zk1008261.htm
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
 
FORM 20-F/A

o
REGISTRATION STATEMENT PURSUANT TO SECTION 12(b) OR 12(g) OF THE SECURITIES EXCHANGE ACT OF 1934

OR

x
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2009

OR

o
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from __________ to ___________

OR
o
SHELL COMPANY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
Date of event requiring this shell company report ______________
 
Commission File Number: 0-29442

FORMULA SYSTEMS (1985) LTD.
(Exact Name of Registrant as Specified in Its Charter)

Israel
(Jurisdiction of Incorporation or Organization)

5 Haplada Street, Or Yehuda 60218, Israel
(Address of Principal Executive Offices)

Guy Bernstein, CEO, 5 Haplada Street, Or Yehuda 60218, Israel
Tel: 972 3 5389487, Fax: 972 3 5389645
(Name, Telephone, E-mail and/or Facsimile Number and Address of Company Contact Person)
 

Securities registered or to be registered pursuant to Section 12(b) of the Act:
 
Title of Each Class    
Ordinary Shares, NIS 1 par value   
American Depositary Shares      
Name of Each Exchange On Which Registered
Tel Aviv Stock Exchange
NASDAQ Global Market
                                                                                                                                                                  
Securities registered or to be registered pursuant to Section 12(g) of the Act:
 
None
 
 
 
 

Securities for which there is a reporting obligation pursuant to Section 15(d) of the Act:
 
None

As of December 31, 2009, the registrant had 13,200,000 outstanding ordinary shares, NIS 1 par value, of which 719,546 were represented by American Depositary Shares as of such date.

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.

Yes o   No x

If this report is an annual or transition report, indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934.

Yes o   No x

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes x   No o

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    
Yes o   No o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer" in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer o                                                      Accelerated filer o                                                               Non-accelerated filer x

Indicate by check mark which basis of accounting the registrant has used to prepare the financial statements included in this filing:
 
U.S. GAAP x
 
International Financial Reporting Standards as issued by the International Accounting Standards Board o
 
Other o

If “Other” has been checked in response to the previous question, indicate by check mark which financial statement item the registrant has elected to follow.

Item 17 o   Item 18 o

If this is an annual report, indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes o   No x

 
 
 
 
Explanatory Note

This amendment on Form 20-F/A, referred to as the Amended 20-F, is being filed by Formula Systems (1985) Ltd., referred to as Formula, to amend the annual report on Form 20-F for the fiscal year ended December 31, 2009, filed on April 29, 2010, referred to as the Original 20-F.  This Amended 20-F is being filed solely for the purpose of (i) including the signed report of our independent auditors, which was included in the Original 20-F but was inadvertently unsigned; and (ii) including the reports of auditors of certain of our subsidiaries, which were inadvertently omitted from the Original 20-F.  This Amended 20-F has not been updated to reflect events occurring subsequent to the filing of the Original 20-F.  The filing of this Amended 20-F shall not be deemed an admission that the Original 20-F, when filed, included any untrue statement of a material fact or omitted to state a material fact necessary to make a statement not misleading.

ITEM 18. FINANCIAL STATEMENTS

Our consolidated financial statements and the report of our independent registered public accounting firm in connection therewith are filed as part of this Amended 20-F, as noted on the pages below:
 
Report of Independent Registered Public Accounting Firm
  
F-2
Consolidated Balance Sheets at December 31, 2009 and 2008
  
F-3-F-4
Consolidated Statements of Operations for theYears Ended December 31, 2009, 2008 and 2007
  
 F-5
Consolidated Statements of Changes in  Equity for the Years Ended December 31, 2009, 2008 and 2007
  
F-6-F-7
Consolidated Statements of Cash Flows for the Years Ended December 31, 2009, 2008 and 2007
  
F-8-F-12
Notes to Consolidated Financial Statements
  
F-13-F-65
 
ITEM 19. EXHIBITS

Exhibit No.
      
 
1.1
 
  
 
Memorandum of Association (1)
  
1.2
  
Articles of Association as amended on December 28, 2005 (2)
 
  
4.1
 
  
Form of Letter of Indemnification, dated December 28, 2005 (2)
  
4.2
  
English translation of Formula Systems (1985) Ltd. Employees and Office Holders Share Option Plan (2008)(3)
 
  
8
  
List of Subsidiaries +
 
  
12.1
  
Certification of the Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002*
 
 
 
 
 
 
 
Exhibit No.
    
 
12.2
  
 
Certification of the Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002*
 
13.1
  
Certification of the Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002*
 
  
13.2
  
Certification of the Chief Financial Officer pursuant to Section. 906 of the Sarbanes-Oxley Act of 2002*
 
  
15.1
  
Consent of Ziv Haft registered certified public accountants (Isr.) BDO member firm +
 
  
15.2
  
Consent of Levy Cohen and Co. +
 
  
15.3
  
Consent of Levy Cohen and Co. +
 
  
15.4
  
Consent of Kost, Forer, Gabbay & Kaiserer +
 
  
15.5
  
Consent of Kost, Forer, Gabbay & Kaiserer  +
 
  
15.6
  
Consent of Verstegen accountants en adviseurs +
 
  
15.7
  
Consent of KDA Audit Corporation  +
 
  
15.8
  
Consent of Maria Negyessy  +
 
  
* Filed herewith.
 
(1)  Incorporated by reference to the Registration Statement on Form F-1 (File No. 333-8858).
(2)  Incorporated by reference to the Annual Report on Form 20-F filed with the Securities and Exchange Commission on June 29, 2006.
(3)  Incorporated by reference to the Annual Report on Form 20-F filed with the Securities and Exchange Commission on April 27, 2009.

+ Previously filed.

 
 
 
 
FORMULA SYSTEMS (1985) LTD.
(An Israeli corporation)
2009 Annual Report
 
 
 
 
 
FORMULA SYSTEMS (1985) LTD.
 (An Israeli Corporation)

2009 CONSOLIDATED FINANCIAL STATEMENTS
 
TABLE OF CONTENTS

 
Page
F-2
CONSOLIDATED FINANCIAL STATEMENTS:
  
F-3-F-4
 F-5
F-6-F-7
F-8-F-12
F-13-F-65
 
The amounts are stated in U.S. dollars ($).

 
F - 1
 
 
FORMULA SYSTEMS (1985) LTD.
(An Israeli Corporation)
 
Report of Independent Registered Public Accounting Firm
To the Shareholders and Board of Directors of
FORMULA SYSTEMS (1985) LTD.
 
We have audited the accompanying consolidated balance sheets of Formula Systems (1985) Ltd. and its subsidiaries (the “Company”) as of December 31, 2009 and 2008 and the related consolidated statements of operations, changes in equity and cash flows for each of the three years in the period ended December 31, 2009. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.
 
We did not audit the financial statements of certain subsidiaries, whose consolidated assets constitute approximately 24% and 21% of total consolidated assets as of December 31, 2009 and 2008, respectively, and whose consolidated revenues constitute approximately 19%, 18% and 20% of total consolidated revenues for the years ended December 31, 2009, 2008 and 2007, respectively.  The financial statements of those subsidiaries were audited by other auditors, whose reports have been furnished to us, and our opinion, insofar as it relates to the amounts included in respect of those subsidiaries is based solely on the reports of the other auditors.
 
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. The Company is not required to have, nor were we engaged to perform, an audit of its 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, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
 
As discussed in Note 1, effective January 1, 2009, the Company adopted new guidance on accounting for business combinations, consolidation, transactions with non controlling interests. During 2009 the company also adopted new guidance regarding impairment of securities.
 
In our opinion, based on our audits and the reports of other auditors , the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of the Company and its subsidiaries as of December 31, 2009 and 2008, and the related consolidated results of their operations and cash flows for each of the three years in the period ended December 31, 2009, in conformity with accounting principles generally accepted in the United States of America.

Tel Aviv, Israel
April 29, 2010
 
/s/ Ziv Haft
 Ziv Haft
Certified Public Accountants (Isr.)
BDO Member Firm
 
 
F - 2
 
 
FORMULA SYSTEMS (1985) LTD.
(An Israeli Corporation)
CONSOLIDATED BALANCE SHEETS

   
December 31,
  
   
2009
    
2008
  
   
(U.S. $ in thousands)
  
ASSETS
            
CURRENT ASSETS:
            
Cash and cash equivalents
     100,205       107,847  
Short-term investments (Note 3)
     58,009       45,717  
Trade receivables (net of allowances for doubtful debts of $4,750
and $4,309 as of December 31, 2009 and 2008, respectively)
     130,236       136,353  
Other current assets (Note 16A)
     22,449       15,425  
Inventories
     2,439       2,772  
Total assets attributed to discontinued operations
     27       27,614  
      313,365       335,728  
                 
LONG-TERM INVESTMENTS:
                
Long term investments (Note 5)
     10,323       16,285  
Investments in affiliates (Note 6)
     3,293       3,694  
      13,616       19,979  
                 
SEVERANCE PAY FUND
     44,131       38,105  
                 
PROPERTY, PLANTS AND EQUIPMENT, NET (Note 7)
     9,989       15,009  
                 
GOODWILL (Note 1K and Note 8)
     145,321       141,919  
                 
OTHER ASSETS, NET (Note 9)
     40,017       45,882  
                 
      566,439       596,622  
 
 
F - 3
 
 
FORMULA SYSTEMS (1985) LTD.
(An Israeli Corporation)

   
December 31,
  
   
2009
    
2008
  
   
(U.S. $ in thousands)
  
LIABILITIES AND SHAREHOLDERS’ EQUITY
            
CURRENT LIABILITIES:
            
Liabilities to banks (Note 16B)
     10,055       8,481  
Trade payables
     43,776       39,475  
Other accounts payable (Note 16C)
     90,924       75,252  
Dividend payable
     -       29,964  
Liability in respect of business combinations
     210       6,954  
Debentures (Note 11)
     14,639       5,157  
Total liabilities attributed to discontinued operations
     314       24,903  
      159,918       190,186  
LONG-TERM LIABILITIES:
                
Debentures (Note 11)
     43,918       56,004  
Deferred taxes
     2,207       4,502  
Customer advances
     1,116       1,093  
Liabilities to banks and others (Note 10)
     8,556       16,640  
Liability in respect of business combinations
     1,517       1,010  
Accrued severance pay
     53,893       49,817  
      111,207       129,066  
                 
COMMITMENTS AND CONTINGENCIES (Note 13)
                
                 
EQUITY (Note 14):
                
Formula shareholders' equity:
                
Share capital - ordinary shares of NIS 1 par value
   (authorized - December 31, 2009 and 2008 - 25,000,000 shares;
   issued: December 31, 2009 - 13,224,780 and 2008 - 13,224,780 shares)
     3,736       3,736  
Additional paid-in capital
     131,631       132,588  
Retained earnings
     60,048       40,972  
Other accumulated comprehensive loss
     (7,115 )     (7,100 )
Cost of 24,780 treasury shares
     (259 )     (259 )
      Total Formula shareholders' equity
     188,041       169,937  
Non-controlling interests
     107,273       107,433  
TOTAL EQUITY
     295,314       277,370  
                 
      566,439       596,622  
 
The accompanying notes form an integral part of the financial statements.
 
 
F - 4
 
 
FORMULA SYSTEMS (1985) LTD.
(An Israeli Corporation)
CONSOLIDATED STATEMENTS OF OPERATIONS
   
Year Ended December 31,
  
   
2009
    
2008
    
2007
  
   
(U.S. $ in thousands,
except per share amounts)
  
                   
Revenues (Note 16H)
                  
Proprietary software products
     101,045       105,453       100,823  
Software services
     368,345       397,790       313,901  
Total revenues
     469,390       503,243       414,724  
Cost of revenues
                        
                         
Proprietary software products
     52,719       53,483       52,923  
Software services
     299,564       320,292       245,487  
Total cost of revenues
     352,283       373,775       298,410  
  Gross profit
     117,107       129,468       116,314  
Research and development costs, net
     4,430       6,564       6,547  
Selling, general and administrative expenses
     77,322       90,451       84,503  
Other income, net
     (1,972 )     -       -  
  Operating income
     37,327       32,453       25,264  
Financial expenses, net (Note 16D)
     (231 )     (5,908 )     (3,619 )
Gain (losses) on realization of investments, net
     -       (337 )     2,039  
Other expenses (Note 16E)
     (304 )     (580 )     (750 )
  Income before taxes on income
     36,792       25,628       22,934  
Taxes on income (Note 15)
     (8,305 )     (3,279 )     (1,891 )
      28,487       22,349       21,043  
Share in losses of affiliated companies, net
     (335 )     (216 )     (653 )
  Income from continuing operation
     28,152       22,133       20,390  
Net income from discontinued operations (Note 17D)
     4,878       555       32,333  
  Net income
     33,030       22,688       52,723  
Net income Attributable to non-controlling interests
     13,954       10,819       15,464  
  Net income attributable to Formula's shareholders
     19,076       11,869       37,259  
                         
Amount attributable to Formula's shareholders
                        
  Income from continuing operation
     14,198       11,314       10,723  
  Income from discontinued operation
     4,878       555       26,536  
      19,076       11,869       37,259  
Earnings per share generated from continuing operation:
                        
Basic
     1.08       0.84       0.82  
Diluted
     1.04       0.84       0.80  
                         
Earnings per share generated from discontinued operations:
                        
Basic
     0.37       0.04       2.00  
Diluted
     0.36       0.04       1.99  
                         
 Total earnings per share:
                        
      Basic
     1.45       0.88       2.82  
     Diluted
     1.40       0.88       2.79  
                         
Weighted average number of shares outstanding in thousands  (Note 16I):
                        
Basic
     13,200       13,200       13,200  
Diluted
     13,564       13,200       13,200  
 
The accompanying notes form an integral part of the financial statements.
 
 
F - 5
 
 
FORMULA SYSTEMS (1985) LTD.
(An Israeli Corporation)
CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY

   
Share Capital
                                
   
Number of Shares
    
Amount
    
Additional paid-in Capital
    
Retained Earnings
    
Accumulated other comprehensive loss
    
Cost of Treasury Shares
    
Total Formula shareholders'' Equity
    
Non- controlling interests (*)
  
                                                 
Balance as of January 1, 2007
     13,200,000       3,736       132,545       32,164       (14,896 )     (259 )     153,290       79,649  
Changes during 2007:
                                                                
Net Income
     -       -       -       37,259       -       -       37,259       15,464  
Unrealized loss from available - for-sale securities, net
     -       -       -       -       (221 )     -       (221 )     88  
Foreign Currency translation adjustments
     -       -       -       -       8,254       -       8,254       6,309  
Total comprehensive income
                                                     45,292          
Implementation of ASC 815 (formerly FSP EITF 00-19-2)
     -       -       -       236       -       -       236       -  
Cumulative impact of change in accounting for uncertainties in income taxes ASC 740 (formerly FIN 48)
     -       -       -       (430 )     -       -       (430 )     (400 )
Stock Based Compensation expenses
     -       -       -       -       -       -       -       674  
Changes in non-controlling interests due to holding changes
     -       -       -       -       -       -       -       8,976  
Dividend paid to non-controlling interests in subsidiaries
     -       -       -       -       -       -       -       (6,502 )
Exercise of employees stock options
     -       -       -       -       -       -       -       3,657  
Balance as of December 31, 2007
     13,200,000       3,736       132,545       69,229       (6,863 )     (259 )     198,388       107,915  
Changes during 2008:
                                                                
Net Income
     -       -       -       11,869       -       -       11,869       10,819  
Unrealized loss from available - for-sale securities, net
     -       -       -       -       (1,123 )     -       (1,123 )     (20 )
Adjustment for other than temporary impairment on marketable securities
     -       -       -       -       27       -       27       20  
Foreign Currency translation adjustments
     -       -       -       -       859       -       859       1,164  
Total comprehensive income
     -       -       -       -       -       -       11,632          
Gain from issuance of shares to third party in a development stage entity
     -       -       43       -       -       -       43       43  
Stock Based Compensation expenses
     -       -       -       -       -       -       -       1,161  
Changes in non-controlling interests due to holding changes
     -       -       -       -       -       -       -       (9,483 )
Exercise of employees stock options
     -       -       -       -       -       -       -       1,426  
Dividend to Formulas'' shareholders and to non-controlling interests in subsidiaries
     -       -       -       (40,126 )     -       -       (40,126 )     (5,612 )
Balance as of December 31, 2008
     13,200,000       3,736       132,588       40,972       (7,100 )     (259 )     169,937       107,433  

The accompanying notes form an integral part of these financial statements.
 
 
F - 6
 
 
FORMULA SYSTEMS (1985) LTD.
(An Israeli Corporation)
CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY (Cont.)

   
Share Capital
                                      
   
Number of Shares
    
Amount
    
Additional paid-in Capital
    
Retained Earnings
    
Accumulated other comprehensive loss
    
Cost of Treasury Shares
    
Total Formula shareholders'' Equity
    
Non- controlling interests (*)
  
Changes during 2009:
                                                
Net Income
     -       -       -       19,076       -       -       19,076       13,954  
Unrealized gain from derivative instruments, net
     -       -       -       -       3       -       3       2  
Unrealized loss gain from available - for-sale securities, net
     -       -       -       -       (66 )     -       (66 )     74  
Other temporary impairment
                                     (250 )             (250 )        
Foreign Currency translation adjustments
     -       -       -       -       298       -       298       413  
Total comprehensive income
                                                     19,061          
Stock Based Compensation expenses
     -       -       308       -       -       -       308       1,333  
Non-controlling interests changes due to holding changes including exercise of employees stock options
     -       -       (1,265 )     -       -       -       (1,265 )     (842 )
Dividend to Formula's shareholders and to non-controlling interests in subsidiaries
     -       -       -       -       -       -       -       (15,094 )
Balance as of December 31, 2009
     13,200,000       3,736       131,631       60,048       (7,115 )     (259 )     188,041       107,273  

   
Year ended December 31,
  
   
2009
    
2008
    
2007
  
                   
Accumulated unrealized gain from available - for-sale securities
     (1,384 )     (1,068 )     28  
Accumulated currency translation adjustments
     (5,734 )     (6,032 )     (6,891 )
Accumulated Unrealized gain from derivative instruments
     3                  
Accumulated other comprehensive loss
     (7,115 )     (7,100 )     (6,863 )
 
*)           Effective January 1, 2009, the Company reclassified non-controlling interests in the equity; 2007 and 2008 were reclassified to conform to 2009 presentation.
 
The accompanying notes form an integral part of the financial statements.
 
 
F - 7
 
 
FORMULA SYSTEMS (1985) LTD.
(An Israeli Corporation)
CONSOLIDATED STATEMENTS OF CASH FLOWS
 
   
Year ended December 31,
  
   
2009
    
2008
    
2007
  
   
(U.S. $ in thousands)
  
CASH FLOWS FROM OPERATING ACTIVITIES:
                  
Net income
     33,030       22,688       52,723  
Adjustments to reconcile net income  to net cash provided
   by operating activities:
                        
Impairment and write down of other investments  and fixed assets
     59       502       649  
Impairment of available for sale marketable securities due to credit loss
     143       -       1,789  
Equity in losses  of affiliated companies, net
     335       216       653  
Depreciation and amortization
     14,605       13,082       15,806  
Increase (decrease)  in accrued severance pay, net
     (1,618 )     4,984       542  
Gain from sale of subsidiaries
     (4,284 )     -       (28,037 )
Gain from sale of operation
     (105 )     -       (170 )
Gain from sale of property, plants and equipment
     (2,219 )     (341 )     (70 )
Loss (gain) on realization of shareholdings and operations
     -       337       (2,039 )
Stock based compensation expenses
     1,641       1,505       1,074  
Changes in financial liabilities, net
     (202 )     4,950       1,691  
Loss (gain) from repurchase of convertible debt, net
     2       (218 )     -  
Changes in value of long term loans and deposits, net
     (210 )     (129 )     1,963  
Deferred taxes
     665       (1,881 )     (2,563 )
Change in liability in respect of acquisition
     458       (558 )     (493 ) 
 Loss (gain) from sale and decrease (increase)
   in value of marketable securities, net
     (2,609 )     1,481       60  
                         
Changes in operating assets and liabilities:
                        
Decrease (increase) in inventories
     340       446       (134 )
Decrease (increase) in trade receivables
     13,057       (8,241 )     (8,415 )
Decrease (increase) in other accounts receivable
     12,478       3,914       (7,296 )
Increase (decrease)  in trade payables
     1,604       (2,602 )     4,082  
 Increase (decrease) in other accounts payable
     (12,875 )     6,674       10,336  
Increase in customer advances
     1,345       575       1,114  
Net cash provided by operating activities 
     55,640       47,384       43,265  
 
The accompanying notes form an integral part of the financial statements.
 
 
F - 8
 
 
FORMULA SYSTEMS (1985) LTD.
(An Israeli Corporation)
CONSOLIDATED STATEMENTS OF CASH FLOWS
 
   
Year ended December 31,
  
   
2009
    
2008
    
2007
  
   
(U.S. $ in thousands)
  
CASH FLOWS FROM INVESTING ACTIVITIES:
                  
Acquisition of newly-consolidated subsidiaries and activities
(Appendix C)
     (1,262 )     (13,633 )     (5,391 )
Proceeds from realization of investment
   in previously-consolidated subsidiaries (Appendix D)
     3,482       -       39,499  
Proceeds from sale of activity in a consolidated company
     105       -       170  
Proceeds from sale of affiliates company
     -       150       -  
Proceeds from sale of subsidiary's operation
     -       15,506       -  
Changes in restrictions on short term deposit
     4,040       (4,040 )     -  
Restricted long term deposit, net
     -       -       2,506  
Purchase of property and equipment
     (2,713 )     (4,055 )     (4,345 )
Proceeds from short term investment , net
     3,064       (6,795 )     (26,297 )
Proceeds from sale of property, plants and equipment
     5,666       1,011       186  
Investment in and loans to affiliates and other companies
     -       (187 )     (499 )
Other investments
     -       (756 )     -  
Payments to formerly shareholders of consolidated company
     (6,455 )     (5,973 )     -  
Changes in short term deposits, net
     (11,945 )     (1,659 )     -  
Proceeds from long term bank deposits
     139       3,090       (9,881 )
Capitalization of software development and other costs
     (6,960 )     (6,683 )     (8,522 )
Purchase of non-controlling interests in subsidiaries
     -       (16,983 )     (6,281 )
Net cash used in investing activities
     (12,839 )     (41,007 )     (18,855 )
 
The accompanying notes form an integral part of the financial statements.

 
F - 9
 
 
FORMULA SYSTEMS (1985) LTD.
(An Israeli Corporation)
CONSOLIDATED STATEMENTS OF CASH FLOWS
 
   
Year ended December 31,
  
   
2009
    
2008
    
2007
  
   
(U.S. $ in thousands)
  
                   
CASH FLOWS FROM FINANCING ACTIVITIES:
                  
Issuance of debentures (net of issuance expense)
     -       -       61,576  
Exercise of employees stock options in subsidiaries
     1,224       876       4,888  
Dividend paid to non-controlling interests in subsidiaries
     (8,400 )     (5,612 )     (8,348 )
Dividend to Formual's shareholders
     (29,964 )     (10,162 )     -  
Short-term bank credit, net
     (247 )     (15,151 )     (16,944 )
Repayment of long-term loans from banks and others
     (8,616 )     (10,855 )     (61,630 )
Receipt of short-term loans
     1,580       (750 )     26,275  
Issuance in a subsidiary to non-controlling interests, net
     -       -       12,915  
Purchase of non-controlling interests
     (3,774 )     -       -  
Deposit for SWAP deal
     1,061       -       (1,040 )
Repayment and repurchase of debenture
     (5,824 )     (18,128 )     (7,818 )
Proceeds from sale of treasury stock of subsidiary
     -       -       3,017  
Net cash provided (used) by financing activities
     (52,960 )     (59,782 )     12,891  
Effect of exchange rate changes on cash and cash equivalents 
     (238 )     2,481       7,824  
                         
NET INCREASE (DECREASE)
   IN CASH AND CASH EQUIVALENTS
     (10,397 )     (50,924 )     45,125  
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR(*)
     110,602       161,526       116,401  
CASH AND CASH EQUIVALENTS AT END OF YEAR (*)
     100,205       110,602       161,526  
 
(*) Include cash and cash equivalents of discontinued operations.
 
The accompanying notes form an integral part of the financial statements.
 
 
F - 10
 
 
FORMULA SYSTEMS (1985) LTD.
(An Israeli Corporation)
CONSOLIDATED STATEMENTS OF CASH FLOWS
 
Appendix Supplemental cash flow information:
 
   
Year ended December 31,
  
   
2009
    
2008
    
2007
  
   
(U.S. $ in thousands)
  
Cash paid in respect of:
                  
Interest
     4,064       5,077       6,107  
                         
Income tax
     4,444       5,192       6,648  
 
Appendix B - Non-cash activities:
 
   
Year ended December 31,
  
   
2009
    
2008
    
2007
  
   
(U.S. $ in thousands)
  
                   
Investment in a consolidated company against account payable
     -       -       949  
                         
Dividend payable to Formula's shareholders and to non-
  controlling interests in subsidiaries
     6,694       29,964       -  
                         
ASC 740 (formerly Fin 48) provision
     -       -       430  
                         
Assets retirement obligation
     275       -       -  
                         
Receivables from sale of property
     450                  
 
The accompanying notes form an integral part of the financial statements.
 
 
F - 11
 
 
FORMULA SYSTEMS (1985) LTD.
(An Israeli Corporation)
CONSOLIDATED STATEMENTS OF CASH FLOWS
 
Appendix C - Acquisition of newly-consolidated subsidiaries and activities:
 
   
Year ended December 31,
  
   
2009
    
2008
    
2007
  
   
(U.S. $ in thousands)
  
Assets and liabilities of subsidiaries consolidated
   as of acquisition date:
                  
Working capital (other than cash and cash equivalents)
     -       (6,209 )     3,603  
Investment in affiliates and loans
     -       -       375  
Property and equipment
     -       (543 )     (308 )
Goodwill and intangibles assets
     (1,262 )     (15,845 )     ( 10,857 )
Long-term liabilities
     -       395       925  
Other long term assets
     -       -       (212 )
Long term deferred tax liability
     -       1,771       (64 )
Liability to formerly shareholders
     -       6,723       -  
Non-controlling interests at acquisition date
     -       75       1,147  
Total
     (1,262 )     (13,633 )     (5,391 )
 
* Mainly goodwill

Appendix D - Proceeds from realization of investments in previously-consolidated subsidiaries:
 
   
Year ended December 31,
  
   
2009
    
2008
    
2007
  
   
(U.S. $ in thousands)
  
Assets and liabilities of consolidated subsidiaries
   as of date of  realization
                  
Working capital (other than cash and cash equivalents)
     (2,259 )     -       9,434  
Debtors from sale of subsidiaries
     -       -       (16,000 )
Accrued severance pay, net
     -       -       (2,036 )
Investment in affiliate (including loans)
     -       -       (4,151 )
Property and equipment
     144       -       2,843  
Other assets, deferred expenses and long term payables
     1,337       -       37,032  
Provision for losses
     -       -       (1,971 )
Long term deposits
     -       -       1,181  
Goodwill
     206       -       54,462  
Adjustment to other comprehensive (loss) gain
     (230 )     -       570  
Long-term liabilities
     -       -       (28,833 )
Gain from realization of investments in subsidiaries
     4,284       -       28,037  
Non-controlling interests
     -       -       (41,069 )
Total
     3,482       -       39,499  
 
The accompanying notes form an integral part of the financial statements.
 
 
F - 12
 
 
FORMULA SYSTEMS (1985) LTD.
(An Israeli Corporation)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
 
Note 1 - Summary of Significant Accounting Policies:
 
General:
 
Formula Systems (1985) Ltd. (“Formula”) was incorporated in Israel in 1985. Since 1991, Formula's shares have been traded on the Tel Aviv Stock Exchange (“TASE”) and since 1997, through American Depositary Shares (“ADS”) under the symbol FORTY on the Global Market in the United States ("NASDAQ"). Each ADS represents one ordinary share of Formula.
 
Formula, through its subsidiaries (collectively, the “Company” or the “Group”) is engaged in the development, production and marketing of information technology ("IT") solutions and services. The Group operates in two reportable segments: IT Services and Proprietary Software Solutions. For a description of the segments see Note 16.G.
 
The following table presents certain information regarding the control and ownership of Formula’s significant subsidiaries , as of the dates indicated:
 
 
Name of subsidiary
  
Percentage of ownership and control
  
   
December 31, 2009
    
December 31, 2008
  
   
%
  
             
Matrix IT Ltd. (“Matrix”)
     50.1       50.2  
Magic Software Enterprises Ltd. (“Magic”)
     58.1       58.2  
NextSource Inc.
     *-       100  
Sapiens International Corporation N.V. (“Sapiens”)
     70.4       70.4  

The above list consists only of active companies that are held directly by Formula.
 
* See Note 2.F.
 
Accounting Principles:
 
The consolidated financial statements have been prepared in accordance with generally accepted accounting principles (“GAAP”) United States.
 
 
F - 13
 
 
FORMULA SYSTEMS (1985) LTD.
(An Israeli Corporation)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
 
Note 1 - Summary of Significant Accounting Policies (Cont.):
 
A.
Adoption of Certain New Accounting Standards:
 
 
Accounting Standards Codification:
 
 
In June 2009, the FASB issued Statement of Financial Accounting Standards (“SFAS”) No. 168, "The FASB Accounting Standards Codification and the Hierarchy of Generally Accepted Accounting"(the “Codification”). This standard replaces SFAS Statement No. 162, The Hierarchy of Generally Accepted Accounting Principles, and establishes only two levels of U.S. generally accepted accounting principles (“GAAP”), authoritative and nonauthoritative. The ASC has become the source of authoritative, nongovernmental GAAP, except for rules and interpretive releases of the SEC, which are sources of authoritative GAAP for SEC registrants. All other nongrandfathered, non-SEC accounting literature not included in the Codification will become nonauthoritative
 
 
This standard is effective for financial statements for interim or annual reporting periods ending after September 15, 2009
 
 
The adoption of the Codification changed the Company’s references to GAAP accounting standards but did not impact the Company’s results of operations, financial position or liquidity.
 
 
Business Combinations and Non-controlling Interests
 
 
Effective January 1, 2009, the Company adopted a new accounting standard included in ASC 805, "Business Combinations" (formerly SFAS Statement No. 141(R), Business Combinations). The new standard applies to all transactions or other events in which an entity obtains control of one or more businesses. Additionally, the new standard requires the acquiring entity in a business combination to recognize all (and only) the assets acquired and liabilities assumed in the transaction; establishes the acquisition-date fair value as the measurement date for all assets acquired and liabilities assumed; and requires the acquirer to disclose additional information needed to evaluate and understand the nature and financial effect of the business combination. The Company’s adoption of this new accounting standard did not have a material impact on the Company’s consolidated financial statements.
 
 
Effective January 1, 2009, the Company adopted a new accounting standard included in ASC810, "Consolidations" (formerly SFAS Statement No. 160, Non-controlling Interests in Consolidated Financial Statements). The new accounting standard establishes accounting and reporting standards for the non-controlling interests (or non-controlling interests) in a subsidiary and for the consolidation of a subsidiary by requiring all non-controlling interests in subsidiaries be reported in the same way, as equity in the consolidated financial statements. As such, this guidance has eliminated the diversity in accounting for transactions between an entity and non-controlling interests by requiring they be treated as equity transactions. The Company’s adoption of the new accounting standard resulted in recording non-controlling interests in equity at the current year and in comparative numbers.
 
 
F - 14
 
 
FORMULA SYSTEMS (1985) LTD.
(An Israeli Corporation)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
 
Note 1 - Summary of Significant Accounting Policies (Cont.):
 
A.
Adoption of Certain New Accounting Standards (Cont.)
 
 
Business Combinations and Non-controlling Interests (Cont.):
 
 
Until December 31, 2008 gain on realization of shareholdings includes the results of realization of the Company’s shareholdings in investees arising either on the sale of such shareholdings or from the issuance of stock by the investees to third parties. The Company charged such results to the statement of operations, provided that the conditions stipulated by SAB 51 for such recognition have been met. When conditions are not met gain is recognized as part of APIC.
 
 
Subsequent Events
 
 
In May 2009, the FASB issued new guidance for subsequent events. The new guidance, which is part of ASC 855, "Subsequent Events" (formerly SFAS Statement No. 165, Subsequent Events) is intended to establish general standards of accounting for and disclosure of events that occur after the balance sheet date but before financial statements are issued or are available to be issued. Specifically, this guidance sets forth the period after the balance sheet date during which management of a reporting entity should evaluate events or transactions that may occur for potential recognition or disclosure in the financial statements, the circumstances under which an entity should recognize events or transactions occurring after the balance sheet date in its financial statements, and the disclosures that an entity should make about events or transactions that occurred after the balance sheet date. ASC 855 is effective for interim and annual reporting periods ending after June 15, 2009. During that period, except as mention in Note 14, no material subsequent events came to the Company’s attention
 
B.
Functional and Reporting Currency:
 
 
Beginning in 2007, the Company changed its functional currency from New Israeli Shekel (NIS) to the United States dollar (“dollar”). This was done according to a change in economic and circumstance factors for the Company, as mentioned in ASC No. 830 "Foreign Currency Matters" (formerly FAS Statement No. 52 "foreign currency translation") ("ASC 830"). Prior to 2007, Formula operated primarily in the economic environment of the NIS and its functional currency was the NIS. The functional currencies of Formula's subsidiaries are NIS and dollar. Formula has elected to use dollar as its reporting currency for all years presented.
 
Formula translates the financial statements of its subsidiaries whose functional currency is NIS, into dollar, under the principles described in ASC 830. Assets and liabilities have been translated at period-end exchange rates.  Results of operations have been translated at the exchange rate at the dates on which those transactions occurred or at an average rate. Formula presents differences resulting from translation in equity under "accumulated other comprehensive income (loss)".

 
F - 15
 
 
FORMULA SYSTEMS (1985) LTD.
(An Israeli Corporation)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
 
Note 1 - Summary of Significant Accounting Policies (Cont.):
 
C.
Use of Estimates and Assumptions in the Preparation of the Financial Statements:
 
 
The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and various assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities as of the dates of the financial statements and the reported amounts of revenues and expenses during the reporting periods.The actual results may differ from these estimates.
 
D.
Principles of Consolidation:
 
 
The consolidated financial statements include Formula’s financial statements as well as those of its subsidiaries in which it has controlling interests. Acquisition of subsidiaries is accounted for under the acquisition method. All inter-company balances and transactions have been eliminated upon consolidation.
 
E.
Fair Value Measurement:
 
 
The Company measures fair value and discloses fair value measurements for financial assets and liabilities. Fair value is based on the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date.
 
 
Effective January 1, 2009, the Company adopted the provisions of ASC 820-10 “Fair Value Measurements and Disclosures” (formerly FAS Statement No. 157, “Fair Value Measurements”), with respect to non-financial assets and liabilities. The adoption did not have a significant effect on the Company’s financial statements (refer to Note 4).
 
 
Effective January 1, 2009, the Company adopted a new accounting standard included in ASC 820, "Fair Value Measurements and Disclosures" (“ASC 820”) (formerly FASB Staff Position (“FSP”) No 157-2, Effective Date of FASB Statement No. 157), which delayed the effective date for disclosing the fair value of all non-financial assets and non-financial liabilities, except for items that are recognized or disclosed at fair value on a recurring basis (at least annually). This standard did not have a material impact on the Company’s consolidated financial statements.
 
 
Effective April 2009, the Company adopted ASC 820 (formerly FSP 157-4, Determining Fair Value When the Volume and Level of Activity for the Asset or Liability Have Significantly Decreased and Identifying Transactions That Are Not Orderly), requires disclosure of the inputs and valuation techniques used, as well as any changes in valuation techniques and inputs used during the period, to measure fair value in interim and annual periods. In addition, the presentation of the fair value hierarchy is required to be presented by major security type as described in ASC 320 "Investments - Debt and Equity Securities". The adoption of the new standard on April 1, 2009 did not have a material impact on the Company’s consolidated financial statements.
 
 
F - 16
 
 
FORMULA SYSTEMS (1985) LTD.
(An Israeli Corporation)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
 
Note 1 - Summary of Significant Accounting Policies (Cont.):
 
F.
Cash and Cash Equivalents:
 
 
Cash and Cash equivalents are considered by the Company to be highly-liquid investments, including, inter-alia, short-term deposits with banks, which the maturity dates are less than three months at the time of acquisition and which are unrestricted.
 
G.
Investments:
 
 
Investments in non-marketable securities of companies in which the Company does not have the ability to exercise significant influence over operating and financial policy are recorded at cost.
 
 
The Company accounts for investments in marketable equity securities and debt securities in accordance with ASC 320 "Investments- Debt and Equity Securities" (formerly SFAS Statement No. 115, "Accounting for Certain Investments in Debt and Equity Securities") ("ASC 320"). Marketable equity securities and debt securities that are classified as "trading" or as "available-for-sale" are reported at fair value.
 
 
Unrealized gains and losses from marketable securities classified as "available for sale" are excluded from earnings and are reported as a component in equity under "accumulated other comprehensive income (loss)". Unrealized gains and losses from marketable securities classified as "trading" are reported in the statements of operations.
 
 
Investments are periodically reviewed to determine whether other-than-temporary impairment in value has occurred, in which case the investment is written down to its fair value, through the statements of operations. In accordance with ASC 320, the Company recognizes an impairment charge when a decline in the fair value of its investments below the cost basis is considered to be other-than-temporary.
 
 
Effective April 2009, the Company adopted new guidance for the accounting for other-than-temporary impairments ("OTTI"). Under the new guidance, which is part of ASC 320, "Investments — Debt and Equity Securities" (formerly FSP 115-2 and 124-2, Recognition and Presentation of Other-Than-Temporary Impairments) that changed the impairment and presentation model for its available-for-sale debt securities. Under the amended impairment model, an OTTI loss is recognized in earnings if the entity has the intent to sell the debt security, or if it is more likely than not that it will be required to sell the debt security before recovery of its amortized cost basis. However, if an entity does not expect to sell a debt security, it will still need to evaluate expected cash flows to be received and determine if a credit loss exists. In the event of a credit loss, only the amount of impairment associated with the credit loss is recognized currently in earnings. Amounts relating to factors other than credit losses are recorded in other comprehensive income.
 
 
F - 17
 
 
FORMULA SYSTEMS (1985) LTD.
(An Israeli Corporation)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
 
Note 1 - Summary of Significant Accounting Policies (Cont.):
 
G.
Investments (Cont.):
 
 
The new guidance is effective periods ending after June 15, 2009. The Company’s adoption of the new guidance did not have a material effect on the Company’s consolidated financial statements.
 
H.
Inventory:
 
 
Inventory is comprised of hardware and software.
 
Inventory is valued at the lower of cost or market value. Cost is determined on the “first in - first out” basis for hardware.
 
I.
Investments in Affiliates:
 
 
Affiliates are companies over which significant influence is exercised, but which are not consolidated subsidiaries, and are accounted for by the equity method, net of write-down for decrease in value, which is not of a temporary nature.
 
J.
Property, Plants and Equipment, net:
 
 
Property and equipment are stated at cost, net of accumulated depreciation. Depreciation is calculated by the straight-line method over their estimated useful lives. The following are the annual depreciation rates:
 
 
%
   
Computers and equipment
6-33
Motor vehicles
15
Buildings
2-4
Leasehold improvements
-*
 
 
* Over the shorter of the term of the lease or the estimated useful life of the asset.
 
K.
Goodwill:
 
 
The Company applies ASC 350, “Intangible - Goodwill and Other” (formerly SFAS Statement No. 142, “Goodwill and Other Intangible Assets”) ("ASC 350"). ASC 350 requires goodwill to be tested for impairment on an annual basis and more frequently in certain circumstances, and written down when impaired rather than being amortized. Furthermore, ASC 350 requires purchased intangible assets other than goodwill to be amortized over their useful lives unless those lives are determined to be indefinite. The Company has selected December 31st as the date on which it will perform its annual goodwill impairment test.
 
 
F - 18
 
 
FORMULA SYSTEMS (1985) LTD.
(An Israeli Corporation)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
 
Note 1 - Summary of Significant Accounting Policies (Cont.):
 
K.
Goodwill (Cont.):
 
 
As required by ASC 350, the impairment test is accomplished using a two- step approach. The first step of the goodwill impairment test compares the fair value of a reporting unit with its carrying amount, including goodwill. As required by ASC 350, the Company compares the fair value of each reporting unit to its carrying value ('step 1') If the fair value exceeds the carrying value of the reporting unit net assets, goodwill is considered not impaired, and no further testing is required. If the carrying value exceeds the fair value of the reporting unit, then the implied fair value of goodwill is determined by subtracting the fair value of all the identifiable net assets from the fair value of the reporting unit. An impairment loss is recorded for the excess, if any; of the carrying value of goodwill over its implied fair value ('step 2'). At December 31, 2009, the market capitalization of one reporting unit was below its carrying value. The Company determines the fair value of this reporting unit using the Income Approach, which utilizes a discounted cash flow model, as it believes that this approach best approximates its fair value at this time. Assumptions related to revenue, gross profit, operating expenses, future short-term and long-term growth rates, weighted average cost of capital, interest, capital expenditures, cash flows, and market conditions are inherent in developing the discounted cash flow model. Additionally, the Company evaluated the reasonableness of the estimated fair value of its reporting unit by reconciling to its market capitalization. The ability to reconcile the gap between the market capitalization and the fair value depends on various factors, some of which are quantitative, such as an estimated control premium that an investor would be willing to pay for a controlling interests in the Company, and some of which are qualitative and involve management judgment, including stable relatively high backlog and growing pipe line.
 
 
During the year ended December 31, 2009, 2008 and 2007, no impairment was required.
 
L.
Software Development Costs:
 
 
Development costs of software, which is intended for sales that are incurred after the establishment of technological feasibility of the relevant product, are capitalized. Technological feasibility is determined when detailed program design is completed and verified in accordance with the provisions of ASC No. 985 "Software" (formerly SFAS Statement No. 86, "Accounting for the Costs of Computer Software to Be Sold, Leased, or Otherwise Marketed").
 
 
Software development costs incurred before technological feasibility has been established are charged to the statements of operations as incurred.
 
 
F - 19
 
 
FORMULA SYSTEMS (1985) LTD.
(An Israeli Corporation)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
 
Note 1 - Summary of Significant Accounting Policies (Cont.):
 
L.
Software Development Costs (Cont.):
 
 
Research and development costs incurred in the process of software development before establishment of technological feasibility are charged to expenses as incurred. Costs incurred subsequent to the establishment of technological feasibility are capitalized according to the principles set forth in ASC 985-20, "Costs of Software to be Sold, Leased or Marketed" (formerly SFAS Statement No. 86, "Accounting for the Costs of Computer Software to Be Sold, Leased, or Otherwise Marketed").
 
 
The Company's and its subsidiaries' technological feasibility is established upon completion of a detailed program design or working model.
 
 
Research and development costs incurred in the process of developing product improvements are generally charged to expenses as incurred.
 
 
Capitalized software costs are amortized on a product by product basis. Amortization equals the greater of the amount computed using the: (i) ratio of 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 six years). The Company assesses the recoverability of these intangible assets 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. During the years ended December 31, 2009, 2008 and 2007, no impairment was required.
 
 
During the year ended December 31, 2009, consolidated subsidiaries capitalized software development costs aggregated to $6.8 million (2008 - $6.4 million, 2007 - $6.0 million) and amortized capitalized software development costs aggregated to $8.4 million (2008 - $7.0 million, 2007 - $6.2 million).
 
M.
Other Intangible Assets:
 
 
Other intangible assets are comprised of customer's related intangible assets and acquired technology and are amortized over their useful lives using a method of amortization that reflects the pattern in which the economic benefits of the intangible assets are consumed or otherwise used up. Amortization is computed using the straight-line method as follows:
 
 
Prepaid royalties
  
15 years
       
 
Distribution rights
  
5 years
       
 
Technology, usage rights and other intangible assets
  
3-8 years
 
 
The company evaluate every year the remaining useful life of the intangible assets.
 
 
During 2009, 2008 and 2007, no impairment was required.
 
 
F - 20
 
 
FORMULA SYSTEMS (1985) LTD.
(An Israeli Corporation)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
 
Note 1 - Summary of Significant Accounting Policies (Cont.):
 
N.
Impairment in Value of Long-Lived Assets:
 
 
The Company’s long-lived assets are reviewed for impairment in accordance with ASC 360, “Property, Plant and Equipment” (formerly SFAS Statement No. 144, “Accounting for the Impairment or Disposal of Long-lived Assets”) ("ASC 360"), whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. The recoverability of assets held and used is measured by a comparison of the carrying amount of the assets 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 their fair value. For the years ended December 31, 2009 and 2008 no impairment was required. During 2007, impairment loss in the amount of $137 thousand was recorded.
 
O.
Severance Pay:
 
 
The Company’s liability for severance pay to its employees pursuant to Israeli law and employment agreements is covered in part by managers’ insurance policies, for which the Company makes monthly payments. These funds are recorded as assets in the Company's balance sheet. The Company can only make withdrawals from these funds for payments of severance pay. The severance pay liability is calculated on the basis of eligibility for one month’s salary for each year of service, based on the most recent salary of each employee.
 
 
Pursuant to Section 14 of the Severance Compensation Law, 1963 ("Section 14"), certain employees of the Company who are subjected to this section, are entitled 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.
 
 
Total expenses (gain) in respect of severance pay for the years 2009, 2008 and 2007 were $(1.06) million, $7.4 million and $9.3 million, respectively.
 
 
F - 21
 
 
FORMULA SYSTEMS (1985) LTD.
(An Israeli Corporation)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
 
Note 1 - Summary of Significant Accounting Policies (Cont.):
 
P.
Revenue Recognition:
 
 
Revenues derived from software license agreements are recognized in accordance ASC 985 "Software" (formerly SOP 97-2 "Software Revenue Recognition") ("ASC 985"), upon delivery of the software when collection is probable, where the license fee is otherwise fixed or determinable, and when there is persuasive evidence that an arrangement exists.
 
 
In addition, there are certain arrangements involving multiple elements such as software product, maintenance and support. For these agreements ASC 985 requires that the fair value of each component in a multiple element arrangement will be determined based on the vendor's specific objective evidence ("VSOE") for that element, and revenue is allocated to each component based on its fair value. ASC 985 requires that revenue be recognized in accordance with the "residual method" when VSOE does not exists for all the delivered elements and exist for all the delivered elements, and all other ASC 985 criteria are met. Under the residual method, any discount in the arrangement is allocated to the delivered elements. The VSOE of post contract support ("PCS") is based on the price charged when PCS sold separately or renewed. The VSOE of consulting services is based on the price charged when the consulting services sold separately based on a time and material basis.
 
 
Revenues from consulting services, on hourly basis, are recognized as the services are rendered.
 
 
Revenues from maintenance and training are recognized over the service period.
 
 
Revenues from long term projects are recognized in accordance with ASC 605-35-25 (formerly SOP 81-1 “Accounting for Performance of Construction-Type Contracts”), based on the percentage of completion method. Provision for estimated losses is recorded on the amount of the estimated losses on the entire contract in the period in which such losses first become evident. These revenues are included in the proprietary software products segment.
 
 
Revenues from sale of hardware are recognized when the merchandise is delivered to the customer, provided no significant vendor obligations remain.
 
 
The Company generally does not grant a right of return to its customers. When a right of return exists, revenue is deferred until the right of return expires, at which time revenue is recognized provided that all other revenue recognition criteria are met.
 
 
Deferred revenue includes unearned amounts received under maintenance contracts and amounts received from customers but not yet recognized as revenues. Payments for maintenance fees are generally made in advance and are nonrefundable.
 
 
Tax collected from customers and remitted to governments authorities (including VAT) are presented in statements of operations on a net basis.
 
 
F - 22
 
 
FORMULA SYSTEMS (1985) LTD.
(An Israeli Corporation)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
 
Note 1 - Summary of Significant Accounting Policies (Cont.):
 
P.
Revenue Recognition (Cont.):
 
 
The Company recognizes revenue from software license sales in accordance with ASC 985-605 “Software Revenue Recognition” (“ASC 985-605”) with Respect to Certain Transactions. Under ASC 985-605, revenues from software product licenses are recognized upon delivery of the software provided there is persuasive evidence of an agreement, the fee is fixed or determinable, collection of the related receivable is probable and no further obligations exist. Revenues under multiple-element arrangements, which may include software licenses, support and maintenance, and training and consulting services, are allocated to each element under the "residual method" when Vendor Specific Objective Evidence ("VSOE") of Fair Value exists for all undelivered elements and VSOE does not exist for all of the delivered elements. VSOE is determined for support and maintenance, training and consulting services based on the price charged when the respective elements are sold separately or renewed.
 
 
The Company charges support and maintenance renewals at a fixed percentage of the total price of the licensed software products purchased by the customer. Under the residual method, the Company defers revenues related to the undelivered elements based on their VSOE of fair value and recognizes the remaining arrangement fee for the delivered elements.
 
 
IT outsourcing services that mainly include maintenance of customers' applications integrated on the Company's license performed on a fixed fee basis are recognized on a straight line basis over the contractual period that the services are rendered, since no other pattern of outputs is discernible. Revenues from IT outsourcing services that are performed on a "time and materials" basis are recognized as services are performed.
 
Q.
Provision for Warranty:
 
 
In light of past experience, the Company does not record any provision for warranties in respect of their products and services.
 
R.
Advertising Costs:
 
 
The Company records advertising expenses as incurred. Advertising costs were recorded at the amount of $2.4 million, $5.5 million, and $5.2 million in the years 2009, 2008, 2007 respectively.
 
 
F - 23
 
 
FORMULA SYSTEMS (1985) LTD.
(An Israeli Corporation)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
 
Note 1 - Summary of Significant Accounting Policies (Cont.):
 
S.
Income Taxes:
 
 
Deferred taxes are determined utilizing the “asset and liability” method, whereby deferred tax asset and liability account balances are determined based on differences between financial reporting and the tax bases of assets and liabilities and are measured using the enacted tax rates and laws that will be in effect when the differences are expected to reverse. The Company provides a valuation allowance, when it’s more likely than not that deferred tax assets will not be realized in the foreseeable future. Deferred tax liabilities and assets are classified as current or non-current based on the expected reversal dates of the specific temporary differences.
 
 
Effective January 1, 2007, the Company adopted ASC 740 “Income Taxes" (formerly FIN 48) (“ASC 740”). Upon the adoption of a new pronouncement which clarifies the accounting for uncertainty in income taxes and prescribes a recognition threshold and measurement attributes for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return, the Company should record accruals for uncertain tax positions. Those accruals should record to the extent that the Company concludes that a tax position is not sustainable under a “more-likely-than-not” standard.
 
 
In addition, the Company should classify interest and penalties recognized in the financial statements relating to uncertain tax positions under the provision for income taxes.
 
T.
Earnings per Share:
 
 
Earnings per share (“EPS”) are calculated in accordance with the provisions of ASC 260 "Earning per Share" (formerly SFAS Statement No. 128 "Earning per Share) ("ASC 260"). ASC 260 requires the presentation of both basic and diluted EPS.
 
 
Basic net earnings per share are calculated on the basis of the weighted average number of common shares outstanding during each year. The diluted earnings per share are calculated on the basis of the weighted average number of common shares outstanding during each year, plus the dilutive potential common shares considered outstanding during the year.
 
U.
Treasury Shares:
 
 
The Company repurchases its shares from time to time and hold them as a treasury shares. These shares are presented as a reduction of equity, at their cost. Gains and losses upon the sale of these shares, net of related income taxes, are recorded to additional paid-in capital.
 
 
F - 24
 
 
FORMULA SYSTEMS (1985) LTD.
(An Israeli Corporation)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
 

Note 1 - Summary of Significant Accounting Policies (Cont.):
 
V.
Concentration of Credit Risks - Allowance for Doubtful Accounts:
 
 
Most of the Group’s cash and cash equivalents and short-term investments as of December 31, 2009 and 2008 were deposited in Israeli, U.S. and European banks. Therefore the Company is of the opinion that the credit risk in respect of these balances is low.
 
 
The Group’s trade receivables are derived from sales to large firm organizations located mainly in North America, Europe and Israel. The Group performs ongoing credit evaluations of its customers and has established an allowance for doubtful accounts based upon factors relating to the credit risk of specific customers and other information. In certain circumstances, the Company may require letters of credit, other collateral or additional guarantees. From time to time, the Company sells certain of its accounts receivable to financial institutions, within the normal course of business.
 
 
ASC 860, "Transfers and servicing" (formerly SFAS Statement No. 140 "Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities"), establishes a standard for determining when a transfer of financial assets should be accounted for as a sale. The underlying conditions are met for the transfer of financial assets to qualify for accounting as a sale. The transfers of financial assets are typically performed by the sale of receivables to a financial institution. There are no outstanding  sales of receivables as of December 31, 2009, 2008 and 2007.
 
 
The agreements, pursuant to which the Company sells its trade receivables, are structured such that the Company (i) transfers the proprietary rights in the receivable from the Company to the financial institution; (ii) legally isolates the receivable from the Company’s other assets, and presumptively puts the receivable beyond the legal reach of the Company and its creditors, even in bankruptcy or other receivership; (iii) confers on the financial institution the right to pledge or exchange the receivable; and (vi) eliminates the Company’s effective control over the receivable, in the sense that the Company is not entitled and shall not be obligated to repurchase the receivable other than in case of failure by the Company to fulfill its commercial obligation.
 
 
The net change in the provision for doubtful accounts charged to general and administrative expenses amounted to $0.5 million, $1.1 million and $0.4 million in the years 2009, 2008 and 2007, respectively, and was determined for specific debts where doubt existed as to their collectability.
 
 
F - 25
 

 
FORMULA SYSTEMS (1985) LTD.
(An Israeli Corporation)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
 
Note 1 - Summary of Significant Accounting Policies (Cont.):
 
W.
Stock based compensation:
 
 
The Company applies ASC 718, and ASC 505-50, "Equity-Based Payments to Non-Employees", with respect to options and warrants issued to non-employees. ASC 718 requires the use of an option valuation model to measure the fair value of the options and warrants at the measurement date as defined in ASC 505-50.
 
 
ASC 718 requires companies to estimate the fair value of share-based awards on the date of grant using an option-pricing model, where applicable. Share-based compensation expense recognized in the Company's consolidated statements of operations for 2009, 2008 and 2007 includes compensation expense for share-based awards granted (i) prior to, but not yet vested as of, January 1, 2006, based on the grant date fair value estimated in accordance with the original provisions of ASC 718, and (ii) subsequent to January 1, 2006, based on the grant date fair value estimated in accordance with the provisions of ASC 718.
 
 
The Company's' subsidiaries granted options to their employees to purchase shares.
 
 
Matrix and Sapiens use the Black-Scholes option-pricing model which 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.
 
 
Magic use the Binomial option-pricing model for options granted. The Binomial model considers characteristics of fair value option pricing that are not available under the Black-Scholes model. Similar to the Black-Scholes model, the Binomial model takes into account variables such as volatility, dividend yield rate and risk free interest rate. However, in addition, the Binomial model considers specific terms and conditions of the options, such as the contractual term of the option, the probability that the option will be exercised prior to the end of its contractual life and the probability of termination of the option holder in computing the value of the option. For these reasons, Magic believes that the Binomial model provides a fair value that is more representative of actual experience and future expected experience than that calculated using the Black-Scholes model.
 
 
F - 26
 
 
FORMULA SYSTEMS (1985) LTD.
(An Israeli Corporation)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
 
Note 1 - Summary of Significant Accounting Policies (Cont.):
 
X.
Derivatives and Hedging:
 
 
The Company accounts for derivatives based on ASC 815, "Derivative and Hedging" (formerly SFAS Statement No. 133, "Accounting for Derivative Instruments and Hedging Activities") ("ASC 815"). According to ASC 815, derivative instruments that are designated and qualify as hedges of forecasted transactions (i.e., cash flow hedges) are carried at fair value with the effective portion of a derivative's gain or loss recorded in other comprehensive income and subsequently recognized in earnings in the same period or periods in which the hedged forecasted transaction affects earnings. For derivative instruments that are not designated and qualified as hedging instruments, the gains or losses on the derivative instruments are recognized in current earnings during the period of the change in fair values.
 
 
Effective January 1, 2009, the Company adopted a new accounting standard included in ASC 815, Derivatives and Hedging (SFAS Statement No. 161, Disclosures about Derivative Instruments and Hedging Activities, an amendment of SFAS Statement No. 133). The new accounting standard requires enhanced disclosures about an entity’s derivative and hedging activities and is effective for fiscal years and interim periods beginning after November 15, 2008. Since the new accounting standard only required additional disclosure, the adoption did not impact the Company’s consolidated financial statements.
 
 
Put options which were granted to non-controlling interests during 2007 and 2009 in Matrix have been measured in fair value pursuant to ASC 810 (formerly EITF 00-06 "Accounting for Freestanding Derivative Financial Instruments Indexed to, and Potentially Settled in, the Stock of a Consolidated Subsidiary") and ASC 505 (formerly EITF 08-8 "Accounting for an Instrument (or an Embedded Feature) with a Settlement Amount That Is Based on the Stock of an Entity’s Consolidated Subsidiary").
 
 
Sapiens also enters into put option contracts to hedge certain transactions denominated in foreign currencies. The purpose of Sapiens foreign currency hedging activities is to protect Sapiens from risk that the eventual dollar cash flows from international activities will be adversely affected by changes in the exchange rates. Sapiens put option contracts did not qualify as hedging instruments under ASC 815.
 
 
Changes in the fair value of put option contracts are reflected in the consolidated statements of operations as financial income or expense as applicable.
 
 
During 2007-2009 Matrix engaged in SWAP deals to exchange interest which was linked to the CPI. This SWAP deals did not qualify for hedge accounting under ASC 815. Matrix measured the fair value of the contracts in accordance with ASC 820. Changes in the fair value are reflected in the consolidated statements of operations as financial income or expense as applicable.
 
 
F - 27
 

FORMULA SYSTEMS (1985) LTD.
(An Israeli Corporation)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
 
 
Note 1 - Summary of Significant Accounting Policies (Cont.):
 
X.
Derivatives and Hedging (Cont.):
 
 
Magic entered into forward contracts, these contracts serve to protect net income against the impact of the translation into U.S. dollars of certain foreign exchange-denominated transactions.
 
 
The derivative instruments primarily hedge or offset exposures in Euro, Japanese Yen and NIS to buy and sell, in the notional amounts of outstanding foreign exchange as December 31, 2009, $2,683 and $2,671 thousands, respectively.
 
Y.
Comprehensive income (loss):
 
The Company accounts for comprehensive income (loss) in accordance with ASC 220 "Comprehensive Income" (formerly SFAS Statement No. 130, “Reporting Comprehensive Income”). This statement establishes standards for the reporting and display of comprehensive income and its components in a full set of general purpose financial statements. Comprehensive income (loss) generally represents all changes in equity during the period except those resulting from investments by, or distributions to, shareholders. The Company determined that its items of other comprehensive income (loss) relate to gain and loss on foreign currency translation adjustments, unrealized gain and loss on derivatives instruments designated as hedge and unrealized gain and loss on available-for-sale marketable securities.
 
Z.
Discontinued operations:
 
Under ASC 205 "Presentation of Financial statements – Discontinued Operation" (formerly SFAS Statement No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets”),  when a component of an entity, as defined in ASC 205, has been disposed of or is classified as held for sale, the results of its operations, including the gain or loss on the disposed component, should be classified as discontinued operations and the assets and liabilities of such component should be classified as assets and liabilities attributed to discontinued operations; that is, provided that the operations, assets and liabilities of the component have been eliminated from the Company's consolidated operations and the Company will no longer have any significant continuing involvement in the operations of the component.
 
AA.
Reclassifications:
 
 
Certain comparative figures have been reclassified to conform to the current year presentation.
 
 
F - 28
 

 
FORMULA SYSTEMS (1985) LTD.
(An Israeli Corporation)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
 
Note 1 - Summary of Significant Accounting Policies (Cont.):
 
AB.
Recently Issued Accounting Pronouncements (Cont.):
 
Accounting Standards Not Yet Effective
 
 
Accounting for the Transfers of Financial Assets
 
 
In June 2009, the FASB issued new guidance relating to the accounting for transfers of financial assets. The new guidance, which was issued as SFAS Statement No. 166, "Accounting for Transfers of Financial Assets, an amendment to SFAS Statement No. 140, was adopted into Codification in December 2009 through the issuance of Accounting Standards Updated (“ASU”) 2009-16. The new standard eliminates the concept of a “qualifying special-purpose entity,” changes the requirements for derecognizing financial assets, and requires additional disclosures in order to enhance information reported to users of financial statements by providing greater transparency about transfers of financial assets, including securitization transactions, and an entity’s continuing involvement in and exposure to the risks related to transferred financial assets.
 
 
The new guidance is effective for fiscal years beginning after November 15, 2009. The Company will adopt the new guidance in 2010 and is evaluating the impact it will have to the Company’s consolidated financial statements.
 
Note 2 - Certain Transactions:
 
A.
In June 2007 the Company sold its entire holdings in BluePhoenix, for consideration of approximately $64 million. The Company recognized approximately $18 million in capital gain upon completion of the sale.  This gain is presented in the statements of operations as income from discontinued operation.
 
B.
On December 30, 2007, the Company's subsidiary, Magic, sold its holding in, Advanced Answers on Demand Holding Corporation,("AAOD"), a Florida corporation that develops and markets application software targeted at the long-term care industry, to Fortissimo Capital for $17 million, which paid Magic $1 million of the sale price in December 2007 and the remaining $16 million in March 2008. As a result of this sale, the Company recorded a net gain of approximately $9.3 million; this gain is presented in the income statement as an income of discontinued operation.
 
 
In addition, as part of the transaction, Magic entered into a three years license agreement with AAOD according to which AAOD will continue to sell Magic’s products, as an OEM partner, in consideration for $3 million, to be paid quarterly over three years starting in 2008.
 
 
F - 29
 
 
FORMULA SYSTEMS (1985) LTD.
(An Israeli Corporation)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
 
Note 2 - Certain Transactions (Cont.):
 
C.
On August 19, 2007, Matrix completed an offering of non-convertible debentures in an aggregate principal amount of approximately $ 62 million (NIS 250 million). The debentures were sold to institutional and other investors in Israel. The debentures bear an interest at an annual rate of 5.15%. The principal will be paid in four equal annual installments on December 31 of each of the years 2010 through 2013. The principal and interest are linked to the Israeli consumer price index ("CPI"). On February 21, 2008, Matrix listed the debentures for trading on the TASE.
 
D.
In June 2007, Sapiens, entered into a private placement investment transaction with several institutional investors, private investors and Formula for an aggregate gross investment amount of $20 million (excluding finders' fees and out of pocket expenses), $6.5 million of which was by Formula.  Sapiens issued to the investors an aggregate of 6,666,667 common shares (of which 2,166,666 common shares were issued to Formula), at a price per share of $3.00 which reflected a premium of approximately 25% above the trading price of Sapiens’ common shares (as of the date Sapiens’ board of directors approved the investment).
 
E.
In 2008 Matrix purchased all the shares of TACT Computers and Systems Ltd. ("TACT") for aggregate consideration $12.5 million. In 2009, Matrix paid to the sellers an additional and final consideration of approximately $6.4 million.
 
 
a.
The following table summarizes the fair values of assets acquired and liabilities assumed as of the date of purchase:
 
   
(in thousands)
  
       
Current assets
     9,615  
Property and equipment
     299  
Goodwill
     10,535  
Customer related intangible asset
     1,884  
Total tangible and intangible assets acquired
     22,333  
         
Current liabilities
     8,465  
Other long-term liabilities
     1,372  
Total liabilities assumed
     9,837  
         
Net assets acquired
     12,496  
         
Cash paid
     12,496  

 
F - 30
 

FORMULA SYSTEMS (1985) LTD.
(An Israeli Corporation)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
 
Note 2 - Certain Transactions (Cont.):
 
 
b.
The following unaudited pro forma summary presents information as if the acquisition of TACT had occurred as of January 1, 2008 and as of January 1, 2007. The pro forma information, which is provided for informational purposes only, is based on historical information and does not necessarily reflect the results that would have occurred, not is it necessarily indicative of future results of operations of the consolidated entity.

   
Year ended December 31.
  
   
2008
    
2007
  
   
(In thousands, except per share data)
  
   
(Unaudited)
  
             
Revenues
     515,278       442,532  
Income from continuing operation
     11,592       11,315  
Earning per share - basic
     0.88       0.85  
Earning per share - diluted
     0.88       0.84  
 
F.
In October 2009 the company completed the sale of our entire 100% shareholdings in our subsidiary NextSource, for aggregate consideration of approximately $12 million, of which $8 million was paid in cash and the remainder through the release of $4 million bank deposits that were previously pledged in favor of banks to secure obligations of NextSource
 
 
This gain is presented in the income statement as income from discontinued operation.
 
 
F - 31
 

FORMULA SYSTEMS (1985) LTD.
(An Israeli Corporation)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
 
Note 3 - Short-term Investments:
 
A.
Composition:
 
   
Interest rate
        
   
December 31,
    
December 31,
  
   
2009
    
2009
    
2008
  
   
%
    
(U.S. $ in thousands)
  
                   
Trading securities
           40,491       40,148  
Available-for-sale securities
           3,680       3,759  
Short-term deposits
   0.96-5.72       13,838       1,810  
Total
             58,009       45,717  
 
B.
The following is a summary of marketable securities which are classified as available-for-sale:
 
   
December 31,
  
   
2009
    
2008
  
   
(U.S. $ in thousands)
  
   
Amortized cost
    
Unrealized gains
    
Market value
    
Amortized costs
    
Unrealized gains
    
Market value
  
Available-for-sale:
                                    
Government debentures
     407       37       444       952       59       1,011  
Commercial debentures
     2,888       175       3,063       2,596       34       2,630  
Equity funds
     118       55       173       118       -       118  
Total available-for-sale
   marketable securities
     3,413       267