MAGIC SOFTWARE ENTERPRISES LTD.
AND ITS SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
--------------------------------------------------------------------------------
U.S. DOLLARS IN THOUSANDS (EXCEPT PER SHARE DATA)
YEAR ENDED DECEMBER 31,
-----------------------------------
2004 2005 2006
-------- -------- --------
Revenues (Note 13):
Software sales $ 28,022 $ 25,103 $ 22,336
Maintenance and technical support 12,555 14,376 14,935
Consulting services 24,590 21,511 24,454
-------- -------- --------
TOTAL revenues 65,167 60,990 61,725
-------- -------- --------
Cost of revenues:
Software sales 6,462 8,483 7,016
Maintenance and technical support 3,199 2,679 3,615
Consulting services 15,818 15,514 18,087
-------- -------- --------
TOTAL cost of revenues 25,479 26,676 28,718
-------- -------- --------
Gross profit 39,688 34,314 33,007
-------- -------- --------
Operating costs and expenses:
Research and development, net (Note 14a) 3,845 3,733 3,942
Selling and marketing 17,157 18,510 16,777
General and administrative 15,384 16,332 15,572
Restructuring and Impairment - - 2,157
-------- -------- --------
TOTAL operating expenses, net 36,386 38,575 38,448
-------- -------- --------
Operating income (loss) 3,302 (4,261) (5,441)
Financial income (expenses), net (Note 14b) 912 (811) 410
Other income, net (Note 1f) - 1,169 278
-------- -------- --------
Income (loss) before taxes on income 4,214 (3,903) (4,753)
Taxes on income (Note 11) 281 491 325
-------- -------- --------
3,933 (4,394) (5,078)
Equity in earnings of affiliates 79 19 15
Minority interest in losses (earnings) of subsidiaries 78 (232) 57
-------- -------- --------
Net income (loss) $ 4,090 $ (4,607) $ (5,006)
======== ======== ========
Basic and diluted net earnings (loss) per share (Note 16) $ 0.13 $ (0.15) $ (0.16)
======== ======== ========
The accompanying notes are an integral part of the consolidated financial
statements.
F - 5
MAGIC SOFTWARE ENTERPRISES LTD.
AND ITS SUBSIDIARIES
STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
--------------------------------------------------------------------------------
U.S. DOLLARS IN THOUSANDS
ACCUMULATED
ADDITIONAL OTHER TREASURY COMPREHENSIVE TOTAL
SHARE PAID-IN COMPREHENSIVE SHARES ACCUMULATED INCOME SHAREHOLDERS'
CAPITAL CAPITAL INCOME (LOSS) AT COST DEFICIT (LOSS) EQUITY
-------- -------- -------- -------- -------- -------- --------
Balance as of January 1, 2004 $ 805 $104,765 $ (80) $ (5,773) $(45,793) $ 53,924
Other comprehensive income:
Foreign currency translation adjustments - - 384 - - $ 384 384
Unrealized gains from available-for-sale securities, net - - 2 - - 2 2
Net income - - - - 4,090 4,090 4,090
--------
Total comprehensive income $ 4,476
========
Exercise of stock options and warrants 22 1,227 - - - 1,249
Purchase of Treasury shares - - - (102) - (102)
-------- -------- -------- -------- -------- --------
Balance as of December 31, 2004 827 105,992 306 (5,875) (41,703) 59,547
Realized losses from available-for-sale securities - - 36 - - 36
Other comprehensive loss:
Foreign currency translation adjustments - - (1,578) - - $ (1,578) (1,578)
Unrealized losses from available-for-sale securities - - (278) - - (278) (278)
Net loss - - - - (4,607) (4,607) (4,607)
--------
Total comprehensive loss $ (6,463)
========
Exercise of stock options 2 80 - - - 82
Purchase of Treasury shares - - - (897) - (897)
-------- -------- -------- -------- -------- --------
Balance as of December 31, 2005 829 106,072 (1,514) (6,772) (46,310) 52,305
Effect of SAB 108 (140) (140)
-------- --------
(46,450) 52,165
Stock based compensation expenses 27 27
Realized losses from available-for-sale securities - - 5 - - 5
Other comprehensive loss:
Foreign currency translation adjustments - - 22 - - 22 22
Unrealized gain from available-for-sale securities - - 150 - - 150 150
Net loss - - - - (5,006) (5,006) (5,006)
--------
Total comprehensive loss $ (4,834)
========
Exercise of stock options 5 276 - - - 281
-------- -------- -------- -------- -------- --------
Balance as of December 31, 2006 $ 834 $106,375 $ (1,337) $ (6,772) $(51,456) $ 47,644
======== ======== ======== ======== ======== ========
The accompanying notes are an integral part of the consolidated financial
statements.
F - 6
MAGIC SOFTWARE ENTERPRISES LTD.
AND ITS SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
--------------------------------------------------------------------------------
U.S. DOLLARS IN THOUSANDS
YEAR ENDED DECEMBER 31,
----------------------------------------
2004 2005 2006
-------- -------- --------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ 4,090 $ (4,607) $ (5,006)
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Depreciation and amortization 4,649 5,139 5,464
Equity in earnings of affiliates (79) (19) (15)
Minority interest in earnings (losses) of subsidiaries (78) 232 (57)
Accrued severance pay, net 37 (30) (69)
Loss (gain) on sale of property and equipment (9) 16 56
Stock-based compensation expenses - - 27
Amortization of premiums and accrued interest on
marketable securities, net (53) 67 55
Loss (gain) on sale of marketable securities (28) 68 10
Gain on sale of subsidiary's operation - - (278)
Impairment of intangible asset - - 309
Decrease in trade receivables 126 4,569 2,752
Decrease (increase) in related parties receivables 5 (28) 204
Decrease (increase) in other accounts receivable and prepaid
expenses (76) 471 242
Decrease (increase) in inventory (181) (20) 72
Increase (decrease) in trade payables (488) 646 19
Increase (decrease) in accrued expenses and other accounts
payable (2,642) (907) 46
-------- -------- --------
Net cash provided by operating activities 5,273 5,597 3,831
-------- -------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capitalized software development costs (3,472) (3,909) (3,535)
Purchase of property and equipment (1,006) (1,123) (1,032)
Purchase of intangible assets (374) - -
Additional investment in subsidiaries (See note 1b-d) (1,626) - (1,910)
Proceeds from sale of subsidiary's operation - - 900
Proceeds from sale of property and equipment 23 18 97
Proceeds from sale of marketable securities 777 664 226
Purchase of marketable securities (5,921) (199) (408)
Change in short-term and long-term deposits (317) (599) 477
-------- -------- --------
Net cash used in investing activities (11,916) (5,148) (5,185)
-------- -------- --------
The accompanying notes are an integral part of the consolidated financial
statements.
F - 7
MAGIC SOFTWARE ENTERPRISES LTD.
AND ITS SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
--------------------------------------------------------------------------------
U.S. DOLLARS IN THOUSANDS
YEAR ENDED DECEMBER 31,
----------------------------------
2004 2005 2006
-------- -------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from exercise of stock options and warrants $ 1,249 $ 82 $ 281
Purchase of Treasury shares (102) (897) -
Short-term credit, net (108) 1,979 328
Repayment of long-term loan (359) (54) (122)
Proceeds from long-term loans 126 164 185
Dividend to minority in subsidiary - (509) -
-------- -------- --------
Net cash provided by financing activities 806 765 672
-------- -------- --------
Effect of exchange rate changes on cash and cash equivalents (164) 322 (272)
-------- -------- --------
Increase (decrease) in cash and cash equivalents (6,001) 1,536 (954)
Cash and cash equivalents at beginning of the year 13,581 7,580 9,116
-------- -------- --------
Cash and cash equivalents at end of the year $ 7,580 $ 9,116 $ 8,162
======== ======== ========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW ACTIVITIES:
NET CASH PAID DURING THE YEAR FOR:
Income taxes $ 281 $ 424 $ 433
======== ======== ========
Interest $ 74 $ 102 $ 265
======== ======== ========
The accompanying notes are an integral part of the consolidated financial
statements.
F - 8
MAGIC SOFTWARE ENTERPRISES LTD.
AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
U.S. DOLLARS IN THOUSANDS
NOTE 1:- GENERAL
a. Magic Software Enterprises Ltd. (the "Company"), an Israeli
corporation, and its subsidiaries ("the Group") develops, markets and
supports software development and deployment technology ("the Magic
technology") and applications developed using this Magic technology.
Magic technology enables enterprises to accelerate the process of
building and deploying software applications that can be rapidly
customized and integrated with existing systems. The principal markets
of the Company and its subsidiaries are Europe, Israel, the U.S. and
Japan (see Note 13).
As for information about the Company's holdings in subsidiaries and
affiliated company, see Appendix A.
b. During 2004, in consideration of $ 1,240, the Company purchased an
additional 20.96% equity interest in Advanced Answer on Demand
Holdings Corp. ("AAOD"), a private Florida based company that provides
integrated software solutions for the long-term healthcare industry.
As a result, the Company's interest in AAOD's share capital increased
to 83.89%.
In February 2006, in consideration of $ 1,910, the Company purchased
an additional 16.11% equity interest in AAOD. As a result, the
Company's interest in AAOD's share capital increased to 100%. The
purchase price was allocated, as follows:
Customer relations *) $ 314
Acquired technology*) 216
Goodwill 990
Minority interest 390
-------
Total net assets acquired $ 1,910
=======
*) The customer relations and acquired technology are amortized on a
straight-line basis over a period of five years.
c. During 2004, the Company purchased an additional equity interest of
26% in Onyx Szoftverhaz Hungary, bringing its holding to 100% in
consideration of $ 290. The excess of the cost over the net amounts
assigned to the fair value of assets acquired and liabilities assumed
was recorded as goodwill at the total amount of $ 69.
d. During 2004, the Company purchased an additional equity interest of
12.5% from the minority in CarPro Systems Ltd., ("CarPro") bringing
it's holding to 87.5%, in consideration of $ 96.
During 2005, the Company invested an additional amount of
approximately $ 214 in CarPro equity, bringing its holding to 90.48%.
F - 9
MAGIC SOFTWARE ENTERPRISES LTD.
AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
U.S. DOLLARS IN THOUSANDS
NOTE 1:- GENERAL (CONT.)
On December 7, 2006, the Company has recorded a net gain of $278
relating to the sale of CarPro's assets and liabilities, including the
intellectual property (the RentPro and LeasePro software) and its
customer base, to its distributor CarPro Systems International B.V.
(the "Buyer"),. Additionally Magic Software Enterprises sold to the
buyer a substantial number of licenses for Magic Software's products
for continued use in the ongoing maintenance and enhancement of the
CarPro software products. The combined sales price is $ 1,750 to be
paid over a period of five years. The Company recognized the
consideration from the sale of Carpro's operations on a cash basis and
net of related expenses (including goodwill and other intangible
assets write-offs).
e. During 2002, Magic U.K., a subsidiary of the Company established a
joint venture company in the U.K., known as Hermes Logistics
Technologies Ltd. Holding ("Hermes"), which owns the Intellectual
Property ("IP") of the Hermes application.
In 2004, the subsidiary purchased the remaining 49% interest in Hermes
and increased its holdings to 100% for a cash consideration of
approximately $ 354, which was recorded as other intangible assets,
and committed to pay royalties to the seller in the amount of 1.75% of
gross sales of the Hermes application for a period of 5 years (see
Note 15e).
f. The Company has recorded a net income of $1,169 in 2005 relating to
life insurance that the Company received in 2005 following the death
of the former chief executive officer of the subsidiary AAOD in June
2004.
g. On August 16, 2006, Magic's board of directors approved a
comprehensive global Restructuring plan (the "Plan"). The Plan
establishes the terms of the benefit arrangement, including the
benefits that employees will receive upon termination. In accordance
with Statement of Financial Accounting Standard No. 146, "Accounting
for Costs Associated with Exit or Disposal Activities" ("SFAS No.
146") the Company recorded $ 1,365 related to one-time termination
benefits provided to terminated employees. As of December 31, 2006,
all termination benefits were paid and substantially all terminated
employees no longer provide services to the Company. In addition the
Company wrote- off certain intangible assets related to the
restructuring plan and incurred other exit costs in the amounts of $
309 and $ 483 respectively.
NOTE 2: - SIGNIFICANT ACCOUNTING POLICIES
The consolidated financial statements have been prepared in accordance with
accounting principles generally accepted in the U.S. ("U.S. GAAP"), applied
on a consistent basis, as follows:
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements
and accompanying notes. Actual results could differ from those estimates.
F - 10
MAGIC SOFTWARE ENTERPRISES LTD.
AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
U.S. DOLLARS IN THOUSANDS
NOTE 2: - SIGNIFICANT ACCOUNTING POLICIES (CONT.)
FINANCIAL STATEMENTS IN UNITED STATES DOLLARS
A substantial portion of the revenues of the Company and certain of its
subsidiaries is generated in U.S. dollars ("dollar"). In addition, a
substantial portion of the Company's costs is incurred in dollars. The
Company's management believes that the dollar is the currency of the
primary economic environment in which the Company and its subsidiaries
operate. Thus, the functional and reporting currency of the Company and
certain of its subsidiaries is the dollar.
Accordingly, monetary accounts maintained in currencies other than the
dollar are remeasured into dollars in accordance with SFAS No. 52, "Foreign
Currency Translation" ("SFAS No. 52"). All transaction gains and losses of
the remeasurement of monetary balance sheet items are reflected in the
statements of operations as financial income or expenses, as appropriate.
The financial statements of foreign subsidiaries and of certain entities
that are reported using the equity method of accounting, whose functional
currency is not the U.S. dollar, have been translated into dollars. All
balance sheet amounts have been translated using the exchange rates in
effect at each balance sheet dates. Statement of operation 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 shareholders' equity.
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of the Company
and its wholly and majority owned subsidiaries. Intercompany balances and
transactions including profit from intercompany sales not yet realized
outside the Group, have been eliminated upon consolidation.
CASH EQUIVALENTS:
Cash equivalents are short-term highly liquid investments that are readily
convertible to cash with maturities of three months or less, at the date
acquired.
SHORT-TERM DEPOSITS
Short-term deposits include deposits with original maturities of more than
three months and less than one year which presented at cost, including
accrued interest. The deposits are in U.S. dollars and in New Israeli
Shekels and bear interest at an average annual rate of 4.94% and 4.24%,
respectively.
F - 11
MAGIC SOFTWARE ENTERPRISES LTD.
AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
U.S. DOLLARS IN THOUSANDS
NOTE 2:- SIGNIFICANT ACCOUNTING POLICIES (CONT.)
MARKETABLE SECURITIES
The Company accounts for investments in marketable securities in accordance
with SFAS No. 115, "Accounting for Certain Investments in Debt and Equity
Securities ("SFAS No. 115"). Management determines the appropriate
classification of its investments in marketable debt securities at the time
of purchase and reevaluates such determinations at each balance sheet date.
Debt securities are classified as available - for - sale and reported at
fair value.
Debt securities that are designated as available-for-sale 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.
INVENTORIES
Inventories consist of software packaging, discs, printed materials,
hardware devices and third party licenses, and are stated at the lower of
cost or market value. Cost is determined by the "first-in, first-out"
method.
Inventory write-offs are provided to cover risks arising from slow-moving
items, technological obsolescence, excess inventories, and for market
prices lower than cost. In 2006, the Company wrote off approximately $ 237
of slow-moving inventory of license, which was not part of the core
business of the Company, related to the reorganization plan which was
approved by the Company's management and Board of Directors during the
third quarter of 2006.
INVESTMENTS IN AFFILIATED COMPANIES
In these financial statements, affiliated companies are companies held to
the extent of 20% or more (which are not subsidiaries), where the Company
can exercise significant influence over operating and financial policy of
the affiliate. The investment in affiliated companies is accounted for by
the equity method. Profits on inter-company sales, not realized outside the
Group, were eliminated.
Management periodically reviews the carrying value of the investments. If
this review indicates that the cost is not recoverable, the carrying value
is reduced to its estimated fair value. As of December 31, 2005 and 2006,
no impairment indicators have been identified.
PROPERTY AND EQUIPMENT NET
Property and equipment are stated at cost, net of accumulated depreciation.
Depreciation is computed by the straight-line method over the estimated
useful lives of the assets at the following estimated useful lives:
F - 12
MAGIC SOFTWARE ENTERPRISES LTD.
AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
U.S. DOLLARS IN THOUSANDS
NOTE 2: - SIGNIFICANT ACCOUNTING POLICIES (CONT.)
YEARS
--------------------------------------------
Buildings 25
Computers and peripheral equipment 3
Office furniture and equipment 7 - 15
Motor vehicles 7
Software for internal use 3
Leasehold improvements Over the shorter of the lease term or useful
economic life
The Group accounts for costs of computer software developed or obtained for
internal use in accordance with Statement of Position No. 98-1, Accounting
for the Costs of Computer Software Developed or Obtained for Internal Use
("SOP No. 98-1"). The SOP requires the capitalization of certain costs
incurred in connection with developing or obtaining internal use software.
During the year 2006, the Company capitalized $ 140 of software cost,
related to the ERP (enterprise resource planning) system. Capitalized
software costs are amortized by the straight-line method over their
estimated useful life of three years. In September 2006, as part of the
restructuring process held by the Company, the Software project was
postponed.
IMPAIRMENT OF LONG-LIVED ASSETS
The Company's long-lived assets are reviewed for impairment in accordance
with SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived
Assets" ("SFAS No. 144") 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 of December 31, 2005, no impairment indicators have been
identified. For the year 2006 see Note 1g.
OTHER INTANGIBLE ASSETS
Intangible assets are comprised of distribution rights, acquired technology
and customer relations, and are amortized over their 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 customer relations are
amortized on a straight line basis over a period of five years.
F - 13
MAGIC SOFTWARE ENTERPRISES LTD.
AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
U.S. DOLLARS IN THOUSANDS
NOTE 2:- SIGNIFICANT ACCOUNTING POLICIES (CONT.)
GOODWILL
Under SFAS No. 142, "Goodwill and Other Intangible Assets," goodwill and
intangible assets with an identifiable useful life are no longer amortized
but are subject to annual impairment tests based on estimated fair value in
accordance with SFAS No. 142. The Company conducts its annual test of
impairment for goodwill in December of each year. In addition the Company
tests for impairment periodically whenever events or circumstances occur
subsequent to its annual impairment tests that indicate that the asset
might be impaired. Indicators the Company considered important which could
trigger an impairment include, but are not limited to, significant
underperformance relative to historical or projected future operating
results, significant changes in the manner of use of the acquired assets or
the strategy for its overall business, significant negative industry or
economic trends, a significant decline in its stock price for a sustained
period and its market capitalization relative to net book value.
The Company has three reporting units. The goodwill of each reporting unit
was measured separately. The first step of the goodwill impairment test
compared the carrying value of each reporting unit with its fair value on
that date. Since the fair value of the reporting units exceeded their
carrying amount, no impairment was identified in 2006.
REVENUE RECOGNITION
To date, the Company has derived its revenues from licensing the rights to
use its software, maintenance and technical support and providing
professional services. The Company sells its products primarily through its
direct sales force and indirectly through distributors.
The Company accounts for software sales in accordance with Statement of
Position No. 97-2, "Software Revenue Recognition" as amended by Statement
of Position 98-9, "Modifications of SOP 97-2, Software Revenue Recognition
with Respect to Certain Transactions" ("SOP No. 97-2"). SOP No. 97-2
generally requires revenues earned from software arrangements involving
multiple elements to be allocated to each element based on the relative
fair values of the elements determined by the vendor's specific objective
evidence (VSOE) of fair value. Revenues are recognized under the "residual
method" when VSOE of fair value exists for all undelivered elements and
VSOE of fair value does not exist for all of the delivered elements, and
when all SOP No. 97-2 criteria for revenue recognition are met. The VSOE of
fair value of the undelivered elements included in multiple element
arrangement (maintenance, support and services) is determined based on the
price charged for the undelivered element when sold separately.
Revenues from license fees are recognized when persuasive evidence of an
agreement exists, delivery of the product has occurred, no significant
obligations with regard to implementation remain, the fee is fixed or
determinable, and collectibility is probable. 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.
F - 14
MAGIC SOFTWARE ENTERPRISES LTD.
AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
U.S. DOLLARS IN THOUSANDS
NOTE 2:- SIGNIFICANT ACCOUNTING POLICIES (CONT.)
Maintenance and technical support revenues are deferred and recognized on a
straight-line basis over the term of the maintenance and support agreement.
Revenue from consulting services consists of billable hours for services
provided, recognized as the services are rendered.
Arrangements that include consulting services are evaluated to determine
whether those services are essential to the functionality of other elements
of the arrangement. When services are considered essential, revenues under
the arrangement are recognized using contract accounting based on Statement
of Position No. 81-1, "Accounting for Performance of Construction-Type and
Certain Production-Type Contracts" ("SOP 81-1") on a percentage of
completion method based on inputs measures. Provisions for estimated losses
on uncompleted contracts are made in the period in which such losses are
first determined, in the amount of the estimated loss for the entire
contract. As of December 31, 2006, no such estimated losses were
identified.
When consulting services are not considered essential, the revenues
allocable to the consulting services are recognized as the services are
performed. In most cases, the Company had determined that the services are
not considered essential to the functionality of other elements of the
arrangement.
Deferred revenue includes unearned amounts received under maintenance and
support contracts, and amounts received from customers but not yet
recognized as revenues.
RESEARCH AND DEVELOPMENT COSTS
SFAS No. 86 "Accounting for the Costs of Computer Software to be Sold,
Leased or Otherwise Marketed", ("SFAS No. 86") requires capitalization of
certain software development costs subsequent to the establishment of
technological feasibility. Based on the Company and its subsidiaries
product development process, technological feasibility is established upon
completion of a detailed program design and working model.
Research and development costs incurred in the process of developing
product improvements are generally charged to expenses as incurred.
Significant costs incurred by the Company and its subsidiaries between
completion of the detailed program design and a working model, and the
point at which the product is ready for general release, have been
capitalized.
F - 15
MAGIC SOFTWARE ENTERPRISES LTD.
AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
U.S. DOLLARS IN THOUSANDS
NOTE 2:- SIGNIFICANT ACCOUNTING POLICIES (CONT.)
Capitalized software costs are amortized by the greater of the amount
computed using the: (i) ratio that current gross revenues from sales of the
software to the total of current and anticipated future gross revenues from
sales of that software, or (ii) the straight-line method over the estimated
useful life of the product (three to five years). The Company assesses the
recoverability of this intangible asset on a regular basis by determining
whether the amortization of the asset over its remaining life can be
recovered through undiscounted future operating cash flows from the
specific software product sold. As of December 31, 2005 and 2006, no
impairment losses have been identified.
SEVERANCE PAY
Pursuant to Section 14 of the Severance Compensation Act, 1963 ("Section
14"), certain employees of the Company who elected to be included under
this section, are entitled only to monthly deposits, at a rate of 8.33% of
their monthly salary, made in their name with insurance companies. Payments
in accordance with Section 14 release the Company from any future severance
payments in respect of those employees. Deposits under Section 14 are not
recorded as an asset in the Company's balance sheet.
The liability of the Israeli companies for severance pay (for those who
elected not to be included under Section 14) is calculated pursuant to
Israel's 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. Employees are entitled to one month's salary for each
year of employment or a portion thereof. The Company's liability for all of
its employees in Israel is fully provided by monthly deposits with
insurance policies and by an accrual. The value of these policies is
recorded as an asset in the Company's balance sheet.
The deposited funds include profits accumulated up to the balance sheet
date. The deposited funds may be withdrawn only upon the fulfillment of the
obligation pursuant to Israel's Severance Pay Law or labor agreements. The
value of the deposited funds is based on the cash surrendered value of
these policies, and includes immaterial profits.
Severance expenses for the years ended December 31, 2004, 2005 and 2006
amounted to approximately $ 389, $ 453 and $ 463, respectively.
ADVERTISING EXPENSES
Advertising expenses are charged to selling and marketing expenses, as
incurred. Advertising expenses for the years ended December 31, 2004, 2005
and 2006 were $ 46, $ 119 and $ 87, respectively.
F - 16
MAGIC SOFTWARE ENTERPRISES LTD.
AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
U.S. DOLLARS IN THOUSANDS
NOTE 2:- SIGNIFICANT ACCOUNTING POLICIES (CONT.)
INCOME TAXES
The Company and its subsidiaries account for income taxes in accordance
with SFAS No. 109, "Accounting for Income Taxes" ("SFAS No. 109"). This
Statement prescribes the use of the liability method whereby deferred tax
assets and liability account balances are determined based on differences
between financial reporting and tax bases of assets and liabilities and are
measured using the enacted tax rates and laws that will be in effect when
the differences are expected to reverse. The Company and its subsidiaries
provide a valuation allowance, if necessary, to reduce deferred tax assets
to their estimated realizable value.
TREASURY SHARES
The Company repurchases its Ordinary shares from time to time in the open
market and holds such shares as Treasury shares. The Company applies the
"cost method" and presents the cost to repurchase such shares as a
reduction in shareholders' equity. As of December 31, 2006, the Company did
not sell any of the shares.
BASIC AND DILUTED NET EARNINGS (LOSS) PER SHARE
Basic net earnings (net loss) per share is computed based on the weighted
average number of Ordinary shares outstanding during each year. Diluted
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
SFAS No. 128, "Earnings Per Share" ("SFAS No. 128").
Part of the outstanding stock options and warrants has been excluded from
the calculation of the diluted earnings (net loss) per share because such
securities are anti-dilutive for 2004, 2005 and 2006. The total weighted
average number of shares related to the outstanding options and warrants
excluded from the calculations of diluted earnings (net loss) per share was
209,161, 1,298,186 and 883,884 for the years ended December 31, 2004, 2005
and 2006, respectively.
ACCOUNTING FOR STOCK-BASED COMPENSATION
On January 1, 2006, the Company adopted Statement of Financial Accounting
Standards No. 123 (revised 2004), "Share-Based Payment" ("SFAS 123(R)")
which requires the measurement and recognition of compensation expense
based on estimated fair values for all share-based payment awards made to
employees and directors. SFAS 123(R) supersedes Accounting Principles Board
Opinion No. 25, "Accounting for Stock Issued to Employees" ("APB 25"), for
periods beginning in fiscal 2006. In March 2005, the Securities and
Exchange Commission issued Staff Accounting Bulletin No. 107 ("SAB 107")
relating to SFAS 123(R). The Company has applied the provisions of SAB 107
in its adoption of SFAS 123(R).
F - 17
MAGIC SOFTWARE ENTERPRISES LTD.
AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
U.S. DOLLARS IN THOUSANDS
NOTE 2:- SIGNIFICANT ACCOUNTING POLICIES (CONT.)
SFAS 123(R) 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 income statement. Prior to the adoption of SFAS
123(R), the Company accounted for equity-based awards to employees and
directors using the intrinsic value method in accordance with APB 25 as
allowed under Statement of Financial Accounting Standards No. 123,
"Accounting for Stock-Based Compensation" ("SFAS 123").
The Company adopted SFAS 123(R) using the modified prospective transition
method, which requires the application of the accounting standard starting
from January 1, 2006, the first day of the Company's fiscal year 2006.
Under that transition method, since all the unvested options had been
accelerated prior to the adoption of statement 123(R), (see note 12),
compensation cost recognized in the year ended December 31, 2006, includes
compensation cost for all share-based payments granted subsequent to
January 1, 2006, based on the grant-date fair value estimated in accordance
with the provisions of Statement 123(R). Results for prior periods have not
been restated.
The Company recognizes compensation expenses for the value of its awards,
which have graded vesting based on the straight line method over the
requisite service period of each of the awards, net of estimated
forfeitures. Estimated forfeitures are based on actual historical
pre-vesting forfeitures.
As a result of adopting SFAS 123(R) on January 1, 2006, the Company's
income before income taxes and net income for the year ended December 31,
2006, is $ 27 lower than if it had continued to account for stock-based
compensation under APB 25.
Prior to January 1, 2006, the Company applied the intrinsic value method of
accounting for stock options as prescribed by APB 25, whereby compensation
expense is equal to the excess, if any, of the quoted market price of the
stock over the exercise price at the grant date of the award.
The Pro-forma table below illustrates the effect of the Company's stock
based compensation expense on net income and basic and diluted earnings per
share for 2005 and 2004, had the Company applied the fair value recognition
provisions of SFAS 123.
The fair value for options granted in 2004 and 2005 is amortized over their
vesting period and estimated at the date of grant using a Black-Scholes
options pricing model with the following weighted average assumptions:
2004 2005
------- -------
Dividend yield 0% 0%
Expected volatility 67.3% 80%
Risk-free interest 2.8% 3.9%
Expected life (in years) 3 5
F - 18
MAGIC SOFTWARE ENTERPRISES LTD.
AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
U.S. DOLLARS IN THOUSANDS
NOTE 2:- SIGNIFICANT ACCOUNTING POLICIES (CONT.)
The pro-forma table below reflects the Company's stock based compensation
expense, net income (loss) and basic and diluted earnings per share for the
years ended December 31 2004 and 2005, had the Company applied the fair
value recognition provisions of SFAS 123, as follows:
YEAR ENDED DECEMBER 31,
-------------------
2004 2005
------- -------
Net income (loss) - as reported $ 4,090 $(4,607)
Add: stock-based compensation expense recognized under APB 25 - -
Deduct: stock-based compensation expense determined under fair
value method for all awards (820) (2,599)
------- -------
Pro forma net income (loss): $ 3,270 $(7,206)
======= =======
Net earnings (loss) per share:
Basic and diluted earnings (loss) per share, as reported $ 0.13 $ (0.15)
======= =======
Pro forma basic and diluted earnings (loss) per share $ 0.10 $ (0.23)
======= =======
The Company estimates the fair value of stock options granted using the
Black-Scholes-Merton option-pricing model. The option-pricing model
requires a number of assumptions, of which the most significant are,
expected stock price volatility, and the expected option term. Expected
volatility was calculated based upon actual historical stock price
movements over the most recent periods ending on the grant date, equal to
the expected option term. The expected option term represents the period
that the Company's stock options are expected to be outstanding and was
determined based on historical experience of similar options, giving
consideration to the contractual terms of the stock options. The Company
has historically not paid dividends and has no foreseeable plans to issue
dividends. The risk-free interest rate is based on the yield from U.S.
Treasury zero-coupon bonds with an equivalent term.
The following weighted assumptions were used in the model for 2006:
2006
-------
Dividend yield 0%
Expected volatility 64%
Risk-free interest 4.7%
Expected life (in years) 5 years
For purpose of pro-forma disclosures stock based compensation is amortized
over the vesting period using the straight line method. Pro-forma
compensation expense under SFAS 123, among other computational differences,
does not consider potential pre-vesting forfeitures. Because of these
differences, the pro-forma stock based compensation expense presented above
for the prior years ended December 31 2004 and 2005 under SFAS 123 and the
stock based compensation expense recognized during the current year ended
December 31, 2006 under SFAS 123(R) are not directly comparable.
F - 19
MAGIC SOFTWARE ENTERPRISES LTD.
AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
U.S. DOLLARS IN THOUSANDS
NOTE 2:- SIGNIFICANT ACCOUNTING POLICIES (CONT.)
During the year ended December 31 2006, the Company recognized stock-based
compensation expense related to employee stock options in the amount of $
27, that were recorded as General and administrative expenses.
As of December 31, 2006, the total unrecognized estimated compensation
costs related to non-vested stock options granted prior to that date was $
7, which is expected to be recognized over a period of up to 2.25 years.
The Company recorded cash received from the exercise of stock options of $
281.
The Company accounts for stock option and warrant grants issued to
non-employee using the guidance of SFAS No. 123(R), "Accounting for
Stock-Based Compensation" and EITF No. 96-18: "Accounting for Equity
Instruments that are Issued to Other Than Employees for Acquiring, or in
Conjunction with Selling, Goods or Services," whereby the fair value of
such option and warrant grants is determined using the Black-Scholes
options pricing model at the earlier of the date at which the
non-employee's performance is completed or a performance commitment is
reached.
CONCENTRATIONS OF CREDIT RISK
Financial instruments which potentially subject the Company and its
subsidiaries to concentration of credit risk consist principally of cash
and cash equivalents, marketable securities and trade receivables.
The Company's cash and cash equivalents are invested primarily in deposits
with major banks worldwide, however, such cash and cash equivalents in the
United States may be in excess of insured limits and are not insured in
other jurisdictions. Management believes that the financial institutions
that hold the Company's investments are financially sound, and accordingly,
minimal credit risk exists with respect to these investments.
The Company's marketable securities include investments in debentures of
corporations, foreign banks, governments and commercial debentures.
Management believes that those corporations and governments are financially
sound and that the portfolios are well-diversified, and accordingly,
minimal credit risk exists with respect to these marketable securities.
Trade receivables of the Company and its subsidiaries are derived from
sales to customers located primarily in the U.S., Europe, Japan and Israel.
The Company performs ongoing credit evaluations of its customers and to
date has not experienced any material losses. An allowance for doubtful
accounts is determined with respect to those amounts that the Company has
determined to be doubtful of collection. Moreover, in some of the
subsidiaries there is an additional general allowance (based on a
percentage of accounts receivables or revenue) which depends on the nature
of the local market and local law requirements. The doubtful accounts
expenses for the years ended December 31, 2005 and 2006 were $ 1,212 and $
607, respectively.
F - 20
MAGIC SOFTWARE ENTERPRISES LTD.
AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
U.S. DOLLARS IN THOUSANDS
NOTE 2:- SIGNIFICANT ACCOUNTING POLICIES (CONT.)
DERIVATIVE INSTRUMENTS
Statement of Financial Accounting Standard No. 133, "Accounting for
Derivative Instruments and Hedging Activities" ("SFAS No. 133"), requires
companies to recognize all of their derivative instruments as either assets
or liabilities in the statement of financial position at fair value.
The Company entered into a forward transaction for the sale of $ 1,250 at a
future price of Euro 1.3225 per $ 1 as at December 1, 2006. During 2006,
the Company recorded a net income of $ 6 related to this forward
transaction.
Besides the aforementioned foreign exchange contract, the Company and its
subsidiaries have no off-balance-sheet concentration of credit risk such as
option contracts or other foreign hedging arrangements.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The following methods and assumptions were used by the Company and its
subsidiaries in estimating their fair value disclosures for financial
instruments:
The carrying amounts of cash and cash equivalents, trade receivables and
other accounts receivable, short-term bank credit, trade payables and other
accounts payable approximate their fair value due to the short-term
maturity of these instruments.
The fair values for marketable securities are presented based on quoted
market prices (see also Note 3).
The carrying amount of the Company's long-term borrowing approximates its
fair value. The fair value was estimated using discounted cash flow
analyses, based on the Company's incremental borrowing rates for similar
type of borrowing arrangements.
IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS:
a. In September 2006, the SEC staff issued Staff Accounting Bulletin No.
108, "Considering the Effects of Prior Year Misstatements when
Quantifying Misstatements in Current Year Financial Statements." ("SAB
108") SAB 108 was issued in order to eliminate the diversity of
practice surrounding how public companies quantify financial statement
misstatements.
Traditionally, there have been two widely-recognized methods for
quantifying the effects of financial statement misstatements: the
"roll-over" method and the "iron curtain" method. The roll-over method
focuses primarily on the impact of a misstatement on the income
statement--including the reversing effect of prior year
misstatements--but its use can lead to the accumulation of
misstatements in the balance sheet. The iron-curtain method, on the
other hand, focuses primarily on the effect of correcting the
period-end balance sheet with less emphasis on the reversing effects
of prior year errors on the income statement. Prior to our application
of the guidance in SAB 108, we used the roll-over method for
quantifying financial statement misstatements.
F - 21
MAGIC SOFTWARE ENTERPRISES LTD.
AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
U.S. DOLLARS IN THOUSANDS
In SAB 108, the SEC staff established an approach that requires
quantification of financial statement misstatements based on the
effects of the misstatements on each of the company's financial
statements and the related financial statement disclosures. This model
is commonly referred to as a "dual approach" because it requires
quantification of errors under both the iron curtain and the roll-over
methods.
SAB 108 permits existing public companies to initially apply its
provisions either by (i) restating prior financial statements as if
the "dual approach" had always been applied or (ii) recording the
cumulative effect of initially applying the "dual approach" as
adjustments to the carrying values of assets and liabilities as of
January 1, 2006 with an offsetting adjustment recorded to the opening
balance of retained earnings.
We elected to record the effects of applying SAB 108 using the
cumulative effect transition method.
The following table summarizes the effects (up to January 1, 2006) of
applying the guidance in SAB 108 (in thousands):
PERIOD IN WHICH THE MISSTATEMENT ORIGINATED
--------------------------------
YEAR ENDED DECEMBER 31,
-------- --------------------
CUMULATIVE ADJUSTMENT
PRIOR TO RECORDED AS OF
JANUARY 1, JANUARY 1,
2004 2004 2005 2006
-------- -------- -------- --------
U.S $ IN THOUSANDS
--------------------------------------------
Accrued depreciation of land lease rights (1) 112 14 14 140
-------- -------- -------- --------
Impact on net income (loss) 112 14 14
======== ======== ========
accumulated deficit (2) 140
========
(1) Prior to these financial statements the Company has not amortized
its lease rights in land related to its headquarters in Or
Yehuda, Israel. The accumulated amortization as at December 31,
2005 of $140 has been recorded against accumulated deficit.
(2) Represents the net increase in the accumulated deficit recorded
as of January 1, 2006 to record the initial application of SAB
108.
b. In September 2006, the FASB issued Statement of Financial Accounting
Standards (SFAS) 157, ``Fair Value Measurements.'' SFAS 157 defines
fair value, establishes a framework for measuring fair value in
generally accepted accounting principles (GAAP) and expands
disclosures about fair value measurements. SFAS 157 is effective for
fiscal years beginning after November 15, 2007 and interim periods
within those fiscal years. The Company is currently evaluating the
effect that the adoption of SFAS 157 will have on its financial
position and results of operations.
F - 22
MAGIC SOFTWARE ENTERPRISES LTD.
AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
U.S. DOLLARS IN THOUSANDS
NOTE 2:- SIGNIFICANT ACCOUNTING POLICIES (CONT.)
c. In February 2007, the FASB issued SFAS No. 159, "The Fair Value Option
for Financial Assets and Financial Liabilities" (SFAS No. 159). SFAS
No. 159 permits companies to choose to measure certain financial
instruments and certain other items at fair value. The standard
requires that unrealized gains and losses on items for which the fair
value option has been elected be reported in earnings. SFAS No. 159 is
effective for the Company beginning in the first quarter of fiscal
year 2008, although earlier adoption is permitted. The Company is
currently evaluating the impact that SFAS No. 159 will have on its
consolidated financial statements
RECLASSIFICATION:
Certain amounts from prior years have been reclassified to conform to
current period presentation.
NOTE 3:- MARKETABLE SECURITIES
The Company invests in marketable debt securities, which are classified as
available-for-sale. The following is a summary of marketable debt
securities:
DECEMBER 31,
---------------------------------------------------------------------------------------------------
2005 2006
---------------------------------------------- ----------------------------------------------
AMORTIZED UNREALIZED UNREALIZED MARKET AMORTIZED UNREALIZED UNREALIZED MARKET
COST LOSSES GAINS VALUE COST LOSSES GAINS VALUE
------ ------ ------ ------ ------ ------ ------ ------
AVAILABLE-FOR-SALE:
Governmental debentures $1,662 $ (81) $ - $1,581 $1,641 $ (18) $ 3 $1,626
Commercial debentures 2,473 (125) 2 2,350 2,842 (56) 7 2,793
Equity funds 486 (36) - 450 249 (19) - 230
------ ------ ------ ------ ------ ------ ------ ------
TOTAL available-for-sale
marketable securities $4,621 $ (242) $ 2 $4,381 $4,732 $ (93) $ 10 $4,649
====== ====== ====== ====== ====== ====== ====== ======
During 2005 and 2006, the Company recorded proceeds from sales of
marketable securities in the amount of $ 664 and $ 226, respectively and
related losses of $ 68 and $ 10, respectively, in financial income, net.
F - 23
MAGIC SOFTWARE ENTERPRISES LTD.
AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
U.S. DOLLARS IN THOUSANDS
NOTE 3:- MARKETABLE SECURITIES (CONT.)
The amortized costs of available-for-sale debt securities at December 31,
2006, by contractual maturities, are shown below:
UNREALIZED GAINS (LOSSES)
---------------------------------------------------
AMORTIZED ESTIMATED
COST GAINS LOSSES FAIR VALUE
------- ------- ------- -------
Due in one year or less $ 928 $ - $ (28) $ 900
Due between one year to five years 3,199 10 (59) 3,150
Due in more than five years 605 - (6) 599
------- ------- ------- -------
$ 4,732 $ 10 $ (93) $ 4,649
======= ======= ======= =======
The actual maturity dates may differ from the contractual maturities
because debtors may have the right to call or prepay obligations without
penalties.
The unrealized losses in the Company's investments in available-for-sale
marketable securities were caused by interest rate increases and
devaluation of the Euro. It is expected that the securities would not be
settled at a price less than the amortized cost of the Company's
investment. Based on the partial recovery in the securities' market value
after the balance sheet date and the ability and intent of the Company to
hold these investments until recovery, the debentures were not considered
to be other than temporarily impaired at December 31, 2006.
NOTE 4: - OTHER ACCOUNTS RECEIVABLE AND PREPAID EXPENSES
DECEMBER 31,
-------------------
2005 2006
------ ------
Short-term deposits and other accounts receivable $ 968 $ 890
Prepaid expenses 876 870
Government authorities 875 642
Employee loans 42 70
Related party receivables 71 -
------ ------
$2,832 $2,472
====== ======
F - 24
MAGIC SOFTWARE ENTERPRISES LTD.
AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
U.S. DOLLARS IN THOUSANDS
NOTE 5:- PROPERTY AND EQUIPMENT
DECEMBER 31,
---------------------
2005 2006
------- -------
Cost:
Buildings and leasehold improvements $ 6,910 $ 6,868
Computers and peripheral equipment 10,688 11,116
Office furniture and equipment 3,106 3,056
Motor vehicles 446 356
Software for internal use 2,083 2,236
------- -------
23,233 23,632
------- -------
Accumulated depreciation:
Buildings and leasehold improvements 2,282 2,682
Computers and peripheral equipment 10,208 10,608
Office furniture and equipment 2,334 2,317
Motor vehicles 228 215
Software for internal use 1,226 1,396
------- -------
16,278 17,218
------- -------
Depreciated cost $ 6,955 $ 6,414
======= =======
Depreciation expenses amounted to $ 1,430, $ 1,492 and $ 1,428 for the
years ended December 31, 2004, 2005 and 2006, respectively. As for charges,
see Note 15c.
NOTE 6:- OTHER INTANGIBLE ASSETS
a. Intangible assets:
DECEMBER 31,
---------------------
2005 2006
------- -------
Original amounts:
Capitalized software costs $31,508 $32,672
Acquired technology and other 1,828 2,196
------- -------
33,336 34,868
------- -------
Accumulated amortization:
Capitalized software costs 21,348 22,606
Acquired technology and other 789 1,399
------- -------
22,137 24,005
------- -------
Amortized cost $11,199 $10,863
======= =======
b. Amortization expenses amounted to $ 3,219, $ 3,647 and $ 4,036 for the
years ended December 31, 2004, 2005 and 2006, respectively.
F - 25
MAGIC SOFTWARE ENTERPRISES LTD.
AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
U.S. DOLLARS IN THOUSANDS
NOTE 6:- OTHER INTANGIBLE ASSETS (CONT.)
c. Estimated acquired technology and other intangible assets amortization
expenses for the years ended:
DECEMBER 31,
------------
2007 $ 119
2008 119
2009 and thereafter 13
NOTE 7:- GOODWILL
The changes in the carrying amount of goodwill for the two years ended
December 31, 2006 are as follows:
Balance as of January 1, 2005 $ 21,684
Foreign currency translation adjustments (922)
Acquisition of additional interest in subsidiaries (see Note 1) -
--------
Balance as of December 31, 2005 20,762
Foreign currency translation adjustments 990
Sale of Subsidiary's operations (see note 1d) (160)
Acquisition of additional interest in subsidiary (see Note 1b) 32
--------
Balance as of December 31, 2006 $ 21,624
========
F - 26
MAGIC SOFTWARE ENTERPRISES LTD.
AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
U.S. DOLLARS IN THOUSANDS
NOTE 8:- SHORT-TERM CREDIT AND CURRENT MATURITIES OF LONG-TERM LOANS
a. Classified by currency, linkage terms and interest rates, the credit
and loans are as follows:
INTEREST RATE DECEMBER 31,
------------------- -------------------
2005 2006 2005 2006
------ ------ ------ ------
%
-------------------
Short-term bank loans:
In, or linked to, U.S. dollars 6 - $2,318 $ -
In, or linked to, Euro 3.75-5.68 5.5 1,405 3,184
In other currencies 1.63 2.13-6.75 341 975
------ ------
4,064 4,159
------ ------
Short-term bank credit:
In other currencies - - - 111
------ ------
- 111
------ ------
Short-term credit (1):
In, or linked to, U.S. dollar 5.6-6.6 5.6-6.6 66 185
------ ------
66 185
------ ------
Current maturities of long-term loans 53 59
------ ------
$4,183 $4,514
====== ======
(1) Financing arrangement in regard to the ERP system.
b. Contractual restrictions and financial covenants:
For the purpose of obtaining credit and/or other bank services from
banking institutions, the Company is committed towards the banking
institutions as follow:
1. The Company is committed that the amount of cash and cash
equivalents and short term investment will not be at any time
below the amount of $ 6.5 million.
2. The Company is committed that at any time the rate of
shareholders' equity of the Company will not drop below 45% of
total balance sheet. In addition, shareholders equity will not
drop at any time below the amount of $ 36 million.
3. The Company is committed that the total of its financial
obligations (i.e., short and long terms from banking institutions
or commitments due to debentures) will not exceed $7 million and
10% of total balance sheet.
4. The Company is committed not to pledge under any form of general
floating charge and for any purpose any of the Companies' assets
and/or part of it in favor of any third party, without receiving
the banking institutions' advance and written consent.
F - 27
MAGIC SOFTWARE ENTERPRISES LTD.
AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
U.S. DOLLARS IN THOUSANDS
NOTE 8:- SHORT-TERM CREDIT AND CURRENT MATURITIES OF LONG-TERM LOANS (CONT.)
If the Company does not comply with all or part of the financial
ratios, or upon the occurrence of certain events as specified in the
agreement, the bank will be allowed to request the immediate repayment
of the aforementioned credit.
As of December 31, 2006, the Company was complied with some of the
financial covenants and received a waiver from the banks for those
financial covenants the Company did not comply with.
c. Credit line:
As of December 31, 2006, the Company used $ 2.2 million of its credit
facility with the First International Bank of Israel Ltd. and $ 3
million with the Poalim Bank Ltd. As of December 31, 2006, the Company
has an unutilized credit line of $ 0.3 million and $ 0.7 million in
the First International Bank of Israel Ltd. and the Poalim Bank Ltd.,
respectively.
NOTE 9:- ACCRUED EXPENSES AND OTHER ACCOUNTS PAYABLE
DECEMBER 31,
------- -------
2005 2006
------- -------
Employees and payroll accruals $ 4,019 $ 4,351
Accrued expenses 2,287 2,109
Deferred revenues 3,442 4,132
Government authorities and other 948 807
------- -------
$10,696 $11,399
======= =======
NOTE 10:- LONG-TERM LOANS
Long-term loans are composed as follows:
INTEREST RATE DECEMBER 31,
------------------ ------------------
2005 2006 2005 2006
----- ----- ----- -----
%
------------------
In U.S. dollar 5.6-6.6 5.6-6.6 $ 94 $ 95
In Yens 4.37 3.70 85 169
In euros 9.35 - 6
In other currencies 10.97 14 33 28
Less - current maturities (53) (59)
----- -----
$ 165 $ 233
===== =====
F - 28
MAGIC SOFTWARE ENTERPRISES LTD.
AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
U.S. DOLLARS IN THOUSANDS
NOTE 11:- TAXES ON INCOME
a. Tax benefits under the Law for the Encouragement of Capital
Investments, 1959 (the "Law"):
Seven expansion programs of the Company have been granted "Approved
Enterprise" status under the Law. For these expansion programs, the
Company has elected the alternative benefits track, waiving grants in
return for tax exemptions. Pursuant thereto, the income of the Company
derived from the following "Approved Enterprise" expansion programs is
tax-exempt for the periods stated below and will be eligible for
reduced tax rates thereafter (such reduced tax rates are dependent on
the level of foreign investments in the Company), as described below.
1. The period of the benefits for the first program and its four
extensions has already ended as of December 31, 2006.
2. The fifth program entitles the Company to a tax exemption for a
four-year period ended December 31, 2000, and is subject to a
reduced tax rate of 25% for an additional period of six years.
The period of benefits for this program has not yet commenced.
3. In each of January 1998, November 1998 and November 2002, the
Company received approvals for other expansions of its "Approved
Enterprise" status, which entitles the Company to a two-year tax
exemption period for each expansion and to a reduced tax rate of
25% for an additional period of five to eight years. The period
of benefits for those expansions has not yet commenced.
The tax benefit periods provided by the fifth, sixth, seventh and
eighth programs end at the earlier of 12 years from the
commencement of production, or 14 years from receipt of the
approval. As the Company currently has no taxable income, these
benefits have not yet commenced.
The benefits available to an enterprise are conditional upon the
fulfillment of conditions stipulated in the Law and its
regulations and the criteria set forth in the specific letters of
approval. In the event that the Company does not meet these
conditions, it would be required to refund the amount of tax
benefits, with the addition of interest and linkage adjustment to
the Israeli Consumer Price Index ("CPI"). In the opinion of the
Company's management, the Company has been in full compliance
with the conditions of the above programs through December 31,
2006, and with respect to the first eight programs, has received
written confirmation to this effect from the Investment Center.
If dividends were to be distributed out of tax-exempt profits
deriving from an "Approved Enterprise", the Company would be
liable for corporate tax at a rate of 25%. The Company does not
anticipate paying dividends in the foreseeable future.
F - 29
MAGIC SOFTWARE ENTERPRISES LTD.
AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
U.S. DOLLARS IN THOUSANDS
NOTE 11:- TAXES ON INCOME (CONT.)
Income from sources other than the "Approved Enterprise" during
the benefit period will be subject to tax at the regular
corporate tax rate (see Note 11d below).
On April 1, 2005, an amendment to the Investment Law came into
effect ("the Amendment") and has significantly changed the
provisions of the Investment Law. The Amendment limits the scope
of enterprises which may be approved by the Investment Center by
setting criteria for the approval of a facility as an Approved
Enterprise, such as provisions generally requiring that at least
25% of the Approved Enterprise's income will be derived from
export. Additionally, the Amendment enacted major changes in the
manner in which tax benefits are awarded under the Investment Law
so that companies no longer require Investment Center approval in
order to qualify for tax benefits.
As a result of the April 2005 amendment, tax-exempt income
generated under the provisions of the new law will subject us to
taxes upon distribution of the tax-exempt income to shareholders
or liquidation of the company, and we may be required to record a
deferred tax liability with respect to such tax-exempt income.
However, the Investment Law provides that terms and benefits
included in any certificate of approval already granted will
remain subject to the provisions of the law as they were on the
date of such approval. Therefore, the Company's existing Approved
Enterprise will generally not be subject to the provisions of the
Amendment. As a result of the amendment, tax-exempt income
generated under the provisions of the new law, will subject the
Company to taxes upon distribution or liquidation and the Company
may be required to record deferred tax liability with respect to
such tax-exempt income. As of December 31, 2006, the Company did
not generate income under the provision of the new law.
b. Tax benefits under the Law for the Encouragement of Industry (Taxes),
1969 ("the Encouragement Law"):
The Company is an "industrial company", as defined by the
Encouragement Law and, as such, is entitled to certain tax benefits,
mainly accelerated depreciation of machinery and equipment, as
prescribed by regulations published under the Inflationary Adjustments
Law, the right to deduct public issuance expenses and patents and
other intangible property rights for tax purposes, and the right to
file, under specified conditions, a consolidated tax return with
additional related Israeli "industrial companies".
c. Measurement of taxable income under the Income Tax (Inflationary
Adjustments) Law, 1985:
Results for tax purposes in Israel are measured and reflected in real
terms in accordance with the change in the CPI. As explained in Note
2b, the consolidated financial statements are presented in dollars.
The differences between the change in the Israeli CPI and in the
NIS/dollar exchange rate causes a difference between taxable income or
loss and the income or loss before taxes reflected in the consolidated
financial statements. In accordance with paragraph 9(f) of SFAS No.
109, "Accounting for Income Taxes" ("SFAS No. 109"), the
F - 30
MAGIC SOFTWARE ENTERPRISES LTD.
AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
U.S. DOLLARS IN THOUSANDS
NOTE 11:- TAXES ON INCOME (CONT.)
Company has not provided deferred income taxes on this difference
between the reporting currency and the tax bases of assets and
liabilities.
d. Tax rates:
Until December 31, 2003, the regular tax rate applicable to income of
companies (which are not entitled to benefits due to "approved
enterprise", as described above) was 36%. In June 2004, an amendment
to the Income Tax Ordinance (No. 140 and Temporary Provision), 2004
was passed by the "Knesset" (Israeli parliament) and on July 25, 2005,
another law was passed, the amendment to the Income Tax Ordinance (No.
147) 2005, according to which the corporate tax rate is to be
progressively reduced to the following tax rates: 2004 - 35%, 2005 -
34%, 2006 - 31%, 2007 - 29%, 2008 - 27%, 2009 - 26%, 2010 and
thereafter - 25%.
e. The Company received final tax assessments for the 1997 to 2002 tax
years. As of today, the Company filed an appeal with the court on one
issue left open. The issue is being deliberated in the Tel - Aviv
district court. The next hearing was set to September 2008. Since the
Company's management, based on the opinion of its legal advisors,
believes that the probability of an unfavorable outcome for the
Company on this matter is remote, no provision was recorded in the
financial statements in respect of this matter (all other items
determined by the tax authorities as increasing the Company's taxable
income, were offset against net operating loss carryforward). In the
remote case that the tax authorities position will be accepted, the
Company will lose most of its carryforward losses as of December 31,
2002, and as a result, will have to pay approximately $ 700.
f. Net operating losses carryforward:
Through December 31, 2005 and 2006, the Company and its Israeli
subsidiaries had operating loss carryforwards of approximately $
23,102 and $ 26,438, respectively, which can be carried forward and
offset against taxable income in the future for an indefinite period.
Through December 31, 2005 and 2006, Magic Software Enterprises Inc.,
CoreTech Consulting Inc. and AAOD had federal net operating tax loss
carryforward of approximately $ 14,497, and $ 11,747, respectively
which can be carried forward and offset against taxable income for
15-20 years and will expire from 2011 to 2026.
The Company's subsidiaries in Europe and Japan had estimated total
available tax loss carryforward of $ 10,847 and $ 1,119 respectively
in 2005 and $ 15,695 and $ 2,358, in 2006 respectively, in 2006 to
offset against future taxable income for 15-20 years and 5 years,
respectively.
F - 31
MAGIC SOFTWARE ENTERPRISES LTD.
AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
U.S. DOLLARS IN THOUSANDS
NOTE 11:- TAXES ON INCOME (CONT.)
g. Income (loss) before taxes on income:
YEAR ENDED DECEMBER 31,
-------------------------------------
2004 2005 2006
------- ------- -------
Domestic $ 3,069 $(6,379) $(2,414)
Foreign 1,145 2,476 (2,339)
------- ------- -------
$ 4,214 $(3,903) $(4,753)
======= ======= =======
h. Taxes on income:
Taxes on income consist of the following:
YEAR ENDED DECEMBER 31,
--------------------------
2004 2005 2006
---- ---- ----
Current:
Domestic $ 99 $ 63 $ 1
Foreign 182 428 324
---- ---- ----
Taxes on income $281 $491 $325
==== ==== ====
i. Deferred income taxes:
Deferred income 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,
------------------------
2005 2006
-------- --------
Net Operating Loss carryforward $ 15,938 $ 16,598
Allowances and reserves 812 829
-------- --------
16,750 17,427
Less: valuation allowance (16,750) (17,427)
-------- --------
Net deferred tax assets $ - $ -
======== ========
The Company and its subsidiaries provided a 100% valuation allowance
against the deferred tax assets in respect of its tax losses
carryforward and other temporary differences due to uncertainty
concerning its ability to realize these deferred tax assets in the
foreseeable future.
F - 32
MAGIC SOFTWARE ENTERPRISES LTD.
AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
U.S. DOLLARS IN THOUSANDS
NOTE 11:- TAXES ON INCOME (CONT.)
j. Reconciliation of the theoretical tax expense to the actual tax
expense:
Reconciliation between the theoretical tax expense, assuming all
income is taxed at the statutory rate applicable to the income of
companies in Israel and the actual tax expenses is as follows:
YEAR ENDED DECEMBER 31,
----------------------------------------
2004 2005 2006
------- ------- -------
Income (loss) before taxes on income,
as reported in the consolidated
statements of operations $ 4,214 $(3,903) $(4,753)
======= ======= =======
Statutory tax rate 35% 34% 31%
======= ======= =======
Theoretical tax expense (benefit) $ 1,475 $(1,327) $(1,473)
Utilization of tax losses carryforward for which
a valuation allowance was provided (1,544) (1,121) (292)
Deferred taxes assets for which valuation
allowance was provided - 2,647 1,930
Non-deductible expenses and other 113 120 63
Tax in respect of previous years 281 138 114
Tax adjustment in respect of inflation in Israel
and other (44) 34 (17)
------- ------- -------
Actual tax expense $ 281 $ 491 $ 325
======= ======= =======
F - 33
MAGIC SOFTWARE ENTERPRISES LTD.
AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
U.S. DOLLARS IN THOUSANDS (EXCEPT SHARE AND PER SHARE DATA)
NOTE 12:- SHAREHOLDERS' EQUITY
a. The Ordinary shares of the Company are traded on both the Nasdaq
National Market in the United States and the Tel-Aviv Stock Exchange
in Israel.
b. Treasury shares
The Company's Board of Directors resolved to authorize and empower the
Company to repurchase its shares from time to time on the open market.
Accordingly, through the end of 2006, the Company repurchased
1,275,368 of its shares for an aggregate amount of $6,772.
c. Stock Option Plan:
Under the Company's 1991 and 2000, Stock Option Plans ("the plans"),
as amended, options may be granted to employees, officers, directors
and consultants of the Company and its subsidiaries.
Pursuant to the plans, the Company reserved for issuance 6,750,000 and
4,600,000 Ordinary shares, respectively. As of December 31, 2006, an
aggregate of 2,258,753 Ordinary shares of the Company are still
available for future grant.
Each option granted under the plans is exercisable until the earlier
of 10 years from the date of the grant of the option or the expiration
dates of the respective option plans. The 1991 plan expired on July
31, 2001 and the 2000 plan will expire on November 5, 2010. The
exercise price of the options granted under the plans may not be less
than 65% of the market price of such shares on the grant date of the
award. The Company grants options to its employees at an exercise
price that is equal to the share market price at the grant date. The
options vest primarily over three years. Any option, which is
forfeited or canceled before expiration, becomes available for future
grants.
On December 29, 2005, the Company has adopted an amendment to 2000
Employee Stock Option Plan to provide for the issuance hereunder of an
additional 600,000 Ordinary shares.
As of December 29, 2005, all of the unvested out-of-the-money options,
which amounted to 611,517, with an average exercise price of $ 3.46
per share with related vesting period from January 1, 2006 through
March 2009 had been accelerated. The shares which may be purchased by
exercise of the accelerated options shall be subject to a holding
period according to which the employees shall only be entitled to sell
a monthly fraction of such numbers of shares (1/36 per month).
The Company's decision to accelerate the vesting of those options and
to grant fully vested options was based primarily upon the issuance of
SFAS No. 123R, which requires the Company to treat all unvested stock
options as compensation expense effective January 1, 2006. The Company
believes that the acceleration of vesting of those options will enable
the Company to avoid recognizing stock-based compensation expense
associated with these options in future periods. Additional purposes
of the fully vested grant and for the acceleration were to make the
options more attractive to the recipients, and to avoid discrimination
between groups of option holders, respectively.
F - 34
MAGIC SOFTWARE ENTERPRISES LTD.
AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
U.S. DOLLARS IN THOUSANDS (EXCEPT SHARE AND PER SHARE DATA)
NOTE 12:- SHAREHOLDERS' EQUITY (CONT.)
The acceleration had no impact on the Company's statement of
operations, however the impact of vesting accelerating on proforma
stock-based compensation required to be disclosed in the financial
statement footnotes under the provisions of SFAS No. 123, was to
increase such disclosed compensation cost by approximately $ 1,021.
A summary of the Company's stock option activity and related
information for the year ended December 31, 2006, is as follows:
WEIGHTED-
AVERAGE
WEIGHTED- REMAINING
AVERAGE CONTRACTUAL AGGREGATE
NUMBER OF EXERCISE TERM INTRINSIC
OPTIONS PRICE (IN YEARS) VALUE
------- ----- ---------- -----
Outstanding at January 1, 2006 3,061,216 $2.62
Granted 62,000 $1.69
Exercised (253,346) $1.11
Forfeited (517,238) $3.41
----------
Outstanding at December 31,2006 2,352,632 $2.52 6.67 $ 1,405
========== ===== ==== ==========
Vested and expected to vest 2,336,982 $3.20 6.65 $ 1,396
==========
Exercisable at December 31,2006 2,290,032 $5.24 6.60 $ 1,370
========== ===== ==== ==========
The weighted-average grant-date fair value of options granted during
the twelve months ended December 31, 2006 was $ 0.98. The aggregate
intrinsic value in the table above represents the total intrinsic
value (the difference between the fair market value of the Company
ordinary shares on December 31, 2006 and the exercise price,
multiplied by the number of in-the-money options) that would have been
received by the option holders had all option holders exercised their
options on December 31, 2006. This amount is changed based on the fair
market value of the Company's shares. Total intrinsic value of options
exercised for the twelve months ended December 31, 2006 was $ 161. As
of December 31, 2006, there was $ 7,052 of total unrecognized
compensation cost related to non-vested share-based compensation
arrangements granted under the Company's stock option plans. That cost
is expected to be recognized over a period of approximately 3 years.
Total grant-date fair value of vested options for the twelve months
ended December 31, 2006 $ 0 as a result of the acceleration in
December 29, 2005.
F - 35
MAGIC SOFTWARE ENTERPRISES LTD.
AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
U.S. DOLLARS IN THOUSANDS (EXCEPT SHARE AND PER SHARE DATA)
NOTE 12:- SHAREHOLDERS' EQUITY (CONT.)
The following table is a summary of the Company's stock option
activity during 2004, 2005 and 2006:
YEAR ENDED YEAR ENDED YEAR ENDED
DECEMBER 31, 2004 DECEMBER 31, 2005 DECEMBER 31, 2006
---------------------- ---------------------- ----------------------
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
NUMBER EXERCISE NUMBER EXERCISE NUMBER EXERCISE
OF OPTIONS PRICE OF OPTIONS PRICE OF OPTIONS PRICE
---------- ---------- ---------- ---------- ---------- ----------
Outstanding at the beginning
of the year 3,346,406 $ 2.26 2,513,237 $ 2.95 3,061,216 $ 2.62
Granted 406,601 $ 4.84 820,028 $ 1.70 62,000 $ 1.69
Exercised (973,551) $ 1.28 (80,604) $ 1.04 (153,346) $ 1.11
Forfeited (266,219) $ 3.6 (191,445) $ 3.54 (617,238) $ 3.41
---------- ---------- ----------
Outstanding at the end of
the year 2,513,237 $ 2.95 3,061,216 $ 2.62 2,352,632 $ 2.52
========== ========== ========== ========== ========== ==========
Exercisable at the end of
the year 1,423,970 $ 2.28 3,061,216 $ 2.62 2,290,632 $ 2.54
========== ========== ========== ========== ========== ==========
Weighted average fair value of
options granted during the year $ 2.2 $ 1.1 $ 1.7
========== ========== ==========
The options outstanding as of December 31, 2006, have been separated
into ranges of exercise price categories, as follows:
OPTIONS WEIGHTED OPTIONS WEIGHTED
OUTSTANDING AVERAGE WEIGHTED EXERCISABLE AVERAGE
AS OF REMAINING AVERAGE AS OF EXERCISE PRICE
DECEMBER 31, CONTRACTUAL LIFE EXERCISE DECEMBER 31, OF EXERCISABLE
EXERCISE PRICE 2006 (YEARS) PRICE 2006 OPTIONS
--------- --------- --------- --------- --------- ---------
0-1 214,355 6 $ 0.83 214,355 $ 0.83
1-2 1,253,793 7 $ 1.37 1,191,793 $ 1.36
2-3 15,600 3 $ 2.48 15,600 $ 2.48
3-4 466,333 7 $ 3.82 466,333 $ 3.82
4-5 230,840 7 $ 4.13 230,840 $ 4.13
5-6 135,500 7 $ 5.95 135,500 $ 5.95
6-7 711 3 $ 6.14 711 $ 6.14
10-11 26,500 3 $ 10.16 26,500 $ 10.16
18-19 9,000 3 $ 18.79 9,000 $ 18.79
--------- ---------
2,352,632 7 $ 2.52 2,290,632 $ 2.54
========= ========= ========= ========= =========
The fair value on grant date of options which became vested during the
year ended December 31, 2006 amounted to $ 0 as there was no vesting
of options during the year.
d. Warrants to service providers:
In April 2003, the Company issued 110,000 warrants as a consideration
of the purchase of its distribution activity in Switzerland.
F - 36
MAGIC SOFTWARE ENTERPRISES LTD.
AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
U.S. DOLLARS IN THOUSANDS (EXCEPT SHARE AND PER SHARE DATA)
NOTE 12:- SHAREHOLDERS' EQUITY (CONT.)
The warrants were exercisable into the Company's Ordinary shares for a
period of four years, at an exercise price of $ 0.6565 per share.
These warrants were exercised in April 2004.
During the year ended December 31, 2006, 50,000 warrants were granted
to Peter Gyenes, a consultant of the Company. Those warrants were not
exercised or forfeited.
The fair value of warrants which became vested during the year ended
December 31, 2006 amounted to $ 24 thousand.
The fair value for the warrants to service providers was estimated on
the date of grant using Black-Scholes option pricing model, with the
following weighted-average assumptions for the year ended December 31,
2006 weighted average volatility of 58.3% risk-free interest rates of
4.7% dividend yields of 0% and a weighted average life of the options
of 3 years.
e. Dividends:
The Company does not intend to pay cash dividends in the foreseeable
future.
f. Accumulated other comprehensive loss
YEAR ENDED DECEMBER 31,
----------------------
2005 2006
------- -------
Accumulated unrealized loss on
available-for-sale securities (240) (83)
Accumulated foreign currency
translation adjustments (1,274) (1,254)
------- -------
Total other comprehensive loss $(1,514) $(1,337)
======= =======
F - 37
MAGIC SOFTWARE ENTERPRISES LTD.
AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
U.S. DOLLARS IN THOUSANDS
NOTE 13:- GEOGRAPHIC INFORMATION
Summary information about geographic areas:
The Company manages its business on the basis of one reportable segment
(see Note 1 for a brief description of the Company's business). The
Company's business is divided into the following geographic areas: Israel,
Europe, the U.S.A., Japan and other regions. Total revenues are attributed
to geographic areas based on the location of the customers.
This data is presented in accordance with SFAS No. 131, "Disclosures about
Segments of an Enterprise and Related Information" ("SFAS No. 131").
The following table presents total revenues classified according to
geographical destination for the years ended December 31, 2004, 2005 and
2006:
YEAR ENDED DECEMBER 31,
-----------------------------------
2004 2005 2006
------- ------- -------
Israel $ 3,354 $ 4,013 $ 4,307
Europe 25,698 23,186 21,887
U.S.A. 21,090 20,435 23,236
Japan 11,450 10,107 10,223
Other 3,575 3,249 2,072
------- ------- -------
$65,167 $60,990 $61,725
======= ======= =======
The Company's long-lived assets are as follows:
DECEMBER 31,
-------------------
2005 2006
------ ------
Israel $5,239 $4,990
Europe 751 679
U.S.A. 561 467
Japan 280 313
Other 124 105
------ ------
$6,955 $6,554
====== ======
F - 38
MAGIC SOFTWARE ENTERPRISES LTD.
AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
U.S. DOLLARS IN THOUSANDS
NOTE 14:- SELECTED STATEMENTS OF OPERATIONS DATA
a. Research and development costs:
YEAR ENDED DECEMBER 31,
-------------------------------------
2004 2005 2006
------- ------- -------
Total costs $ 7,317 $ 7,642 $ 7,477
Less - capitalized software costs (3,472) (3,909) (3,535)
------- ------- -------
Research and development, net $ 3,845 $ 3,733 $ 3,942
======= ======= =======
b. Financial income (expenses), net:
Interest and bank charges $ (157) $ (117) $ (49)
Gain (loss) arising from foreign
currency transactions 1,069 (694) 459
------- ------- -------
Financial income (expenses),net $ 912 $ (811) $ 410
======= ======= =======
NOTE 15:- COMMITMENTS AND CONTINGENTIES
a. Lease commitments:
Certain of the facilities, motor vehicles 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, 2006, are as follows:
2007 2,670
2008 2,298
2009 1,751
2010 and thereafter 1,064
-----
7,783
=====
Rent expenses for the years ended December 31, 2004, 2005 and 2006,
were approximately $ 1,844, $ 1490 and $ 1,585, respectively.
b. Guarantees:
The Company has provided two of its clients with bank guarantees
totaling $ 41, which is linked to the NIS and valid through July 2007.
F - 39
MAGIC SOFTWARE ENTERPRISES LTD.
AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
U.S. DOLLARS IN THOUSANDS
NOTE 15:- COMMITMENTS AND CONTINGENCIES (CONT.)
c. Charges:
As collateral for a subsidiary's line of credit, a charge was recorded
on the subsidiary's trade receivables.
In respect of a lease agreement, the Company placed a lien on the
leased computer equipment.
d. Legal proceedings:
Lawsuits have been lodged against the Company in the ordinary course
of business in insignificant amounts. The Company intends to defend
itself vigorously against those lawsuits. Management cannot predict
the outcome of the lawsuits nor can they make any estimate of the
amount of damages; therefore, no provision has been made for the
lawsuits.
1. In June 2004, an Israeli Company has filed a lawsuit against the
Company in the Tel-Aviv District Court in the amount of NIS 8
million (approximately $ 1,840), with a possibility to increase
the lawsuit's amount to approximately NIS 17 million
(approximately $ 3,900), for recovery of damages caused to
plaintiff by the Company's failure to integrate a software
system. During the last three years, the parties tried to settle
the case with an external mediator. This attempt failed recently
and the parties returned to the court to proceed with the court
proceedings. Preliminary court proceedings have commenced, such
as disclosure of documents and questionnaires. As of December 31,
2006, the Company's management, based on its legal advisors
opinion, cannot predict the outcome of the lawsuit nor can they
make any estimate of the amount of damages; therefore, no
provision has been made for the lawsuit.
2. In February 2006, a client of the Company's subsidiary, CarPro
Systems Ltd., has filed in the Magistrate's court in Tel Aviv,
Israel, a lawsuit against the subsidiary, claiming an alleged
breach of the agreement between the parties, in the amount of $
257. The claim had been moved to arbitration, which will commence
in August 2007. The lawsuit is in its initial stages, therefore
the Company's management, based on its legal advisors opinion,
cannot predict the outcome of the lawsuit nor can they make any
estimate of the amount of damages; therefore, no provision has
been made for the lawsuit.
3. In May 2005, a client of the Company's subsidiary, Magic Software
Enterprises (Israel) Ltd., filed a lawsuit against the subsidiary
claiming an alleged breach of the agreement between the parties.
The plaintiff is seeking damages in the amount of $ 336. The
claim was moved to arbitration. The Company's management, due to
the preliminary stage of this litigation and based on its legal
advisors opinion, cannot predict the outcome of the lawsuit nor
can they make any estimate of the amount of damages; therefore,
no provision has been made for the lawsuit.
F - 40
MAGIC SOFTWARE ENTERPRISES LTD.
AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
U.S. DOLLARS IN THOUSANDS
NOTE 15:- COMMITMENTS AND CONTINGENCIES (CONT.)
4. In March 2006, a client of the Company's subsidiary, Magic
Software Enterprises France, filed a lawsuit against the
subsidiary in the commercial court in Paris claiming an alleged
breach of the agreement between the parties. The plaintiff is
seeking damages in the amount of (euro) 548,000 (approximately $
708). The Company's management, due to the preliminary stage of
this litigation and based on its legal advisors opinion, cannot
predict the outcome of the lawsuit nor can they make any estimate
of the amount of damages; therefore, no provision has been made
for the lawsuit.
e. Royalty commitments:
1. The Government of Israel, through the Fund for the Encouragement
of Marketing Activities ("the Fund"), awarded the Company grants
for participation in its foreign marketing expenses. The Company
received an aggregate amount of grants of $ 1,526 for the years
up to and including 2005. The Company is committed to pay
royalties at the rate of 3% of the increase in exports, up to the
amount of the grants. As of December 31, 2006, the remaining
contingent obligation of the Company amounted to $ 442.
2. The Company is committed to pay royalties to Enformia Software
Ltd. ("Enformia") in the amount of 40% regarding any sale of
products related to the IP purchased from Enformia and to comply
with all of the terms required by the Office of the Chief
Scientist ("OCS") in connection with its grants to Enformia.
As of December 31, 2005 and 2006, the aggregate contingent
liability to the OCS, in regard to Enformia products, amounted to
$ 52 and $ 42, respectively. Through December 31, 2005 and 2006,
the Company has paid and accrued royalties to Enformia, in regard
to sales of its product, in the amount of $ 114 and $ 84,
respectively.
3. The Company is committed to pay royalties of 1.75% of gross sales
of the Hermes application, including license fees and all
services fees for a period of 5 years until end of 2008. Through
December 31, 2006, the Company has paid and accrued royalties to
Hermes, in regard to sales of the product, in the amount of $9
(see Note 1e).
F - 41
MAGIC SOFTWARE ENTERPRISES LTD.
AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
U.S. DOLLARS IN THOUSANDS
NOTE 16:- NET EARNINGS (LOSS) PER SHARE
The following table sets forth the computation of basic and diluted net
earnings (loss) per share:
YEAR ENDED DECEMBER 31,
-------------------------------------------
2004 2005 2006
-------- ------------ --------
Numerator for basic and diluted earnings (loss)
per share - net income (loss)
available to shareholders $ 4,090 $ (4,607) $ (5,006)
======== ============ ========
Weighted average shares outstanding:
Denominator for basic net earnings (loss) per share 31,029 31,124 31,184
Effect of dilutive securities 1,397 *) - *) -
-------- ------------ --------
Denominator for diluted net earnings (loss) per share 32,426 31,124 31,184
======== ============ ========
Basic and diluted net earnings (loss) per share $ 0.13 $ (0.15) $ (0.16)
======== ============ ========
*) Anti dilutive.
NOTE 17:- RELATED PARTIES
In July 2005, the Company signed a memorandum of understanding with a
related party, to implement the ERP system in a total consideration of $
670. In 2005 and 2006, the Company performed only part of the project in
the amount of $ 235 and $ 263, respectively.
NOTE 18:- SUBSEQUENT EVENTS (NOT AUDITED)
In July 2006, the FASB issued FASB Interpretation No. 48 "Accounting for
Uncertainty in Income Taxes an Interpretation of FASB Statement No. 109"
("FIN 48"). FIN 48 clarifies the accounting for income taxes by prescribing
the minimum recognition threshold a tax position is required to meet before
being recognized in the financial statements. FIN 48 utilizes a two-step
approach for evaluating tax positions. Recognition (step one) occurs when
an enterprise concludes that a tax position, based solely on its technical
merits, is more-likely-than-not to be sustained upon examination.
Measurement (step two) is only addressed if step one has been satisfied
(i.e., the position is more-likely-than-not to be sustained). Under step
two, the tax benefit is measured as the largest amount of benefit,
determined on a cumulative probability basis that is more-likely-than-not
to be realized upon ultimate settlement.
F - 42
MAGIC SOFTWARE ENTERPRISES LTD.
AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
U.S. DOLLARS IN THOUSANDS
NOTE 18:- SUBSEQUENT EVENTS (NOT AUDITED) (CONT.)
FIN 48 applies to all tax positions related to income taxes subject to the
Financial Accounting Standard Board Statement No. 109, "Accounting for
income taxes" ("FAS 109"). This includes tax positions considered to be
"routine" as well as those with a high degree of uncertainty.
FIN 48 has expanded disclosure requirements, which include a tabular roll
forward of the beginning and ending aggregate unrecognized tax benefits as
well as specific detail related to tax uncertainties for which it is
reasonably possible the amount of unrecognized tax benefit will
significantly increase or decrease within twelve months. These disclosures
are required at each annual reporting period unless a significant change
occurs in an interim period.
FIN 48 is effective for fiscal years beginning after December 15, 2006. The
cumulative effect of applying FIN 48 will be reported as an adjustment to
the opening balance of retained earnings. The Company does not expect that
the adoption of FIN 48 will have a significant impact on the Company's
financial position and results of operations.
F - 43
MAGIC SOFTWARE ENTERPRISES LTD.
AND ITS SUBSIDIARIES
--------------------------------------------------------------------------------
DETAILS OF SUBSIDIARIES AND AFFILIATE
Details of the percentage of control of the share capital and voting rights of
subsidiaries and an affiliated company as of December 31, 2006:
PERCENTAGE OF PLACE OF
NAME OF COMPANY OWNERSHIP AND CONTROL INCORPORATION
--------------- --------------------- -------------
%
---------------------
Magic Software Japan K.K. 100 Japan
Magic Software Enterprises Inc. 100 U.S.A.
Magic Software Enterprises (UK) Ltd. 100 U.K.
Hermes Logistics Technologies Limited 100 U.K.
Magic Software Enterprises Spain Ltd. 100 Spain
Coretech Consulting Group Inc. 100 U.S.A
Coretech Consulting Group LLC 100 U.S.A
MSE Holdings, INC 100 U.S.A
Magic Software Enterprises (Israel) Ltd. 100 Israel
Magic Software Enterprises Italy S.r.l. 100 Italy
Magic Software Enterprises Netherlands B.V. 100 Netherlands
Magic Software Enterprises France 100 France
Magic Beheer B.V. 100 Netherlands
Magic Benelux B.V. 100 Netherlands
Magic Software Enterprises GMBH 100 Germany
Magic Software Enterprises India Pvt. Ltd. 100 India
Onyx Magyarorszag Szsoftverhaz*) 100 Hungary
CarPro Systems Ltd. *) 90.48 Israel
Advanced Answers On Demand Holding Corp. *) 100 U.S.A
Nextstep Infotech Prt. Ltd. 40 India
*) See Note 1.
F - 44
REPORT OF INDEPENDENT AUDITORS
TO THE SHAREHOLDERS OF
MAGIC SOFTWARE ENTERPRISES (UK) LIMITED
We have audited the accompanying balance sheets of MAGIC SOFTWARE
ENTERPRISES (UK) LIMITED (the "Company") as of December 31, 2005 and 2006, and
the related statements of operations, changes in shareholders' equity for each
of the three years in the period ended December 31, 2006. These financial
statements are the responsibility of Company's management. Our responsibility is
to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public
Company Accounting Oversight Board (United States). Those standards require that
we plan and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. We were not engaged to
perform an audit of the Company's internal control over financial reporting. Our
audits included consideration of internal control over financial reporting as a
basis for designing audit procedures that are appropriate in the circumstances,
but not for the purpose of expressing an opinion on the effectiveness of the
Company's internal control over financial reporting. Accordingly, we express no
such opinion. An audit also includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements, assessing
the accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits and the reports of other auditors provide a reasonable basis for our
opinion.
In our opinion, based on our audits, the financial statements referred to
above present fairly, in all material respects, the financial position of the
Company and at December 31, 2005 and 2006, and the related results of their
operations for each of the three years in, the period ended December 31, 2006,
in conformity with U.S. generally accepted accounting principles.
/s/ LEVY COHEN & CO.
--------------------------
LEVY COHEN & CO.
Registered Auditors
8th February 2007
F - 45
REPORT OF INDEPENDENT AUDITORS
TO THE SHAREHOLDERS OF
HERMES LOGISTICS TECHNOLOGIES LIMITED
We have audited the accompanying balance sheets of HERMES LOGISTICS
TECHNOLOGIES LIMITED (the "Company") as of December 31, 2005 and 2006, and the
related statements of operations, changes in shareholders' equity for each of
the three years in the period ended December 31, 2006. These financial
statements are the responsibility of Company's management. Our responsibility is
to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public
Company Accounting Oversight Board (United States). Those standards require that
we plan and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. We were not engaged to
perform an audit of the Company's internal control over financial reporting. Our
audits included consideration of internal control over financial reporting as a
basis for designing audit procedures that are appropriate in the circumstances,
but not for the purpose of expressing an opinion on the effectiveness of the
Company's internal control over financial reporting. Accordingly, we express no
such opinion. An audit also includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements, assessing
the accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits and the reports of other auditors provide a reasonable basis for our
opinion.
In our opinion, based on our audits, the financial statements referred to
above present fairly, in all material respects, the financial position of the
Company and at December 31, 2005 and 2006, and the related results of their
operations for each of the three years in the period ended December 31, 2006, in
conformity with U.S. generally accepted accounting principles.
/s/ LEVY COHEN & CO.
-----------------------------
LEVY COHEN & CO.
Registered Auditors
8th February 2007
F - 46
GRANT THORNTON ASG [GRANT THORNTON LOGO]
Certified Public Accountants
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Shareholders of
Magic Software Japan K. K.
We have audited the accompanying balance sheet of Magic Software Japan K. K.
(the "Company") as of December 31, 2004, and the related statements of income
and accumulated deficit, and cash flows for the year then ended. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion based on our audit.
We conducted our audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our
audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Magic Software Japan K. K. as
of December 31, 2004, and the results of its operations and its cash flows for
the year then ended in conformity with generally accepted accounting principles
in the United States of America.
/s/ Grant Thornton ASG
Tokyo, Japan
January 21, 2005
F - 47
[K.D.A. LOGO]
KDA AUDIT CORPORATION
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
TO THE BOARD OF DIRECTORS AND SHAREHOLDERS OF
MAGIC SOFTWARE JAPAN K.K.
We have audited the accompanying balance sheet of Magic Software Japan
K.K. (the "Company") as of December 31, 2006, and the related statements of
income and cash flows for the year then ended. These financial statements are
the responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements based on our audit.
We conducted our audit in accordance with the standards of the Public
Company Accounting Oversight Board (United States). Those standards require that
we plan and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our
audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of the Company as of December
31, 2006, and the results of its operations and its cash flows for the year then
ended in conformity with accounting principles generally accepted in the United
States of America.
Tokyo, Japan
January 26, 2007 /s/ KDA Audit Corporation
---------------------------------------
KDA Audit Corporation
(A Member of Baker Tilly International)
F - 48
MOCK & PARTNERS INTERNATIONAL
REGISTERACCOUNTANTS
AUDITORS' REPORT
INTRODUCTION
We have audited the financial statements of Magic Beheer B.V., for the period
until December 31st, 2006. These financial statements are the responsibility of
the company's management. Our responsibility is to express an opinion on these
financial statements based on our audit.
SCOPE
We conducted our audit in accordance with the standards of the Public Company
Accounting Oversight Board generally accepted in the United States of America.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall presentation of the financial
statements. We believe that our audit provides a reasonable basis for our
opinion.
OPINION
In our opinion, the financial statements give a true and fair view of the
financial position of the company as at December 31st, 2006 and of the result
for the year then ended in accordance with accounting principles generally
accepted in the United States of America.
Amsterdam, February 27th 2007
Mock & Partners International
/s/ H.J.S. Mock
Drs. H.J.S. Mock RA
Rapenburgerstreat 109, 1011 VL Amsterdam. Tel: 020 6381881, Fax: 020 6272624
F - 49
REPORT OF INDEPENDENT AUDITORS
TO THE SHAREHOLDERS OF MAGIC SOFTWARE ENTERPRISES LTD.
MAGIC (ONYX) MAGYARORSZAG SZOFTVERHAZ KFT.
We have audited the accompanying consolidated balance sheets of Magic
(Onyx) Magyarorszag Szoftverhaz Kft. (the "Company") as of December 31, 2005 and
2006, and the related consolidated statements of operations, changes in
shareholders' equity and cash flows for each of the three years in the period
ended December 31, 2006. These financial statements are the responsibility of
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public
Company Accounting Oversight Board (United States). Those standards require that
we plan and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. We were not engaged to
perform an audit of the Company's internal control over financial reporting. Our
audits included consideration of internal control over financial reporting as a
basis for designing audit procedures that are appropriate in the circumstances,
but not for the purpose of expressing an opinion on the effectiveness of the
Company's internal control over financial reporting. Accordingly, we express no
such opinion. An audit also includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements, assessing
the accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits and the reports of other auditors provide a reasonable basis for our
opinion.
In our opinion, based on our audits, the financial statements referred to
above present fairly, in all material respects, the consolidated financial
position of the Company and its subsidiaries at December 31, 2005 and 2006,
and the related consolidated results of their operations and their cash flows
for each of the three years in the period ended December 31, 2006, in conformity
with U.S. generally accepted accounting principles.
Budapest, 25 February, 2007
/s/ Maria Negyessy
Maria Negyessy
Reg. Auditors
F - 50
[STUDIO NASSINI ASSOCIATI LOGO]
DOTTORI COMMERCIALISTI
Damiano Nassini, Giovanni Nulli, Federico Pozzi, Alessandro Masetti Zannini
Brescia, 21st February 2007
REPORT OF INDEPENDENT AUDITORS
TO THE SHAREHOLDERS OF
MAGIC SOFTWARE ENTERPRISES ITALY SRL
We have audited the accompanying consolidated balance sheets of Magic
Software Enterprises Italy Srl (the "Company") as of December 31, 2005 and 2006,
and the related consolidated statements of operations, changes in shareholders'
equity and cash flows for each of the three years in the period ended December
31, 2006. These financial statements are the responsibility of Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with the standards of the Public
Company Accounting Oversight Board (United States). Those standards require that
we plan and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. We were not engaged to
perform an audit of the Company's internal control over financial reporting.
Our audits included consideration of internal control over financial reporting
as a basis for designing audit procedures that are appropriate in the
circumstances, but not for the purpose of expressing an opinion on the
effectiveness of the Company's internal control over financial reporting.
Accordingly, we express no such opinion. An audit also includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant estimates
made by management, and evaluating the overall financial statement presentation.
We believe that our audits and the reports of other auditors provide a
reasonable basis for our opinion.
In our opinion, based on our audits, the financial statements referred to
above present fairly, in all material respects, the consolidated financial
position of the Company and its subsidiaries at December 31, 2005 and 2006, and
the related consolidated results of their operations and their cash flows for
each of the three years in the period ended December 31, 2006, in conformity
with U.S. generally accepted accounting principles.
Yours Truly
/s/ Federico Pozzi
Federico Pozzi
25135 BRESCIA, ITALY VIA BROZZONI, 9 TEL. +39.30.223262 R.A. FAX +39.30.224054
E-MAIL: INFO@STUDIONASSINI.IT WEB SITE: HTTP://WWW.STUDIONASSINI.IT
[TIAG LOGO]
ARGENTINA, AUSTRALIA, AUSTRIA, BELGIUM, CANADA (BRITHIS COLUMBIA, ONTARIO,
QUEBEC), CHINA, CYPRUS, EGYPT, ENGLAND, FRANCE, GERMANY, GUATEMALA, HONG KONG,
INDIA, IRELAND, JAPAN, KENYA, LEBANON, LUXENBOURG, MALAYSIA, MALTA, MAURITIUS,
MEXICO, NETHERLANDS, PAKISTAN, POLAND, SCOTLAND, SINGAPORE, SPAIN, SWITZERLAND,
TURKEY, USA (ALABAMA, ARIZONA, CALIFORNIA, ILLINOIS, NEW JERSEY, NEW YORK, NORTH
CAROLINA, OKLAHOMA, PENNSYLVANIA, TEXAS, UTAH, WASHINGTON,)
CF.EP.1VA 01957960170
12
S I G N A T U R E S
The registrant hereby certifies that it meets all of the requirements for
filing on Form 20-F/A and that it has duly caused and authorized the undersigned
to sign this annual report on its behalf.
MAGIC SOFTWARE ENTERPRISES LTD.
By: /s/ David Assia
-------------------
Name: David Assia
Title: Chairman of the Board of Directors
Dated: September 24, 2007
6
