a decline in the use
and adversely affect sales of our products and our results of operations.
Our products have
a lengthy sales cycle that 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 proprietary
platforms and vertical software solutions 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,
undetected errors or “bugs” 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. In addition, the professional liability insurance that we
maintain may not be sufficient against potential claims. Accordingly, we could fail to realize revenues and suffer damage to our
reputation as a result of, or in defense of, a substantial claim.
Third parties
have in the past, and may in the future, claim that we infringe upon their intellectual property rights and such claims could
harm our business.
The software industry
is characterized by the existence of a large number of patents and frequent claims and related litigation regarding patents and
other intellectual property rights. In particular, leading companies in the software industry own large numbers of patents, copyrights,
trademarks and trade secrets, which they may use to assert claims against us. From time to time, third parties, including certain
of these leading companies, may assert patent, copyright, trademark or other intellectual property claims against us, our customers
and partners, and those from whom we license technology and intellectual property.
Although we believe
that our products and services do not infringe upon the intellectual property rights of third parties, we cannot assure you that
third parties will not assert infringement or misappropriation claims against us with respect to current or future products or
services, or that any such assertions will not require us to enter into royalty arrangements or result in costly litigation, or
result in us being unable to use certain intellectual property. We cannot assure you that we are not infringing or otherwise violating
any third party intellectual property rights. Infringement assertions from third parties may involve patent holding companies
or other patent owners who have no relevant product revenues, and therefore our own issued and pending patents may provide little
or no deterrence to these patent owners in bringing intellectual property rights claims against us.
Any intellectual property
infringement or misappropriation claim or assertion against us, our customers or partners, and those from whom we license technology
and intellectual property could have a material adverse effect on our business, financial condition, reputation and competitive
position regardless of the validity or outcome. If we are forced to defend against any infringement or misappropriation claims,
whether they are with or without merit, are settled out of court, or are determined in our favor, we may be required to expend
significant time and financial resources on the defense of such claims. Furthermore, an adverse outcome of a dispute may require
us to pay damages, potentially including treble damages and attorneys’ fees, if we are found to have willfully infringed
on a party’s intellectual property; cease making, licensing or using our products or services that are alleged to infringe
or misappropriate the intellectual property of others; expend additional development resources to redesign our products or services;
enter into potentially unfavorable royalty or license agreements in order to obtain the right to use necessary technologies or
works; and to indemnify our partners, customers, and other third parties. Royalty or licensing agreements, if required or desirable,
may be unavailable on terms acceptable to us, or at all, and may require significant royalty payments and other expenditures.
Any of these events could seriously harm our business, results of operations and financial condition. In addition, any lawsuits
regarding intellectual property rights, regardless of their success, could be expensive to resolve and divert the time and attention
of our management and technical personnel.
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. In accordance with industry practice,
since we have no registered patents on our software solution technologies, we rely on a combination of trade secret and copyright
laws and confidentiality, non-disclosure and assignment-of-inventions agreements to protect our proprietary technology. We believe
that due to the dynamic nature of the computer and software industries, copyright protection is less significant than factors
such as the knowledge and experience of our management and personnel, the frequency of product enhancements and the timeliness
and quality of our support services. Therefore, we distribute our products under software license agreements that grant customers
a personal, non-transferable license to use our products and contain terms and conditions prohibiting the unauthorized reproduction
or transfer of our products and 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.
Our customers
and we rely on technology and intellectual property of third parties, the loss of which could limit the functionality of our products
and disrupt our business.
We use technology and
intellectual property licensed from unaffiliated third parties in certain of our products, and we may license additional third-party
technology and intellectual property in the future. Any errors or defects in this third-party technology and intellectual property
could result in errors that could harm our brand and business. In addition, licensed technology and intellectual property may
not continue to be available on commercially reasonable terms, or at all. The loss of the right to license and distribute this
third party technology could limit the functionality of our products and might require us to redesign our products.
Further, although we
believe that there are currently adequate replacements for the third-party technology and intellectual property we presently use
and distribute, the loss of our right to use any of this technology and intellectual property could result in delays in producing
or delivering affected products until equivalent technology or intellectual property is identified, licensed or otherwise procured,
and integrated. Our business would be disrupted if any technology and intellectual property we license from others or functional
equivalents of this software were either no longer available to us or no longer offered to us on commercially reasonable terms.
In either case, we would be required either to attempt to redesign our products to function with technology and intellectual property
available from other parties or to develop these components ourselves, which would result in increased costs and could result
in delays in product sales and the release of new product offerings. Alternatively, we might be forced to limit the features available
in affected products. Any of these results could harm our business and impact our results of operations.
Some of our services
and technologies may use “open source” software, which may restrict how we use or distribute our services or require
that we release the source code of certain products subject to those licenses.
Some of our services
and technologies may incorporate software licensed under so-called “open source” licenses, including, but not limited
to, the GNU General Public License and the GNU Lesser General Public License. In addition to risks related to license requirements,
usage of open source software can lead to greater risks than use of third-party commercial software, as open source licensors
generally do not provide warranties or controls on origin of the software. Additionally, open source licenses typically require
that source code subject to the license be made available to the public and that any modifications or derivative works to open
source software continue to be licensed under open source licenses. These open source licenses typically mandate that proprietary
software, when combined in specific ways with open source software, become subject to the open source license. If we combine our
proprietary software with open source software, we could be required to release the source code of our proprietary software.
We take steps to ensure
that our proprietary software is not combined with, and does not incorporate, open source software in ways that would require
our proprietary software to be subject to an open source license. However, few courts have interpreted open source licenses, and
the manner in which these licenses may be interpreted and enforced is therefore subject to some uncertainty. Additionally, we
rely on multiple software programmers to design our proprietary technologies, and although we take steps to prevent our programmers
from including open source software in the technologies and software code that they design, write and modify, we do not exercise
complete control over the development efforts of our programmers and we cannot be certain that our programmers have not incorporated
open source software into our proprietary products and technologies or that they will not do so in the future. In the event that
portions of our proprietary technology are determined to be subject to an open source license, we could be required to publicly
release the affected portions of our source code, re-engineer all or a portion of our technologies, or otherwise be limited in
the licensing of our technologies, each of which could reduce or eliminate the value of our services and technologies and materially
and adversely affect our business, results of operations and prospects.
We could be required
to provide the source code of our products to our customers.
Some of our customers
have the right to require the source code of our products to be deposited into a source code escrow. Under certain circumstances,
our source code could be released to our customers. The conditions triggering the release of our source code vary by customer.
A release of our source code would give our customers access to our trade secrets and other proprietary and confidential information
that could harm our business, results of operations and financial condition. A few of our customers have the right to use the
source code of some of our products based on the license agreements signed with such clients (mostly with respect to older versions
of our solutions), although such use is limited for specific matters and cases, these clients are exposed to some of our trade
secrets and other proprietary and confidential information which could harm us.
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 business may
be materially affected by changes to fiscal and tax policies. Potentially negative or unexpected tax consequences of these policies,
or the uncertainty surrounding their potential effects, could adversely affect our results of operations and share price.
As a multinational corporation,
we are subject to income taxes, withholding taxes and indirect taxes in numerous jurisdictions worldwide. Significant judgment
and management attention and resources are required in evaluating our tax positions and our worldwide provision for taxes. In
the ordinary course of business, there are many activities and transactions for which the ultimate tax determination is uncertain.
In addition, our tax obligations and effective tax rates could be adversely affected by changes in the relevant tax, accounting,
and other laws, regulations, principles and interpretations. This may include recognizing tax losses or lower than anticipated
earnings in jurisdictions where we have lower statutory rates and higher than anticipated earnings in jurisdictions where we have
higher statutory rates, changes in foreign currency exchange rates, or changes in the valuation of our deferred tax assets and
liabilities.
We may be audited in
various jurisdictions, and such jurisdictions may assess additional taxes against us. If we experience unfavorable results from
one or more such tax audits, there could be an adverse effect on our tax rate and therefore on our net income. Although we believe
our tax estimates are reasonable, the final determination of any tax audits or litigation could be materially different from our
historical tax provisions and accruals, which could have a material adverse effect on our operating results or cash flows in the
period or periods for which a determination is made. Additionally, we are subject to transfer pricing rules and regulations, including
those relating to the flow of funds between us and our affiliates, which are designed to ensure that appropriate levels of income
are reported in each jurisdiction in which we operate.
The recently enacted
U.S. Tax Cuts and Jobs Act of 2017, or the Tax Act, enacted in December 2017, introduced significant changes to the U.S. Internal
Revenue Code. The primary impact of the Tax Act on us was a reduction of our effective tax rate in the US. The final impact of
the Tax Act may differ from the tax expense we incurred, due to, among other things, possible changes in the interpretations and
assumptions made by us as a result of additional information, additional guidance that will be issued by the U.S. Department of
Treasury, the IRS or other standard-setting bodies. There may be additional tax effects of the Tax Act that may impact our future
financial statements upon finalization of law, regulations, and additional guidance and will be accounted for when such guidance
is issued.
Certain of our
credit facility agreements with banks and other financial institutions are subject to a number of restrictive covenants that,
if breached, could result in acceleration of our obligation to repay our debt.
In the context of our
engagements with banks and other financial institutions for receiving various credit facilities, we have undertaken to maintain
a number of conditions and limitations on the manner in which we can operate our business, including a negative pledge and limitations
on our ability to distribute dividends. These credit facilities agreements also contain various financial covenants that require
us to maintain certain financial ratios related to shareholders’ equity, total rate of financial liabilities and minimum
outstanding balance of total cash and short-term investments. These limitations and covenants may force us to pursue less than
optimal business strategies or forego business arrangements that could have been financially advantageous to us and, by extension,
to our shareholders. A breach of the restrictive covenants could result in the acceleration of our obligations to repay our debt.
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 of our Ordinary Shares on these markets is made
in different currencies (U.S. dollars on the NASDAQ Global Select Market and NIS on the TASE) and at different times (resulting
from different time zones, different trading days and different public holidays in the United States and Israel). Consequently,
the trading prices of our Ordinary Shares on these two markets may differ. Any decrease in the trading price of our Ordinary Shares
on one of these markets could cause a decrease in the trading price of our Ordinary Shares on the other market.
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 litigations have 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.
Our controlling
shareholder, Formula Systems (1985) Ltd., beneficially owns approximately 45.21% of our outstanding Ordinary Shares and therefore
has a controlling influence over matters requiring shareholder approval, which could delay or prevent a change of control that
may benefit our public shareholders.
Formula Systems (1985)
Ltd., or Formula Systems (symbol: FORTY), an Israeli company whose shares trade on the NASDAQ Global Select Market and the TASE,
directly owned 22,080,468 or 45.21%, of our outstanding Ordinary Shares as of December 31, 2018. Asseco Poland S.A., or Asseco,
a Polish company listed on Warsaw Stock Exchange, owns 26.29% of the outstanding shares of Formula Systems. Guy Bernstein, our
Chief Executive Officer who is also the Chief Executive Officer of Formula Systems, owns 13.437% of the outstanding shares of
Formula Systems. In addition, on October 4, 2017 Asseco entered into a shareholders agreement with Mr. Bernstein, under which
agreement Asseco has been granted an irrecoverable proxy to vote an additional 1,971,973 Ordinary Shares of Formula, thereby effectively
giving Asseco beneficial ownership (voting power) over an aggregate of 39.66% of Formula’s outstanding ordinary share. Therefore,
based on the foregoing beneficial ownership by each of Formula and Asseco, each of Formula and Asseco may be deemed to directly
or indirectly (as appropriate) control us.
Although transactions
between us and our controlling shareholders are subject to special approvals under Israeli law, Formula and Asseco may exercise
their controlling influence over our operations and business strategy and use their sufficient voting power to control the outcome
of various matters requiring shareholder approval. These matters may include:
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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.
Our U.S. shareholders
may suffer adverse tax consequences if we are classified as a passive foreign investment company or as a “controlled foreign
corporation.”
Generally, if for any
taxable year 75% or more of our gross income is passive income, or at least 50% of the average quarterly value of our assets (which
may be measured in part by the market value of our Ordinary Shares, which is subject to change) are held for the production of,
or produce, passive income, we would be characterized as a passive foreign investment company, or PFIC, for U.S. federal income
tax purposes under the Code. Based on our gross income and gross assets, and the nature of our business, we believe that we were
not classified as a PFIC for the taxable year ended December 31, 2018. Because PFIC status is determined annually based on our
income, assets and activities for the entire taxable year, it is not possible to determine whether we will be characterized as
a PFIC for the taxable year ending December 31, 2019, or for any subsequent year, until we finalize our financial statements for
that year. Furthermore, because the value of our gross assets is likely to be determined in large part by reference to our market
capitalization, a decline in the value of our Ordinary Shares may result in our becoming a PFIC. Accordingly, there can be no
assurance that we will not be considered a PFIC for any taxable year. Our characterization as a PFIC could result in material
adverse tax consequences for you if you are a U.S. investor, including having gains realized on the sale of our Ordinary Shares
treated as ordinary income, rather than a capital gain, the loss of the preferential rate applicable to dividends received on
our Ordinary Shares by individuals who are U.S. holders, and having interest charges apply to distributions by us and the proceeds
of share sales. Certain elections exist that may alleviate some of the adverse consequences of PFIC status and would result in
an alternative treatment (such as mark-to-market treatment) of our Ordinary Shares. Prospective U.S. investors should consult
their own tax advisers regarding the potential application of the PFIC rules to them. Prospective U.S. investors should refer
to “Item 10.E. Taxation—U.S. Federal Income Tax Considerations” for discussion of additional U.S. income tax
considerations applicable to them based on our treatment as a PFIC.
Certain U.S. holders
of our Ordinary Shares may suffer adverse tax consequences if we or any of our non-U.S. subsidiaries are characterized as a “controlled
foreign corporation”, or a CFC, under Section 957(a) of the Code. Certain changes to the CFC constructive ownership rules
under Section 958(b) of the Code introduced by the TCJA may cause one or more of our non-U.S. subsidiaries to be treated as CFCs,
may also impact our CFC status, and may affect holders of our Ordinary Shares that are United States shareholders. Generally,
for U.S. shareholders that own 10% or more of the combined vote or combined value of our Ordinary Shares, this may result in negative
U.S. federal income tax consequences and these shareholders may be subject to certain reporting requirements with the U.S. Internal
Revenue Service. Any such 10% U.S. shareholder should consult its own tax advisors regarding the U.S. tax consequences of acquiring,
owning, or disposing our Ordinary Shares and the impact of the TCJA, especially the changes to the rules relating to CFCs.
Risks Related to Our Location in Israel
Political, economic
and military instability in Israel may disrupt our operations and negatively affect our business condition, harm our results of
operations and adversely affect our share price.
We are organized under
the laws of the State of Israel, and our principal executive offices and manufacturing and research and development facilities
are located in Israel. As a result, political, economic and military conditions affecting Israel directly influence us.
Any major hostilities involving Israel, a full or partial mobilization of the reserve forces of the Israeli army, the interruption
or curtailment of trade between Israel and its present trading partners, or a significant downturn in the economic or financial
condition of Israel could adversely affect our business, financial condition and results of operations.
Conflicts in North Africa
and the Middle East, including in Egypt and Syria that border Israel, have resulted in continued political uncertainty
and violence in the region. Efforts to improve Israel’s relationship with the Palestinian Authority have failed to result
in a permanent solution, and there have been numerous periods of hostility in recent years. In addition, relations between Israel and
Iran continue to be seriously strained, especially with regard to Iran’s nuclear program. Such instability may affect the
economy, could negatively affect business conditions and, therefore, could adversely affect our operations. To date, these matters
have not had any material effect on our business and results of operations; however, the regional security situation and worldwide
perceptions of it are outside our control and there can be no assurance that these matters will not negatively affect our business,
financial condition and results of operations in the future.
Furthermore, there are
a number of countries, primarily in the Middle East, as well as Malaysia and Indonesia, that restrict business with Israel or
Israeli companies, and we are precluded from marketing our products to these countries. Restrictive laws or policies directed
towards Israel or Israeli businesses may have an adverse impact on our operations, our financial results or the expansion of our
business.
Our results of
operations may be adversely affected by the obligation of our personnel to perform military service.
Many of our executive
officers and employees in Israel are obligated to perform annual reserve duty in the Israeli Defense Forces and may be called
for active duty under emergency circumstances at any time. If a military conflict or war arises, these individuals could be required
to serve in the military for extended periods of time. Our operations could be disrupted by the absence for a significant period
of one or more of our executive officers or key employees or a significant number of other employees due to military service.
Any disruption in our operations could adversely affect our business.
We currently have
the ability to benefit from certain government tax benefits, which may be cancelled or reduced in the future.
We are currently eligible
to receive certain tax benefits under programs of the Government of Israel. In order to maintain our eligibility for these tax
benefits, we must continue to meet specific requirements. If we fail to comply with these requirements in the future, such tax
benefits may be cancelled.
Service and enforcement
of legal process on us and our directors and officers may be difficult to obtain.
We are organized in
Israel and some of our directors and executive officers reside outside the United States. Service of process upon them may be
difficult to effect within the United States. Furthermore, most of our assets and the assets of some of our executive officers
are located outside the United States. Therefore, a judgment obtained against us or any of them in the United States, including
one based on the civil liability provisions of the U.S. federal securities laws may not be collectible in the United States and
may not be enforced by an Israeli court. It also may be difficult for you to assert U.S. securities law claims in original actions
instituted in Israel.
Provisions of
Israeli law may delay, prevent or make difficult an acquisition of us, which could prevent a change of control and therefore depress
the price of our shares.
Israeli corporate law
regulates mergers, requires tender offers for acquisitions of shares above specified thresholds, requires special approvals for
transactions involving directors, officers or significant shareholders and regulates other matters that may be relevant to these
types of transactions. Furthermore, Israeli tax considerations may make potential transactions unappealing to us or to some of
our shareholders. These provisions of Israeli corporate and tax law may have the effect of delaying, preventing or complicating
a merger with, or other acquisition of, us. This could cause our Ordinary Shares to trade at prices below the price for which
third parties might be willing to pay to gain control of us. Third parties who are otherwise willing to pay a premium over prevailing
market prices to gain control of us may be unable or unwilling to do so because of these provisions of Israeli law.
The rights and
responsibilities of our shareholders are governed by Israeli law and differ in some respects from the rights and responsibilities
of shareholders under U.S. law.
We are organized under
Israeli law. The rights and responsibilities of holders of our Ordinary Shares are governed by our memorandum of association,
articles of association and by Israeli law. These rights and responsibilities differ in some respects from the rights and responsibilities
of shareholders in typical U.S. corporations. In particular, a shareholder of an Israeli company has a duty to act in good faith
in exercising his or her rights and fulfilling his or her obligations toward the company and other shareholders and to refrain
from abusing his power in the company, including, among other things, in voting at the general meeting of shareholders on certain
matters. Israeli law provides that these duties are applicable in shareholder votes at the general meeting with respect to, among
other things, amendments to a company’s articles of association, compensation policy, increases in a company’s authorized
share capital, mergers and actions and transactions involving interests of officers, directors or other interested parties which
require the shareholders’ general meeting’s approval. In addition, a controlling shareholder of an Israeli company
or a shareholder who knows that he or she possesses the power to determine the outcome of a vote at a meeting of our shareholders,
or who has, by virtue of the company’s articles of association, the power to appoint or prevent the appointment of an office
holder in the company, or any other power with respect to the company, has a duty of fairness toward the company. The Israeli
Companies Law does not establish criteria for determining whether or not a shareholder has acted in good faith.
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ITEM 4.
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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, 2014
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 $4,699,000 was paid upon closing, $2,137,000 (measured based on present value) was allocated to deferred payment
and contingent payment and paid in 2017 and 2018. Shavit specializes in software professional and outsource management services.
In late December 2017,
we acquired a 100% equity interest in Futurewave Systems, Inc., a U.S.-based full-service provider of consulting and outsourcing
solutions for IT personnel, for a total consideration of $3.0 million.
On July 12, 2018, we
issued 4,268,293 ordinary shares at a price of $8.20 per share for a total of $34.6 million net of issuance expenses. The shares
were issued to Israeli institutional investors and to our controlling shareholder, Formula Systems (1985) Ltd.
Our fixed assets capital
expenditures for the years ended December 31, 2016, 2017 and 2018 were approximately $0.8 million, $1.4 million and $0.9 million,
respectively. These expenditures were principally for network equipment and computer hardware, as well as for vehicles, 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, as well as (iii) a vendor of software services and IT outsourcing software services. We report our results on the basis
of two reportable business segments: software solutions (which include proprietary and non-proprietary software technology, maintenance
and support and complementary services) and IT professional services.
Our software solutions
are used by customers to develop, deploy and integrate on-premise, mobile and cloud-based business applications quickly and cost
effectively. In addition, our technology enables enterprises to accelerate the process of delivering business solutions that meet
current and future needs and allow customers to dramatically improve their business performance and return on investment. We also
provide selected verticals with a complete software solution.
In the aggregate, we
employ approximately 2,226 persons and operate through a network of over 3,000 independent software vendors, who we refer to as
Magic Software Providers, or MSP’s, and hundreds of system integrators, distributors, resellers, and consulting and OEM
partners. Thousands of enterprises in approximately 50 countries use our products and services.
Our software technology platforms
Throughout our history,
we have traditionally maintained two major lines of products, one is our application development platform, which today is known
as Magic xpa Application Platform, an evolution of our original metadata-based development platform; and the second is our application
integration platform, Magic xpi Integration Platform, originally introduced in 2003 under the name iBOLT. In December 2011, we
acquired the AppBuilder development platform of BluePhoenix Solutions Ltd., a leading provider of value-driven legacy IT modernization
solutions. AppBuilder is a comprehensive application development infrastructure used by many Fortune 1000 enterprises around the
world. This enterprise application development environment is a powerful, model-driven tool that enables development teams to
build, deploy, and maintain large-scale, custom-built business applications.
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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Magic
xpc Integration Platform - hybrid integration platform as a service (iPaaS).
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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. Our Hermes Solution covers all aspects
of cargo handling, from physical handling and cargo documentation through customs, seamless
EDI communications, dangerous goods and special handling, tracking and tracing, security
and billing. Customers benefit through faster processing and more accurate billing, reporting
and ultimately enhanced revenue. The Hermes Solution is delivered on a licensed or fully
hosted basis. Hermes recently supplemented its offering with the Hermes Business Intelligence
(HBI) solution, adding unprecedented data analysis capabilities and management-decision
support tools.
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HR
Pulse –
Offered by our Pilat NAI, Inc. and Pilat Europe Ltd. subsidiaries,
Pulse (now in its 10
th
release) is a proprietary tool for the creation of
customizable HCM solutions quickly and affordably. It has been used by Pilat to create
products, such as Pilat Frist and Pilat Professional, that provide “out of the
box” SaaS solutions for organizations that implement Continuous Performance and/or
Talent Management.
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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, DevOps (Development & Operations),
Mobile, Big Data and Analytical BI, M/F, cloud computing for deployment of highly available and massively-scalable applications
and APIs and supplemental IT outsourcing services to a wide variety of companies, including Fortune 1000 companies. The technical
personnel we provide generally supplement in-house capabilities of our customers. We have extensive and proven experience with
virtually all types of telecom infrastructure technologies in wireless and wire-line as well as in the areas of infrastructure
design and delivery, application development, project management, technology planning and implementation services.
We have substantial
experience in end-to-end development of high-end software solutions, beginning with collection and analysis of system requirements,
continuing with architecture specifications and setup, to software implementation, component integration and testing. From concept
to implementation, from application of the ideas of startups requiring the early development of an application or a device, to
somewhat larger, more established enterprises, vendors or system houses who need our team of experts to take full responsibility
for the development of their systems and products. With our ability to draw on our pool of resources, comprised of hundreds of
highly trained, skilled, educated and flexible engineers, we adhere to timelines and budget and work in full transparency with
our customers every step of the way to create a tailor-made and cost-effective solution to answer all of our customers’
unique needs.
Our IT services subsidiaries consist of:
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Coretech Consulting Group LLC
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AllStates Consulting Services LLC
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Futurewave Systems, Inc.
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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, Microsoft, IBM and SugarCRM to enhance
our mobile, integration and cloud offerings.
In September 2013, we
initiated a technology partnership with GigaSpaces Technologies, a pioneer provider of In-Memory Computing technology for deployment,
management and scaling of mission-critical applications. By combining our technologies, we assist our customers in becoming cloud-ready
and enjoying the benefits of high performance, scalability and availability that can be achieved with in-memory computing technology,
all with a seamless migration effort and virtually no learning curve. Since the announcement, we have implemented IMDG architecture
in our Magic xpi Integration Platform.
In October 2013, we
partnered with Sugar CRM, a growing cloud and on-premise CRM ecosystem, and Sage, a popular provider of ERP and other business
systems to small and medium business, enabling us to provide pre-built connectors for quick and reliable integration with these
applications.
In July 2015, we were
recognized as “Salesforce Ecosystem Champion of the Year for France” for the Magic xpi Integration Platform with its
pre-built and certified Salesforce adapter. In giving this award, Salesforce said their “growth is possible through the
commitment to exceptional solutions and customer satisfaction provided by Salesforce partners like Magic Software.”
Also in July 2015, our
Valinor subsidiary was recognized as the 2015 Microsoft Country Partner of the Year for Israel. The Microsoft Country Partner
of the Year Awards honor partners at the country level that have demonstrated business excellence in delivering Microsoft solutions
to multiple customers over the past year. This award recognizes Valinor as succeeding in effective engagement with its local Microsoft
office while showcasing innovation and business impact, driving customer satisfaction, and winning new customers.
In 2016, we received
the SugarCRM’s global ISV Partner Award for best engagement and teaming with fellow partners across the SugarCRM partner
ecosystem.
In March 2017, we became
a certified technology partner in the Technology Alliance Program for ServiceMax, a GE Digital company, the leader in cloud-based
field service management solutions. As a result of this partnership, we launched a prebuilt, certified ServiceMax connector for
our Magic xpi integration platform. This dedicated connector enables real-time business process integration between ServiceMax
and other enterprise software, such as ERP systems, enabling ServiceMax customers to streamline field service processes, eliminate
duplicate data entry, and increase productivity.
In March 2018, following
an extension of our partnership with Salesforce, we included new features in our Magic xpi 4.7 to make the integration
between Salesforce and other systems even easier. By collaborating with Salesforce, we are significantly expanding our partners’
network and maximizing our service offering to customers around the world, enabling them to better serve their customers via all
channels by connecting to back-office ERP and finance applications, and streamlining business processes across numerous applications.
We are an Oracle Platinum
Partner holding an Oracle Validated Integration status, a SAP Channel Gold Partner holding SAP Certified Integration status, an
IBM Server Proven, and a SYSPRO business partner, among others. We appear on the Salesforce AppExchange and are a featured partner
on SugarCRM’s Sugar Exchange, marketplaces for apps provided by partners. We continue to update and strengthen our relationships
with these major IT partners by attending partner events and by updating and certifying our Magic xpi connectors for each specific
ecosystem.
Industry Overview
In recent years, the
number of available enterprise applications has grown significantly which has led information system complexity within many organizations
to a level that has obstructed business progress and evolution, reduced business agility and led to significantly higher costs.
We believe this complexity will continue to increase in the future. Although it is not unusual for organizations to operate multiple
applications, systems and platforms that were created utilizing disparate programming languages, the complexity of these environments
typically reduces an organization’s operating flexibility, hinders decision-making processes and leads to costly inefficiencies
and redundancies. When organizations seek to swiftly change, update and upgrade IT assets to support new business processes or
to cope with changes in business and regulatory environments, they often find that the introduction and integration of new or
upgraded business applications is more complex than expected, requires significant implementation resources, takes a long time
to implement and is costly. The proliferation of smartphones and mobile platforms necessitates device-independent and future-proof
business solutions for fast, simple, and cost-effective mobile deployment. In addition, new cloud computing technologies present
enterprises with an opportunity to realize greater agility and meaningful cost savings to businesses, creating a growing need
for further changes to enterprises’ IT applications and systems.
Based on Gartner, Inc.,
or Gartner, a leading research and advisory firm providing information technology related insight, despite uncertainty fueled
by recession rumors, Brexit, and trade wars and tariffs, the likely scenario for IT spending in 2019 is growth, with the global
enterprise information technology market growing by 3.9% in 2018 and expected growth for 2019 and 2020 of 3.2% (to $3.76 trillion)
and 2.8%, respectively (Gartner, Worldwide IT Spending Forecast, Q4.18 Update, January 2019). The market consists of five primary
components, including communication services, IT services, devices, enterprise software and data center systems. The IT services
segment represented $983 billion (26.9%) of the overall IT spending in 2018, and 27.3% of the total expected market opportunity
in 2019. The enterprise software segment represented $397 billion (10.9%) of the overall IT spending in 2018, and 11.4% of the
total expected market opportunity in 2019. 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, Q418 Update).
The pace of digital
transformation is also accelerating at companies all around the world. Customers are increasingly demanding an all-digital experience
from the companies they do business with. They seek instant gratification through real-time updates or instant customer service
without having to talk to or wait for other human beings. Employees are also pushing for a more digital experience in their workplaces.
The confluence of these internal and external forces is causing companies of all sizes to put digital transformation goals at
the top of the agenda. It is becoming clearer that companies will need to embrace and prioritize the creation of a digital operating
environment to gain a competitive edge and be able to recruit and maintain a talented employee base. The confluence of these internal
and external forces is causing companies of all sizes to put digital transformation goals at the top of the agenda. It is becoming
clearer that companies will need to embrace and prioritize the creation of a digital operating environment to gain a competitive
edge and be able to recruit and maintain a talented employee base.
Although the market
for low-code development platforms is not new by any means, it has certainly started to gain more traction over the past couple
of years and is expected to continue its strong growth as the gap between the important role of software at large enterprises
and the lack of software skills in the market continues to widen. Forrester expects the market to increase to $21.2 billion by
2022, up from $3.8 billion in 2017, a CAGR of 41%. Some of the highest-growth years for the market are expected to be between
2019 and 2021, where growth is expected to be over 50%.
Manual coding and application
development is a complex and time-consuming process with an end result that is not guaranteed. The process requires constant iteration
as bugs are discovered and new features are integrated. In addition, the communication gap and general disconnect between developers
and end-users are critical shortcomings of manual coding that results in business applications that are less than ideally designed.
Many of these problems can be addressed by low-code and no-code development platforms. The enterprise application development
software market consists of several application development sub-segments and includes large dominant players such as IBM, Microsoft,
Oracle, Salesforce.com, HP, CA Technologies and Compuware as well as a large number of highly specialized vendors, with focused
capabilities for specific vertical markets. Huge backlogs of enterprise app development work and growing demand for apps coupled
with shortage and expense of skilled programmers, is increasingly leading enterprises to turn to low-code/no-code application
development platforms that democratize the development process and give business users the ability to develop applications themselves
with minimal or no assistance from IT. Through the adoption of business applications, these business users are increasingly looking
for ways to automate manual workflows and become more efficient and effective by reallocating their time to solving more complex
business problems. Even IT resources and developers are using low-code development tools to increase their development speed and
reduce backlog. a growing market for low-code/no-code development platforms.
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
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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.
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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, Magic xpi and Magic xpc provide MSPs with the ability to rapidly build integrated applications in a more
productive manner, deploy them in multiple modes and architectures as needed, lower IT maintenance costs and speed time-to-market.
Our solutions are comprehensive and industry proven. These technologies can be applied to the entire software development market,
from the implementation of micro-vertical solutions, through tactical application modernization and process automation solutions,
to enterprise spanning service-oriented architecture, or SOA, migrations and composite applications initiatives. Unlike most competing
platforms, we offer a coherent and unified toolset based on the same proven metadata driven and rules-based declarative technology.
Our low-code, metadata platforms consist of pre-compiled and pre-written technical and administrative functions, which are essentially
ready-made business application coding that enables developers to bypass the intensive technical code-writing stage of application
development and integration, concentrate on building the correct logic for their apps and move quickly and efficiently to deployment.
Through the use of metadata-driven platforms such as Magic xpa, AppBuilder, Magic xpi and Magic xpc, 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 integration platforms that allow the integration and interoperability of diverse solutions, applications and systems in a
quick and efficient manner. These solutions enable our customers to improve their business performance and return on investment
by supporting the affordable and rapid delivery and integration of business applications, systems and databases. Using our software
solutions, enterprises and ISVs can accelerate time-to-market by rapidly building integrated solutions, deploying them in multiple
environments while leveraging existing IT resources. In addition, our solutions are scalable and platform-agnostic, enabling our
customers to build solutions by specifying their business logic requirements in a commonly used language rather than in computer
code, and to benefit from seamless platform upgrades and cross-platform functionality without the need to re-write applications.
Our technology also enables future-proof protection and supports current market trends such as the development of mobile applications
that can be deployed on a variety of smartphones and tablets, and cloud environments. In addition, we also offer a variety of
vertical-targeted products that are focused on the needs and requirements of specific growing markets. Certain of these products
were developed utilizing our application development platform.
We sell our solutions
globally through our own direct sales representatives and offices and through a broad sales distribution network, including independent
country distributors, independent service vendors that use our technology to develop and sell solutions to their customers, and
system integrators. We also offer software maintenance, support, training, and consulting services in connection with our products,
thus aiding the successful implementation of projects and assuring successful operation of the platforms once installed. We sell
our integration solutions to customers using specific popular software applications, such as SAP, Salesforce.com, IBM i (AS/400),
Oracle JD Edwards, Microsoft SharePoint, Microsoft Dynamics, SugarCRM and other eco-systems. As such, we enjoy a well-diversified
client base across geographies and industries including oil & gas companies, telecommunications groups, financial institutions,
healthcare providers, industrial companies, public institutions and international agencies.
The underlying principles and purpose of
our technology are to provide:
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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 and Magic xpc iPaaS solution delivers fast and simple integration and orchestration of business processes and applications.
We gained 104 new Magic xpa and xpi end customers in 2018. 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.
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.
In February 2018, we
released Magic xpa 3.3 with a more seamless and easier integration with Java, similar to the already existing integration with
.NET, making the Magic xpa platform even more robust. Along with that, we provided a new WS provider mechanism, built on Apache
Axis2, enhancing our current WCF based capabilities.
In August 2018, we released
Magic xpa 4.0 with its new Angular-based Web application framework that provides developers and Angular developers with the power
to develop device-agnostic and feature-packed Web applications. Magic xpa 4.0 decouples the business logic from the presentation
of the apps providing developers with the flexibility to use the Angular open-source platform with industry-standard state-of-the-art
technologies, including HTML5, CSS, and JavaScript for designer-quality screens, while benefiting from the productivity, security,
and scalability capabilities provided by our low-code development platform.
In addition, we further
modernized our Integrated Development Environment (IDE) by moving toward a full-fledged Visual Studio-based studio, offering our
users an even more intuitive and user-friendly experience.
Our 2019 roadmap includes the release of
a 64-bit edition of Magic xpa, featuring a full 64-bit runtime engine for Windows and Linux.
During 2018, Magic xpa was listed in Gartner’s
Market Guide for Application Platforms report. In addition, Magic xpa was listed in the Forrester Wave™ for Mobile Low-Code
Development Platforms.
AppBuilder Application Platform
AppBuilder, a platform
we acquired in December 2011, is a proprietary development environment used for managing, maintaining and reusing complicated
applications needed by large businesses. It provides the infrastructure for enterprises worldwide, across several industries,
with applications running millions of transactions daily on legacy systems. Enterprises using AppBuilder can build, deploy and
maintain large-scale custom-built business applications for years without being dependent on any particular technology. The AppBuilder
deployment environments include IBM mainframe, Unix, Linux and Windows. AppBuilder is intended to increase productivity and agility
in the creation and deployment of enterprise class computing.
AppBuilder follows the
4GL development paradigm to help enterprises focus on the business needs and definition and overlook technical hurdles. AppBuilder
developers define the business roles and prior to deployment the code is generated from the development environment to the required
run time environment. Several large MSPs have utilized AppBuilder to build state of the art applications that are deployed through
many large customers.
AppBuilder implements
a model driven architecture approach to application development. It provides the ability to design an application at the business
modeling level and generate forward to an application. AppBuilder has a platform-independent, business-rules language that enables
generation to multiple platforms. It is possible to generate the client part of an application as Java and the server part as
COBOL. As businesses change, the server part can be generated as Java without changing the application logic. Only a simple configuration
option needs to be changed.
AppBuilder contains
everything a development environment needs to create any type of simple or complex business application with platform-independent
functionality, including:
|
●
|
System administration security
controls for scope and permissions;
|
|
●
|
Migration, testing, and deployment
functions;
|
|
●
|
Architecture-independent development;
|
|
●
|
An integrated toolset for
designing, developing, and deploying applications;
|
|
●
|
Object-based components managed
from host, server, or client repositories;
|
|
●
|
Support for Java/J2EE, COBOL,
C#, and C programming languages;
|
|
●
|
An efficient, cross-platform
code generation facility;
|
|
●
|
Ready-to-use business logic
and libraries;
|
|
●
|
A remote prepare facility
for mainframe development;
|
|
●
|
Multiple language user interface
support; and
|
In April 2016, AppBuilder launched a next-generation
HTML5 development tool. AppBuilderHTML5 enables AppBuilder enterprise customers to easily turn their large-scale client/server
business applications into fully functional browser-based apps.
During 2016, AppBuilder
launched the next generation of its group repository tool, the Versioned Group Repository (VGRE). AppBuilder VGRE is aimed at
mid-size development projects, runs on Microsoft Windows Server platform and enables AppBuilder enterprise customers to parallel
support for multiple application releases, called branches, and access to the full history of individual objects. This includes
comparisons as well as version manipulation features like merge. VGRE is an extension to the existing repository portfolio with
full backward compatibility including well known features like impact analysis, security, upload/download, migrations, rebuilds,
remote preparation and others.
Magic xpi Integration Platform
Our Magic xpi integration
platform (an evolution of our original and formerly branded iBOLT platform, launched in 2003) is a graphical, wizard-based code-free
solution delivering fast and simple integration and orchestration of business processes and applications. Magic xpi allows businesses
to more easily view, access, and leverage their mission-critical information, delivering true enterprise application integration,
or EAI, business process management, or BPM, and SOA infrastructure. Increasing the usability and life span of existing legacy
and other IT systems, Magic xpi allows fast EAI, development and customization of diverse applications, systems and databases,
assuring rapid return on invested capital and time-to-market, increased profitability and customer satisfaction.
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.
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:
|
●
|
SugarCRM upgrade to API V10
|
|
●
|
Google calendar – API upgrade
|
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.
In
August 2017, our Magic xpi integration platform was recognized by the analyst firm Ovum as a well-positioned integration platform
that is a good option for small-and medium-size enterprises. In addition, Magic xpi was listed in 2017 in 10 Gartner reports including
three Market Guides for Application Integration Platforms, HIP-Enabling Technologies and IoT Integration.
In March 2018, we released
Magic xpi version 4.7 with a new OData Provider connector, Active Directory Federation Services (ADFS) support for the SharePoint
Online (MOSS) connector, ability to write new connectors based on Magic xpa Application Platform’s runtime technology and
multiple features to improve programming productivity, such as visual indicators of data flow status and an enhanced monitor to
provide an even more accurate bird’s eye view of all running projects.
In October 2018, we
announced that Magic xpi Integration Platform 4 achieved SAP-certified integration with SAP S/4HANA, enabling our customers to
optimize business processes through automation across leading ERP, CRM, finance, and other enterprise systems using a single platform.
In February 2019, we
released Magic xpi version 4.9 with a new REST client connector, ODATA connector enhancements, inherent UPSERT support in the
data mapper, and built-in cloud support.
Magic xpc Integration Platform
In
November 2017, we announced the expansion of our integration offering with the launch of Magic xpc, a hybrid integration platform
as a service (IPaaS), which enable customers to accelerate digital transformation on the cloud, on-premises or on both.
Magic
xpc is powered by its out-of-the-box integration connectors for mainstream business applications, databases, protocols and tools
for building custom integrations. Magic’s iPaaS platform was built using node.JS and docker technology. Magic xpc users
can monitor their integration flows and create and manage alerts from a single interface. Built on top of open-source components
with no cloud vendor lock-in, Magic xpc is available on both public and private cloud platforms including, Amazon Web Services,
Azure, and Google Cloud.
Vertical software solutions
Clicks™
Our Roshtov subsidiary
has approximately three decades of proven experience based on its proprietary comprehensive core software solution for medical
record information management systems, using in the design and management of patient-file for managed care and large-scale healthcare
providers. The platform, which can be tailor-made to the specific needs of the healthcare provider, is connected to the clinical,
administrative and financial data base system, residing at the provider’s central computer, and allows immediate analysis
of complex data with potentially real-time feedback to meet the specific needs of physicians, nurses, laboratory technicians,
pharmacists, front- and back-office professionals and consumers.
All of our clients that
buy or subscribe to our Clicks software solution also enter into software support agreements with us for maintenance and support
of their medical record management systems. In addition to immediate software support in the event of problems, these agreements
allow clients to access new releases covered by support agreements. In addition, each client has 12-hour access, six days a week
(6 hours on Friday) to the applicable call-center support teams.
We employ a team of
30 research and development specialists that together with our clients create a future where the health care system works to improve
the well-being of individuals and communities. Roshtov’s proven ability to innovate has led to what we believe to be an
industry leading architectures and a breadth and depth of solutions and services.
There are four healthcare service providers
in Israel, of which, Maccabi Healthcare Services and Clalit, which are the two largest healthcare providers in Israel accounting
for 77% of the Israeli market, have been our customers since the early 1990’s.
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.
During
2017, FTS was evaluated by Gartner in its Magic Quadrant for Integrated Revenue and Customer Management for CSPs. FTS has improved
its position based on both of the Magic Quadrant axes, Completeness of Vision and Ability to Execute, according to Gartner’s
evaluation of FTS’ IRCM products, including FTS Billing, FTS Policy Control and FTS express.
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 “out of the box” HCM SaaS Solutions, such as Pilat Frist and Pilat Professional, that
provides a menu of templates that can be used to affordably and expeditiously create customized HCM solutions for companies.
The HR Pulse platform promotes the building and implementation of solutions that address broader business challenges as well.
Such offerings include 360-degree feedback, employee surveys, leadership and management development, coaching and job evaluation.
Hermes
Hermes
has been developing and evolving cargo management systems for the air cargo industry since 2002. Hermes Air Cargo Management System
is a proprietary, state-of-the-art, packaged software solution for managing air cargo ground handling. Our Hermes Solution covers
all aspects of cargo handling, from physical handling and cargo documentation through customs, seamless EDI communications, dangerous
goods and special handling, tracking and tracing, security and billing. Over the last 10 years Hermes systems have been
implemented in over 70 terminals on five continents, providing efficient and accurate handling of more than 5 million tons of
freight annually. Customers benefit through faster processing and more accurate billing, reporting and ultimately enhanced revenue.
Customers include independent ground handlers, airlines with a cargo arm, hubs belonging to an individual airline or those catering
to a number of airlines transiting cargo to additional destinations. The Hermes Solution is delivered on a licensed or fully
hosted basis. In 2016, Hermes 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 Aviation, WFS (FRA), Luxair, Etihad Airport Services and Frankfurt Cargo Services 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).
|
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●
|
Grow
our customer base through new offerings.
We plan to grow our business by attracting
new ISV enterprise customers with new technology offerings and new professional services
through our already established expertise in the areas of mobile technologies and projects,
cloud applications, SaaS and Big Data solutions, and integration solutions. Due to our
track record in these industry segments, we believe we are well positioned to develop
and offer new application development and integration solutions that will enable us to
attract new customers. In addition, we believe our familiarity with these verticals will
allow us to differentiate our IT services offering and grow our market share in this
vertical as well.
|
|
●
|
Provide
new solutions to new ecosystems.
We expect the same industry trends of mobile, cloud,
SaaS and big data to lead to the creation of additional enterprise applications ecosystems.
We intend to continue to develop new solutions that will allow us to form new partnerships,
which in turn will grow our revenues. We also intend to focus on recruiting OEM partners
that will incorporate our Magic xpi integration technology into their product offerings.
|
|
●
|
Acquire
complementary businesses.
As part of our growth strategy,
we will continue to seek and evaluate opportunities to grow through acquisitions of companies
and operations with complementary software solutions, technologies and related intellectual
property, packaged software solutions, augmenting integration and services capabilities,
additional distribution channels or market share. We have a strict acquisition policy
pursuant to which we only pursue acquisitions in cases we identify as having a clear
business opportunity and a clear path to revenue growth. In addition, we only pursue
acquisitions which we believe entail low integration and operational risk as a result
of our internal familiarity with the target or the industry in which it operates, through
our network of MSPs, system integrators, distributors, resellers, and consulting and
OEM partners. We intend to balance any investments in such acquisitions with investments
in our existing business and our policy of returning value to shareholders in the form
of dividends.
|
Product
Development
We
place considerable emphasis on research and development in order to improve and expand the functionality of our technologies and
to develop new applications. We believe that our future success depends upon our ability to maintain our technological leadership,
to enhance our existing products and to introduce new commercially viable products addressing the needs of our customers on a
timely basis. We also intend to support emerging technologies as they are introduced in the same way we have supported new technologies
in the past. We will continue to devote a significant portion of our resources to research and development. We believe that internal
development of our technology is the most effective means of achieving our strategic objective of providing an extensive, integrated
and feature-rich development technology. For significant version release see “Magic’s Software Solutions” discussed
above.
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 Magic xpc 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 1,700 experts and hundreds of projects gone live in a variety of advanced technologies in the U.S., Europe and Israel,
we have developed significant expertise and accumulated vast experience in integration projects. Such projects are typically more
complex and require a high level of industry knowledge and highly skilled professionals. Our integration expertise, as well as
our global reach allows us to deliver comprehensive, value added services to our customers. Our IT services customers include
major global telecoms, OEMs and engineering, furnish and installation service companies.
Strategic
Consulting and Outsourcing Services
We
provide a broad range of IT consulting services in the areas of infrastructure design and delivery, application development, technology
planning and implementation services, cloud computing, as well as supplemental outsourcing services. Our wholly-owned subsidiaries,
Fusion Solutions LLC, Xsell Resources Inc., Allstates Consulting Services LLC, Futurewave Systems, Inc., 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,
|
|
|
|
2016
|
|
|
2017
|
|
|
2018
|
|
|
|
(
in
thousands
)
|
|
Software sales
|
|
$
|
19,626
|
|
|
$
|
21,644
|
|
|
$
|
25,454
|
|
Maintenance and technical support
|
|
|
25,885
|
|
|
|
30,386
|
|
|
|
30,951
|
|
Consulting services
|
|
|
156,135
|
|
|
|
206,110
|
|
|
|
227,970
|
|
Total revenues
|
|
$
|
201,646
|
|
|
$
|
258,140
|
|
|
$
|
284,375
|
|
|
|
Year ended December 31,
|
|
|
|
2016
|
|
|
2017
|
|
|
2018
|
|
|
|
(
in
thousands
)
|
|
Israel
|
|
$
|
58,079
|
|
|
$
|
91,917
|
|
|
$
|
103,850
|
|
Europe
|
|
|
23,642
|
|
|
|
26,635
|
|
|
|
28,257
|
|
United States.
|
|
|
100,470
|
|
|
|
123,113
|
|
|
|
137,066
|
|
Japan
|
|
|
11,226
|
|
|
|
9,253
|
|
|
|
9,797
|
|
Other
|
|
|
8,229
|
|
|
|
7,222
|
|
|
|
5,405
|
|
Total revenues
|
|
$
|
201,646
|
|
|
$
|
258,140
|
|
|
$
|
284,375
|
|
Our
Magic xpa, Magic xpi, Magic xpc 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
MatrixCare
Mahindra & Mahindra
Moose Toys
Morgan Advanced Materials
Mundipharma
Nagarjuna Fertilizers &
Chemicals Ltd.
Nespresso
NextiraOne
NHS Trust
Nihon UNISYS
Nintendo
Orangina Schweppes
Pacific Steel & Recycling
Parrot
|
Petzl
PGG Wrightson
PTT
QboCel Mexico
Rosenbauer
Segafredo France
Sennheiser
Sony DADC
Staff Development Management
Systems (SDMS Ltd)
SECOM Trust Systems
Sodiaal
Stallergenes
State of Washington Courts
Sterling Crane
Sun Life Insurance
Synbra Holding BV
Telenet Belgium
TelOne Zimbabwe
The Himalaya Drug Company
TOA
TOTO
UPS
Valeo services
Veolia Waters
Viparis
Vishay Intertechnology
Vodafone Iceland
Volvo Brazil
WellMark
Worldwide Flight Services (WFS)
ZF Lemforder
|
Sales,
Marketing and Distribution
We
market, sell and support our products through our own global offices and marketing department, as well as through a broad global
channel-network of MSPs, system integrators, value-added distributors and resellers, and OEM and consulting partners. Our sales
force is based in our regional offices in the United States, Japan, Germany, United Kingdom, Netherlands, France, Hungary, South
Africa, India and Israel, and through regional distributors elsewhere. Our sales network is present in about 50 countries worldwide.
Direct
Sales
.
For Magic xpa and AppBuilder, our direct sales force pursues software solution providers and enterprise
accounts. Our sales personnel carry out strategic sales with a direct approach to decision makers, managing a constantly monitored
consultative type of sales cycle. Magic xpi and Magic xpc are mostly sold through indirect channels and through our ecosystem
business relationships, but we have some direct customers with integration needs.
As
of December 31, 2018, we employed approximately 140 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.
More
and more enterprises prefer to integrate their applications using integration platform as a service (iPaaS) technology and for
this purpose we launched our new Magic xpc, a hybrid iPaaS solution.
There
are several similar products in the market utilizing the model driven architecture, or MDA, approach utilized by AppBuilder. The
market for this type of platform is highly competitive. Companies such as CA and IBM have tools that compete directly with AppBuilder.
Furthermore, new development paradigms have become very popular in IT software development and developers today have many alternatives.
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
In
accordance with industry practice, since we have no registered patents on our software solution technologies, we rely upon a combination
of copyright, trademark, trade secret laws and contractual restrictions to protect our rights in our software products. Our policy
has been to pursue copyright protection for our software and related documentation and trademark registration of our product names.
In addition, our key employees and independent contractors and distributors are required to sign non-disclosure and secrecy agreements.
We
provide our products to customers under a non-exclusive, non-transferable license. Usually, we have not required end-users of
our products to sign license agreements. Generally, a “shrink wrap” license agreement is included in the product packaging,
which explains that by opening the package seal, the user is agreeing to the terms contained therein. It is uncertain whether
license agreements of this type are legally enforceable in all of the countries in which the software is marketed.
We
do not believe that patent laws are a significant source of protection for our products since the software industry is characterized
by rapid technological changes, the policing of unauthorized use of software is a difficult task and software piracy is expected
to continue to be a persistent problem for the packaged software industry. As there can be no assurance that the above-mentioned
means of legal protection will be effective against piracy of our products, and since policing unauthorized use of software is
difficult, software piracy can be expected to be a persistent potential problem.
We
believe that because of the rapid pace of technological change in the software industry, the legal protections for our products
are less significant factors in our success than the knowledge, ability and experience of our employees, the frequency of product
enhancements and the timeliness and quality of our support services.
Our
trademark rights include rights associated with our use of our trademarks and rights obtained by registration of our trademarks.
We have obtained trademark registrations in South Africa, Canada, China, Israel, the Netherlands (Benelux), Switzerland, Thailand,
Japan, the United Kingdom and the United States. The initial terms of the registration of our trademarks range from 10 to 20 years
and are renewable thereafter. Our use and registration of our trademarks do not ensure that we have superior rights to others
that may have registered or used identical or related marks on related goods or services. We have registered a copyright for our
software in the United States and Japan. In addition, we have registered copyrights for some of our manuals in the United States
and have acquired an International Standard Book Number (ISBN) for some of our manuals. Our copyrights expire 70 years from date
of first publication.
|
C.
|
Organizational
structure
|
The
following table sets forth the legal name, location and country or state of incorporation and percentage ownership of our subsidiaries
as of December 31, 2018:
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
|
%
|
Fusion Solutions LLC.
|
|
Delaware
|
|
|
100
|
%
|
Fusion Technical Solutions LLC.
|
|
Delaware
|
|
|
49
|
%
|
Xsell Resources Inc.
|
|
Pennsylvania
|
|
|
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
|
%
|
Onyx Magyarorszag Szsoftverhaz
|
|
Hungary
|
|
|
100
|
%
|
Magix Integration (Proprietary) Ltd
|
|
South Africa
|
|
|
100
|
%
|
AppBuilder Solutions Ltd
|
|
United Kingdom
|
|
|
100
|
%
|
Complete Business Solutions Ltd
|
|
Israel
|
|
|
100
|
%
|
Datamind Technologies Ltd
|
|
Israel
|
|
|
80
|
%
|
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
|
%
|
Pilat Europe Ltd.
|
|
United Kingdom
|
|
|
100
|
%
|
Pilat (North America), Inc.
|
|
New Jersey
|
|
|
100
|
%
|
Roshtov Software Industries Ltd
|
|
Israel
|
|
|
60
|
%
|
BridgeQuest Labs, Inc.
|
|
North Carolina
|
|
|
100
|
%
|
BridgeQuest, Inc.
|
|
North Carolina
|
|
|
100
|
%
|
Allstates Consulting Services LLC
|
|
Delaware
|
|
|
100
|
%
|
F.T.S. - Formula Telecom Solutions Ltd.
|
|
Israel
|
|
|
100
|
%
|
FTS Bulgaria Ltd. (FTS Global Ltd.)
|
|
Bulgaria
|
|
|
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
|
%
|
Skysoft Solutions Ltd.
|
|
Israel
|
|
|
75
|
%
|
Futurewave Systems, Inc.
|
|
Georgia
|
|
|
100
|
%
|
|
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 paid $0.4 million in annual rent for
the Or Yehuda facilities under a lease agreement expiring in June 2019.
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 $2.4 million in the year ended December 31, 2018.
|
ITEM
4A.
|
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, Israel Europe, Asia and South Africa. 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 provide maintenance and technical
support as well as professional services to our enterprise customers and to MSPs. In addition, we sell our Magic xpi and magic
xpc technologies for business integration to enterprises using specific popular software applications, such as SAP, Salesforce.com,
IBM i (AS/400) or Oracle JD Edwards and other business applications. We refer to these vendor-centered market sectors as ecosystems.
Vision
and Focus Areas
Our
vision of how the industry will evolve is being driven by the change in enterprise mobility, cloud computing and Big Data. We
believe that our technology and vast services will allow us to expand our offerings into the cloud and mobile enterprise markets
with speed, scale and flexibility. We intend to remain focused on both the technology and business architectures that will enable
our customers to take advantage of the cost efficiencies and competitive advantages conveyed by these technologies. We intend
to continue to prudently take advantage of opportunities to capture market transitions and to put our assets to use in existing
and new markets as the recovery continues. We believe that our strategy and our ability to innovate and execute may enable us
to improve our competitive position in difficult business conditions and may continue to provide us with long-term growth opportunities.
Key
Factors Affecting our Business
Our
operations and the operating metrics discussed below have been, and will likely continue to be affected by certain key factors
as well as certain historical events and actions. The key factors affecting our business and results of operations include among
others, dependence on a limited number of core product families, selected vertical software solutions and services, competition,
ability to realize benefits from business acquisitions, dependence on a key customer for a significant percentage of our revenues
and changes in the mix of revenues generated by different revenue elements affect our gross margins and profitability. For further
discussion of the factors affecting our results of operations, see “Risk Factors.”
Dependence
on a limited number of core product families and services
We
derive a significant portion of our revenues from sales of application and integration platforms primarily under our Magic xpa,
Magic xpi, Magic xpc and AppBuilder brands and from related professional services, software maintenance and technical support
as well as from packaged software solutions in several business verticals (mainly human recourses, cargo handling, patient medical
records and billing), and from other IT professional services, which include IT consulting and outsourcing services. Our future
growth depends heavily on our ability to effectively develop and sell new products developed by us or acquired from third parties
as well as add new features to existing products. A decrease in revenues from our principal products and services would adversely
affect our business, results of operations and financial condition.
Competition
We
compete with other companies in the areas of application platforms, business integration and business process management, and
in the applications and services markets in which we operate. The growth of the SaaS and Enterprise Mobility market has increased
the competition in these areas. We expect that such competition will continue to increase in the future, both with respect to
our technology, applications and services which we currently offer and applications and services which we and other vendors are
developing. Increased competition, direct and indirect, could adversely affect our business, financial condition and results of
operations.
We
also compete with other companies in the technical IT consulting and outsourcing services industry. This industry is highly competitive
and fragmented and has low entry barriers. We, through five of our subsidiaries in the United States and five of our subsidiaries
in Israel, compete for potential customers with providers of outsourcing services, systems integrators, computer systems consultants,
other providers of technical IT consulting services and, to a lesser extent, temporary personnel agencies. We expect competition
to increase, and we may not be able to remain competitive.
Some
of our existing and potential competitors are larger companies, have substantially greater resources than us, including financial,
technological, marketing, skilled human resources and distribution capabilities, and enjoy greater market recognition than us.
We may not be able to differentiate our products and services from those of our competitors, offer our products as part of integrated
systems or solutions to the same extent as our competitors, or successfully develop or introduce new products that are more cost-effective,
or offer better performance than our competitors. Failure to do so could adversely affect our business, financial condition and
results of operations.
Dependence
on key customers
We depend on repeat product and professional
services revenues from a certain base of existing customers. Our five largest customers accounted for in the aggregate 27% of
our revenues in each of the years ended December 31, 2017 and 2018, respectively. One of these five customers accounts for 84%
of the revenues of a subsidiary. If these existing customers decide not to continue utilizing our professional services, not to
renew their existing engagements, not to continue using our products, or decide to significantly decrease their total expenditures
with us, it may adversely affect our business, results of operations and financial condition. Under their master services agreements,
all five customers may terminate their agreements with us upon only a 30-days’ notice and without any penalty.
Revenue
Mix
We
derive our revenues from the sale of proprietary and third party software licenses, related professional services, maintenance
and technical support as well as from other IT professional services. In recent years the decline in our gross margin was primarily
affected by the change in proportion of our revenues generated from the sale of each of those elements of our revenues. Our revenues
from the sale of our proprietary software licenses, related professional services, maintenance and technical support have higher
gross margins than our revenues from third party software licenses and IT professional and outsourcing services. Any increase
in the portion of third party software license sales out of total license sales will decrease our gross profit margin. If the
relative proportion of our revenues from the sale of IT professional services continues to increase as a percentage of our total
revenues, our gross profit margins may continue to decline in the future.
We
may encounter difficulties in realizing the potential financial or strategic benefits of recent and future business acquisitions.
A
significant part of our business strategy is to pursue acquisitions and other initiatives based on strategy centered on three
key factors: growing our customer base, expanding geographically and adding complementary solutions to our portfolio— all
while we seek to ensure our continued high quality of services and product delivery. As such, in recent years we made numerous
of acquisitions. Mergers and acquisitions of companies are inherently risky and subject to many factors outside of our control
and no assurance can be given that our future acquisitions will be successful and will not adversely affect our business, operating
results, or financial condition. In the future, we may seek to acquire or make strategic investments in complementary businesses,
technologies, services or products, or enter into strategic partnerships or alliances with third parties in the future in order
to expand our business. Failure to manage and successfully integrate acquisitions could materially harm our business and operating
results. Prior acquisitions have resulted in a wide range of outcomes, from successful introduction of new products and technologies
to a failure to do so. Even when an acquired company has previously developed and marketed products, there can be no assurance
that new product enhancements will be made in a timely manner or that pre-acquisition due diligence will have identified all possible
issues that might arise with respect to such products.
|
●
|
If
we acquire another business, we may face difficulties, including: Difficulties in integrating
the operations, systems, technologies, products, and personnel of the acquired businesses
or enterprises;
|
|
●
|
Diversion
of management’s attention from normal daily operations of the business and the
challenges of managing larger and more widespread operations resulting from acquisitions;
|
|
●
|
Potential
difficulties in completing projects associated with in-process research and development;
|
|
●
|
Difficulties
in entering markets in which we have no or limited direct prior experience and where
competitors in such markets have stronger market positions;
|
|
●
|
Insufficient
revenue to offset increased expenses associated with acquisitions; and
|
|
●
|
The
potential loss of key employees, customers, distributors, vendors and other business
partners of the companies we acquire following and continuing after announcement of acquisition
plans.
|
Impact
of Currency Fluctuations and of Inflation
Our
financial statements are stated in U.S. dollars, our functional currency. However, a substantial portion of our revenues and costs
are incurred in other currencies, particularly NIS, Euros, Japanese yen, and the British pound. We also maintain substantial non-U.S.
dollar balances of assets, including cash, accounts receivable, and liabilities, including accounts payable and debts to banks
and financial institutions. Therefore, fluctuations in the value of the currencies in which we do business relative to the U.S.
dollar may adversely affect our business, results of operations and financial condition. The depreciation of such other currencies
in relation to the U.S. dollar has the effect of reducing the U.S. dollar value of any of our liabilities which are payable in
those other currencies (unless such costs or payables are linked to the U.S. dollar). Such depreciation also has the effect of
decreasing the U.S. dollar value of any asset that is denominated in such other currencies or receivables payable in such other
currencies (unless such receivables are linked to the U.S. dollar). In addition, the U.S. dollar value of revenues and expenses
denominated in such other currencies would decrease. Conversely, the appreciation of any currency in relation to the U.S. dollar
has the effect of increasing the U.S. dollar value of any unlinked assets and the U.S. dollar amounts of any unlinked liabilities
and increasing the U.S. dollar value of revenues and expenses denominated in other currencies.
In
addition, while we incur a portion of our costs in NIS, the U.S. dollar cost of our operations in Israel is influenced by the
extent to which any increase in the rate of inflation in Israel is (or is not) offset, or is offset on a lagging basis, by a devaluation
of the NIS in relation to the U.S. dollar.
Because
exchange rates between the NIS, euro, Japanese Yen and the British pound and the U.S. dollar fluctuate continuously, exchange
rate fluctuations and especially larger periodic devaluations will have an impact on our profitability and period-to-period comparisons
of our results. We cannot assure you that in the future our results of operations may not be adversely affected by currency fluctuations.
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,
|
|
|
|
2014
|
|
|
2015
|
|
|
2016
|
|
|
2017
|
|
|
2018
|
|
New Israeli Shekel
|
|
|
(12
|
)%
|
|
|
(0.3
|
)%
|
|
|
(1.5
|
)%
|
|
|
(9.8
|
)%
|
|
|
8.1
|
%
|
Euro
|
|
|
(11.5
|
)%
|
|
|
(10.4
|
)%
|
|
|
3.5
|
%
|
|
|
(12.2
|
)%
|
|
|
4.6
|
%
|
Japanese Yen
|
|
|
(14.9
|
)%
|
|
|
(0.8
|
)%
|
|
|
(2.8
|
)%
|
|
|
(3.8
|
)%
|
|
|
(2.4
|
)%
|
British Pound
|
|
|
(5.5
|
)%
|
|
|
(4.9
|
)%
|
|
|
20.6
|
%
|
|
|
(9
|
)%
|
|
|
5.6
|
%
|
Israeli Consumer Price Index
|
|
|
(0.2
|
)%
|
|
|
(1.0
|
)%
|
|
|
(0.2
|
)%
|
|
|
0.4
|
%
|
|
|
0.8
|
%
|
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, 2016, 2017 and 2018.
|
|
Software
services
|
|
|
IT professional
services
|
|
|
Unallocated
expense
|
|
|
Total
|
|
|
|
(U.S. dollars in thousands)
|
|
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
|
|
Depreciation, amortization
and stock based compensation expenses
|
|
|
7,531
|
|
|
|
3,769
|
|
|
|
460
|
|
|
|
11,760
|
|
Capitalized software development costs
|
|
|
(4,224
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
(4,224
|
)
|
EBITDA
|
|
$
|
15,592
|
|
|
$
|
15,918
|
|
|
$
|
(2,887
|
)
|
|
$
|
28,623
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2017
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
$
|
77,100
|
|
|
$
|
181,040
|
|
|
$
|
-
|
|
|
$
|
258,140
|
|
Expenses
|
|
|
63,649
|
|
|
|
164,558
|
|
|
|
3,977
|
|
|
|
232,184
|
|
Operating income (loss)
|
|
$
|
13,451
|
|
|
$
|
16,482
|
|
|
$
|
(3,977
|
)
|
|
$
|
25,956
|
|
Depreciation, amortization
and stock based compensation expenses
|
|
|
9,242
|
|
|
|
4,100
|
|
|
|
347
|
|
|
|
13,689
|
|
Capitalized software development costs
|
|
|
(3,771
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
(3,771
|
)
|
EBITDA
|
|
$
|
18,922
|
|
|
$
|
20,582
|
|
|
$
|
(3,630
|
)
|
|
$
|
35,874
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2018
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
$
|
81,332
|
|
|
$
|
203,043
|
|
|
$
|
-
|
|
|
$
|
284,375
|
|
Expenses
|
|
|
63,902
|
|
|
|
183,985
|
|
|
|
4,790
|
|
|
|
252,677
|
|
Operating income (loss)
|
|
$
|
17,430
|
|
|
$
|
19,058
|
|
|
$
|
(4,790
|
)
|
|
$
|
31,698
|
|
Depreciation, amortization
and stock based compensation expenses
|
|
|
8,727
|
|
|
|
3,611
|
|
|
|
,420
|
|
|
|
12,758
|
|
Capitalized software development costs
|
|
|
(3,666
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
(3,666
|
)
|
EBITDA
|
|
$
|
22,491
|
|
|
$
|
22,669
|
|
|
$
|
(4,370
|
)
|
|
$
|
40,790
|
|
Explanation
of Key Income Statement Items
Revenues
.
Revenues are derived from sales of software licenses (proprietary and non-proprietary), related professional services, maintenance
and technical support and other IT professional services, which include, cloud computing and IT consulting and outsourcing services.
Revenues may continue to be affected by factors including market uncertainty, which can result in cautious spending in our global
markets; changes in the geopolitical environment; sales cycles; fluctuation of exchange rates; changes in the mix of direct sales
and indirect sales and variations in sales channels.
Cost
of Revenues.
Cost of revenues for software sales consist primarily of software production costs, royalties and licenses
payable to third parties, as well as amortization of capitalized and acquired software costs. Cost of revenues for maintenance
and technical support and professional services consists primarily of personnel expenses, subcontracting and other related costs.
Cost of revenues for software sales is affected by changes in the mix of products sold; price competition; sales discounts; fluctuation
of exchange rates; and increases in labor costs. Service gross margin may be impacted by various factors such as the change in
mix between technical support services and advanced IT professional services, the timing of technical support service contract
initiations and renewals and the timing of our strategic investments in headcount and resources to support this business.
Research
and Development Expenses, Net.
Research and development costs consist primarily of personnel expenses of employees engaged
in on-going research and development activities, subcontracting, development tools and other related expenses. The capitalization
of software development costs is applied as reductions to gross research and development costs to calculate net research and development
expenses.
The
following table sets forth the gross research and development costs, capitalized software development costs, and the net research
and development expenses for the periods indicated:
|
|
Year ended December 31,
|
|
|
|
2016
|
|
|
2017
|
|
|
2018
|
|
|
|
(U.S. dollars in thousands)
|
|
Gross research and development costs
|
|
$
|
10,063
|
|
|
$
|
10,713
|
|
|
$
|
9,363
|
|
Less capitalized software development costs
|
|
|
(4,224
|
)
|
|
|
(3,771
|
)
|
|
|
(3,667
|
)
|
Research and development expenses, net
|
|
$
|
5,839
|
|
|
$
|
6,942
|
|
|
$
|
5,696
|
|
Selling
and Marketing Expenses
.
Selling and marketing expenses consist primarily of salaries and related expenses for sales
and marketing personnel, sales commissions, third party royalties, marketing programs and campaigns, website related expenses,
public relations, on-line advertising, industry analyst relations, promotional materials, travel expenses and conferences and
trade shows exhibit expenses, as well as amortization of acquired customer relationships recorded as a result of business combinations.
General
and Administrative Expenses
.
General and administrative expenses consist primarily of salaries and related expenses
for executive, accounting, human resources and administrative personnel, professional fees, legal expenses, provisions for doubtful
accounts, and other general and administrative corporate expenses.
Financial
income (expenses), net
.
Net financial income (expenses) consists primarily of interest earned on cash equivalents
deposits and marketable securities, bank fees and interest paid on loans received, interest expenses related to liabilities in
connection with acquisitions and 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,
|
|
|
|
2016
|
|
|
2017
|
|
|
2018
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
Software
|
|
|
9.7
|
%
|
|
|
8.4
|
%
|
|
|
9.0
|
%
|
Maintenance and technical support
|
|
|
12.8
|
|
|
|
11.8
|
|
|
|
10.8
|
|
Consulting services
|
|
|
77.5
|
|
|
|
79.8
|
|
|
|
80.2
|
|
Total revenues
|
|
|
100.0
|
%
|
|
|
100.0
|
%
|
|
|
100.0
|
%
|
Cost of revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
Software
|
|
|
4.3
|
|
|
|
3.7
|
|
|
|
3.5
|
|
Maintenance and technical support
|
|
|
1.5
|
|
|
|
1.5
|
|
|
|
1.4
|
|
Consulting services
|
|
|
60.3
|
|
|
|
62.6
|
|
|
|
63.9
|
|
Total cost of revenues
|
|
|
66.1
|
|
|
|
67.8
|
|
|
|
68.8
|
|
Gross profit
|
|
|
33.9
|
|
|
|
32.2
|
|
|
|
31.2
|
|
Operating costs and expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
Research and development, net
|
|
|
2.9
|
|
|
|
2.7
|
|
|
|
2.0
|
|
Selling and marketing,
|
|
|
11.8
|
|
|
|
10.6
|
|
|
|
9.6
|
|
General and administrative
|
|
|
8.7
|
|
|
|
8.8
|
|
|
|
8.5
|
|
Total operating expenses, net
|
|
|
23.4
|
|
|
|
22.1
|
|
|
|
20.1
|
|
Operating income
|
|
|
10.5
|
|
|
|
10.1
|
|
|
|
11.1
|
|
Financial income (expenses), net
|
|
|
(0.2
|
)
|
|
|
(0.7
|
)
|
|
|
0.1
|
|
Income before taxes on income
|
|
|
10.3
|
|
|
|
9.4
|
|
|
|
11.2
|
|
Tax on income
|
|
|
2.0
|
|
|
|
2.5
|
|
|
|
2.5
|
|
Net income attributable to redeemable non-controlling interests
|
|
|
(0.2
|
)
|
|
|
(0.6
|
)
|
|
|
(0.5
|
)
|
Net income attributable to non-controlling interests
|
|
|
(2.4
|
)
|
|
|
(0.6
|
)
|
|
|
(1.2
|
)
|
Net income attributable to Magic’s shareholders
|
|
|
5.9
|
|
|
|
6.0
|
|
|
|
7.7
|
|
Year
Ended December 31, 2018 Compared With Year Ended December 31, 2017
Revenues
.
Revenues in 2018 increased by 10% from $258.1 million in 2017 to $284.4 million in 2018.
Revenues
from the software services business segment increased by 5%, from $77.1 million in 2017 to $81.3 million in 2018.
Revenues
from the IT professional services business segment increased by 13% from $180.0 million in 2017 to $203.0 million in 2018, primarily
attributable to: (i) the inclusion of Futurewave Systems Inc. (consolidated as of December 2017), and (ii) increased demand for
the professional services offerings in Israel by Comblack IT Ltd, and in the U.S. by our U.S. subsidiaries.
Revenues
from sales of proprietary technology software licenses increased by 16% from $14.7 million in 2017 to $17.0 million in 2018. The
increase in sales of licenses was attributable mainly to an increase in demand for both our Magic xpa and Magic xpi solutions.
Revenues
from sales of proprietary packaged and third party software solutions increased by 23% from $6.9 million in 2017 to $8.5 million
in 2018, primarily attributable to a significant increase in third party software solutions ordered by Israeli customers.
Revenues
from maintenance and technical support increased by 2% from $30.4 million in 2017 to $31.0 million in 2018.
Revenues
from IT consulting services increased by 11% from $206.1 million in 2017 to $228.0 million in 2018. The increase was primarily
attributable to: (i) the inclusion of Futurewave Systems Inc. (consolidated as of December 2017), and (ii) increased demand for
the professional services offerings in Israel by Comblack IT Ltd, and in the U.S. by our U.S. subsidiaries.
The
following table summarizes our revenues by geographical market for the years ended December 31, 2017 and 2018:
|
|
Year ended December 31,
|
|
|
|
2017
|
|
|
2018
|
|
|
|
(U.S. dollars in thousands)
|
|
United States
|
|
$
|
123,113
|
|
|
$
|
137,066
|
|
Israel
|
|
|
91,917
|
|
|
|
103,850
|
|
Europe
|
|
|
26,635
|
|
|
|
28,257
|
|
Japan
|
|
|
9,253
|
|
|
|
9,797
|
|
Other
|
|
|
7,222
|
|
|
|
5,405
|
|
Total revenues
|
|
$
|
258,140
|
|
|
$
|
284,375
|
|
Cost
of Revenues
. Cost of revenues increased by 12% from $175.2 million in 2017 to $195.6 million in 2018.
Cost
of revenues for software increased by 4% from $9.6 million in 2017 to $10.0 million in 2018.
Cost
of revenues for maintenance and technical support increased by 5% from $3.9 million in 2017 to $4.1 million in 2018.
Cost
of revenues for IT consulting services increased by 12% from $161.7 million in 2017 to $181.5 million in 2018. The increase in
cost of revenues for IT consulting services is consistent with the increase in revenues from the same segment. Cost of revenues
for the years ended December 31, 2017 and 2018 include $7,000 and $2,000, respectively, of stock-based compensation recorded under
ASC 718
.
Gross
Margin
. Gross margin in 2018 was 31% compared to gross margin of 32% in 2017. The decrease in gross margin was primarily
attributable to an increase in sales of IT professional services carrying a lower gross margin, partially offset by the increase
in sales of software and maintenance and technical support carrying a higher gross margin.
Research
and Development Expenses, Net
. Gross research and development costs decreased by 13% from $10.7 million in 2017 to $9.4
million in 2018. Net research and development costs decreased by 18% from $6.9 million in 2017 to $5.7 million in 2018. In 2018,
we capitalized $3.7 million of software development costs compared to $3.8 million in 2017. Net research and development costs
as a percentage of revenues was 2.0% in 2018 compared to 2.7% in 2017. Gross (net) research and development costs as a percentage
of revenues of our software services business segment was approximately 12% (7%) in 2018 compared to approximately 14% (9%) in
2017. The decrease in our absolute gross and net research and development costs in 2018 is primarily attributable to the cost
reduction program which was implemented in Israel, offset by an increase in our offshore activities which further contributed
to our cost efficiency. Research and development costs for the years ended December 31, 2017 and 2018 include $8,000 and $4,000,
respectively, of stock-based compensation recorded under ASC 718.
Selling
and Marketing Expenses
.
Selling and marketing expenses of $27.2 million remained constant in 2017 and 2018. Selling
and marketing expenses as a percentage of revenues decreased from 10.6% in 2017 to 9.6% in 2018. The decrease in selling and marketing
expenses as a percentage of revenues is primarily due to the increase of our revenues in 2018. Selling and marketing expenses
for the years ended December 31, 2017 and 2018 include $0 and $4,000, respectively, of stock-based compensation recorded under
ASC 718.
General
and Administrative Expenses
. General and administrative expenses increased by 6% from $22.8 million in 2017 to $24.2 million
in 2018. General and administrative expenses as a percentage of revenues decreased from 8.8% in 2017 to 8.5% in 2018. The increase
in general and administrative expenses is primarily attributable to: (i) an increase in legal expenses in 2018 compared to 2017;
and (ii) a decrease in income recorded due to contingent liabilities as part of a business combination that did not meet its conditions
from $0.8 million recorded in 2017 to $0.2 million recorded in 2018. General and administrative expenses for the years ended December
31, 2017 and 2018 include $63,000 and $184,000, respectively, of stock-based compensation recorded under ASC 718.
Financial
Expenses, Net.
We recorded net financial expenses of $1.7 million in 2017 and net financial
income of $0.1 million in 2018. The change in net financial expenses (income) between 2017 and 2018 was primarily attributable
to the devaluation of the NIS in relation to the U.S. dollar on our NIS-denominated debt to financial institution.
Taxes
on Income
. We recorded taxes on income of $6.3 million in 2017 compared to $7.1 million in 2018. The increase in taxes
on income is primarily attributable to an increase in tax uncertainties amounting to $1.0 million.
Net Income Attributable to Our Shareholders
.
Our net income increased from $15.4 million in 2017 to $19.9 million in 2018, primarily attributable to (i) an increase in
gross profit of $5.8 million and (ii) a decrease in financial expenses, net, of $1.9 million, which was offset by (i) an increase
in net income attributable to redeemable non-controlling interests of $1.8 million, (ii) an increase in taxes on income of $0.7
million, and (iii) an increase in net income attributable to non-controlling interests of $0.6 million.
Year
Ended December 31, 2017 Compared With Year Ended December 31, 2016
Revenues
.
Revenues in 2017 increased by 28% from $201.6 million in 2016 to $258.1 million in 2017.
Revenues
from the software services business segment increased by 9%, from $70.8 million in 2016 to $77.1 million in 2017, primarily attributable
to the inclusion of Roshtov Software Industries Ltd. for the full year (consolidated during the second half of 2016), accounting
for 68% of the growth.
Revenues
from the IT professional services business segment increased by 38% from $130.8 million in 2016 to $180.0 million in 2017, primarily
attributable to: (i) increased demand for the professional services offerings in Israel by Comblack IT Ltd, and in the U.S. by
all of our U.S. subsidiaries; and (ii) the inclusion 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) for the full year.
Revenues
from sales of proprietary technology software licenses increased by 16% from $12.7 million in 2016 to $14.7 million in 2017. The
increase in sales of licenses was attributable to anticipated software renewal lifecycle among some of our AppBuilder’s
larger enterprise customers and increased demand for the Magic xpi Integration Platform growing by 51% compared to 2016. This
growth was offset by a decrease in our vertical packaged software solution Leap™ revenues following a successful completion
of a large project and by a 6% decline in our Magic xpa license sales.
Revenues
from sales of proprietary packaged and third party software solutions amounting to $6.9 million remained constant in 2016 and
2017.
Revenues
from maintenance and technical support increased by 17% from $25.9 million in 2016 to $30.4 million in 2017. The increase in maintenance
and technical support was primarily attributable to the inclusion of Roshtov Software Industries Ltd. for the full year (consolidated
during the second half of 2016).
Revenues
from IT consulting services increased by 32% from $156.1 million in 2016 to $206.1 million in 2017. The increase was primarily
attributable to: (i) increased demand for the professional services offerings of in Israel by Comblack IT Ltd, and in the U.S.
from all our U.S. subsidiaries; and (ii) the inclusion 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) for the full year.
The
following table summarizes our revenues by geographical market for the years ended December 31, 2016 and 2017:
|
|
Year ended December 31,
|
|
|
|
2016
|
|
|
2017
|
|
|
|
(U.S. dollars in thousands)
|
|
United States
|
|
$
|
100,470
|
|
|
$
|
123,113
|
|
Israel
|
|
|
58,079
|
|
|
|
91,917
|
|
Europe
|
|
|
23,642
|
|
|
|
26,635
|
|
Japan
|
|
|
11,226
|
|
|
|
9,253
|
|
Other
|
|
|
8,229
|
|
|
|
7,222
|
|
Total revenues
|
|
$
|
201,646
|
|
|
$
|
258,140
|
|
Cost
of Revenues
. Cost of revenues increased by 31% from $133.4 million in 2016 to $175.2 million in 2017.
Cost
of revenues for software increased from $8.7 million in 2016 to $9.6 million in 2017. The increase in cost of revenues for licenses
was attributable to: (i) the increase in amortization costs of acquired software, Clicks (acquired during the second half of 2016);
and (ii) the increase in amortization of capitalized software development costs related to our Magic xpa and Magic xpi application
development and integration platforms.
Cost
of revenues for maintenance and technical support increased by 32% from $3.0 million in 2016 to $3.9 million in 2017, primarily
due to the inclusion of Roshtov Software Industries Ltd. for the full year (consolidated during the second half of 2016).
Cost
of revenues for IT consulting services increased by 33% from $121.8 million in 2016 to $161.7 million in 2017. The increase in
cost of revenues for IT consulting services was primarily attributable to the inclusion 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) for
the full year, with the remaining increase being consistent with the increase in revenues from IT consulting services. Cost of
revenues for the years ended December 31, 2016 and 2017 include $15,000 and $7,000, respectively, of stock-based compensation
recorded under ASC 718.
Gross
Margin
. Gross margin in 2017 was 32% compared to gross margin of 34% in 2016. The decrease in gross margin was primarily
attributable to: (i) an increase in sales of IT professional services carrying a lower gross margin compared to the increase in
sales of software and Maintenance and technical support despite its higher gross margin; and (ii) an increase in amortization
of capitalized software development costs (related to Magic xpa and Magic xpi application development and integration platforms)
and acquired technology (related to Roshtov Software Industries Ltd) amounting to $5.4 million in 2017 compared to $4.5 million
in 2016.
Research
and Development Expenses, Net
. Gross research and development costs increased by 6% from $10.1 million in 2016 to $10.7
million in 2017. Net research and development costs increased by 19% from $5.8 million in 2016 to $6.9 million in 2017. In 2017,
we capitalized $3.8 million of software development costs compared to $4.2 million in 2016. Net research and development costs
as a percentage of revenues was 2.7% in 2017 compared to 2.9% in 2016. Gross (net) research and development costs as a percentage
of revenues of our software services business segment was approximately 14% (9%) in 2017 compared to approximately 14% (8.2%)
in 2016. The increase in our absolute gross research and development costs in 2017 is primarily attributable to the inclusion
of Roshtov Software Industries Ltd. for the full year (consolidated during the second half of 2016). Research and development
costs for the years ended December 31, 2016 and 2017 include $17,000 and $8,000, respectively, of stock-based compensation recorded
under ASC 718.
Selling
and Marketing Expenses
.
Selling and marketing expenses increased by 15% from $23.8 million in 2016 to $27.2 million
in 2017. Selling and marketing expenses as a percentage of revenues decreased from 11.8% in 2016 to 10.6% in 2017. The increase
in selling and marketing costs was primarily attributable to (i) an increase in amortization expenses of acquired customer relationships
recorded as a result of business combinations in 2017 amounting to $6.5 million compared to $5.3 million in 2016, and (ii) acquisitions
completed during 2016 and consolidated for the entire year for the first time in 2017 amounting to $1.4 million, and (iii) increase
in our sales and marketing investments in our software technology platforms amounting to $0.8 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, 2016 and 2017 include $71,000 and $0, respectively, of stock-based compensation
recorded under ASC 718.
General
and Administrative Expenses
. General and administrative expenses increased by 30% from $17.6 million in 2016 to $22.8
million in 2017. General and administrative expenses as a percentage of revenues increased from 8.7% in 2016 to 8.8% in 2017.
The increase in general and administrative expenses is primarily attributable to: (i) acquisitions completed during 2016 and consolidated
for the entire year for the first time in 2017 amounting to $1.9 million; (ii) an increase in headcount of general and administrative
employees from 122 in 2016 to 139 in 2017; and (iii) an increase in provision for doubtful accounts from $0.4 million recorded
in 2016 to $1.2 million recorded in 2017. General and administrative expenses for the years ended December 31, 2016 and 2017 include
$49,000 and $63,000, respectively, of stock-based compensation recorded under ASC 718.
Financial
Expenses, Net
. We recorded net financial expenses of $0.4 million in 2016 and $1.7 million in 2017. The increase in net
financial expenses between 2016 and 2017 was primarily attributable to an increase in interest expenses on debt to banks and financial
institutions of $1.6 million, offset by a valuation of contingent liabilities in acquired subsidiaries in 2016 amounting to $0.2
million.
Taxes
on Income
. We recorded taxes on income of $3.9 million in 2016 compared to $6.3 million in 2017. The increase in taxes
on income is primarily attributable to: (i) acquisitions completed during 2016 and consolidated for the entire year for the first
time in 2017 amounting to $1.4 million: (ii) a decrease in deferred tax assets relate to net operating losses amounting to $1.2
million and (iii) an increase in current taxes recorded by our subsidiaries in Israel and the U.S. in line with the increase in
our operating income. These increase were offset by the positive impact of the decrease in our deferred tax liabilities recorded
following the reduction in the U.S. federal income tax rate to 21% (instead of 35%) effective from January 1, 2018, amounting
to $0.4 million.
Net Income Attributable to Our Shareholders
.
Our net income increased from $14.2 million in 2016 to $15.4 million in 2017, primarily attributable to (i) an increase in
gross profit of $14.7 million and (ii) a decrease in net income attributable to redeemable non-controlling interests of $3.0 million,
which was offset by (i) an increase in operating expenses of $9.8 million, (ii) an increase in taxes on income of $2.4 million,
(iii) an increase in net income attributable to non-controlling interests of $0.7 million, and (iv) an increase in financial expenses
of $1.3 million.
|
B.
|
Liquidity
and capital resources
|
To
date, we have financed our operations through income generated by operations, proceeds from our public offerings in 1991 (approximately
$8.5 million), 1996 (approximately $5.0 million), 2000 (approximately $79.6 million) and 2014 (approximately $54.7 million), private
equity investments in 1998 (approximately $12.2 million), 2010 (approximately $20.3 million) and 2018 (approximately $34.6 million),
loans and research and development and marketing grants primarily from the Government of Israel. In addition, we have also financed
our operations through short-term loans, long-term loans and borrowings under available credit facilities.
In
November 2016, we obtained a NIS 120 million loan linked to the New Israel Shekel from an Israeli financial institution. We intended
to use the proceeds from this loan for our general corporate purposes, which may include the funding of our working capital needs
and the funding of potential acquisitions. The principal amount of the loan is payable in seven equal annual payments with the
final payment due on November 2, 2023 and bears a fixed interest rate of 2.60% per annum, payable in two semi-annually payments.
The loan, which may be prepaid under certain circumstances (in any event for not less than NIS 5.0 million and thereon for amounts
which are a multiple of NIS 5.0 million), is subject to various financial covenants which mainly consist of the following:
|
a.
|
Our
equity will not be lower than $100 million (one hundred million U.S. Dollars) at all
times.
|
|
b.
|
Our
cash and cash equivalent and marketable securities available for sales will not be less
than $10 million (ten million U.S. Dollars).
|
|
c.
|
The
ratio of our total financial debts to total assets will not exceed 50%.
|
|
d.
|
The
ratio of our total financial debts less cash, short-term deposits and short-term marketable
securities to the annual EBITDA will not exceed 3.25 to 1.
|
|
e.
|
Cross
default, including following an immediate repayment initiated in relation to other financial
indebtedness in an amount that exceeds $5 million;
|
|
f.
|
Suspension
of trading of the debentures on the TASE over a period of 60 days, or the delisting of
the debentures from the TASE;
|
|
g.
|
If
there is a change in control without consent of the lender (a change of control is deemed
to occur if Formula ceases to be the controlling shareholder of our company, whether
directly or indirectly. Formula will be considered a controlling shareholder for so long
as it continues to hold at least 30% of the means of control of our company (within the
meaning of the Israeli Securities Law) and there is no other person or entity holding
a higher percentage. To the extent that Formula holds such controlling interest jointly
with others, it will be deemed to remain our controlling shareholder if it maintains
the highest percentage ownership among such other shareholders);
|
|
h.
|
The
existence and continuation of a bankruptcy event involving our company, or the liquidation
of our company or writing off of our assets;
|
|
i.
|
There
has been a material adverse change in the business of our company compared to the position
of our company shortly before the issuance of the loan and there is a material concern
that we will not be able to pay our obligations under the loan agreement on time;
|
|
j.
|
Failure
to comply with the negative pledge covenant.
|
To
date, we are in full compliance with the financial covenants of the loan.
On
July 12, 2018, we issued 4,268,293 ordinary shares at a price of $8.20 per share for a total of $34.6 million net of issuance
expenses. The shares were issued to Israeli institutional investors and to our controlling shareholder, Formula Systems (1985)
Ltd.
As
of December 31, 2018, we had approximately $113.9 million in cash and cash equivalents and available-for-sale marketable securities,
with net working capital of approximately $158.3 million and long term debts to banks and others of approximately $19.4 million
compared to approximately $90.9 million in cash and cash equivalents and available-for-sale marketable securities, with working
capital of approximately $122.4 million and long term debts to banks and others of approximately $27.8 million, as of December
31, 2017.
As
of December 31, 2017 and 2018, our long-term and short-term debt amounted to $37.6 million and $28.0 million, respectively and
our redeemable non-controlling interests as of December 31, 2017 and 2018 amounted to $25.8 million and $27.2 million, respectively.
Based
on our current operating forecast, we believe that our cash and cash equivalents (including available-for-sale marketable securities
and existing working capital, will be sufficient to meet our cash requirements for working capital and capital expenditures for
at least the next 12 months. We assume that our cash provided by operating activities may fluctuate in future periods as a result
of a number of factors, including fluctuations in our operating results, accounts receivable collections, payments of loans and
the timing and amount of tax and other payments.
We
believe the overall credit quality of our portfolio is strong, with our cash equivalents and fixed income portfolio invested in
securities with a weighted-average credit rating exceeding A. Our fixed income and publicly traded equity securities are classified
as Level 2 investments, as measured under ASC 820, “Fair Value Measurements and Disclosures,” as these vendors either
provide a quoted market price in an active market or use observable inputs.
Cash
Flows
The
following table summarizes our cash flows for the periods presented:
|
|
Year ended December 31,
|
|
|
|
2016
|
|
|
2017
|
|
|
2018
|
|
|
|
(
U.S. dollars in thousands
)
|
|
Net income from operations
|
|
$
|
16,708
|
|
|
$
|
17,914
|
|
|
$
|
24,776
|
|
Adjustments to reconcile net income to net cash provided by operating activities:
|
|
|
11,247
|
|
|
|
7,594
|
|
|
|
(726
|
)
|
Net cash provided by operating activities
|
|
|
27,955
|
|
|
|
25,508
|
|
|
|
24,050
|
|
Net cash used in investing activities
|
|
|
(34,203
|
)
|
|
|
(7,316
|
)
|
|
|
(19,554
|
)
|
Net cash provided by (used in) financing activities
|
|
|
20,411
|
|
|
|
(19,414
|
)
|
|
|
8,426
|
|
Effect of exchange rate changes on cash and cash equivalents
|
|
|
(1,037
|
)
|
|
|
1,985
|
|
|
|
(1,872
|
)
|
Increase (decrease) in cash and cash equivalents from operations
|
|
|
13,126
|
|
|
|
762
|
|
|
|
11,050
|
|
Net
cash provided by operating activities was $24.1 million for the year ended December 31, 2018, compared to $25.5 million and $28.0
million for the years ended December 31, 2017 and 2016, respectively.
Net
cash provided by operations in 2018 consists primarily of $24.8 million of net income adjusted for non-cash activities, including
$12.6 million of depreciation and amortization expenses, $0.2 million of stock compensation expenses, a $2.2 million increase
in trade payables, a $0.2 million of amortization of marketable securities premium, a $1.8 million increase in accrued expenses
and other accounts payable, a $0.4 million decrease in deferred revenues, and a $2.1 million decrease in value of loans which
are denominated in NIS as a result of the devaluation of the NIS in relation to the U.S. dollar, offset by a $0.1 million change
in deferred taxes, net, a $4.4 million increase in in other long term and short term accounts receivable and prepaid expenses,
and a $11.4 million increase in trade receivables, net.
Net
cash provided by operations in 2017 consists primarily of $17.9 million of net income adjusted for non-cash activities, including
$13.6 million of depreciation and amortization expenses, a $0.1 million of stock compensation expenses, a $3.6 million increase
in trade payables, a $0.2 million of amortization of marketable securities premium, a $4.4 million increase in accrued expenses
and other accounts payable, a $1.2 million increase in deferred revenues, and a $3.2 million increase in value of loans which
are denominated in NIS as a result of the appreciation of the NIS in relation to the U.S. dollar, offset by a $1.1 million change
in deferred taxes, net, a $1.8 million increase in in other long term and short term accounts receivable and prepaid expenses,
and a $15.8 million increase in trade receivables, net.
Net
cash 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 used in investing activities
was approximately $19.6 million for the year ended December 31, 2018, compared to net cash used in investing activities of approximately
$7.3 million for the year ended December 31, 2017 and net cash used in investing activities of approximately $34.2 million for
the year ended December 31, 2016.
Net
cash used in investing activities in 2018 is primarily attributable to $16.9 million investment in marketable securities and short-term
bank deposits, $0.9 investment in long-term bank deposits, $1.2 million used in business combinations, $0.9 million used to purchase
property and equipment and $3.7 million of capitalized software development costs, offset by $4 million provided by proceeds from
maturity of marketable securities.
Net cash used in investing activities
in 2017 is primarily attributable to $5.8 million investment in marketable securities, $1.8 million paid in connection with business
combinations, $1.4 million used primarily to purchase network equipment and computer hardware, as well as for furniture, office
equipment and leasehold improvements, and $3.8 million of capitalized software development costs, offset by, $1.2 million repayment
of short-term loan by a related-party, and $4.2 million provided by proceeds from maturity of marketable securities.
Net cash used in investing activities
in 2016 is primarily attributable to $9.4 million investment in marketable securities, $29.7 million paid in connection with 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 provided by financing activities was approximately $8.4 million for the year ended December 31, 2018, primarily attributable
to the issuance of $34.6 million of ordinary shares and $0.3 million received from the exercise of employee options, which were
offset by $3.1 million used in business combinations, dividend distributions of $13.5 million, dividends paid to redeemable non-controlling
interests of $2.7 million, decrease in short-term credit of $0.4 million and repayment of long-term loans of $6.6 million.
Net cash used in financing activities
was approximately $19.4 million for the year ended December 31, 2017, primarily attributable to dividend distributions of $9.4
million, dividend paid to non-controlling and redeemable non-controlling interests of $5.9 million, $5.1 million used in business
combinations and repayment of long-term loans of $8.2 million, offset by a $8.5 million long-term loan received and $0.6 million
received from the exercise of employee options.
Net cash provided by financing activities
was approximately $20.4 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, $1.8 million used in business combinations 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.
Dividends
We
have paid dividends since September 2012 consistent with our Board of Directors’ dividend policy. On August 2017, our Board
of Directors amended our dividend distribution policy, whereas, each year we distribute a dividend of up to 75% of our annual
distributable profits (previously 50%), subject to applicable law. Our Board of Directors may at its discretion and at any time,
change, whether as a result of a one-time decision or a change in policy, the rate of dividend distributions or decide not to
distribute a dividend. Since 2012 until December 31, 2018 we declared in the aggregate cash dividends of approximately $1.376
per share ($58.6 million in the aggregate). On March 3, 2019, we declared a cash dividend in the amount of $0.15 per share ($7.3
million in the aggregate) that was paid on March 27, 2019.
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
Effective
as of January 1, 2018, we implement the provisions of Accounting Standards Codification (“ASC”) Topic 606, Revenue
from Contracts with Customers (“ASC 606”). See Note 19 to our financial statements included in this annual report
for further disclosures required under ASC 606.
Revenues
are recognized when control of the promised goods or services are transferred to the customers, in an amount that reflects the
consideration that we expect to receive in exchange for those goods or services.
We
determine revenue recognition through the following steps:
|
●
|
identification
of the contract with a customer;
|
|
●
|
identification
of the performance obligations in the contract;
|
|
●
|
determination
of the transaction price;
|
|
●
|
allocation
of the transaction price to the performance obligations in the contract; and
|
|
●
|
recognition
of revenue when, or as, we satisfy a performance obligation.
|
Most
of our contracts with customers contain multiple performance obligations. For these contracts, we account for individual performance
obligations separately if they are distinct.
We
derive our revenues from licensing the rights to use our software (proprietary and non-proprietary), provision of related professional
services, maintenance and technical support as well as from other software and IT professional services (either fixed price or
based on time and materials). We sell our products primarily through direct sales force and indirectly through distributors and
value added resellers.
Under
ASC 606, an entity recognizes revenue when or as it satisfies a performance obligation by transferring software license or software
services to the customer, either at a point in time or over time. We recognize our revenues from software sales at a point in
time upon delivery of a software license. The software license is considered a distinct performance obligation, as the customer
can benefit from the software on its own. We recognize revenue over time on significant customization contracts that are covered
by contract accounting standards using cost inputs to measure progress toward completion of its performance obligations, which
is similar to the method prior to the adoption of ASC 606. Provisions for estimated losses on uncompleted contracts are made in
the period in which such losses are first determined, in the amount of the estimated loss for the entire contract. During the
years ended December 31, 2016, 2017 and 2018, no material estimated losses were identified.
Our
revenues from maintenance and support are derived from annual maintenance contracts providing for unspecified upgrades for new
versions and enhancements on a when-and-if-available basis for an annual fee. The right for an unspecified upgrade for new versions
and enhancements on a when-and-if-available basis do not specify the features, functionality and release date of future product
enhancements for the customer to know what will be made available and the general timeframe in which it will be delivered. We
consider the maintenance performance obligation as a distinct performance obligation that is satisfied over time and recognized
on a straight-line basis over the contractual period.
Revenue
from professional services both related to software and IT professional services businesses consists of either fixed price or
Time and Materials (T&M), and are considered performance obligations that are satisfied over time, and revenues are recognized
as the services are provided.
The
transaction price is allocated to the separate performance obligations on a relative standalone selling price basis. Standalone
selling prices of software license are estimated using the residual approach, due to the lack of selling software licenses on
a standalone basis, or the fact Company sells the license to different customers for a broad range of amounts. Standalone selling
prices of services are determined by considering several external and internal factors including, but not limited to, transactions
where the specific performance obligation is sold separately.
We
generally do not grant a right of return to our customers. When a right of return exists, we defer revenue until the right of
return expires, at which time revenue is recognized provided that all other revenue recognition criteria are met. Deferred revenues
include unearned amounts received under maintenance and support (mainly) and amounts received from customers for which revenues
have not yet been recognized.
Revenue
from third-party sales is recorded at a gross or net amount according to certain indicators. The application of these indicators
for gross and net reporting of revenue depends on the relative facts and circumstances of each sale and requires significant judgment.
We
pay commissions to sales and marketing and certain management personnel based on their attainment of certain predetermined sales
or profit goals. Sales commissions are considered incremental costs of obtaining a contract with a customer and are deferred and
amortized. We capitalize and amortize incremental costs of obtaining a contract, such as certain sales commission costs, on a
systematic basis that is consistent with the transfer to the customer of the performance obligations to which the asset relates.
We generally expense sales commissions as they are incurred when the amortization period would have been less than one year. Amortization
expenses related to these costs are included in sales and marketing expenses in the accompanying condensed interim consolidated
statements of operations.
We
do not assess whether a contract has a significant financing component if the expectation at contract inception is such that the
period between payment by the customer and the transfer of the promised goods or services to the customer will be one year or
less.
Research
and development costs
Research
and development costs incurred in the process of software development before establishment of technological feasibility are charged
to expenses as incurred. Costs incurred subsequent to the establishment of technological feasibility are capitalized according
to the principles set forth in ASC 985-20, “Costs of Software to be Sold, Leased or Marketed.”
We
establish technological feasibility upon completion of a detailed program design or working model.
Research
and development costs incurred in the process of developing product enhancements are generally charged to expenses as incurred.
ASC
985-20-35 requires that a product be amortized when the product is available for general release to customers. We consider a product
to be available for general release to customers when we complete the internal validation of the product that is necessary to
establish that the product meets its design specifications including functions, features, and technical performance requirements.
Internal validation includes the completion of coding, documentation and testing that ensure bugs are reduced to a minimum. The
internal validation of the product takes place a few weeks before the product is made available to the market. In certain instances,
we enter into a short pre-release stage, during which the product is made available to a selected number of customers as a beta
program for their own review and familiarization. Subsequently, the release is made generally available to customers from our
download area. Once a product is considered available for general release to customers, the capitalization of costs ceases and
amortization of such costs to “cost of sales” begins.
Capitalized
software costs are amortized on a product by product basis by the straight-line method over the estimated useful life of the software
product (approximately 5 years, due to their high rates of acceptance, the continued reliance on these products by existing customers,
and the demand for such products from prospective customers, all of which validate our expectations) which provides greater amortization
expense compared to the revenue-curve method.
We
assess the recoverability of these intangible assets on a regular basis by assessing the net realizable value of these intangible
assets based on the estimated future gross revenues from each product reduced by the estimated future costs of completing and
disposing of it, including the estimated costs of performing maintenance and customer support over its remaining economical useful
life using internally generated projections of future revenues generated by the products, cost of completion of products and cost
of delivery to customers over its remaining economical useful life. During the years ended December 31, 2016, 2017 and 2018, 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.
We
make estimates of fair value based upon assumptions and judgments a marketplace participant would consider and which we believe
to be reasonable. These estimates are based on historical experience and information obtained from the management of the acquired
businesses and relevant market and industry data and are, inherently, uncertain. Critical estimates made in valuing certain of
the intangible assets include, among other things, the following: (i) future expected cash flows from license sales, maintenance
agreements, customer contracts and acquired developed technologies and patents; (ii) expected costs to develop the in-process
research and development into commercially viable products and estimated cash flows from the projects when completed; (iii) the
acquired company’s brand and market position as well as assumptions about the period of time the acquired brand will continue
to be used in the combined company’s product portfolio; and (iv) discount rates. Unanticipated events and circumstances
may occur which may affect the accuracy or validity of such assumptions, estimates or actual results. Changes to these estimates,
relating to circumstances that existed at the acquisition date, are recorded as an adjustment to goodwill during the purchase
price allocation period (generally within one year of the acquisition date) and as operating expenses, if otherwise.
In
connection with purchase price allocations, we estimate the fair value of the support obligations assumed in connection with acquisitions.
The estimated fair value of the support obligations is determined utilizing a cost build-up approach. The cost build-up approach
determines fair value by estimating the costs related to fulfilling the obligations plus a normal profit margin. The sum of the
costs and operating profit approximates, in theory, the amount that we would be required to pay a third party to assume the support
obligation. See Note 3 to our consolidated financial statements for additional information on accounting for our recent acquisitions.
Goodwill
As
a result of our acquisitions, our goodwill represents the excess of the consideration paid or transferred plus the fair value
of contingent consideration and any non-controlling interest in the acquiree at the acquisition date over the fair values of the
identifiable net assets acquired.
ASC
350 allows an entity to first assess qualitative factors to determine whether it is necessary to perform the two-step quantitative
goodwill impairment test. If the qualitative assessment does not result in a more likely than not indication of impairment, no
further impairment testing is required. If it does result in a more likely than not indication of impairment, the two-step impairment
test is performed. Alternatively, ASC 350 permits an entity to bypass the qualitative assessment for any reporting unit and proceed
directly to performing the first step of the goodwill impairment test.
The
provisions of ASC 350 require that the quantitative two-step impairment test will be performed on goodwill at the level of the
reporting units. In the first step, or “Step one”, we compare the fair value of each reporting unit to its
carrying value. If the fair value exceeds the carrying value of the net assets, goodwill is considered not impaired, and we are
not required to perform further testing. If the carrying value of the net assets exceeds the fair value, then we must perform
the second step, or “Step two”, of the impairment test in order to determine the implied fair value of goodwill.
To determine the fair value used in Step one, we use discounted cash flows. If and when we are required to perform a Step two
analysis, determining the fair value of its net assets and its off-balance sheet intangibles, then we would be required to make
judgments that involve the use of significant estimates and assumptions.
We
determine the fair value of each reporting unit by using the income approach, which utilizes a discounted cash flow model, as
it believes that this approach best approximates the reporting unit’s fair value. Judgments and assumptions related to revenue,
operating income, future short-term and long-term growth rates, weighted average cost of capital, interest, capital expenditures,
cash flows, and market conditions are inherent in developing the discounted cash flow model. We consider historical rates and
current market conditions when determining the discount and growth rates to use in its analyses. If these estimates or their related
assumptions change in the future, we may be required to record impairment charges for its goodwill.
We
performed annual impairment tests during the fourth quarter in each of the years ended December 31, 2016, 2017 and 2018 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, judgments and estimates that marketplace
participants would consider in determining the fair value of long-lived assets (or asset groups).
Intangible
assets with finite lives are comprised of distribution rights, acquired technology, customer relationships, backlog and non-compete
agreements and are amortized over their economic useful life using a method of amortization that reflects the pattern in which
the economic benefits of the intangible assets are consumed or otherwise used up. Distribution rights, acquired technology and
non-compete agreements were amortized on a straight line basis and customer relationships and backlog were amortized on an accelerated
method basis over a period between 1 and 15 years based on the customer relationships identified.
During
the years ended December 31, 2016, 2017 and 2018, no impairment indicators were identified.
Marketable
Securities
We
account for all our investments in marketable securities in accordance with ASC 320 “Investments – Debt and Equity
Securities,” or ASC 320. Our marketable securities consist 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.
Other debt securities are held as trading securities and are measured at fair value through profit or loss.
We
recognize an impairment charge when a decline in the fair value of an investment that falls below its cost basis is determined
to be other-than-temporary.
Declines
in fair value of available-for-sale equity securities that are considered other-than-temporary, based on criteria described in
SAB Topic 5M, “Other Than Temporary Impairment of Certain Investments in Equity Securities,” are charged to earnings
(based on the entire difference between fair value and amortized cost). Factors considered in making such a determination include
the duration and severity of the impairment, the financial condition and near-term prospects of the issuer, and the intent and
ability of the company to retain its investment for a period of time sufficient to allow for any anticipated recovery in market
value.
For
declines in value of debt securities we apply an amendment to ASC 320. Under the amended impairment model, an other-than-temporary
impairment loss is deemed to exist and recognized in earnings if management intends to sell or if it is more likely than not that
it will be required to sell, a debt security, before recovery of its amortized cost basis. If the criteria mentioned above, does
not exist, we evaluate the collectability of the security in order to determine if the security is other than temporary impaired.
For
debt securities that are deemed other-than-temporary impaired, the amount of impairment recognized in the statement of operations
is limited to the amount related to “credit losses” (the difference between the amortized cost of the security and
the present value of the cash flows expected to be collected), while impairment related to other factors is recognized in other
comprehensive income.
We
did not record any impairment in the value of marketable securities during the years ended December 31, 2016, 2017 and 2018.
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. Expected volatility is based upon actual historical stock price movements and is calculated as of the grant dates for
different periods, since the Binomial model can be used for different expected volatilities for different periods. The risk-free
interest rate is based on the yield from U.S. Treasury zero-coupon bonds with an equivalent term to the contractual term of the
options. The 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. Since dividend payment is applied to reduce the exercise price of our options, the effect of the dividend protection
is reflected by using an expected dividend assumption of zero. For awards with performance conditions, compensation cost is recognized
over the requisite service period if it is ‘probable’ that the performance conditions will be satisfied, 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 ASC 740. ASC 740 prescribes the use of the
“asset and liability” method whereby deferred tax asset and liability account balances are determined based on differences
between financial reporting and tax bases of assets and liabilities and are measured using the enacted tax rates and laws that
will be in effect when the differences are expected to reverse. We provide a valuation allowance, if necessary, to reduce deferred
tax assets to their estimated realizable value. Deferred tax assets and liabilities are classified as non-current.
Taxes
that would apply in the event of disposal of investments in subsidiaries have not been taken into account in computing deferred
taxes, as it is our intention to hold these investments, rather than realize them. We do not expect our non-Israeli subsidiaries
to distribute taxable dividends in the foreseeable future, as their earnings are needed to fund their growth while we expect to
have sufficient resources in the Israeli companies to fund our cash needs in Israel.
Our
non-Israeli subsidiaries are taxed according to the tax laws in their respective domiciles of residence. If earnings are distributed
to Israel in the form of dividends or otherwise, the Company may be subject to additional Israeli income taxes (subject to an
adjustment for foreign tax credits) and foreign withholding tax rates.
Neither
Israeli income taxes, foreign withholding taxes nor deferred income taxes were provided in relation to undistributed earnings
of the non-Israeli subsidiaries. This is because we intend to permanently reinvest undistributed earnings in the foreign subsidiaries
in which those earnings arose. If these earnings were distributed in the form of dividends or otherwise, we would be subject to
additional Israeli income taxes (subject to an adjustment for foreign tax credits) and non-Israeli withholding taxes.
The
amount of cash and cash equivalents that are currently held outside of Israel that would be subject to income taxes if distributed
as dividends is $12.9 million. However, a determination of the amount of the unrecognized deferred tax liability for temporary
difference related to those undistributed earnings of foreign subsidiaries is not practicable due to the complexity of the structure
of our group of subsidiaries for tax purposes and the difficulty of projecting the amount of future tax liability.
We
utilize a two-step approach in recognizing and measuring uncertain tax positions accounted for in accordance with ASC 740. Under
the first step we evaluate a tax position taken or expected to be taken in a tax return by determining if the weight of available
evidence indicates that it is more likely than not that, based on technical merits, the tax position will be sustained on audit,
including resolution of any related appeals or litigation processes. The second step is to measure the tax benefit as the largest
amount that is more than 50% likely to be realized upon ultimate settlement with the tax authorities. We have accrued interest
and penalties related to unrecognized tax benefits in our provisions for income taxes. The total amount of gross unrecognized
tax benefits (tax on income) for the years ended December 31, 2016, 2017 and 2018 were ($159,000), ($300,000) and ($1,050,000),
respectively.
Recently
Issued Accounting Standards
For
a description of recently issued and recently adopted accounting standards, see Note 2 to our consolidated financial statements
appearing elsewhere in this annual report.
|
C.
|
Research
and Development
|
Our
research and development and support personnel work closely with our customers, our prospective customers and relevant market
analysts to determine our requirements and to design enhancements and new releases to meet market needs. We periodically release
enhancements and upgrades to our core products. In the years ended December 31, 2018, 2017 and 2016, we invested $9.4 million,
$10.7 million and $10.1 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, 2018, we employed 198 employees in research and development activities, of which 78 persons were located in Israel,
94 persons in India, 21 persons in Russia, 5 persons in Japan (when measured on a full time basis). 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, 2018 and the effect we expect them to have on
our liquidity and cash flow in future periods.
|
|
Payments due by period
|
|
Contractual Obligations
|
|
Total
|
|
|
less than
1 year
|
|
|
1-3 years
|
|
|
3-5 years
|
|
Operating lease obligations
|
|
$
|
6,235,000
|
|
|
$
|
2,224,000
|
|
|
$
|
3,305,000
|
|
|
$
|
706,000
|
|
Liabilities due to acquisition activities
|
|
|
1,004,000
|
|
|
|
910,000
|
|
|
|
94,000
|
|
|
|
-
|
|
Severance payments, net*
|
|
|
3,934,000
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Uncertainties in income taxes (ASC 740) **
|
|
|
2,175,000
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Short and Long term debt
|
|
|
28.049,000
|
|
|
|
8,661,000
|
|
|
|
10,241,000
|
|
|
|
9,147,000
|
|
Total contractual obligations
|
|
$
|
41,397,000
|
|
|
$
|
11,795,000
|
|
|
$
|
13,640,000
|
|
|
$
|
9,853,000
|
|
|
*
|
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
|
|
51
|
|
Chief
Executive Officer and Director
|
Sagi
Schliesser
(1)
|
|
47
|
|
External
Director
|
Ron
Ettlinger
(1)
|
|
52
|
|
External
Director
|
Naamit
Salomon
|
|
54
|
|
Director
|
Avi
Zakay
(1)
|
|
40
|
|
Director
|
Asaf
Berenstin
|
|
41
|
|
Chief
Financial Officer
|
Udi
Ertel
|
|
59
|
|
President,
Software Solutions division
|
Amit
Birk
|
|
48
|
|
Vice
President, Mergers and Acquisitions, General Counsel and Corporate Secretary
|
Arik
Kilman
|
|
66
|
|
Chairman,
Software Solutions division
|
Yakov
Tsaroya
|
|
49
|
|
Chief
Executive Officer of Coretech Consulting Services and Fusion Solutions
|
Uzi
Yaari
|
|
45
|
|
Chief
Executive Officer of Complete Business Solutions
|
Arik
Faingold
|
|
42
|
|
President,
Integration Solutions division
|
Yuval
Baruch
|
|
52
|
|
Chief
Executive Officer of Hermes Logistics
|
Hanan
Shahaf
|
|
67
|
|
Chief
Executive Officer of Roshtov Software Industries Ltd
|
|
(1)
|
Member
of our Audit and Compensation Committees
|
Messrs.
Guy Bernstein, Avi Zakay and Ms. Naamit Salomon were re-elected as directors at our 2018 annual general meeting of shareholders
to serve as directors until our 2019 annual general meeting of shareholders.
Messrs.
Sagi Schliesser and Ron Ettlinger are serving as external directors pursuant to the provisions of the Israeli Companies Law for
their second three-year terms.
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.
Avi
Zakay
has served as director of our company since February 2018. Mr. Zakay has been the sales manager of the Volkswagen
dealership and showroom in Rishon Letzion (Champion Motors) since 2014. In 2013, he served as the sales manager of the showroom
of Mitsubishi Motors in Netanya, and from 2007 to 2013, he served as a sales manager of BMW and Mercedes-Benz in Tel Aviv.
Mr. Zakay holds a B.A. degree in Business Administration and studied for an M.B.A. degree, both from Michlala Le-minhal College
in Tel-Aviv.
Asaf
Berenstin
has served as our chief financial officer since April 2010. In November 2011, Mr. Berenstin was appointed as
Chief Financial Officer of our parent company Formula Systems (1985) Ltd. in addition to his position as chief financial officer
of our company. Prior to that and from August 2008, Mr. Berenstin served as our corporate controller. Mr. Berenstin also serves
as a director of Michpal Micro Computers (1983) Ltd., a director at TSG IT Advanced Systems Ltd., and is a director at InSync
staffing, all of them are subsidiaries of Formula Systems. Prior to joining our company and from July 2007, Mr. Berenstin served
as a controller at Gilat Satellite Networks Ltd. (NASDAQ: GILT). From October 2003 to July 2008, Mr. Berenstin was a certified
public accountant at Kesselman & Kesselman, a member of PriceWaterhouseCoopers. Mr. Berenstin holds a B.A. degree in Accounting
and Economics and an M.B.A. degree, both from Tel Aviv University, and is a certified public accountant (CPA) in Israel.
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 chairman of our Software Solutions division since January 2017 and president of AppBuilder Software
Solutions division since January 2012, following our acquisition of AppBuilder Solutions Ltd. at which time he was named Chief
Executive Officer of AppBuilder. Prior to joining our company, Mr. Kilman served as Chief Executive Officer of BluePhoenix Solutions
Ltd., the former parent of AppBuilder from May 2003 to January 2009 and from April 2010 to December 2011. Mr. Kilman holds a B.A.
degree in Economics and Computer Science from New York City College of Technology.
Yakov
Tsaroya
has served as chief executive officer of our subsidiary, CoreTech Consulting Group LLC, since 2006. Mr. Tsaroya
has also served as Chief Executive Officer of Fusion Solution LLC and Xsell Resources Inc. since our acquisition of these companies
in 2010. Mr. Tsaroya holds a B.A. degree in Accounting and Finance from the College of Administration in Israel and is a certified
public accountant (CPA) in Israel.
Uzi
Yaari
joined Complete Business Solutions as CEO in 2015 after spending seven years as CEO at leading ERP implementer,
Intentia Advanced Solutions. Having served in various positions during his 15 years at Intentia, Uzi brings a rich history
of ERP experience and expertise in various ERP ecosystems and in various countries having lead many ERP projects both in the country
and abroad. Uzi is an industrial engineer.
Arik
Faingold
has served as president of our Integration Solutions division since July 2012. Mr. Faingold has served as chairman
of Comm-IT Group since 2009. Mr. Faingold was General Manager of Open TV Israel, part of OpenTV Global, from 2003 to 2009. Mr.
Faingold served as Co-founder and CTO of Betting Corp from 1999 to 2003. Mr. Faingold holds a B.A. degree in Computer Science
from the Interdisciplinary Center in Herzliya and an M.B.A. from Tel Aviv University.
Yuval
Baruch
has served as an officer of our company since his appointment in September 2012 as the chief executive officer
of Hermes Logistics Technologies (HLT). Mr. Baruch has also served as the chief executive officer of Pilat HR solutions since
April 2013. Mr. Baruch was chief executive officer of J.R. Holdings & Development from November 2007 to January 2012. Mr.
Baruch has served as an external director of Matrix IT, a publicly traded company in Israel, since 2011. Between 2004 and 2008
Mr. Baruch launched, managed and divested a chain of fitness centers in Israel. Mr. Baruch holds a B.A. degree in Marketing and
Finance from The College of Management in Israel and an M.B.A. degree from the Stanford Graduate School of Business.
Hanan
Shahaf
became an officer of our company in July 2016, as part of the Roshtov Software Industries Ltd. acquisition. Mr.
Shahaf was one of Roshtov’s founders in 1989 and has served as its Chief Executive Officer and a director since its inception.
He also served as a director and chairman on several private companies’ boards. Mr. Shahaf holds a B.sc in Industrial engineering
and Management and an M.B.A. from Northwestern University (Kellogg School of Management) and Tel Aviv university (Recanati Graduate
School of BA).
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, 2018.
|
|
Salaries, fees,
commissions and bonuses
|
|
|
Pension, retirement
and similar benefits
|
|
All directors and executive officers as a group (14 persons)
|
|
$
|
3,738,408
|
|
|
$
|
123,714
|
|
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, 2018. All amounts reported in the table reflect the cost to our company, as recognized in our financial statements
for the year ended December 31, 2018.
2018
Summary Compensation Table
Name and Position
|
|
Salary
|
|
|
Bonus
(1)
|
|
|
Equity
Based
Compensation
(2)
|
|
|
All
Other
Compensation
(3)
|
|
|
Total
|
|
Arik Kilman, Chairman, Software Group
|
|
$
|
399,344
|
|
|
$
|
577,012
|
|
|
$
|
64,387
|
|
|
$
|
0
|
|
|
$
|
1,040,743
|
|
Yakov Tsaroya, President, Coretech Consulting Group
LLC
|
|
$
|
225,000
|
|
|
$
|
337,000
|
|
|
$
|
0
|
|
|
$
|
9,000
|
|
|
$
|
571,000
|
|
Arik Faingold, President, Integration Solutions
division
|
|
$
|
321,139
|
|
|
$
|
196,529
|
|
|
$
|
0
|
|
|
$
|
0
|
|
|
$
|
517,668
|
|
Udi Ertel, President, Software Division
|
|
$
|
222,142
|
|
|
$
|
58,078
|
|
|
$
|
0
|
|
|
$
|
43,705
|
|
|
$
|
323,925
|
|
Hanan Shahaf, Chief Executive Officer of Roshtov Software Industries Ltd
|
|
$
|
284,433
|
|
|
$
|
17,364
|
|
|
$
|
0
|
|
|
$
|
0
|
|
|
$
|
301,797
|
|
(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, 2018, we paid to each of our outside and independent directors an annual fee of approximately $18,442
and a per-meeting attendance fee of approximately $687. 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, 2018, our directors and executive officers as a group, then consisting of 14 persons, held options to purchase
an aggregate of 126,000 ordinary shares, at exercise prices ranging from $2.26 to $4.00 per share. Of such options, options to
purchase 66,000 ordinary shares expire in 2020 and options to purchase 60,000 ordinary shares expire in 2021. All such options
were granted under our 2007 Incentive Compensation Plan. See Item 6E “Directors, Senior Management and Employees - Share
Ownership - Stock-Based Compensation Plans.”
Introduction
According
to the Israeli Companies Law and our Articles of Association, the management of our business is vested in our board of directors.
The board of directors may exercise all powers and may take all actions that are not specifically granted to our shareholders.
Our executive officers are responsible for our day-to-day management. The executive officers have individual responsibilities
established by our board of directors. Executive officers are appointed by and serve at the discretion of the board of directors,
subject to any applicable agreements.
Election
of Directors
Our
articles of association provide for a board of directors consisting of no less than three and no more than eleven members or such
other number as may be determined from time to time at a general meeting of shareholders. Our board of directors is currently
composed of five directors.
Pursuant
to our articles of association, all of our directors are elected at our annual general meeting of shareholders, which are required
to be held at least once during every calendar year and not more than 15 months after the last preceding meeting. Except for our
external directors (as described below), our directors are elected by a vote of the holders of a majority of the voting power
represented and voting at such meeting and hold office until the next annual meeting of shareholders following the annual meeting
at which they were appointed. Directors (other than external directors) may be removed earlier from office by resolution passed
at a general meeting of our shareholders. Our board of directors may temporarily fill vacancies in the board until the next annual
meeting of shareholders, provided that the total number of directors will not exceed the maximum number permitted under our articles
of association.
Under
the Israeli Companies Law, our board of directors is required to determine the minimum number of directors who must have “accounting
and financial expertise” (as such term is defined in regulations promulgated under the Israeli Companies Law). In determining
such number, the board of directors must consider, among other things, the type and size of the company and the scope of and complexity
of its operations. Our board of directors has determined that at least one director must have “accounting and financial
expertise,” within the meaning of the regulations promulgated under the Israeli Companies Law.
External
and Independent Directors
External
Directors
. The Israeli Companies Law requires companies organized under the laws of the State of Israel with shares that
have been offered to the public in or outside of Israel to appoint at least two external directors. No person may be appointed
as an external director if the person is a relative of the controlling shareholder of the company or if the person or the person’s
relative, partner, employer or any entity under the person’s control has or had, on or within the two years preceding the
date of the person’s appointment to serve as an external director, any affiliation with the company or the controlling shareholder
of the company or the controlling shareholder’s relative or any entity controlled by the company or by the controlling shareholder
of the company. If the company does not have a controlling shareholder or a person or entity which holds 25% of the total voting
rights of the company, an external director may also not have an affiliation with chairman of the board, the chief executive officer,
beneficial owner of 5% or more of the issued shares or the voting power of the company and the most senior executive officer of
the company in the finance field. The term “affiliation” includes an employment relationship, a business or professional
relationship maintained on a regular basis (other than negligible relationships), control and service as an “office holder”
as defined in the Israeli Companies Law, however, “affiliation” does not include service as a director of a private
company prior to its first public offering if the director was appointed to such office for the purpose of serving as an external
director following the company’s first public offering. In addition, no person may serve as an external director if the
person’s position or other activities create or may create a conflict of interest with the person’s responsibilities
as an external director or may otherwise interfere with the person’s ability to serve as an external director. In addition,
a director in a company may not be appointed as an external director in another company if at that time, a director of the other
company serves as an external director in the first company. Moreover, a person may not be appointed as an external director,
if he or she is employed by the Israeli Securities Authority or by Tel-Aviv Stock Exchange. If, at the time external directors
are to be appointed, all current members of the board of directors which are not the controlling shareholders of the company or
their relatives are of the same gender, then at least one external director must be of the other gender.
At
least one of the external directors must have “accounting and financial expertise” and the other external directors
must have “professional expertise,” as such terms are defined by regulations promulgated under the Israeli Companies
Law.
The
election of the nominee for external director requires the affirmative vote of (i) the majority of the votes actually cast
with respect to such proposal including at least a majority of the voting power of the non-controlling shareholders (as such term
is defined in the Israel Securities Law, 1968) or those shareholders who do not have a personal interest in approval of the nomination
except for a personal interest that is not as a result of the shareholder’s connections with the controlling shareholder,
who are present in person or by proxy and vote on such proposal, or (ii) the majority of the votes cast on such proposal at the
meeting, provided that the total votes cast in opposition to such proposal by the non-controlling shareholders or those shareholders
who do not have a personal interest in approval of the nomination except for a personal interest that is not as a result of the
shareholder’s connections with the controlling shareholder (as such term is defined in the Israel Securities Law, 1968)
does not exceed 2% of all the voting power in the Company.
External
directors serve for a three-year term. However, in accordance with the Israeli Companies Law regulations, external directors of
a public company whose shares are traded on the NASDAQ may be appointed for additional periods of three-year each provided that
the audit committee and the board of directors have approved that, given the external director’s expertise and contribution to
the board and committee meetings, such appointment is for the company’s benefit and provided further that the nomination to additional
periods of three-year terms is approved through one of the following mechanisms: (i) the board of directors proposed the nominee
and his appointment was approved by the shareholders in the manner required to appoint external directors for their initial term
(described above); or (ii) one or more shareholders holding 1% or more of the voting rights proposed the nominee, and the nominee
is approved by the majority of the votes actually cast with respect to such proposal and all of the following conditions are met:
(a) the majority of votes does not include the votes of the controlling shareholder or votes of shareholders who have a personal
interest in approval of the nomination except for a personal interest that is not as a result of the shareholder’s connections
with the controlling shareholder and (b) the total votes cast in favor of such proposal by the non-controlling shareholders or
those shareholders who do not have a personal interest in the approval of the nomination except for a personal interest that is
not as a result of the shareholder’s connections with the controlling shareholder exceed 2% of all the voting power in the
company
External
directors may be removed from office only by the same percentage of shareholders as is required for their election, or by a court,
and then only if the external directors cease to meet the statutory qualifications for their appointment, violate their duty of
loyalty to the company or are found by a court to be unable to perform his or hers duties on a full time basis. External directors
may also be removed by the court if they are found guilty of bribery, fraud, administrative offenses or use of inside information.
Each
committee of the board of directors that may exercise a responsibility of the board of directors must include at least one external
director. The audit committee must be comprised of at least three directors and include all the external directors. An external
director is entitled to compensation as provided in regulations adopted under the Israeli Companies Law and is otherwise prohibited
from receiving any other compensation, directly or indirectly, in connection with such service.
Until
the lapse of two years from termination of office, we may not engage an external director, or his or her spouse or child to service
as an office holder and cannot employ or receive services from that person, either directly or indirectly, including through a
corporation controlled by that person.
Independent
Directors
. NASDAQ Stock Market Rules require us to establish an audit committee comprised of at least three members and
only of independent directors each of whom satisfies the respective “independence” requirements of the SEC and NASDAQ.
Pursuant
to the Israeli Companies Law, a director may be qualified as an independent director if such director is either (i) an external
director; or (ii) a director that serves as a board member less than nine years and the audit committee has approved that he or
she meets the independence requirements of an external director. A majority of the members serving on the audit committee must
be independent under the Israeli Companies Law. In addition, an Israeli company whose shares are publicly traded may elect to
adopt a provision in its articles of association pursuant to which a majority of its board of directors will constitute individuals
complying with certain independence criteria prescribed by the Israeli Companies Law. We have not included such a provision in
our articles of association. Pursuant to Israeli regulations adopted in January 2011, directors who comply with the independence
requirements of NASDAQ and the SEC are deemed to comply with the independence requirements of the Israeli Companies Law.
Our
board of directors has determined that Mr. Sagi Schliesser and Mr. Ron Ettlinger both qualify as independent directors under
the SEC and NASDAQ requirements and as external directors under the Israeli Companies Law requirements. Our board of directors
has further determined that Mr. Avi Zakay qualifies as an independent director under the SEC, NASDAQ and Israeli Companies Law
requirements.
Committees
of the Board of Directors
Audit
Committee
. Our audit committee, established in accordance with Sections 114-117 of the Israeli Companies Law and Section
3(a)(58)(A) of the Securities Exchange Act of 1934, assists our board of directors in overseeing the accounting and financial
reporting processes of our company and audits of our financial statements, including the integrity of our financial statements,
compliance with legal and regulatory requirements, our independent public accountants’ qualifications and independence,
the performance of our internal audit function and independent public accountants, finding any irregularities in the business
management of our company for which purpose the audit committee may consult with our independent auditors and internal auditor,
proposing to the board of directors ways to correct such irregularities and such other duties as may be directed by our board
of directors. The responsibilities of the audit committee also include approving related-party transactions as required by law.
The audit committee is also required to determine whether any action is material and whether any transaction is an extraordinary
transaction or non-negligible transaction, for the purpose of approving such action or transaction as required by the Israeli
Companies Law. Under Israeli law, an audit committee may not approve an action or a transaction with a controlling shareholder,
or with an office holder, unless at the time of approval two external directors are serving as members of the audit committee
and at least one of the external directors was present at the meeting in which an approval was granted.
Our
audit committee is currently composed of Messrs. Ettlinger, Schliesser and Zakay, each of whom satisfies the respective “independence”
requirements of the SEC and NASDAQ. We also comply with Israeli law requirements for audit committee members. Our board of directors
has determined that Mr. Ettlinger qualifies as a financial expert. The audit committee meets at least once each quarter.
Compensation
Committee
.
In accordance with the Israeli Companies Law, we have a compensation committee, whose role is to: (i)
recommend a compensation policy for office holders and to recommend to the board, once every three years, on the approval of the
continued validity of the compensation policy that was determined for a period exceeding three years; (ii) recommend an update
the compensation policy from time to time and to examine its implementation; (iii) determine whether to approve the terms of service
and employment of office holders that require the committee’s approval; and (iv) exempt a transaction from the requirement
of shareholders’ approval in accordance with the provisions of the Israeli companies Law. The compensation committee also
has oversight authority over the actual terms of employment of directors and officers and may make recommendations to the board
of directors and the shareholders (where applicable) with respect to deviation from the compensation policy that was adopted by
the company.
Under
the Israeli Companies Law, a compensation committee must consist of no less than three members, including all of the external
directors (who must constitute a majority of the members of the committee), and the remainder of the members of the compensation
committee must be directors whose terms of service and employment were determined pursuant to the applicable regulations. The
same restrictions on the actions and membership in the audit committee as discussed above under “Audit Committee,”
including the requirement that an external director serve as the chairman of the committee and the list of persons who may not
serve on the committee, also apply to the compensation committee. We have established a compensation committee that is currently
composed of Messrs. Ettlinger, Schliesser and Zakay.
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, 2018, we sold approximately $2.5 million of services to affiliated companies of Formula Systems. In
2018, we also purchased from those affiliated companies approximately $0.3 million of hardware and software. We also provided
Formula Systems cash management, accounting and bookkeeping services for total consideration of $0.1 million.
Approval
Process of Terms of Service and Employment of Office Holders
Under
the Israeli Companies Law, the method of approval of Terms of Service and Employment of office holders must be approved as follows:
|
●
|
With
respect to an office holder who is not the general manager, a director, a controlling
shareholder or a relative of the controlling shareholder:
|
|
o
|
In
the event the transaction is in accordance with the compensation policy of the company
– approval (in the following order) of: (i) compensation committee and (ii) board
of directors.
|
|
o
|
In
the event the transaction is not in accordance with the compensation policy of the company
– approval, in special cases (in the following order), by the (i) compensation
committee, (ii) board of directors and (iii) company’s shareholders, by a simple
majority, provided that such majority shall include (i) at least one half of the votes
of shareholders who are participating in the vote and are not controlling shareholders
or do not have a personal interest regarding the approval of the compensation policy,
or (ii) the aggregate number of the opposing votes, voted by shareholders who do not
have such personal interest or are not controlling shareholders, do not exceed two percent
(2%) of the entire voting rights in the company (the “
Special Majority
”).
Under these circumstances, the compensation committee and board of directors are required
to approve the transaction based on certain considerations and include certain instructions
in connection with the compensation policy. In the event the company’s shareholders
do not approve the compensation of the office holder, the compensation committee and
board of directors may still approve the transaction, in special cases and with detailed
reasons and after discussion and examining the rejection of the company’s shareholders.
|
|
●
|
With
respect to a company’s general manager (generally the equivalent of a CEO):
|
|
o
|
In
the event the transaction is in accordance with the compensation policy - approval (in
the following order) by the: (i) compensation committee, (ii) board of directors and
(iii) company’s shareholders with the “Special Majority” described
above.
|
|
o
|
In
the event the transaction is not in accordance with the compensation policy – the
approval process and requirements are the same as the approval process for such a transaction
with an office holder who is not the general manager, a controlling shareholder or a
relative of the controlling shareholder.
|
|
▪
|
The
Israeli Companies Law includes an exception from the shareholder approval requirement
in connection with the approval of a transaction with a general manager candidate, subject
to certain conditions. In addition, in the event the company’s shareholders do
not approve the compensation of the general manager, the compensation committee and board
of directors may still approve the transaction, in special cases and with detailed reasons
and after discussion and examining the rejection of the company’s shareholders.
|
|
●
|
With
respect to a director who is not a controlling shareholder or a relative of the controlling
shareholder:
|
|
o
|
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.
|
|
o
|
In
the event the transaction is not in accordance with the compensation policy – the
approval process and requirements are the same as the approval process for such a transaction
with an office holder who is not the general manager, a controlling shareholder or a
relative of the controlling shareholder (other than the possibility to approve a transaction
that was not approved by the shareholders).
|
|
●
|
With
respect to a controlling shareholder or a relative of a controlling shareholder:
|
|
o
|
In
the event the transaction is in accordance with the compensation policy - approval (in
the following order) by the: (i) compensation committee, (ii) board of directors and
(iii) company’s shareholders with the “Special Majority” described
above.
|
|
o
|
In
the event the transaction is not in accordance with the compensation policy: the approval
process and requirements are the same as the approval process for such a transaction
with an office holder who is not the general manager, a controlling shareholder or a
relative of the controlling shareholder (other than the possibility to approve a transaction
that was not approved by the shareholders).
|
In
accordance with the Israeli Companies Law, the audit committee is responsible to determine that Controlling Party Transactions
shall be subject to a competitive procedure or other similar procedure before such transactions are approved.
Provisions
Restricting Change in Control of Our Company
Tender
Offer
. In certain circumstances, an acquisition of shares in a public company must be made by means of a tender offer
if, as a result of the acquisition, the purchaser would hold 25% or more of the voting rights in the company (unless there is
already a 25% or greater shareholder of the company) or more than 45% of the voting rights in the company (unless there is already
a shareholder that holds more than 45% of the voting rights in the company). If, as a result of an acquisition, the acquirer would
hold more than 90% of a company’s shares or voting rights, the acquisition must be made by means of a tender offer for all
of the shares. A purchase by a tender offer is subject to additional requirements as specified in the Israeli Law and regulations
promulgated thereunder.
Merger
.
The Israeli Companies Law generally requires that a merger be approved by the board of directors and by the general meeting of
the shareholders. Upon the request of any creditor of a merging company, a court may delay or prevent the merger if it concludes
that there is a reasonable concern that, as a result of the merger, the surviving company will be unable to satisfy its obligations.
In addition, a merger may generally not be completed unless at least (i) 50 days have passed since the filing of the merger proposal
with the Israeli Registrar of Companies, and (ii) 30 days have passed since the merger was approved by the shareholders of each
of the merging companies. The approval of merger by the company is also subject to additional approval requirements as specified
in the Israeli Companies Law and regulations promulgated thereunder.
Exculpation,
Indemnification and Insurance of Directors and Officers
Exculpation
and Indemnification of Office Holders
The
Israeli Companies Law and our Articles of Association authorize us, subject to the receipt of requisite corporate approvals, to
indemnify and exempt our directors and officers, subject to certain conditions and limitations. Most recently, in November
2011 our shareholders approved a form of indemnification and exculpation letter to ensure that our directors and officers (including
any director and officer who may be deemed to be a controlling shareholder, within the meaning of the Israeli Companies Law) are
afforded protection to the fullest extent permitted by law as currently in effect. Under the approved form of indemnification
and exculpation letter, the total amount of indemnification allowed may not exceed an amount equal to 25% of our shareholders’
equity in the aggregate, calculated with respect to each of our directors and officers.
The
Israeli Companies Law provides that an Israeli company may not exculpate an office holder from liability for a breach of the duty
of loyalty of the office holder. The company may, however, approve an office holder’s act performed in breach of the duty
of loyalty, provided that the office holder acted in good faith, the act or its approval does not harm the company and the office
holder discloses the nature of his or her personal interest in the act and all material facts and documents a reasonable time
before discussion of the approval. An Israeli company may exculpate an office holder in advance from liability to the company,
in whole or in part, for a breach of duty of care, but only if a provision authorizing such exculpation is inserted in its articles
of association. An Israeli company may also not exculpate a director for liability arising out of a prohibited dividend or distribution
to shareholders.
The
Israeli Companies Law provides that a company may, if permitted by its articles of association, indemnify an office holder for
acts or omissions performed by the office holder in such capacity for:
|
●
|
A
financial liability imposed on the office holder in favor of another person by any judgment,
including a settlement or an arbitrator’s award approved by a court;
|
|
●
|
Reasonable
litigation expenses, including attorney’s fees, actually incurred by the office
holder as a result of an investigation or proceeding instituted against him or her by
a competent authority, provided that such investigation or proceeding concluded without
the filing of an indictment against the office holder or the imposition of any financial
liability instead of criminal proceedings, or concluded without the filing of an indictment
against the office holder and a financial liability was imposed on the officer holder
instead of criminal proceedings with respect to a criminal offense that does not require
proof of criminal intent;
|
|
●
|
Reasonable
litigation expenses, including attorneys’ fees, incurred by such office holder
or which were imposed on him by a court, in proceedings the company instituted against
the office holder or that were instituted on the company’s behalf or by another
person, or in a criminal charge from which the office holder was acquitted, or in a criminal
proceeding in which the office holder was convicted of a crime which does not require
proof of criminal intent; and
|
|
●
|
Expenses,
including reasonable litigation expenses and legal fees, incurred by such office holder
as a result of a proceeding instituted against him in relation to (A) infringements that
may result in imposition of financial sanction pursuant to the provisions of Chapter
H’3 under the Israeli Securities Law or (B) administrative infringements pursuant to
the provisions of Chapter H’4 under the Israeli Securities Law or (C) infringements pursuant
to the provisions of Chapter I’1 under the Israeli Securities Law; and (e)
payments to an injured party of infringement under Section 52ND(a)(1)(a) of the Israeli
Securities Law.
|
In
accordance with the Israeli Companies Law, a company’s articles of association may permit the company to:
|
●
|
Undertake
in advance to indemnify an office holder, except that with respect to a financial liability
imposed on the office holder by any judgment, settlement or court-approved arbitration
award, the undertaking must be limited to types of occurrences, which, in the opinion
of the company’s board of directors, are, at the time of the undertaking, foreseeable
due to the company’s activities and to an amount or standard that the board of
directors has determined is reasonable under the circumstances; and
|
|
●
|
Retroactively
indemnify an office holder of the company.
|
Insurance
for Office Holders
The
Israeli Companies Law provides that a company may, if permitted by its articles of association, insure an office holder for acts
or omissions performed by the office holder in such capacity for:
|
●
|
A
breach of his or her duty of care to the company or to another person;
|
|
●
|
A
breach of his or her duty of loyalty to the company, provided that the office holder
acted in good faith and had reasonable cause to assume that his act would not prejudice
the company’s interests; and
|
|
●
|
A
financial liability imposed upon the office holder in favor of another person.
|
Subject
to the provisions of the Israeli Companies Law and the Israeli Securities Law, a company may also enter into a contract
to insure an office holder for (A) expenses, including reasonable litigation expenses and legal fees, incurred by the office holder
as a result of a proceeding instituted against such office holder in relation to (1) infringements that may impose financial sanction
pursuant to the provisions of Chapter H’3 under the Israeli Securities Law or (2) administrative infringements pursuant
to the provisions of Chapter H’4 under the Israeli Securities Law or (3) infringements pursuant to the provisions of Chapter
I’1 under the Israeli Securities Law and (B) payments made to the injured parties of such infringement under Section 52ND(a)(1)(a)
of the Israeli Securities Law.
Limitations
on Exculpation, Insurance and Indemnification
The
Israeli Companies Law provides that neither a provision of the articles of association permitting the company to enter into a
contract to insure the liability of an office holder, nor a provision in the articles of association or a resolution of the board
of directors permitting the indemnification of an office holder, nor a provision in the articles of association exempting an office
holder from duty to the company shall be valid, where such insurance, indemnification or exemption relates to any of the following:
|
●
|
A
breach by the office holder of his duty of loyalty, except with respect to insurance
coverage or indemnification if the office holder acted in good faith and had reasonable
grounds to assume that the act would not prejudice the company;
|
|
●
|
A
breach by the office holder of his duty of care if such breach was committed intentionally
or recklessly, unless the breach was committed only negligently;
|
|
●
|
Any
act or omission committed with intent to derive an unlawful personal gain; and
|
|
●
|
Any
fine, civil fine, financial sanction or forfeiture imposed on the office holder.
|
In
addition, pursuant to the Israeli Companies Law, exemption of, procurement of insurance coverage for, an undertaking to indemnify
or indemnification of an office holder must be approved by the compensation committee and the board of directors and, if such
office holder is a director or a controlling shareholder or a relative of the controlling shareholder, also by the shareholders
general meeting.
Our
articles of association allow us to insure, indemnify and exempt our office holders to the fullest extent permitted by law, subject
to the provisions of the Israeli Companies Law.
The
current coverage of our directors’ and officers’ liability insurance policy is up to a maximum of $40.0 million both
per incident and in the aggregate, plus $10.0 million of Side A DIC coverage for which we currently pay an annual premium of approximately
$67,000.
According
to our compensation policy, any officers’ liability insurance policy is conditioned on the following terms: (i) the total
cover amount for an office holder under an insurance policy will not be greater than $80 million; (ii) the total annual premium
will not be greater than $250,000; and (iii) our deductible for a claim will not be greater than $350,000.
The
following table presents the number of our employees categorized by geographic location as of December 31, 2016, 2017 and 2018:
|
|
Year ended December 31,
|
|
|
|
2016
|
|
|
2017
|
|
|
2018
|
|
Israel
|
|
|
843
|
|
|
|
921
|
|
|
|
999
|
|
Asia
|
|
|
122
|
|
|
|
139
|
|
|
|
164
|
|
North America
|
|
|
597
|
|
|
|
861
|
|
|
|
933
|
|
South Africa
|
|
|
10
|
|
|
|
16
|
|
|
|
14
|
|
Europe
|
|
|
127
|
|
|
|
115
|
|
|
|
116
|
|
Total
|
|
|
1,699
|
|
|
|
2,052
|
|
|
|
2,226
|
|
The
following table presents the number of our employees categorized by activity as of December 31, 2016, 2017 and 2018:
|
|
Year ended December 31,
|
|
|
|
2016
|
|
|
2017
|
|
|
2018
|
|
Technical support and consulting
|
|
|
1,238
|
|
|
|
1,615
|
|
|
|
1,761
|
|
Research and development
|
|
|
206
|
|
|
|
181
|
|
|
|
198
|
|
Marketing and sales
|
|
|
133
|
|
|
|
117
|
|
|
|
140
|
|
Operations and administrations
|
|
|
122
|
|
|
|
139
|
|
|
|
127
|
|
Total
|
|
|
1,699
|
|
|
|
2,052
|
|
|
|
2,226
|
|
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, 2019 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)
|
|
|
78,670
|
|
|
|
*
|
|
Udi Ertel
|
|
|
--
|
|
|
|
*
|
|
Ron Ettlinger
|
|
|
--
|
|
|
|
--
|
|
Naamit Salomon
(4)
|
|
|
6,000
|
|
|
|
*
|
|
Sagi Schliesser
|
|
|
--
|
|
|
|
--
|
|
Avi Zakay
|
|
|
--
|
|
|
|
--
|
|
Amit Birk
(5)
|
|
|
129,062
|
|
|
|
*
|
|
Arik Faingold
|
|
|
--
|
|
|
|
--
|
|
Yuval Baruch
|
|
|
--
|
|
|
|
--
|
|
Arik Kilman
|
|
|
--
|
|
|
|
--
|
|
Yakov Tsaroya
(6)
|
|
|
40,000
|
|
|
|
*
|
|
(1)
|
Beneficial
ownership is determined in accordance with the rules of the SEC and generally includes
voting or investment power with respect to securities. Ordinary Shares relating to options
currently exercisable or exercisable within 60 days of the date of this table are deemed
outstanding for computing the percentage of the person holding such securities but are
not deemed outstanding for computing the percentage of any other person. Except as indicated
by footnote, and subject to community property laws where applicable, the persons named
in the table above have sole voting and investment power with respect to all shares shown
as beneficially owned by them.
|
(2)
|
The
percentages shown are based on 48,891,038 Ordinary Shares issued and outstanding as of
March 31, 2019.
|
(3)
|
Includes
50,000 currently exercisable options granted under our 2007 Stock Option Plan, having
an exercise price ranging from $1.59 to $3.33 per share that expire in 2021 at the latest
and 28,670 Ordinary Shares.
|
(4)
|
Includes
6,000 currently exercisable options granted under our 2007 Stock Option Plan, having
an exercise price of $1.59 per share, with expiration dates through 2020.
|
(5)
|
Includes
30,000 currently exercisable options granted under our 2007 Stock Option Plan, having
an exercise price of $3.33 per share that expire in 2021 and 99,062 Ordinary Shares.
|
(6)
|
Includes
40,000 currently exercisable options granted under our 2007 Stock Option Plan, having
an exercise price of $1.59 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
2018, options to purchase an aggregate of 9,375 Ordinary Shares were exercised under the 2000 Plan at an average exercise price
of $6.46 per share and options to purchase 21,875 Ordinary Shares forfeited. As of December 31, 2018, no options under the 2000
Plan 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 a 1,000,000 share increase in the number of Ordinary Shares available for issuance under
the 2007 Stock Option Plan.
On
December 31, 2015 our board of directors increased the amount of Ordinary Shares reserved for issuance by an additional 250,000
Ordinary Shares and extended the plan by 10 years until August 1, 2027. As of December 31, 2018, an aggregate of 962,500 Ordinary
Shares are available for future grants under the Plan.
The
2007 Plan will terminate upon the earliest of: (i) August 31, 2027; (ii) the termination of all outstanding awards in connection
with a corporate transaction; or (iii) in connection with, and as a result of, any other relevant event, including the 2007 Plan’s
termination by the Board of Directors.
Under
the 2007 Plan, the option committee shall have full discretionary authority to grant or, when so restricted by applicable law,
recommend the Board of Directors to grant, pursuant to the terms of the 2007 Plan, options and restricted shares and restricted
share units to those individuals who are eligible to receive awards.
The
2007 Plan provides that each option will expire on the date stated in the award agreement, which will not be more than ten years
from its date of grant. The exercise price of an option shall be determined by the option committee of the Board of Directors
and set forth in the award agreement. Unless determined otherwise by the Board of Directors, the exercise price shall be equal
to, or higher than, the fair market value of our company’s shares on the date of grant.
Under
the 2007 Plan, restricted shares and restricted share units shall not be purchased for less than the ordinary share’s par
value, unless determined otherwise by the Board of Directors.
Under
the 2007 Plan in the event of any reclassification, recapitalization, merger or consolidation, reorganization, stock dividend,
cash dividend, distribution of subscription rights or other distribution in securities of the Company, stock split or reverse
stock split, combination or exchange of shares, repurchase of shares, or other similar change in corporate structure, that proportionally
apply to all of our Ordinary Shares, we, shall substitute or adjust, as applicable, the number, class and kind of securities which
may be delivered under Section 4.1; the number, class and kind, and/or price (such as the Option Price of Options) of securities
subject to outstanding awards; and other value determinations applicable to outstanding awards, as determined by our Board of
Directors, in order to prevent dilution or enlargement of participants’ rights under the 2007 Plan; provided, however, that the
number of Ordinary Shares subject to any award shall always be a whole number. The Board of Directors shall also make appropriate
adjustments and modifications, in the terms of any outstanding awards to reflect such changes in our share capital, including
modifications of performance goals and changes in the length of performance periods, if applicable.
Our
Board of Directors may, from time to time, alter, amend, suspend or terminate the 2007 Plan, with respect to awards that have
not been granted, subject to shareholder approval, if and to the extent required by applicable law. In addition, no such amendment,
alteration, suspension or termination of the 2007 Plan or any award theretofore granted, shall be made which would materially
impair the previously accrued rights of a participant under any outstanding award without the written consent of such participant,
provided, however, that the Board of Directors may amend or alter the 2007 Plan and the option committee may amend or alter any
award, including any agreement, either retroactively or prospectively, without the consent of the applicable participant, (i)
so as to preserve or come within any exemptions from liability under any law or the rules and releases promulgated by the SEC,
or (ii) if the Board of Directors or the option committee determines in its discretion that such amendment or alteration either
is (a) required or advisable for us, the 2007 Plan or the award to satisfy, comply with or meet the requirements of any law, regulation,
rule or accounting standard, or (b) not reasonably likely to significantly diminish the benefits provided under such award, or
that such diminishment has been or will be adequately compensated.
During
2018, options to purchase an aggregate of 94,792 Ordinary Shares were exercised under the 2007 Plan at an average exercise price
of $2.54 per share and options to purchase 220,000 Ordinary Shares remained outstanding. As of December 31, 2017, our executive
officers and directors as a group, consisting of 14 persons, held options to purchase 146,000 Ordinary Shares under the 2007 Plan,
having an average exercise price of $3.12 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 22,080,468 or 45.16% of our outstanding
Ordinary Shares. Formula Systems is controlled by Asseco, a Polish company listed on the Warsaw Stock Exchange, which holds 25.35%
of the Ordinary Shares of Formula Systems. Guy Bernstein owns 13.4% of the outstanding shares of Formula Systems. In addition,
on October 4, 2018 Asseco entered into a shareholders agreement with Mr. Bernstein, under which agreement Asseco has been granted
an irrecoverable proxy to vote an additional 1,971,973 Ordinary Shares of Formula, thereby effectively giving Asseco beneficial
ownership (voting power) over an aggregate of 38.25% of Formula’s outstanding ordinary share. Therefore, based on the foregoing
beneficial ownership by each of Formula and Asseco, each of Formula and Asseco may be deemed to directly or indirectly (as appropriate)
control us.
The
following table sets forth as of March 31, 2019 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)
|
|
|
22,080,468
|
|
|
|
45.16
|
%
|
Clal Insurance Enterprises Holdings Ltd
(4)
|
|
|
3,630,149
|
|
|
|
7.43
|
%
|
Yelin Lapidot
(5)
|
|
|
2,858,607
|
|
|
|
5.86
|
%
|
Phoenix Holdings
(6)
|
|
|
2, 936,180
|
|
|
|
6.01
|
%
|
Harel Insurance
(7)
|
|
|
2,728,908
|
|
|
|
5.58
|
%
|
(1)
|
Beneficial
ownership is determined in accordance with the rules of the SEC and generally includes
voting or investment power with respect to securities. Ordinary Shares relating to options
currently exercisable or exercisable within 60 days of the date of this table are deemed
outstanding for computing the percentage of the person holding such securities but are
not deemed outstanding for computing the percentage of any other person. Except as indicated
by footnote, and subject to community property laws where applicable, the persons named
in the table above have sole voting and investment power with respect to all shares shown
as beneficially owned by them.
|
(2)
|
The
percentages shown are based on 48,891,038 Ordinary Shares issued and outstanding as of
March 31, 2019.
|
(3)
|
Asseco
owned 25.35% of the outstanding shares of Formula Systems based on the Schedule 13D filed
by Asseco with the SEC on October 19, 2018. As such, Asseco may be deemed to be the beneficial
owner of the aggregate 22,080,468 Ordinary Shares held directly by Formula Systems. Guy
Bernstein owns 12.489% of the outstanding shares of Formula Systems. In addition, on
October 4, 2018 Asseco entered into a shareholders agreement with Mr. Bernstein, under
which agreement Asseco has been granted an irrecoverable proxy to vote an additional
1,971,973 Ordinary Shares of Formula, thereby effectively giving Asseco beneficial ownership
(voting power) over an aggregate of 38.25% of Formula’s outstanding ordinary shares.
Therefore, based on the foregoing beneficial ownership by each of Formula and Asseco,
each of Formula and Asseco may be deemed to directly or indirectly (as appropriate) control
us. The address of Asseco is 35-322 Rzeszow, ul. Olchowa 14, Poland.
|
(4)
|
Based
on a Schedule 13G filed on February 14, 2019, Clal Insurance Enterprises Holdings Ltd.
is an Israeli public company, with a principal business address at 36 Raul Wallenberg
St., Tel Aviv 66180, Israel.
|
(5)
|
Based
on a Schedule 13G amendment filed on February 6, 2019. The Ordinary Shares beneficially
owned by Yelin are held by provident funds managed by Yelin Lapidot Provident Funds Management
Ltd., or Yelin Provident, and/or mutual funds managed by Yelin Lapidot Mutual Funds Management
Ltd., or Yelin Mutual. Each of Yelin Provident and Yelin Mutual is a wholly-owned subsidiary
of Yelin Holdings. Messrs. Dov Yelin and Yair Lapidot each own 24.38% of the share capital
and 25% of the voting rights of Yelin Holdings, and are responsible for the day-to-day
management of Yelin Holdings. The Ordinary Shares beneficially owned are held for the
benefit of the members of the provident funds and the mutual funds. Each of Messrs. Yelin
and Lapidot, Yelin Holdings, Yelin Provident and Yelin Mutual disclaims beneficial ownership
of the subject Ordinary Shares. The address of Yalin is 50 Dizengoff Street, Dizengoff
Center, Gate 3, Top Tower, 13th floor, Tel Aviv 64332, Israel.
|
(6)
|
Based
on written notification received from The Phoenix Holding Ltd., or Phoenix Holdings,
and Delek Group Ltd., subsequent to the filing by such shareholder of Amendment No. 1
of a schedule 13G on February 13, 2019. The Ordinary Shares held by Phoenix Holdings
are beneficially owned by various direct or indirect, majority or wholly-owned subsidiaries
of Phoenix Holdings, or the Phoenix Subsidiaries. The Phoenix Subsidiaries manage their
own funds and/or the funds of others, including for holders of exchange-traded notes
or various insurance policies, members of pension or provident funds, unit holders of
mutual funds, and portfolio management clients. Each of the Phoenix Subsidiaries operates
under independent management and makes its own independent voting and investment decisions.
Phoenix Holdings is a majority-owned subsidiary of Delek Group Ltd. The majority of Delek
Group Ltd.’s outstanding share capital and voting rights are owned, directly and
indirectly, by Itshak Sharon (Tshuva) through private companies wholly-owned by him,
and the remainder are held by the public. The address of Phoenix Holdings is Derech Hashalom
53, Givataim, 53454, Israel.
|
(7)
|
Based
on a Schedule 13G filed on January 29, 2019, Harel Insurance Investments & Financial
Services Ltd. is an Israeli public company, with a principal business address at Harel
House; 3 Aba Hillel Street; Ramat Gan 52118, Israel.
|
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%. In July 2018, Formula participated in our private placement (together with other institutional investors)
and reported on July 30, 2018 on Schedule 13D/A that it holds 22,080,468 Ordinary Shares reflecting ownership of 45.2%.
In
the past three years, Yelin Lapidot Holdings Management Ltd. jointly with Messrs. Dov Yelin and Yair Lapidot, filed several Schedules
13G with the SEC reflecting their level of investment in our company. As of March 31, 2019 their reports indicate ownership of
2,858,607 or 5.85% of our Ordinary Shares.
Based
on a Schedule 13G filed on January 29, 2019, Harel Insurance Investments & Financial Services Ltd. holds 2,728,908 or 5.58%
of our Ordinary Shares.
In
January 2018, Clal first filed a Schedule 13G with the SEC reflecting ownership of 2,276,349 or 5.2% of our Ordinary Shares. A
Schedule 13G filed with the SEC on February 14, 2019, reflected an increase in ownership to 3,630,149, or 7.43% of our Ordinary
Shares.
In
the past two years, Phoenix Holdings, filed several Schedules 13G with the SEC reflecting their level of investment in our company.
A Schedule 13G filed with the SEC on February 14, 2019 reflected an increase in ownership to 2,936,180, or 6.01% 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 22, 2019, there were 60 record holders,
of which 45 record holders holding approximately 96.2% of our Ordinary Shares had registered addresses in the United States.
These numbers are not representative of the number of beneficial holders of our shares nor are they representative of where such
beneficial holders reside, since many of these Ordinary Shares were held of record by brokers or other nominees (including one
U.S. nominee company, CEDE & Co., which held approximately 96.1% of our outstanding Ordinary Shares as of such date).
|
B.
|
Related
Party Transactions
|
For
information about related party transactions see “Item 6C. Directors, Senior Management and Employees – Board Practices
- Approval of Related Party Transactions Under Israeli Law.”
|
C.
|
Interests
of Experts and Counsel
|
Not
applicable.
|
ITEM
8.
|
FINANCIAL
INFORMATION
|
|
A.
|
Consolidated
Statements and Other Financial Information
|
See
the consolidated financial statements, including the notes thereto, included in Item 18.
Legal
Proceedings
In
addition to the below mentioned legal proceedings, we and our subsidiaries are, from time to time, subject to legal, administrative
and regulatory proceedings, claims, demands and investigations in the ordinary course of business, including claims with respect
to intellectual property, contracts, employment and other matters. Based upon the advice of counsel, we do not believe that the
ultimate resolution of these matters will materially affect our consolidated financial position, results of operations or cash
flows.
In
September 2016, an Israeli software company, that was previously involved in an arbitration proceeding with us in 2015 and won
damages from us for $2.4 million, filed a lawsuit seeking damages of NIS 34,106,000 against us and one of our subsidiaries. This
lawsuit was filed as part of an arbitration proceeding. In the lawsuit, the software company claimed that warning letters that
we sent to its clients in Israel and abroad, warning those clients against the possibility that the conversion procedure offered
by the software company may amount to an infringement of our copyrights (the “Warning Letters”), as well as other
alleged actions, have caused the software company damages resulting from loss of potential business. The lawsuit is based on rulings
given in the 2015 arbitration proceeding in which it was allegedly ruled that the Warning Letters constituted a breach of a non-disclosure
agreement (NDA) signed between the parties.
We
rejected the claims by the Israeli software company and moved to dismiss the lawsuit entirely. At this point, all the relevant
motions have been filed and all witnesses deposed. We are unable to make a reasonably reliable estimate of our chances of successfully
defending this lawsuit.
In
February 2018, Comm-IT Ltd., a subsidiary of our company, commenced an action against a customer for payment of an overdue amount
in the Supreme Court of the State of New York, New York County. In April 2018, the customer filed an answer in the action that
included counterclaims asserting causes of action for breach of contract, fraud and trespass to chattel. In May 2018, Comm-IT
filed a reply to the counterclaims. The parties agreed to participate in a mediation before a neutral mediator in March 2019.
While it appears that the allegations against Comm-IT probably do not have merit, it is difficult to predict at this point whether
Comm-IT’s liability is remote or probable.
Dividend
Distribution Policy
In
September 2012, our Board of Directors adopted a policy for distributing dividends, under which we will distribute a dividend
of up to 50% of our annual distributable profits each year, subject to any applicable law. On August 2018, our Board of Directors
amended our dividend distribution policy, whereas, each year we will distribute a dividend of up to 75% of our annual distributable
profit. It is possible that our Board of Directors will decide, subject to the conditions stated above, to declare additional
dividend distributions. Our Board of Directors may at its discretion and at any time, change, whether as a result of a one-time
decision or a change in policy, the rate of dividend distributions or not to distribute a dividend.
According
to the Israeli Companies Law, a registrant may distribute dividends out of its profits provided that there is no reasonable concern
that such dividend distribution will prevent the company from paying all its current and foreseeable obligations, as they become
due. Notwithstanding the foregoing, dividends may be paid with the approval of a court, provided that there is no reasonable concern
that such dividend distribution will prevent the company from satisfying its current and foreseeable obligations, as they become
due. Profits, for purposes of the Israeli Companies Law, means the greater of retained earnings or earnings accumulated during
the preceding two years, after deducting previous distributions that were not deducted from the surpluses.
Since
the adoption of our dividend policy, the following dividends have been paid:
In
September 2012, we declared a cash dividend of $0.10 per share ($3.7 million in the aggregate) that was paid on October 17, 2012.
In
February 2013 we declared a cash dividend of $0.12 per share ($4.4 million in the aggregate) that was paid on March 14, 2013.
In
August 2013, we declared a cash dividend of $0.09 per share ($3.4 million in the aggregate) that was paid on September 3, 2013.
In
February 2014, we declared a cash dividend of $0.12 per share ($4.5 million in the aggregate) that was paid on March 14, 2014.
In
September 2014, we declared a cash dividend in the amount of US $0.095 per share ($4.2 million in the aggregate) that was paid
on September 4, 2014.
In
February 2015, we declared a cash dividend in the amount of US $0.081 per share ($3.6 million in the aggregate), that was paid
on March 11, 2015.
In
August 2015, we declared a cash dividend in the amount of $0.095 per share ($4.2 million in the aggregate) that was paid on September
10, 2015.
In
February 2016, we declared a cash dividend in the amount of $0.09 per share ($4.0 million in the aggregate) that was paid on March
17, 2016.
In
August 2016, we declared a cash dividend in the amount of $0.085 per share ($3.8 million in the aggregate) that was paid on September
22, 2016.
In
February 2017, we declared a cash dividend in the amount of $0.085 per share ($3.8 million in the aggregate) that was paid on
April 5, 2017.
In
August 2017, we declared a cash dividend in the amount of $0.13 per share ($5.8 million in the aggregate) that was paid on September
13, 2017.
In
February 2018, we declared a cash dividend in the amount of $0.13 per share ($5.8 million in the aggregate) that was paid on March
26, 2018.
In
August 2018, we declared a cash dividend in the amount of $0.155 per share ($7.6 million in the aggregate) that was paid on September
5, 2018.
In
March 2019, we declared a cash dividend in the amount of $0.15 per share ($7.3 million in the aggregate) that was paid on March
27, 2019.
Except
as otherwise disclosed in this annual report, no significant change has occurred since December 31, 2018.
|
ITEM
9.
|
THE
OFFER AND LISTING
|
|
A.
|
Offer
and Listing Details
|
Our
ordinary shares are traded on the NASDAQ Global Select Market under the ticker symbol “MGIC”.
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 property owners, we do not deem any such individual contract
to be material contracts that 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 that has not been subject to judicial or administrative interpretation, we cannot assure you that
the views expressed in the discussion will be accepted by the appropriate tax authorities or the courts. The discussion is not
intended, and should not be construed, as legal or professional tax advice and is not exhaustive of all possible tax considerations.
Holders
of our Ordinary Shares should consult their own tax advisors as to the United States, Israeli or other tax consequences of the
purchase, ownership and disposition of Ordinary Shares, including, in particular, the effect of any foreign, state or local taxes.
Israeli
Tax Considerations
Tax
regulations have a material impact on our business, particularly in Israel where we have our headquarters. The following is a
summary of some of the current tax law applicable to companies in Israel, with special reference to its effect on us. The following
also contains a discussion of specified Israeli tax consequences to our shareholders and government programs benefiting us. To
the extent that the discussion is based on tax legislation that has not been subject to judicial or administrative interpretation,
there can be no assurance that the views expressed in the discussion will be accepted by the tax authorities in question. The
discussion is not intended, and should not be construed, as legal or professional tax advice and is not exhaustive of all possible
tax considerations.
General
Corporate Tax Structure
Generally,
Israeli companies are subject to corporate tax on their taxable income. As of 2018 the corporate tax rate is 23%. However, the
effective tax rate payable by a company that derives income from an AE, BE, PFE or a PTE, in each case, as defined and further
discussed below, may be considerably lower. See “Law for the Encouragement of Capital Investments” in this Item 5.A
below. In addition, Israeli companies are currently subject to regular corporate tax rate on their capital gains. Besides being
subject to the general corporate tax rules in Israel, certain of our Israeli subsidiaries have also, from time to time, applied
for and received certain grants and tax benefits from, and participate in, programs sponsored by the Government of Israel, as
described below.
Law
for the Encouragement of Industry (Taxes), 1969
The
Law for the Encouragement of Industry (Taxes), 5729-1969 (the “
Industry Encouragement Law
”) provides several
tax benefits for an “Industrial Company.” Pursuant to the Industry Encouragement Law, a company qualifies as an Industrial
Company if it is an Israeli resident company which was incorporated in Israel and at least 90% of its income in any tax year (other
than income from certain government loans) is generated from an “Industrial Enterprise” that it owns and is located
in Israel. 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.
Law
for the Encouragement of Capital Investments, 5719-1959
The
Law for the Encouragement of Capital Investments, 5719-1959, or the Investment Law, provides certain incentives for capital investments
in a production facility (or other eligible assets). Generally, an investment program that is implemented in accordance with the
provisions of the Investment Law, referred to as an Approved Enterprise, or AE, a Benefitted Enterprise, or BE, or a Preferred
Enterprise, or PE, is entitled to benefits as discussed below. These benefits may include cash grants from the Israeli government
and tax benefits, based upon, among other things, the geographic location in Israel of the facility in which the investment is
made. In order to qualify for these incentives, an AE, 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, or AE, 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 AE), 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 AE 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
AE 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 AE 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 AE, 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 AE 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 AE, whichever ends earlier. If a company has more than
one AE 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 AE will not enjoy tax benefits.
A
company that has an AE 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 AE program will be eligible for an extension of the period during which it is entitled to tax
benefits under its AE 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 AE 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 AE 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 AE 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 AE (or out of dividends received from a company whose income is attributed
to an AE) 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 AE 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 AE 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 Subsequent to the 2005 Amendment
The
2005 Amendment applies to new investment programs commencing after 2004, but does not apply to investment programs approved prior
to April 1, 2005. The 2005 Amendment provides that terms and benefits included in any certificate of approval that was granted
before the 2005 Amendment became effective (April 1, 2005) will remain subject to the provisions of the Investment Law as
in effect on the date of such approval. Pursuant to the 2005 Amendment, the Investment Center will continue to grant AE status
to qualifying investments. The 2005 Amendment, however, limits the scope of enterprises that may be approved by the Investment
Center by setting criteria for the approval of a facility as an AE.
An
enterprise that qualifies under the new provisions is referred to as a BE, rather than AE. The 2005 Amendment provides that
a certificate of approval from the Investment Center will only be necessary for receiving cash grants. As a result, it was no
longer necessary for a company to obtain the advance approval of the Investment Center in order to receive the tax benefits previously
available under the alternative benefits track. Rather, a company may claim the tax benefits offered by the Investment Law directly
in its tax returns, provided that its facilities meet the criteria for tax benefits set forth in the 2005 Amendment. A company
that has a BE may, at its discretion, approach the Israel Tax Authority for a pre-ruling confirming that it is in compliance with
the provisions of the Investment Law.
Tax
benefits are available under the 2005 Amendment to production facilities (or other eligible facilities) which are generally required
to derive more than 25% of their business income from export to specific markets with a population of at least 14 million in 2012
(such export criteria will further be increased in the future by 1.4% per annum). In order to receive the tax benefits, the 2005
Amendment states that a company must make an investment that meets certain conditions set forth in the amendment for tax benefits,
including exceeding a minimum investment amount specified in the Investment Law. Such investment entitles a company to receive
a BE status with respect to the investment, and may be made over a period of no more than three years ending in the end of the
year in which the company chose to have the tax benefits apply to its BE. Where a company requests to have the tax benefits apply
to an expansion of existing facilities, only the expansion will be considered to be a BE and the company’s effective tax
rate will be the weighted average of the applicable rates. In such case, the minimum investment required in order to qualify as
a BE must exceed a certain percentage of the value of the company’s production assets before the expansion.
The
extent of the tax benefits available under the 2005 Amendment to qualifying income of a BE depends on, among other things, the
geographic location in Israel of the BE. The location will also determine the period for which tax benefits are available. Such
tax benefits include an exemption from corporate tax on undistributed income generated by the BE for a period of between two to
ten years, depending on the geographic location of the BE in Israel, and a reduced corporate tax rate of between 10% to 25% for
the remainder of the benefits period, depending on the level of foreign investment in the company in each year, as explained above.
The benefits period is limited to 12 or 14 years from the year the company first chose to have the tax benefits apply, depending
on the location of the company.
A
company qualifying for tax benefits under the 2005 Amendment which pays a dividend out of income derived by its BE during the
tax exemption period will be subject to corporate tax in respect of the amount of the dividend distributed (grossed-up to reflect
the pre-tax income that it would have had to earn in order to distribute the dividend) at the corporate tax rate which would have
otherwise been applicable. Dividends paid out of income attributed to a BE (or out of dividends received from a company whose
income is attributed to a BE) are generally subject to withholding tax at source at the rate of 15% or at a 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). The reduced rate of 15% is limited to dividends and distributions out of income attributed to
a Beneficiary Enterprise during the benefits period and actually paid at any time up to 12 years thereafter except with respect
to an FIC, in which case the 12-year limit does not apply.
The
benefits available to a BE are subject to the continued fulfillment of conditions stipulated in the Investment Law and its regulations.
If a company does not meet these conditions, it would be required to refund the amount of tax benefits, adjusted to the Israeli
consumer price index, and interest, or other monetary penalties.
Tax
benefits under the 2011 Amendment
The
2011 Amendment, effective January 1, 2011. canceled the availability of the benefits granted in accordance with the provisions
of the Investment Law prior to 2011 and, instead, introduced new benefits for income generated by a “Preferred Company”
through its PFE (as such terms are defined in the Investment Law) as of January 1, 2011. A Preferred Company is defined as either
(i) a company incorporated in Israel which is not wholly owned by a governmental entity or (ii) a limited partnership that (a)
was registered under the Israeli Partnerships Ordinance and (b) all of its limited partners are companies incorporated in Israel,
but not all of them are governmental entities; which has, among other things, PFE status and is controlled and managed from Israel.
Pursuant to the 2011 Amendment, a Preferred Company is entitled to a reduced corporate tax rate of 15% with respect to its preferred
income, or PFI, attributed to its PFE in 2011 and 2012, unless the PFE is located in a certain development zone, in which case
the rate will be 10%. Such corporate tax rate was reduced to 12.5% and 7%, respectively, in 2013 and was increased to 16% and
9%, respectively, in 2014 until 2016. Pursuant to the 2017 Amendment, in 2017 and thereafter, the corporate tax rate for a PFE
that is located in a specified development zone was decreased to 7.5%, while the reduced corporate tax rate for other development
zones remains 16%. Income derived by a Preferred Company from a ‘Special PFE’ (as such term is defined in the Investment
Law) would be entitled, during a benefits period of 10 years, to further reduced tax rates of 8%, or 5% if the Special PFE is
located in a certain development zone. As of January 1, 2017, the definition for ‘Special PFE’ includes less stringent
conditions.
Dividends
paid out of preferred income attributed to a PFE or to a Special PFE are generally subject to withholding tax at source at the
rate of 20% or such lower rate as may be provided in an applicable tax treaty (subject to the receipt in advance of a valid certificate
from the Israel Tax Authority allowing for a reduced tax rate). However, if such dividends are paid to an Israeli company, no
tax is required to be withheld (although, if such dividends are subsequently distributed to individuals or a non-Israeli company,
withholding tax at a rate of 20% or such lower rate as may be provided in an applicable tax treaty will apply).
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 AE, that had participated in an alternative benefits program, before the 2011 Amendment became effective, will remain
subject to the provisions of the Investment Law as in effect on the date of such approval, provided that certain conditions are
met. We and one of our Israeli subsidiaries have elected to apply the new incentives regime under the Amendment to our industrial
activity 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”, or PTE, and will thereby enjoy a reduced corporate tax rate of 12% on income that qualifies as “Preferred
Technology Income”, or PTI, as defined in the Investment Law. The tax rate is further reduced to 7.5% for a PTE located
in development zone A. In addition, a Preferred Technology Company will enjoy a reduced corporate tax rate of 12% on capital gain
derived from the sale of certain “Benefited Intangible Assets” (as defined in the Investment Law) to a related foreign
company if the Benefited Intangible Assets were acquired from a foreign company on or after January 1, 2017 for at least NIS 200
million, and the sale receives prior approval from the National Authority for Technological Innovation (referred to as NATI).
The
2017 Amendment further provides that a technology company satisfying certain conditions will qualify as a “Special Preferred
Technology Enterprise”, or Special PTE, (an enterprise for which total consolidated revenues of its parent company and all
subsidiaries exceed NIS 10 billion) and will thereby enjoy a reduced corporate tax rate of 6% on “Preferred Technology
Income”, or PTI, regardless of the company’s geographic location within Israel. In addition, a Special PTE will enjoy
a reduced corporate tax rate of 6% on capital gain derived from the sale of certain “Benefited Intangible Assets”
to a related foreign company if the Benefited Intangible Assets were either developed by 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 PTE that acquires Benefited
Intangible Assets from a foreign company for more than NIS 500 million will be eligible for these benefits for at least ten years,
subject to certain approvals as specified in the Investment Law.
Dividends
distributed by a PTE or a Special PTE, paid out of PTI, are subject to withholding tax at source at the rate of 20% or such lower
rate as may be provided in an applicable tax treaty (subject to the receipt in advance of a valid certificate from the Israel
Tax Authority allowing for a reduced tax rate). However, if such dividends are paid to an Israeli company, no tax is required
to be withheld (although, if such dividends are subsequently distributed from such Israeli company to individuals or a non-Israeli
company, withholding tax at a rate of 20% or such lower rate as may be provided in an applicable tax treaty will apply). If such
dividends are distributed to a foreign company and other conditions are met, the withholding tax rate will be 4%.
We
examined the impact of the 2017 Amendment and the degree to which we will qualify as a PTE or Special PTE, and the amount of PTI
that we may have, or other benefits that we may receive, from the 2017 Amendment. Beginning in 2017, part of the Company taxable
income in Israel is entitled to a preferred 12% tax rate under Amendment 73 to the Investment Law.
Tax
Benefits and Grants for Research and Development
Israeli
tax law allows, under certain conditions, a tax deduction for research and development expenditures, including capital expenditures,
for the year in which they are incurred. Such expenditures must relate to scientific research and development projects, and must
be approved by the relevant Israeli government ministry, determined by the field of research. Furthermore, the research and development
must be for the promotion of the company’s business and carried out by or on behalf of the company seeking such tax deduction.
However, the amount of such deductible expenses is reduced by the sum of any funds received through government grants for the
finance of such scientific research and development projects. Expenditures not so approved 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.
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 50% in 2017).
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, starting in 2018 the corporate tax
rate is 23%.
Non-Israeli
Resident Shareholders
Israeli
capital gain tax is imposed on the disposal of capital assets by a non-Israeli resident if such assets are either (i) located
in Israel; (ii) shares or rights to shares in an Israeli resident company; or (iii) represent, directly or indirectly, rights
to assets located in Israel, unless a tax treaty between Israel and the seller’s country of residence provides otherwise.
As mentioned above, Real Capital Gain is generally subject to tax at the corporate tax rate (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 50% for an individual in 2018).
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 AE are subject to withholding tax at the rate of 15% (if the dividend is distributed during the tax
benefits period under the Investment Law or within 12 years after such period) or 20% with respect to PFE. An average rate will
be set in case the dividend is distributed from mixed types of income (regular and Approved/ 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 AE or 20% with respect to PFE. Such dividends are generally subject to Israeli withholding tax at a rate of
25% so long as the shares are registered with a Nominee Company (whether the recipient is a Substantial Shareholder or not), and
15% if the dividend is distributed from income attributed to an AE or 20% if the dividend is distributed from income attributed
to a PFE, unless a reduced rate is provided under an applicable tax treaty (subject to the receipt in advance of a valid certificate
from the Israel Tax Authority allowing for a reduced tax rate). For example, under the U.S-Israel Treaty, the maximum rate of
tax withheld in Israel on dividends paid to a holder of our Ordinary Shares who is a U.S. resident (for purposes of the U.S.-Israel
Treaty) is 25%. However, generally, the maximum rate of withholding tax on dividends, not generated by our 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 AE 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 AE, or a PFE, and partly to other sources of
income, the withholding rate will be a blended rate reflecting the relative portions of the two types of income. U.S. residents
who are subject to Israeli withholding tax on a dividend may be entitled to a credit or deduction for U.S. federal income tax
purposes in the amount of the taxes withheld, subject to detailed rules contained in United States tax legislation.
A
non-Israeli resident who receives dividends from which tax was withheld is generally exempt from the obligation to file tax returns
in Israel with respect to such income, provided that (i) such income was not generated from business conducted in Israel
by the taxpayer, and (ii) the taxpayer has no other taxable sources of income in Israel with respect to which a tax return
is required to be filed.
Excess
Tax
Individuals
who are subject to tax in Israel (whether any such individual is an Israeli resident or non-Israeli resident) are also subject
to an additional tax for income exceeding a certain level. For 2018 and onwards, the additional tax is 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.
Estate
and Gift Tax
Israeli
law presently does not impose estate or gift taxes.
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. In addition, 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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regulated
investment companies, real estate investment trusts, or grantor trusts;
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dealers
or traders in securities, commodities or currencies;
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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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direct,
indirect or constructive owners of investors that actually or constructively own 10%
or more of our shares by vote or value; or
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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 our 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 our 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, as used herein, the term “U.S. Holder” means a person that is eligible for the benefits
of the Treaty and is a beneficial owner of an ordinary share who is, for U.S. federal income tax purposes:
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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 the income of which is subject to U.S. federal income taxation regardless of its
source; or
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a
trust if such trust has validly elected to be treated as a U.S. person for U.S. federal
income tax purposes or if (1) a court within the United States is able to exercise primary
supervision over its administration and (2) one or more U.S. persons have the authority
to control all of the substantial decisions of such trust.
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Unless
otherwise specifically indicated, this discussion does not consider the U.S. tax consequences to a person that is not a U.S. holder
(which we refer to as a non-U.S. holder) and considers only U.S. holders that will own our Ordinary Shares as capital assets (generally,
for investment).
Furthermore,
unless otherwise indicated, this discussion assumes that the Company is not, and will not become, a “passive foreign investment
company,” or a PFIC, for U.S. federal income tax purposes. See
“—
Passive Foreign Investment Companies
”
below.
Taxation
of Distributions
Subject
to the discussion below under the heading
“—Passive Foreign Investment Companies
,” the gross amount of
any distributions received with respect to our 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. Because we do not expect to maintain calculations of our earnings and profits
under U.S. federal income tax principles, it is expected that the entire amount of any distribution will generally be reported
as dividend income to you. Dividends are included in gross income as ordinary income. Distributions in excess of our current and
accumulated earnings and profits would be treated as a non-taxable return of capital to the extent of your tax basis in our 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 would 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, regardless of whether the
payment is in fact converted into U.S. dollars. 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 U.S.-source 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, some of which vary depending upon the U.S. Holder’s circumstances, any Israeli withholding tax imposed
on dividends paid with respect to our Ordinary Shares, at a rate not exceeding the applicable rate provided by the Treaty, 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). Israeli taxes withheld in excess of the applicable rate allowed
by the Treaty (if any) will not be eligible for credit against a U.S. Holder’s federal income tax liability. The limitation
on foreign income taxes eligible for credit is calculated separately with respect to specific classes of income. Dividends generally
will be treated as foreign-source passive category income or, in the case of certain U.S. Holders, general category income for
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 may be denied a foreign tax credit
with respect to Israeli income tax withheld from dividends received on our Ordinary Shares if such U.S. Holder fails to satisfy
certain minimum holding period requirements or to the extent such U.S. Holder’s position in ordinary shares is hedged. An
election to deduct foreign taxes instead of claiming foreign tax credit applies to all foreign taxes paid or accrued in the taxable
year. The rules relating to the determination of the foreign tax credit are complex, and you should consult with your own tax
advisors to determine whether and to what extent you would be entitled to this credit.
Subject
to certain limitations (including the PFIC rules discussed below), “qualified dividend income” received by a non-corporate
U.S. Holder will be subject to tax at the lower long-term capital gain rates (currently at 20%). Distributions taxable as dividends
paid on our Ordinary Shares should qualify for a reduced rate provided that either: (i) we are entitled to benefits under the
Treaty, or (ii) our 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 our Ordinary Shares currently
are readily tradable on an established securities market in the United States (see discussion below). However, no assurance can
be given that our Ordinary Shares will remain readily tradable. The rate reduction does not apply unless certain holding period
requirements are satisfied, nor does it apply to dividends received from a PFIC (see discussion below), in respect of certain
risk-reduction transactions, or in certain other situations. The legislation enacting the reduced tax rate on qualified dividend
income 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 our Ordinary Shares should consult their own tax advisors regarding the effect of these
rules in their particular circumstances.
Sale
or Disposition of Ordinary Shares
Subject
to the discussion of PFIC rules below, if you sell or otherwise dispose of our Ordinary Shares, you will generally recognize gain
or loss for U.S. federal income tax purposes in an amount equal to the difference between the amount realized on the sale or other
disposition and your adjusted tax basis in our Ordinary Shares, in each case determined in U.S. dollars. Such gain or loss will
generally be capital gain or loss and will be long-term capital gain or loss if you have held the ordinary shares for more than
one year at the time of the sale or other disposition. Long-term capital gain realized by a non-corporate U.S. Holder is generally
eligible for a preferential tax rate (currently 20%). In general, any gain that you recognize on the sale or other disposition
of ordinary shares will be U.S.-source for purposes of the foreign tax credit limitation; losses will generally be allocated against
U.S. source income. Deduction of capital losses is subject to certain limitations under the Code.
In
the case of a cash basis U.S. Holder who receives NIS in connection with the sale or disposition of our 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 cash basis U.S. Holder who receives payment in NIS and converts NIS into U.S. dollars at a conversion
rate other than the rate in effect on the settlement date may have a foreign currency exchange gain or loss, which 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 our Ordinary Shares that are traded on an established securities market, provided that the election is applied consistently
from year to year. Such election may not be changed without the consent of 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 U.S.- source 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
We
would be a passive foreign investment company, or PFIC, for a taxable year if either (1) 75% or more of our gross income in the
taxable year is passive income; or (2) the average percentage (by value determined on a quarterly basis) in a taxable year of
our assets that produce, or are held for the production of, passive income is at least 50%. Passive income for this purpose generally
includes, among other things, certain dividends, interest, royalties, rents and gains from commodities and securities transactions
and from the sale or exchange of property that gives rise to passive income. If we own (directly or indirectly) at least 25% by
value of the stock of another corporation, we would be treated for purposes of the foregoing tests as owning our proportionate
share of the other corporation’s assets and as directly earning our proportionate share of the other corporation’s
income. As discussed below, we believe that we were not a PFIC for 2018.
If
we were a PFIC, each U.S. holder would (unless it made one of the elections discussed below on a timely basis) be taxable on gain
recognized from the disposition of our Ordinary Shares (including gain deemed recognized if our Ordinary Shares are used as security
for a loan) and upon receipt of certain excess distributions (generally, distributions that exceed 125% of the average amount
of distributions in respect to such shares received during the preceding three taxable years or, if shorter, during the U.S. holder’s
holding period prior to the distribution year) with respect to our Ordinary Shares as if such income had been recognized ratably
over the U.S. holder’s holding period for the shares. The U.S. holder’s income for the current taxable year would
include (as ordinary income) amounts allocated to the current taxable year and to any taxable year prior to the first day of the
first taxable year for which we were a PFIC. Tax would also be computed at the highest ordinary income tax rate in effect for
each other taxable year to which income is allocated, and an interest charge on the tax as so computed would also apply. The tax
liability with respect to the amount allocated to the taxable year prior to the taxable year of the distribution or disposition
cannot be offset by any net operating losses. Additionally, if we were a PFIC, U.S. holders who acquire our Ordinary Shares from
decedents (other than nonresident aliens) would be denied the normally-available step-up in basis for such shares to fair market
value at the date of death and, instead, would have a tax basis in such shares equal to the lesser of the decedent’s basis
or the fair market value of such shares on the decedent’s date of death.
As
an alternative to the tax treatment described above, a U.S. holder could elect to treat us as a “qualified electing fund”
(a QEF), in which case the U.S. holder would be taxed, for each taxable year that we are a PFIC, on its pro rata share of our
ordinary earnings and net capital gain (subject to a separate election to defer payment of taxes, which deferral is subject to
an interest charge). Special rules apply if a U.S. holder makes a QEF election after the first taxable year in its holding period
in which we are a PFIC. We have agreed to supply U.S. holders with the information needed to report income and gain under a QEF
election if we were a PFIC. Amounts includable in income as a result of a QEF election will be determined without regard to our
prior year losses or the amount of cash distributions, if any, received from us. A U.S. holder’s basis in its Ordinary Shares
will increase by any amount included in income and decrease by any amounts not included in income when distributed because such
amounts were previously taxed under the QEF rules. So long as a U.S. holder’s QEF election is in effect with respect to
the entire holding period for its Ordinary Shares, any gain or loss realized by such holder on the disposition of its Ordinary
Shares held as a capital asset generally will be capital gain or loss. Such capital gain or loss ordinarily would be long-term
if such U.S. holder had held such Ordinary Shares for more than one year at the time of the disposition and would be eligible
for a reduced rate of taxation for certain non-corporate U.S. holders. The maximum long-term capital gains rate is 20% for individuals
with annual taxable income that exceeds certain thresholds. The QEF election is made on a shareholder-by-shareholder basis, applies
to all Ordinary Shares held or subsequently acquired by an electing U.S. holder and can be revoked only with the consent of the
IRS. The QEF election must be made on or before the U.S. holder’s tax return due date, as extended, for the first taxable year
to which the election will apply.
As
an alternative to making a QEF election, a U.S. holder of PFIC stock that is “marketable stock” (e.g., “regularly
traded” on the NASDAQ Global Select Market) may, in certain circumstances, avoid certain of the tax consequences generally
applicable to holders of stock in a PFIC by electing to mark the stock to market as of the beginning of such U.S. holder’s
holding period for our Ordinary Shares. Special rules apply if a U.S. holder makes a mark-to-market election after the first year
in its holding period in which we are a PFIC. As a result of such an election, in any taxable year that we are a PFIC, a U.S.
holder would generally be required to report gain or loss to the extent of the difference between the fair market value of the
Ordinary Shares at the end of the taxable year and such U.S. holder’s tax basis in such shares at that time. Any gain under
this computation, and any gain on an actual disposition of our Ordinary Shares in a taxable year in which we are PFIC, would be
treated as ordinary income. Any loss under this computation, and any loss on an actual disposition of our Ordinary Shares in a
taxable year in which we are PFIC, would be treated as ordinary loss to the extent of the cumulative net-mark-to-market gain previously
included. Any remaining loss from marking our Ordinary Shares to market will not be allowed, and any remaining loss from an actual
disposition of our Ordinary Shares generally would be capital loss. A U.S. holder’s tax basis in its Ordinary Shares is
adjusted annually for any gain or loss recognized under the mark-to-market election. There can be no assurances that there will
be sufficient trading volume with respect to our Ordinary Shares for the Ordinary Shares to be considered “regularly traded”
or that our Ordinary Shares will continue to trade on the NASDAQ Capital Market. Accordingly, there are no assurances that our
Ordinary Shares will be marketable stock for these purposes. As with a QEF election, a mark-to-market election is made on a shareholder-by-shareholder
basis, applies to all Ordinary Shares held or subsequently acquired by an electing U.S. holder and can only be revoked with consent
of the IRS (except to the extent our Ordinary Shares no longer constitute “marketable stock”).
Based
on an analysis of our assets and income, we believe that we were not a PFIC for 2018. We currently expect that we will not be
a PFIC in 2019. The tests for determining PFIC status are applied annually and it is difficult to make accurate predictions of
future income and assets, which are relevant to this determination. Accordingly, there can be no assurance that we will not become
a PFIC in any future taxable years. U.S. holders who hold our Ordinary Shares during a period when we are a PFIC will be subject
to the foregoing rules, even if we cease to be a PFIC, subject to certain exceptions for U.S. holders who made QEF, mark-to-market
or certain other special elections. U.S. holders are urged to consult their tax advisors about the PFIC rules, including the consequences
to them of making a mark-to-market or QEF election with respect to our Ordinary Shares in the event that we qualify as a PFIC.
Non-U.S.
holders of Ordinary Shares
Except
as provided below, a non-U.S. holder of our Ordinary Shares will not be subject to U.S. federal income or withholding tax on the
receipt of dividends on, or the proceeds from the disposition of, our Ordinary Shares, unless, in the case of U.S. federal income
taxes, that item is effectively connected with the conduct by the non-U.S. holder of a trade or business in the United States
and, in the case of a resident of a country which has an income tax treaty with the United States, such item is attributable to
a permanent establishment in the United States or, in the case of an individual, a fixed place of business in the United States.
In addition, gain recognized on the disposition of our Ordinary Shares by an individual non-U.S. holder will be subject to tax
in the United States if the non-U.S. holder is present in the United States for 183 days or more in the taxable year of the sale
and certain other conditions are met.
Additional
Tax on Investment Income
A
U.S. holder that is an individual or estate, or a trust that does not fall into a special class of trusts that is exempt from
the tax, will be subject to a 3.8% tax on the lesser of (1) the U.S. holder’s “net investment income” for the
relevant taxable year and (2) the excess of the U.S. holder’s modified adjusted gross income for the taxable year over a
certain threshold (which in the case of individuals will be between $125,000 and $250,000, depending on the individual’s
circumstances). A U.S. holder’s net investment income generally will include its dividends on our Ordinary Shares and net
gains from dispositions of our Ordinary Shares, unless those dividends or gains are derived in the ordinary course of the conduct
of trade or business (other than trade or business that consists of certain passive or trading activities). Net investment income,
however, may be reduced by deductions properly allocable to that income. A U.S. holder that is an individual, estate or trust
is urged to consult its tax adviser regarding the applicability of the Medicare tax to its income and gains in respect of its
investment in the Ordinary Shares.
Backup
Withholding and Information Reporting
Except
as provided below, a non-U.S. holder of our Ordinary Shares will not be subject to U.S. federal income or withholding tax on the
receipt of dividends on, or the proceeds from the disposition of, our Ordinary Shares, unless, in the case of U.S. federal income
taxes, that item is effectively connected with the conduct by the non-U.S. holder of a trade or business in the United States
and, in the case of a resident of a country which has an income tax treaty with the United States, such item is attributable to
a permanent establishment in the United States or, in the case of an individual, a fixed place of business in the United States.
In addition, gain recognized on the disposition of our Ordinary Shares by an individual non-U.S. holder will be subject to tax
in the United States if the non-U.S. holder is present in the United States for 183 days or more in the taxable year of the sale
and certain other conditions are met.
A
U.S. holder generally is subject to information reporting and may be subject to backup withholding at a rate of up to 28% with
respect to dividend payments on, or receipt of the proceeds from the disposition of, our Ordinary Shares. Backup withholding will
not apply with respect to payments made to exempt recipients, including corporations and tax-exempt organizations, or if a U.S.
holder provides a correct taxpayer identification number, certifies that such holder is not subject to backup withholding or otherwise
establishes an exemption. Non-U.S. holders are not subject to information reporting or backup withholding with respect to dividend
payments on, or receipt of the proceeds from the disposition of, our Ordinary Shares in the U.S., or by a U.S. payor or U.S. middleman,
provided that such non-U.S. holder provides a taxpayer identification number, certifies to its foreign status, or otherwise establishes
an exemption. Backup withholding is not an additional tax and may be claimed as a credit against the U.S. federal income tax liability
of a holder, or alternatively, the holder may be eligible for a refund of any excess amounts withheld under the backup withholding
rules, in either case, provided that the required information is furnished to the IRS.
U.S.
citizens and individuals taxable as resident aliens of the United States that own “specified foreign financial assets”
with an aggregate value in a taxable year in excess of certain threshold (as determined under Treasury regulations) and that are
required to file a U.S. federal income tax return generally will be required to file an information report with respect to those
assets with their tax returns. IRS Form 8938 has been issued for that purpose. “Specified foreign financial assets”
include any financial accounts maintained by foreign financial institutions, foreign stocks held directly, and interests in foreign
estates, foreign pension plans or foreign deferred compensation plans. Under those rules, our Ordinary Shares, whether owned directly
or through a financial institution, estate or pension or deferred compensation plan, would be “specified foreign financial
assets”. Under Treasury regulations, the reporting obligation applies to certain U.S. entities that hold, directly or indirectly,
specified foreign financial assets. Penalties can apply if there is a failure to satisfy this reporting obligation. A U.S. Holder
is urged to consult his tax adviser regarding his reporting obligation.
The
above description is not intended to constitute a complete analysis of all tax consequences relating to acquisition, ownership
and disposition of our ordinary shares. You should consult your tax advisor concerning the tax consequences of your particular
situation.
|
F.
|
Dividends
and Paying Agents
|
Not
applicable.
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.
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, 2018, we had approximately $104.0 million in cash and cash equivalents and short term bank deposits and $9.9 million
in marketable securities. Our marketable securities include investments in commercial and government bonds and foreign banks and
equity funds. As of such date our marketable securities portfolio was composed primarily of governmental and commercial bonds
bearing average annual interest rates of approximately 3.2%, with average maturities of 0.9 years and maximum maturities of 1.6
years. The performance of the capital markets affects the values of the funds we hold in marketable securities. These assets are
subject to market fluctuations. In such case, the fair value of our investments may decline. As of December 31, 2018, net unrealized
losses in our marketable securities portfolio totaled $94,000 (ninety-four 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).
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 2018 would have resulted in a decrease in the U.S. dollar
reporting value of our operating income of $1.1 million for that year, while a decrease of 10% in the value of the NIS relative
to the U.S. dollar in 2018 would have resulted in an increase in the U.S. dollar reporting value of our operating income of $0.9
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 2018 would have resulted in an increase in the U.S. dollar reporting value of our operating income of $1.1 million,
$0.2 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 2018 would have resulted in a decrease in the U.S. dollar reporting value of our
operating income of $1.1 million, $0.3 million and $0.1 million, respectively, for that year.
Equity
Price Risk
As
of December 31, 2018, we had $8.8 million of trading securities that are classified as available for sale. Those securities have
exposure to equity price risk. The estimated potential loss in fair value resulting from a hypothetical 10% decrease in prices
quoted on stock exchanges is approximately $0.8 million.
|
ITEM
12.
|
DESCRIPTION
OF SECURITIES OTHER THAN EQUITY SECURITIES
|
Not
applicable.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
|
U.S.
dollars in thousands (except share and per share data)
MAGIC
SOFTWARE ENTERPRISES LTD., an Israeli company (“the Group” or “the Company”), is a global provider of:
(i) proprietary application development and business process integration platforms that accelerate the planning, development,
deployment and integration of on-premise, mobile and cloud business applications (“the Magic Technology”); (ii) selected
packaged vertical software solutions; and (iii) a vendor of software services and IT outsourcing software services.
Magic
Technology enables enterprises to accelerate the process of delivering business solutions that meet current and future needs and
allow customers to dramatically improve their business performance and return on investment. To complement its software products
and to increase its traction with customers, the Group also offers a complete portfolio of software services in the areas of infrastructure
design and delivery, application development, technology planning and implementation services, communications services and solutions,
and supplemental IT professional outsourcing services. The Company reports its results on the basis of two reportable business
segments: software services (which include proprietary and non-proprietary software solutions, maintenance and support and related
services) and IT professional services (see Note 18 for further details).
The
principal markets of the Group are the United States, Israel, Europe and Japan (see Note 18).
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, unless otherwise stated:
Use
of estimates
The
preparation of the consolidated financial statements in conformity with U.S. GAAP requires management to make estimates, judgments
and assumptions. The Company’s management believes that the estimates, judgments and assumptions used are reasonable based
upon information available at the time they are made. These estimates, judgments and assumptions can affect the reported amounts
of assets and liabilities and disclosure of contingent assets and liabilities at the dates of the financial statements, and the
reported amounts of revenue and expenses during the reporting period. Actual results could differ from those estimates.
Financial
statements in United States dollars
A
substantial portion of the revenues and expenses of the Company and of certain subsidiaries is generated in U.S. dollars (“dollar”).
The Company’s management believes that the dollar is the currency of the primary economic environment in which the Company
and certain subsidiaries operate. Thus, the functional and reporting currency of the Company and certain subsidiaries is the dollar.
MAGIC
SOFTWARE ENTERPRISES LTD.
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. Monetary accounts and transactions maintained in dollars are presented
at their original amounts.
For
those foreign subsidiaries whose functional currency is not the dollar, all balance sheet amounts have been translated using the
exchange rates in effect at each balance sheet date. Statement of income amounts have been translated using the average exchange
rate prevailing during each year. Such translation adjustments are reported as a component of accumulated other comprehensive
income (loss) in equity.
Principles
of consolidation
The
consolidated financial statements include the accounts of the Company and its majority-owned subsidiaries. Intercompany balances
and transactions, including profit from intercompany sales not yet realized outside the Group, have been eliminated upon consolidation.
Changes
in the Company’s ownership interest in a subsidiary with no change of control are treated as equity transactions, with any
difference between the amount of consideration paid and the change in the carrying amount of the non-controlling interest, recognized
in equity.
Non-controlling
interests of subsidiaries represent the non-controlling shareholders’ share of the total comprehensive income (loss) of
the subsidiaries and fair value of the net assets upon the acquisition of the subsidiaries. The non-controlling interests are
presented in equity separately from the equity attributable to the equity holders of the Company. Redeemable non-controlling interests
are classified as mezzanine equity, separate from permanent equity, on the consolidated balance sheets and measured at each reporting
period at the higher of their redemption amount or the non-controlling interest book value, in accordance with the requirements
of ASC 810 “Consolidation” and ASC 480-10-S99-3A, “Distinguishing Liabilities from Equity”.
The
following table provides a reconciliation of the redeemable non-controlling interests for the year ended December 31, 2018:
January 1, 2018
|
|
$
|
25,839
|
|
Net income attributable to redeemable non-controlling interest
|
|
|
3,383
|
|
Increase in value of put options of redeemable non-controlling interests
|
|
|
1,726
|
|
Dividend declared to redeemable non-controlling interest
|
|
|
(1,979
|
)
|
Foreign currency translation adjustments
|
|
|
(1,734
|
)
|
|
|
|
|
|
December 31, 2018
|
|
$
|
27,235
|
|
Out
of the closing balance, an amount of $ 25,778 become exercisable during 2019.
MAGIC
SOFTWARE ENTERPRISES LTD.
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 acquisition.
Cash
and cash equivalents include amounts held primarily in NIS, dollar, Euro, Japanese Yen and British Pound.
Short-term
deposits and restricted deposits
Short-term
deposits include deposits with original maturities of more than three months and less than one year. Such deposits are presented
at cost (including accrued interest) which approximates their fair value. Restricted deposits are used to secure certain of the
Group’s ongoing projects and are classified under other long-term receivables.
Marketable
securities
The
Company accounts for all its investments in marketable securities in accordance with ASC No. 320, “Investments – Debt
and Equity Securities”. The Company classifies all of its marketable securities as available for sale and held for trading.
Available for sale securities are carried at fair value, with the unrealized gains and losses, net of tax, reported in “accumulated
other comprehensive income (loss)” in equity. Realized gains and losses on sale of investments are included in “financial
expense (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 expense (income), net”.
The
Company recognizes an impairment charge when a decline in the fair value of its investments in debt securities below the cost
basis of such securities is judged to be other-than-temporary. Factors considered in making such a determination include the duration
and severity of the impairment, the reason for the decline in value, the potential recovery period and the Company’s intent
to sell, including whether it is more likely than not that the Company will be required to sell the investment before recovery
of cost basis. For securities that are deemed other-than-temporarily impaired, the amount of impairment is recognized in “net
gain (impairment net of gains) on sale of marketable securities previously impaired” in the statements of income and is
limited to the amount related to credit losses, while impairment related to other factors is recognized in other comprehensive
income.
The
Company classifies its marketable debt securities as either short-term or long-term based on each instrument’s underlying
contractual maturity date and the entity’s expectations of sales and redemptions in the following year.
Held
for trading securities are measured at fair value through profit or loss.
MAGIC
SOFTWARE ENTERPRISES LTD.
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 - 5
|
Office furniture and equipment
|
|
7 - 15 (mainly 7)
|
Motor vehicles
|
|
7
|
Software
|
|
3 – 5 (mainly 5)
|
Leasehold
improvements are amortized using the straight-line method over the term of the lease (including option terms that are deemed to
be reasonably assured) or the estimated useful life of the improvements, whichever is shorter.
Business
combinations
The
Company accounts for business combinations under ASC 805, “Business Combinations”. ASC 805 requires recognition of
assets acquired, liabilities assumed, contingent consideration, non-controlling interest and redeemable non-controlling interest
in the acquiree at the acquisition date, to be measured at their fair values as of that date. As required by ASC 820, “Fair
Value Measurements and Disclosures” the Company applies assumptions, judgments and estimates that marketplace participants
would consider in determining the fair value of assets acquired, liabilities assumed, non-controlling interest and redeemable
non-controlling interest in the acquiree at the acquisition date. Any excess of the fair value of net assets acquired over purchase
price and any subsequent changes in estimated contingencies are to be recorded in earnings. Acquisition related costs are expensed
to the statements of income in the period incurred. The cumulative impact of measurement period adjustments, including the impact
to prior periods, is recognized in the reporting period in which the adjustment is identified.
During
the years ended December 31, 2016, 2017 and 2018 the Company recorded $ 665, $ 300 and $ (38), with respect to changes in the
fair value of contingent consideration liability, respectively.
MAGIC
SOFTWARE ENTERPRISES LTD.
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 (approximately 5 years, due to their high rates of acceptance, the continued reliance on these products by existing customers,
and the demand for such products from prospective customers, all of which validate the Company’s expectations) which provides
greater amortization expense compared to the revenue-curve method.
The
Company assesses the recoverability of these intangible assets on a regular basis by assessing the net realizable value of these
intangible assets based on the estimated future gross revenues from each product reduced by the estimated future costs of completing
and disposing of it, including the estimated costs of performing maintenance and customer support over its remaining economical
useful life using internally generated projections of future revenues generated by the products, cost of completion of products
and cost of delivery to customers over its remaining economical useful life. During the years ended December 31, 2016, 2017 and
2018, 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.
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, judgments and estimates
that marketplace participants would consider in determining the fair value of long-lived assets (or asset groups).
Intangible
assets with finite lives are amortized over their economic useful life using a method of amortization that reflects the pattern
in which the economic benefits of the intangible assets are consumed or otherwise used up. Acquired technology and non-compete
agreements were amortized on a straight line basis and customer relationships and backlog were amortized on an accelerated method
basis over a period between 1 - 15 years based on the intangible assets identified.
During
the years ended December 31, 2016, 2017 and 2018, no impairment losses have been identified.
Goodwill
Goodwill
represents the excess of the purchase price in a business combination over the fair value of the net tangible and intangible assets
acquired. Under ASC 350, “Intangibles - Goodwill and Other”, goodwill is subject to an annual impairment test or more
frequently if impairment indicators are present. Goodwill impairment is deemed to exist if the net book value of a reporting unit
exceeds its estimated fair value. As of December 31, 2018, the Company operates in four reporting units within its operating segments.
Goodwill
reflects the excess of the consideration paid or transferred plus the fair value of contingent consideration and any non-controlling
interest in the acquiree at the acquisition date over the fair values of the identifiable net assets acquired.
ASC
350 allows an entity to first assess qualitative factors to determine whether it is necessary to perform the two-step quantitative
goodwill impairment test. If the qualitative assessment does not result in a more likely than not indication of impairment, no
further impairment testing is required. If it does result in a more likely than not indication of impairment, the two-step impairment
test is performed. Alternatively, ASC 350 permits an entity to bypass the qualitative assessment for any reporting unit and proceed
directly to performing the first step of the goodwill impairment test.
MAGIC
SOFTWARE ENTERPRISES LTD.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
|
U.S.
dollars in thousands (except share and per share data)
NOTE
2:-
|
SIGNIFICANT
ACCOUNTING POLICIES (Cont.)
|
The
provisions of ASC 350 require that the quantitative two-step impairment test will be performed on goodwill at the level of the
reporting units. In the first step, or “Step one”, the Company compares the fair value of each reporting
unit to its carrying value. If the fair value exceeds the carrying value of the net assets, goodwill is considered not impaired,
and the Company is not required to perform further testing. If the carrying value of the net assets exceeds the fair value, then
the Company must perform the second step, or “Step two”, of the impairment test in order to determine the
implied fair value of goodwill. To determine the fair value used in Step one, the Company uses discounted cash flows. If and when
the Company is required to perform a Step two analysis, determining the fair value of its net assets and its off-balance sheet
intangibles, then the Company would be required to make judgments that involve the use of significant estimates and assumptions.
The
Company determines the fair value of each reporting unit by using the income approach, which utilizes a discounted cash flow model,
as it believes that this approach best approximates the reporting unit’s fair value. Judgments and assumptions related to
revenue, operating income, future short-term and long-term growth rates, weighted average cost of capital, interest, capital expenditures,
cash flows, and market conditions are inherent in developing the discounted cash flow model. The Company considers historical
rates and current market conditions when determining the discount and growth rates to use in its analyses. If these estimates
or their related assumptions change in the future, the Company may be required to record impairment charges for its goodwill.
The
Company performed an annual impairment test as of December 31, of each of 2016, 2017 and 2018 and did not identify any impairment
losses (see Note 9).
Revenue
recognition
Effective
as of January 1, 2018, The Company implements the provisions of Accounting Standards Codification (“ASC”) Topic
606, Revenue from Contracts with Customers (“ASC 606”) using the modified retrospective method. no cumulative
effect adjustment as of the date of the adoption was required. Prior years information has not been restated and continues to
be reported under the old accounting standard 605, “Revenue Recognition” (ASC 605). See Note 19 for further disclosures
required under ASC 606.
Revenues
are recognized when control of the promised goods or services are transferred to the customers, in an amount that reflects the
consideration that the company expects to receive in exchange for those goods or services.
The
Company determines revenue recognition through the following steps:
|
|
●
|
identification
of the contract with a customer;
|
|
|
|
|
|
|
●
|
identification
of the performance obligations in the contract;
|
|
|
|
|
|
|
●
|
determination
of the transaction price;
|
|
|
|
|
|
|
●
|
allocation
of the transaction price to the performance obligations in the contract; and
|
|
|
|
|
|
|
●
|
recognition
of revenue when, or as, the Company satisfies a performance obligation.
|
MAGIC
SOFTWARE ENTERPRISES LTD.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
|
U.S.
dollars in thousands (except share and per share data)
NOTE
2:-
|
SIGNIFICANT
ACCOUNTING POLICIES (Cont.)
|
The
Company enters into contracts that can include various combinations of products, software and professional services, as detailed
below, which are generally capable as being distinct from each other and accounted for as separate performance obligations.
The
Company derives its revenues from licensing the rights to use its software (proprietary and non-proprietary), provision of related
professional services, maintenance and technical support as well as from other software and IT professional services (either fixed
price or based on time and materials). The Company sell its products primarily through direct sales force and indirectly through
distributors and value added resellers.
Under
ASC 606, an entity recognizes revenue when or as it satisfies a performance obligation by transferring software license or software
related services to the customer, either at a point in time or over time. The company recognizes its revenues from software sales
at a point in time upon delivery of its software license. The software license is considered a distinct performance obligation,
as the customer can benefit from the software on its own. Revenues from contracts that involve significant customization to customer-specific
specifications are performance obligations the Company generally accounts for as performance obligations satisfied over time.
The underlying deliverable is owned and controlled by the customer, and does not create an asset with an alternative use to the
Company. The Company recognizes revenue of such contracts over time using cost inputs, which recognize revenue and gross profit
as work is performed based on a ratio between actual costs incurred compared to the total estimated costs for the contract, to
measure progress toward completion of its performance obligations, which is similar to the method prior to the adoption of ASC
606. Provisions for estimated losses on uncompleted contracts are made in the period in which such losses are first determined,
in the amount of the estimated loss for the entire contract. During the years ended December 31, 2016, 2017 and 2018, no material
estimated losses were identified. In addition, the Company provides professional services that do not involve significant customization
to customer-specific specifications. For contracts that do not involve significant customization to customer-specific specifications
(typically staffing or consulting services) revenue is recognized as the services are performed, either on a straight-line basis
or based on the hours of services that were provided to the customer, in accordance with the terms of the contracts.
The
Company’s revenues from post contract support are derived from annual maintenance contracts providing for unspecified upgrades
for new versions and enhancements on a when-and-if-available basis for an annual fee. The right for an unspecified upgrade for
new versions and enhancements on a when-and-if-available basis do not specify the features, functionality and release date of
future product enhancements for the customer to know what will be made available and the general timeframe in which it will be
delivered. The Company considers the post contract support performance obligation as a distinct performance obligation that is
satisfied over time, and recognized on a straight-line basis over the contractual period.
Revenue
from professional services both related to software and IT professional services businesses consists of either fixed price or
Time and Materials (T&M), and are considered performance obligations that are satisfied over time, and revenues are recognized
as the services are provided.
The
transaction price is allocated to the separate performance obligations on a relative standalone selling price basis. Standalone
selling prices of software licenses are estimated using the residual approach, due to the lack of selling software licenses on
a standalone basis, or the fact the Company sells the license to different customers for a broad range of amounts. Standalone
selling prices of services are determined by considering several external and internal factors including, but not limited to,
transactions where the specific performance obligation is sold separately.
MAGIC
SOFTWARE ENTERPRISES LTD.
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.
Deferred
revenues include unearned amounts received under maintenance and support (mainly) and amounts received from customers for which
revenues have not yet been recognized.
Revenue
from third-party sales is recorded at a gross or net amount according to certain indicators. The application of these indicators
for gross and net reporting of revenue depends on the relative facts and circumstances of each sale.
The
Company pays commissions to sales and marketing and certain management personnel based on their attainment of certain predetermined
sales or profit goals. When sales commissions are considered incremental costs of obtaining a contract with a customer they are
deferred and amortized on a systematic basis that is consistent with the transfer to the customer of the performance obligations
to which the asset relates. The Company expenses sales commissions as they are incurred when the amortization period would have
been less than one year. In addition, generally, sales commission which are paid upon contract renewal are commensurate with
the initial commissions as the renewal amounts are substantially identical to the initial commission costs. During the year ended
December 31, 2018, no costs have been capitalized.
The
Company does not assess whether a contract has a significant financing component if the expectation at contract inception is such
that the period between payment by the customer and the transfer of the promised goods or services to the customer will be one
year or less.
Accrued
severance pay and retirement plans
The
Company’s and its Israeli subsidiaries’ obligation for severance pay with respect to their Israeli employees (for
the period for which the employees were not included under Section 14 of the Severance Pay Law, 1963) is calculated pursuant to
the Israeli Severance Pay Law based on the most recent salary of the employees multiplied by the number of years of employment
as of the balance sheet date, and are presented on an undiscounted basis (referred to as the “Shut Down Method”).
Employees are entitled to one month’s salary for each year of employment or a portion thereof. The Company’s obligation
for all of its Israeli employees is fully provided for by monthly deposits with insurance policies and severance pay funds and
by an accrual.
MAGIC
SOFTWARE ENTERPRISES LTD.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
|
U.S.
dollars in thousands (except share and per share data)
NOTE
2:-
|
SIGNIFICANT
ACCOUNTING POLICIES (Cont.)
|
The
carrying value of deposited funds includes profits (losses) accumulated up to the balance sheet date. The deposited funds may
be withdrawn only upon the fulfillment of the obligations pursuant to the Israeli Severance Pay Law or labor agreements and are
recorded as an asset in the Company’s consolidated balance sheet.
The
Company and its Israeli subsidiaries’ agreements with most of their Israeli employees are in accordance with Section 14
of the Severance Pay Law -1963, mandating that upon termination of such employees’ employment; all the amounts accrued in
their insurance policies shall be released to them instead of severance compensation. Upon release of deposited amounts to the
employee, no additional liability exists between the parties regarding the matter of severance pay and no additional payments
are payable by the Company or its subsidiaries to the employee. Further, the related obligation and amounts deposited on behalf
of such obligation are not stated on the balance sheet, as the Company and its subsidiaries are legally released from their obligations
to employees once the deposit amounts have been paid.
The
Group has a number of savings plans in the United States that qualify under Section 401(k) of the Internal Revenue Code. U.S.
employees may contribute up to 100% of their pretax or post-tax salary, but not more than statutory limits. Matching contributions
are discretionary and if made, are up to 3% of the participants annual contributions. When contributions are granted, they
are invested in proportion to each participant’s voluntary contributions in the investment options provided under the plan.
Severance
expenses for the years ended December 31, 2016, 2017 and 2018 amounted to approximately $ 2,248, $ 3,748 and $ 4,052,
respectively.
Advertising
expenses
Advertising
expenses are charged to selling and marketing expenses, as incurred. Advertising expenses for the years ended December 31, 2016,
2017 and 2018 amounted to $ 423, $ 384 and $ 304, respectively.
Income
taxes
The
Company accounts for income taxes in accordance with ASC 740, “Income Taxes”. ASC 740 prescribes the use of the “asset
and liability” method whereby deferred tax asset and liability account balances are determined based on differences between
financial reporting and tax bases of assets and liabilities and are measured using the enacted tax rates and laws that will be
in effect when the differences are expected to reverse. The Company provides a valuation allowance, if necessary, to reduce deferred
tax assets to their estimated realizable value. Deferred tax assets and liabilities are classified as non-current.
The
Company utilizes a two-step approach for recognizing and measuring uncertain tax positions accounted for in accordance with an
amendment of ASC 740 “Income Taxes.” Under the first step the Company evaluates a tax position taken or expected to
be taken in a tax return by determining if the weight of available evidence indicates that it is more likely than not that, based
on its technical merits, the tax position will be sustained on audit, including resolution of any related appeals or litigation
processes.
MAGIC
SOFTWARE ENTERPRISES LTD.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
|
U.S.
dollars in thousands (except share and per share data)
NOTE
2:-
|
SIGNIFICANT
ACCOUNTING POLICIES (Cont.)
|
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 21,998 and 2,093 for the years ended December 31, 2016 and 2017, respectively.
As of December 31, 2018, there were no outstanding options excluded from the calculations of diluted earnings per share.
The
Company changed its accounting policy regarding the presentation of the adjustment to the net income attributable to Magic
Software Enterprises’ shareholders as a result of the accretion of redeemable non-controlling interest. According to
the new accounting policy, the Company presents the accretion amount in the calculation of the earnings per share in the
notes of the financial statements, compared to the previous presentation on the face of the consolidated statements of
income, since Company’s management believes that reflecting the effects of the accretion as an adjustment to income
available to Magic Software Enterprises’ shareholders in the earnings per share note is a more appropriate
presentation. The change in the accounting policy was retrospectively effected
reported net income attributable to
Magic Software Enterprises’ shareholders during December 31, 2016 in the amount of $ 2,262 (also refer to note
17).
Stock-based
compensation
The
Company accounts for stock-based compensation in accordance with ASC 718, “Compensation - Stock Compensation” which
requires the measurement and recognition of compensation expense based on estimated fair values for all share-based payment awards
made. ASC 718 requires companies to estimate the fair value of equity-based payment awards on the date of grant using an option-pricing
model. The value of the portion of the award that is ultimately expected to vest is recognized as an expense over the requisite
service periods in the Company’s consolidated statement of income.
The
Company recognizes compensation expenses for the value of its awards, which have graded vesting based on the accelerated method
over the requisite service period of each of the awards, net of estimated forfeitures.
The
Company uses the Binomial option-pricing model (“the Binomial model”) to estimate the fair value for any options granted.
The Binomial model takes into account variables such as volatility, dividend yield rate, and risk-free interest rate and also
allows for the use of dynamic assumptions and considers the contractual term of the option, the probability that the option will
be exercised prior to the end of its contractual life, and the probability of termination or retirement of the option holder in
computing the value of the option.
MAGIC
SOFTWARE ENTERPRISES LTD.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
|
U.S.
dollars in thousands (except share and per share data)
NOTE
2:-
|
SIGNIFICANT
ACCOUNTING POLICIES (Cont.)
|
The
fair value of each option granted using the Binomial model, was estimated on the date of grant with the following assumptions:
expected volatility was based upon actual historical stock price movements and was calculated as of the grant dates for different
periods, since the Binomial model can be used for different expected volatilities for different periods. The risk-free interest
rate was based on the yield from U.S. Treasury zero-coupon bonds with an equivalent term to the contractual term of the options.
The expected term of options granted was derived from the output of the option valuation model and represented the period of time
that options granted were expected to be outstanding. Estimated forfeitures were based on actual historical pre-vesting forfeitures.
Since dividend payments are applied to reduce the exercise price of the option, the effect of the dividend protection was reflected
by using an expected dividend assumption of zero.
For
awards with performance conditions, compensation cost is recognized over the requisite service period if it is ‘probable’
that the performance conditions will be satisfied.
No
grants were made to employees or directors in 2016 and 2017.
During
the years ended December 31, 2016, 2017 and 2018, the Company recognized stock-based compensation expense related to employee
stock options in the amount of $ 152, $ 78 and $ 194, respectively, as follows:
|
|
Year ended December 31,
|
|
|
|
2016
|
|
|
2017
|
|
|
2018
|
|
|
|
|
|
|
|
|
|
|
|
Cost of revenue
|
|
$
|
15
|
|
|
$
|
7
|
|
|
$
|
2
|
|
Research and development
|
|
|
17
|
|
|
|
8
|
|
|
|
4
|
|
Selling and marketing
|
|
|
71
|
|
|
|
-
|
|
|
|
4
|
|
General and administrative
|
|
|
49
|
|
|
|
63
|
|
|
|
184
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total stock-based compensation expense
|
|
$
|
152
|
|
|
$
|
78
|
|
|
$
|
194
|
|
Concentrations
of credit risk
Financial
instruments that potentially subject the Company to concentration of credit risk consist principally of cash and cash equivalents,
short-term deposits, restricted cash, marketable securities, trade receivables and foreign currency derivative contracts.
MAGIC
SOFTWARE ENTERPRISES LTD.
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, short-term deposits and restricted cash are invested primarily in bank deposits with
major banks worldwide, mainly in the United States and Israel, however, such cash and cash equivalents and short-term deposits
in the United States may be in excess of insured limits and are not insured in other jurisdictions. The Company believes that
since these deposits may be redeemed upon demand and since such institutions are of high rating they bear low risk.
The
Company’s marketable securities include investments in commercial and government bonds and foreign banks. The Company’s
marketable securities are considered to be highly liquid and have a high credit standing (also refer to Note 4). In addition,
management considered its portfolios in foreign banks to be well-diversified.
The
Company’s trade receivables are derived from sales to customers located primarily in the United States, Israel, Europe and
Japan. An allowance for doubtful accounts is determined with respect to those amounts that the Company has determined to be doubtful
of collection. The expense related to doubtful accounts for the years ended December 31, 2016, 2017 and 2018 was $ 437, $
1,164 and $ 1,070, respectively.
From
time to time the Company enters into foreign exchange forward contracts and option contracts intended to protect against the changes
in value of forecasted non-dollar currency cash flows related to salary and related expenses. These derivative instruments are
designed to offset the Company’s non-dollar currency exposure.
Fair
value measurements
The
Company accounts for certain assets and liabilities at fair value under ASC 820, “Fair Value Measurements and Disclosures”.
Fair value is an exit price, representing the amount that would be received to sell an asset or paid to transfer a liability in
an orderly transaction between market participants. As such, fair value is a market-based measurement that should be determined
based on assumptions that market participants would use in pricing an asset or a liability. As a basis for considering such assumptions,
ASC 820 establishes a three-tier value hierarchy, which prioritizes the inputs used in the valuation methodologies in measuring
fair value:
|
Level
1 -
|
Observable
inputs that reflect quoted prices (unadjusted) for identical assets or liabilities in active markets;
|
|
Level
2 -
|
Includes
other inputs that are directly or indirectly observable in the marketplace, other than quoted prices included in Level 1,
such as quoted prices for similar assets or liabilities in active markets, quoted prices for identical or similar assets or
liabilities in markets with insufficient volume or infrequent transactions, or other inputs that are observable (model-derived
valuations in which significant inputs are observable), or can be derived principally from or corroborated by observable market
data;
|
|
|
|
|
Level
3 -
|
Unobservable
inputs which are supported by little or no market activity;
|
MAGIC
SOFTWARE ENTERPRISES LTD.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
|
U.S.
dollars in thousands (except share and per share data)
NOTE
2:-
|
SIGNIFICANT
ACCOUNTING POLICIES (Cont.)
|
The
fair value hierarchy also requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs
when measuring fair value. The Company categorized each of its fair value measurements in one of these three levels of hierarchy.
Assets and liabilities measured at fair value on a recurring basis are comprised of marketable securities, foreign currency forward
contracts and contingent consideration of acquisitions (see Note 5).
The
carrying amounts reported in the balance sheet for cash and cash equivalents, short term bank deposits, trade receivables, other
accounts receivable, short-term bank credit, trade payables and other accounts payable approximate their fair values due to the
short-term maturities of such instruments.
Comprehensive
income (loss)
The
Company accounts for comprehensive income (loss) in accordance with ASC 220, “Comprehensive Income.” This Statement
establishes standards for the reporting and display of comprehensive income and its components in a full set of general purpose
financial statements. Comprehensive income (loss) generally represents all changes in equity during the period except those resulting
from investments by, or distributions to, shareholders. The Company determined that its items of other comprehensive income (loss)
relate to gain and loss on foreign currency translation adjustments, unrealized gain and loss on derivative instruments designated
as hedges and unrealized gain and loss on available-for-sale marketable securities.
Recently
adopted accounting pronouncement
In
May 2014, the FASB issued ASU 2014-09 establishing Accounting Standards Codification (ASC) Topic 606, “Revenue from Contracts
with Customers” (ASC 606). ASC 606 establishes a comprehensive new revenue recognition model designed to depict the transfer
of goods or services to a customer in an amount that reflects the consideration the entity expects to be entitled to receive in
exchange for those goods or services and requires significantly enhanced revenue disclosures. The Company adopted the standard
effective January 1, 2018 using the modified retrospective method. Results for reporting periods beginning after January 1, 2018,
were presented under Topic 606, while prior period amounts were not adjusted and were reported in accordance with the Company’s
historic accounting practices, under legacy revenue recognition standards. See Note 19 to the financial statements for further
information regarding the initial application of ASC 606.
MAGIC
SOFTWARE ENTERPRISES LTD.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
|
U.S.
dollars in thousands (except share and per share data)
NOTE
2:-
|
SIGNIFICANT
ACCOUNTING POLICIES (Cont.)
|
In August 2016, the Financial
Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) 2016-15 “Statement of Cash Flows (Topic 230):
Classification of Certain Cash Receipts and Cash Payments” (ASU 2016-15). ASU 2016-15 provides specific guidance on eight
cash flow classification issues, including debt prepayment, payments of contingent liabilities as part of business combinations,
or debt extinguishment costs and distributions received from equity method investees, to reduce diversity in practice. ASU 2016-15
is effective for interim and annual periods beginning after December 15, 2017. The Company adopted this standard during 2018.
As a result of the adoption
of ASU 2016-15, the Company adjusted the previously reported consolidated statement of cash flows for the years ended December
31, 2017 and 2016 as follows:
|
|
Year Ended December 31,
2017
|
|
|
|
As previously reported
|
|
|
Adjustments
|
|
|
As Adjusted
|
|
Net cash used in investing activities
|
|
$
|
(12,419
|
)
|
|
$
|
5,103
|
|
|
$
|
(7,316
|
)
|
Net cash used in financing activities
|
|
$
|
(14,311
|
)
|
|
$
|
(5,103
|
)
|
|
$
|
(19,414
|
)
|
|
|
Year Ended December 31,
2016
|
|
|
|
As previously reported
|
|
|
Adjustments
|
|
|
As Adjusted
|
|
Net cash used in investing activities
|
|
$
|
(35,982
|
)
|
|
$
|
1,779
|
|
|
$
|
(34,203
|
)
|
Net cash provided by financing activities
|
|
$
|
22,190
|
|
|
$
|
(1,779
|
)
|
|
$
|
20,411
|
|
In
January 2017, FASB issued ASU 2017-01, Business Combinations (Topic 805) Clarifying the Definition of Business. ASU 2017-01 clarifies
the definition of a business with the objective of adding standard to assist entities with evaluating whether transactions should
be accounted for as acquisitions (or disposals) of assets or businesses. The update to the standard is effective for interim and
annual periods beginning after December 15, 2017, and applied prospectively. The Company adopted this standard during 2018, with
no material impact on its financial statements.
In
May 2017, the FASB issued ASU 2017-09, “Compensation - Stock Compensation (Topic 718): Scope of Modification Accounting”
(“ASU 2017-09”), which gives direction on which changes to the terms or conditions of share-based payment awards require
an entity to apply modification accounting in Accounting Standard Codification (“ASC”) Topic 718. In general, entities
will apply the modification accounting guidance if the value, vesting conditions or classification of the award changes. ASU 2017-09
is effective for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. Early adoption
is permitted, including adoption in an interim period. The Company adopted this standard during 2018, with no material impact
on its financial statements.
Recently
issued accounting pronouncements and not yet adopted
In February 2016, the FASB issued
ASU 2016-02, “Leases” (Topic 842). Topic 842 supersedes the lease requirements in Accounting Standards Codification
(ASC) Topic 840, “Leases”. Under Topic 842 lessees will be required to recognize for all leases at the commencement
date a lease liability; and a right-of-use asset (“ROU”). In July 2018, the FASB issued amendments in ASU 2018-11,
which provide another transition method in addition to the existing transition method, by allowing entities to initially apply
the new leases standard at the adoption date and recognize a cumulative-effect adjustment to the opening balance of retained earnings
in the period of adoption, and to not apply the new guidance in the comparative periods they present in the financial statements.
The modified retrospective approach does not require applying the new standard to all leases existing at the date of initial application.
ASU 2016-02 is effective for annual and interim periods beginning after December 15, 2018. The Company will adopt this standard
at January 1, 2019 (“the Transition Date”), using the modified retrospective approach at the beginning of the period
of adoption through a cumulative-effect adjustment. The Company also expects to elect certain relief options offered in ASU 2016-02
including the package of practical expedients. Additionally, the Company intends to elect an accounting policy, by class of underlying
asset to combine, lease and non-lease components.
MAGIC
SOFTWARE ENTERPRISES LTD.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
|
U.S.
dollars in thousands (except share and per share data)
NOTE
2:-
|
SIGNIFICANT
ACCOUNTING POLICIES (Cont.)
|
The
Company expects the adoption of the standard will have a material impact on its consolidated balance sheets which will result
in the recognition of ROU and lease liabilities of approximately $12,322 at the Transition Date. The most significant
impact from recognition of ROU assets and lease liabilities relates to the Company’s leased office space. However, the Company
does not anticipate that the adoption of this standard will have a material impact on the operating expenses in its consolidated
statements of operations since the expense recognition under this new standard will be similar to current practice.
In
June 2016, the FASB Issued ASU 2016-13, Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial
Instruments. The new standard requires financial assets measured at amortized cost be presented at the net amount expected to
be collected, through an allowance for credit losses that is deducted from the amortized cost basis. The standard will be effective
for the Company beginning January 1, 2020, with early adoption permitted. The Company is evaluating the impact of adopting this
new accounting guidance on its consolidated financial statements.
In
January 2017, the FASB issued ASU 2017-04 (ASU 2017-04): Intangibles-Goodwill and Other (Topic 350): Simplifying the Test for
Goodwill Impairment. ASU 2017-04 eliminates step two of the goodwill impairment test and specifies that goodwill impairment should
be measured by comparing the fair value of a reporting unit with its carrying amount. Additionally, the amount of goodwill allocated
to each reporting unit with a zero or negative carrying amount of net assets should be disclosed. ASU 2017-04 is effective for
annual or interim goodwill impairment tests performed in fiscal years beginning after December 15, 2019, and early adoption is
permitted. The Company is evaluating the impact of adopting this new accounting guidance on its consolidated financial statements.
NOTE
3:-
|
BUSINESS
COMBINATION, SIGNIFICANT TRANSACTION AND SALE OF BUSINESS
|
|
a.
|
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
|
)
|
Redeemable 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, 2018, the Comblack redeemable non-controlling interest amounted to $ 7,245.
MAGIC
SOFTWARE ENTERPRISES LTD.
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.)
|
|
b.
|
On
June 30, 2015, the Company acquired a 70% interest in Infinigy Solutions LLC (“Infinigy”), a U.S.-based services
company focused on expanding the development and implementation of technical solutions throughout the telecommunications industry
with offices across the U.S., providing nationwide coverage and support for wireless engineering, deployment services, surveying,
environmental service and project management, for a total consideration of $ 6,527, of which $ 5,600 was paid upon closing
and $ 927 was 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
|
|
Redeemable 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.
In 2017, the acquired business did not meet its operational targets and therefore as of December 31, 2017, the seller is not entitled
to any additional contingent payments.
As
of December 31, 2018, the Infinigy redeemable non-controlling interest amounted to $ 3,886.
|
c.
|
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.
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 estimated fair values of the assets acquired and liabilities at the date of acquisition:
Net assets, excluding cash acquired
|
|
$
|
15
|
|
Redeemable 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
|
|
As
of December 31, 2018, Roshtov redeemable non-controlling interest amount to $ 14,408.
|
d.
|
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, $ 2,137 (measured based on present value) was allocated to a deferred payment and contingent payment upon
the acquired business meeting certain operational targets in 2017. The Company’s management believes the acquisition
will broaden its professional service offering to its existing and new customers in Israel. 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.
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 estimated fair values of the assets acquired and liabilities at the date of acquisition:
Net assets, excluding cash acquired
|
|
$
|
533
|
|
Intangible assets
|
|
|
3,489
|
|
Deferred tax liability
|
|
|
(871
|
)
|
Goodwill
|
|
|
3,685
|
|
|
|
|
|
|
Total assets acquired net of acquired cash
|
|
$
|
6,836
|
|
During
the years ended December 31, 2017 and 2018, the Company paid the seller $ 924 and $ 2,535, respectively with respect to deferred
payment and contingent payment.
|
e.
|
During
the years ended December 31, 2017 and 2018, the Company acquired additional activities whose influence on the financial statements
of the Company was immaterial, for a total consideration of $ 1,050 and $ 588, respectively.
|
The
following table summarizes the provisional estimated fair values of the assets acquired and liabilities at the date of acquisitions:
|
|
December 31,
|
|
|
|
2017
|
|
|
2018
|
|
|
|
|
|
|
|
|
Net assets, excluding cash acquired
|
|
$
|
(1,822
|
)
|
|
$
|
306
|
|
Intangible assets
|
|
|
1,149
|
|
|
|
23
|
|
Goodwill
|
|
|
1,723
|
|
|
|
259
|
|
|
|
|
|
|
|
|
|
|
Total assets acquired net of acquired cash
|
|
$
|
1,050
|
|
|
$
|
588
|
|
MAGIC
SOFTWARE ENTERPRISES LTD.
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 securities, which were classified at fair value through profit or loss and as available-for-sale
securities. The following is a summary of marketable securities:
|
|
December 31,
|
|
|
|
2017
|
|
|
2018
|
|
|
|
|
|
|
|
|
Fair
value through profit or loss
(1)
|
|
$
|
1,209
|
|
|
$
|
1,156
|
|
Available-for-sale
|
|
|
12,929
|
|
|
|
8,757
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
14,138
|
|
|
$
|
9,913
|
|
(1)
|
The
Group recognized trading gains in the amount of $ 53 during the year ended December 31,
2018.
|
|
b.
|
The
following is a summary of marketable securities which are classified as available-for-sale:
|
|
|
December 31,
|
|
|
|
2017
|
|
|
2018
|
|
|
|
Amortized
cost
|
|
|
Unrealized
losses
|
|
|
Unrealized
gains
|
|
|
Market
value
|
|
|
Amortized
cost
|
|
|
Unrealized
losses
|
|
|
Unrealized
gains
|
|
|
Market
value
|
|
Available-for-sale:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate bonds
|
|
$
|
12,987
|
|
|
$
|
(58
|
)
|
|
$
|
-
|
|
|
$
|
12,929
|
|
|
$
|
8,851
|
|
|
$
|
(94
|
)
|
|
$
|
-
|
|
|
$
|
8,757
|
|
Marketable
securities with contractual maturities within one year and from one to three years are as follows:
|
|
Amortized
|
|
|
Unrealized
|
|
|
Market
|
|
|
|
cost
|
|
|
Gains
|
|
|
Losses
|
|
|
value
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Due within one year
|
|
$
|
3,326
|
|
|
$
|
-
|
|
|
$
|
(21
|
)
|
|
$
|
3,305
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Due after one year through three years
|
|
$
|
5,525
|
|
|
$
|
-
|
|
|
$
|
(73
|
)
|
|
$
|
5,452
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
8,851
|
|
|
$
|
-
|
|
|
$
|
(94
|
)
|
|
$
|
8,757
|
|
As
of December 31, 2017 and 2018, management believes the impairments are not other than temporary and therefore the impairment
losses were recorded in accumulated other comprehensive income (loss).
MAGIC
SOFTWARE ENTERPRISES LTD.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
|
U.S.
dollars in thousands (except share and per share data)
NOTE
4:-
|
MARKETABLE
SECURITIES (Cont.)
|
The
following is the change in the other comprehensive income of available-for-sale securities during 2017:
|
|
Other
comprehensive
income (loss)
|
|
|
|
|
|
Other comprehensive income from available-for-sale
securities as of January 1, 2017
|
|
$
|
40
|
|
Gains reclassified into earnings from marketable securities
|
|
|
(94
|
)
|
Unrealized losses from available-for-sale
securities
|
|
|
(4
|
)
|
Other comprehensive loss from available-for-sale
securities as of December 31, 2017
|
|
$
|
(58
|
)
|
The
following is the change in the other comprehensive income of available-for-sale securities during 2018:
|
|
Other
comprehensive
loss
|
|
|
|
|
|
Other comprehensive loss from available-for-sale
securities as of January 1, 2018
|
|
$
|
(58
|
)
|
Unrealized losses from available-for-sale
securities
|
|
|
(36
|
)
|
Other comprehensive loss from available-for-sale
securities as of December 31, 2018
|
|
$
|
(94
|
)
|
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 equity funds are classified within Level 1, this is because these assets are valued using quoted prices
in active markets. Foreign currency derivative contracts, certain corporate bonds and convertible bonds are classified within
Level 2 as the valuation inputs are based on quoted prices and market observable data of similar instruments.
Contingent
consideration is classified within Level 3. The Company values the Level 3 contingent consideration using discounted cash flow
of the expected future payments, whose inputs include interest rate.
MAGIC
SOFTWARE ENTERPRISES LTD.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
|
U.S.
dollars in thousands (except share and per share data)
NOTE
5:-
|
FAIR
VALUE MEASUREMENTS (Cont.)
|
The
Company’s financial assets and liabilities measured at fair value on a recurring basis, consisted of the following types
of instruments:
|
|
December 31, 2017
|
|
|
|
Fair value measurements using
input type
|
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
Total
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate bonds
|
|
$
|
-
|
|
|
$
|
12,929
|
|
|
$
|
-
|
|
|
$
|
12,929
|
|
Convertible bonds
|
|
|
-
|
|
|
|
1,209
|
|
|
|
-
|
|
|
|
1,209
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total financial assets
|
|
$
|
-
|
|
|
$
|
14,138
|
|
|
$
|
-
|
|
|
$
|
14,138
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Contingent consideration
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
1,333
|
|
|
$
|
1,333
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total financials liabilities
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
1,333
|
|
|
$
|
1,333
|
|
|
|
December 31, 2018
|
|
|
|
Fair value measurements using
input type
|
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
Total
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate bonds
|
|
$
|
-
|
|
|
$
|
8,757
|
|
|
$
|
-
|
|
|
$
|
8,757
|
|
Convertible bonds
|
|
|
-
|
|
|
|
1,156
|
|
|
|
-
|
|
|
|
1,156
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total financial assets
|
|
$
|
-
|
|
|
$
|
9,913
|
|
|
$
|
-
|
|
|
$
|
9,913
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Contingent consideration
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
414
|
|
|
$
|
414
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total financials liabilities
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
414
|
|
|
$
|
414
|
|
Fair
value measurements using significant unobservable inputs (Level 3):
|
|
December 31,
|
|
|
|
2017
|
|
|
2018
|
|
|
|
|
|
|
|
|
Opening balance
|
|
$
|
3,088
|
|
|
$
|
1,333
|
|
Increase in contingent consideration due to acquisitions
|
|
|
-
|
|
|
|
124
|
|
Payment of contingent consideration
|
|
|
(2,109
|
)
|
|
|
(974
|
)
|
Increase in fair value of contingent consideration
|
|
|
1,587
|
|
|
|
210
|
|
Decrease in fair value of contingent consideration
|
|
|
(1,287
|
)
|
|
|
(248
|
)
|
Decrease in liability against other receivables
|
|
|
(118
|
)
|
|
|
-
|
|
Amortization of interest and exchange rate
|
|
|
172
|
|
|
|
(31
|
)
|
|
|
|
|
|
|
|
|
|
Closing balance
|
|
$
|
1,333
|
|
|
$
|
414
|
|
MAGIC
SOFTWARE ENTERPRISES LTD.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
|
U.S.
dollars in thousands (except share and per share data)
NOTE
6:-
|
OTHER
ACCOUNTS RECEIVABLE AND PREPAID EXPENSES
|
|
|
December 31,
|
|
|
|
2017
|
|
|
2018
|
|
|
|
|
|
|
|
|
Prepaid expenses
|
|
$
|
2,659
|
|
|
$
|
3,712
|
|
Government authorities
|
|
|
4,900
|
|
|
|
2,053
|
|
Related parties
|
|
|
314
|
|
|
|
303
|
|
Other
|
|
|
770
|
|
|
|
961
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
8,643
|
|
|
$
|
7,029
|
|
NOTE
7:-
|
PROPERTY
AND EQUIPMENT
|
|
|
December 31,
|
|
|
|
2017
|
|
|
2018
|
|
Cost:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Leasehold improvements
|
|
$
|
918
|
|
|
$
|
981
|
|
Computers and peripheral equipment
|
|
|
14,842
|
|
|
|
15,221
|
|
Office furniture and equipment
|
|
|
3,778
|
|
|
|
3,774
|
|
Motor vehicles
|
|
|
1,237
|
|
|
|
1,217
|
|
Software
|
|
|
3,094
|
|
|
|
3,084
|
|
|
|
|
|
|
|
|
|
|
|
|
|
23,869
|
|
|
|
24,277
|
|
Accumulated depreciation:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Leasehold improvements
|
|
|
429
|
|
|
|
470
|
|
Computers and peripheral equipment
|
|
|
14,194
|
|
|
|
14,528
|
|
Office furniture and equipment
|
|
|
2,471
|
|
|
|
2,699
|
|
Motor vehicles
|
|
|
447
|
|
|
|
564
|
|
Software
|
|
|
2,860
|
|
|
|
2,944
|
|
|
|
|
|
|
|
|
|
|
|
|
|
20,401
|
|
|
|
21,205
|
|
|
|
|
|
|
|
|
|
|
Depreciated cost
|
|
$
|
3,468
|
|
|
$
|
3,072
|
|
MAGIC
SOFTWARE ENTERPRISES LTD.
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 $ 893, $ 1,046 and $ 1,175 for the years ended December 31, 2016, 2017 and 2018, respectively.
NOTE
8:-
|
INTANGIBLE
ASSETS
|
|
|
December 31,
|
|
|
|
2017
|
|
|
2018
|
|
Original amounts:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capitalized software costs
|
|
$
|
75,126
|
|
|
$
|
78,793
|
|
Customer relationships
|
|
|
56,296
|
|
|
|
54,850
|
|
Backlog and non-compete agreement
|
|
|
2,712
|
|
|
|
2,712
|
|
Acquired technology
|
|
|
13,087
|
|
|
|
12,722
|
|
|
|
|
|
|
|
|
|
|
|
|
|
147,221
|
|
|
|
149,077
|
|
Accumulated amortization:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capitalized software costs
|
|
|
61,834
|
|
|
|
66,123
|
|
Customer relationships
|
|
|
27,967
|
|
|
|
33,578
|
|
Backlog and non-compete agreement
|
|
|
2,486
|
|
|
|
2,674
|
|
Acquired technology
|
|
|
3,923
|
|
|
|
5,223
|
|
|
|
|
|
|
|
|
|
|
|
|
|
96,210
|
|
|
|
107,598
|
|
|
|
|
|
|
|
|
|
|
Intangible assets, net
|
|
$
|
51,011
|
|
|
$
|
41,479
|
|
|
b.
|
Amortization
expenses amounted to $ 10,715, $ 12,565 and $ 11,389 for the years ended December 31, 2016, 2017 and 2018,
respectively.
|
|
c.
|
The
estimated future amortization expense of intangible assets as of December 31, 2018 is as follows:
|
2019
|
|
$
|
10,323
|
|
2020
|
|
|
8,572
|
|
2021
|
|
|
7,057
|
|
2022
|
|
|
4,749
|
|
2023
|
|
|
3,546
|
|
2024 and thereafter
|
|
|
7,232
|
|
|
|
|
|
|
|
|
$
|
41,479
|
|
MAGIC
SOFTWARE ENTERPRISES LTD.
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, 2017 and 2018 according to the Company’s reportable
segments are as follows (see also Note 18):
|
|
IT
professional
services
|
|
|
Software
services
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
As of January 1, 2017
|
|
$
|
43,874
|
|
|
$
|
47,128
|
|
|
$
|
91,002
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Business combination
|
|
|
1,723
|
|
|
|
-
|
|
|
|
1,723
|
|
Measurement period adjustments
|
|
|
614
|
|
|
|
28
|
|
|
|
642
|
|
Foreign currency translation adjustments
|
|
|
2,192
|
|
|
|
2,630
|
|
|
|
4,822
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2017
|
|
$
|
48,403
|
|
|
$
|
49,786
|
|
|
$
|
98,189
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Business combination
|
|
|
-
|
|
|
|
277
|
|
|
|
277
|
|
Measurement period adjustments
|
|
|
(18
|
)
|
|
|
-
|
|
|
|
(18
|
)
|
Foreign currency translation adjustments
|
|
|
(1,694
|
)
|
|
|
(1,748
|
)
|
|
|
(3,442
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2018
|
|
$
|
46,691
|
|
|
$
|
48,315
|
|
|
$
|
95,006
|
|
The
Company performed an annual impairment tests as of December 31, of each of 2016, 2017 and 2018 and did not identify any impairment
losses (see Note 2).
NOTE
10:-
|
SHORT
TERM DEBT
|
|
|
|
|
Interest
|
|
|
|
|
|
Linkage
|
|
rate
|
|
December 31,
|
|
|
|
basis
|
|
%
|
|
2017
|
|
|
2018
|
|
Short-term credit from banks
|
|
USD
|
|
U.S Prime -0.2
|
|
$
|
2,125
|
|
|
$
|
2,362
|
|
Short-term credit from banks
|
|
NIS
|
|
2.0
|
|
|
618
|
|
|
|
-
|
|
Short-term loans from banks
|
|
NIS
|
|
1.6-2.0
|
|
|
259
|
|
|
|
-
|
|
Current maturities of long-term loans from financial institution
|
|
NIS
|
|
2.6-3.0
|
|
|
6,769
|
|
|
|
6,299
|
|
|
|
|
|
|
|
$
|
9,771
|
|
|
$
|
8,661
|
|
MAGIC
SOFTWARE ENTERPRISES LTD.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
|
U.S.
dollars in thousands (except share and per share data)
NOTE
11:-
|
ACCRUED
EXPENSES AND OTHER ACCOUNTS PAYABLE
|
|
|
December 31,
|
|
|
|
2017
|
|
|
2018
|
|
|
|
|
|
|
|
|
Employees and payroll accruals
|
|
$
|
15,203
|
|
|
$
|
16,242
|
|
Accrued expenses
|
|
|
6,234
|
|
|
|
6,219
|
|
Government authorities
|
|
|
4,738
|
|
|
|
1,426
|
|
Other
|
|
|
1,614
|
|
|
|
571
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
27,789
|
|
|
$
|
24,458
|
|
|
|
Linkage
|
|
Interest
|
|
December 31,
|
|
|
|
basis
|
|
rate
|
|
2017
|
|
|
2018
|
|
|
|
|
|
%
|
|
|
|
|
|
|
Loan from
banks and other
(1)
|
|
NIS
|
|
2.6-5
|
|
$
|
34,447
|
|
|
$
|
25,572
|
|
Other long term debt
|
|
|
|
|
|
|
136
|
|
|
|
115
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
34,583
|
|
|
$
|
25,687
|
|
Current maturities
|
|
NIS
|
|
|
|
|
(6,769
|
)
|
|
|
(6,299
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
27,814
|
|
|
$
|
19,388
|
|
(1)
|
On
November 2016, the Company obtained a loan in the amount of $ 31,356 linked to the New Israel Shekel from an Israeli financial
institution. The principal amount of the loan is payable in seven equal annual installments with the final payment due on
November 2, 2023 and bears a fixed interest rate of 2.60% per annum, payable in two semi-annual payments.
|
Under
the terms of the loan with the Israeli financial institution, the Company has undertaken to maintain the following financial covenants,
as they will be expressed in its consolidated financial statements, as described:
|
a.
|
Total
equity attributable to Magic Software Enterprises shareholders shall not be lower than $ 100,000 at all times;
|
|
b.
|
The
Company’s consolidated cash and cash equivalent and marketable securities available for sales shall not be less than
$ 10,000;
|
|
c.
|
The
ratio of the Company’s consolidated total financial debts to consolidated total assets will not exceed 50%;
|
|
d.
|
The
ratio of the Company’s total financial debts less cash, short-term deposits and short-term marketable securities to
the annual EBITDA will not exceed 3.25 to 1; and
|
|
e.
|
The
Company shall not create any pledge on all of its property and assets in favor of any third party without the financial institution’s
consent.
|
As
of December 31, 2018, the Company was in compliance with the financial covenants.
MAGIC
SOFTWARE ENTERPRISES LTD.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
|
U.S.
dollars in thousands (except share and per share data)
NOTE
13:-
|
TAXES
ON INCOME
|
|
1.
|
Corporate
tax rate in Israel:
|
The
Israeli corporate income tax rate was 25% in 2016, 24% in 2017 and 23% in 2018.
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.
|
2.
|
Tax
benefits under the Israeli Law for the Encouragement of Capital Investments, 1959 (“the Law”):
|
Effective
January 1, 2011, the Knesset enacted the Law for Economic Policy for 2011 and 2012 (Amended Legislation), and among other things,
amended the Law, (“the Amendment”). According to the Amendment, a flat corporate tax rate of 16% was established for
exporting industrial enterprises (over 25%). The reduced tax rate will not be program dependent and will apply to the “Preferred
Enterprise’s” (as such term is defined in the Investment Law) entire “preferred income”.
The
Amendment also prescribes that any dividends distributed to individuals or foreign residents from the preferred enterprise’s
earnings as above will be subject to tax at a rate of 20%.
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 2011.
New
Amendment- Preferred Technology Enterprise
In
December 2016, the Israeli Knesset passed Amendment 73 to the Investment Law which included a number of changes to the Investments
Law regimes. Certain changes were scheduled to come into effect beginning January 1, 2017, provided that regulations are promulgated
by the Finance Ministry to implement the “Nexus Principles” based on OECD guidelines recently published as part of
the Base Erosion and Profit Shifting (BEPS) project. The regulations were approved on May 1, 2017 and accordingly, these changes
have come into effect. Applicable benefits under the new regime include:
Introduction
of a benefit regime for “Preferred Technology Enterprises” granting a 12% tax rate in central Israel – on income
deriving from Intellectual Property, subject to a number of conditions being fulfilled, including a minimal amount or ratio of
annual R&D expenditure and R&D employees, as well as having at least 25% of annual income derived from exports. A Preferred
Technology Enterprise (“PTE”) is defined as an enterprise which meets the aforementioned conditions and for which
total consolidated revenues of its parent company and all subsidiaries are less than NIS 10 billion.
MAGIC
SOFTWARE ENTERPRISES LTD.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
|
U.S.
dollars in thousands (except share and per share data)
NOTE
13:-
|
TAXES
ON INCOME (Cont.)
|
A
12% capital gains tax rate on the sale of a preferred intangible asset to a foreign affiliated enterprise, provided that the asset
was initially purchased from a foreign resident at an amount of NIS 200 million or more.
A
withholding tax rate of 20% for dividends paid from PTE income (with an exemption from such withholding tax applying to dividends
paid to an Israeli company). Such rate may be reduced to 4% on dividends paid to a foreign resident company, subject to certain
conditions regarding percentage of foreign ownership of the distributing entity.
Starting
2017, part of the Company’s taxable income in Israel is entitled to a preferred 12% tax rate under Amendment 73 to the Investment
Law.
|
3.
|
The
Company’s Israeli entities have received final tax assessments for their Israeli tax return filings through the year
2013.
|
|
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 one of its Israeli subsidiaries calculate their tax liability in U.S. dollars
according to certain orders. The tax liability, as calculated in U.S. dollars is translated into NIS according to the exchange
rate as of December 31 of each year.
MAGIC
SOFTWARE ENTERPRISES LTD.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
|
U.S.
dollars in thousands (except share and per share data)
NOTE
13:-
|
TAXES
ON INCOME (Cont.)
|
|
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.
Neither
Israeli income taxes, foreign withholding taxes nor deferred income taxes were provided in relation to undistributed earnings
of the non-Israeli subsidiaries. This is because the Company intends to permanently reinvest undistributed earnings in the foreign
subsidiaries in which those earnings arose. If these earnings were distributed in the form of dividends or otherwise, the Company
would be subject to additional Israeli income taxes (subject to an adjustment for foreign tax credits) and non-Israeli withholding
taxes.
The
amount of the Company’s cash and cash equivalents that are currently held outside of Israel that would be subject to income
taxes if distributed as dividends is $ 12,865. However, a determination of the amount of the unrecognized deferred tax liability
for temporary difference related to those undistributed earnings of foreign subsidiaries is not practicable due to the complexity
of the structure of our group of subsidiaries for tax purposes and the difficulty of projecting the amount of future tax liability.
Tax
Reform- United States of America
The
U.S. Tax Cuts and Jobs Act of 2017 (“TCJA”) was approved by the U.S. Congress on December 20, 2017 and signed into
law by U.S. President Donald J. Trump on December 22, 2017. This legislation makes complex and significant changes to the U.S.
Internal Revenue Code. Such changes include a reduction in the corporate tax rate and limitations on certain corporate deductions
and credits, among other changes.
The
TCJA reduces the U.S. federal corporate income tax rate from 35% to 21% effective January 1, 2018. In addition, the TCJA makes
certain changes to the depreciation rules and implements new limits on the deductibility of certain expenses and deduction.
The
Company’s subsidiaries in the United States do not have any foreign subsidiaries and, therefore, the remaining provisions
of the TCJA have no material impact on the Company’s results of operations.
The
Company re-measured its U.S. deferred tax assets and liabilities, based on the rates at which they are expected to reverse in
the future. The estimated tax benefit recorded related to the re-measurement of the provisional net deferred taxes was approximately
$ 428 for the year ended December 31, 2017.
In
March 2018, the FASB issued Accounting Standards Update No. 2018-05, “Income Taxes Topic (740): Amendments to SEC Paragraphs
Pursuant to SEC Staff Accounting Bulletin No. 118” (“ASU 2018-05”) to address the application of GAAP in situations
when a registrant does not have the necessary information available, prepared or analyzed (including computations) in reasonable
detail to complete the accounting for certain income tax effects of the TCJA.
The
Company completed the accounting treatment related to the tax effects of the TCJA. As a result, the Company recognized its accounting
for changes in the U.S. federal rate and deferred tax impact for the rate change to be complete.
MAGIC
SOFTWARE ENTERPRISES LTD.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
|
U.S.
dollars in thousands (except share and per share data)
NOTE
13:-
|
TAXES
ON INCOME (Cont.)
|
|
c.
|
Net
operating loss carryforwards:
|
As
of December 31, 2018, three Israeli subsidiaries of the Company had operating loss carryforwards of $ 13,542 (mainly F.T.S
Formula Telecom Solutions, Ltd.) which accounts for $ 11,360), which can be carried forward to offset against taxable income in
the future for an indefinite period.
One
of the Company’s subsidiaries in England had estimated total available tax loss carryforwards of $ 3,876 as of December
31, 2018, which can be carried forward to offset against future taxable income.
|
d.
|
Income
before taxes on income:
|
|
|
Year ended December 31,
|
|
|
|
2016
|
|
|
2017
|
|
|
2018
|
|
|
|
|
|
|
|
|
|
|
|
Domestic
|
|
$
|
15,334
|
|
|
$
|
19,442
|
|
|
$
|
25,839
|
|
Foreign
|
|
|
5,323
|
|
|
|
4,803
|
|
|
|
6,008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
20,657
|
|
|
$
|
24,245
|
|
|
$
|
31,847
|
|
Taxes
on income (tax benefit) consist of the following:
|
|
Year ended December 31,
|
|
|
|
2016
|
|
|
2017
|
|
|
2018
|
|
Current:
|
|
|
|
|
|
|
|
|
|
Domestic
|
|
$
|
2,919
|
|
|
$
|
5,928
|
|
|
$
|
5,186
|
|
Foreign
|
|
|
1,863
|
|
|
|
1,511
|
|
|
|
1,359
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4,782
|
|
|
|
7,439
|
|
|
|
6,545
|
|
Deferred taxes:
|
|
|
|
|
|
|
|
|
|
|
|
|
Domestic
|
|
|
(666
|
)
|
|
|
(1,160
|
)
|
|
|
81
|
|
Foreign
|
|
|
(167
|
)
|
|
|
52
|
|
|
|
445
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(833
|
)
|
|
|
(1,108
|
)
|
|
|
526
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Taxes on income
|
|
$
|
3,949
|
|
|
$
|
6,331
|
|
|
$
|
7,071
|
|
MAGIC
SOFTWARE ENTERPRISES LTD.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
|
U.S.
dollars in thousands (except share and per share data)
NOTE
13:-
|
TAXES
ON INCOME (Cont.)
|
|
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,
|
|
|
|
2017
|
|
|
2018
|
|
|
|
|
|
|
|
|
Net operating loss carryforwards
|
|
$
|
4,355
|
|
|
$
|
3,914
|
|
Allowances, reserves and intangible assets
|
|
|
1,974
|
|
|
|
1,361
|
|
|
|
|
|
|
|
|
|
|
Deferred tax assets before valuation allowance
|
|
|
6,329
|
|
|
|
5,275
|
|
Less - valuation allowance
|
|
|
(3,339
|
)
|
|
|
(3,417
|
)
|
|
|
|
|
|
|
|
|
|
Deferred tax assets, net
|
|
$
|
2,990
|
|
|
$
|
1,858
|
|
|
|
December 31,
|
|
|
|
2017
|
|
|
2018
|
|
|
|
|
|
|
|
|
Long-term tax assets
|
|
$
|
2,990
|
|
|
$
|
1,858
|
|
Long-term tax liabilities
|
|
|
(11,331
|
)
|
|
|
(10,343
|
)
|
|
|
|
|
|
|
|
|
|
Net deferred tax liabilities
|
|
$
|
(8,341
|
)
|
|
$
|
(8,485
|
)
|
Deferred
tax liabilities are mainly in respect of certain property and equipment, acquired intangible assets and capitalized software costs.
The
Company has provided valuation allowances in respect of certain deferred tax assets resulting from operating losses carry forwards
and other reserves and allowances due to uncertainty concerning realization of these deferred tax assets.
MAGIC
SOFTWARE ENTERPRISES LTD.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
|
U.S.
dollars in thousands (except share and per share data)
NOTE
13:-
|
TAXES
ON INCOME (Cont.)
|
|
g.
|
Reconciliation
of the theoretical tax expense to the actual tax expense:
|
A
reconciliation between the theoretical tax expense, assuming all income is taxed at the statutory tax rate applicable to income
for an Israeli company (2016, 2017 and 2018 statutory tax rate 25%, 24% and 23%, respectively), and the actual tax expense as
reported in the statements of income is as follows:
|
|
Year ended December 31,
|
|
|
|
2016
|
|
|
2017
|
|
|
2018
|
|
|
|
|
|
|
|
|
|
|
|
Income before taxes,
as reported in the consolidated statements of income
|
|
$
|
20,657
|
|
|
$
|
24,245
|
|
|
$
|
31,847
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Statutory tax rate
|
|
|
25
|
%
|
|
|
24
|
%
|
|
|
23
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Theoretical tax expenses on the above amount at the Israeli
statutory tax rate
|
|
$
|
5,164
|
|
|
$
|
5,819
|
|
|
$
|
7,325
|
|
Tax adjustment in respect of different tax rates
|
|
|
(1,214
|
)
|
|
|
268
|
|
|
|
(826
|
)
|
Deferred taxes on losses for which full valuation allowance
was provided in the past
|
|
|
(455
|
)
|
|
|
658
|
|
|
|
(11
|
)
|
Tax-deductible costs, not included in the accounting
costs
|
|
|
(342
|
)
|
|
|
(38
|
)
|
|
|
-
|
|
Tax benefits (expenses) in respect of prior years, net
|
|
|
1,262
|
|
|
|
(488
|
)
|
|
|
(22
|
)
|
Nondeductible expenses
|
|
|
(232
|
)
|
|
|
70
|
|
|
|
45
|
|
Uncertain tax position and other
differences
|
|
|
(234
|
)
|
|
|
42
|
|
|
|
560
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income tax
|
|
$
|
3,949
|
|
|
$
|
6,331
|
|
|
$
|
7,071
|
|
MAGIC
SOFTWARE ENTERPRISES LTD.
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 years ended December 31,
2016, 2017 and 2018 the Company recorded $ 159, $ 300 and $ 1,050 (respectively) of tax expenses as a result of this application.
|
A
reconciliation of the beginning and ending balances of the total amounts of gross unrecognized tax benefits is as follows:
Gross unrecognized tax benefits at January 1, 2016
|
|
$
|
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
|
|
|
|
|
|
|
Increase in tax positions taken in prior years
|
|
|
300
|
|
|
|
|
|
|
Decrease in tax positions taken in prior years
|
|
|
-
|
|
|
|
|
|
|
Gross unrecognized tax benefits at December 31, 2017
|
|
|
1,125
|
|
|
|
|
|
|
Increase in tax positions taken in prior years
|
|
|
1,050
|
|
|
|
|
|
|
Decrease in tax positions taken in prior years
|
|
|
-
|
|
|
|
|
|
|
Gross unrecognized tax benefits at December 31, 2018
|
|
$
|
2,175
|
|
Although
the Company believes that it has adequately provided for any reasonably foreseeable outcomes related to tax audits and settlement,
there is no assurance that the final tax outcome of its tax audits will not be different from that which is reflected in the Company’s
income tax provisions. Such differences could have a material effect on the Company’s income tax provision, cash flow from
operating activities and net income in the period in which such determination is made.
|
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.
|
MAGIC
SOFTWARE ENTERPRISES LTD.
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, 2018, an aggregate of 962,500 Ordinary shares of the Company are available for future grants under the 2007
Plan. Each option granted under the 2007 Plan is exercisable for a period of ten years from the date of the grant of the option
The
exercise price for each option is determined by the Board of Directors and set forth in the Company’s award agreement. Unless
determined otherwise by the Board of Directors, the option exercise price shall be equal to or higher than the share market price
at the grant date. The options generally vest over 3-4 years. Any option that is forfeited or canceled before expiration becomes
available for future grants under the 2007 Plan.
A
summary of employee option activity under the 2007 Plan as of December 31, 2018 and changes during the year ended December 31,
2018 are as follows:
|
|
Number
of
options
|
|
|
Weighted
average
exercise
price
|
|
|
Weighted
average
remaining
contractual
term
(in years)
|
|
|
Aggregate
intrinsic
value
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at January 1, 2018
|
|
|
309,309
|
|
|
$
|
4.38
|
|
|
|
3.97
|
|
|
$
|
1,237
|
|
Granted
|
|
|
37,500
|
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
(104,167
|
)
|
|
$
|
2.99
|
|
|
|
|
|
|
|
|
|
Forfeited
|
|
|
(21,875
|
)
|
|
$
|
6.89
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at December 31, 2018
|
|
|
220,767
|
|
|
$
|
3.83
|
|
|
|
3.81
|
|
|
$
|
1,684
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable at December 31, 2018
|
|
|
190,767
|
|
|
$
|
4.43
|
|
|
|
2.92
|
|
|
$
|
1,456
|
|
MAGIC
SOFTWARE ENTERPRISES LTD.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
|
U.S.
dollars in thousands (except share and per share data)
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, 2018. 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, 2016,
2017 and 2018 was $ 112, $ 502 and $ 617, respectively. As of December 31, 2018, there was no unrecognized compensation cost related
to non-vested share-based compensation arrangements granted under the Plans.
The
options outstanding as of December 31, 2018, 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
|
|
|
30,000
|
|
|
|
9.49
|
|
|
$
|
-
|
|
|
|
-
|
|
|
$
|
-
|
|
2.01-3
|
|
|
66,000
|
|
|
|
1.26
|
|
|
$
|
2.32
|
|
|
|
66,000
|
|
|
$
|
2.32
|
|
3.01-4
|
|
|
73,517
|
|
|
|
2.77
|
|
|
$
|
4.00
|
|
|
|
73,517
|
|
|
$
|
4.00
|
|
5.01-6
|
|
|
6,250
|
|
|
|
4.61
|
|
|
$
|
6.00
|
|
|
|
6,250
|
|
|
$
|
6.00
|
|
8.01-9
|
|
|
45,000
|
|
|
|
5.35
|
|
|
$
|
8.01
|
|
|
|
45,000
|
|
|
$
|
8.01
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
220,767
|
|
|
|
3.81
|
|
|
$
|
3.83
|
|
|
|
190,767
|
|
|
$
|
4.43
|
|
|
c.
|
Accumulated
other comprehensive income (loss):
|
|
|
December 31,
|
|
|
|
2016
|
|
|
2017
|
|
|
2018
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated realized and unrealized gain
(loss) on available-for-sale securities, net
|
|
$
|
40
|
|
|
$
|
(58
|
)
|
|
$
|
(94
|
)
|
Accumulated foreign currency translation adjustments
|
|
|
(7,494
|
)
|
|
|
115
|
|
|
|
(6,057
|
)
|
Accumulated unrealized gain on
derivative instruments, net
|
|
|
26
|
|
|
|
26
|
|
|
|
26
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other comprehensive income (loss)
|
|
$
|
(7,428
|
)
|
|
$
|
83
|
|
|
$
|
(6,125
|
)
|
|
d.
|
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.
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 September 4, 2014 the Company declared accumulated cash
dividend distributions of $ 0.525 per share ($ 20,111 in the aggregate). 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. On February 22, 2017, the Company declared a dividend distribution of $ 0.085
per share ($ 3,775 in the aggregate) which was paid on April 5, 2017.
On
August 9, 2017, the Company’s Board of Directors decided to amend the dividend distribution policy announced in 2012. According
to the Company’s amended policy, each year the Company will distribute a dividend of up to 75% of its annual distributable
profits. The Company’s Board of Directors may at its discretion and at any time, change, whether as a result of a one-time
decision or a change in policy, the rate of dividend distributions and/or decide not to distribute a dividend, all at its discretion.
On August 13, 2017, the Company declared a dividend distribution of $ 0.13 per share ($ 5,779 in the aggregate) which was
paid on September 13, 2017. On February 28, 2018, the Company declared a dividend distribution of $ 0.13 per share ($ 5,785 in
the aggregate) which was paid on March 26, 2018. On August 8, 2018, the Company declared a dividend distribution of $ 0.155 per
share ($ 7,563 in the aggregate) which was paid on September 5, 2018.
Subsequent
to the balance sheet date, on March 4, 2019, the Company declared a dividend distribution of $ 0.15 per share ($ 7,334 in
the aggregate) which was paid on March 27, 2019 (Note 21).
|
e.
|
On
July 12, 2018, the Company issued 4,268,293 ordinary shares at a price of $8.2 per share and in a total amount of $34,569
net of issuance expenses. The shares were issued to Israeli institutional investors and to our controlling shareholder, Formula
Systems (1985) Ltd.
|
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 $ 3,950, $ 2,511 and $ 2,535, in aggregate for the years ended December 31, 2016, 2017 and 2018, respectively
and acquired services amounting to approximately $ 102, $ 165 and $ 309 for the years ended December 31, 2016, 2017 and 2018,
respectively.
|
|
|
|
As
of December 31, 2017 and 2018, the Company had trade and other receivables balances due to its related parties in amount of
approximately $ 931 and $ 601, respectively. In addition, as of December 31, 2017 and 2018, the Company had trade payables
balances due from its related parties in amount of approximately $ 64 and $ 106, respectively.
|
MAGIC
SOFTWARE ENTERPRISES LTD.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
|
U.S.
dollars in thousands (except share and per share data)
NOTE
16:-
|
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, 2018, are as follows:
2019
|
|
$
|
2,224
|
|
2020
|
|
|
1,698
|
|
2021
|
|
|
977
|
|
2022 and thereafter
|
|
|
1,336
|
|
|
|
|
|
|
|
|
$
|
6,235
|
|
Rent
expenses for the years ended December 31, 2016, 2017 and 2018 were approximately $ 2,204, $ 2,729 and $ 2,843, respectively.
MAGIC
SOFTWARE ENTERPRISES LTD.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
|
U.S.
dollars in thousands (except share and per share data)
NOTE
16:-
|
COMMITMENTS
AND CONTINGENCIES (Cont.)
|
The
Company and its subsidiaries currently occupy approximately 170,363 square feet of space based on a lease agreement as of December
31, 2018. The remaining terms of the outstanding leases range from six months to five years.
As
of December 31, 2018, the aggregated amount of lease commitment in all locations mentioned above is approximately $ 6,235.
|
b.
|
Guarantees
and Collaterals:
|
As
of December 31, 2018, the Company has provided performance bank guarantees in the amount of $453 as security for the performance
of various contracts with customers. As of December 31, 2018, the Company has restricted bank deposits of $ 408 in favor of the
issuing banks.
|
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.
In
September 2016, an Israeli software company, that was previously involved in an arbitration proceeding with us in 2015 and won
damages from us for $2.4 million, filed a lawsuit seeking damages of NIS 34,106 against the Company and one its subsidiaries.
This lawsuit was filed as part of an arbitration proceeding.. In the lawsuit, the software company claimed that warning letters
that the Company sent to its clients in Israel and abroad, warning those clients against the possibility that the conversion procedure
offered by the software company may amount to an infringement of the Company’s copyrights (the “Warning Letters”),
as well as other alleged actions, have caused the software company damages resulting from loss of potential business. The lawsuit
is based on rulings given in the 2015 arbitration proceeding in which it was allegedly ruled that the Warning Letters constituted
a breach of a non-disclosure agreement (NDA) signed between the parties.
MAGIC
SOFTWARE ENTERPRISES LTD.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
|
U.S.
dollars in thousands (except share and per share data)
NOTE
16:-
|
COMMITMENTS
AND CONTINGENCIES (Cont.)
|
The
Company rejects the claims by the Israeli software company and moved to dismiss the lawsuit entirely. At this point, all the relevant
motions have been filed and all witnesses deposed. The Company is unable to make a reasonably reliable estimate of its chances
of successfully defending this lawsuit.
In
February 2018, Comm-IT Ltd., a subsidiary of the Company commenced an action against a customer for payment of an overdue amount
in the Supreme Court of the State of New York, New York County. In April 2018, the customer filed an answer in the action that
included counterclaims asserting causes of action for breach of contract, fraud, and trespass to chattel. In May 2018, Comm-IT
filed a reply to the counterclaims. The parties have agreed to participate in a mediation before a neutral mediator in March 2019.
While it appears that the allegations against Comm-IT probably do not have merit, it is difficult to predict at this point whether
Comm-IT’s liability is remote or probable.
NOTE
17:-
|
NET
EARNINGS PER SHARE
|
The
following table sets forth the computation of basic and diluted net earnings per share:
|
|
Year ended December 31,
|
|
|
|
2016
|
|
|
2017
|
|
|
2018
|
|
|
|
|
|
|
|
|
|
|
|
Net income attributable to Magic shareholders
|
|
$
|
14,169
|
|
|
$
|
15,442
|
|
|
$
|
19,883
|
|
Accretion of redeemable non-controlling interests
|
|
$
|
(2,262
|
)
|
|
$
|
-
|
|
|
$
|
(1,726
|
)
|
Net income attributable to Magic
shareholders after accretion of redeemable non-controlling interests
|
|
$
|
11,907
|
|
|
$
|
15,442
|
|
|
$
|
18,157
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average Ordinary shares outstanding:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator for basic net earnings per share
|
|
|
44,347,083
|
|
|
|
44,435,671
|
|
|
|
46,665,042
|
|
Effect of dilutive securities
|
|
|
168,953
|
|
|
|
161,548
|
|
|
|
131,648
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator for diluted net earnings per share
|
|
|
44,516,036
|
|
|
|
44,597,219
|
|
|
|
46,796,690
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and Diluted earnings per share
|
|
$
|
0.27
|
|
|
$
|
0.35
|
|
|
$
|
0.39
|
|
MAGIC
SOFTWARE ENTERPRISES LTD.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
|
U.S.
dollars in thousands (except share and per share data)
NOTE
18:-
|
SEGMENT
GEOGRAPHICAL INFORMATION AND MAJOR CUSTOMERS
|
|
a.
|
The
Company reports its results on the basis of two reportable business segments: software services (which include proprietary
and none proprietary software technology) and IT professional services.
|
The
Company evaluates segment performance based on revenues and operating income of each segment. The accounting policies of the operating
segments are the same as those described in the summary of significant accounting policies. This data is presented in accordance
with ASC 280, “Segment Reporting.”
Headquarters’
general and administrative costs have not been allocated between the different segments.
Software
services
The
Company develops markets, sells and supports a proprietary and none proprietary application platform, software applications, business
and process integration solutions and related services.
IT
professional services
The
Company offers advanced and flexible IT services in the areas of infrastructure design and delivery, application development,
technology planning and implementation services, communications services and solutions, as well as supplemental outsourcing services.
There
are no significant transactions between the two segments.
|
b.
|
The
following is information about reported segment results of operation:
|
|
|
Software
services
|
|
|
IT
professional
services
|
|
|
Unallocated
expense
|
|
|
Total
|
|
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
|
|
MAGIC
SOFTWARE ENTERPRISES LTD.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
|
U.S.
dollars in thousands (except share and per share data)
NOTE
18:-
|
SEGMENT
GEOGRAPHICAL INFORMATION AND MAJOR CUSTOMERS (Cont.)
|
|
|
Software
services
|
|
|
IT
professional
services
|
|
|
Unallocated
expense
|
|
|
Total
|
|
2017
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
$
|
77,100
|
|
|
$
|
181,040
|
|
|
$
|
-
|
|
|
$
|
258,140
|
|
Expenses
|
|
|
63,649
|
|
|
|
164,558
|
|
|
|
3,977
|
|
|
|
232,184
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment operating income (loss)
|
|
$
|
13,451
|
|
|
$
|
16,482
|
|
|
$
|
(3,977
|
)
|
|
$
|
25,956
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
$
|
9,242
|
|
|
$
|
4,100
|
|
|
$
|
269
|
|
|
$
|
13,611
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2018
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
$
|
81,332
|
|
|
$
|
203,043
|
|
|
$
|
-
|
|
|
$
|
284,375
|
|
Expenses
|
|
|
63,902
|
|
|
|
183,985
|
|
|
|
4,790
|
|
|
|
252,677
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment operating income (loss)
|
|
$
|
17,430
|
|
|
$
|
19,058
|
|
|
$
|
(4,790
|
)
|
|
$
|
31,698
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
$
|
8,727
|
|
|
$
|
3,611
|
|
|
$
|
226
|
|
|
$
|
12,564
|
|
|
c.
|
The
Company’s business is divided into the following geographic areas: United States, Israel, Europe, Japan and other regions.
Total revenues are attributed to geographic areas based on the location of the customers.
|
The
following table presents total revenues classified according to geographical destination for the years ended December 31, 2016,
2017 and 2018:
|
|
Year ended December 31,
|
|
|
|
2016
|
|
|
2017
|
|
|
2018
|
|
|
|
|
|
|
|
|
|
|
|
United States
|
|
$
|
100,470
|
|
|
$
|
123,113
|
|
|
$
|
137,066
|
|
Israel
|
|
|
58,079
|
|
|
|
91,917
|
|
|
|
103,850
|
|
Europe
|
|
|
23,642
|
|
|
|
26,635
|
|
|
|
28,257
|
|
Japan
|
|
|
11,226
|
|
|
|
9,253
|
|
|
|
9,797
|
|
Other
|
|
|
8,229
|
|
|
|
7,222
|
|
|
|
5,405
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
201,646
|
|
|
$
|
258,140
|
|
|
$
|
284,375
|
|
MAGIC
SOFTWARE ENTERPRISES LTD.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
|
U.S.
dollars in thousands (except share and per share data)
NOTE
18:-
|
SEGMENT
GEOGRAPHICAL INFORMATION AND MAJOR CUSTOMERS (Cont.)
|
|
d.
|
The
Company’s long-lived assets are located as follows:
|
|
|
December 31,
|
|
|
|
2017
|
|
|
2018
|
|
|
|
|
|
|
|
|
Israel
|
|
$
|
111,217
|
|
|
$
|
100,206
|
|
United States
|
|
|
32,223
|
|
|
|
30,222
|
|
Japan
|
|
|
5,008
|
|
|
|
5,082
|
|
Other
|
|
|
2,931
|
|
|
|
2,800
|
|
Europe
|
|
|
1,289
|
|
|
|
1,247
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
152,668
|
|
|
$
|
139,557
|
|
|
e.
|
The
Company does not allocate its assets to its reportable segments; accordingly, asset information by reportable segments is
not presented.
|
|
f.
|
In
2016, 2017 and 2018, the Company had one major customer, included in the IT professional services segment, which accounted
for 9%, 13% and 13% of the group revenues, respectively.
|
NOTE
19:-
|
REVENUE
RECOGNITION
|
The
Company adopted ASC 606 on January 1, 2018 for all open contracts at the date of initial application, and applied the standard
using modified retrospective approach, with the cumulative effect of applying ASC 606 recognized as an adjustment to the opening
retained earnings balance. Results for reporting periods beginning after January 1, 2018 are presented under ASC 606, while prior
period amounts are not adjusted and continue to be reported under the accounting standards in effect for the prior period.
MAGIC
SOFTWARE ENTERPRISES LTD.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
|
U.S.
dollars in thousands (except share and per share data)
NOTE
19:-
|
REVENUE
RECOGNITION (Cont.)
|
The
following table includes estimated revenue expected to be recognized in future periods related to performance obligations that
are unsatisfied or partially unsatisfied at the end of the reporting period and are part of a contract that has an original expected
duration of more than one year:
|
|
2019
|
|
|
2020
|
|
|
2021 and thereafter
|
|
Software license and related revenues and consulting services
|
|
$
|
5,281
|
|
|
$
|
5,183
|
|
|
$
|
969
|
|
The
following table includes the impact of the adoption of ASC 606 on the Company’s financial statements. There was no material
impact on other line items of statements of income and balance sheets:
|
|
Year
ended
December
31, 2018
|
|
|
|
As
reported
|
|
|
Balance without adoption ASC
606
|
|
|
Effect
of change higher/
(lower)
|
|
|
|
(U.S. dollars in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
Revenue
|
|
$
|
284,375
|
|
|
$
|
282,263
|
|
|
$
|
2,112
|
|
Taxes on income
|
|
|
7,071
|
|
|
|
6,809
|
|
|
|
262
|
|
Net income
|
|
|
24,776
|
|
|
|
22,926
|
|
|
|
1,850
|
|
Net income attributable to Magic Software Enterprises’ shareholders
|
|
$
|
19,883
|
|
|
$
|
18,033
|
|
|
$
|
1,850
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted earnings per share
|
|
|
0.39
|
|
|
|
0.35
|
|
|
|
0.04
|
|
MAGIC
SOFTWARE ENTERPRISES LTD.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
|
U.S.
dollars in thousands (except share and per share data)
NOTE
19:-
|
REVENUE
RECOGNITION (Cont.)
|
|
|
December 31, 2018
|
|
|
|
As reported
|
|
|
Balance without adopting ASC
606
|
|
|
Effect of change higher/(lower)
|
|
|
|
(U.S. dollars in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
Trade receivables (net of allowance for doubtful accounts)
|
|
$
|
90,274
|
|
|
$
|
87,853
|
|
|
$
|
2,421
|
|
Other accounts receivable and prepaid expenses
|
|
|
7,029
|
|
|
|
8,984
|
|
|
|
(1,955
|
)
|
Other long-term receivables
|
|
|
6,363
|
|
|
|
4,717
|
|
|
|
1,646
|
|
Accrued expenses and other accounts payable
|
|
|
24,458
|
|
|
|
24,196
|
|
|
|
262
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total equity attributable to Magic Software Enterprises’ shareholders
|
|
$
|
243,956
|
|
|
$
|
242,106
|
|
|
$
|
1,850
|
|
The
most significant impact of the new standard relates to term-license arrangements. Under ASC 605, the Company recognized both the
term-license and post contract support revenues ratably over the contract period whereas under the new revenue standard term-license
revenues are considered as a separate performance obligation and recognized upon delivery and the associated post contract
support revenues are recognized over the contract period.
There
was no material impact on other line items of consolidated statements of income, consolidated balance sheets and no impact on
the Company’s cash from or used in operating, financing, or investing activities in consolidated cash flows statements.
For
disaggregation of revenue, refer to note 18.
Contract
balances:
The
following table provides information about trade receivables, contract assets (unbilled receivables) and contract liabilities
(deferred revenues) from contracts with customers (in thousands):
|
|
December 31,
|
|
|
|
2017
|
|
|
2018
|
|
|
|
|
|
|
|
|
Trade receivables (net of allowance for doubtful accounts)
|
|
$
|
82,051
|
|
|
$
|
90,274
|
|
Deferred revenues
|
|
$
|
5,586
|
|
|
$
|
4,857
|
|
Trade
receivable are recorded when the right to consideration becomes unconditional, and an invoice is issued to the customer. Unbilled
receivables related to the Company’s contractual right to consideration for services performed and not yet invoiced.
MAGIC
SOFTWARE ENTERPRISES LTD.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
|
U.S.
dollars in thousands (except share and per share data)
NOTE
19:-
|
REVENUE
RECOGNITION (Cont.)
|
Billing
terms and conditions generally vary by contract type. Amounts are billed as work progresses in accordance with agreed-upon contractual
terms, either at periodic intervals (e.g., monthly or quarterly) or upon achievement of contractual milestones.
Deferred
revenues represent contract liabilities, and include unearned amounts received under contracts with customers and not yet recognized
as revenues.
During
the year ended December 31, 2018, the Company recognized $5,586 that was included in deferred revenues (short-term contract liability)
balance at January 1, 2018.
NOTE
20:-
|
SELECTED
STATEMENTS OF INCOME DATA
|
|
a.
|
Research
and development costs, net:
|
|
|
Year ended December 31,
|
|
|
|
2016
|
|
|
2017
|
|
|
2018
|
|
|
|
|
|
|
|
|
|
|
|
Total costs
|
|
$
|
10,063
|
|
|
$
|
10,713
|
|
|
$
|
9,362
|
|
Less - capitalized software costs
|
|
|
(4,224
|
)
|
|
|
(3,771
|
)
|
|
|
(3,666
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Research and development, net
|
|
$
|
5,839
|
|
|
$
|
6,942
|
|
|
$
|
5,696
|
|
|
b.
|
Financial
income (expenses), net:
|
Bank charges and interest from loans offset
by interest from short term deposits
|
|
$
|
(199
|
)
|
|
$
|
(1,124
|
)
|
|
$
|
(986
|
)
|
Interest expenses related to liabilities in connection
with acquisitions
|
|
|
(257
|
)
|
|
|
(62
|
)
|
|
|
(4
|
)
|
Interest income from marketable securities, net of amortization
of premium on marketable securities
|
|
|
240
|
|
|
|
284
|
|
|
|
284
|
|
Gain (loss) arising from foreign
currency translation and other
|
|
|
(214
|
)
|
|
|
(809
|
)
|
|
|
855
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financial income (expenses), net
|
|
$
|
(430
|
)
|
|
$
|
(1,711
|
)
|
|
$
|
149
|
|
NOTE
21:-
|
SUBSEQUENT
EVENTS
|
|
On
March 4, 2019, the Company declared a dividend distribution of $ 0.15 per share ($ 7,334 in the aggregate) which was
paid on March 27, 2019. The dividend distribution relates to the Company’s earnings in the second half of 2018.
|
MAGIC
SOFTWARE ENTERPRISES LTD.
APPENDIX
TO CONSOLIDATED FINANCIAL STATEMENTS
|