MATRIX IT LTD. AND ITS SUBSIDIARIES CONSOLIDATED FINANCIAL STATEMENTS

Transcription

1 CONSOLIDATED FINANCIAL STATEMENTS AS OF DECEMBER 31, 2013

2 CONSOLIDATED FINANCIAL STATEMENTS AS OF DECEMBER 31, 2013 NIS IN THOUSANDS INDEX Page Auditors' Reports 2-4 Consolidated Statements of Financial Position 5-6 Consolidated Statements of Comprehensive Income 7 Consolidated Statements of Changes in Equity 8-10 Consolidated Statements of Cash Flows Notes to Consolidated Financial Statements

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6 CONSOLIDATED STATEMENTS OF FINANCIAL POSITION MATRIX IT LTD. AND ITS SUBSIDIARIES ASSETS Note December 31, CURRENT ASSETS: Cash and cash equivalents 4 148, ,655 Short-term deposit 2,333 - Financial assets at fair value through profit or loss 5, 25 59,361 52,172 Trade receivables 6, 9 587, ,109 Income taxes receivable 28,485 39,475 Other accounts receivable 7 62,768 52,581 Inventories 8 8,239 7, , ,891 NON-CURRENT ASSETS: Investments and other loans 10 6,528 6,303 Investments in associated company 11 3,102 6,950 Long term prepaid expenses 21,150 8,549 Property, plant and equipment, net 12 61,404 64,845 Goodwill , ,907 Intangible assets, net 13 24,621 28,114 Deferred taxes 21 40,071 39, , ,426 1,512,122 1,510,317 The accompanying notes are an integral part of the consolidated financial statements

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8 CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME MATRIX IT LTD. AND ITS SUBSIDIARIES Note Year ended December 31, (except per share data) Revenues 26b 1,931,650 1,983,952 1,758,230 Costs of revenues 26c 1,602,219 1,651,371 1,442,847 Gross profit 329, , ,383 Selling and marketing expenses 26d 74,231 75,703 69,213 General and administrative expenses 26e 114, , ,452 Operating income 140, , ,718 Financial expenses 26f 26,611 26,867 24,801 Financial income 26f 3,627 4,271 5,917 Company's share in losses of associated company (3,848) (158) (1,263) Income before taxes on income 113, , ,571 Taxes on income 21 24,575 26,985 24,136 Net income 89,132 90,672 93,435 Other comprehensive income: Actuarial gain (loss) from defined benefit plans (3,054) (2,299) 2,617 Foreign currency translation adjustments (8,722) (2,509) 2,176 Total comprehensive income 77,356 85,864 98,228 Net income attributable to: Equity holders of the Company 85,973 86,424 93,590 Non-controlling interests 3,159 4,248 (155) 89,132 90,672 93,435 Total comprehensive income attributable to: Equity holders of the Company 74,197 81,616 98,383 Non-controlling interests 3,159 4,248 (155) 77,356 85,864 98,228 Net earnings per share attributable to equity holders of the Company: 27 Basic net earnings Diluted net earnings The accompanying notes are an integral part of the consolidated financial statements

9 CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY Issued share capital Share premium Treasury shares Attributed to the Company's shareholders Foreign currency Retained translation earnings reserve Reserve- Transaction With a Former Controlling Shareholder Reserve from share-based payment Total Noncontrolling interests Total equity Balance as of January 1, , ,426 (7,982) 233,698 (5,860) 10,186 10, , ,839 Net income , ,973 3,159 89,132 Foreign currency translation reserve (8,722) - - (8,722) - (8,722) Actuarial gain (loss) from defined benefit plans (3,054) (3,054) - (3,054) Total other comprehensive loss (3,054) (8,722) - - (11,776) - (11,776) Total comprehensive income (loss) ,919 (8,722) ,197 3,159 77,356 Exercise of options (75) Dividend paid at 27% per NIS 1 par value of Ordinary shares (63,031) (63,031) - (63,031) Reserve from put options to noncontrolling interests - (599) (599) (1,066) (1,665) Purchase of non-controlling interests - (65) (65) 45 (20) Share-based payment ,367 3,367-3,367 Balance as of December 31, , ,762 (7,982) 253,586 (14,582) 10,186 13, ,564 2, ,846 The accompanying notes are an integral part of the consolidated financial statements

10 CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY Issued share capital Share premium Treasury shares Attributed to the Company's shareholders Retained earnings Foreign currency translation reserve Reserve- Transaction With a Former Controlling Shareholder Reserve from share-based payment Total Noncontrolling interests Total equity Balance as of January 1, , ,513 (7,982) 219,159 (3,351) 10,186 4, ,236 (193) 588,043 Net income , ,424 4,248 90,672 Foreign currency translation reserve (2,509) - - (2,509) - (2,509) Actuarial gain (loss) from defined benefit plans (2,299) (2,299) - (2,299) Total other comprehensive loss (2,299) (2,509) - - (4,808) - (4,808) Total comprehensive income (loss) ,125 (2,509) ,616 4,248 85,864 Exercise of options (149) Dividend paid at 30% per NIS 1 par value of Ordinary shares (69,586) (69,586) - (69,586) Purchase of non-controlling interests - (40,150) (40,150) (3,911) (44,061) Share-based payment ,579 5,579-5,579 Balance as of December 31, , ,426 (7,982) 233,698 (5,860) 10,186 10, , ,839 The accompanying notes are an integral part of the consolidated financial statements

11 CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY Issued share capital Share premium Treasury shares Attributed to the Company's shareholders Retained earnings Foreign currency translation reserve Reserve- Transaction With a Former Controlling Shareholder Reserve from share-based payment Total Noncontrolling interests Total equity Balance as of January 1, , ,619 (7,982) 190,028 (5,527) 10, , ,371 Net income (loss) , ,590 (155) 93,435 Foreign currency translation reserve , ,176-2,176 Actuarial gain from defined benefit plans , ,617-2,617 Total other comprehensive income ,617 2, ,793-4,793 Total comprehensive income (loss) ,207 2, ,383 (155) 98,228 Exercise of options 128 1, (2,022) Dividend paid at 28% per NIS 1 par value of Ordinary shares (67,076) - - (67,076) - (67,076) Purchase of non-controlling interests (558) (558) Share-based payment ,078 6,078-6,078 Balance as of December 31, , ,513 (7,982) 219,159 (3,351) 10,186 4, ,236 (193) 588,043 The accompanying notes are an integral part of the consolidated financial statements

12 CONSOLIDATED STATEMENTS OF CASH FLOWS Cash flows from operating activities: Year ended December 31, Net income 89,132 90,672 93,435 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 26,375 29,861 21,144 Taxes on income 24,575 26,985 24,136 Revaluation of debentures 2,012 7,982 9,066 Gain from available-for-sale financial assets - - (75) Change in employee benefit liabilities, net (4,192) (7,801) (2,490) Loss (gain) from change in value and sale of financial assets at fair value through profit or loss (1,705) (1,449) 5,269 Other financial expenses (income), net 16,283 12,991 (1,053) Revaluation of long-term loans from banks (235) 1, Company's share of losses of associated company 3, ,263 Gain from sale of subsidiaries - - (2,206) Revaluation of liabilities in respect of business combinations (7,049) Capital loss (gain) from sale of property, plant and equipment (42) Share-based payment 3,367 5,579 6,078 Decrease (increase) in value of put options of noncontrolling interests (2,708) 3,000 (993) Changes in asset and liability items: 60,581 79,126 61,807 Increase in trade receivables (96) (2,892) (44,366) Decrease (increase) in other accounts receivable (23,172) 7,585 (18,594) Decrease (increase) in inventories (340) 1,461 10,519 Increase (decrease) in trade payable 6,590 3,949 (37,382) Increase in employee benefit liabilities, deferred revenues and other payable 35,404 7,625 12,077 Cash paid and received during the year for: 18,386 17,728 (77,746) Interest paid (15,979) (14,059) (5,762) Interest received 1,770 2,126 4,068 Taxes paid (44,301) (57,774) (45,539) Taxes received 19,092 10,719 4,607 (39,418) (58,988) (42,626) Net cash provided by operating activities 128, ,538 34,870 The accompanying notes are an integral part of the consolidated financial statements

13 CONSOLIDATED STATEMENTS OF CASH FLOWS Cash flows from investing activities: Year ended December 31, Proceeds from sale of property, plant and equipment Purchase of property, plant and equipment (12,917) (12,144) (28,811) Proceeds (payments) from sale (for purchase) of financial assets at fair value through profit or loss, net (5,484) (645) 71,396 Proceeds from sale of available-for-sale financial assets Other investments - - (2,185) Proceeds from long-term loan Purchase of business operations - - (8,283) Capitalization of development costs (1,830) - (5,178) Payment for business acquisitions (a) 23 (58,899) (36,916) Proceeds from sale of investments in subsidiaries (b) - - 1,811 Investment in long-term deposits (2,273) (1,086) - Net cash used in investing activities (22,329) (72,736) (7,414) Cash flows from financing activities: Short-term credit from banks and other credit providers, net 8,478 1,630 17,365 Proceeds from long-term loans from banks 66, , ,000 Repayment of debentures and interest (60,752) (127,300) - Repayment of long-term loans from banks (49,056) (34,658) (23,132) Dividend paid to Matrix's shareholders (63,031) (69,586) (67,076) Payment of liabilities in respect of business combinations (2,034) (2,676) (3,140) Repayment of capital lease obligation (1,645) (724) (763) Dividend paid to non-controlling interests (5,378) (7,212) (7,602) Payment of liability for put option to non-controlling interests - (18,445) - Net cash provided by (used in) financing activities (107,418) (98,971) 35,652 Exchange differences on balances of cash and cash equivalents (3,828) (1,609) 3,093 Increase (decrease) in cash and cash equivalents (4,894) (44,778) 66,201 Cash and cash equivalents at the beginning of the year 153, , ,232 Cash and cash equivalents at the end of the year 148, , ,433 The accompanying notes are an integral part of the consolidated financial statements

14 CONSOLIDATED STATEMENTS OF CASH FLOWS (a) Payment for business acquisitions: The acquiree's assets and liabilities at date of acquisition: Year ended December 31, Working capital (excluding cash and cash equivalents) 2,537 (7,484) (7,273) Cash held for distribution to previous controlling shareholder - - (17,255) Long-term deferred taxes - (2,144) (84) Property, plant and equipment, net (53) (2,629) (4,474) Goodwill (5,735) (76,223) (69,698) Intangible assets (1,400) (20,669) (14,389) Other long-term liabilities Employee benefit liabilities - 5,142 2,722 Deferred taxes 744 5,170 4,757 Liability to previous controlling shareholder - 6,428 24,857 Non-controlling interests - 23,562 - Liability in respect of business combinations 3,930 9,958 43, (58,899) (36,916) (b) Proceeds from sale of investments in subsidiary: Working capital (excluding cash and cash equivalents) - - (428) Long-term deferred taxes Property, plant and equipment Goodwill Other long-term liabilities - - (31) Non-controlling interests - - (558) Receivables for sale of investment in subsidiary Gain from sale of subsidiary - - 2, ,811 (c) Significant non-cash transaction: Purchase of property, plant and equipment against payables - - 9,650 The accompanying notes are an integral part of the consolidated financial statements

15 NOTE 1:- GENERAL a. Matrix IT Ltd. ("the Company") was incorporated in Israel and began its business operations on September 12, The Company is considered an Israeli resident. The Company's registered address is 3 Abba Even Boulevard, Herzliya, Israel. The controlling shareholder in the Company is Formula Systems (1985) Ltd. ("Formula Systems"). In November 2010, the control in Formula Systems was acquired by Asseco Poland S.A., a Polish public company, traded on the Warsaw Stock Exchange. The Company operates in four operating segments as follows (see detail in note 29): 1. Software solutions and services. 2. Software product marketing and support. 3. Computer infrastructure and integration solutions. 4. Learning and integration. The Company has been traded on the Tel-Aviv Stock Exchange ("the TASE") since May b. Definitions: In these financial statements: The Company The Group Subsidiaries Associates Affiliates companies The parent company The ultimate parent company Interested parties and controlling shareholder - Matrix IT Ltd. - The Company and its affiliates companies - Companies that are controlled by the Company (as defined in IAS 27 (2008)) and whose accounts are consolidated with those of the Company. - Companies in which the Company has significant influence and that are not subsidiaries. The Company's investment therein is accounted for in the consolidated financial statements of the Company using the equity method. - Subsidiaries and associates. - Formula Systems (1985) Ltd. - Asseco Poland S.A. - As defined in the Israeli Securities Regulations (Annual Financial Statements), Related parties - As defined in IAS

16 NOTE 2:- SIGNIFICANT ACCOUNTING POLICIES The following accounting policies have been applied consistently in the financial statements for all periods presented, unless otherwise stated. a. Basis of presentation of the financial statements: 1. Measurement basis: The Group's financial statements have been prepared on a cost basis, except for liability in respect of certain financial instruments at fair value through profit or loss, income taxes receivable and income taxes payable, deferred tax assets and deferred tax liabilities, employee benefit assets and employee benefit liabilities, provisions and investments which are accounted for at equity. The Group has elected to present the statement of comprehensive income using the function of expense method. 2. Basis of preparation of the financial statements: These financial statements have been prepared in accordance with International Financial Reporting Standards ("IFRS"). Furthermore, the financial statements have been prepared in conformity with the provisions of the Israeli Securities Regulations (Annual Financial Statements), 2010.b. In the process of applying the significant accounting policies, the Group has made the following judgments, estimates and assumptions which have the most significant effect on the events recognized in the financial statements. Judgments: - Classification of leases: In order to determine whether to classify a lease as a finance lease or an operating lease, the Group evaluates whether the lease transfers substantially all the risks and benefits incidental to ownership of the leased asset. In this respect, the Group evaluates such criteria as the existence of a bargain purchase option, the lease term in relation to the economic life of the asset and the present value of the minimum lease payments in relation to the fair value of the asset. - Recognizing revenue on a gross or net basis: In cases where the Group acts as agent or broker bearing the risks and rewards derived from the transaction, revenue is presented on a gross basis. - Determining the fair value of non-controlling interests: When the Group measures the non-controlling interests in a business combination at fair value, the Group determines the fair value based on a valuation technique, generally the discounted cash flow method

17 NOTE 2:- SIGNIFICANT ACCOUNTING POLICIES (Cont.) - Determining the fair value of share-based payment transactions: The fair value of share-based payment transactions is determined using an acceptable option-pricing model. The inputs to the model include share price, exercise price, expected volatility, expected life, expected dividend and risk-free interest rate. Estimates and assumptions: The preparation of the financial statements requires management to make estimates and assumptions that have an effect on the application of the accounting policies and on the reported amounts of assets, liabilities, revenues and expenses. These estimates and underlying assumptions are reviewed regularly. Changes in accounting estimates are reported in the period of the change in estimate. The key assumptions made in the financial statements concerning uncertainties at the end of the reporting period and the critical estimates computed by the Group that may result in a material adjustment to the carrying amounts of assets and liabilities within the next financial year are discussed below. - Legal claims: In estimating the likelihood of outcome of legal claims filed against the Company and its investees, the companies rely on the opinion of their legal counsel. These estimates are based on the legal counsel's best professional judgment, taking into account the stage of proceedings and legal precedents in respect of the different issues. Since the outcome of the claims will be determined in courts, the results could differ from these estimates. - Impairment of goodwill: The Group reviews goodwill for impairment at least once a year. This requires management to make an estimate of the projected future cash flows from the continuing use of the cash-generating unit to which the goodwill is allocated and also to choose a suitable discount rate for those cash flows (see additional information in p below). - Deferred tax assets: Deferred tax assets are computed regarding unused carryforward tax losses and temporary differences to the extent that their utilization is probable. Management judgment is required to determine the amount of deferred tax assets that can be recognized, based upon the timing and level of expected future taxable profits, its source and the tax planning strategy. See additional information in q below

18 NOTE 2:- SIGNIFICANT ACCOUNTING POLICIES (Cont.) - Pension and other post-employment benefits: The liability in respect of post-employment defined benefit plans is determined using actuarial valuations. The actuarial valuation involves making assumptions about, among others, the discount rate, future salary increases and forfeiture rates. The carrying amount of the liability may be highly sensitive out of changes in these estimates. See additional information in s below. - Revenues from construction contracts: Revenues from construction contracts are recognized by the percentage of completion method. The percentage of completion is determined based on the ratio of the actual costs related to contact performance incurred to date to the estimated total costs. c. Consolidated financial statements: The consolidated financial statements comprise the financial statements of companies that are controlled by the Company (subsidiaries). Control exists when a company has the power, directly or indirectly, to govern the financial and operating policies of an entity. The effect of potential voting rights that are exercisable at the end of the reporting period is considered when assessing whether an entity has control. The consolidation of the financial statements commences on the date on which control is obtained and ends when such control ceases. The financial statements of the Company and of the Subsidiaries are prepared as of the same dates and periods. The accounting policies in the financial statements of the Subsidiaries have been applied consistently and uniformly with those applied in the financial statements of the Company. Significant intragroup balances and transactions and gains or losses resulting from intragroup transactions are eliminated in full in the consolidated financial statements. Non-controlling interests of Subsidiaries represent the non-controlling shareholders' share of the total comprehensive income (loss) of the Subsidiaries and their share of the net assets at fair value upon the acquisition of the Subsidiaries. The non-controlling interests are presented in equity separately from the equity attributable to the equity holders of the Company. Losses are attributed to non-controlling interests even if they result in a negative balance of non-controlling interests in the consolidated statements of financial position. d. Functional currency, presentation currency and foreign currency: 1. Functional currency and presentation currency: The presentation currency of the financial statements is the NIS. The functional currency, which is the currency that best reflects the economic environment in which the Group operates and conducts its transactions, is

19 NOTE 2:- SIGNIFICANT ACCOUNTING POLICIES (Cont.) separately determined for each Group entity, including an associate accounted for using the equity method, and is used to measure its financial position and operating results. The functional currency of the Group is the NIS. When an investee's functional currency differs from the Company's functional currency, that investee represents a foreign operation whose financial statements data are translated so that they can be included in the consolidated financial statements as follows: a) Assets and liabilities at the end of each reporting period (including comparative data) are translated at the closing rate at the end of the reporting period. Goodwill and any fair value adjustments to the carrying amounts of assets and liabilities arising on the acquisition of that foreign operation are treated as assets and liabilities of the foreign operation and are translated at the closing rate at the end of the reporting period, in each reporting date. b) Income and expenses for each period included in the statement of comprehensive income (including comparative data) are translated at average exchange rates for the relevant periods; however, if exchange rates fluctuate significantly, income and expenses are translated at the exchange rates at the date of the transactions. c) Share capital, capital reserves and other changes in capital are translated at the exchange rate prevailing at the date of incurrence. d) Retained earnings are translated based on the opening balance translated at the exchange rate at that date and other relevant transactions (such as dividend) during the period are translated as described in b) and c) above. e) All resulting translation differences are recognized as a separate component of other comprehensive income (loss) in equity "foreign currency translation reserve". Intragroup loans for which settlement is neither planned nor likely to occur in the foreseeable future are, in substance, a part of the investment in that foreign operation and are accounted for as part of the investment and the exchange differences arising on these loans (net of their tax effect) are recognized in the same component of equity as discussed in e) above. 2. Transactions, assets and liabilities in foreign currency: Transactions denominated in foreign currency are recorded on initial recognition at the exchange rate at the date of the transaction. After initial recognition, monetary assets and liabilities denominated in foreign currency are translated at the end of each reporting period into the functional currency at the exchange rate at that date. Exchange differences, other than those capitalized to qualifying assets or recorded in equity in hedging transactions, are recognized in the statement of comprehensive income. Non-monetary assets and liabilities measured at cost in a foreign currency

20 NOTE 2:- SIGNIFICANT ACCOUNTING POLICIES (Cont.) are translated at the exchange rate at the date of the transaction. Non-monetary assets and liabilities denominated in foreign currency and measured at fair value are translated into the functional currency using the exchange rate prevailing at the date when the fair value was determined. 3. Index-linked monetary items: e. Cash equivalents: Monetary assets and liabilities linked to the changes in the Israeli Consumer Price Index ("Israeli CPI") are adjusted at the relevant index at the end of each reporting period according to the terms of the agreement. Linkage differences arising from the adjustment as above are recognized in the statement of comprehensive income. Cash equivalents are considered as highly liquid investments, including unrestricted short-term bank deposits with an original maturity of three months or less from the date of acquisition or with a maturity of more than three months, but which are redeemable on demand without penalty and which form part of the Group's cash management. f. Short-term deposits: Short-term deposits are bank deposits, with an original maturity period of more than three months from the investment date which do not meet the definition of cash equivalents. The deposits are presented according to the deposit terms. g. Allowance for doubtful accounts: The allowance for doubtful accounts is determined in respect of specific debts whose collection, in the opinion of the Group's management, is doubtful. Bad debts are derecognized when they are assessed as uncollectible. h. Inventories: Inventories are measured at the lower of cost and net realizable value. The cost of inventories comprises costs of purchase and costs incurred in bringing the inventories to their present location and condition. Net realizable value is the estimated selling price in the ordinary course of business less the estimated costs of completion and the estimated selling costs. The subsidiaries hold inventories of purchased merchandise and products which consist of educational software kits, computers, peripheral equipment and spare parts, cost of the inventories is determined using the first-in, first-out method. The Group periodically evaluates the condition and age of inventories and makes provisions for slow moving inventories accordingly. i. Receivables for construction contracts: Income receivable from construction contracts is separately calculated for each construction contract and presented in the statement of financial position at the aggregate

21 NOTE 2:- SIGNIFICANT ACCOUNTING POLICIES (Cont.) amount of total costs incurred, and total recognized profits, less total recognized losses and progress billings. Progress billings are amounts billed for work performed up to the end of the reporting period, whether settled or not settled. If the amount is due from the customer, it is recorded in the statement of financial position as an asset under receivables for construction contracts. If the amount is due to the customer, it is recorded in the statement of financial position as a liability for construction contracts. The financial asset, receivables for construction contracts, is reviewed for impairment and derecognition as discussed below regarding impairment of financial assets presented at amortized cost and the derecognition of financial assets, respectively. The costs of projects based on construction contracts are recognized at cost that includes identifiable direct costs and shared indirect costs. Shared indirect costs are allocated between the projects using a relevant basis. j. Financial instruments: 1. Financial assets: Financial assets within the scope of IAS 39 are initially recognized at fair value plus directly attributable transaction costs, except for financial assets measured at fair value through profit or loss in respect of which transaction costs are recorded in profit or loss. After initial recognition, the accounting treatment of investments in financial assets is based on their classification into one of the following two categories: financial assets at fair value through profit or loss loans and receivables a) Financial assets at fair value through profit or loss: The group of financial assets at fair value through profit or loss comprises financial assets designated upon initial recognition as at fair value through profit or loss. b) Loans and receivables: The Group has loans and receivables that are financial assets (nonderivative) with fixed or determinable payments that are not quoted in an active market. After initial recognition, loans are measured based on their terms at cost (less directly attributable transaction costs) using the effective interest method and less any impairment losses. Short-term receivables (such as trade and other receivables) are measured based on their terms, normally at nominal value. Gains and losses are recognized in the statement of comprehensive income when the loans and receivables

22 NOTE 2:- SIGNIFICANT ACCOUNTING POLICIES (Cont.) are derecognized or impaired, as well as through the periodic amortizations. 2. Financial liabilities: a) Financial liabilities measured at amortized cost: Interest-bearing loans and borrowings are initially recognized at fair value less directly attributable transaction costs (such as loan raising costs). After initial recognition, loans, including debentures, are measured based on their terms at amortized cost using the effective interest method taking into account directly attributable transaction costs. Short-term borrowings (such as trade and other payables) are measured based on their terms, normally at nominal value. b) Financial liabilities at fair value through profit or loss: Financial liabilities at fair value through profit or loss include financial liabilities classified as held for trading and financial liabilities designated upon initial recognition as at fair value through profit or loss. 2. Fair value measurement: Fair value is the price that would be received to sell an asset or paid to transfer a liability in transaction between market participants at the measurement date. Fair value measurement is based on the assumption that the transaction will take place in the asset's or the liability's principal market, or in the absence of a principal market, in the most advantageous market. The fair value of an asset or a liability is measured using the assumptions that market participants would use when pricing the asset or liability, assuming that market participants act in their economic best interest. The group uses valuation techniques that are considered suitable given the circumstances and for which enough data is available to measure fair value, while maximizing the use of relevant foreseeable data and minimizing the use of unforeseeable data. All assets and liabilities measured at fair value or for which fair value is disclosed are categorized into levels within the fair value hierarchy based on the lowest level input that is significant to the entire fair value measurement: Level 1 Level 2 Level 3 - quoted prices (unadjusted) in active markets for identical assets or liabilities. - inputs other than quoted prices included within Level 1 that are observable either directly or indirectly. - inputs that are not based on observable market data (valuation techniques which use inputs that are not based on observable market data)

23 NOTE 2:- SIGNIFICANT ACCOUNTING POLICIES (Cont.) 4. Offsetting financial instruments: Financial assets and financial liabilities are offset and the net amount is presented in the statement of financial position if there is a legally enforceable right to set off the recognized amounts and there is an intention either to settle on a net basis or to realize the asset and settle the liability simultaneously. 5. Put option granted to non-controlling interests: When the Group grants non-controlling interests a put option to sell part or all of their interests in a subsidiary during a certain period, on the date of grant, the noncontrolling interests are classified as a financial liability. The Group remeasures the financial liability at the end of each reporting period based on the estimated present value of the consideration to be transferred upon the exercise of the put option. If the Group has present ownership of the non-controlling interests, these noncontrolling interests are accounted for as if they are held by the Group and changes in the amount of the liability are carried to profit and loss. If the Group does not have present ownership, the interests are accounted for using the partial recognition method. Accordingly, the Group grants the non-controlling interests their share of the profits in each period but at the end of the reporting period subtracts the noncontrolling interests against the liability whereby the difference between noncontrolling interests at the end of the reporting period and the present value of the liability is recognized against the premium. If the option is exercised in subsequent periods, the consideration paid upon exercise is treated as settlement of the liability. If the option expires, the liability is settled and it is a portion of the investment in the subsidiary disposed of, without loss of control therein. 6. Derecognition of financial instruments: a) Financial assets: A financial asset is derecognized when the contractual rights to the cash flows from the financial asset expire or the Group has transferred its contractual rights to receive cash flows from the financial asset or assumes an obligation to pay the cash flows in full without material delay to a third party, and in addition it has transferred substantially all the risks and rewards of the asset, or has neither transferred nor retained substantially all the risks and rewards of the asset, but has transferred control of the asset. A transaction involving factoring of accounts receivable and credit card vouchers is derecognized when the abovementioned conditions are met. If the Group transfers its rights to receive cash flows from an asset and neither transfers nor retains substantially all the risks and rewards of the asset nor transfers control of the asset, a new asset is recognized to the extent of the Group's continuing involvement in the asset. When continuing involvement takes the form of guaranteeing the transferred asset, the extent of the continuing involvement is measured as the lower of the original

24 NOTE 2:- SIGNIFICANT ACCOUNTING POLICIES (Cont.) carrying amount of the asset and the maximum amount of consideration received that the Group could be required to repay. As of December 31, 2013, the Group has no open factoring transactions. b) Financial liabilities: A financial liability is derecognized when it is extinguished, that is when the obligation is discharged or cancelled or expires. A financial liability is extinguished when the debtor (the Group) discharges the liability by paying in cash, other financial assets, goods or services or is legally released from the liability. When an existing financial liability is exchanged with another liability from the same lender on substantially different terms, or the terms of an existing liability are substantially modified, such an exchange or modification is accounted for as an extinguishment of the original liability and the recognition of a new liability. The difference between the carrying amount of the above liabilities is recognized in the statement of comprehensive income. If the exchange or modification is not substantial, it is accounted for as a change in the terms of the original liability and no gain or loss is recognized on the exchange. 7. Impairment of financial assets: The Group evaluates at the end of each reporting period whether there is any objective evidence of impairment of a financial asset or group of financial assets as follows. a) Financial assets carried at amortized cost: There is objective evidence of impairment of debt instruments, loans and receivables carried at amortized cost as a result of one or more events that has occurred after the initial recognition of the asset and that loss event has an impact on the estimated future cash flows. Evidence of impairment may include indications that the debtor is experiencing financial difficulties, including liquidity difficulty and default in interest or principal payments. The amount of the loss recorded in profit or loss is measured as the difference between the assets' carrying amount and the present value of estimated future cash flows (excluding future credit losses that have not yet been incurred) discounted at the financial assets' original effective interest rate (the effective interest rate computed at initial recognition). If the financial asset has a variable interest rate, the discount rate of capitalization, is the current effective interest rate. The carrying amount of the asset is reduced through the use of an allowance account (see allowance for doubtful accounts above). In a subsequent period, the amount of the impairment loss is reversed if the recovery of the asset can be related objectively to an event occurring after the impairment was recognized. The amount of the reversal, up to the amount of any previous impairment, is recorded in profit or loss

25 NOTE 2:- SIGNIFICANT ACCOUNTING POLICIES (Cont.) k. Leases: The criteria for classifying leases as finance or operating leases depend on the substance of the agreements and are made at the inception of the lease in accordance with the following principles as set out in IAS 17. The Group as lessee: 1. Finance leases: Finance leases transfer to the Group substantially all the risks and benefits incidental to ownership of the leased asset (property, plant and equipment). At the commencement of the lease term, the leased assets are measured at the lower of the fair value of the leased asset or the present value of the minimum lease payments. The liability for lease payments is presented at its present value and the lease payments are apportioned between finance charges and a reduction of the lease liability using the effective interest method. After initial recognition, the leased asset is accounted for based on the accounting policies practiced for such assets. 2. Operating leases: Lease agreements are classified as an operating lease if they do not transfer substantially all the risks and benefits incidental to ownership of the leased asset. Lease payments are recognized as an expense in profit or loss on a straight-line basis over the lease term. l. Business combinations and goodwill: Business combinations are accounted for by applying the acquisition method. The cost of the acquisition is measured at the fair value of the consideration transferred on the date of acquisition including for non-controlling interests in the acquiree. In each business combination, the Group chooses whether to measure the non-controlling interests in the acquiree based on their fair value on the date of acquisition or at their proportionate share in the fair value of the acquirees' net identifiable assets. Direct acquisition costs are carried to the statement of comprehensive income as incurred. Upon the acquisition of a business, the assets acquired and liabilities assumed are classified and designated in accordance with the contractual terms, economic circumstances and other pertinent conditions that exist at the acquisition date, including separation of embedded derivatives from the host contract of the acquiree. In a business combination achieved in stages, equity interests in the acquiree that had been held by the acquirer prior to obtaining control are measured at the

26 NOTE 2:- SIGNIFICANT ACCOUNTING POLICIES (Cont.) acquisition date at fair value while recognizing a gain or loss resulting from the revaluation of the prior investment on the date of gaining control. Contingent consideration is recognized at fair value on the acquisition date and classified as a financial asset or liability in accordance with IAS 39. Subsequent changes in the fair value of the contingent consideration are recognized in the statement of comprehensive income. Goodwill is initially measured at cost which represents the excess of the acquisition consideration and the amount of non-controlling interests over the net identifiable assets acquired and liabilities assumed. If the resulting amount is negative, the acquirer recognizes the resulting gain on the acquisition date. After initial recognition, goodwill is measured at cost less any accumulated impairment losses. For purposes of evaluation of impairment of goodwill, goodwill purchased in a business combination is evaluated and attributed to the cash-generating units to which it had been allocated. m. Investments in associate using the equity method: Associates are companies in which the Group has significant influence over the financial and operating policies without having control. The investment in an associate is accounted for using the equity method. Under the equity method, the investment in the associate is presented at cost with the addition of post-acquisition changes in the Group's share of net assets, including other comprehensive income of the associate. Profits and losses resulting from transactions between the Group and the associate are eliminated to the extent of the interest in the associate. The equity method is applied until the loss of significant influence or classification as an asset held-for-sale. Goodwill relating to the acquisition of an associate is presented as part of the investment in the associate, measured at cost and not systematically amortized. Goodwill is evaluated for impairment as part of the investment in the associate as a whole. The financial statements of the Group and of the associate are prepared as of the same dates and periods. The accounting policies applied in the financial statements of the associate are uniform and consistent with the policies applied in the financial statements of the Group. Losses of an associate in amounts which exceed its equity are recognized by the Group to the extent of its investment in the associate plus any losses that the Group may incur as a result of a guarantee or other financial support provided in respect of the associate. For this purpose, the investment includes long-term receivables (such as loans granted) for which settlement is neither planned nor likely to occur in the foreseeable future

27 NOTE 2:- SIGNIFICANT ACCOUNTING POLICIES (Cont.) n. Property, plant and equipment, net: Property, plant and equipment are measured at cost, including directly attributable costs, less accumulated depreciation, accumulated impairment losses and any related investment grants and excluding day-to-day servicing expenses. The cost includes spare parts and peripheral equipment that are used in connection with plant and equipment. Depreciation is calculated on a straight-line basis over the useful life of the assets at annual rates as follows: Building 2-4 Computers, furniture and equipment 7-33 Motor vehicles 15 Leasehold improvements 10 Leasehold improvements are depreciated on a straight-line basis over the shorter of the lease term (including the extension option held by the Group and intended to be exercised) and the expected life of the improvement. The useful life, depreciation method and residual value of an asset are reviewed at least each year-end and any changes are accounted for prospectively as a change in accounting estimate. As for testing the impairment of property, plant and equipment, see p below. Depreciation of an asset ceases at the earlier of the date that the asset is classified as held for sale and the date that the asset is derecognized. An asset is derecognized on disposal or when no further economic benefits are expected from its use. The gain or loss arising from derecognition of the asset (determined as the difference between the net disposal proceeds and the carrying amount in the financial statements) is included in profit or loss when the asset is derecognized. o. Intangible assets: Separately acquired intangible assets are measured on initial recognition at cost including directly attributable costs. Intangible assets acquired in a business combination are measured at fair value at the acquisition date. Expenditures relating to internally generated intangible assets, excluding capitalized development costs, are recognized in the statement of comprehensive income when incurred. After initial recognition, intangible assets are carried at their cost less any accumulated amortization and any accumulated impairment losses. According to management's assessment, intangible assets that have a finite useful life, are amortized over their useful life using the straight-line method and reviewed for impairment whenever there is an indication that the asset may be impaired. The amortization period and the amortization method for an intangible asset with a finite useful life are reviewed at least at each financial year end. Changes in the expected useful life or the expected pattern of consumption of future economic benefits embodied in the %

28 NOTE 2:- SIGNIFICANT ACCOUNTING POLICIES (Cont.) asset are accounted for prospectively as changes in accounting estimates. The amortization of intangible assets with finite useful lives is recognized in the statement of comprehensive income. The useful life of intangible assets is as follows: Years Customer base and backlog 5-6 Brand names 5 Licenses and franchises 2-4 Intangible assets under development 3-10 Capitalized courses development costs 3 Gains or losses arising from the derecognition of an intangible asset are determined as the difference between the net disposal proceeds and the carrying amount of the asset and are recognized in the statement of comprehensive income, see p below. p. Impairment of non-financial assets: The Group evaluates the need for an impairment of non-financial assets (property, plant and equipment, intangible assets, goodwill, investments in associate) whenever events or changes in circumstances indicate that the carrying amount is not recoverable. If the carrying amount of non-financial assets exceeds their recoverable amount, the assets are reduced to their recoverable amount. The recoverable amount is the higher of fair value less costs of sale, and value in use. In measuring value in use, the expected cash flows are discounted using a pre-tax discount rate that reflects the risks specific to the asset. The recoverable amount of an asset that does not generate independent cash flows is determined for the cash-generating unit to which the asset belongs. Impairment losses are recognized in the statement of comprehensive income. An impairment loss of an asset, other than goodwill, is reversed only if there have been changes in the estimates used to determine the assets' recoverable amount since the last impairment loss was recognized. Reversal of an impairment loss, as above, shall not be increased above the lower of the carrying amount that would have been determined (net of depreciation or amortization) had no impairment loss been recognized for the asset in prior years and its recoverable amount. The reversal of impairment loss of an asset presented at cost is recognized in the statement of comprehensive income. The following unique criteria are applied in assessing impairment of these specific assets: 1. Goodwill in respect of acquired businesses: For the purpose of impairment testing, goodwill acquired in a business combination is allocated, at the acquisition date, to each of the Group's cash-generating units that is expected to benefit from the synergies of the combination

29 NOTE 2:- SIGNIFICANT ACCOUNTING POLICIES (Cont.) The Company performs its own tests and uses third party valuation specialists to test goodwill for impairment once a year, on December 31, or more frequently if events or changes in circumstances indicate that there is impairment. Goodwill is tested for impairment by assessing the recoverable amount of the cashgenerating unit (or group of cash-generating units) to which the goodwill has been allocated, compared to the carrying amount of the cash-generating unit (or group of cash-generating units). Any impairment loss is allocated first to goodwill. Impairment losses recognized for goodwill cannot be reversed in subsequent periods. 2. Investment in associate company using the equity method: q. Taxes on income: After application of the equity method, the Company determines whether it is necessary to recognize any additional impairment loss with respect to the investment in associates. The Company determines at the end of each reporting period whether there is objective evidence that the carrying amount of the investment in the associate is impaired. The test of impairment is carried out with reference to the entire investment, including the goodwill attributed to investment in the associate company. If there is objective evidence, an impairment loss is recognized in the amount of the difference between the recoverable amount of the investment in the associate and its carrying amount. The recoverable amount is the higher of value in use and fair value less costs to sell based on the estimated net cash flows to be generated by the associate. Impairment loss, as above, is not allocated specifically to goodwill that forms part of the investment and, accordingly, any reversal of that impairment loss is recognized to the extent that the recoverable amount of the investment subsequently increases. The loss, or its reversal, is recognized in the statement of comprehensive income in the line item, Company's share in losses of associated company". Taxes on income in the statement of comprehensive income comprise current and deferred taxes. Current or deferred taxes are recognized in profit or loss, except to the extent that the tax arises from items which are recognized directly in other comprehensive income or in equity. In such cases, the tax effect is also recognized in the relevant item. 1. Current taxes: The current tax liability is measured using the tax rates and tax laws that have been enacted or substantively enacted by the end of reporting period as well as adjustments required in connection with the tax liability in respect of previous years

30 NOTE 2:- SIGNIFICANT ACCOUNTING POLICIES (Cont.) 2. Deferred taxes: Deferred taxes are computed in respect of temporary differences between the carrying amounts in the financial statements and the amounts attributed for tax purposes. Deferred taxes are measured at the tax rates that are expected to apply when the asset is realized or the liability is settled, based on tax laws that have been enacted or substantively enacted by the end of the reporting period. Deferred tax assets are reviewed at the end of each reporting period and reduced to the extent that it is not probable that they will be utilized. Temporary differences (such as carryforward losses) for which deferred tax assets had not been recognized are reviewed at the end of each reporting period and a respective deferred tax asset is recognized to the extent that their utilization is probable. Taxes that would apply in the event of the disposal of investments in investees have not been taken into account in computing deferred taxes, as long as the disposal of the investments in investees is not probable in the foreseeable future. Also, deferred taxes that would apply in the event of distribution of earnings by investees as dividends have not been taken into account in computing deferred taxes, since the distribution of dividends does not involve an additional tax liability or since it is the Group's policy not to initiate distribution of dividends from a subsidiary that would trigger an additional tax liability. All deferred tax assets and deferred tax liabilities are presented in the statement of financial position as non-current assets and non-current liabilities, respectively. Deferred taxes are offset in the statement of financial position if there is a legally enforceable right to offset a current tax asset against a current tax liability and the deferred taxes relate to the same taxpayer and the same tax jurisdiction. r. Share-based payment transactions: The Group's employees are entitled to remuneration in the form of equity-settled sharebased payment transactions. Equity-settled transactions: The cost of equity-settled transactions with employees is measured at the fair value of the equity instruments granted at grant date. The fair value is determined using a standard option pricing model. In estimating fair value, the vesting conditions (consisting of service conditions and performance conditions other than market conditions) are not taken into account. The only conditions taken into account in estimating fair value are market conditions and non-vesting conditions

31 NOTE 2:- SIGNIFICANT ACCOUNTING POLICIES (Cont.) The cost of equity-settled transactions is recognized in the statement of comprehensive income, together with a corresponding increase in equity, during the period which the performance and/or service conditions are to be satisfied, ending on the date on which the relevant employees become fully entitled to the award ("the vesting period"). The cumulative expense recognized for equity-settled transactions at the end of each reporting period until the vesting date reflects the extent to which the vesting period has expired and the Group's best estimate of the number of equity instruments that will ultimately vest. The expense or income recognized in the statement of comprehensive income represents the change between the cumulative expense recognized at the end of the reporting period and the cumulative expense recognized at the end of the previous reporting period. No expense is recognized for awards that do not ultimately vest, except for awards where vesting is conditional upon a market condition, which are treated as vesting irrespective of whether the market condition is satisfied, provided that all other vesting conditions (service and/or performance) are satisfied. s. Employee benefit liabilities: The Group has several employee benefit plans: 1. Short-term employee benefits: Short-term employee benefits include salaries, paid annual leave, paid sick leave, recreation and social security contributions and are recognized as expenses as the services are rendered. A liability in respect of a cash bonus or a profit-sharing plan is recognized when the Group has a legal or constructive obligation to make such payment as a result of past service rendered by an employee and a reliable estimate of the amount can be made. 2. Post-employment benefits: The plans are normally financed by contributions to insurance companies and classified as defined contribution plans or as defined benefit plans. The Group has defined contribution plans pursuant to Section 14 to the Severance Pay Law under which the Group pays fixed contributions and will have no legal or constructive obligation to pay further contributions if the fund does not hold sufficient amounts to pay all employee benefits relating to employee service in the current and prior periods. Contributions to the defined contribution plan in respect of severance or retirement pay are recognized as an expense when contributed concurrently with performance of the employee's services. The Group also operates a defined benefit plan in respect of severance pay pursuant to the Severance Pay Law. According to the Law, employees are entitled to severance pay upon dismissal or retirement. The liability for termination of employment is measured using the projected unit credit method. The actuarial assumptions include rates of employee turnover and future salary increases based

32 NOTE 2:- SIGNIFICANT ACCOUNTING POLICIES (Cont.) on the estimated timing of payment. The amounts are presented based on discounted expected future cash flows using a discount rate determined by reference to yields on Government bonds with a term that matches the estimated term of the benefit obligation. In respect of its severance pay obligation to certain of its employees, the Group makes current deposits in pension funds and insurance companies ("the plan assets"). Plan assets comprise assets held by a long-term employee benefit fund or qualifying insurance policies. Plan assets are not available to the Group's own creditors and cannot be returned directly to the Group. The liability for employee benefits shown in the statement of financial position reflects the present value of the defined benefit obligation less the fair value of the plan assets, less past service costs. Actuarial gains and losses are directly recognized in other comprehensive income in the period in which they occur. During 2012, the Group decided to change its accounting policies and early adopt IAS 19R. Consequently, the Group recognizes all the actuarial gains and losses in the period in which they are incurred in other comprehensive income. The Group previously recognized net actuarial gains and losses in profit and loss. The changes were effected retrospectively pursuant to IAS Other long-term employee benefits: The Group's employees are entitled to adjustment grants. These benefits are accounted for as other long-term benefits since the Group estimates that these benefits will be used and the respective Group's obligation will be settled during the employment period and after one year from the end of the reporting period. The Group's net obligation in respect of other long-term employee benefits is in respect of the future benefit amount due to employees for services rendered in current and prior periods. This amount of benefits is discounted to its present value and the fair value of the assets relating to this obligation is deducted from said amount. The discount rate is determined by reference to the yields on Government bonds whose currency and terms are similar with the currency and terms of the Group's obligations. Actuarial gains and losses are fully recognized in the statement of comprehensive income in the period in which they occur. t. Revenue recognition: Revenues are recognized in the statement of comprehensive income when the revenues can be measured reliably, it is probable that the economic benefits associated with the transaction will flow to the Group and the costs incurred or to be incurred in respect of the transaction can be measured reliably. Revenues are measured at the fair value of the consideration received less any trade discounts, volume rebates and returns

33 NOTE 2:- SIGNIFICANT ACCOUNTING POLICIES (Cont.) The Company and its subsidiaries recognize revenues based on the following criteria: 1. Revenues from software solutions and services: a) Revenues from contracts based on actual inputs: Revenues from master agreements based on actual inputs are recognized based on actual labor hours. b) Outsourcing - these agreements are similar in nature to agreements that are based on actual labor hours. The Group allocates employees to projects that are generally managed by the customers at their charge based on the pricing of labor hours. Revenues are recognized based on actual labor hours. c) Revenues from fixed price contracts: Revenues from these contracts are recognized using the percentage of completion method when all the following conditions are satisfied: the revenues are known or can be estimated reliably, collection is probable, costs related to performing the work are determinable or can be reasonably determined, there is no substantial uncertainty regarding the Group's ability to complete the contract and meet the contractual terms and the percentage of completion can be estimated reliably. The percentage of completion is determined based on the proportion of actual costs incurred to date to the estimated total costs. If not all the criteria for recognition of revenue from construction contracts are met, then revenue is recognized only to the extent of costs whose recoverability is probable ("zero profit margin" presentation). An expected loss on a contract is recognized immediately in cost of sales irrespective of the stage of completion. 2. Revenues from sales, distribution and support of software products: Revenues from the sale of products are recognized after all the significant risks and rewards of ownership of the products have been transferred to the buyer, the Group does not retain any continuing management involvement that is associated with ownership and does not retain the effective control of the sold products, the amount of revenues can be measured reliably, it is probable that the economic benefits associated with the transaction will flow to the Group and the costs incurred or to be incurred in respect of the transaction can be measured reliably. The Group reports income on a gross basis since it acts as a principal and bears the risks and rewards derived from the transaction. Revenues from sale agreements that do not provide a general right of return and consist of multiple elements such as hardware, service and support agreements are split into different accounting units which are separately recognized

34 NOTE 2:- SIGNIFICANT ACCOUNTING POLICIES (Cont.) An element only represents a separate accounting unit if and only if it has standalone value for the customer. Moreover, there should be reliable and objective evidence of the fair value of all the elements in the agreement or of the fair value of undelivered elements. Revenues from the various accounting units are recognized when the revenue recognition criteria are met with respect to all the elements of the accounting unit based on their specific type and only up to the amount of the consideration that is not contingent on completion or performance of the other elements in the contract. Revenues from maintenance services are recognized on a straight-line basis at the relative portion of the maintenance contract that is determined for each reporting year. Revenues that have been received before the respective service has been provided are carried to deferred income. 3. Revenues from training services: Revenues from services are recognized on a straight-line basis over the service period. The Group recognizes revenue when there is objective evidence of the existence of an arrangement, the service has been rendered, the agreed price has been or can be determined and collection is probable. 4. Revenues from hardware products and infrastructure solutions: Revenues from hardware products and infrastructure solutions are recognized after all the significant risks and rewards of ownership of the products have been transferred to the buyer, the Group does not retain any continuing management involvement that is associated with ownership and does not retain the effective control of the sold products, the amount of revenues can be measured reliably, it is probable that the economic benefits associated with the transaction will flow to the Group and the costs incurred or to be incurred in respect of the transaction can be measured reliably. 5. Interest income: Interest income on financial assets is recognized as it accrues using the effective interest method and recorded in the statement of comprehensive income as financial income. 6. Revenues from dividends: Revenues from dividends from investments in shares that are not accounted for at equity (investments classified as available-for-sale financial assets at fair value) are recognized when the right to receive the dividends is established and recorded in the statement of comprehensive income as financial income

35 NOTE 2:- SIGNIFICANT ACCOUNTING POLICIES (Cont.) u. Cost of sales and supplier discounts: Cost of sales includes expenses for loss, storage and delivers of inventories to the end point of sale. Cost of sales also includes provisions for write-downs of inventories, inventory write offs and provisions for slow-moving inventories. In addition, the Cost of sale includes salary expenses net of participation of government grants received by the Ministry of Economic. Discounts are deducted from cost of purchase when the conditions entitling to those discounts are satisfied. The portion of the discounts relating to that portion of the purchases that are in closing inventories are attributed to inventories and the balance reduces the cost of sales. Supplier discounts received at the end of the year and in respect of which the Group is not obligated to comply with certain targets, are recognized in the financial statements proportionately as the purchases entitling the Group to the mentioned discounts are made. Supplier discounts for which the Group is required to meet certain targets, such as a minimum amount of annual purchases (either quantitative or monetary) or an increase in purchases compared to previous periods. are recognized in the financial statements in proportion to the purchases made by the Group during the year that qualify for the target, provided that it is expected that the targets will be achieved and the amount of the discount can be reasonably estimated. The probability of meeting the targets is based, among others, on past experience, on the Group's relationship with the suppliers and on the expected amount of purchases from the suppliers in the remaining period. v. Finance income and expenses: Finance income comprises interest income on amounts invested, changes in fair value of financial assets at fair value through profit or loss, exchange rate gains and gains on hedges recognized in profit or loss. Interest income is recognized as it accrues using the effective interest method. Dividend income is recognized when the Group's right to receive the dividend is established. If the dividend is received on quoted shares, the Group recognizes dividend income on the ex-date. Changes in fair value of financial assets at fair value through profit or loss include interest and dividend income. Finance expenses comprise interest expense on borrowings, changes in the time value of provisions, changes in the fair value of financial assets at fair value through profit or loss, impairment losses of financial assets and losses on hedges recognized in profit or loss. Borrowing costs that are not capitalized to qualifying assets are recognized in profit or loss using the effective interest method. Gains and losses on exchange rate differences are reported on a net basis

36 NOTE 2:- SIGNIFICANT ACCOUNTING POLICIES (Cont.) w. Operating segments: An operating segment is a component of the Group that meets the following three criteria: 1. The segment is engaged in business activities from which it may earn revenues and incur expenses, including revenues and expenses relating to intragroup transactions; 2. The operating results of the segment are regularly reviewed by the Group's chief operating decision maker to make decisions about resources to be allocated to the segment and assess its performance; and 3. Separate financial information is available for the segment. x. Earnings per share: Earnings per share are calculated by dividing the net income attributable to equity holders of the Group by the weighted number of Ordinary shares outstanding during the period. Basic earnings per share only include shares that were actually outstanding during the period. Potential Ordinary shares (convertible securities such as convertible debentures, warrants and employee options) are only included in the computation of diluted earnings per share when their conversion decreases earnings per share or increases loss per share from continuing operations. Further, potential Ordinary shares that are converted during the period are included in diluted earnings per share only until the conversion date and from that date in basic earnings per share. The Group's share of earnings of investees is included based on the earnings per share of the investees multiplied by the number of shares held by the Group. y. Provisions: A provision in accordance with IAS 37 is recognized when the Group has a present obligation (legal or constructive) as a result of a past event, it is probable that an outflow of resources embodying economic benefits will be required to settle the obligation and a reliable estimate can be made of the amount of the obligation. If the effect is material, provisions are measured according to the estimated future cash flows discounted using a pre-tax interest rate that reflects the market assessments of the time value of money and, where appropriate, those risks specific to the liability. Following are the types of provisions included in the financial statements: Legal claims: A provision for claims is recognized when the Group has a present legal or constructive obligation as a result of a past event, it is more likely than not that an outflow of resources embodying economic benefits will be required by the Group to settle the obligation and a reliable estimate can be made of the amount of the obligation. Where the effect of the time value of money is material, a provision is measured at its present value

37 NOTE 2:- SIGNIFICANT ACCOUNTING POLICIES (Cont.) Contingent liability recognized in a business combination: A contingent liability in a business combination is measured at fair value upon initial recognition. In subsequent periods, it is measured at the higher of the amount initially recognized less, when appropriate, cumulative amortization, and the amount that would be recognized at the end of the reporting period in accordance with IAS 37. z. Advertising expenses: Expenditures incurred on advertising, marketing or promotional activities, such as production of catalogues and promotional pamphlets, are recognized as an expense when the Group has the right of access to the advertising goods or when the Group receives those services. aa. Treasury shares: The company shares held by the Company are recognized at cost and deducted from equity. Any gain or loss arising from a purchase, sale, issue or cancellation of treasury shares is recognized directly in equity. ab. Presentation of statement of comprehensive income: The Group has elected to present a single statement of comprehensive income which includes both the items of the statement of income and the items of other comprehensive income. ac. Presentation of the changes in other comprehensive income items: The Group presents the changes between the opening and closing balance of each component of other comprehensive income in the statement of changes in equity. ad. Disclosure of new IFRSs in the period prior to their adoption: a. IAS 32 - Financial Instruments: Presentation and IFRS 7 - Financial Instruments: Disclosure: The IASB issued certain amendments to IAS 32 ("the amendments to IAS 32") regarding the offsetting of financial assets and liabilities. The amendments to IAS 32 clarify, among others, the meaning of "currently has a legally enforceable right of set-off" ("the right of set-off"). Among others, the amendments to IAS 32 prescribe that the right of set-off must be legally enforceable not only during the ordinary course of business of the parties to the contract but also in the event of bankruptcy or insolvency of one of the parties. The amendments to IAS 32 also state that in order for the right of set-off to be currently available, it must not be contingent on a future event, there may not be periods during which the right is not available, or there may not be any events that will cause the right to expire

38 NOTE 2:- SIGNIFICANT ACCOUNTING POLICIES (Cont.) The amendments to IAS 32 are to be applied retrospectively commencing from the financial statements for periods beginning on January 1, 2014, or thereafter. Earlier application is permitted. The Group estimates that the amendments to IAS 32 are not expected to have a material impact on its financial statements. b. IFRS 9 - Financial Instruments: 1. The IASB issued IFRS 9, "Financial Instruments", the first part of Phase 1 of a project to replace IAS 39, "Financial Instruments: Recognition and Measurement". IFRS 9 ("the Standard") focuses mainly on the classification and measurement of financial assets and it applies to all financial assets within the scope of IAS 39. According to the Standard, all financial assets (including hybrid contracts with financial asset hosts) should be measured at fair value upon initial recognition. In subsequent periods, debt instruments should be measured at amortized cost only if both of the following conditions are met: - the asset is held within a business model whose objective is to hold assets in order to collect the contractual cash flows. - the contractual terms of the financial asset give rise on specified dates to cash flows that are solely payments of principal and interest on the principal amount outstanding. Notwithstanding the aforesaid, upon initial recognition, the Group may designate a debt instrument that meets both of the abovementioned conditions as measured at fair value through profit or loss if this designation eliminates or significantly reduces a measurement or recognition inconsistency ("accounting mismatch") that would have otherwise arisen. Subsequent measurement of all other debt instruments and financial assets should be at fair value. When an entity changes its business model for managing financial assets, it shall reclassify all affected financial assets. In all other circumstances, reclassification of financial instruments is not permitted. Financial assets that are equity instruments should be measured in subsequent periods at fair value and the changes recognized in profit or loss or in other comprehensive income (loss), in accordance with the election by the Company on an instrument-by-instrument basis (amounts recognized in other comprehensive income cannot be subsequently reclassified to profit or loss). If equity instruments are held for trading, they should be measured at fair value through profit or loss. The IASB did not set a mandatory effective date for IFRS 9. Early application is permitted. Upon initial application, IFRS 9 should be applied

39 NOTE 2:- SIGNIFICANT ACCOUNTING POLICIES (Cont.) retrospectively by providing the required disclosure or restating comparative figures, except as specified in IFRS The IASB issued certain amendments to the Standard regarding derecognition and financial liabilities. According to those amendments, the provisions of IAS 39 will continue to apply to derecognition and to financial liabilities for which the fair value option has not been elected (designated as measured at fair value through profit or loss); that is, the classification and measurement provisions of IAS 39 will continue to apply to financial liabilities held for trading and financial liabilities measured at amortized cost. Pursuant to the amendments, the amount of the adjustment to the liability's fair value that is attributable to changes in credit risk should be presented in other comprehensive income. All other fair value adjustments should be presented in profit or loss. If presenting the fair value adjustment of the liability arising from changes in credit risk in other comprehensive income creates an accounting mismatch in profit or loss, then that adjustment should also be presented in profit or loss rather than in other comprehensive income. The IASB did not set a mandatory effective date for IFRS 9. Early application is permitted provided that the Company also adopts the provisions of IFRS 9 regarding the classification and measurement of financial assets (the first part of Phase 1). Upon initial application, the amendments are to be applied retrospectively by providing the required disclosure or restating comparative figures, except as specified in the amendments. 3. In November 2013, the IASB issued Phase 3 of IFRS 9 ("Phase 3 of IFRS 9") as part of the complete version of IFRS 9. Phase 3 of IFRS 9 includes the new hedge accounting requirements and related amendments to IFRS 9, IFRS 7 and IAS 39. Below are the significant principles of hedge accounting under IFRS 9 (2013): - Hedge accounting can be applied to the risk components of financial hedged items and non-financial hedged items provided that risk component is separately identifiable and can be reliably measured. - The hedge effectiveness test is to be made only on a qualitative basis and the quantitative effectiveness test of the 80%-125% range is eliminated. The test focuses on achieving the hedge objectives and the economic relationship between the hedged item and the hedging instrument and the effect of credit risk on that relationship

40 NOTE 2:- SIGNIFICANT ACCOUNTING POLICIES (Cont.) - Adjustments of interaction between hedging instrument and hedged item can be made also after inception of the hedge if changes in hedging are required as part of risk management objective. In such case, no redesignation of the hedge is required. - The time value of an option, the forward element of a forward and foreign currency basis spread can be excluded from the designation of a financial instrument as the hedging instrument and accounted for as costs of hedging transaction. This means that, instead of affecting profit or loss like a trading instrument (speculative) these amounts are carried as transaction costs in other comprehensive income and amortized to profit or loss over the hedge period. The IASB did not set a mandatory effective date for Phase 3 of IFRS 9. Entities may apply Phase 3 of IFRS 9 early provided that they also adopt the other provisions of IFRS 9. As part of the amendments included in Phase 3 of IFRS 9, the provisions of Phase 2 regarding measurement of liabilities at fair value and presenting fair value changes in own credit risk in other comprehensive income can be applied before applying any other requirements in IFRS 9. The Group believes that IFRS 9 (including all its phases) is not expected to have a material impact on the financial statements. The Group believes that the Standard is not expected to have a material effect on the financial statements. c. Amendments to IAS 36, "Impairment of Assets": In May 2013, the IASB issued amendments to IAS 36, "Impairment of Assets" ("the amendments") regarding the disclosure requirements of fair value less costs of disposal. The amendments include additional disclosure requirements of the recoverable amount and fair value. The additional disclosures include the fair value hierarchy, the valuation techniques and changes therein, the discount rates and the principal assumptions underlying the valuations. The amendments are effective for annual periods beginning on January 1, 2014 or thereafter. Earlier application is permitted. The appropriate disclosures will be included in the Group's financial statements upon the first-time adoption of the amendments

41 NOTE 3:- BUSINESS COMBINATIONS a. In January 2011, an agreement was signed for the purchase of 51% of the share capital of K.B.I.S. Ltd. ("K.B.I.S.") in consideration of NIS 4.5 million, and a contingent consideration of NIS 2.3 million, which was fully paid by December 31, In addition, the Company and the sellers received mutual options for the sale of the sellers' remaining shares in K.B.I.S. to the Company. At each reporting date, the Company recognizes a financial liability measured based on the estimated present value of the consideration upon exercise of the put option and the non-controlling interests are accounted for as if they are held by the Company. The fair value of the put option as of December 31, 2013 and 2012 was NIS 11,701 thousand and NIS 11,895 thousand, respectively. The purchase price has been allocated to the assets acquired and liabilities assumed based on their estimated fair value at the date of acquisition. The excess of the purchase price over the estimated fair value of the assets acquired and liabilities assumed in a total of approximately NIS 7.9 million was allocated to backlog (NIS 2.2 million), customer base (NIS 2.5 million), and software (NIS 0.1 million) and the remaining balance was allocated to goodwill. b. In January 2011, John Bryce Training Ltd. ("John Bryce") entered into an agreement with Smart IT Training Ltd. ("Smart") in which John Bryce purchased the entire activities of Smart and its subsidiary, Smart Point Ltd., in the area of technology integration and training in consideration of approximately NIS 5 million. The purchase price has been allocated to the assets acquired and liabilities assumed based on their estimated fair value at the date of acquisition. The excess of the purchase price over the estimated fair value of the assets acquired and liabilities assumed in a total of approximately NIS 5.4 million was allocated to customer base (NIS 1.7 million) and the remaining balance was allocated to goodwill. c. In April 2011, following an agreement signed in March 2011, a transaction was completed in which the Company purchased 75% of the shares of MatchPoint IT Ltd. ("MatchPoint") in consideration of NIS 10 million, additional contingent consideration of up to a cumulative maximum payment of NIS 2 million. The Company and the seller received mutual options for the sale of the sellers' remaining shares in MatchPoint to the Company. At each reporting date, the Company recognizes a financial liability measured based on the estimated present value of the consideration upon exercise of the put option and the non-controlling interests are accounted for as if they are held by the Company. The fair value of the put option as of December 31, 2013 and 2012 was NIS 4,557 thousand and NIS 6,479 thousand, respectively. The purchase price has been allocated to the assets acquired and liabilities assumed based on their estimated fair value at the date of acquisition. The excess of the purchase price over the estimated fair value of the assets acquired and liabilities assumed in a total of approximately NIS 10.3 million was allocated to customer base (NIS 2.2 million) and the remaining balance was allocated to goodwill

42 NOTE 3:- BUSINESS COMBINATIONS (Cont.) d. On May 29, 2011, an agreement was signed with the shareholders of Babcom Centers Ltd. ("Babcom") in which the Company purchased 50.1% of the share capital of Babcom in consideration of NIS 15 million. In addition, the Company and the sellers received mutual options for the sale of the sellers' remaining shares in Babcom to the Company. At each reporting date, the Company recognizes a financial liability measured based on the estimated present value of the consideration upon exercise of the put option and the noncontrolling interests are accounted for as if they are held by the Company. The fair value of the put option as of December 31, 2013 and 2012 was NIS 25,674 thousand and NIS 26,329 thousand, respectively. The purchase price has been allocated to the assets acquired and liabilities assumed based on their estimated fair value at the date of acquisition. The excess of the purchase price over the estimated fair value of the assets acquired and liabilities assumed in a total of approximately NIS 15.1 million was allocated to customer base (NIS 5.6 million) and the remaining balance was allocated to goodwill. d. On September 1, 2011, a transaction was completed in which the Company purchased 100% of the share capital of HighView Ltd. ("HighView") from its shareholders in consideration of approximately NIS 5.5 million. The purchase price has been allocated to the assets acquired and liabilities assumed based on their estimated fair value at the date of acquisition. The excess of the purchase price over the estimated fair value of the assets acquired and liabilities assumed in a total of approximately NIS 5.5 million allocated to certain intangible assets (NIS 0.6 million) and the remaining balance was allocated to goodwill. e. In September 2011, a transaction was completed for the purchase of 100% of the shares of Beyond Information Technology Ltd. ("Beyond") and of Supra Information Technology Ltd. ("Supra") in consideration of NIS 2.2 million. The acquisition included the payment of a contingent consideration that will be calculated based on the acquirees' operating income for a period of three years from the acquisition date. The outstanding liability for the purchase of these companies as of December 31, 2013 and 2012 was NIS 1,099 thousand and NIS 1,900 thousand, respectively. The purchase price has been allocated to the assets acquired and liabilities assumed based on their estimated fair value at the date of acquisition. The excess of the purchase price over the estimated fair value of the assets acquired and liabilities assumed in a total of approximately NIS 2.4 million was allocated to certain intangible assets (NIS 1 million) and the remaining the balance was allocated to goodwill. g. On January 2, 2012, the Company purchased from the holders (the "Founders") in AG 2000 Holdings LLC ("the Acquiree") 60% of their interests. The sole asset held by the acquiree was the share capital of Exzac Inc., a U.S. company ("Exzac"). In consideration for the shares, the Company paid the Founders an amount of $ 6.75 million, with the addition of approximately $ 215 thousand for the Acquiree's equity. Moreover, the Founders were entitled to an additional consideration that is contingent on meeting certain targets based on the excess of operating income results over predetermined

43 NOTE 3:- BUSINESS COMBINATIONS (Cont.) amount, but in any event not more than $ 2.5 million. As of December 31, 2013, the outstanding liability approximates NIS 8,401 thousand. The purchase price has been allocated to the assets acquired and liabilities assumed based on their estimated fair value at the date of acquisition. The excess of the purchase price over the estimated fair value of the assets acquired and liabilities assumed in a total of approximately NIS 62 million was allocated to customer base (NIS 13.5 million) and the remaining balance was allocated to goodwill. The Company and the Founders received mutual options for the purchase of the founders' remaining shares in the Acquiree. On December 19, 2012, the option was partially exercised and the Company purchased from one of the Founders its shares in the Acquiree (20% of the Acquiree's shares) in consideration of $ 5 million and with an additional consideration that will be calculated according to a formula based on the Acquiree's results in As of December 31, 2013, the outstanding liability regarding the additional consideration approximates NIS 11,645 thousand. The option for purchasing the remaining 20% in the Acquiree, which was measured in approximately NIS 29,000 thousand as of December 31, 2013, was exercised after the Balance Sheet date, see additional information in note 30 below. h. On April 1, 2012, the Company purchased 100% of the share capital of Netwise Applications Ltd. ("Netwise") from its shareholders in consideration of NIS 17.5 million. Netwise provides a variety of website and/or portal services to organizations. The purchase price has been allocated to the assets acquired and liabilities assumed based on their estimated fair value at the date of acquisition. The excess of the purchase price over the estimated fair value of the assets acquired and liabilities assumed in a total of approximately NIS 17 million was allocated to certain intangible assets (NIS 3.7 million) and the remaining balance was allocated to goodwill. i. On November 1, 2012, the Company purchased 100% of the share capital of 2Bsecure Ltd. ("2Bsecure") from its former shareholders in consideration of approximately NIS 19.8 million in cash. According to the agreement, the buyer paid an additional consideration in the amount of NIS 1.2 million during The purchase price has been allocated to the assets acquired and liabilities assumed based on their estimated fair value at the date of acquisition. The excess of the purchase price over the estimated fair value of the assets acquired and liabilities assumed in a total of approximately NIS 20.5 million was allocated to intangible assets (NIS 6.9 million) and the remaining the balance was allocated to goodwill. j. On December 17, 2013, the Company purchased 100% of the share capital of Strategic Sales Systems Inc. from its former shareholders in consideration of approximately NIS 1,400 thousand in cash. The buyer will pay an additional consideration in the amount of approximately NIS 5.2 million subject to certain revenue and profit goals. As of the

44 NOTE 3:- BUSINESS COMBINATIONS (Cont.) date of the financial statements, the purchase price allocation of the consideration to the assets and liabilities has not been completed and accordingly, a preliminary allocation was performed based on management's estimate which will be adjusted in future periods after the valuation is completed. According to the preliminary allocation, the purchase price has been allocated to the assets acquired and liabilities assumed based on their estimated fair value at the date of acquisition. The excess of the purchase price over the estimated fair value of the assets acquired and liabilities assumed in a total of approximately NIS 7,135 thousand was allocated to intangible assets (NIS 1,400 thousand) and the remaining balance was allocated to goodwill. During 2013 only one company was acquired (see note 3j). In case the business combination had been carried out at the beginning of 2013, the impact on the consolidated net income and the consolidated revenues of 2013 would not be material. The companies acquired in 2012 contributed an amount of NIS 11,915 thousand to the consolidated net income and an amount of NIS 125,580 thousand to the consolidated revenue turnover. Had the business combination taken place at the beginning of the year, the consolidated net income as of December 31, 2012 and 2011 would have been NIS 86,168 thousand and NIS 101,314 thousand, respectively and the consolidated revenue turnover as of December 31, 2012 and 2011 would have been NIS 2,051,521 thousand and NIS 1,921,279 thousand, respectively. The goodwill recorded in the acquisitions described above is attributed to the expected benefits arising from the synergy of the activities of the Company and the companies acquired. NOTE 4:- CASH AND CASH EQUIVALENTS December 31, In NIS: Cash for immediate withdrawal 54,564 62,150 Short-term deposits 20,568 38,232 75, ,382 In foreign currency: Cash for immediate withdrawal 71,563 51,477 Short-term deposits 2,066 1,796 73,629 53, , ,

45 NOTE 5:- SHORT-TERM INVESTMENTS a. Composition: December 31, Financial assets at fair value through profit or loss: Shares 11,461 5,760 Debentures 47,900 46,412 Non-derivative financial assets held for trading 59,361 52,172 b. Details of investments in non-convertible debentures: December 31, 2013 Unlinked CPI-linked Stated interest rate: 1%-10% 2%-6% Total Government bonds 19,357 8,196 27,553 Corporate debentures 4,313 16,034 20,347 23,670 24,230 47,900 December 31, 2012 Unlinked CPI-linked Stated interest rate: 1%-10% 2%-6% Total Government bonds 17,290 9,229 26,519 Corporate debentures 5,281 14,612 19,893 22,571 23,841 46,

46 NOTE 6:- TRADE RECEIVABLES December 31, Open debts: In NIS 441, ,962 In foreign currency 36,301 35,785 Related parties Checks receivable 2,308 16,340 Credit cards 9,000 8,456 Unbilled receivable 104, ,141 Less - allowance for doubtful accounts (6,085) (6,589) Trade receivables, net 587, ,109 Impaired debts are accounted for through recording an allowance for doubtful accounts. The movement in the allowance for doubtful accounts is as follows: NIS in thousands Balance at January 1, ,324 Charge for the year 1,257 Initially consolidated subsidiaries 2,943 Derecognition of bad debts (2,518) Reversal of collected doubtful accounts (417) Balance at December 31, ,589 Charge for the year 3,538 Derecognition of bad debts (2,172) Reversal of collected doubtful accounts (1,870) Balance at December 31, ,085 An analysis of the aging of trade receivables, net (net of allowance for doubtful accounts) : Current < 30 days Past due trade receivables with aging of >120 days days days days Total December 31, , ,233 52,550 21,794 12,852 26, ,185 December 31, ,866 63,618 30,580 12,654 6,611 27, ,

47 NOTE 7:- OTHER ACCOUNTS RECEIVABLE December 31, Employees (1) 1,483 1,429 Government authorities 18,781 13,588 Prepaid expenses 40,177 35,654 Advances to suppliers 1, Other 983 1,024 62,768 52,581 (1) Employee balances are linked to the Israeli CPI and bear annual interest at a rate of 4%. NOTE 8:- INVENTORIES December 31, Purchased products: Inventories of educational software kits Inventories of computers and peripheral equipment 7,717 7,327 8,239 7,899 NOTE 9:- RECEIVABLES FOR CONSTRUCTION CONTRACTS (LIABILITIES FOR CONSTRUCTION CONTRACTS) Receivables for construction contracts: December 31, Costs incurred plus recognized profits 44,207 24,622 Less - billings 53,775 36,270 (9,568) (11,648) Income receivable 5,348 3,014 Deferred income (14,916) (14,662) (9,568) (11,648)

48 NOTE 10:- INVESTMENTS AND OTHER LOANS December 31, Deposits 1,906 2,110 Loan to the Dan Academic Center 4,622 4,193 6,528 6,303 NOTE 11:- INVESTMENT IN ASSOCIATED COMPANY a. Composition: December 31, Shares in associate 3,102 6,950 Goodwill included in the investment 1,486 1,486 b. Details of financial information of companies accounted for at equity: December 31, The Group's share of the balance sheet of associates based on the interests therein at reporting date: Current assets 4,305 6,723 Non-current assets *) 1,586 1,634 Current liabilities (2,367) (1,030) Non-current liabilities (422) (377) Net assets 3,102 6,950 *) Includes balances of excess cost and goodwill

49 NOTE 11:- INVESTMENT IN ASSOCIATED COMPANY (Cont.) Year ended December 31, The Group's share of the operating results of associates based on the interests therein in the reporting year: Revenues 4,424 6,381 Loss 3, NOTE 12:- PROPERTY, PLANT AND EQUIPMENT, NET Composition and movement: 2013: Cost: Building Computers, furniture and equipment Motor Leasehold vehicles improvements Total Balance at January 1, ,204 64,537 1,026 54, ,059 Initially consolidated company Purchases - 8, ,603 12,916 Disposals - (8,332) (367) (1,809) (10,508) Exchange differences on translation of foreign operations - (337) (29) (7) (373) Balance at December 31, ,204 64, , ,566 Accumulated depreciation: Balance at January 1, ,516 40, ,080 62,214 Initially consolidated company Purchases 341 9, ,202 16,190 Disposals - (8,285) (250) (1,809) (10,344) Exchange differences on translation of foreign operations - (288) (24) (5) (317) Balance at December 31, ,857 41, ,468 68,162 Depreciated cost at December 31, ,347 22, ,611 61,

50 NOTE 12:- PROPERTY, PLANT AND EQUIPMENT, NET (Cont.) 2012: Cost: Building Computers, furniture and equipment Motor Leasehold vehicles improvements Total Balance at January 1, ,204 52,988 1,145 48, ,077 Initially consolidated company - 7, ,521 Purchases - 7,037-4,997 12,034 Disposals - (3,385) (133) (166) (3,684) Exchange differences on translation of foreign operations Balance at December 31, ,204 64,537 1,026 54, ,059 Accumulated depreciation: Balance at January 1, ,175 29, ,526 44,338 Initially consolidated company - 5, ,892 Purchases 341 8, ,301 15,482 Disposals - (3,374) (133) (79) (3,586) Exchange differences on translation of foreign operations Balance at December 31, ,516 40, ,080 62,214 Depreciated cost at December 31, ,688 24, ,212 64,

51 NOTE 13:- GOODWILL AND INTANGIBLE ASSETS, NET a. Composition: 2013: Brand names Customer base and backlog Licenses and franchises Intangible assets under development (1) Capitalized Courses Development Costs (1) Goodwill Total Cost: Balance as of January 1, ,607 50,709 3,476 30,629 5, , ,529 Purchases - 1, ,030 8,033 11,263 Reclassification - 3, (3,462) - Foreign currency translation adjustments (8,364) (8,364) Balance as of December 31, ,607 55,571 3,476 31,429 6, , ,428 Accumulated amortization: Balance as of January 1, ,402 27,080 3,000 30,561 2, , ,508 Amortization 187 7, ,889-10,185 Balance as of December 31, ,589 34,900 3,221 30,629 4, , ,693 Net Balance as of December 31, ,018 20, , , ,735 (1) Intangible assets developed by the Group

52 NOTE 13:- GOODWILL AND INTANGIBLE ASSETS, NET (Cont.) 2012: Brand names Customer base and backlog Licenses and franchises Intangible assets under development (1) Capitalized Courses Development Costs (1) Goodwill Total Cost: Balance as of January 1, ,607 29,979 3,476 30,629 5, , ,182 Purchases - 20, ,335 99,065 Foreign currency translation adjustments (2,718) (2,718) Balance as of December 31, ,607 50,709 3,476 30,629 5, , ,529 Accumulated amortization: Balance as of January 1, ,045 15,389 2,816 30, , ,126 Amortization , ,088-14,382 Balance as of December 31, ,402 27,080 3,000 30,561 2, , ,508 Net balance as of December 31, ,205 23, , , ,021 (1) Intangible developed by the Group. b. Amortization of intangible assets: 1. The amortization method reflects the future economic benefits that will derive from the asset. 2. The amortization expenses of intangible assets with a definite useful life are included in the cost of sales, general and administrative expenses and selling and marketing expenses in the statement of comprehensive income

53 NOTE 13:- GOODWILL AND INTANGIBLE ASSETS, NET (Cont.) c. Testing the impairment of goodwill: In order to test the impairment of goodwill, the goodwill was allocated to operating segments that represent four cash-generating units as follows: 1. Software solutions and services. 2. Learning and integration. 3. Software product marketing and support. 4. Computer infrastructure and integration solutions. As of December 31, 2013, the carrying amount of the goodwill allocated to each cashgenerating unit (each representing a segment) is as follows: Software solutions and services Learning and integration Software product marketing and support Computer infrastructure and integration solutions Total Goodwill balance as of December 31, ,998 13,947 9,034 83, ,907 Purchases 4, ,739 Goodwill adjustment after revaluation of contingent consideration (168) (168) Foreign currency translation adjustments (8,364) (8,364) Goodwill balance as of December 31, ,373 13,947 9,034 83, ,114 d. Data of units to which material goodwill was allocated in relation to the goodwill's carrying amount: Software solutions and services: Total goodwill as of December 31, 2013 amounts to NIS 351,373 thousand (total goodwill as of December 31, NIS 354,998 thousand). The recoverable amount of the software solutions and services unit was determined based on the value in use which is calculated according to the expected estimated future cash flows from this cashgenerating unit, as determined according to the budget for the next five years and approved by the Group's management. The key assumptions used in calculating the value in use by the Group's management consist of: discount rate, salary expenses in relation to revenues and growth rate. The discount rate underlying the cash flows is 11%, whereby the calculation of the average capital price takes into consideration a gross average debt price of about 5.1% and equity price of about 13.16%. The cash flows for the period exceeding the five budget years will be estimated using a fixed growth rate of 1.5%, representing half of the growth rate of the operation in the forecast period for

54 NOTE 13:- GOODWILL AND INTANGIBLE ASSETS, NET (Cont.) Sensitivity analysis of changes in assumptions: With respect to the assumptions used in determining the value in use of the unit, management believes that there have been no potential changes in the key assumptions detailed above which might lead to a significant increase in the carrying amount of the software solutions and services unit over its recoverable amount. Learning and integration: Total goodwill as of December 31, 2013 amounts to NIS 83,760 thousand (total goodwill as of December 31, NIS 83,928 thousand). The recoverable amount of the training and integration unit was determined based on the value in use which is calculated according to the expected estimated future cash flows from this cash-generating unit, as determined according to the budget for the next five years and approved by the Group's management. The key assumptions used in calculating the value in use by the Group's management consist of: discount rate, salary expenses in relation to revenues and growth rate. The discount rate underlying the cash flows is 11.5%, whereby the calculation of the average capital price takes into consideration a gross average debt price of about 6.45% and equity price of about 14.34%. The cash flows for the period exceeding the five budget years will be estimated using a fixed growth rate of 1.75%, which approximates the population growth rate, and is lower than the Group's growth rate in the forecast for Sensitivity analysis of changes in assumptions: With respect to the Learning and integration unit it is likely that changes have occurred in the key assumptions used to calculate the value in use, which are likely to lead to a significant increase in the carrying amount of the unit over its recoverable amount. As of December 31, 2013, the recoverable amount of the Learning and integration unit exceeds its carrying amount by approximately NIS 5.2 million. Below are the effects of the changes in the key assumptions on the recoverable amount: Capital price - the discount rate reflects management's assumptions regarding the specific risk of the Learning and integration unit's expected cash flows and capital structure. In determining the appropriate discount rate for the unit, the Group took into account the risk-free interest and risk premium that are appropriate for the Learning and integration unit's inherent risks. An increase of about 0.5% in the discount rate would reduce the unit's fair value in use to the unit's carrying amount. Growth rates - the Group's management is aware that numerous factors have a material effect on growth rates. A decrease of about 0.75% in the growth rate would reduce the unit's fair value in use to the unit's carrying amount. Personnel - represents the Group's principal expenditure and consists of employees' wages and subcontractors who act as lecturers and instructors for the unit's courses. Management estimates that long-term salary expenses will account for about 54% of the Group's revenues. An increase of about 0.5% in these expenses would reduce the unit's fair value in use to the unit's carrying amount

55 NOTE 14:- CREDIT FROM BANKS AND OTHERS Linkage Interest December 31, basis rate % Short-term credit from banks Unlinked Prime Current maturities of debentures Linked ,740 Short-term loans from banks Prime ,215 31,738 Current maturities of long-term loans from banks Unlinked ,850 41, , ,702 NOTE 15:- TRADE PAYABLES December 31, Open accounts: In NIS 49,431 68,435 In foreign currency 28,020 7,347 Checks payable 41,837 28,049 Accrued expenses 49,038 57, , ,106 NOTE 16:- OTHER ACCOUNTS PAYABLE December 31, Government authorities 29,998 24,635 Customer advances 9,027 3,424 Other 2,144 2,509 41,169 30,

56 NOTE 17:- LOANS FROM BANKS a. Composition: December 31, Interest rate December 31, Total less Total less December 31, 2013 Total Current maturities current maturities current maturities % Linkage basis: Unlinked ,708 65, , ,449 b. Maturity dates after the reporting date: December 31, 2013 NIS in thousands First year 65,850 Second year 75,579 Third year 54,287 Fourth year 45,527 Fifth year and thereafter 33,465 c. As for financial covenants, see note 22c(4) below. 274,708 NOTE 18:- DEBENTURES a. Debentures (series A) were issued in August 2007 and listed for trade based on prospectus issued by the Company in February The total issued par value of the debentures as of the issuance date was NIS 250,000,000. The principal and interest of the debentures are linked to the Israeli CPI of July The debentures bear annual interest at a rate of 5.15% with the addition of 0.5% until the debentures are listed for trade, payable semi-annually starting from December 31, 2007 through December 31, The principal is repayable in four equal annual installments on December 31 of each of the years 2010 through 2013 (included). The effective interest rate on the debentures is 5.21% per annum. On May , the Company's Board of Directors decided on early redemption of the outstanding balance of the Company's debentures (series A). The early redemption payment was made in one installment, at the interest payment date on June 30, 2013 (the "Early Redemption Date"). The amount of actual redemption was approximately NIS 60.8 million. After the early redemption, the debentures were written off for trading and from the TASE Clearing House. The amount per NIS 1 par value that the Company

57 NOTE 18:- DEBENTURES (Cont.) redeemed equals to the value of the bonds` liability value, (i.e. principal plus interest and linkage differences to the actual date of early redemption). As of December 31, 2013, no debentures are outstanding. NOTE 19:- FINANCE LEASE OBLIGATIONS Minimum lease fees Present value Interest of minimum component lease fees First year 2, ,666 Second to fourth years 5, ,927 7, ,593 NOTE 20:- EMPLOYEE BENEFIT LIABILITIES Employee benefits consist of post-employment benefits, other long-term benefits and termination benefits. a. Post-employment benefits: According to the labor laws and Severance Pay Law in Israel, the Group is required to pay compensation to an employee upon dismissal or retirement or to make current contributions in defined contribution plans pursuant to section 14 to the Severance Pay Law, as specified below. The Group's liability is accounted for as a post-employment benefit. The computation of the Group's employee benefit liability is made according to the current employment contract based on the employee's salary and employment term which establish the entitlement to receive the compensation. The post-employment employee benefits are normally financed by contributions classified as defined benefit plan or as defined contribution plan, as detailed below. 1. Defined contribution plans: Section 14 to the Severance Pay Law, 1963 applies to part of the compensation payments, pursuant to which the fixed contributions paid by the Group into pension funds and/or policies of insurance companies release the Group from any additional liability to employees for whom said contributions were made. These contributions and contributions for compensation represent defined contribution plans

58 NOTE 20:- EMPLOYEE BENEFIT LIABILITIES (Cont.) 2. Defined benefit plans: The Group accounts for that part of the payment of compensation that is not covered by contributions in defined contribution plans, as above, as a defined benefit plan for which an employee benefit liability is recognized and for which the Group deposits amounts in central severance pay funds and in qualifying insurance policies. According to the Company's agreements with a senior officer, he is entitled to an adaptation bonus in the amount of 12 salaries. This liability has been recognized as a defined benefit. b. Composition of defined benefit plans: December 31, Defined benefit obligation 229, ,057 Fair value of plan assets (227,282) (214,591) Net defined benefit liability 2,430 2,466 c. The movement in the fair value of the plan assets: Balance as of January 1, , ,243 Expected return on plan assets 6,861 7,557 Actuarial gain (loss) from defined benefit plans 2,978 (264) Contributions by employer 32,634 38,700 Benefits paid (29,782) (30,911) Business combinations - 4,266 Balance as of December 31, , ,

59 NOTE 20:- EMPLOYEE BENEFIT LIABILITIES (Cont.) d. Changes in the present value of defined benefit obligation: Balance as of January 1, , ,303 Current service cost 34,145 34,406 Interest expense 7,178 10,102 Net actuarial losses 7,153 2,802 Benefits paid (35,821) (36,964) Business combinations - 9,408 Balance as of December 31, , ,057 e. Expenses carried to the statement of comprehensive income: Year ended December 31, Current service cost 34,145 34,406 37,474 Interest cost 7,178 10,102 9,260 Expected return on plan assets (6,861) (7,557) (6,807) Actuarial losses (gains) 4,156 3,066 (3,489) Total expense recognized in comprehensive income 38,618 40,017 36,438 f. The expenses are included in the statement of comprehensive income in the following items: Year ended December 31, Cost of sales 30,327 32,517 35,618 Selling and marketing expenses General and administrative expenses 3,446 3,695 3,

60 NOTE 20:- EMPLOYEE BENEFIT LIABILITIES (Cont.) g. The principal actuarial assumptions: Year ended December 31, % Discount rate of the plan liabilities Expected real rate of return on plan assets Expected real salary increases rate The expected return on plan assets is equivalent to the average weighted return for each type of asset in the employee defined benefit plan. Moreover, the actual return on plan assets in 2013, 2012 and 2011 was NIS 7,200 thousand, NIS 9,715 thousand and NIS 3,172 thousand, respectively. h. Amounts, timing and uncertainties involving future cash flows: As of December 31, 2013: Sensitivity test for changes in the expected rate of salary increase: Defined benefit obligation The change as a result of: Salary increase of 1% (4,628) Salary decrease of 1% 3,297 Sensitivity test for changes in the discount rate of the plan assets and liability: The change as a result of: Increase of 0.5% in discount rate 2,029 Decrease of 0.5% in discount rate (2,338) i. The net benefit liability balances are as follows: December 31, Defined benefit obligation 229, ,057 Fair value of plan assets 227,282 (214,591) Net balance 2,430 2,

61 NOTE 20:- EMPLOYEE BENEFIT LIABILITIES (Cont.) j. Expenses in the period in respect of defined contribution plans: Year ended December 31, Total expense recognized in respect of defined contribution plans 19,039 10,943 7,188 NOTE 21:- TAXES ON INCOME a. Tax laws applicable to the Group companies: Income Tax (Inflationary Adjustments) Law, 1985: According to the law, until 2007, the results for tax purposes were adjusted for the changes in the Israeli CPI. In February 2008, the "Knesset" (Israeli parliament) passed an amendment to the Income Tax (Inflationary Adjustments) Law, 1985, which limits the scope of the law starting 2008 and thereafter. Since 2008, the results for tax purposes are measured in nominal values, excluding certain adjustments for changes in the Israeli CPI carried out in the period up to December 31, Adjustments relating to capital gains such as for sale of property (betterment) and securities continue to apply until disposal. Since 2008, the amendment to the law includes, among others, the cancellation of the inflationary additions and deductions and the additional deduction for depreciation (in respect of depreciable assets purchased after the 2007 tax year). The Law for the Encouragement of Industry (Taxation), 1969: 1. The Company and certain subsidiaries have the status of an "industrial company", as defined in this law. According to this status and by virtue of regulations published thereunder, the Company may claim a deduction for accelerated depreciation on equipment used in industrial activity, as determined in the regulations effective under the Inflationary Law as well as deduction of know-how (solely know-how acquisition costs depreciation). 2. Under this law, a subsidiary files a consolidated tax return with some of its subsidiaries. b. Tax rates applicable to the Group: 1. The Israeli corporate tax rate was 24% in 2011 and 25% in 2012 and A company is taxable on its real (non-inflationary) capital gains at the corporate tax rate in the year of sale. A temporary provision for stipulates that the sale of an asset other than a quoted security (excluding goodwill that was not

62 NOTE 21:- TAXES ON INCOME (Cont.) acquired) that had been purchased prior to January 1, 2003, and sold by December 31, 2009, is subject to corporate tax as follows: the part of the real capital gain that is linearly attributed to the period prior to December 31, 2002 is subject to the corporate tax rate in the year of sale as set forth in the Israeli Income Tax Ordinance, and the part of the real capital gain that is linearly attributed to the period from January 1, 2003 through the date of sale is subject to tax at a rate of 25%. On December 5, 2011, the "Knesset" (Israeli parliament) passed the Law for Tax Burden Reform (Legislative Amendments), 2011 ("the Law") which, among others, cancels effective from 2012, the scheduled reduction in the corporate tax rate. The Law also increases the corporate tax rate to 25% in In view of this increase in the corporate tax rate to 25%, as above, the real capital gain tax rate and the real betterment tax rate were also increased accordingly. On August 5, 2013, the "Knesset" issued the Law for Changing National Priorities (Legislative Amendments for Achieving Budget Targets for 2013 and 2014), 2013 ("the Budget Law"), which consists, among others, of fiscal changes whose main aim is to enhance the collection of taxes in those years. These changes include, among others, increasing the corporate tax rate from 25% to 26.5%, cancelling the reduction in the tax rates applicable to privileged enterprises (9% in development area A and 16% elsewhere) and, in certain cases, increasing the rate of dividend withholding tax within the scope of the Law for the Encouragement of Capital Investments to 20% effective from January 1, There are also other changes such as taxation of revaluation gains effective from August 1, The provisions regarding revaluation gains will become effective only after the publication of regulations defining what should be considered as "retained earnings not subject to corporate tax" and regulations that set forth provisions for avoiding double taxation of overseas assets. As of the date of approval of these financial statements, these regulations have not been issued. 2. The Group has several companies that have inactive approved enterprises under the alternative track. Any dividends distributed from tax-exempt income from these approved enterprises will be taxable at the rate that would have applied to the Company's income from the approved enterprise had it not chosen the alternative track. The Group's policy is not to distribute such dividends and therefore the Group does not create deferred tax assets in respect of this tax-exempt income. 3. The principal tax rates applicable to the subsidiaries whose place of incorporation is outside Israel is: A company incorporated in the U.S. - weighted tax at the rate of about 35% (Federal tax, State tax and City tax of the city where the company operates)

63 NOTE 21:- TAXES ON INCOME (Cont.) c. Final tax assessments: The Company and its subsidiaries have received final tax assessments (or assessments that are deemed final) through the 2010 and 2009 tax years. d. Carryforward losses for tax purposes and other temporary differences: Carryforward operating tax losses and capital losses of the Group total approximately NIS 116,929 thousand as of December 31, The majority of the Group's carryforward losses result from Israeli companies, therefore, the utilization period of these losses is unlimited. Deferred tax assets relating to carryforward operating losses of approximately NIS 21.4 million and to other temporary differences for marketable securities approximately NIS 1.6 million were not recognized because their utilization in the foreseeable future is not probable

64 MATRIX IT LTD. AND ITS SUBSIDIARIES NOTE 21:- TAXES ON INCOME (Cont.) e. Deferred taxes: Composition: Provision for vacation PPE and intangible assets Carryforward tax losses Deferred taxes due to Employee benefits Temporary differences due to cash basis adjustment Allowance for doubtful accounts Employee options Other temporary differences Total Balance as of January 1, ,789 (3,302) 32, (17,299) 1, ,342 Initially consolidated company - (5,321) 857 1, (3,178) Employee benefits Foreign currency translation adjustments - - (67) (67) Change recorded in the statement of comprehensive income 924 2,799 (3,743) (1,951) , Balance as of December 31, ,713 (5,824) 29, (16,994) 1, ,742 18,549 Initially consolidated company - (1,237) - - (1,600) (2,837) Employee benefits , ,102 Adjustment of deferred tax balance following a change in tax rate 463 1, (640) ,842 Change recorded in the statement of comprehensive income 48 1,875 (5,737) (1,112) 5,744 (272) Balance as of December 31, ,224 (5,186) 25, (13,490) 1, ,865 19,573 The deferred taxes are computed at the tax rate of 26.5%, based on the tax rates that are expected to apply to the Group upon reversal of the temporary differences in their respect

65 NOTE 21:- TAXES ON INCOME (Cont.) f. Taxes on income included in the statement of comprehensive income: Year ended December 31, Current taxes 29,376 28,030 29,537 Deferred taxes (917) (685) (767) Adjustment of deferred tax balance following a change in tax rate (1,842) - (2,308) Taxes in respect of previous years (2,042) (360) (2,326) g. Taxes on income relating to equity items: 24,575 26,985 24,136 Year ended December 31, Tax benefit (expense) on actuarial gains 1, (872)

66 NOTE 21:- TAXES ON INCOME (Cont.) h. Theoretical tax: The reconciliation between the tax expense, assuming that all the income, expenses, gains and losses in the comprehensive income were taxed at the statutory tax rate and the taxes on income recorded in comprehensive income is as follows: Year ended December 31, Income before taxes on income 113, , ,571 Statutory tax rate 25% 25% 24% Tax computed at the statutory tax rate 28,427 29,414 28,217 Increase (decrease) in taxes on income resulting from the following: Adjustment of deferred tax balance following a change in tax rate (1,842) - (2,308) Unrecognized temporary differences (288) (429) 451 Non-deductible expenses for tax purposes, net 757 2,416 2,769 First-time creation of deferred taxes (1,000) (4,056) (2,632) Deferred taxes recorded at difference tax rates (35) Company's share in losses of associated company, net Taxes in respect of previous years and update of tax losses from previous years (3,035) (360) (2,326) 24,575 26,985 24,

67 NOTE 22:- COLLATERALS, GUARANTEES, CONTINGENT LIABILITIES AND COMMITMENTS a. Collaterals: As of December 31, 2013, the Group has not recorded any collateral. b. Contingent liabilities: Litigation: Several legal claims have been filed against the Company and the subsidiaries in the ordinary course of business in the reporting period and in previous periods in an aggregate of approximately NIS 3.7 million. The Group's management estimates, based on its legal counsel opinion regarding the chances of these claims, the provisions included in the financial statements for covering any potential exposure arising from these claims are adequate. c. Commitments: 1. The Company has entered into real estate lease agreement with Ofer Brothers Properties Ltd. according to which the Company leases office spaces in Herzliya, Israel. The lease term is expected to end in October In June 2011, John Bryce ("JB" the Company's subsidiary) has entered into real estate lease agreement with an unrelated third party for a period of seven years with an exit point after five years and an option for additional 13 years. The expected lease fees are approximately NIS 6.5 million per annum. In regard to the agreement, the Company provided a guarantee for the fulfillment of JB's liabilities. 3. The Company and its subsidiaries insure themselves in bodily injury and property damage insurance policies, including third party, professional liability and employer's liability insurance policies. The Company's directors and officers are insured under Formula Systems' Directors and Officers liability insurance policies for a period of four years in effect from December 2010 (in February 2011, the Company's shareholders' meeting approved the Company's participation in said policies). 4. In the context of the Group's engagements with banks for receiving credit facilities, the Group has undertaken to maintain the following financial covenants, as they will be expressed in its financial statements, as described: a) The total rate of the Group's debts and liabilities to banks with the addition of debts in respect of debentures that have been and/or will be issued by it and shareholders' loans that have been and/or will be provided by it (collectively, "the debts") will not exceed 40% of total balance sheet

68 NOTE 22:- COLLATERALS, GUARANTEES, CONTINGENT LIABILITIES AND COMMITMENTS (Cont.) b) The ratio of the Group's debts less cash to the annual EBITDA will not exceed 3.5. c) The equity shall not be lower than NIS 275 million at all times. d) The balances of cash and short-term investments in the balance sheet shall not be lower than NIS 50 million. e) In the event that Formula Systems (1985) Ltd. ceases to hold 30% of the Company's share capital or is no longer the largest shareholder in the Company, the credit may be placed for immediate repayment. f) The Group will not create any pledge on all or part of its property and assets in favor of any third party and will not provide any guarantee to secure any third party's debts as they are today and as they will be without the banks' consent. g) The Group will not sell and/or transfer all or part of its assets to others in any manner whatsoever without the banks' advance written consent, unless it is done in the ordinary course of business. h) As of the date of the financial statements, the Company is in compliance with the above financial covenants. 5. Operating lease obligation: a) The Group has entered into operating lease agreements for vehicles with an average life of three years without an extension option. The Group is not subject to any limitations in respect of these leases. The future minimum lease fees payable as of December 31, 2013 are as follows: NIS in thousands First year 37,740 Second through fifth years 30,192 67,

69 NOTE 22:- COLLATERALS, GUARANTEES, CONTINGENT LIABILITIES AND COMMITMENTS (Cont.) b) The Group has entered into commercial real estate lease agreements owned by it which consist of the office building. The leases under non-cancellable terms and mature over 1-7 years. All the lease contracts include a clause that allows the Company to update the lease fees annually based on changes in market terms. The future minimum lease fees payable as of December 31, 2013 are as follows: NIS in thousands First year 31,139 Second year 25,472 Third year 22,037 Fourth year 17,620 After fifth year 12, Commitments in respect of acquisition of companies: 108,583 In November 2002, the Company entered into an agreement with JB for the acquisition of John Bryce's business activity in computer training. In consideration for the acquisition of activity, the Company paid John Bryce a cash amount of $ 905 thousand and assumed John Bryce's liabilities to its employees up to an amount of $ 1,315 thousand. In addition, the Company undertook to pay royalties at a rate of 1.5% of the Group's training operations over a period of fifteen years, with a fixed annual minimum fee of $ 185 thousand. In 2006, following the acquisition of High-Tech College, the minimum fee described above was raised to $ 210 thousand (representing approximately NIS 729 thousand as of December 31, 2013) and accordingly, the scope of the High-Tech College's (the Company's subsidiary) activity was offset from the Group's training revenues for the calculation of the minimum royalties. During the years ended December 31, 2013 and 2012, JB did not pay any royalties. The value of the liability of John Bryce's operation acquisition was measured using the discounted cash flow method under the following assumptions: - Expected discount rate of 11%. - Long-term industrial growth rate ranging between 2.5% and 3.5%. This growth rate was used to determine the projected revenues in future years

70 NOTE 22:- COLLATERALS, GUARANTEES, CONTINGENT LIABILITIES AND COMMITMENTS (Cont.) The outstanding liability for the acquisition of operation as of December 31, 2013 and 2012 amounts to approximately NIS 12,290 thousand and NIS 12,177 thousand, respectively. See additional information on liabilities relating to the acquisition of companies in Note 3 above. d. Engagement with the Company's CEO: On September 6, 2010, after obtaining the approval of the Company's Board and audit committee, the Company's general meeting approved the Company's engagement in a new employment agreement with the CEO, Mr. Moti Gutman, under substantially the same terms and principles as in the previous employment agreement signed with the CEO in 2007 ("the new agreement"). The new agreement is in effect from January According to both the 2007 agreement and the new agreement, the CEO is entitled to grant services to the Company through a management company owned by him provided that the cost is identical to the cost in the employment agreement. Moreover, effective from October 1, 2010, the CEO grants the Company services through a company controlled by him, see details in Note 24b below. e. Guarantees: 1. The Company and the subsidiaries provided each other cross guarantees. 2. The Company and the subsidiaries provided performance guarantees in favor of customers totaling approximately NIS 49.8 million. 3. The Company and the subsidiaries provided guarantees for the payment of rent totaling approximately NIS 15.2 million. NOTE 23:- EQUITY a. Composition of share capital: December 31, 2013 December 31, 2012 Issued and Issued and Authorized outstanding Authorized outstanding Number of shares Ordinary shares of NIS 1 par value each 100,000 60, ,000 60,

71 NOTE 23:- EQUITY (Cont.) b. Movement in share capital: Ordinary shares of NIS 1 par value each Number of shares Balance as of January 1, ,648,677 60,637,234 60,434,794 Issue of restricted shares 75,000-75,000 Exercise of warrants into shares - 11, ,440 Balance as of December 31, ,723,677 60,648,677 60,637,234 c. Rights attached to shares: Ordinary shares of NIS 1 par value each confer their holders voting rights at the general meeting, rights to dividends and rights to participate in the distribution of the Company's assets upon liquidation. The shares are quoted on the Tel-Aviv Stock Exchange. d. Treasury shares - Company shares held by the Company and subsidiaries: The holding interests of the Company and its subsidiaries in the Company's shares are as follows: December 31, % Percentage of issued share capital

72 NOTE 23:- EQUITY (Cont.) e. Dividends paid to the shareholders: The following table presents the dividend distributions effected in the reporting periods: Date of distribution decision by the Board Actual date of distribution Amount distributed per share (in Agorot) Overall amount distributed (NIS in thousands) March 14, 2011 April 12, ,800 May 12, 2011 June 28, ,700 August 14, 2011 September 26, ,800 November 10, 2011 November 19, ,800 March 12, 2012 April 18, ,000 May 13, 2012 June 6, ,000 August 14, 2012 September 27, ,400 November 12, 2012 December 25, ,000 March 14, 2013 April 9, ,000 May 9, 2013 June 26, ,800 August 12, 2013 September 11, ,800 November 12, 2013 December 25, ,400 In August 2010, the Company's Board decided to change the Company's dividend distribution policy whereby every year, the Company will distribute a dividend at a rate of 75% (instead of 50% before) of its annual net income. The dividend will be distributed on a quarterly basis. f. Capital management in the Group: 1. The Group's principal capital management objective is to secure the ability to create a fixed return to the shareholders through capital increase or distributions and through payment of an annual dividend. In order to meet this objective, the Group strives to maintain a leverage ratio that reasonably balances the risks and rewards and to maintain a financial base that will allow the Group to respond to its investment and working capital needs. In making decisions regarding changes in the Group's capital structure aimed at achieving this objective, whether by revising the dividend distribution policy, issuing capital or reducing the Group's debt, the Group not only considers its short-term position but also its long-term targets. The Group defines the leverage ratio as the ratio between the liabilities to banks less cash and cash equivalents and less other financial assets and the Group's capital as defined above. 2. The Group examines the total cash and cash equivalents with the addition of financial assets in relation to liabilities to banks and debenture holders

73 NOTE 23:- EQUITY (Cont.) 3. The Group's policy is to meet the financial covenants undertaken with banks and debenture holders. In regard to credit agreements, the Group has undertaken, among others, to ascertain that the rate of its total debts to banks with the addition of debts in respect of issued debentures will not exceed 40% of total balance sheet and that the balances of cash and short-term investments in the balance sheet will not be lower than NIS 50 million. In addition, the Group has undertaken toward debenture holders not to distribute a dividend to its shareholders if it will result in a decrease in the Company's equity below NIS 275 million. As of December 31, 2013, the Company is complying with the financial covenants detailed in note 22c(4) above. Condensed quantitative data on differences managed by the Company in respect of: December 31, Cash and cash equivalents 148, ,655 Short term deposit 2,333 - Financial assets 59,361 52,172 Debentures (including current maturities) - (58,740) Liabilities to banks (314,924) (289,411) Net debt (104,469) (142,324) Debentures - 58,740 Liabilities to banks 314, ,411 Total debts 314, ,151 Ratio of net debt to total balance sheet 21% 23% Total capital 581, ,

74 NOTE 24:- SHARE-BASED PAYMENT a. Expenses recognized in the financial statements: The expense recognized in the financial statements for for employee services received is shown in the following table: Year ended December 31, Equity-settled share-based payment plans 3,367 5,579 6,078 The share-based payment transactions that the Company granted to its employees are described below. There have been no modifications or cancellations to any of the employee benefit plans during 2013, 2012 or b. The Company's existing share-based payment plans: Allocation of options to the Company's CEO: The general meeting held on September 6, 2010 approved the Company's engagement in a new employment agreement with the Company's CEO and a director therein, Mr. Moti Gutman, according to which Mr. Gutman was granted, among others, 300,000 options in the Company in the context of a private placement. The agreement is in effect for a period of four years commencing January 1, In January 2012, the options were allocated to a trustee for a period of at least two years from the date of allocation of the options in order to comply with the provisions of section 102 to the Income Tax Ordinance under the capital gains track. All the options allocated to the trustee on behalf of the CEO are available for immediate exercise. In addition, the options are restricted in such a manner that the CEO may transfer from the trustee or sell 37,500 shares every six months starting from June 10, In the event of irregular termination of employment, the release of the shares from restriction will be accelerated and the CEO will be able to sell or transfer from the trustee the entire shares. Any dividends paid in respect of the shares will be delivered to the trustee after withholding tax has been remitted as required by law and transferred to the CEO based on the dates of release from restriction of the shares underlying the dividends

75 NOTE 24:- SHARE-BASED PAYMENT (Cont.) Share-based payment plan for senior managers: On May 11, 2011, following the approval of the audit committee, the Company's Board approved an expansion of the option plan adopted by the Company's Board on July 28, 2003 by 1,950,000 options and the allocation of 1,950,000 options which are exercisable into up to 1,950,000 Ordinary shares of NIS 1 par value each to 21 senior officers of the Company or of corporations controlled by it. The exercise price of the options is NIS 19.57, which will be adjusted upon the distribution of a dividend. Half of the options vest on May 10, 2013 and the other half will vest in equal portions on January 1, 2014 and January 1, The fair value of the options was estimated on the date of grant using the Black & Scholes model based on the terms of grant of these instruments. The contractual life of the share options is 4.5 years from the date of grant. This share-based payment transaction can only be settled using the Company's shares (no cash settlement alternative) whereby each option is exercisable into one share of NIS 1 par value. c. Movement during the year: The following table lists the number of share options, the weighted average exercise prices of share options and modification in employee option plans during the current year: Number of options Weighted Weighted average average exercise Number of exercise Number of price options price options Weighted average exercise price Share options outstanding at beginning of year 2,100, ,191, , Share options granted during the year - - 2,250, Share options exercised during the year 75, , , Share options outstanding at end of year 2,025, ,100, ,191, Share options exercisable at end of year 1,050, ,

76 NOTE 24:- SHARE-BASED PAYMENT (Cont.) d. The weighted average remaining contractual life for the share options outstanding as of December 31, 2013 was 1.96 years (as of December 31, years). e. The range of exercise prices for share options outstanding as of December 31, 2013 was NIS 0 - NIS (as of December 31, NIS 0 NIS 15.47). f. Measurement of the fair value of equity-settled share options: The Company uses the Black & Scholes model when measuring the fair value of equitysettled share options. The measurement was made at the grant of equity-settled share options since the options were granted to employees. The following table lists the inputs used for the fair value measurement of equity-settled share options for the above plan according to the Black & Scholes option pricing model: Expected volatility of the share prices (%) 36.5% Risk-free interest rate (%) 4.3% Expected life of share options (years) 4.6 Forfeiture rate (%) 13.7% Share price (NIS) 20.1 Based on the above inputs, the fair value of the options was determined at NIS 10,005 thousand at the grant date. The expected life of the share options is based on historical data and is not necessarily indicative of the exercise patterns of share options that may occur in the future. The expected volatility of the share prices reflects the assumption that the historical volatility of the share prices is reasonably indicative of expected future trends

77 NOTE 25:- FINANCIAL INSTRUMENTS a. Classification of financial assets and financial liabilities: The financial assets and financial liabilities in the statement of financial position are classified by groups of financial instruments pursuant to IAS 39: Financial assets: December 31, Financial assets at fair value through profit or loss: Designated as such upon initial recognition 59,361 52,172 Loans and receivables 645, ,927 Financial liabilities: Financial liabilities measured at amortized cost 684, ,217 Financial liabilities at fair value through profit or loss: Designated as such upon initial recognition 108, ,006 b. Financial risks factors: The Group's activities expose it to various financial risks such as market risk (including foreign exchange risk, fair value risk in respect of interest rate and price risk), credit risk, liquidity risk and cash flow risk in respect of interest rate. The Group's comprehensive risk management plan focuses on activities that reduce to a minimum any possible adverse effects on the Group's financial performance. The Group's finance department identifies and assesses the financial risks and they are managed by the Company's CFO and the investment committee established by the Board. The Board has not established specific policies with respect to certain exposures to risks such as foreign exchange risk, interest rate risk, credit risk, the use of derivative financial instruments and non-derivative financial instruments and the investments of excess liquid positions

78 NOTE 25:- FINANCIAL INSTRUMENTS (Cont.) 1. Market risks: a) Foreign currency risk: Foreign currency risk arises from transactions, recognized assets and recognized liabilities denominated in foreign currency that is not the functional currency and from net investments in foreign operations. The Group's policy is to allow the Group entities to pay liabilities denominated in their functional currency (mainly NIS) using the cash flows generated by each entity's activities. When the Group entities have liabilities denominated in foreign currency that is not their functional currency (and have no sufficient cash balances in this currency to settle the liabilities), the Group, if possible, transfers cash balances from one Group entity to the other. The software products marketing and integration segment is exposed to currency risk in respect of current purchases from U.S. suppliers. The effect of fluctuations in the exchange rates on trade payables denominated in dollars is partly offset by the balance of trade receivables denominated in dollars. As of the reporting date, the Group has a balance of trade payables totaling NIS 28,020 thousand (as of December 31, NIS 7,347 thousand) denominated in U.S. dollars and a balance of trade receivables totaling NIS 36,301 thousand (as of December 31, NIS 35,785 thousand). The Group has an investment in a foreign operation whose net financial assets are exposed to possible fluctuations in the U.S. dollar exchange rate. The currency exposure arising from the foreign operation's net financial assets in the U.S. is mainly managed by the CFO. b) Price risk: The Group invests surplus cash in marketable corporate debentures, in Government bonds which are partly linked to the Israeli CPI and in up to 15% in shares listed on the Tel-Aviv 100 Index and in share indices in the U.S. Investment decisions are made by an investment committee established by the Board using professional advisors. These investments are classified as financial assets at fair value through profit or loss in respect of which the Group is exposed to the risk of fluctuations in the securities' quoted market prices. The carrying amount of these investments as of December 31, 2013 amounts to NIS 59,361 thousand (as of December 31, NIS 52,172 thousand)

79 NOTE 25:- FINANCIAL INSTRUMENTS (Cont.) c) CPI risk: The Group has loans from banks and issued debentures that are linked to changes in the Israeli CPI. The Group's policy is to reduce the CPI risk in respect of cash flows from issued debentures by using fixed interest rate swap (IRS) contracts or by investing part of the surplus cash in CPI-linked financial assets. The net amount of the CPI-linked financial instruments in respect of which the Group is exposed to changes in the Israeli CPI approximates NIS 25,713 thousand as of December 31, 2013 (December 31, approximately NIS 29,673 thousand). d) Interest rate risk: The Group's interest rate risk mainly arises from long-term loans received. Loans that bear variable interest rates expose the Group to interest rate risk in respect of cash flows. The majority of long-term loans received in the last two years were at fixed interest, which minimizes the exposure to interest. The Group invests part of the surplus cash in marketable corporate debentures, which exposes it to changes in structured interest rates in this market. The investment committee and CFO make investment related decisions after consulting with professional advisors. Details of the interest type of the Group's interest-bearing financial instruments: December 31, Fixed interest instruments: Financial assets 28,852 28,033 Financial liabilities (254,497) (276,675) (225,645) (248,642) Variable interest instruments: Financial assets 23,670 22,571 Financial liabilities (67,191) (79,916) (43,521) (57,345)

80 NOTE 25:- FINANCIAL INSTRUMENTS (Cont.) 2. Credit risk: Credit risk is the risk that a counterparty will not meet its obligations as a customer or under a financial instrument leading to a loss to the Group. Credit risk mainly arises from the Group's customers and from investments in corporate debentures. a) Trade receivables: Before accepting new customers, the Group runs a credit check on the prospective customers using a reliable outside source. This information is used to determine payment terms and credit limits which are approved based on the size of the customer. Cases of exceeding credit limits are approved (according to procedures) depending on each specific case and based on past experience with the specific customer. Customers that consistently fail to meet their credit terms are required to make advance payments for any additional purchases until their credit rating can be re-reestablished. The Group believes that no provision for impairment is needed in respect of debts that are not in arrears or that are in arrears of up to 180 days based on past experience with such debts. b) Investment in corporate debentures: The Group maintains low exposure to credit risk in connection with its investments in corporate debentures by investing in debentures rated A1-Aa3 (based on S&P) only. Solely the investment committee established by the Company's Board approves investment decisions and the CFO receives a monthly analysis of the held debentures. If the credit rating of certain debentures drops below (A1), the Group sells those debentures as soon as possible. c) Investment in cash and cash equivalents: The Group holds cash and cash equivalents, short and long-term investments and other financial instruments in various financial institutions. According to the Group's policy, ongoing credit evaluations are made to determine the credit strength of those financial institutions. As of December 31, 2013, cash and cash equivalents total approximately NIS 148,761 thousand and short-term investments total approximately NIS 59,361 thousand

81 NOTE 25:- FINANCIAL INSTRUMENTS (Cont.) d) Short-term deposits: 3. Liquidity risk: The Group holds short-term deposits in various financial institutions. According to the Group's policy, reviews are performed regularly to check the relative credit stability of the various financial institutions. As at 31 December 2013, short-term deposits amounted to approximately NIS 2,333 thousand. Liquidity risk arises from managing the Group's working capital as well as from financial expenses and principal payments of the Group's debt instruments. Liquidity risk consists of the risk that the Group will have difficulty in fulfilling obligations relating to financial liabilities. The Group's policy is to ascertain constant cash adequacy needed for settling its liabilities when due. For this purpose, the Group aims to hold cash balances (or adequate credit lines) that will meet anticipated demands. The Group finances business combinations using long-term loans for average periods of six-seven years. The Group examines cash flow forecasts on a monthly basis as well as information regarding cash balances and the Group's investments in corporate debentures. As of the reporting date, these forecasts indicate that the Group can expect sufficient liquid sources for covering its entire liabilities under reasonable assumptions. The table below summarizes the maturity profile of the Group's financial liabilities based on contractual undiscounted payments (including interest payments): December 31, 2013: First year Second year Third Fourth year year Fifth year Total Trade payables 168, ,326 Other payables 30, ,304 Employee benefit liabilities 157, ,671 Income taxes payable 6, ,701 Finance lease 1,838 1,627 1,653 1,647 6,765 Loans from banks 106,066 75,579 54,287 45,527 33, , ,906 77,206 55,940 47,174 33, ,

82 NOTE 25:- FINANCIAL INSTRUMENTS (Cont.) December 31, 2012: First year Second year Third Fourth year year Fifth year Total Trade payables 161, ,106 Other payables 25, ,175 Employee benefit liabilities 153, ,151 Income taxes payable 15, ,194 Debentures 58, ,740 Finance lease 1,969 1,601 1,625 1,650 1,595 8,440 Loans from banks 72,962 48,400 57,207 42,838 68, , ,297 50,001 58,832 44,488 69, ,217 c. Fair value: (*) The above tables do not include liabilities in respect of business combinations. The following table demonstrates the carrying amount and fair value of the financial instruments that are presented in the financial statements not at fair value: December 31, Carrying amount Fair value Carrying amount Fair value Debentures ,740 61,235 The carrying amount of cash and cash equivalents, short-term investments, trade receivables, other accounts receivable, short-term loans granted, credit from banks and others, trade payables and other accounts payable approximates their fair value. Marketable assets and liabilities Interest-bearing short-term non-marketable assets and liabilities with fixed maturities Assets and liabilities with no maturities - Based on quoted prices in an active market as of the reporting date. - The carrying amount reflects the fair value as of the reporting date since their average interest rate is not materially different from standard market rate for similar items as of the reporting date. - Fair value is determined at the amount payable upon demand on the reporting date

83 NOTE 25:- FINANCIAL INSTRUMENTS (Cont.) Assets and liabilities at variable interest Long-term loans at fixed interest Options Guarantees and liabilities to grant loans - The fair value of assets and liabilities at variable interest which do not involve a material credit risk is based on their carrying amount. - The fair value of long-term loans bearing fixed interest is based on the calculation of the present value of cash flows using the standard interest rate for similar loans with similar characteristics. - The fair value is based on market price. In the absence of market price, the fair value is based on economic models. - The fair value is based on the amount payable as of the reporting date for similar engagements taking into consideration the remaining period of the agreement and the credit strength of the parties to the contract. d. Classification of financial instruments by fair value hierarchy: The financial instruments presented in the statement of financial position at fair value are grouped into classes with similar characteristics using the following fair value hierarchy which is determined based on the source of input used in measuring fair value: Level 1 Level 2 Level 3 - quoted prices (unadjusted) in active markets for identical assets or liabilities. - inputs other than quoted prices included within Level 1 that are observable either directly or indirectly. - inputs that are not based on observable market data (valuation techniques which use inputs that are not based on observable market data). December 31, 2013: Financial assets measured at fair value: Level 1 Level 2 Level 3 Financial assets at fair value through profit or loss: Shares 11, Debentures 47, ,

84 NOTE 25:- FINANCIAL INSTRUMENTS (Cont.) Financial liabilities measured at fair value: Level 1 Level 2 Level 3 Financial liabilities at fair value through profit or loss: Liability for option to non-controlling interests ,614 Liabilities in respect of business combinations ,365 December 31, 2012: Financial assets measured at fair value: ,979 Level 1 Level 2 Level 3 Financial assets at fair value through profit or loss: Shares 5, Debentures 46, Financial liabilities measured at fair value: 52, Level 1 Level 2 Level 3 Financial liabilities at fair value through profit or loss: Liability for option to non-controlling interests ,808 Liabilities in respect of business combinations , ,

85 NOTE 25:- FINANCIAL INSTRUMENTS (Cont.) e. Sensitivity tests relating to changes in market factors: December 31, Sensitivity test to changes in interest rates: Profit (loss) from the change: Increase of 1% in interest (435) (573) Decrease of 1% in interest Sensitivity test to changes in the Israeli CPI: Profit (loss) from the change: Increase of 1% in CPI 257 (297) Decrease of 1% in CPI (257) 297 Sensitivity test to changes in U.S. dollar exchange rates: Profit (loss) from the change: Increase of 5% in exchange rate (2,642) (3,384) Decrease of 5% in exchange rate 2,642 3,384 Sensitivity test to changes in quoted market prices of securities: Profit (loss) from the change: Increase of 5% in quoted market price 2,968 2,609 Decrease of 5% in quoted market price (2,968) (2,609) Sensitivity tests and principal work assumptions: The selected changes in the relevant risk variables were determined based on management's estimate as to reasonable possible changes in these risk variables. The Group has performed sensitivity tests of principal market risk factors that are liable to affect its reported operating results or financial position. The sensitivity tests present the profit or loss and/or change in equity (before tax) in respect of each financial instrument for the relevant risk variable chosen for that instrument as of each reporting date. The test of risk factors was determined based on the materiality of the exposure of the operating results or financial condition of each risk with reference to the functional currency and assuming that all the other variables are constant. The Group is not exposed to interest rate risk in respect of long-term loans with fixed interest. The sensitivity test for long-term loans with variable interest was only performed on the variable component of interest

86 NOTE 25:- FINANCIAL INSTRUMENTS (Cont.) The sensitivity tests for listed investments with quoted market price (bid price) were performed on possible changes in these market prices. f. Linkage terms of financial assets by groups of financial instruments pursuant to IAS 39: December 31, 2013: In or linked to U.S. dollar Linked to Israeli CPI Unlinked Total Financial assets at fair value through profit or loss 6,982 24,230 28,149 59,361 Loans and receivables 37,204 1, , ,745 December 31, 2012: 44,186 25, , ,106 In or linked to U.S. dollar Linked to Israeli CPI Unlinked Total Financial assets at fair value through profit or loss: ,841 27,826 52,172 Loans and receivables 36,871 5, , ,927 37,376 29, , ,

87 NOTE 25:- FINANCIAL INSTRUMENTS (Cont.) g. Linkage terms of financial liabilities by groups of financial instruments pursuant to IAS 39: December 31, 2013: In or linked to U.S. dollar Linked to Israeli CPI Unlinked Total Financial liabilities measured at amortized cost: 43, , ,690 Financial liabilities at fair value through profit or loss 53,659-55, ,979 December 31, 2012: 97, , ,669 In or linked to U.S. dollar Linked to Israeli CPI Unlinked Total Financial liabilities measured at amortized cost: 36,083 58, , ,217 Financial liabilities at fair value through profit or loss 68,975-48, , ,058 58, , ,

88 NOTE 26:- ADDITIONAL INFORMATION TO THE STATEMENTS OF COMPREHENSIVE INCOME ITEMS a. Geographical information: Revenues reported in the financial statements derive from the Company's country of domicile (Israel) and foreign countries based on the location of the customers, are as follows: Year ended December 31, Israel 1,746,699 1,806,048 1,665,402 Foreign countries 184, ,904 92,828 1,931,650 1,983,952 1,758,230 The carrying amount of non-current assets (property, plant and equipment and intangible assets) in the Company's country of domicile (Israel) and in foreign countries based on the location of the assets, are as follows: December 31, Israel 479, ,786 Foreign countries 64,265 68,080 b. Revenues: 554, ,866 Year ended December 31, Software solutions and services 1,405,576 1,380,879 1,163,007 Software product marketing and support 149, , ,537 Computer infrastructure and integration solutions 241, , ,260 Learning and integration 135, , ,426 1,931,650 1,983,952 1,758,

89 NOTE 26:- ADDITIONAL INFORMATION TO THE STATEMENTS OF COMPREHENSIVE INCOME ITEMS (Cont.) c. Cost of sales and services: Year ended December 31, Purchases 299, , ,220 Wages and related expenses 1,014, , ,524 Subcontractors 160, , ,412 Depreciation and amortization 11,536 11,015 7,619 Motor vehicles 83,985 93,742 92,130 Rent 15,540 19,385 15,637 Maintenance and other expenses 16,788 15,289 31,787 1,602,559 1,649,909 1,432,329 Decrease (increase) in inventories (340) 1,462 10,518 d. Selling and marketing expenses: 1,602,219 1,651,371 1,442,847 Year ended December 31, Wages and related expenses 50,274 48,582 49,707 Amortization 8,296 12,294 8,133 Advertising and marketing 7,068 7,668 7,895 Other 8,593 7,159 3,478 e. General and administrative expenses: 74,231 75,703 69,213 Year ended December 31, Wages and related expenses 57,149 59,463 56,623 Depreciation and amortization 6,543 6,552 5,392 Doubtful accounts and bad debts 1,668 2,526 1,869 Capital loss (gain) from sale of property, plant and equipment (42) Rent 40,601 41,781 34,897 Other 8,690 6,045 9, , , ,

90 NOTE 26:- ADDITIONAL INFORMATION TO THE STATEMENTS OF COMPREHENSIVE INCOME ITEMS (Cont.) f. Financial income and expenses: Year ended December 31, Financial expenses: Expenses in respect of business combinations liabilities 2,708 3,000 2,233 Commissions, interest, linkage differences and other 7,949 2,953 1,879 Interest expenses on long-term loans 13,942 12,932 2,248 Loss from marketable securities - - 5,269 Interest expenses and linkage differences on debentures 2,012 7,982 13,172 26,611 26,867 24,801 Financial income: Income from marketable securities 3,563 3,690 4,565 Interest income from deposits and linkage differences ,352 3,627 4,271 5,

91 NOTE 27:- NET EARNINGS PER SHARE Details of the net income and par value of shares used in the calculation of net earnings per Ordinary share of NIS 1 par value and the adjustments made for the calculation of basic and fully diluted net earnings per share: Basic net earnings per share: Year ended December 31, Net income attributable to equity holders of the Group 85,973 86,424 93,590 Weighted number of shares 60,017,791 59,805,823 59,851,181 Basic net earnings per share Diluted net earnings per share: Net income attributable to equity holders of the Group 85,973 86,424 93,590 Weighted number of shares used to calculate basic net earnings per share 60,017,791 59,805,823 59,851,181 Effect of potential dilutive Ordinary shares 129,453 97, ,196 Adjusted weighted average number of shares 60,147,244 59,903,292 59,968,377 Diluted net earnings per share

92 NOTE 28:- INTERESTED AND RELATED PARTIES a. Balances: December 31, 2013: See Note Parent Related company parties Trade receivables Other payables December 31, 2012: See Note Parent Related company parties Trade receivables 6-14 b. Compensation of key management personnel: No. of key managers Year ended December 31, NIS in No. of key NIS in No. of key thousands managers thousands managers NIS in thousands Post-employment benefits (1) Share-based payment (2) 22 3, , ,078 (1) See also note 20. (2) See also note 24. c. Salaries and benefits to interested parties: No. of people Year ended December 31, NIS in No. of NIS in No. of thousands people thousands people NIS in thousands Salaries and related expenses paid to executives 2 9, , ,833 Salaries and related expenses paid to interested parties Public directors' fees

93 NOTE 28:- INTERESTED AND RELATED PARTIES (Cont.) c. Transactions with interested and related parties: Year ended December 31, 2013: Parent Related company parties Sale of goods/provision of services - 3,096 Year ended December 31, 2012: Parent Related company parties Sale of merchandise/grant of services Year ended December 31, 2011: Parent Related company parties Sale of goods/provision of services

94 NOTE 29:- OPERATING SEGMENTS a. General: The Company operates through subsidiaries in the following segments: - Software solutions and services (Information Technology IT). - Learning and integration. - Computer infrastructure and integration solutions. - Software product marketing and support. Software solutions and services: The software solutions and services provided by the Group consist of providing tailored software solutions and upgrading and expanding existing software systems. These services include, among others, developing customized software, adapting software to the customer's specific needs, implementing software and modifying it based on the customer's needs and integrating all or part of the above elements. The scope of work invested in each element varies from one customer to the other. Learning and integration: The Group's activities in this segment consist of operating a network of high-tech training and instruction centers which provide application courses, professional training courses and advanced professional studies in the high-tech industry. Computer infrastructure and integration solutions: The Group's activities in this segment consist of: (1) providing computer and telecommunication infrastructure solutions; (2) selling and marketing personal computers, portable computers, Intel servers, peripheral equipment, operating systems, servers and workstations that use UNIX and VMS and selling and marketing mainframe storage and backup systems such as IP and IBM; (3) providing computer and peripheral equipment maintenance services, lab and helpdesk services. Software product marketing and support: The Group's activities in this segment include marketing and support for various software products the principal of which being CRM, computer systems management infrastructures, web world content management, database and data warehouse mining, application integration, database and systems, data management and software development tools

95 NOTE 29:- OPERATING SEGMENTS (Cont.) b. Reporting on operating segments: Software solutions and services Learning and integration Year ended December 31, 2013 Software product marketing and support Computer infrastruct ure and integration solutions Adjustments Total Revenues/from external customers 1,405, , , ,804-1,931,650 Inter-segment revenues 28,609 13,588 2,355 6,113 (50,665) - Revenues 1,434, , , ,917 (50,665) 1,931,650 Depreciation and amortization 18,055 7, ,004-26,375 Segment operating results 104,051 9,859 16,177 10, ,539 Financial expenses (26,611) Financial income 3,627 Taxes on income (24,575) Company's share of losses of associate (3,848) Net income 89,

96 NOTE 29:- OPERATING SEGMENTS (Cont.) Software solutions and services Learning and integration Year ended December 31, 2012 Software product marketing and support Computer infrastruct ure and integration solutions Adjustments Total Revenues/from external customers 1,380, , , ,615-1,983,952 Inter-segment revenues 24,015 14,279 4,051 7,778 (50,123) - Revenues 1,404, , , ,393 (50,123) 1,983,952 Depreciation and amortization 19,919 8, ,042-29,861 Segment operating results 103,084 10,000 16,788 10, ,411 Financial expenses (27,132) Financial income 4,536 Taxes on income (26,985) Company's share of losses of associate (158) Net income 90,

97 NOTE 29:- OPERATING SEGMENTS (Cont.) Software solutions and services Learning and integration Year ended December 31, 2011 Software product marketing and support Computer infrastruct ure and integration solutions Adjustments Total Revenues/from external customers 1,163, , , ,260-1,758,230 Inter-segment revenues 13,823 9,785 4,833 9,864 (38,305) - Revenues 1,176, , , ,124 (38,305) 1,758,230 Depreciation and amortization 15,336 4, ,144 Segment operating results 97,773 11,364 18,564 10, ,718 Financial expenses (24,801) Financial income 5,917 Taxes on income (24,136) Company's share of losses of associate (1,263) Net income 93,435 NOTE 30:- SUBSEQUENT EVENT As part of the acquisition of Exzac from January 2, 2012, as detailed in note 3g, the Company and the Founders received mutual options for the purchase of the Founders' remaining shares of Exzac. On January 5, 2014, the second founder exercised his option and the Company purchased from him its remaining shares in the Acquiree (20% of the Acquiree's shares) in consideration of $ 5 million and with and additional amount that will be calculated according to a predetermined formula based on the Acquiree's results in As a result of this exercise, the Company holds 100% in Exzac F:\W2000\w2000\30585\M\13\EC12-MATRIX-IFRS.docx דוח באנגלית\ H:\Matrix\2013\ \Conclusion\FS