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AN N U ALR E P O R TAN DAC C O U N T S1 9 9 8
CONTENTFINANCIAL HIGHLIGHTS1ABOUT THE COM PANY2LETTER TO THE SHAREHOLDERS4M cKESSONHBOC6SICOVAM S.A.8SYNTEL10M ANAGEM ENT DISCUSSION AND ANALYSIS12REPORT OF INDEPENDENT AUDITORS14CORPORATE INFORM ATION30S
HIGLIGHT Magic Software forms new “Magic Applications” business division Acquisition of new Magic Applications “Magic eMerchant” and “RentPro” New distributorships achieved in Korea and Brazil Establishment of joint venture subsidiaries Magic Software Japanand Magic Software Enterprises India Opening of Research & Development facility in Pune, India Magic Software Enterprises receives ISO 9001 Certification Magic Enterprise Edition wins ‘DBMS Reader’s Choice Award’ as top applicationdevelopment tool for 1998 Magic Software opens new East Coast office in New York, USA User Conference in Orlando, USA, with over 400 participants from over 40 countries Release of Magic Enterprise Edition V8.2 with Euro support. Release of Magic/400 V8.2 (Client and Server) for IBM’s AS/400 Advanced Series Release of Magic for Linux Version 8.2. Release of Magic Web Online technology, phase one.F I N A N C I A LI N C O M EHH I G H L I G H T SS TA T E M E N TD A TA( U . S. d o l l a r s i n t h o u s a n d s e x c e p t p e r s h a r e a m o u n t s )SalesResearch and development costsOperating incomeIncome before taxesTaxes on incomeNet incomeEarnings per shareWeighted average number of shares outstandingB A L A N C ESS H E E TD A T A( U . S. d o l l a r s i n t h o u s a n d s e x c e p t p e r s h a r e a m o u n t s )Working capitalTotal assetsShort-term debt including current maturitiesPayable to parent and affiliated companiesShareholders’ equity1(December )5,739(December 7,136
A B O U TT H EC O M P A N YM agic Softw are Enterprises (” M SE” ) develops andm arket s ap p licat io n d evelo p m en t t ech n o lo g y,applications, and associated services. M SE’s suite ofproduct s and services enables companies t o solvebusiness problems w hile leveraging t heir exist ingreso u rces an d t akin g ad van t ag e o f em erg in gtechnologies.In M agic, t he
I N T E G R A T I N GT O M O R R O W ’ SMS O L U T I O N Sagic Software Enterprises wasestablished in 1986. It has beena public, NASDAQ-traded company(NASDAQ: MGIC) since 1991, andemploys more than 560 peopleworldwide. Magic’s products and servicesare available through a global networkof subsidiaries, distributors, and MagicSolutions Partners in more than 50countries.competitions, customer sites, and inanalyst evaluations. Magic’s uniformdevelopment paradigm across a widerange of platforms, architectures, andthe Internet, means that an organizationneeds only one technology and one setof development skills to develop for anenterprise-wide mix of platforms,architectures, and deploymentenvironments.Magic Software Enterprises develops,markets and supports its flagshipproduct, Magic Enterprise Edition(Magic), a highly productive, crossplatform development and deploymentenvironment for building e-commerceand enterprise level applications. InMagic, the time it takes to build andmaintain mission-critical applications isdrastically reduced. The developer buildssophisticated, strategic applications byusing a unique, engine-based,programming paradigm which eliminatesthe repetitive and tedious aspects ofcoding.Magic’s decisive technologicaladvantage has proven the competitiveadvantage of many MIS departmentsand independent software vendors. Itsrapidity and portability let them deliverworking prototype applications in daysrather than weeks or months, directlyresulting in reduced project costs, timeframes, and ongoing maintenanceoverhead.Magic has repeatedly been proven themost rapid development technology onthe market at industry developerMSE markets selected “MagicApplications”, the elite of the applicationsdeveloped by its base of Magic SolutionsPartners, in various vertical andhorizontal markets. Magic Software’sProfessional Services provide productmaintenance, technical support,installation services, applicationT O D A Ydevelopment services, consulting, projectmanagement, and Magic Universitytraining to help our clients and partnersobtain the maximum from theirinvestment.MSE recently joined the FormulaGroup (TASE: FORMULA, NASDAQ:FORTY), Israel’s largest public softwaregroup. Significant investments ofFormula Group in Mashov Computersand directly in MSE have resulted inFormula Group holding approximately53% of Mashov and 26% of MSE.With over 100,000 development unitsand 1,300,000 end-user deploymentunits sold to date, Magic’s installed baseof corporate IS system staff, VARs,systems integrators, independentdevelopers and software publishers, iscontinually growing. Magic solutionsperform strategic functions in some ofthe world’s most prestigiousorganizations including McKessonHBOC, Ernst & Young, Hitachi,Seimens Nixdorf, Club Med, FinancialTimes, Gap, Johnson & Johnson, PhilipMorris, Saab, and many more.It t akes t o build andmaint ain mission crit icalapps is drast ically reduced3
LETTER TO TH E SH A REH O LD ERS1 9 9 8 W as AFor M agicDavid AssiaJack DunietzDear Shareholders:1998 w as a t urnaround year f or M agic Sof t w areEnterprises. The year began w ith heavy losses, butreversed half-w ay through to deliver a profitable thirdquarter and the best fourth quarter in our Company’shistory. Revenues for 1998 increased to 38.8 millionfrom 37.4 million recorded in the previous year. Netloss for the year w as 6.5 million compared to the 10.5 million loss posted for 1997. M SE increased itsgross margin percentage from approximately 60% inthe fourth quarter of 1997 to roughly 66% in thefourth quarter of 1998. M SE’s cash position tripled,from 1.4 million in the fourth quarter of 1997 to 5.8 million in 1998.Early in the year we identified aneed for strong financial backing toprovide us with credibility and aguarantee of existence into themedium and long term to show toour potential and existing customers.This we managed to procure fromFormula Systems, Israel's largestsoftware group, who invested 12million in MSE during the course of1998.Following heavy losses incurredin the first half of the year, weperformed a major restructuring inmid 1998. In response to continuingmarket signals of a shift towardssolutions purchase and away fromdevelopment tools, we decided toreposition the company as a providerof broader business solutions for theenterprise market. At the same time,we continue to strengthen our coreexpertise as a premier provider of arapid application developmentenvironment. We have realized thatthe future of our industry belongs tothose who can integrate a broadspectrum of tools, applications, andassociated services, under a singleoffering. Acting upon this realization,we now offer complementaryapplications, training, and servicesto our customers, where before weconcentrated mostly on ourdevelopment tool.In 1998 we introduced MagicV8.20 for the Windows, AS/400 andUNIX platforms. This received anextremely positive response fromindustry analysts, media, andcustomers, who are increasinglyusing the software to develop ecommerce and Web-basedapplications. We continue to nurtureand focus on our strategicrelationship with IBM’s AS/400division, and achieved significantsales in 1998 on this platform,including sales to German furnituresupplier Moebel Unger, US-basedParadise Cruises and many others.We embarked upon an aggressivecost containment program, whichhas significantly lowered operatingand SG&A expenses. This was
Turnaround YearSof t ware Ent erprisesevidenced by the fourth quarterdecline of 33% in cost of softwaresales, 14% in sales and marketingexpenses, and 10% in G&A. Aroundthe world, we've raised productivityand shed costs. The efficiency storyis repeated all across MSE as ourdepartments and subsidiarieschallenge themselves to achievelower costs, greater efficiency andhigher productivity.An integral part of our newstrategy is our determination toleverage our international presence,which our larger, multinationalenterprise customers demand. Aspart of our efficiency story, we areforging a more cohesive and tightlyknit corporate identity. We arefostering teamwork between ourdepartments and subsidiaries acrossthe world; encouraging sharing andreuse of labor, skills, materials, andexpertise. Not only, in this way, dowe cut costs, but we also increasesales, encouraging distributors andsubsidiaries to leverage one another’sexperience and base of customerreferences to their mutual benefit.We look forward to extending thisin 1999 to include our broaderchannel of Value Added Resellersand Magic Solutions Partners in theactualization of an identifiable, selfaware, Magic Community ofdevelopers and users.MSE made several investments in1998 to strengthen its position as asolutions provider. We purchased a75% interest in MRTI, an Israelicompany that develops and marketsa leading car rental applicationdeveloped using Magic, and acquiredthe rights to “Magic eMerchant,” aMagic-based, ecommerce, businessto-business application.MSE is committed to Asia/Pacificas a promising growth market forthe 21st century. We signed anagreement with Wacom, MSEexclusive distributor in Japan for thepast 10 years, to form “MagicSoftware Japan,” a Japanesesubsidiary held 80% by MSE and20% by Wacom. MSE increased itsequity holding in Magic (Infotech)India (MII) from 30% to 51%, andtook a two-year option to acquire60% of Next Step, an Indian softwarehouse specializing in banking. Wehave just signed an agreement toacquire a controlling interest inMagic Thailand, our Thai distributor5for the last eight years, and in MagicGroup Australia, our Australiandistributor.MSE invested heavily in the futureduring 1998. We added significantlyto our talent base, focused ourstrategy, increased our operatingefficiency, and took steps to expandand adapt our product offering tofacilitate penetration into newmarkets and industries, whileimproving service to our existingloyal customer base.We are confident that 1999 willbe a record-breaking year for ourcompany.Yours sincerely,David AssiaExecutive ChairmanJack DunietzCEO
McKESSONName: M cKessonHBOCHeadquart ers: London, UKBusiness: Software and technology provider to the health industryProduct : Pat hw ays pat ient administ rat ion syst emHBOC
S O F T W A R EP R O V I D E RT OT H EH E A L T HI N D U S T R YM cKessonHBOC, t he w orld’s largest supplier of sof t w aresolutions and technological innovations to the health industry,t urned t o M agic t o develop Pat hw ays – a new pat ientadminist rat ion syst em f or deployment by healt h servicest hroughout Europe and across t he globe. Pat hw ays handleseveryt hing f rom management of pat ient ref errals, pat ientflow, and contract administration, to hospital and outpatientscheduling and access t o archive dat a. Pat hw ays runs onM S Window s NT and SQL Server, and M cKessonHBOC plansto use Magic to quickly port Pathways to many other RDBMSand operat ing environment s.M agic Allows Us to Develop PathwaysIn a M odular Fashion"Adaptability is vital to healthcareproviders products must employ an open systemsarchitecture that enables them to add functionalitywithout making their current systems obsolete. Magicallows us to develop Pathways in a modular fashion."Peter LoomesProgram Manager, McKessonHBOC7
SICOVAName: Sicovam S.A.Headquart ers: Paris, FranceBusiness: Clearing House f or French Securit iesat t he Bank of FranceProduct : Treasury Bill Clearing Syst emMS.A.
EUROTRANSACTIONSINREALTIMESicovam S.A., established in 1949, keeps in custody and clears alltrades for the Central French Securities Depository, handling over 1 billion in trades a day. They selected M agic Solutions PartnerESDS to build the Euro-compliant system, RGV, in M agic, follow inga failed project begun w ith another tool in 1995. RGV managesSicovam’s off-market trading and treasury bonds operations w ithreal-time delivery against payment and a turnkey client w orkstation.RGV, developed in only 11 months, is the only system to have receivedunreserved approval from the European Central Bank. Thanks toRGV, Paris is the w orld’s only financial center to offer Euro transactions,settled w ith central bank money, in real time.M agic Could Quickly React In anEver- Changing Business Environment“Euro issues are behind us. ESDS’s ability to implementRGV within such a tight deadline showed how wellMagic could meet our needs and quickly react in anever-changing business environment.”Jean-Marc EyssautierExecutive Vice President ofMarketing, Sicovam S.A.9
SYNName: Synt el Financial Sof t w areHeadquart ers: Reeuw ijk, The Net herlandsBusiness: Financial Services Sof t w are ProviderProduct : EuroPortTEL
F I N A N C I A LS E R V I C E SS O F T W A R EP R O V I D E RSyntel Financial Softw are, established in 1979, is a leading M agicSolutions Partner. Syntel numbers amongst its clients a distinguishedlist of international banks. Syntel used M agic to develop EuroPort,a sophisticated banking system for administration of securities,derivatives, current accounts, custodial accounts, and all relatedactivities for the real-time pricing and administration of stocks andbonds. EuroPort features an Internet brow ser-enabled front end,w hich enables clients to trade stocks and bonds online by directlyaccessing the relevant financial markets. EuroPort runs on C-ISAM ,Oracle, and the IBM RS/6000.W ith M agic, we can rapidly developt ransact ion- int ensive e- business syst ems"With Magic, we can rapidly develop transactionintensive e-business systems, enabling us to lead theway in a competitive and demanding market."Marco Grimberg, Marketing Manager,Syntel Financial Software.11
MANAGEMENTThe Company's consolidated financialstatements are stated in U.S. dollars andprepared in accordance with IsraeliGAAP and U.S. GAAP, which asapplicable to these financial statementsare practically identical in all materialrespects. The currency of the primaryThe follow ing discussion andrespect to future events andanalysis of the Company’sfinancial results. Thisbusiness, as w ell as thediscussion and analysis shouldconducted is the U.S. dollar which is theremaining sections of thisbe read in conjunction w ithfunctional and reporting currency of theAnnual Report, containthe Company’s ConsolidatedCompany and its subsidiaries.various forw ard-lookingFinancial Statements andstatements, w hich reflect thenotes thereto includeddenominated in U.S. dollars areCompany’s current view s w ithelsew here in this Report.presented at their original amounts.economic environment in which theoperations of the Company areTransactions and balances originallyTransactions and balances in othercurrencies are remeasured into dollars inaccordance with the principles set forthin Financial Accounting Standards Board("FASB") Statement No. 52.Remeasurement of gains and losses areincluded in financial income and expense.12
DISCI n c o m eUSS t a t e m e n tS1995t h o u sa n d s,1996e x c e p t 18,764 19,856 28,085 24,026 637,43238,760Sof t w are salesTot al revenues1997sh a r e1998d a t a )Cost s of revenues:ServicesTot al cost of revenuesGross prof itOPERATIONSp e rRevenues:Sof t w are salesAND RESULTS OFNYear Ended Decem ber 31,1994(InServicesCONDITIONSOD a t a :ANALYSIS 0)Operat ing expenses:Research and developm ent , netSelling and m arket ing, netGeneral and adm inist rat iveRest ruct uring and ot her non-recurring expensesTot al operat ing expensesOperat ing incom e (loss)Financial expenses, netIncom e (loss) bef ore incom e t ,560(10,640)(6,322)-67(115)(51)(149)Incom e t axesEquit y in earnings (loss) of an aff iliat eM inorit y int erest in losses (earnings)of consolidat ed subsidiary88123(47)23712Net incom e (loss) (1,400) (438) 1,398 (10,454) (6,459)Basic earnings (loss) per share (0.34) (0.10) 4,1584,303 (0.34) (0.10)4,1584,3030.30( 2.15)(1.10)Shares used t o com put e basicearnings (loss) per shareDilut ed earnings (loss) per share4,720 .0294,853 (2.15)5,870 (1.10)Shares used t o com put e dilut edearnings (loss) per shareB a l a n c eS h e e tWorking capit al (def icit )Tot al asset sTot al debtShareholders' equit y134,9755,0425,870D a t a :19941995199619971998 7,376 6,213 9,820 (519) 43614,88915,10921,95611,43617,136
MAANALYSIS OFFINANCIALCONDITIONSAND RESULTS OFOPERATIONSNAGEMENTOverviewCompany increased its sales force in aThe Company was established innumber of countries, including the1983 and completed an initialUnited Kingdom, Germany and France.public offering of its Ordinary Shares inThe UK also began to offer an increasingthe United States in August 1991. Inamount of fee-based consulting services1994, the Company began to experience aand technical support throughout thenumber of changes in its businessproduce life cycle. The cumulativeenvironment which impacted on itsimpact of these changes was a decline inoperating and financial performance. Asthe Company's rate of growth, ana result of the strong acceptance of theincrease in services as a percentage ofWindows operating system, sales of therevenues as well as an increase in sales,DOS version of Magic began to decline.marketing and research and developmentAs a result, the Company began focusingexpenses.on sales to cross platform client/serverIn 1998, the Company incurred a net lossenvironments for use in largeof approximately 6.5 million due to itsdepartments or on an enterprise-widefinancial results in the first two quarters ofbasis. In addition, the Companythe year. Of such amount 2.68 millionaccelerated its development of a Windowswas attributable to non-recurring expenses,compatible product which was released ina provision for doubtful receivables of 1.2September 1995.million (mainly in Southeast Asia) andWith the introduction and shipment of itsexpenses resulting from the Company’sWindows-based product, Magic 6, and itsrestructuring plan, especially in the Israeliability to offer advanced client/serversales office, which began in 1997. Thefunctionality, the Company began toCompany further attributes its losses torealize accelerated sales growth and athe continuing trend of organizations toreturn to profitability in 1996. In 1996,purchase packaged application forthe Company had sales of 36.0 millionenterprise information managementand net income of 1.4 million.instead of building them.The enterprise market generally requiresAs a result of improved margins, aa longer sales cycle and a greater degreesignificant reduction in expenses, increase inof up-front support. In order to facilitaterevenues in France and Germany and athe sales of its tools for UNIX VMS, IBMpositive contribution from Magic USA, theAS/400, Windows, and other client/serverCompany returned to profitability in theenvironments into this market, thethird quarter of 1998. The Company also14
DISANALYSIS OFFINANCIALCONDITIONSCUSIONbenefited from a sharp increase in earningsResearch and development costs, net offrom its maintenance, consultancy and othergovernment and other grants, are charged toservices. Such increase was a result of theincome as incurred until technologicalCompany’s adoption of a strategic decisionfeasibility is established. Technologicalto become a provider, together with itsfeasibility is established upon completion of aMSPs, of complete solutions to key verticaldetailed program design. Costs incurred bymarkets and business processes as well asthe Company subsequent to thebeing a provider of development tools.establishment of technical feasibility areAND RESULTS OFcapitalized in accordance with Statement ofAccount ing M at t ersOPERATIONSSFinancial Accounting Standards ("SFAS")Revenues from software licenseagreements are recognized upon deliveryof the software if: (i) collection is probable,(ii) all license payments are due within oneyear, (iii) the license fee is fixed ordeterminable, (iv) vendor - specificevidence exist to allocate the total fee tothe undelivered elements of thearrangement, and (v) persuasive evidenceof an arrangement exists.No. 86. Capitalized software costs areamortized by the greater of (i) the ratio thatcurrent gross revenues from sales of thesoftware bear to the total of current andanticipated future gross revenues from salesof the software or (ii) the straight-linemethod over the remaining estimated usefullife of the product (not greater than fiveyears). The Company assesses therecoverability of this intangible asset byRevenues from consulting services,maintenance contracts and training arerecognized ratably over the contractualperiod or as services are performed.determining whether the amortization of theasset over its remaining life can be recoveredthrough undiscounted future operating cashflows from the specific product.Royalty-bearing grants from theGovernment of Israel and others forfunding certain approved research projectsThe follow ing table sets forth the total research and developmentcosts, the amount of royalty-bearing grants received from theGovernment of Israel, softw are development costs capitalized, andthe net research and development expenses for the periodsindicated:and marketing activities are recognized atthe time the Company is entitled to suchgrants on the basis of the related costsYear Ended December 31,199619971998Total research and development costs 6,950 6,758 4,080Less royalty bearing grants(1,922)(285)--1998 to the BIRD-F with the objective ofLess capitalization of softw are(2,417)(3,125)(1,283)canceling the agreement it had reached inResearch and development , net 2,611 3,348 2,797the past which amounted to 350,000.incurred. The Company applied during15
MANAR e s u l t sANALYSIS OFGo fEMENTO p e r a t i o n sThe f ollow ing t able set s f ort h, f or t he periods indicat ed, select ed f inancial inf orm at ion f or t he Com pany as a percent age of t ot alrevenue:1996FINANCIALSof t w are sales77%ServicesCONDITIONSAND RESULTS OF199864%53%233647100100100Sof t w are sales11128Services202832Tot al cost of revenues314040696060Tot al revenuesCost of revenues:Gross prof itOPERATIONS1997Revenues:Operat ing expenses:Research and developm ent , net797Selling and m arket ing, net444741General and adm inist rat ive expenses11162001476286757(26)(15)Rest ruct uring and ot her non-recurring expensesTot al operat ing expensesOperat ing incom e (loss)Financial incom e (expenses), net(Loss) incom e bef ore incom e t axesIncom e t axesEquit y in earnings of an aff iliat e(1)(1)(1)6(27)(16)(2)(1)0000M inorit y int erest in losses of consolidat ed subsidiary0Net (loss) incom e4%1610(27)%(16)%
DISANALYSIS OFCUSYear Ended December 31, 1998Compared w it h Year Ended December31, 1997SIONexpenses and other related costs. Cost ofrevenues for maintenance and technicalsupport consists primarily of personnelFINANCIALCONDITIONSAND RESULTS OFOPERATIONSTot al Revenues. Revenues consistexpenses for the European and Israeliprimarily of: (i) software sales (ii)technical support center and other relatedmaintenance and technical support and (iii)costs. Cost of revenues increased 4.2%services (including consulting services andto 15.3 million in 1998 from 14.7training). Total revenues increased 3.5%million in 1997. Costs of revenues forto 38.8 million in 1998 from 37.4software sales decreased 30.8% in 1998 tomillion in 1997. Software sales decreased 3.0 million from 4.3 million in 1997 as14.8% to 20.5 million in 1998 from 24.0a result of the decline in softwaremillion in 1997. This decrease wasproduction to the Japanese market. Costprincipally attributable to the decline inof revenues for services increased 17.4%software revenues in Japan and Southeastto 9.0 million in 1998 from 7.7 millionAsia, where economic turmoil disruptedin 1997 as a result of the Company’s shiftsales. Revenues from technical support andfrom software sales to services. Cost ofmaintenance increased 37.8% to 5.8revenues for maintenance and technicalmillion in 1998 from 4.2 million in 1997support increased 22.7% to 3.3 millionand revenue from services increased 35.7%in 1998 from 2.7 million in 1997.to 12.5 million from 9.2 million in 1997.Gross prof it . Gross profit increased 3.1%This growth, mainly in Europe, reflectsto 23.4 million in 1998 from 22.7the Company’s increased efforts to grow itsmillion in 1997. In 1998, the Company'sfee-based consulting and training servicesgross margin (gross profit as a percentageto external contractors.of total revenues) on software salesCost of Revenues. Cost of revenues forincreased to 85% from 82% in 1997. Thesoftware sales consists primarily of: (i)Company's gross margin on servicesamortization of capitalized software; (ii)increased to 28% in 1998 from 16% insoftware production costs (including1997. The Company’s gross margin onmedia, packaging, freight andmaintenance and technical supportdocumentation); (iii) certain royalties andincreased to 43% in 1998 from 37% inlicenses payable to third parties (including1997. The Company expects its grossthe Chief Scientist); and (iv) pre-salemargin to vary in the future due totechnical support costs. Cost of revenueschanges in the composition of its revenuefor services consists primarily of personneland its product and customer mix.17
MAANALYSIS OFFINANCIALCONDITIONSAND RESULTS OFOPERATIONSNAGEMENTResearch and Development , Net .Selling and M arket ing, Net . Selling andResearch and development costs consistmarketing expenses consist of costsprimarily of salaries of employees engagedrelating to promotion, advertising, tradein on-going research and developmentshows and exhibitions, compensation, salesactivities and other related costs. Grants forsupport, travel and related expenses andresearch and development and theroyalties payable to the Israelicapitalization of software developmentGovernment's Fund for theexpenses are applied as reductions to totalEncouragement of Marketing Activitiesresearch and development costs to calculate(the "Marketing Fund"). Selling andnet research and development expenses.marketing expenses decreased 8% to 16.1Total research and development costsmillion in 1998 from 17.5 million indecreased to 4.1 million in 1998 from1997. Selling and marketing expenses as a 6.8 million in 1997. The decrease waspercentage of sales decreased to 41.5% inprimarily a result of the decreased1998 from 46.8% in 1997, principally as aexpenses associated with the restructuringresult of the decrease in software sales.plan. Net research and development costsThe Company expects that selling anddecreased to 2.8 million in 1998 frommarketing expenses will increase in 1999 as 3.3 million in 1997. The Company dida result of the planned increase innot receive any grants from the Chiefmarketing and sales efforts for theScientist in 1998 as compared to 285,000Company's new products, but are expectedin 1997. The Company did not accrueto decrease as a percentage of sales.any grants from the BIRD-F in 1998. TheGeneral and Administ rat ive. GeneralCompany expects that its total researchand administrative expenses consist ofand development costs as a percentage ofcompensation costs for administration,sales will decrease approximately 3.8% infinance and general management1999 as compared to 1998.personnel and office maintenance andIn 1998 the Company reached anadministrative costs. General andagreement with the Chief Scientistadministrative expenses increased to 7.8according to which the Company will paymillion in 1998 from 6.1 million in 1997.royalties on all of the Company'sThe increase was primarily attributable toconsolidated revenues. As a result, thethe costs associated with the Company’sCompany provided for the full amount ofincreased activities in the United States,the royalty commitment, which amountedGermany and France - and the overallto approximately 1.0 million.growth in the Company's operations.18
DISANALYSIS OFFINANCIALCONDITIONSAND RESULTS OFOPERATIONSCUSSIONGeneral and administrative expenses as aEquity in Results of Affiliates. Equity inpercentage of revenues increased to 20.2%earnings of an affiliate represent thein 1998 as compared to 16% in 1997. TheCompany's proportionate share ofCompany expects that general andMicronova, MII, MRTI, and Magicadministrative expenses will increase byThailand. In 1998, the Company54% in 1999 compare to 1998 and as arecognized a loss of 45,000 from its 42%percentage of sales will decrease 1% as aminority interest in Micronova and 20%result of the continued growth in theminority interest in Magic Thailand asCompany's operations.compared to a loss of 13,000 in 1997. InFinancial Income (Expenses), Net .1998 the Company also recognized a loss ofFinancial expenses consist of interest 95,000 from its 20% minority interest inexpense from borrowings and currencyMRTI and its 35% minority interest in MII.transaction adjustments and financialM inorit y Int erest in Prof it s ofincome consists of income on cash andConsolidat ed Subsidiaries. Minoritycash equivalent balances. The Company’sinterest in profits of consolidatedfinancial expenses were 322,000 in 1998subsidiaries represents the minorityas compared to financial expenses ofshareholders' share of the profits of the 488,000 in 1997 as a result of Formula’ssubsidiaries, Magic Benelux and Magicequity investment in the Company duringItaly, in which the Company currentlythe second half o
fourth quarter of 1998. MSE's cash position tripled, from 1.4 million in the fourth quarter of 1997 to 5.8 million in 1998. David Assia Jack Dunietz Early in the year we identified a need for strong financial backing to provide us with credibility and a guarantee of existence into the medium and long term to show to our potential and .
