FORMULA SYSTEMS (1985) LTD

Formula Systems (1985) Ltd. is a global information technology holding company that operates through its subsidiaries and affiliate company, providing software consulting services, computer-based business solutions, hardware products, and proprietary software solutions. The company delivers its solutions in Israel and numerous countries worldwide to customers with complex IT services needs, including a number of Fortune 1000 companies. The global information technology industry continues to undergo significant structural transformation, driven by rapid technological advancements, increasing complexity of enterprise systems, and evolving business and regulatory requirements. Organizations across industries are accelerating their digital transformation initiatives in order to enhance operational efficiency, improve customer experience and maintain competitiveness. The IT services industry is evolving from traditional capacity-based outsourcing models toward outcome-driven and capability-based service models, with greater emphasis on integrated solutions combining software, services and infrastructure. According to data published by Forrester in 2026, global technology spending is projected to increase by approximately 7.8% in 2026, to reach $5.6 trillion, while Gartner projected that global IT spending is expected to grow by approximately 10.8% in 2026, reaching approximately $6.15 trillion.

The markets for the IT products and services offered by Formula are rapidly evolving, highly competitive and fragmented, with frequent new product introductions and mergers and acquisitions. Matrix IT Ltd. is Israel's leading IT services company as demonstrated in recent research reports of the Israeli IT market published by IDC and STKI. In the Israeli market, the principal competitors of Matrix and Magic Software include IT services companies and system integrators such as Hilan, Malam-Team, One1, TSG Systems, Aman, Elad, Yael, Emet Computing, Amnet, Abra, SQLink, Log-on, HMS, SpeedValue, Kyndryl and IBM Israel. In the United States and other international markets, Matrix and Magic Software compete with numerous service providers including companies that provide offshore services from India at lower cost structures. In certain areas including governance, risk and compliance, Matrix competes with large global corporations such as IBM, Accenture and Oracle, as well as the consulting divisions of the Big-4 accounting firms. Michpal is considered one of the leading providers of payroll solutions in Israel, with principal competitors including T.M.L Solutions, One Technologies, Malam Team and Hilan. The company competes based on breadth and integration of product offering, functionality, ease of use, customer support, long-term customer relationships and pricing.

Formula generates revenue through its subsidiaries and affiliate company by providing software consulting services, selling and marketing computer-based business solutions and hardware products, and developing proprietary software solutions. The company recognizes revenues in two categories: the delivery of software services and the delivery of proprietary software solutions and related services. For the year ended December 31, 2025, revenues from the delivery of software services were $2,418,430 thousand ¹ and revenues from the sale of proprietary software products and related services were $208,694 thousand ². Software services revenues constituted 92.1% ³ of total revenues, while proprietary software products and related services constituted 7.9% ⁴ of total revenues. The company provides its investees with management, technical expertise and marketing experience to help them create long-term value and directs their overall strategy through active involvement. Formula's operations are conducted by way of its subsidiaries and affiliate company, with the parent company not conducting independent operations at its level.

Matrix IT Ltd. is Israel's leading IT services company, employing approximately 12,880 ⁵ software, hardware, integration, engineering and training professionals as of year-end 2025. Matrix operates through four principal areas of activity: Information Technologies solutions and services, consulting and management in Israel; IT solutions and services in the United States; cloud and computing infrastructure; and sales, marketing and support of software products. In 2025, Matrix's revenues under the IT solutions and services in Israel business line were approximately NIS 3.821 billion (approximately $1.111 billion) ⁶, compared to NIS 3.337 billion (approximately $902.3 million) ⁷ in 2024, representing an increase of approximately 14.5% when measured in NIS. Operating income under this business line in 2025 was approximately NIS 291.5 million (approximately $84.7 million) ⁸ compared to approximately NIS 250.1 million (approximately $67.6 million) ⁹ in 2024. Matrix's revenues under the IT solutions and services in the United States business line were approximately NIS 458.6 million (approximately $133.3 million) ¹⁰ in 2025 compared to NIS 460.9 million (approximately $124.6 million) ¹¹ in 2024. Matrix's revenues under the cloud and computing infrastructures business line were approximately NIS 1,645.3 million (approximately $478.3 million) ¹² in 2025 compared to approximately NIS 1,465.9 million (approximately $409.8 million) ¹³ in 2024. Matrix's revenues under the sales, marketing and support of software products business line were approximately NIS 440.4 million (approximately $128.0 million) ¹⁴ in 2025 compared to approximately NIS 456.8 million (approximately $123.5 million) ¹⁵ in 2024.

Magic Software, which merged with Matrix in February 2026, is a global provider of software services and IT outsourcing services, proprietary application development and business process integration platforms, selected packaged vertical software solutions, and cloud-based services for end-to-end digital transformation. As of December 31, 2025, Magic Software had approximately 4,072 ¹⁶ employees. Magic Software's software technology platforms include Magic xpa Application Platform, AppBuilder Application Platform, Magic xpi Integration Platform, Magic xpi cloud native, Magic SmartUX, FactoryEye, and Magic Data Management and Analytics Platform. Its vertical software packages include Clicks for healthcare, Hermes Cargo for air cargo management, HR Pulse for human capital management, MBS Solution for TV broadcast channels, Nativ for rehabilitation centers, and Mobisale for sales and distribution. Michpal Technologies is an Israeli technology company engaged in the development and provision of proprietary software solutions and related services in payroll, human capital management, pension administration, financial management and business process automation. Michpal serves more than 15,000 ¹⁷ customers in Israel. Michpal's largest client accounted for 13.1% ¹⁸ of its revenues in the year ended December 31, 2025. Michpal completed an initial public offering in September 2025, issuing 4,910,000 ¹⁹ new shares at a price of NIS 61.1 ²⁰ per share for aggregate gross proceeds of approximately NIS 300 million (approximately $89.9 million) ²¹. Zap Group is Israel's largest group of consumer websites managing more than 20 leading consumer websites with a total of more than 17 million ²² visits per month. InSync is a US-based national supplier of employees to Vendor Management Systems Workforce Management Program accounts, currently supporting more than 30 ²³ VMS program customers with employees in over 40 ²⁴ states.

On December 17, 2025, Sapiens, a subsidiary of Formula at that time, completed its acquisition by Advent, a leading global private equity investor, for cash. Existing shareholders of Sapiens received $43.50 ²⁵ per common share. Formula retained an indirect 18.68% ²⁶ minority ownership interest in Sapiens held through SI Swan. The total contribution from Sapiens, including the capital gain and Formula's share in Sapiens' results up to the date of the transaction, amounted to approximately $570 million ²⁷. On February 24, 2026, Matrix and Magic Software completed a reverse triangular merger, with former shareholders of Magic Software holding 31.125% ²⁸ of Matrix's outstanding shares on a fully diluted basis and shareholders who held Matrix ordinary shares immediately prior holding 68.875% ²⁹ of Matrix's outstanding shares on a fully diluted basis. During 2025, Formula's subsidiaries completed numerous acquisitions including: Matrix's acquisition of 70% of Gav Systems Ltd. and Gav Expert Ltd. for total consideration of approximately NIS 45.5 million (approximately $12.5 million) ³⁰; Magic Software's acquisition of Expim Ltd for approximately NIS 18.2 million (approximately $5.0 million) ³¹; Michpal's acquisition of 70% of Mishmarot Technologies Ltd for approximately NIS 19.5 million in cash (approximately $5.8 million) ³²; and Formula Infrastructure's acquisition of 60% of Advance Engineering Ltd for total consideration of approximately NIS 20.1 million (approximately $6.2 million) ³³. Formula's board of directors announced its intention to declare a special cash dividend in an aggregate amount of up to $200 million ³⁴ following the filing of the Annual Report on Form 20-F for the fiscal year ended December 31, 2025.

For the year ended December 31, 2025, total revenues were $2,627,124 thousand ³⁵ compared to $2,218,434 thousand ³⁶ for 2024, representing an increase of approximately 18.4%. Gross profit was $519,162 thousand ³⁷ in 2025 compared to $445,756 thousand ³⁸ in 2024. Operating income was $196,377 thousand ³⁹ in 2025 compared to $183,332 thousand ⁴⁰ in 2024. Net income from continued operations was $109,584 thousand ⁴¹ in 2025 compared to $122,169 thousand ⁴² in 2024. Net income from discontinued operations was $559,480 thousand ⁴³ in 2025 compared to $71,621 thousand ⁴⁴ in 2024. Net income attributable to Formula's shareholders was $606,479 thousand ⁴⁵ in 2025 compared to $79,670 thousand ⁴⁶ in 2024. Cash and cash equivalents and short-term investments were $1,280.5 million ⁴⁷ as of December 31, 2025 compared to $563.2 million ⁴⁸ as of December 31, 2024. Indebtedness to banks and others including debentures was $441.6 million ⁴⁹ as of December 31, 2025 compared to $479.4 million ⁵⁰ as of December 31, 2024.

A significant growth vector for Formula is its M&A growth strategy, centered on three key factors: growing the customer base, expanding geographic footprint and adding complementary solutions and services to offerings. The company has completed numerous acquisitions in recent years and expects to continue to pursue such opportunities in the future. In February 2026, Formula Infrastructure completed the acquisition of 73% of M.L.B.S. Technologies Ltd for total consideration of approximately NIS 53.0 million (approximately $17.1 million) ⁵¹ and 70% of David Barhom Engineers & Consultants Ltd for total consideration of approximately NIS 42 million (approximately $13.6 million) ⁵². In February 2026, Matrix completed an issuance of convertible debentures (Series 2) with a nominal value of approximately NIS 297 million ⁵³, for gross proceeds of approximately NIS 300.6 million (approximately $93 million) ⁵⁴. The merger between Matrix and Magic Software completed on February 24, 2026 is expected to create a combined entity with enhanced capabilities, with Matrix's ordinary shares continuing to trade on the TASE.

Another growth vector is the expansion of Michpal's integrated platform and strengthening its position in the Israeli market through organic growth and acquisitions. Michpal has significantly expanded its activities beyond its traditional payroll business into adjacent domains including recruitment and human resources systems, financial and accounting software, digital workflow platforms and automation solutions. In November 2025, Michpal entered into an agreement to acquire 60% of the share capital of the Zviran Group for cash consideration of NIS 48 million (approximately $14.9 million) ⁵⁵, with additional contingent consideration. The acquisition was completed on April 1, 2026. Michpal continues to invest in the development of cloud-based solutions, automation tools and artificial intelligence capabilities aimed at improving user experience, enhancing analytics and enabling more efficient processing of payroll and financial data.The filing does not contain specific operational outlook details regarding supply chain posture, manufacturing capacity, technology infrastructure investments, or headcount strategy with exact figures.

Research and development expenses, net, were $20,023 thousand ⁵⁶ in 2025 compared to $18,077 thousand ⁵⁷ in 2024. Capitalization of software costs in 2025 and 2024 was attributable to subsidiaries engaged in providing proprietary software solutions.Capital expenditure plans are not specified with exact figures for future periods. Formula's board of directors announced its intention to declare a special cash dividend in an aggregate amount of up to $200 million ⁵⁸ following the filing of the Annual Report on Form 20-F for the fiscal year ended December 31, 2025. Formula's dividend policy states that sums not planned to be used for investments in the near future may be distributed to shareholders as a cash dividend, to the extent performance allows. The filing does not specify share repurchase authorization amounts.

A structural headwind explicitly flagged by management is the impact of the ongoing military conflicts between Israel and Iran and its proxies, which may adversely affect operations. As of the date of the annual report, 500 ⁵⁹ employees employed in Israel by Formula's subsidiaries were called up for reserve military service in the renewed conflict that began in February 2026. The mobilization of employees for military service has had a limited adverse effect on financial performance, primarily due to reduced revenues from Time and Material contracts and the fact that salaries paid to mobilized employees are not fully reimbursed by the State of Israel. If the various military conflicts continue, that could have a negative impact on the level of economic activity in the entire Israeli economy or on certain sectors, and/or on certain government offices and bodies, which may adversely affect the financial strength of some Israeli clients and/or lead to a reduction in demand and a reduction in their IT procurement budgets.

Another headwind is the macroeconomic environment characterized by lingering inflation, relatively high interest rates and increased tariffs, which may adversely impact the budgets of customers and potential customers for capital expenditures. The global macroeconomic environment includes headwinds caused by lingering inflationary conditions and relatively high interest rates, which could adversely impact the budgets of customers and potential customers for capital expenditures, and consequently, revenues, profitability, and cash flows. Fluctuations in foreign currency exchange rates have been adversely affecting and could continue to adversely affect the business. In 2025, the NIS, Euro and GBP appreciated significantly relative to the U.S. dollar, by approximately 7.1% ⁶⁰, 5.8% ⁶¹ and 2.8% ⁶² respectively, based on the average exchange rates over the course of 2025 as compared to 2024, thereby increasing the U.S. dollar value of revenues and operational profits generated in those currencies.

The implementation of Formula's M&A growth strategy involves significant risks, and the failure to integrate acquired companies successfully may adversely affect future results. The company has made a significant number of important acquisitions over the past decade and since the start of the last fiscal year alone, with integration challenges including preserving customer relationships, integrating complex core products and services, combining IT systems, and retaining key employees. The ongoing military conflicts between Israel and Iran and its proxies, including Hamas and Hezbollah, may materially adversely affect operations, as 500 ⁶³ employees were called up for reserve military service in the renewed conflict beginning in February 2026, and the company's commercial insurance does not cover losses that may occur as a result of the current war. The significant amount of goodwill and identifiable intangible assets on the consolidated statements of financial position, which totaled $793.9 million ⁶⁴ as of December 31, 2025, may result in future impairment charges which could adversely affect results of operations. Fluctuations in foreign currency exchange rates have been adversely affecting the business, with the NIS depreciating by 8.9% ⁶⁵ relative to the U.S. dollar in 2023 based on average exchange rates, and any recurrence of that trend would adversely affect U.S. dollar-reported results of operations. The company's largest shareholder, Asseco Poland S.A., owned approximately 25.82% ⁶⁶ of outstanding share capital as of May 1, 2026 and can significantly influence the outcome of matters requiring shareholder approval, which may have the effect of delaying or preventing a change in control.

Management's message emphasizes the resilience of the Israeli high-tech sector and the company's performance in 2025. For 2025 overall, when disregarding the results of operations of Sapiens which have been classified as discontinued operations, revenues for the full 2025 year increased by 18.4% ⁶⁷ year over year to approximately $2.63 billion ⁶⁸, compared to $2.22 billion ⁶⁹ for the full 2024 year. Operating income for 2025 increased by approximately 7.1% ⁷⁰ year over year, to approximately $196.4 million ⁷¹ compared to $183.3 million ⁷² for 2024. Excluding the impact of higher amortization expenses resulting from revising the estimated useful lives of certain acquired customer relationship intangible assets, operating income for the full year of 2025 would have increased by approximately 17.3% ⁷³ to $215.1 million ⁷⁴ compared to 2024. The strategic priorities emphasized include the continued execution of the M&A growth strategy, the successful integration of acquired companies, and the expansion of international operations. Management also highlights the importance of developing and deploying new technologies to address customer needs, particularly in areas such as cloud, cybersecurity, digital, data, DevOps and AI. The company's strategy is focused on creating long-term value for shareholders and the companies in which it invests, including supporting the growth and development of existing subsidiaries while pursuing acquisitions of businesses that complement the current portfolio.