Magic Software Enterprises(MGIC) - 2020 Q4 - Annual Report

ITEM 1. Identity of Directors, Senior Management and Advisers This section identifies the company's directors, senior management, and advisors ITEM 2. Offer Statistics and Expected Timetable This section provides details on the offer statistics and expected timetable ITEM 3. Key Information This section presents essential financial and operational data, including selected financial data and risk factors A. Selected Financial Data This section summarizes selected consolidated financial data from 2016-2020, including income statements and balance sheets, prepared under U.S. GAAP Statement of Income Data (U.S. dollars in thousands) | Year ended December 31, | 2020 | 2019 | 2018 | 2017 | 2016 | | :---------------------- | :------- | :------- | :------- | :------- | :------- | | Revenues: | | | | | | | Software | $ 24,272 | $ 28,084 | $ 25,454 | $ 21,644 | $ 19,626 | | Maintenance and technical support | 33,181 | 30,996 | 30,951 | 30,386 | 25,885 | | Consulting services | 313,741 | 266,550 | 227,970 | 206,110 | 156,135 | | Total revenues | $ 371,194 | $ 325,630 | $ 284,375 | $ 258,140 | $ 201,646 | | Gross profit | 109,592 | 102,129 | 88,818 | 82,979 | 68,264 | | Operating income | 40,588 | 33,652 | 31,698 | 25,956 | 21,087 | | Net income | $ 30,117 | $ 25,598 | $ 24,776 | $ 17,914 | $ 16,708 | | Net income attributable to Magic's Shareholders | 25,186 | 20,266 | 19,883 | 15,442 | 14,169 | | Basic and diluted earnings per share | $ 0.49 | $ 0.26 | $ 0.39 | $ 0.35 | $ 0.27 | | Dividends | 12,503 | 14,963 | 13,348 | 9,554 | 7,761 | | Cash dividend declared per ordinary share | $ 0.25 | $ 0.31 | $ 0.29 | $ 0.22 | $ 0.18 | Balance Sheet Data (U.S. dollars in thousands) | December 31, | 2020 | 2019 | 2018 | 2017 | 2016 | | :----------- | :-------- | :-------- | :-------- | :-------- | :-------- | | Working capital | $ 126,397 | $ 138,167 | $ 158,301 | $ 122,403 | $ 113,668 | | Cash, cash equivalents, short term deposits and marketable securities | 89,654 | 95,511 | 113,920 | 90,946 | 87,822 | | Total assets | 447,386 | 404,606 | 362,285 | 342,539 | 316,399 | | Total equity | 269,006 | 264,697 | 248,369 | 213,563 | 196,641 | B. Capitalization and Indebtedness This section is not applicable to the report C. Reasons for the Offer and Use of Proceeds This section is not applicable to the report D. Risk Factors This section outlines various risks, including business, industry, ordinary shares, and Israeli location, that could materially impact the company's operations and share price - The ongoing COVID-19 pandemic poses significant risks, including global economic uncertainty, disruptions to operations, increased cyber-attack attempts, and potential negative impacts on sales, marketing, and employee productivity[43][48][49] - The company's M&A growth strategy, involving over 25 acquisitions in the past decade, carries significant integration risks, including preserving customer relationships, integrating complex products/services, and combining IT systems, which could adversely affect future results[43][54][55] - Dependence on a limited number of core product families (Magic xpa, Magic xpi, AppBuilder, Magic xpc, FactoryEye, Magic SmartUX) and vertical solutions (Clicks, Leap™, Hermes, HR Pulse) means a decrease in revenues from these offerings would adversely affect business and financial condition[43][58][59] - The company faces intense competition in application development platforms, business integration, and IT professional services markets, with larger competitors having greater resources and market recognition, which could adversely affect its business and financial performance[43][76][79] - International operations expose the company to risks such as currency exchange rate fluctuations (primarily NIS, Euro, Japanese Yen), compliance with foreign regulations, political/economic instability in regions like Israel, and increased costs of doing business abroad[92][93][96] - As a foreign private issuer, the company is exempt from certain SEC and NASDAQ rules, resulting in less frequent disclosure and different corporate governance practices compared to U.S. domestic companies, which may afford shareholders less protection[126][127] - Formula Systems (1985) Ltd., as the controlling shareholder with approximately 45.53% ownership, has significant influence over matters requiring shareholder approval, which could delay or prevent a change of control and potentially affect the share price[128][129] - U.S. investors face potential adverse tax consequences if the company is classified as a Passive Foreign Investment Company (PFIC), although the company believes it will not be classified as such for the 2020 taxable year[131] ITEM 4. Information on the Company This section provides comprehensive information on the company's history, business operations, organizational structure, and property A. History and Development of the Company This section details the company's corporate history, including its founding, public listings, and significant capital transactions and acquisitions from 2018 to 2020 - Magic Software Enterprises Ltd. was organized and registered in Israel on February 10, 1983, and its Ordinary Shares have been listed on NASDAQ since August 16, 1991, and on the Tel Aviv Stock Exchange since November 16, 2000[142] - In July 2018, the company issued 4,268,293 ordinary shares at $8.20 per share, raising $34.6 million net of issuance expenses, including shares issued to Israeli institutional investors and its controlling shareholder, Formula Systems (1985) Ltd[144] - Significant acquisitions in 2019 included OnTarget Group Inc. ($12.456 million), PowWow Inc. (SmartUX™ platform, $8.4 million), and NetEffects Inc. ($12.5 million), expanding software development, low-code, and IT staffing services[145][146][147] - In 2020, the company further expanded through acquisitions, including additional stakes in subsidiaries Roshtov Software Industries Ltd. (20.05% for ~$15 million) and Comblack IT Ltd. (10.17% for ~$3.6 million), and the acquisition of Aptonet Inc. ($4.663 million) and Stockell Information Systems, Inc. ($7.714 million)[148][149][150][151] Fixed Assets Capital Expenditures (U.S. dollars in millions) | Year | Amount | | :--- | :----- | | 2018 | $0.9 | | 2019 | $1.4 | | 2020 | $2.8 | B. Business Overview This section provides a comprehensive overview of the company's global operations, product offerings, market trends, and strategic partnerships, focusing on low-code development and integration - Magic Software is a global provider of proprietary application development and business process integration platforms, selected packaged vertical software solutions, and software/IT outsourcing services, reporting results in two segments: software solutions and IT professional services[153] - The company's software technology platforms include Magic xpa (application development), AppBuilder (mainframe-grade applications), Magic xpi (application integration), Magic xpc (hybrid iPaaS), Magic SmartUX (low-code mobile development), and FactoryEye (Industry 4.0 for manufacturers)[156][158] - Vertical software solutions offered include Clicks™ (medical record management), Leap™ (telecom BSS), Hermes Solution (air cargo management), HR Pulse (human capital management), and MBS Solution (TV broadcast management)[158] - The company maintains strategic partnerships with major IT vendors like Oracle, SAP, Salesforce.com, Microsoft, and IBM, enhancing its mobile, integration, and cloud offerings, and has achieved statuses like Salesforce Premier ISV partner and Microsoft Gold Competency[161][162][163][164][165] - Key industry trends driving demand for the company's solutions include increasingly complex business integration, the need to reuse IT assets, enterprise mobility, the growth of cloud/SaaS/PaaS, Big Data, evolving IT consulting, and a persistent IT skills shortage[167][168][174] - Magic's software solutions are designed for simplicity (low-code), business focus (pre-compiled logic), comprehensiveness (end-to-end), automation, and interoperability, enabling rapid, cost-effective, and scalable deployment of integrated applications across multiple platforms[175][176][177][180] - The company markets and sells its products and services globally through direct sales representatives and a broad channel network of MSPs, system integrators, distributors, resellers, and OEM partners in approximately 50 countries[178][250][253][254] - Competition is intense across its markets, including low-code application platforms (e.g., OutSystems, Appian), integration platforms (e.g., IBM, Informatica), and telecom BSS (e.g., Amdocs, Ericsson), with many competitors possessing greater resources and market recognition[260][261][263][264][265] C. Organizational Structure This section lists the company's subsidiaries, including legal names, countries of incorporation, and ownership percentages as of December 31, 2020 Subsidiaries and Ownership (as of December 31, 2020) | Subsidiary Name | Country of Incorporation | Ownership Percentage | | :---------------------------------- | :----------------------- | :------------------- | | Magic Software Japan K.K | Japan | 100% | | Magic Software Enterprises Inc. | Delaware | 100% | | Hermes Logistics Technologies Limited | United Kingdom | 100% | | Coretech Consulting Group LLC | Delaware | 100% | | Fusion Solutions LLC. | Delaware | 100% | | Magic Software Enterprises (Israel) Ltd | Israel | 100% | | Comm-IT Technology Solutions Ltd. | Israel | 77.8% | | Roshtov Software Industries Ltd. | Israel | 80% | | F.T.S. - Formula Telecom Solutions Ltd. | Israel | 100% | | Comblack IT Ltd | Israel | 80% | | Infinigy Solutions LLC. | U.S.A | 100% | | OnTarget Group, Inc | U.S.A | 100% | | NetEffects, Inc. | U.S.A | 100% | | PowWow Inc. | U.S.A | 100% | | Stockell Information Systems Inc. | U.S.A | 100% | | Aptonet, Inc. | U.S.A | 100% | | And many others listed in the report. | | | D. Property, Plants and Equipment This section describes the company's real estate holdings, primarily leased office spaces for its headquarters and global subsidiaries - The company's headquarters is located in a 32,404 square foot leased office facility in Or Yehuda, Israel, with an annual rent of $0.4 million in 2020, under a lease agreement expiring in June 2033[278] - Subsidiaries lease additional office space in various locations worldwide, including the United States, France, Germany, India, Japan, Hungary, South Africa, and the United Kingdom, with an aggregate annual cost of $3.3 million for the year ended December 31, 2020[279] ITEM 4 A. Unresolved Staff Comments This section addresses any unresolved comments from the staff regarding the company's filings ITEM 5. Operating and Financial Review and Prospects This section provides a detailed analysis of the company's operating results, liquidity, capital resources, and R&D activities A. Operating Results This section analyzes the company's financial performance from 2018-2020, covering revenues, costs, gross profit, and net income, alongside key business factors and pandemic impacts Revenue Breakdown (U.S. dollars in thousands) | Revenue Type | 2020 | 2019 | 2018 | | :---------------------------- | :------- | :------- | :------- | | Software sales | $ 24,272 | $ 28,084 | $ 25,454 | | Maintenance and technical support | 33,181 | 30,996 | 30,951 | | Consulting services | 313,741 | 266,550 | 227,970 | | Total revenues | $ 371,194 | $ 325,630 | $ 284,375 | Revenue by Geographical Market (U.S. dollars in thousands) | Region | 2020 | 2019 | 2018 | | :------------ | :------- | :------- | :------- | | United States | $ 177,882 | $ 158,095 | $ 137,066 | | Israel | 149,094 | 124,523 | 103,850 | | Europe | 26,947 | 25,788 | 28,257 | | Japan | 12,643 | 12,499 | 9,797 | | Other | 4,628 | 4,725 | 5,405 | | Total revenues | $ 371,194 | $ 325,630 | $ 284,375 | - Total revenues increased by 14% from $325.6 million in 2019 to $371.2 million in 2020, primarily driven by a 19% increase in IT professional services revenues, reaching $285.2 million in 2020, largely due to acquisitions and increased demand[309][310] - Gross margin declined by 1.9% from 31.4% in 2019 to 29.5% in 2020, mainly attributable to a change in revenue mix, with lower-margin IT professional services increasing as a percentage of total revenues[315][293] - Net income attributable to Magic's Shareholders increased from $20.3 million in 2019 to $25.2 million in 2020, primarily due to a $7.5 million increase in gross profit, partially offset by a $3.4 million revaluation related to contingent consideration[321] - The COVID-19 pandemic has caused significant disruptions, leading to cautious spending, curtailment of direct sales activities, and potential impacts on workforce availability and supply networks, with the full financial effect potentially not reflected until future periods[322][323][324][51] Currency Fluctuations vs. U.S. Dollar (Year Ended December 31, % Change) | Currency | 2020 | 2019 | 2018 | | :------------------------ | :----- | :----- | :----- | | New Israeli Shekel | (7.0)% | (7.8)% | 8.1% | | Euro | (8.5)% | 2.0% | 4.6% | | Japanese Yen | (5.0)% | (1.2)% | (2.4)% | | British Pound | (3.4)% | (3.1)% | 5.6% | | Israeli Consumer Price Index | (0.7)% | 0.6% | 0.8% | B. Liquidity and Capital Resources This section details the company's financing, cash position, working capital, debt, and cash flow activities, highlighting its ability to meet short-term cash requirements and dividend policy - The company finances its operations through income, public offerings, private equity investments, loans, and government grants, and believes its current cash and working capital are sufficient for at least the next 12 months[326][332] Key Financial Position Metrics (U.S. dollars in thousands, as of December 31) | Metric | 2020 | 2019 | | :---------------------------------------- | :-------- | :-------- | | Cash, cash equivalents, short-term deposits and marketable securities | $ 89,654 | $ 95,511 | | Net working capital | $ 126,397 | $ 138,167 | | Long-term debts to banks and others | $ 13,352 | $ 15,540 | | Total long-term and short-term debt | $ 24,881 | $ 22,600 | - The company is in full compliance with financial covenants for its NIS 120 million loan, which include maintaining equity above $100 million, cash above $10 million, a total financial debt to total assets ratio not exceeding 50%, and a debt less cash to annual EBITDA ratio not exceeding 3.25 to 1[327][329][787] Cash Flow Summary (U.S. dollars in thousands) | Activity | 2020 | 2019 | 2018 | | :-------------------------------------- | :-------- | :-------- | :-------- | | Net cash provided by operating activities | $ 52,296 | $ 45,948 | $ 24,050 | | Net cash used in investing activities | $ (9,604) | $ (15,440) | $ (19,554) | | Net cash used in financing activities | $ (39,647) | $ (36,980) | $ 8,426 | - Net cash provided by operating activities increased to $52.3 million in 2020, up from $45.9 million in 2019, primarily driven by net income and adjustments for non-cash activities and working capital changes[334][336] - Net cash used in investing activities was $9.6 million in 2020, primarily due to $16.5 million for business combinations, $2.8 million for property and equipment, and $3.3 million for capitalized software development, partially offset by proceeds from investments[339][340] - Net cash used in financing activities was $39.6 million in 2020, mainly due to $12.5 million in dividend distributions, $5.1 million in dividends to non-controlling interests, $18.0 million for purchasing redeemable non-controlling interests, and $9.4 million in loan repayments[343] - The dividend distribution policy was amended in August 2017 to distribute up to 75% of annual distributable profits, subject to board discretion and applicable law. In 2020, dividends of $0.08 and $0.175 per share were declared[346][821][822] C. Research and Development This section outlines the company's R&D strategy, investment, and global personnel distribution, emphasizing continuous product enhancement and new application development - The company places considerable emphasis on R&D to improve and expand technology functionality and develop new applications, with future success dependent on maintaining technological leadership and timely product introductions[236][406] Research and Development Investment (U.S. dollars in thousands) | Year | Total Costs | Less Capitalized Software Costs | Research and Development, Net | | :--- | :---------- | :------------------------------ | :---------------------------- | | 2020 | $ 12,091 | $ (3,302) | $ 8,789 | | 2019 | $ 12,382 | $ (4,143) | $ 8,239 | | 2018 | $ 9,362 | $ (3,666) | $ 5,696 | - As of December 31, 2020, the company employed 233 individuals in R&D activities, with personnel located in Israel (78), India (129), Russia (20), Japan (5), and the US (1)[407] D. Trend Information This section refers to trend information discussed in Item 4, 'Business Overview,' and Item 5, 'Operating Results' E. Off-Balance Sheet Arrangements The company is not a party to any off-balance sheet arrangements and has no unconsolidated entities likely to create material contingent obligations F. Tabular Disclosure of Contractual Obligations This section summarizes the company's minimum contractual obligations as of December 31, 2020, detailing expected payments for leases, acquisition liabilities, severance, and debt Contractual Obligations (U.S. dollars in thousands, as of December 31, 2020) | Contractual Obligations | Total | Less than 1 year | 1-3 years | Over 3 years | | :-------------------------------- | :--------- | :--------------- | :--------- | :----------- | | Operating lease obligations | $ 29,176 | $ 3,853 | $ 5,987 | $ 19,336 | | Liabilities due to acquisition activities | 22,637 | 4,998 | 17,639 | - | | Severance payments, net | 5,545 | - | - | - | | Uncertainties in income taxes (ASC 740) | 1,103 | - | - | - | | Short and Long term debt | 24,881 | 11,529 | 13,056 | 296 | | Total contractual obligations | $ 83,342 | $ 20,380 | $ 36,682 | $ 19,632 | - Severance payments relate to accrued obligations for Israeli employees, fully provided for by monthly deposits with insurance policies and accruals. Payments for uncertain tax benefits are not included in the table due to difficulty in determining settlement timing, with no significant payments expected within 12 months[411][412] ITEM 6. Directors, Senior Management and Employees This section details the company's directors, senior management, employee information, and share ownership A. Directors and Senior Management This section lists the names, ages, and principal positions of the company's directors and executive officers, including biographical descriptions and family relationships - Key executive officers include Guy Bernstein (CEO), Asaf Berenstin (CFO), Arik Kilman (Chairman, Software Solutions), Yakov Tsaroya (CEO, Coretech Consulting & Fusion Solutions), Uzi Yaari (CEO, Complete Business Solutions), Arik Faingold (President, Integration Solutions), Yuval Baruch (CEO, Hermes Logistics), Hanan Shahaf (CEO, Roshtov Software Industries Ltd.), and Yuval Lavi (VP Technology and Innovation)[414][417][422][423][425][426][427][428][429][430] - The board of directors includes Guy Bernstein, Sagi Schliesser (External Director), Ron Ettlinger (External Director), Naamit Salomon, and Avi Zakay. Messrs. Schliesser and Ettlinger are serving their second three-year terms as external directors[414][415] - Family relationships exist between Guy Bernstein (CEO) and Asaf Berenstin (CFO) as first cousins, and Arik Faingold (President, Integration Solutions) is the brother of Idan Faingold, an executive officer of the Comm-IT Group[416] B. Compensation This section details compensation for directors and executive officers, including aggregate and individual compensation for the top five in 2020, along with stock options and director fees Aggregate Compensation for All Directors and Executive Officers (13 persons, 2020) | Category | Amount (U.S. dollars) | | :---------------------------- | :-------------------- | | Salaries, commissions and bonuses | $ 3,361,141 | | Pension, fees, and retirement benefits | $ 87,971 | 2020 Summary Compensation Table for Top Five Highly Compensated Officers (U.S. dollars) | Name and Position | Salary | Bonus | All Other Compensation | Total | | :---------------------------------------------- | :-------- | :-------- | :--------------------- | :-------- | | Yakov Tsaroya, President, Coretech Consulting Group LLC | $ 234,000 | $ 612,000 | $ 9,000 | $ 855,000 | | Arik Faingold, President, Integration Solutions division | $ 379,593 | $ 184,844 | - | $ 564,437 | | Arik Kilman, Chairman, Software Group | $ 418,361 | $ 92,969 | - | $ 511,330 | | Yuval Baruch, Chief Executive Officer of Hermes Logistics | $ 207,160 | $ 112,310 | - | $ 319,470 | | Hanan Shahaf, Chief Executive Officer of Roshtov Software Industries Ltd | $ 297,978 | - | $ 12,631 | $ 310,609 | - Each outside and independent director received an annual fee of $27,789 and a per-meeting attendance fee of $750 for the year ended December 31, 2020[436] - As of December 31, 2020, the company's directors and executive officers as a group held options to purchase an aggregate of 15,000 ordinary shares, with an exercise price of $2.93 per share, set to expire in 2021[437] C. Board Practices This section describes the company's corporate governance, including director elections, external and independent director roles, and Audit and Compensation Committee functions, adhering to Israeli and NASDAQ rules - The management of the company's business is vested in its board of directors, with executive officers responsible for day-to-day operations. Directors are elected at annual general meetings and serve until the next annual meeting, except for external directors[438][440] - Israeli Companies Law requires at least two external directors for public companies, who must meet specific independence criteria and serve three-year terms, with at least one possessing 'accounting and financial expertise'[442][443][445] - Mr. Sagi Schliesser, Mr. Ron Ettlinger, and Mr. Avi Zakay are qualified as independent directors under SEC and NASDAQ requirements, with Mr. Ettlinger also designated as a financial expert[452][454] - The Audit Committee, composed of Messrs. Ettlinger, Schliesser, and Zakay, oversees financial reporting, audits, regulatory compliance, and related-party transactions. The Compensation Committee, with the same members, recommends and reviews compensation policies for office holders[453][454][455][456] - Israeli law codifies fiduciary duties (duty of care and duty of loyalty) for office holders and imposes specific approval processes for transactions involving office holders or controlling shareholders, especially for 'extraordinary transactions'[460][461][463][464] - The company is authorized to indemnify and exempt its directors and officers from certain liabilities, subject to conditions and limitations under Israeli Companies Law, with a total indemnification amount not exceeding 25% of shareholders' equity[471][472][473][474] D. Employees This section breaks down employee count by geographic location and activity, highlighting commitment to development, retention, and a safe work environment, especially during COVID-19 Number of Employees by Geographic Location (as of December 31) | Region | 2020 | 2019 | 2018 | | :------------ | :---- | :---- | :---- | | Israel | 1,184 | 1,133 | 999 | | Asia | 204 | 186 | 164 | | North America | 1,513 | 1,194 | 933 | | South Africa | 12 | 14 | 14 | | Europe | 126 | 115 | 116 | | Total | 3,039 | 2,642 | 2,226 | Number of Employees by Activity (as of December 31) | Activity | 2020 | 2019 | 2018 | | :---------------------------- | :---- | :---- | :---- | | Technical support and consulting | 2,506 | 2,126 | 1,761 | | Research and development | 233 | 212 | 198 | | Marketing and sales | 161 | 158 | 140 | | Operations and administrations | 139 | 146 | 127 | | Total | 3,039 | 2,642 | 2,226 | - The company considers its employees its most valuable asset, offering competitive compensation, comprehensive benefits, and investing in career growth and development through learning opportunities and training programs[480] - In response to COVID-19, the company implemented precautions such as work-from-home flexibility, mandatory social distancing, health monitoring, daily disinfection, and optimization of telecommuting systems to ensure a safe work environment[481] E. Share Ownership This section details beneficial ownership of ordinary shares by executive officers and directors, and describes the 2007 Incentive Compensation Plan for stock-based awards Beneficial Ownership by Directors and Executive Officers (as of December 31, 2020) | Name | Number of Ordinary Shares Beneficially Owned | Percentage of Ownership | | :------------ | :--------------------------------------- | :---------------------- | | Guy Bernstein | 150,000 | * Less than 1% | | Asaf Berenstin | 38,225 | * Less than 1% | | Arik Kilman | 38,130 | * Less than 1% | | Yakov Tsaroya | 20,000 | * Less than 1% | | Other directors/officers | -- | -- | | Total for group | 15,000 exercisable options + other shares | <1% | - The 2007 Incentive Compensation Plan allows for the grant of options, restricted shares, restricted share units, and performance awards. As of December 31, 2020, an aggregate of 932,500 Ordinary Shares were available for future grants under the plan, which is set to terminate on August 1, 2027[485][487][488] - Options granted under the 2007 Plan generally have a 10-year term and vest over 3-4 years. In 2020, 95,517 Ordinary Shares were exercised at an average price of $2.28 per share, and 24,250 options remained outstanding at year-end with an average exercise price of $3.45 per share[490][494][816] ITEM 7. Major Shareholders and Related Party Transactions This section identifies major shareholders, details related party transactions, and discusses interests of experts and counsel A. Major Shareholders This section identifies major shareholders owning 5% or more of ordinary shares, detailing ownership changes and the controlling influence of Formula Systems (1985) Ltd - Formula Systems (1985) Ltd. is the controlling shareholder, beneficially owning 22,324,434 Ordinary Shares, representing 45.53% of the outstanding shares as of December 31, 2020. Formula Systems is itself controlled by Asseco Poland S.A.[495][496] Major Shareholders (as of December 31, 2020) | Name | Number of Ordinary Shares Beneficially Owned | Percentage of Ownership | | :---------------------------------- | :--------------------------------------- | :---------------------- | | Formula Systems (1985) Ltd. | 22,324,434 | 45.53% | | Harel Insurance | 4,835,262 | 9.86% | | Clal Insurance Enterprises Holdings Ltd | 3,765,068 | 7.68% | | Yelin Lapidot | 2,626,903 | 5.36% | - Significant changes in ownership include Harel Insurance increasing its stake from 5.58% in January 2019 to 9.86% in January 2021, and Clal Insurance's ownership fluctuating, most recently decreasing to 7.68% in February 2021[500][501] - Major shareholders do not have different voting rights. As of January 1, 2021, 42 U.S. record holders held approximately 96.5% of the Ordinary Shares, many through brokers or nominees[503][504] B. Related Party Transactions This section details transactions and balances with related parties, primarily Formula Systems affiliates, including services rendered and acquired, and cash management - In 2020, the company sold approximately $3.0 million of services to affiliated companies of Formula Systems and purchased approximately $0.8 million of hardware, software, and services from them[465][823] - The company also provided Formula Systems with cash management, accounting, and bookkeeping services for a total consideration of $0.2 million in 2020[465] - As of December 31, 2020, the company had trade and other receivables balances of approximately $0.763 million due from related parties and trade payables balances of approximately $0.130 million due to related parties[824] C. Interests of Experts and Counsel This section is not applicable to the report ITEM 8. Financial Information This section refers to consolidated financial statements, discusses legal proceedings, and outlines the dividend distribution policy A. Consolidated Statements and Other Financial Information This section refers to consolidated financial statements in Item 18 and discusses ongoing legal proceedings and the company's dividend distribution policy - The company is involved in a lawsuit filed in September 2016 by an Israeli software company seeking NIS 34.1 million in damages, alleging that the company's warning letters regarding potential copyright infringement caused business loss. The company is vigorously defending the lawsuit and cannot reliably estimate the outcome[507][508][509][827][828] - The company's dividend distribution policy, amended in August 2019, allows for the distribution of up to 75% of annual distributable profits, subject to board discretion and compliance with Israeli Companies Law, which requires reasonable assurance that distributions will not prevent the company from meeting its obligations[511][512] B. Significant Changes The company reports no significant changes have occurred since December 31, 2020, except as otherwise disclosed in this annual report ITEM 9. The Offer and Listing This section details the company's offer and listing information, including trading markets and share details A. Offer and Listing Details The company's ordinary shares are traded on the NASDAQ Global Select Market under the ticker symbol "MGIC" B. Plan of Distribution This section is not applicable to the report C. Markets This section details the listing history of the company's ordinary shares on both the NASDAQ Stock Market and the Tel Aviv Stock Exchange (TASE) - The company's Ordinary Shares were listed on the NASDAQ Global Market from August 16, 1991, and transferred to the NASDAQ Global Select Market on January 3, 2011[516] - Since November 16, 2000, the Ordinary Shares have also traded on the Tel Aviv Stock Exchange (TASE) and were included in the TASE's TA-125 Index on December 15, 2011[516] D. Selling Shareholders This section is not applicable to the report E. Dilution This section is not applicable to the report F. Expenses of the Issue This section is not applicable to the report ITEM 10. Additional Information This section provides additional information on share capital, corporate documents, material contracts, exchange controls, and taxation A. Share Capital This section is not applicable to the report B. Memorandum and Articles of Association This section describes key provisions of the company's Articles of Association and Israeli Companies Law, including corporate purposes, director powers, and share rights - The company's memorandum of association states its purpose is to engage in all fields of the computer business and any other lawful activity permissible under Israeli law[523] - The board of directors has the power to borrow money, secure payments, and set aside profits as reserves. Directors are not subject to age limitations for retirement and are not required to own shares to qualify for service[524][525] - Annual general meetings of shareholders must be convened at least once every calendar year, and extraordinary general meetings can be called by the board or by shareholders holding specified percentages of share capital or voting power[526] C. Material Contracts The company does not deem any individual contract material outside its ordinary course of business, despite numerous contracts with customers, resellers, and property owners D. Exchange Controls Israeli law imposes no material foreign exchange restrictions on non-Israeli holders of Ordinary Shares, allowing free repatriation of dividends and sale proceeds after tax E. Taxation This section discusses Israeli and U.S. tax consequences for shareholders, covering corporate tax, government benefits, capital gains, dividends, and potential PFIC status - Israeli companies are subject to a corporate tax rate of 23% as of 2018. However, companies deriving income from a Preferred Enterprise (PFE) or Preferred Technological Enterprise (PTE) may benefit from considerably lower effective tax rates[533][540][545] - Under the 2017 Amendment to the Investment Law, a PTE can enjoy a reduced corporate tax rate of 12% (7.5% in development zone A) on Preferred Technology Income (PTI), and a Special PTE (with consolidated revenues ≥ NIS 10 billion) can achieve a 6% tax rate on PTI[545][546] - Dividends distributed from PTE or SPFE income are generally subject to a 20% withholding tax at source, which can be reduced to 4% for foreign companies meeting specific ownership conditions[548] - Non-Israeli resident shareholders are generally exempt from Israeli capital gains tax on publicly traded shares, provided certain conditions are met, and tax treaties like the U.S.-Israel Treaty may offer further exemptions or credits[557][559] - For U.S. federal income tax purposes, distributions are generally treated as dividends, and Israeli withholding taxes may be eligible for foreign tax credits. The company believes it will not be classified as a Passive Foreign Investment Company (PFIC) for 2020, but this status is determined annually and can have adverse tax consequences for U.S. holders[571][574][580] - U.S. Holders may be subject to a 3.8% Medicare contribution tax on net investment income and various information reporting requirements, including IRS Form 8938 for specified foreign financial assets[587][590] F. Dividends and Paying Agents This section is not applicable to the report G. Statement by Experts This section is not applicable to the report H. Documents on Display The company, as a foreign private issuer, is subject to SEC reporting requirements, filing annual reports on Form 20-F and reports on Form 6-K, publicly available online I. Subsidiary Information This section is not applicable to the report ITEM 11. Quantitative and Qualitative Disclosures About Market Risks This section discusses the company's exposure to market risks, primarily interest rate changes affecting investments and foreign currency fluctuations impacting global operations - The company is exposed to interest rate risk primarily through its investments in marketable securities, which include money market funds, government bonds, bank deposits, and corporate debt. Its cash investment policy aims to preserve principal and maintain liquidity while maximizing income[596][597][598] - Foreign currency exchange risk significantly impacts financial results, as a substantial portion of revenues and expenses are denominated in currencies other than the U.S. dollar, particularly NIS, Euro, Japanese Yen, and British Pound. The company uses foreign exchange hedging contracts to mitigate this risk[600][602] - A 10% increase in the value of the NIS relative to the U.S. dollar in 2020 would have resulted in a $2.1 million increase in operating income, while a 10% decrease would have resulted in a $1.8 million decrease[602] - As of December 31, 2020, the company had no trading securities classified as available for sale, indicating minimal equity price risk from such instruments[603] ITEM 12. Description of Securities Other Than Equity Securities This section describes securities other than equity securities ITEM 13. Defaults, Dividend Arrearages and Delinquencies The company reports no defaults, dividend arrearages, or delinquencies ITEM 14. Material Modifications to the Rights of Security Holders and Use of Proceeds This section addresses material modifications to security holder rights and the use of proceeds ITEM 15. Controls and Procedures This section details management's evaluation of the effectiveness of disclosure controls and internal control over financial reporting as of December 31, 2020, concluding they were effective - Management, including the Chief Executive Officer and Chief Financial Officer, concluded that the company's disclosure controls and procedures were effective as of December 31, 2020[609] - Management also concluded that the company's internal control over financial reporting was effective as of December 31, 2020, based on the COSO framework[610][611] - Management's assessment of internal control over financial reporting did not include the internal controls of Aptonet Inc., Mobisoft Ltd., and Stockell Information Systems Inc., which were acquired during 2020 and constituted 3% of total assets, 1% of net assets, 5% of revenues, and 10% of net income for the year[612] - Kost Forer Gabbay & Kasierer, a member of EY Global, issued an unqualified attestation report on management's assessment of the effectiveness of internal control over financial reporting[613] - No changes in internal control over financial reporting occurred during the year ended December 31, 2020, that materially affected, or are reasonably likely to materially affect, the company's internal control over financial reporting[614] ITEM 16. Reserved This item is reserved ITEM 16A. Audit Committee Financial Expert The board determined that Mr. Ettlinger, an external director, meets the SEC's definition of an audit committee financial expert ITEM 16B. Code of Ethics The company adopted a code of ethics for its CEO and senior financial officers, with copies available and disclosures for amendments or waivers ITEM 16C. Principal Accountant Fees and Services This section details fees billed by Kost Forer Gabbay & Kasierer for audit and tax services, and outlines the Audit Committee's pre-approval policies Fees Billed by Principal Independent Registered Public Accounting Firm (U.S. dollars) | Services Rendered | 2020 | 2019 | | :---------------- | :-------- | :-------- | | Audit | $ 365,000 | $ 355,000 | | Tax and other | $ 92,000 | $ 115,000 | | Total | $ 457,000 | $ 470,000 | - The Audit Committee has adopted a policy for the pre-approval of audit and non-audit services, which can be given as a general pre-approval or on an individual basis, and prohibits the retention of accountants for certain non-audit functions as defined by the Sarbanes-Oxley Act[618] ITEM 16D. Exemptions from the Listing Standards for Audit Committees This section addresses any exemptions from listing standards for audit committees ITEM 16E. Purchases of Equity Securities by the Issuer and Affiliated Purchasers The company reports no purchases of equity securities by the issuer or affiliated purchasers ITEM 16F. Changes in Registrant's Certifying Accountant The company reports no changes in its certifying accountant ITEM 16G. Corporate Governance This section explains the company's adherence to home country corporate governance practices as a foreign private issuer, exempting it from certain NASDAQ rules - As a foreign private issuer, the company follows Israeli law and practice, which allows exemptions from certain NASDAQ Stock Market Rules, including requirements for a majority of independent directors, independent director executive sessions, independent director oversight of nominations, and shareholder approval for certain dilutive events or acquisitions[622][624] ITEM 16H. Mine Safety Disclosure This section provides disclosure regarding mine safety ITEM 17. Financial Statements This item is not applicable and refers to Item 18 for the consolidated financial statements ITEM 18. Financial Statements This item includes the consolidated financial statements and related notes, presented in detail starting on page 129 ITEM 19. Exhibits This section provides an index of all exhibits filed as part of the annual report on Form 20-F, including corporate documents, stock option plans, and certifications Consolidated Financial Statements This section presents the audited consolidated financial statements for the fiscal year ended December 31, 2020, prepared under U.S. GAAP, including auditor reports, balance sheets, income statements, and detailed notes Reports of Independent Registered Public Accounting Firm This section contains audit reports from Kost Forer Gabbay & Kasierer and KDA Audit Corporation, providing unqualified opinions on consolidated financial statements and internal control for 2020 - Kost Forer Gabbay & Kasierer (EY Global) issued an unqualified opinion on the consolidated financial statements and the effectiveness of internal control over financial reporting for the period ended December 31, 2020[635][637][649] - The audit of internal control over financial reporting did not include the businesses of Aptonet Inc., Mobisoft Ltd., and Stockell Information Systems, Inc., acquired during 2020, which constituted 3% of total assets, 1% of net assets, 5% of revenues, and 10% of net income[651] - KDA Audit Corporation also issued an unqualified opinion on the financial statements and internal control over financial reporting for Magic Software Japan K.K., a wholly-owned subsidiary[858][859][865] - A critical audit matter identified was the valuation of Goodwill, due to the significant estimation and assumptions required by management to estimate the fair value of reporting units, particularly projected future operating cash flows, growth rates, and discount rates[643] Consolidated Balance Sheets This section presents the consolidated balance sheets as of December 31, 2020, and 2019, detailing the company's assets, liabilities, and equity in thousands of U.S. dollars Consolidated Balance Sheets (U.S. dollars in thousands) | ASSETS | December 31, 2020 | December 31, 2019 | | :---------------------------------------- | :---------------- | :---------------- | | Cash and cash equivalents | $ 88,127 | $ 81,915 | | Short-term bank deposits | 289 | 6,996 | | Marketable securities | 1,238 | 6,600 | | Trade receivables (net) | 111,059 | 96,694 | | Other accounts receivable and prepaid expenses | 10,513 | 12,845 | | Total current assets | 211,226 | 205,050 | | Severance pay fund | 4,673 | 4,013 | | Deferred tax asset | 6,397 | 2,188 | | Operating lease right-of-use assets | 24,509 | 14,956 | | Other long-term receivables | 5,507 | 5,879 | | Property and equipment, net | 5,988 | 3,649 | | Intangible assets, net | 53,404 | 51,128 | | Goodwill | 135,682 | 117,743 | | Total long-term assets | 236,160 | 199,556 | | Total assets | $ 447,386 | $ 404,606 | | LIABILITIES AND EQUITY | | | | Short term debt | $ 11,529 | $ 7,079 | | Trade payables | 14,250 | 10,990 | | Accrued expenses and other accounts payable | 41,846 | 32,619 | | Current maturities of operating lease liabilities | 3,413 | 3,833 | | Liabilities due to acquisition activities | 4,998 | 3,638 | | Deferred revenues and customer advances | 8,793 | 8,724 | | Total current liabilities | 84,829 | 66,883 | | Long-term debt | 13,352 | 15,540 | | Long-term operating lease liabilities | 21,109 | 11,119 | | Long-term liabilities due to acquisition activities | 10,926 | 8,613 | | Deferred tax liability | 17,639 | 11,069 | | Accrued severance pay | 5,545 | 4,770 | | Total long term liabilities | 68,571 | 51,111 | | Redeemable non-controlling interest | 24,980 | 21,915 | | Total equity attributable to Magic Software Enterprises shareholders | 260,432 | 247,838 | | Non-controlling interests | 8,574 | 16,859 | | Total liabilities, redeemable non-controlling interest and equity | $ 447,386 | $ 404,606 | Consolidated Statements of Income This section presents consolidated statements of income for 2018-2020, detailing revenues, costs, gross profit, operating expenses, and net income Consolidated Statements of Income (U.S. dollars in thousands) | Metric | 2020 | 2019 | 2018 | | :---------------------------------------- | :------- | :------- | :------- | | Revenues: | | | | | Software | $ 24,272 | $ 28,084 | $ 25,454 | | Maintenance and technical support | 33,181 | 30,996 | 30,951 | | Consulting services | 313,741 | 266,550 | 227,970 | | Total revenues | 371,194 | 325,630 | 284,375 | | Cost of revenues: | | | | | Software | 10,487 | 10,220 | 9,960 | | Maintenance and technical support | 3,598 | 4,167 | 4,120 | | Consulting services | 247,517 | 209,114 | 181,477 | | Total cost of revenues | 261,602 | 223,501 | 195,557 | | Gross profit | 109,592 | 102,129 | 88,818 | | Operating costs and expenses: | | | | | Research and development, net | 8,789 | 8,239 | 5,696 | | Selling and marketing | 31,160 | 30,454 | 27,197 | | General and administrative | 27,967 | 29,529 | 24,265 | | Change in valuation of contingent consideration related to acquisitions | 1,088 | 255 | (38) | | Total operating costs and expenses | 69,004 | 68,477 | 57,120 | | Operating income | 40,588 | 33,652 | 31,698 | | Financial income (expenses), net | (917) | (1,169) | 153 | | Increase in valuation of consideration related to acquisitions | (2,268) | (11) | (4) | | Income before taxes on income | 37,403 | 32,472 | 31,847 | | Taxes on income | 7,286 | 6,874 | 7,071 | | Net income | 30,117 | 25,598 | 24,776 | | Net income attributable to redeemable non-controlling interests | 2,526 | 3,111 | 3,383 | | Net income attributable to non-controlling interests | 2,405 | 2,221 | 1,510 | | Net income attributable to Magic Software Enterprises shareholders | $ 25,186 | $ 20,266 | $ 19,883 | | Net earnings per share attributable to Magic Software Enterprises' shareholders: | | | | | Basic and Diluted earnings per share | $ 0.49 | $ 0.26 | $ 0.39 | Consolidated Statements of Comprehensive Income This section presents consolidated statements of comprehensive income for 2018-2020, detailing net income and other comprehensive income (loss) components Consolidated Statements of Comprehensive Income (U.S. dollars in thousands) | Metric | 2020 | 2019 | 2018 | | :---------------------------------------- | :------- | :------- | :------- | | Net income | $ 30,117 | $ 25,598 | $ 24,776 | | Other comprehensive income (loss), net of tax: | | | | | Foreign currency translation adjustments, net | 10,275 | 8,125 | (8,217) | | Unrealized gains (losses) from available-for-sale securities | (1) | 95 | (36) | | Total other comprehensive income (loss), net of tax | 10,274 | 8,220 | (8,253) | | Total comprehensive income | 40,391 | 33,818 | 16,523 | | Comprehensive income attributable to redeemable non-controlling interests | 4,374 | 5,106 | 1,649 | | Comprehensive income attributable to non-controlling interests | 2,672 | 2,645 | 1,200 | | Comprehensive income attributable to Magic Software Enterprises' shareholders | $ 33,345 | $ 26,067 | $ 13,674 | Consolidated Statements of Changes in Shareholders' Equity This section presents consolidated statements of changes in shareholders' equity for 2018-2020, detailing movements in share capital, paid-in capital, comprehensive income, retained earnings, and non-controlling interests Consolidated Statements of Changes in Shareholders' Equity (U.S. dollars in thousands, except share data) | Metric | As of January 1, 2018 | As of December 31, 2018 | As of December 31, 2019 | As of December 31, 2020 | | :---------------------------------------- | :-------------------- | :---------------------- | :---------------------- | :---------------------- | | Number of Shares | 44,488,578 | 48,861,038 | 48,939,538 | 49,035,055 | | Share capital | $ 1,040 | $ 1,159 | $ 1,161 | $ 1,164 | | Additional paid-in capital | 183,445 | 218,400 | 218,647 | 211,713 | | Accumulated other comprehensive income (loss) | 83 | (6,125) | (324) | 7,835 | | Retained earnings | 25,713 | 30,522 | 28,354 | 39,720 | | Non-controlling interests | 3,282 | 4,413 | 16,859 | 8,574 | | Total equity | 213,563 | 248,369 | 264,697 | 269,006 | | Net income attributable to the Company's shareholders | - | 19,883 | 20,266 | 25,186 | | Dividends | - | (13,348) | (14,963) | (12,503) | Consolidated Statements of Cash Flows This section presents consolidated statements of cash flows for 2018-2020, categorizing cash flows into operating, investing, and financing activities, with supplementary non-cash information Consolidated Statements of Cash Flows (U.S. dollars in thousands) | Cash Flow Activity | 2020 | 2019 | 2018 | | :---------------------------------------- | :-------- | :-------- | :-------- | | Net cash provided by operating activities | $ 52,296 | $ 45,948 | $ 24,050 | | Net cash used in investing activities | $ (9,604) | $ (15,440) | $ (19,554) | | Net cash provided by (used in) financing activities | $ (39,647) | $ (36,980) | $ 8,426 | | Effect of exchange rate changes on cash and cash equivalents | 3,167 | 1,261 | (1,872) | | Increase (decrease) in cash and cash equivalents | 6,212 | (5,211) | 11,050 | | Cash and cash equivalents at end of the year | $ 88,127 | $ 81,915 | $ 87,126 | - Net cash provided by operating activities increased to $52.3 million in 2020, driven by net income ($30.1 million) and non-cash adjustments including depreciation and amortization (**