{"url_path":"/sec/forty/10-k/2026/item-11","section_key":"item-11","section_title":"Item 11 QUANTITATIVE AND QUALITATIVE DISCLOSURES","topic":"sec","document":{"doc_type":"20-F","doc_date":"2026-05-13","source_url":"https://www.sec.gov/Archives/edgar/data/1045986/0001213900-26-055948-index.html","accession_number":"0001213900-26-055948","cik":"0001045986","ticker":"FORTY","issuer_name":"FORMULA SYSTEMS (1985) LTD","edgar_url":"https://www.sec.gov/Archives/edgar/data/1045986/0001213900-26-055948-index.html","primary_entity_key":"0001045986","primary_entity_name":"FORMULA SYSTEMS (1985) LTD"},"word_count":1288,"has_tables":true,"body_markdown":"**ITEM 11. QUANTITATIVE AND QUALITATIVE DISCLOSURES\nABOUT MARKET RISK**\n\n \n\nMarket risks relating to our\noperations result primarily from changes in interest rates, exchange rates, and/or weak economic conditions in the markets in which we\nsell our products and services. We have been monitoring and continue to actively monitor these potential exposures. To manage the volatility\nrelating to these exposures, we may enter into various forward contracts or other hedging instruments. Our objective is to reduce, where\nit is deemed appropriate to do so, fluctuations in earnings and cash flows associated with changes in interest rates and foreign currency\nexchange rates.\n\n** **\n\n170\n\n \n\n** **\n\n**Interest Rate and Currency Exchange\nRate Fluctuations; Impact of Inflation**\n\n \n\nIn light of the nature of\nour activities, we invest our cash and cash equivalents primarily in short-term and long-term deposits. As of December 31, 2025, substantially\nall of the cash that we held was invested in dollar, Euro, Indian Rupee, Danish Krone, Swedish Krona, Polish Zloty and British Pound accounts\nbearing interest based on SOFR, and NIS accounts bearing interest based on the Israeli prime rate. Given the current interest rates in\nthe financial markets, assuming a 10% interest rate decrease, the net decrease in our earnings from our financial assets would not be\nmaterial, holding other variables constant.\n\n \n\nAs described above in this\nannual report (under “*Item 3.D Risk Factors— Risks Related to Operations in Israel— Our international operations\nexpose us to risks associated with fluctuations in foreign currency exchange rates that have in the recent past adversely affected, and\ncould once again adversely affect, our business*” and “*Item 5. Operating and Financial Review and Prospects— Operating\nResults— Impact of Inflation and Currency Fluctuations on Results of Operations*”), because most of our software services\nrevenues are received in NIS, a devaluation of the NIS against the U.S. dollar adversely impacts the U.S. dollar value of our software\nservices revenues and operating profit, by reducing the U.S. dollar value of those revenues for software services. Accordingly, the appreciation\nof the NIS against the U.S. dollar (as has occurred significantly later in 2025 and thus far in 2026) has positively impacted the U.S.\ndollar value of our software services revenues and operating profit.\n\n \n\nAt the same time, a significant\nportion of our revenues from proprietary software products is currently denominated in U.S. dollars and other currencies, particularly,\nEuro, Japanese yen, and, to a lesser extent the British pound and Indian rupee, while a substantial portion of our expenses relating to\nproprietary software products, principally salaries and related personnel expenses, is denominated in NIS. As a result, the appreciation\nof the NIS relative to the U.S. dollar (which occurred during 2025 and thus far in 2026) increases our operating costs (when translated\ninto dollars) relative to our revenues from proprietary software products, and, therefore, adversely affects the operational profitability\nof our proprietary software product reporting segment. Any increase in the rate of Israeli inflation (which did not occur in 2025, as\nIsraeli inflation actually declined to 2.6% annually from 3.2% annually in 2024) would compound the negative impact of increased NIS-incurred\nexpenses in U.S. dollar terms by further increasing our NIS-incurred (and ultimately dollar-recorded) operating expenses, and, consequently,\nwould reduce our operational profitability in that business line. Also, the devaluation of those other currencies— particularly\nEuro, British pound and Japanese yen— relative to the U.S. dollar (which was not the case in 2025, when those other currencies appreciated\nrelative to the U.S. dollar) would reduce our dollar-recorded revenues from sales of our proprietary software products in those other\ncurrencies and thereby harm our results of operations.\n\n \n\nThe net effect of these risks\nstemming from currency exchange rate fluctuations on our operating results can be quantified as follows:\n\n \n\nA hypothetical 10% devaluation\nor appreciation of foreign currencies (primarily the NIS, GBP, Euro, Japanese yen and INR) against the US dollar, with all other variables\nheld constant on the expected sales, would have resulted in a decrease or increase in 2025 sales revenues of approximately $200 million\nor $242 million, respectively.\n\n \n\nDepending upon the circumstances,\nwe will consider entering into currency hedging transactions to decrease the risk of financial exposure from fluctuations in the exchange\nrate of the dollar, Euro, Japanese yen and/or British Pound against the NIS, or the Euro, Japanese yen and/or British pound against the\ndollar. There can be no assurance that these activities, or others that we may use from time to time, will eliminate the negative financial\nimpact of currency fluctuations and inflation. We do not, nor do we intend to in the future, engage in currency speculation.\n\n \n\n171\n\n \n\n \n\n**Inflation Risk.**We\nand some of our subsidiaries are subject to inflation risk. Given that over recent years we have expanded our global presence and offer\nour software solutions and services to new markets, particularly in the United States, the U.K. and Europe, upwards inflationary pressures\ncan adversely impact our operations. Increased inflation, as was the case globally, and in Europe and the U.S. in particular, in 2022\nand early 2023, leads to an increase in certain of our operating costs and expenses, such as employee compensation and office operating\nexpenses. The moderate levels of inflation that have been prevalent globally since the second half of 2023, including throughout 2024\nand 2025, have mitigated these adverse effects. In addition, during periods of significant inflation, the purchasing power of our customers\ndeclines due to our customers’ rising other expenses, and customer demand for our software solutions and services is, to a certain\nextent, adversely impacted, which negatively affects our results of operations, financial condition and prospects at the time. We continue\nto monitor, on an ongoing basis, inflationary pressures and their impact on our results of operations.\n\n \n\n**Market Risk.**We\ncurrently do not invest in, or otherwise hold, for trading or other purposes, any financial instruments subject to market risk.\n\n \n\n**Interest Rate Risk**.\nWe and three of our subsidiaries (Matrix, Michpal and Zap Group) account for the majority of the Group’s bank credits, loans and\ndebentures, which are subject to interest rate risk. Matrix and Formula pay interest on their debentures based on a fixed interest rate\nwhich is denominated in NIS. Because Formula does not have any material outstanding debt obligations other than with respect to its debentures,\nit has not been materially impacted by the global rise in interest rates that began in 2022. Therefore, no quantitative tabular disclosures\nare required. Additionally, as Matrix is impacted by interest rate risk with respect to its bank credits and loan, in an effort to hedge\nthe risk, Matrix conducted two Series B bond issuances at a fixed interest rate of 4.1% and Series 2 convertible bond issuance at a fixed\ninterest rate of 0.5%. As a result, Matrix has not been materially impacted by the relatively higher interest rates that have been in\nplace globally since 2022 (which have been reduced moderately over the course of subsequent years, in 2023, 2024 and 2025). An increase\nof 1% in interest rates would have increased Matrix’s, Zap Group’s and Michpal’s combined financial expenses by approximately\n$1.8 million in 2025.\n\n \n\n**Fluctuations in Market Price of Securities\nWe Hold**\n\n \n\nWe hold the securities of\ntwo subsidiaries and one affiliate— Matrix, Michpal and TSG Systems— which are companies whose securities are listed for trading\non the TASE. We consider these holdings to be long-term holdings. We are exposed to the risk of fluctuation of the price of these companies’\nsecurities. All our publicly traded investees have experienced significant historical volatility in their share prices. Fluctuations in\nthe market price of our holdings in these companies may result in the fluctuation of the value of our assets. We typically do not attempt\nto reduce or eliminate our market exposure on the value of these securities."}