SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
FORM
10-Q
(Mark
One)
|
x
|
QUARTERLY
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
|
For
the quarterly period ended September 30, 2010
|
¨
|
TRANSITION
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
|
For the
transition period from ________ to ________
Commission
File Number 000-50954
NESS
TECHNOLOGIES, INC.
(Exact
name of registrant as specified in its charter)
Delaware
|
98-0346908
|
(State
or other jurisdiction of
|
(I.R.S.
Employer
|
incorporation
or organization)
|
Identification
Number)
|
|
|
Ness
Tower
|
Ness
Technologies
|
Atidim
High-Tech Industrial Park, Building 4
|
3
University Plaza, Suite 600
|
Tel
Aviv 61580, Israel
|
Hackensack,
NJ 07601
|
Telephone:
+972 (3) 766-6800
|
Telephone:
(201) 488-7222
|
(Address
of registrant’s principal executive offices and registrant’s telephone number,
including area code)
Indicate
by check mark whether the registrant: (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days.
x
Yes
¨
No
Indicate
by check mark whether the registrant has submitted electronically and posted on
its corporate Web site, if any, every Interactive Data File required to be
submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this
chapter) during the preceding 12 months (or for such shorter period that the
registrant was required to submit and post such files).
¨
Yes
¨
No
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer or a smaller reporting company. See
the definition of “large accelerated filer,” “accelerated filer” and “smaller
reporting company” in Rule 12b-2 of the Exchange Act.
Large
accelerated filer
¨
|
Accelerated
filer
x
|
Non-accelerated
filer
¨
|
Smaller
reporting company
¨
|
Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act).
¨
Yes
x
No
As of
October 29, 2010, 38,003,058 shares of the issuer’s common stock, $0.01 par
value per share, were outstanding.
NESS
TECHNOLOGIES, INC. AND SUBSIDIARIES
INDEX
PART
I – FINANCIAL INFORMATION
|
3
|
|
|
Item
1. Financial Statements
|
3
|
Consolidated
Balance Sheets – December 31, 2009 and September 30, 2010
(Unaudited)
|
3
|
Consolidated
Statements of Income – Three and nine months ended September 30, 2009 and
2010 (Unaudited)
|
5
|
Consolidated
Statements of Cash Flows – Nine months ended September 30, 2009 and 2010
(Unaudited)
|
6
|
Notes
to Interim Consolidated Financial Statements – September 30, 2010
(Unaudited)
|
8
|
Item
2. Management’s Discussion and Analysis of Financial Condition and Results
of Operations
|
24
|
Forward-Looking
Statements
|
24
|
Overview
|
24
|
Consolidated
Results of Operations
|
26
|
Three
Months Ended September 30, 2010 Compared to the Three Months Ended
September 30, 2009
|
26
|
Nine
Months Ended September 30, 2010 Compared to the Nine months Ended
September 30, 2009
|
29
|
Results
by Business Segment
|
32
|
Liquidity
and Capital Resources
|
33
|
Item
3. Quantitative and Qualitative Disclosures About Market
Risk
|
35
|
Item
4. Controls and Procedures
|
36
|
Evaluation
of Disclosure Controls and Procedures
|
36
|
Changes
in Internal Control Over Financial Reporting
|
36
|
|
|
PART
II – OTHER INFORMATION
|
37
|
|
|
Item
1. Legal Proceedings
|
37
|
Item
1A. Risk Factors
|
37
|
Item
2. Unregistered Sales of Equity Securities and Use of
Proceeds
|
37
|
Item
3. Defaults upon Senior Securities
|
37
|
Item
4. (Removed and Reserved)
|
37
|
Item
5. Other Information
|
37
|
Item
6. Exhibits
|
37
|
|
|
SIGNATURES
|
29
|
|
|
EXHIBIT
INDEX
|
40
|
PART
I – FINANCIAL INFORMATION
Item
1. Financial Statements
NESS
TECHNOLOGIES, INC. AND ITS SUBSIDIARIES
Interim
Consolidated Balance Sheets
U.S.
dollars in thousands
|
|
|
|
|
|
|
|
|
|
|
|
(Unaudited)
|
|
ASSETS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CURRENT
ASSETS:
|
|
|
|
|
|
|
Cash
and cash equivalents
|
|
$
|
40,218
|
|
|
$
|
35,232
|
|
Restricted
cash
|
|
|
2,470
|
|
|
|
2,572
|
|
Short-term
bank deposits
|
|
|
25,939
|
|
|
|
14,802
|
|
Trade
receivables, net of allowance for doubtful accounts of $2,789 at December
31, 2009 and $2,239 at September 30, 2010
|
|
|
131,452
|
|
|
|
146,683
|
|
Unbilled
receivables
|
|
|
28,012
|
|
|
|
42,307
|
|
Other
accounts receivable and prepaid expenses
|
|
|
27,832
|
|
|
|
30,451
|
|
Work
in progress
|
|
|
9,690
|
|
|
|
6,877
|
|
Total
assets attributed to discontinued operations
|
|
|
43,212
|
|
|
|
30,616
|
|
Total
current assets
|
|
|
308,825
|
|
|
|
309,540
|
|
|
|
|
|
|
|
|
|
|
LONG-TERM
ASSETS:
|
|
|
|
|
|
|
|
|
Long-term
prepaid expenses and other assets
|
|
|
6,083
|
|
|
|
7,209
|
|
Unbilled
receivables
|
|
|
4,654
|
|
|
|
3,508
|
|
Deferred
income taxes, net
|
|
|
3,608
|
|
|
|
2,704
|
|
Severance
pay fund
|
|
|
53,145
|
|
|
|
57,074
|
|
Property
and equipment, net
|
|
|
35,739
|
|
|
|
33,813
|
|
Intangible
assets, net
|
|
|
10,016
|
|
|
|
11,129
|
|
Goodwill
|
|
|
263,541
|
|
|
|
279,875
|
|
Total
long-term assets
|
|
|
376,786
|
|
|
|
395,312
|
|
|
|
|
|
|
|
|
|
|
Total
assets
|
|
$
|
685,611
|
|
|
$
|
704,852
|
|
The
accompanying notes are an integral part of the interim consolidated financial
statements.
NESS
TECHNOLOGIES, INC. AND ITS SUBSIDIARIES
Interim
Consolidated Balance Sheets
U.S.
dollars in thousands (except share and par value data)
|
|
|
|
|
|
|
|
|
|
|
|
(Unaudited)
|
|
LIABILITIES
AND STOCKHOLDERS’ EQUITY
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CURRENT
LIABILITIES:
|
|
|
|
|
|
|
Short-term
bank credit
|
|
$
|
500
|
|
|
$
|
30,379
|
|
Current
maturities of long-term debt
|
|
|
21,332
|
|
|
|
26,303
|
|
Trade
payables
|
|
|
30,914
|
|
|
|
33,796
|
|
Advances
from customers and deferred revenues
|
|
|
40,639
|
|
|
|
31,640
|
|
Other
accounts payable and accrued expenses
|
|
|
99,464
|
|
|
|
106,300
|
|
Total
liabilities attributed to discontinued operations
|
|
|
25,461
|
|
|
|
12,779
|
|
Total
current liabilities
|
|
|
218,310
|
|
|
|
241,197
|
|
|
|
|
|
|
|
|
|
|
LONG-TERM
LIABILITIES:
|
|
|
|
|
|
|
|
|
Long-term
debt, net of current maturities
|
|
|
50,836
|
|
|
|
43,351
|
|
Other
long-term liabilities
|
|
|
6,689
|
|
|
|
7,722
|
|
Deferred
income taxes
|
|
|
2,045
|
|
|
|
2,477
|
|
Accrued
severance pay
|
|
|
56,443
|
|
|
|
60,670
|
|
Total
long-term liabilities
|
|
|
116,013
|
|
|
|
114,220
|
|
|
|
|
|
|
|
|
|
|
COMMITMENTS
AND CONTINGENT LIABILITIES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
STOCKHOLDERS’
EQUITY:
|
|
|
|
|
|
|
|
|
Preferred
stock of $0.01 par value –
Authorized:
8,500,000 shares at December 31, 2009 and at September 30, 2010;
Issued
and outstanding: none at December 31, 2009 and September 30,
2010
|
|
|
—
|
|
|
|
—
|
|
Common
stock of $0.01 par value –
Authorized:
76,500,000 shares at December 31, 2009 and at September 30, 2010;
Issued:
39,628,994 at December 31, 2009 and 39,630,962 at September 30, 2010;
Outstanding:
38,399,290 at December 31, 2009 and 38,003,058 at September 30,
2010
|
|
|
396
|
|
|
|
396
|
|
Additional
paid-in capital
|
|
|
332,928
|
|
|
|
335,289
|
|
Accumulated
other comprehensive income
|
|
|
16,176
|
|
|
|
18,009
|
|
Retained
earnings
|
|
|
6,476
|
|
|
|
2,598
|
|
Treasury
stock, at cost (1,229,704 shares at December 31, 2009 and 1,627,904 at
September 30, 2010)
|
|
|
(4,688
|
)
|
|
|
(6,857
|
)
|
Total
stockholders’ equity
|
|
|
351,288
|
|
|
|
349,435
|
|
|
|
|
|
|
|
|
|
|
Total
liabilities and stockholders’ equity
|
|
$
|
685,611
|
|
|
$
|
704,852
|
|
The
accompanying notes are an integral part of the interim consolidated financial
statements.
NESS
TECHNOLOGIES, INC. AND ITS SUBSIDIARIES
Interim
Consolidated Statements of Income
U.S.
dollars in thousands (except per share data)
|
|
Three months ended
September 30,
|
|
|
Nine months ended
September 30,
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Unaudited)
|
|
|
(Unaudited)
|
|
|
(Unaudited)
|
|
|
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
$
|
123,202
|
|
|
$
|
141,346
|
|
|
$
|
376,370
|
|
|
$
|
414,380
|
|
Cost
of revenues
|
|
|
89,780
|
|
|
|
102,716
|
|
|
|
276,681
|
|
|
|
301,512
|
|
Gross
profit
|
|
|
33,422
|
|
|
|
38,630
|
|
|
|
99,689
|
|
|
|
112,868
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling
and marketing
|
|
|
10,033
|
|
|
|
9,542
|
|
|
|
28,926
|
|
|
|
29,433
|
|
General
and administrative
|
|
|
19,521
|
|
|
|
25,401
|
|
|
|
64,339
|
|
|
|
74,294
|
|
Insurance
settlement related to 2007 arbitration expense, net of related
expenses
|
|
|
—
|
|
|
|
—
|
|
|
|
(2,610
|
)
|
|
|
—
|
|
Commissions
related to the sale of Israeli SAP sales and distribution
operations
|
|
|
—
|
|
|
|
—
|
|
|
|
(2,534
|
)
|
|
|
—
|
|
Total
operating expenses
|
|
|
29,554
|
|
|
|
34,943
|
|
|
|
88,121
|
|
|
|
103,727
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
income
|
|
|
3,868
|
|
|
|
3,687
|
|
|
|
11,568
|
|
|
|
9,141
|
|
Financial
expenses, net
|
|
|
(388
|
)
|
|
|
(489
|
)
|
|
|
(2,210
|
)
|
|
|
(1,140
|
)
|
Income
before taxes on income
|
|
|
3,480
|
|
|
|
3,198
|
|
|
|
9,358
|
|
|
|
8,001
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Taxes
on income
|
|
|
826
|
|
|
|
1,631
|
|
|
|
2,005
|
|
|
|
4,848
|
|
Net
income from continuing operations
|
|
$
|
2,654
|
|
|
$
|
1,567
|
|
|
$
|
7,353
|
|
|
$
|
3,153
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
loss from discontinued operations
|
|
|
(1,812
|
)
|
|
|
(799
|
)
|
|
|
(3,941
|
)
|
|
|
(7,031
|
)
|
Net
income (loss)
|
|
$
|
842
|
|
|
$
|
768
|
|
|
$
|
3,412
|
|
|
$
|
(3,878
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
net earnings per share from continuing operations
|
|
$
|
0.07
|
|
|
$
|
0.04
|
|
|
$
|
0.19
|
|
|
$
|
0.08
|
|
Diluted
net earnings per share from continuing operations
|
|
$
|
0.07
|
|
|
$
|
0.04
|
|
|
$
|
0.19
|
|
|
$
|
0.08
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
and diluted net loss per share from discontinued
operations
|
|
$
|
(0.05
|
)
|
|
$
|
(0.02
|
)
|
|
$
|
(0.10
|
)
|
|
$
|
(0.18
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
net earnings (loss) per share
|
|
$
|
0.02
|
|
|
$
|
0.02
|
|
|
$
|
0.09
|
|
|
$
|
(0.10
|
)
|
Diluted
net earnings (loss) per share
|
|
$
|
0.02
|
|
|
$
|
0.02
|
|
|
$
|
0.09
|
|
|
$
|
(0.10
|
)
|
__________________
(*)
Includes stock-based compensation, as follows:
|
|
Three months ended
September 30,
|
|
|
Nine months ended
September 30,
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Unaudited)
|
|
|
(Unaudited)
|
|
|
(Unaudited)
|
|
|
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost
of revenues
|
|
$
|
63
|
|
|
$
|
49
|
|
|
$
|
183
|
|
|
$
|
204
|
|
Selling
and marketing
|
|
|
52
|
|
|
|
40
|
|
|
|
155
|
|
|
|
125
|
|
General
and administrative
|
|
|
748
|
|
|
|
668
|
|
|
|
2,281
|
|
|
|
1,588
|
|
The
accompanying notes are an integral part of the interim consolidated financial
statements.
NESS
TECHNOLOGIES, INC. AND ITS SUBSIDIARIES
Interim
Consolidated Statements of Cash Flows
U.S.
dollars in thousands
|
|
Nine months ended
September 30,
|
|
|
|
|
|
|
|
|
|
|
(Unaudited)
|
|
|
(Unaudited)
|
|
Cash flows from operating
activities
:
|
|
|
|
|
|
|
Net
income (loss)
|
|
$
|
3,412
|
|
|
$
|
(3,878
|
)
|
Adjustments
required to reconcile net income (loss) to net cash provided by (used in)
operating activities:
|
|
|
|
|
|
|
|
|
Net
loss from discontinued operations
|
|
|
3,941
|
|
|
|
7,031
|
|
Stock-based
compensation
|
|
|
2,619
|
|
|
|
2,357
|
|
Currency
fluctuation of restricted cash and short-term bank
deposits
|
|
|
—
|
|
|
|
(999
|
)
|
Depreciation
and amortization
|
|
|
12,937
|
|
|
|
13,387
|
|
Loss
(gain) on sale of property and equipment and impairment and sale of cost
investments
|
|
|
(138
|
)
|
|
|
108
|
|
Commissions
related to the sale of Israeli SAP sales and distribution
operations
|
|
|
(2,534
|
)
|
|
|
—
|
|
Decrease
(increase) in trade receivables, net
|
|
|
53,444
|
|
|
|
(9,255
|
)
|
Decrease
(increase) in unbilled receivables
|
|
|
3,549
|
|
|
|
(11,298
|
)
|
Increase
in other accounts receivable and prepaid expenses
|
|
|
(4,293
|
)
|
|
|
(1,982
|
)
|
Decrease
(increase) in work-in-progress
|
|
|
(754
|
)
|
|
|
2,612
|
|
Increase
in long-term prepaid expenses
|
|
|
(414
|
)
|
|
|
(825
|
)
|
Deferred
income taxes, net
|
|
|
395
|
|
|
|
1,437
|
|
Increase
(decrease) in trade payables
|
|
|
(17,174
|
)
|
|
|
2,372
|
|
Decrease
in advances from customers and deferred revenues
|
|
|
(2,210
|
)
|
|
|
(9,518
|
)
|
Decrease
in other accounts payable and accrued expenses
|
|
|
(15,508
|
)
|
|
|
(15
|
)
|
Increase
in other long-term liabilities
|
|
|
677
|
|
|
|
902
|
|
Increase
(decrease) in accrued severance pay, net
|
|
|
(2,570
|
)
|
|
|
114
|
|
Net
cash used in discontinued operations
|
|
|
(1,279
|
)
|
|
|
(6,109
|
)
|
Net
cash provided by (used in) operating activities
|
|
|
34,100
|
|
|
|
(13,559
|
)
|
|
|
|
|
|
|
|
|
|
Cash flows from investing
activities
:
|
|
|
|
|
|
|
|
|
Consideration
from sale of a consolidated subsidiary
|
|
|
—
|
|
|
|
1,711
|
|
Net
cash paid for acquisition of a consolidated subsidiary
|
|
|
—
|
|
|
|
(17,197
|
)
|
Cash
paid for acquisition of intangible assets
|
|
|
—
|
|
|
|
(513
|
)
|
Additional
payments in connection with acquisitions of subsidiaries in prior
periods
|
|
|
(13,643
|
)
|
|
|
(1,330
|
)
|
Proceeds
from maturity of (investment in) short-term bank deposits,
net
|
|
|
(16,822
|
)
|
|
|
12,031
|
|
Proceeds
from sale of property and equipment
|
|
|
796
|
|
|
|
—
|
|
Purchase
of property and equipment and capitalization of software developed for
internal use
|
|
|
(9,395
|
)
|
|
|
(6,906
|
)
|
Net
cash used in discontinued operations
|
|
|
(1,808
|
)
|
|
|
—
|
|
Net
cash used in investing activities
|
|
|
(40,872
|
)
|
|
|
(12,204
|
)
|
|
|
|
|
|
|
|
|
|
Cash flows from financing
activities
:
|
|
|
|
|
|
|
|
|
Exercise
of options
|
|
|
—
|
|
|
|
4
|
|
Repurchase
of shares
|
|
|
(2,037
|
)
|
|
|
(2,169
|
)
|
Acquired
subsidiary’s dividend to its former shareholder
|
|
|
(1,430
|
)
|
|
|
—
|
|
Short-term
bank loans and credit, net
|
|
|
(2,960
|
)
|
|
|
26,622
|
|
Proceeds
from long-term debt
|
|
|
15,000
|
|
|
|
13,364
|
|
Principal
payments of long-term debt
|
|
|
(4,411
|
)
|
|
|
(14,659
|
)
|
Net
cash provided by financing activities
|
|
|
4,162
|
|
|
|
23,162
|
|
The
accompanying notes are an integral part of the interim consolidated financial
statements.
NESS
TECHNOLOGIES, INC. AND ITS SUBSIDIARIES
Interim
Consolidated Statements of Cash Flows
U.S.
dollars in thousands
|
|
Nine months ended
September 30,
|
|
|
|
|
|
|
|
|
|
|
(Unaudited)
|
|
|
(Unaudited)
|
|
|
|
|
|
|
|
|
Effect
of exchange rate changes on cash and cash equivalents
|
|
|
(1,038
|
)
|
|
|
(2,385
|
)
|
Decrease
in cash and cash equivalents
|
|
|
(3,648
|
)
|
|
|
(4,986
|
)
|
Cash
and cash equivalents at the beginning of the period
|
|
|
44,585
|
|
|
|
40,218
|
|
Cash
and cash equivalents at the end of the period
|
|
$
|
40,937
|
|
|
$
|
35,232
|
|
_____________________
Non-cash
activity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gain
(loss) from mark-to-market of foreign exchange forward contracts and
interest rate swap
|
|
$
|
48
|
|
|
$
|
(1,737
|
)
|
The
accompanying notes are an integral part of the interim consolidated financial
statements.
NESS
TECHNOLOGIES, INC. AND ITS SUBSIDIARIES
Notes
to Interim Consolidated Financial Statements
U.S.
dollars in thousands (except share and per share data)
(Unaudited)
Note
1: General
Ness
Technologies, Inc. (“we,” “our,” “us” or “the Company”) was incorporated under
the laws of the State of Delaware in March 1999. We operate through our
subsidiaries in North America, Europe, Israel and Asia Pacific.
We are a
global provider of IT and business services and solutions with specialized
expertise in software product engineering; and system integration, application
development, consulting and software distribution. We deliver our portfolio of
solutions and services using a global delivery model combining offshore,
near-shore and local teams. The primary verticals we serve include high-tech
companies and independent software vendors; utilities and government; financial
services; defense and homeland security; and life sciences and
healthcare.
Note
2: Significant Accounting Policies
|
a.
|
Unaudited Interim
Financial Information
|
The
accompanying consolidated balance sheet as of September 30, 2010, consolidated
statements of income for the three and nine months ended September 30, 2009 and
2010 and consolidated statements of cash flows for the nine months ended
September 30, 2009 and 2010 are unaudited. These unaudited interim consolidated
financial statements have been prepared in accordance with U.S. generally
accepted accounting principles for interim financial information. In the opinion
of management, the unaudited interim consolidated financial statements include
all adjustments of a normal recurring nature necessary for a fair presentation
of our consolidated financial position as of September 30, 2010, our
consolidated results of operations for the three and nine months ended September
30, 2009 and 2010 and our consolidated cash flows for the nine months ended
September 30, 2009 and 2010.
The
balance sheet at December 31, 2009 has been derived from the audited
consolidated financial statements at that date but does not include all of the
information and footnotes required by U.S. generally accepted accounting
principles for complete financial statements.
These
consolidated financial statements should be read in conjunction with the audited
consolidated financial statements and accompanying notes for the year ended
December 31, 2009 included in our Annual Report on Form 10-K filed with the U.S.
Securities and Exchange Commission (“SEC”) on March 15, 2010.
Results
for the three and nine months ended September 30, 2010 are not necessarily
indicative of results that may be expected for the year ending December 31,
2010.
Unless
otherwise noted, all references to “dollars” or “$” are to United States dollars
and all references to “NIS” are to New Israeli Shekels.
Certain
prior period amounts have been reclassified to conform to the current period
presentation.
The
preparation of financial statements in conformity with United States generally
accepted accounting principles requires our management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Our management believes that the estimates, judgments and
assumptions used are reasonable based upon information available at the time
they are made. These estimates, judgments and assumptions can affect the
reported amounts of assets and liabilities and disclosure of contingent assets
and liabilities at the dates of the financial statements, and the reported
amounts of revenue and expenses during the reporting period. Actual results
could differ from those estimates.
NESS
TECHNOLOGIES, INC. AND ITS SUBSIDIARIES
Notes
to Interim Consolidated Financial Statements
U.S.
dollars in thousands (except share and per share data)
(Unaudited)
|
d.
|
Principles of
consolidation
|
Our
consolidated financial statements include the accounts of the company and its
wholly and majority owned subsidiaries, referred to herein as the group.
Inter-company transactions and balances, including profit from inter-company
sales not yet realized outside the group, have been eliminated in
consolidation.
|
e.
|
Fair value
measurements
|
We
categorize the fair value of our financial assets and liabilities according to
the hierarchy established by the Financial Accounting Standards Board (“FASB”),
which prioritizes the inputs to valuation techniques used to measure fair value.
The hierarchy gives the highest priority to unadjusted quoted prices in active
markets for identical assets or liabilities (Level 1 measurements) and the
lowest priority to unobservable inputs (Level 3 measurements). The three levels
of the fair value hierarchy are described as follows:
Level
1
|
Valuations
based on quoted prices in active markets for identical assets or
liabilities that we have the ability to directly
access.
|
|
|
Level
2
|
Valuations
based on quoted prices for similar assets or liabilities; valuations for
interest-bearing securities based on non-daily quoted prices in active
markets; quoted prices in markets that are not active; or other inputs
that are observable or can be corroborated by observable data for
substantially the full term of the assets or
liabilities.
|
|
|
Level
3
|
Valuations
based on inputs that are supported by little or no market activity and
that are significant to the fair value of the assets or
liabilities.
|
A
financial instrument’s level within the fair value hierarchy is based on the
lowest level of any input that is significant to its fair value
measurement.
In
circumstances in which a quoted price in an active market for the identical
liability is not available, we are required to use the quoted price of the
identical liability when traded as an asset, quoted prices for similar
liabilities, or quoted prices for similar liabilities when traded as assets. If
these quoted prices are not available, then we are required to use another
valuation technique, such as an income approach or a market
approach.
Assets
and liabilities measured at fair value under Accounting Standards Codification
(“ASC”) Topic 820, “Fair Value Measurements and Disclosures” (“ASC 820”), as of
September 30, 2010 were presented on our Consolidated Balance Sheet as
follows:
NESS
TECHNOLOGIES, INC. AND ITS SUBSIDIARIES
Notes
to Interim Consolidated Financial Statements
U.S.
dollars in thousands (except share and per share data)
(Unaudited)
|
|
|
|
|
Quoted
Prices in
Active
Markets
for
Identical
Assets
(Level 1)
|
|
|
Significant
Other
Observable
Inputs
(Level 2)
|
|
|
Significant
Unobservable
Inputs
(Level 3)
|
|
Derivative
instruments (recurring basis)
|
|
$
|
972
|
|
|
$
|
—
|
|
|
$
|
972
|
|
|
$
|
—
|
|
Goodwill
and intangible assets, net (non-recurring basis)
|
|
$
|
291,004
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
291,004
|
|
Total
assets
|
|
$
|
291,976
|
|
|
$
|
—
|
|
|
$
|
972
|
|
|
$
|
291,004
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivative
instruments (recurring basis)
|
|
$
|
1,532
|
|
|
$
|
—
|
|
|
$
|
1,532
|
|
|
$
|
—
|
|
Total
liabilities
|
|
$
|
1,532
|
|
|
$
|
—
|
|
|
$
|
1,532
|
|
|
$
|
—
|
|
Assets
and liabilities measured at fair value under ASC 820 as of December 31, 2009
were presented on our Consolidated Balance Sheet as follows:
|
|
|
|
|
Quoted
Prices in
Active
Markets
for
Identical
Assets
(Level 1)
|
|
|
Significant
Other
Observable
Inputs
(Level 2)
|
|
|
Significant
Unobservable
Inputs
(Level 3)
|
|
Derivative
instruments (recurring basis)
|
|
$
|
1,221
|
|
|
$
|
—
|
|
|
$
|
1,221
|
|
|
$
|
—
|
|
Goodwill
and intangible assets, net (non-recurring basis)
|
|
$
|
273,557
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
273,557
|
|
Total
assets
|
|
$
|
274,778
|
|
|
$
|
—
|
|
|
$
|
1,221
|
|
|
$
|
273,557
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivative
instruments (recurring basis)
|
|
$
|
665
|
|
|
$
|
—
|
|
|
$
|
665
|
|
|
$
|
—
|
|
Total
liabilities
|
|
$
|
665
|
|
|
$
|
—
|
|
|
$
|
665
|
|
|
$
|
—
|
|
The fair
value of long-term debt is estimated by discounting the future cash flows using
current interest rates for loans of similar terms and maturities. The carrying
amount of the long-term debt approximates its fair value.
In
addition to the assets and liabilities described above, our financial
instruments also include cash, trade receivables, other accounts receivable,
related party receivables, trade payables, accrued expenses and other payables.
The fair value of these financial instruments was not materially different from
their carrying value at September 30, 2010 and December 31, 2009 due to the
short-term maturity of these instruments.
NESS
TECHNOLOGIES, INC. AND ITS SUBSIDIARIES
Notes
to Interim Consolidated Financial Statements
U.S.
dollars in thousands (except share and per share data)
(Unaudited)
|
f.
|
Impact of recently
issued and adopted accounting
pronouncements
|
In
October 2009, the FASB issued ASU No. 2009-13, “Multiple-Deliverable Revenue
Arrangements (amendments to FASB ASC Topic 605, Revenue Recognition)” (“ASU
2009-13”), and ASU No. 2009-14, “Certain Arrangements That Include Software
Elements (amendments to FASB ASC Topic 985, Software)” (“ASU 2009-14”). ASU
2009-13 requires entities to allocate revenue in an arrangement using estimated
selling prices of the delivered goods and services based on a selling price
hierarchy. The amendments eliminate the residual method of revenue allocation
and require revenue to be allocated using the relative selling price method. ASU
2009-14 removes tangible products from the scope of software revenue guidance
and provides guidance on determining whether software deliverables in an
arrangement that includes a tangible product are covered by the scope of the
software revenue guidance. As a result of the amendments included in ASU
2009-14, many tangible products and services that rely on software will be
accounted for under the multiple-element arrangements revenue recognition
guidance rather than under the software revenue recognition guidance. ASU
2009-14 also provides guidance on how to allocate transaction consideration when
an arrangement contains both deliverables within the scope of software revenue
guidance (software deliverables) and deliverables not within the scope of that
guidance (non-software deliverables). ASU 2009-13 and ASU 2009-14 are to be
applied on a prospective basis for revenue arrangements entered into or
materially modified in fiscal years beginning on or after June 15, 2010, with
early adoption permitted. We are currently evaluating the impact of these
standards on our consolidated results of operations and financial
condition.
In
January 2010, the FASB issued ASU No. 2010-06 which amends ASC Topic 820-10,
“Fair Value Measurements and Disclosures – Overall” (“ASC 820-10”). The update
requires a gross presentation of activities within the Level 3 roll-forward and
adds a new requirement to disclose transfers in and out of Level 1 and 2
measurements. The update further clarifies the existing disclosure requirements
in ASC 820-10 regarding: i) the level of disaggregation of fair value
measurements; and ii) the disclosures regarding inputs and valuation techniques.
The update was effective for our fiscal year beginning January 1, 2010 except
for the gross presentation of the Level 3 roll-forward information, which is
effective for our fiscal year beginning January 1, 2011. The principal impact
from this update will be expanded disclosures regarding our fair value
measurements.
In July
2010, the FASB issued ASU No. 2010-20, “Disclosures about the Credit Quality of
Financing Receivables and the Allowance for Credit Losses,” which amends FASB
ASC Topic 310, “Receivables.” The update enhances disclosures about the credit
quality of financing receivables and the allowance for credit losses. We are
currently evaluating the impact of this standard on our consolidated financial
statements.
Note
3: Acquisitions
|
a.
|
Gilon Business Insight
Ltd.
|
On March
25, 2010, we signed a definitive agreement to acquire all of the outstanding
capital stock of Gilon Business Insight Ltd. (“Gilon”), a privately-held,
leading Israeli provider of business intelligence consulting and implementation
solutions and services, for cash consideration of NIS 65 million, or $17,218,
and related acquisition and integration costs of $728. The related acquisition
and integration costs were recognized as expenses in our operating expenses. An
additional payment of up to NIS 9 million, or approximately $2,400, may be made
during the two-year period following the closing of the agreement should Gilon
achieve certain performance and retention goals. As of the acquisition date, in
anticipation of full achievement of the performance goals, we provided for a
present value of $1,292 with respect to the potential additional payment; and
the remaining amount consists of retention expenses, which will be recorded
during the next two years in our statements of income. The purchase closed on
May 4, 2010 and we consolidated the results of Gilon commencing April 1, 2010
due to immateriality. The acquisition of Gilon increases our market share in
Israel and further positions us as a provider of enterprise solutions, with a
blend of enterprise resource planning (“ERP”), business intelligence (“BI”) and
customer relationship management (“CRM”) capabilities. We intend to utilize
Gilon’s capabilities to help fulfill the demand for business intelligence
applications, solutions and services around the world. Following our acquisition
of Gilon, it became part of Ness Israel under our System Integration and
Application Development segment.
NESS
TECHNOLOGIES, INC. AND ITS SUBSIDIARIES
Notes
to Interim Consolidated Financial Statements
U.S.
dollars in thousands (except share and per share data)
(Unaudited)
This
acquisition was accounted for under the purchase method of accounting and,
accordingly, the purchase price was allocated to the assets acquired and
liabilities assumed based on their relative fair values as of the acquisition
date, using the exchange rate prevailing on that date, as follows:
Cash
and cash equivalents
|
|
$
|
959
|
|
Current
assets, excluding cash and cash equivalents
|
|
|
9,215
|
|
Property
and equipment
|
|
|
113
|
|
Customer
relations
|
|
|
4,477
|
|
Backlog
|
|
|
313
|
|
Goodwill
|
|
|
14,858
|
|
Current
liabilities
|
|
|
(8,780
|
)
|
Accrual
for additional consideration to be paid subsequent to the balance sheet
date
|
|
|
(1,292
|
)
|
Long-term
liabilities
|
|
|
(2,645
|
)
|
Total
purchase price
|
|
$
|
17,218
|
|
The value
assigned to the tangible assets, intangible assets and liabilities has been
determined as follows:
|
a.
|
Gilon’s
current assets and liabilities were recorded at their carrying amounts.
The carrying amounts of the current assets and liabilities were reasonable
proxies for their market values due to their short-term
maturity.
|
|
b.
|
The
value assigned to the customer-related intangibles was $4,790. The fair
value of Gilon’s customer-related intangibles were determined using the
Income Approach. Customer-related intangibles are amortized over their
estimated useful lives, which are nine years for customer relations and
one year for backlog.
|
|
c.
|
Included
in long-term liabilities is a deferred tax liability of $1,079 recorded by
the Company for the difference between the assigned values and the tax
bases of the customer-related intangibles
acquired.
|
|
d.
|
Goodwill
represents the excess of the purchase price over the fair value of the net
tangible and amortizable intangible assets
acquired.
|
In the
nine months ended September 30, 2010, we increased our goodwill by $14,858 due
to the Gilon acquisition and by $1,476 on account of foreign currency
translation adjustments.
Goodwill
and intangible assets deemed to have indefinite lives are tested for impairment
annually, or between annual tests in certain circumstances, and written down
when impaired. Goodwill is tested for impairment at the reporting unit level by
comparing the fair value of the reporting unit with its carrying value. We
perform our annual impairment analysis of goodwill as of December 31 of each
year, or more often if there are indicators of impairment present. As of
December 31, 2009, we performed our annual impairment test and recorded goodwill
impairment of $28,531. As our market capitalization is lower than our
stockholders’ equity and in response to changes in our assumptions related to
future cash flows and market conditions during the nine months ended September
30, 2010, we updated our analysis and performed an impairment test as of
September 30, 2010. As a result of the analysis, we concluded that goodwill was
not impaired.
NESS
TECHNOLOGIES, INC. AND ITS SUBSIDIARIES
Notes
to Interim Consolidated Financial Statements
U.S.
dollars in thousands (except share and per share data)
(Unaudited)
In
accordance with ASC Topic 350, “Intangibles – Goodwill and Other,” each time we
performed the test, we compared the fair value of each reporting unit to its
carrying value. In such a test, if the fair value exceeds the carrying value of
the net assets, goodwill is considered not impaired, and we are not required to
perform further testing. We determined the fair value of each reporting unit
using the Income Approach, which utilizes a discounted cash flow model, as this
approach best approximates the reporting unit’s fair value at this time.
Judgments and assumptions related to revenues, operating income, future
short-term and long-term growth rates, weighted average cost of capital,
interest, capital expenditures, cash flows, and market conditions are inherent
in developing the discounted cash flow model. We considered historical rates and
current market conditions when determining the discount and growth rates to use
in our analyses. We corroborated the fair values using the Market Approach. If
the carrying value of the net assets exceeds the fair value, then we must
perform the second step of the impairment test in order to determine the implied
fair value of goodwill. Determining the fair value of our net assets and our
off-balance sheet intangibles would require us to make judgments that involve
the use of significant estimates and assumptions. If these estimates or their
related assumptions change in the future, we may be required to record
impairment charges for our goodwill.
|
c.
|
Pro Forma Financial
Information
|
The
following table presents certain combined unaudited statements of income data
for the nine months ended September 30, 2009 and 2010 as if our 2010 acquisition
of Gilon had occurred on January 1
st
of each
respective year, after giving effect to purchase accounting adjustments,
including amortization of identifiable intangible assets:
|
|
Nine months ended
September 30,
|
|
|
|
|
|
|
|
|
|
|
(Unaudited)
|
|
|
(Unaudited)
|
|
|
|
|
|
|
|
|
Revenues
|
|
$
|
392,138
|
|
|
$
|
420,130
|
|
Net
earnings (loss)
|
|
$
|
2,674
|
|
|
$
|
(4,574
|
)
|
|
|
|
|
|
|
|
|
|
Earnings
(loss) per share:
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
0.07
|
|
|
$
|
(0.12
|
)
|
Diluted
|
|
$
|
0.07
|
|
|
$
|
(0.12
|
)
|
Note
4: Discontinued operations
On
January 15, 2010, we closed a share purchase agreement with a privately-held
Dutch company to sell the shares of our indirectly wholly-owned subsidiary Ness
Benelux for a total of €1.2 million, or $1,711. Prior to the sale, Ness Benelux
operated as part of Ness Europe under our System Integration and Application
Development segment and was engaged primarily in providing IT professional
services in the Netherlands.
NESS
TECHNOLOGIES, INC. AND ITS SUBSIDIARIES
Notes
to Interim Consolidated Financial Statements
U.S.
dollars in thousands (except share and per share data)
(Unaudited)
On
February 1, 2010, our board of directors resolved to sell our operations in the
Asia Pacific region, and on April 24, 2010, we signed a definitive asset
transfer agreement with the buyer. Ness Asia Pacific operated as part of our
System Integration and Application Development segment and was engaged primarily
in providing IT professional services in Singapore, Thailand and Malaysia. The
sale closed on September 1, 2010, except for Ness Thailand, which is expected to
close during the fourth quarter of 2010 or the first quarter of 2011. The sale
is effective as of April 1, 2010.
On March
29, 2010, our board of directors resolved to sell our NessPRO operations in
Europe, and we are currently seeking a buyer for these operations. NessPRO
Europe operates as part of our former Software Distribution segment and is
engaged primarily in selling and distributing licenses to third-party enterprise
software products in Italy, Spain and Portugal.
In
connection with the acquisition of Gilon, our board of directors resolved to
sell Gilon’s Turkish subsidiary. Therefore, the results of operations of Gilon
Turkey were initially classified as discontinued operations. Summary revenue and
expenses for this discontinued operation are not presented due to their
immateriality.
The
results of operations for Ness Asia Pacific and NessPRO Europe for the three and
nine months ended September 30, 2010, and the results of operations for Ness
Benelux, Ness Asia Pacific and NessPRO Europe for the three and nine months
ended September 30, 2009, including revenues and operating expenses, have been
reclassified in the accompanying income statements as discontinued operations in
accordance with ASC Topic 205-20, “Presentation of Financial Statements –
Discontinued Operations” (“ASC 205-20”). In addition, our balance sheets at
December 31, 2009 and September 30, 2010 have been reclassified to reflect the
assets and liabilities of these operations as assets and liabilities of
discontinued operations within current assets and current liabilities; and our
statements of cash flows for the nine months ended September 30, 2009 and 2010
have been reclassified to reflect the cash flows used in or provided by
discontinued operations.
The
results of operations for Ness Asia Pacific for the three and nine months ended
September 30, 2009 and 2010, which were reported separately as discontinued
operations in the consolidated statements of income, are summarized as
follows:
|
|
Three months ended
September 30,
|
|
|
Nine months ended
September 30,
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Unaudited)
|
|
|
(Unaudited)
|
|
|
(Unaudited)
|
|
|
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
$
|
4,173
|
|
|
$
|
—
|
|
|
$
|
11,636
|
|
|
$
|
4,783
|
|
Operating
loss
|
|
$
|
(213
|
)
|
|
$
|
(200
|
)
|
|
$
|
(1,309
|
)
|
|
$
|
(2,825
|
)
|
Net
loss from discontinued operations
|
|
$
|
(185
|
)
|
|
$
|
(200
|
)
|
|
$
|
(1,317
|
)
|
|
$
|
(2,844
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
and diluted net loss per share from discontinued
operations
|
|
$
|
(0.00
|
)
|
|
$
|
(0.01
|
)
|
|
$
|
(0.03
|
)
|
|
$
|
(0.07
|
)
|
The
results of operations for NessPRO Europe for the three and nine months ended
September 30, 2009 and 2010, which were reported separately as discontinued
operations in the consolidated statements of income, are summarized as
follows:
NESS
TECHNOLOGIES, INC. AND ITS SUBSIDIARIES
Notes
to Interim Consolidated Financial Statements
U.S.
dollars in thousands (except share and per share data)
(Unaudited)
|
|
Three months ended
September 30,
|
|
|
Nine months ended
September 30,
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Unaudited)
|
|
|
(Unaudited)
|
|
|
(Unaudited)
|
|
|
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
$
|
3,646
|
|
|
$
|
3,773
|
|
|
$
|
13,439
|
|
|
$
|
11,586
|
|
Operating
loss
|
|
$
|
(1,737
|
)
|
|
$
|
(576
|
)
|
|
$
|
(3,095
|
)
|
|
$
|
(3,943
|
)
|
Net
loss from discontinued operations
|
|
$
|
(1,766
|
)
|
|
$
|
(519
|
)
|
|
$
|
(3,001
|
)
|
|
$
|
(4,060
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
and diluted net loss per share from discontinued
operations
|
|
$
|
(0.04
|
)
|
|
$
|
(0.01
|
)
|
|
$
|
(0.08
|
)
|
|
$
|
(0.11
|
)
|
The
results of operations for Ness Benelux for the three and nine months ended
September 30, 2009, which were reported separately as discontinued operations in
the consolidated statements of income, are summarized as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Unaudited)
|
|
|
(Unaudited)
|
|
|
|
|
|
|
|
|
Revenues
|
|
$
|
1,712
|
|
|
$
|
4,965
|
|
Operating
income
|
|
$
|
159
|
|
|
$
|
417
|
|
Net
income from discontinued operations
|
|
$
|
139
|
|
|
$
|
377
|
|
|
|
|
|
|
|
|
|
|
Basic
net earnings per share from discontinued operations
|
|
$
|
0.00
|
|
|
$
|
0.01
|
|
Diluted
net earnings per share from discontinued operations
|
|
$
|
0.00
|
|
|
$
|
0.01
|
|
Note
5: Insurance settlement related to 2007 arbitration expense, net of related
expenses
On March
31, 2009, we received a settlement payment of $2,610, net of related expenses,
from our liability insurance provider related to the arbitration settlement,
which we recognized in the fourth quarter of 2007 using the exchange rate
prevailing on the payment date. No further payments from our insurance provider
are expected related to this matter.
Note
6: Commissions related to the sale of Israeli SAP sales and distribution
operations
In the
nine months ended September 30, 2009, we recorded income of $2,534, representing
commissions related to the sale of our SAP sales and distribution operations in
Israel to SAP AG in August 2008, in connection with meeting certain performance
criteria for 2008.
NESS
TECHNOLOGIES, INC. AND ITS SUBSIDIARIES
Notes
to Interim Consolidated Financial Statements
U.S.
dollars in thousands (except share and per share data)
(Unaudited)
Note
7: Derivative Instruments
ASC Topic
815, “Derivatives and Hedging,” requires companies to recognize all of their
derivative instruments as either assets or liabilities in the statement of
financial position at fair value. For derivative instruments that are designated
and qualify as a fair value hedge (i.e., they hedge the exposure to changes in
the fair value of an asset or a liability or an identified portion thereof that
is attributable to a particular risk), the gain or loss on the derivative
instrument as well as the offsetting loss or gain on the hedged item
attributable to the hedged risk are recognized in current earnings during the
period of the change in fair values. Derivatives that are designated and qualify
as hedges of forecasted transactions (i.e., cash flow hedges) are carried at
fair value with the effective portion of a derivative’s gain or loss recorded in
other comprehensive income and subsequently recognized in earnings in the same
period or periods in which the hedged forecasted transaction affects earnings.
For derivative instruments that are not designated and qualified as hedging
instruments, the gains or losses on the derivative instruments are recognized in
current earnings during the period of the change in fair values.
The
derivative instruments we use are designed to reduce the market risk associated
with the exposure of our underlying transactions, assets and liabilities to
fluctuations in currency exchange rates or interest rates. We believe that there
is no significant risk of nonperformance by these counterparties because we
monitor the credit ratings of counterparties with whom we have outstanding
contracts with a significant mark-to-market positive amount, and we limit our
financial exposure with any one financial institution.
Cash
Flow Hedging Strategy:
At
September 30, 2010, we held interest rate swap derivatives to convert certain
floating-rate debts to fixed-rate debts. The interest rate swap derivatives
involve an agreement to pay fixed-rate interest and receive floating-rate
interest, at specified intervals, calculated on agreed notional amounts that
match the amounts of the original loans and paid on the same installments and
maturity dates and as such there was no ineffectiveness related to these
derivatives for the nine months ended September 30, 2010. At September 30, 2010,
the aggregate notional amount of the interest rate swaps was $18,621, with all
unrealized losses being deferred in accumulated other comprehensive income. The
liability is presented within other long-term liabilities on the balance sheet
at September 30, 2010, as the interest rate swap derivatives expire in November
2012 through April 2013.
We enter
into foreign exchange forward contracts to hedge against the effect of exchange
rate fluctuations on forecasted cash flows primarily denominated in Indian
Rupees. At September 30, 2010, the notional amount of foreign exchange forward
contracts we entered into was $47,261 and there was no ineffectiveness related
to these foreign exchange forward contracts for the nine months ended September
30, 2010, with all unrealized gains being deferred in accumulated other
comprehensive income. The asset is presented within other accounts receivable
and prepaid expenses on the balance sheet at September 30, 2010, as the foreign
exchange forward contracts expire through September 30, 2011.
Derivatives
Instruments Not Designated as Hedging Strategy:
We enter
into foreign exchange forward contracts to hedge a portion of our trade payables
and receivables for a period of one to three months. The purpose of the foreign
currency instruments is to protect the fair value of our trade payables and
receivables due to foreign exchange rates. All gains and losses related to such
derivative instrument are recorded in financial expenses, net.
The
following tables present fair value amounts and gains and losses of derivative
instruments and related hedged items:
NESS
TECHNOLOGIES, INC. AND ITS SUBSIDIARIES
Notes
to Interim Consolidated Financial Statements
U.S.
dollars in thousands (except share and per share data)
(Unaudited)
|
Fair Values of Derivative Instruments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Unaudited)
|
|
|
|
|
|
|
(Unaudited)
|
|
Cash
flow hedging:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign
exchange forward contracts
|
“Other
accounts
receivable
and
prepaid
expenses”
|
|
$
|
928
|
|
|
$
|
972
|
|
“Other
accounts
payable
and
accrued
expenses”
|
|
$
|
77
|
|
|
$
|
—
|
|
Interest
rate swap
|
|
|
|
—
|
|
|
|
—
|
|
“Other
long-term liabilities”
|
|
|
480
|
|
|
|
489
|
|
Total
cash flow hedging
|
|
|
$
|
928
|
|
|
$
|
972
|
|
|
|
$
|
557
|
|
|
$
|
489
|
|
Derivatives
not designated as hedging:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign
exchange forward contracts
|
“Other
accounts
receivable
and
prepaid
expenses”
|
|
|
293
|
|
|
|
—
|
|
“Other
accounts
payable
and
accrued
expenses”
|
|
|
108
|
|
|
|
1,043
|
|
Total
derivatives
|
|
|
$
|
1,221
|
|
|
$
|
972
|
|
|
|
$
|
665
|
|
|
$
|
1,532
|
|
|
|
Loss
Recognized in
Other
|
|
|
|
Gain (loss) Recognized in Statements of Income
|
|
|
|
Comprehensive
Income
|
|
|
|
Three months ended
September 30,
|
|
|
Nine months ended
September 30,
|
|
|
|
September 30,
2010
|
|
Statements of
Income Item
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Unaudited)
|
|
|
|
(Unaudited)
|
|
|
(Unaudited)
|
|
|
(Unaudited)
|
|
|
(Unaudited)
|
|
Cash flow hedging:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign
exchange forward contracts
|
|
$
|
742
|
|
“Cost
of
revenues”
and
“Total operating
expenses”
|
|
$
|
(566
|
)
|
|
$
|
498
|
|
|
$
|
(3,519
|
)
|
|
$
|
2,044
|
|
Interest
rate swap
|
|
|
(255
|
)
|
“Financial
expenses, net”
|
|
|
(174
|
)
|
|
|
(98
|
)
|
|
|
(277
|
)
|
|
|
(345
|
)
|
Total
cash flow hedging
|
|
$
|
487
|
|
|
|
$
|
(740
|
)
|
|
$
|
400
|
|
|
$
|
(3,796
|
)
|
|
$
|
1,699
|
|
Derivatives
not designated as hedging:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign
exchange forward contracts
|
|
|
|
|
“Financial
expenses, net”
|
|
|
309
|
|
|
|
(926
|
)
|
|
|
(244
|
)
|
|
|
(708
|
)
|
Total
derivatives
|
|
|
|
|
|
|
$
|
(431
|
)
|
|
$
|
(526
|
)
|
|
$
|
(4,040
|
)
|
|
$
|
991
|
|
NESS
TECHNOLOGIES, INC. AND ITS SUBSIDIARIES
Notes
to Interim Consolidated Financial Statements
U.S.
dollars in thousands (except share and per share data)
(Unaudited)
Note
8: Commitments and Contingent Liabilities
We are
periodically a party to routine litigation incidental to our business. Other
than as disclosed below, we do not believe that we are a party to or our
property is subject to any pending legal proceeding that is likely to have a
material adverse effect on our business, financial condition or results of
operations.
One of
our Israeli subsidiaries is currently involved in legal proceedings with the
Israeli Ministry of Justice (the “MOJ”). The legal proceedings relate to a
contract for the provision of an information system for the MOJ, executed in
November 2005 (the “MOJ Contract”). Following continued disputes, correspondence
and discussions, on February 9, 2009 we filed a claim with the Israeli District
Court located in Jerusalem claiming, among other things, a breach of the MOJ
Contract by the MOJ, including in connection with the MOJ’s demands for
revisions and changes to the software that were not contemplated in the MOJ
Contract. Our claim is for damages in the amount of NIS 20.7 million, or
approximately $5,600, using the exchange rate prevailing at September 30, 2010.
On February 11, 2009, the MOJ filed a claim against our Israeli subsidiary in
the Israeli District Court located in Jerusalem claiming, among other things,
that our Israeli subsidiary breached the MOJ Contract and failed to fulfill its
undertakings and obligations set forth therein. The MOJ’s claim is for damages
in the amount of NIS 79.5 million, or approximately $21,700, using the exchange
rate prevailing at September 30, 2010. The MOJ and our subsidiary have filed
answers to the respective claims. Both claims were subsequently transferred to
the Israeli District Court located in Tel Aviv. The first pre-trial hearing for
both claims was held on September 7, 2010, at which time the court transferred
the case to non-binding mediation. We believe that we have a substantial basis
with respect to our claim and valid defenses with respect to the MOJ’s claim.
While we intend to vigorously prosecute our claim and defend against the MOJ’s
claim, we cannot at this point predict the outcome of either claim. Adverse
decisions on these claims may materially adversely affect our financial
condition.
Guarantees
are contingent commitments issued by us generally to guarantee our performance
in different projects to our customers, such as tenders. The term of a guarantee
generally is equal to the term of the related projects, which can be as short as
30 days or as long as 8 years. The maximum potential amount of future payments
we could be required to make under our guarantees at December 31, 2009 and
September 30, 2010 is $36,650 and $38,294, respectively. We do not hold
collateral to support guarantees except when deemed necessary.
In order
to obtain loans, credits or other banking services from certain commercial
banks, we signed a negative pledge agreement with these banks. With the consent
of the banks, we recorded a fixed charge on deposits in the amount of
approximately $2,572 held by our Indian subsidiary related to the mark-to-market
of foreign exchange forward contracts.
Long-term
loans and bank guarantees contain customary restrictive covenants as further
discussed below. Failure to comply with the covenants could lead to an event of
default under the agreements governing some or all of the indebtedness,
permitting the applicable lender to accelerate all borrowings under the
applicable agreement.
NESS
TECHNOLOGIES, INC. AND ITS SUBSIDIARIES
Notes
to Interim Consolidated Financial Statements
U.S.
dollars in thousands (except share and per share data)
(Unaudited)
|
1.
|
Long-term
loans denominated in dollars and euros contain covenants which, among
other things, require us to maintain positive operating income in the last
four quarters; require a certain ratio of total financial obligations to
EBITDA and of total stockholders’ equity to total consolidated assets; and
place limitations on our ability to merge or transfer assets to third
parties. As of December 31, 2009, we were not in compliance with covenants
under certain long-term loans requiring positive operating income and a
certain ratio of total financial obligations to EBITDA. We received a
waiver from the banks with respect to the covenants as of December 31,
2009, and the banks agreed to provide, as substitutes, less stringent
covenants to apply through September 30, 2010. As of September 30, 2010,
we were in compliance and expect to remain in compliance with the
applicable covenants.
|
|
2.
|
A
long-term loan and bank guarantees denominated in NIS contain covenants
which, among other things, require our Israeli subsidiary to maintain
positive annual net income in a fiscal year; require a certain ratio of
total stockholders’ equity to total consolidated assets and minimum
stockholders’ equity; and place limitations on its ability to merge,
transfer or pledge assets to third parties. As of September 30, 2010, we
were in compliance and expect to remain in compliance with these
covenants.
|
Note
9: Stockholders’ Equity
|
a.
|
Total comprehensive
income:
|
|
|
Three months ended
September 30,
|
|
|
Nine months ended
September 30,
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Unaudited)
|
|
|
(Unaudited)
|
|
|
(Unaudited)
|
|
|
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income (loss)
|
|
$
|
842
|
|
|
$
|
768
|
|
|
$
|
3,412
|
|
|
$
|
(3,878
|
)
|
Foreign
currency translation adjustments, net
|
|
|
11,120
|
|
|
|
16,754
|
|
|
|
9,607
|
|
|
|
1,797
|
|
Unrealized
income (loss) on foreign exchange forward contracts and interest rate
swap
|
|
|
366
|
|
|
|
1,004
|
|
|
|
3,748
|
|
|
|
38
|
|
Comprehensive
income (loss)
|
|
$
|
12,328
|
|
|
$
|
18,526
|
|
|
$
|
16,767
|
|
|
$
|
(2,043
|
)
|
|
b.
|
Changes in accumulated
other gain (loss) due to cash flow hedging
strategy:
|
|
|
Nine months ended
September 30,
|
|
|
|
|
|
|
|
|
|
|
(Unaudited)
|
|
|
(Unaudited)
|
|
|
|
|
|
|
|
|
Balance
at the beginning of the period
|
|
$
|
(4,000
|
)
|
|
$
|
449
|
|
Mark
to market of foreign exchange forward contracts and interest rate
swap
|
|
|
(48
|
)
|
|
|
1,737
|
|
Loss
(gain) recognized in earnings during the period
|
|
|
3,796
|
|
|
|
(1,699
|
)
|
Balance
at the end of the period
|
|
$
|
(252
|
)
|
|
$
|
487
|
|
In the
nine months ended September 30, 2009 and 2010, options to purchase 1,968 shares
of our common stock were exercised for aggregate consideration of
$4.
NESS
TECHNOLOGIES, INC. AND ITS SUBSIDIARIES
Notes
to Interim Consolidated Financial Statements
U.S.
dollars in thousands (except share and per share data)
(Unaudited)
During
the nine months ended September 30, 2009 and 2010, we repurchased 636,163 and
398,200 shares of our common stock on the open market for an aggregate purchase
price of $2,037 and $2,169, respectively.
Note
10: Segment Reporting
Our
segment information has been prepared in accordance with ASC Topic 280, “Segment
Reporting.” Operating segments are defined as components of an enterprise
engaging in business activities about which separate financial information is
available that is evaluated regularly by our chief operating decision-maker in
deciding how to allocate resources and assess performance. Our chief operating
decision-maker is our chief executive officer, who evaluates our performance and
allocates resources based on segment revenues and operating profit.
We no
longer report a separate Software Distribution segment, as we reclassified our
European software distribution operations as discontinued operations and we
reclassified our Israeli software distribution operations to our System
Integration and Application Development segment, effective as of January 1,
2010, as a result of the resolution of our board of directors to sell our
European software distribution operations. Segment data for prior periods has
been restated to reflect the current organization of the segments.
Our
operating segments are:
|
1.
|
Software Product
Engineering
, in which, through our Software Product Labs business
unit, we offer software product research and development services. We set
up these labs for clients and operate them on an ongoing basis, enabling
us to collaborate with our clients’ engineering teams to extend their
capacity and budgets throughout the software product life cycle. We locate
our Software Product Labs predominantly in India and in Central and
Eastern Europe and we operate them across multiple locations as needed to
optimize global delivery. They primarily serve customers in North America
and Europe, and may include team members local to the
client.
|
|
2.
|
System Integration and
Application Development
, in which we offer a broad set of IT
services to our clients in the areas of system integration, application
development, consulting and software distribution. We provide these
services to customers in over 20 countries throughout North America,
Europe, Israel and Asia Pacific. We deliver the services through a global
delivery model that includes local teams as well as offshore and
near-shore resources. We provide these services for a wide range of
clients in many verticals, including utilities and government, financial
services, defense and homeland security, life sciences and healthcare,
manufacturing and transportation, retail, and
others.
|
Segment
operating profit is defined as income from operations, excluding unallocated
headquarters costs. Expenses included in segment operating profit consist
principally of direct selling, general, administrative and delivery costs.
Certain general and administrative expenses, stock-based compensation and a
portion of depreciation are not allocated to specific segments as management
believes they are not directly attributable to any specific segment.
Accordingly, these expenses are categorized as “Unallocated Expenses” and
adjusted against our total income from operations. Additionally, our management
has determined that it is not practical to allocate certain identifiable assets
by segment when such assets are used interchangeably among the
segments.
NESS
TECHNOLOGIES, INC. AND ITS SUBSIDIARIES
Notes
to Interim Consolidated Financial Statements
U.S.
dollars in thousands (except share and per share data)
(Unaudited)
The table
below presents financial information for our reportable segments:
|
|
Three months ended September 30, 2010
|
|
|
|
Software
Product
Engineering
|
|
|
System
Integration &
Application
Development
|
|
|
Unallocated
Expenses
|
|
|
Total
|
|
|
|
(
Unaudited
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
from external customers
|
|
$
|
28,879
|
|
|
$
|
112,467
|
|
|
$
|
—
|
|
|
$
|
141,346
|
|
Operating
income (loss)
|
|
$
|
3,675
|
|
|
$
|
4,002
|
|
|
$
|
(3,990
|
)
|
|
|
3,687
|
|
Financial
expenses, net
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(489
|
)
|
Income
before taxes on income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
3,198
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three
months ended September 30, 2009
|
|
|
|
Software
Product
Engineering
|
|
|
System
Integration
&
Application
Development
|
|
|
Unallocated
Expenses
|
|
|
Total
|
|
|
|
(
Unaudited
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
from external customers
|
|
$
|
25,621
|
|
|
$
|
97,581
|
|
|
$
|
—
|
|
|
$
|
123,202
|
|
Operating
income (loss)
|
|
$
|
3,609
|
|
|
$
|
3,159
|
|
|
$
|
(2,900
|
)
|
|
|
3,868
|
|
Financial
expenses, net
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(388
|
)
|
Income
before taxes on income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
3,480
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine
months ended September 30, 2010
|
|
|
|
Software
Product
Engineering
|
|
|
System
Integration
&
Application
Development
|
|
|
Unallocated
Expenses
|
|
|
Total
|
|
|
|
(
Unaudited
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
from external customers
|
|
$
|
83,336
|
|
|
$
|
331,044
|
|
|
$
|
—
|
|
|
$
|
414,380
|
|
Operating
income (loss)
|
|
$
|
11,916
|
|
|
$
|
9,975
|
|
|
$
|
(12,750
|
)
|
|
|
9,141
|
|
Financial
expenses, net
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,140
|
)
|
Income
before taxes on income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
8,001
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine
months ended September 30, 2009
|
|
|
|
Software
Product
Engineering
|
|
|
System
Integration
&
Application
Development
|
|
|
Unallocated
Expenses
|
|
|
Total
|
|
|
|
(
Unaudited
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
from external customers
|
|
$
|
76,275
|
|
|
$
|
300,095
|
|
|
$
|
—
|
|
|
$
|
376,370
|
|
Operating
income (loss)
|
|
$
|
11,819
|
|
|
$
|
11,698
|
|
|
$
|
(11,949
|
)
|
|
|
11,568
|
|
Financial
expenses, net
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(2,210
|
)
|
Income
before taxes on income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
9,358
|
|
NESS
TECHNOLOGIES, INC. AND ITS SUBSIDIARIES
Notes
to Interim Consolidated Financial Statements
U.S.
dollars in thousands (except share and per share data)
(Unaudited)
Our total
revenues are attributed to geographic areas based on the location of the end
customer.
The
following tables present total revenues for the three and nine months ended
September 30, 2009 and 2010, and long-lived assets as of December 31, 2009 and
September 30, 2010:
|
|
Three months ended
September 30,
|
|
|
Nine months ended
September 30,
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Unaudited)
|
|
|
(Unaudited)
|
|
|
(Unaudited)
|
|
|
(Unaudited)
|
|
Revenues
from sales to unaffiliated customers:
|
|
|
|
|
|
|
|
|
|
|
|
|
Israel
|
|
$
|
41,905
|
|
|
$
|
51,714
|
|
|
$
|
129,546
|
|
|
$
|
150,680
|
|
North
America
|
|
|
42,115
|
|
|
|
48,557
|
|
|
|
128,138
|
|
|
|
142,187
|
|
Europe
(excluding Czech Republic)
|
|
|
18,380
|
|
|
|
21,506
|
|
|
|
58,319
|
|
|
|
62,588
|
|
Czech
Republic
|
|
|
18,439
|
|
|
|
16,943
|
|
|
|
53,574
|
|
|
|
53,026
|
|
Asia
Pacific
|
|
|
2,363
|
|
|
|
2,626
|
|
|
|
6,793
|
|
|
|
5,899
|
|
|
|
$
|
123,202
|
|
|
$
|
141,346
|
|
|
$
|
376,370
|
|
|
$
|
414,380
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Unaudited)
|
|
Long-lived
assets:
|
|
|
|
|
|
|
Israel
|
|
$
|
21,983
|
|
|
$
|
21,990
|
|
India
|
|
|
6,812
|
|
|
|
6,006
|
|
Europe
|
|
|
4,184
|
|
|
|
3,444
|
|
North
America
|
|
|
2,760
|
|
|
|
2,373
|
|
|
|
$
|
35,739
|
|
|
$
|
33,813
|
|
Other
than as disclosed in the tables above, the revenues and long-lived assets
attributable to individual foreign countries are not material.
Note
11: Income Taxes
As of
September 30, 2010, the total of our unrecognized tax benefits was $4,798,
which, if recognized, would affect our effective tax rates in future periods.
Included in that amount are accrued interest and penalties resulting from such
unrecognized tax benefits of $825 at September 30, 2010. During the nine months
ended September 30, 2010, we recorded $139 for interest and penalties expenses
with respect to uncertain tax positions. A reconciliation of the beginning and
ending amounts of unrecognized tax benefits as of September 30, 2010 is as
follows:
Balance
as of January 1, 2010
|
|
$
|
3,892
|
|
Reductions
related to changes in interest rates and foreign currency exchange
rates
|
|
|
(68
|
)
|
Additions
related to tax positions taken during the period
|
|
|
974
|
|
Balance
as of September 30, 2010
|
|
$
|
4,798
|
|
NESS
TECHNOLOGIES, INC. AND ITS SUBSIDIARIES
Notes
to Interim Consolidated Financial Statements
U.S.
dollars in thousands (except share and per share data) (Unaudited)
The
amount of income taxes we pay is subject to ongoing audit by federal, state and
foreign tax authorities, which often results in proposed assessments. Management
performs a comprehensive review of our global tax positions on a quarterly basis
and accrues amounts for contingent tax liabilities. Based on these reviews, the
result of discussions and resolutions of matters with certain tax authorities
and the closure of tax years subject to tax audit, reserves are adjusted as
necessary. However, future results may include favorable or unfavorable
adjustments to estimated tax liabilities in the period the assessments are
determined or resolved. Additionally, the jurisdictions in which earnings and/or
deductions are realized may differ from current estimates. We are no longer
subject to U.S. federal, state and local, or non-U.S. income tax examination for
years before 2004 with respect to our primary locations.
The
effective tax rate used in computing the provision for income taxes is based on
our projected fiscal year income before taxes, including estimated income by tax
jurisdiction. The difference between the effective tax rate and the statutory
tax rate is due primarily to foreign tax holidays, foreign subsidiaries with
different tax rates and non-deductible expenses.
Note
12: Basic and Diluted Net Earnings per Share
Basic net
earnings per share are computed based on the weighted average number of shares
of common stock outstanding during each period. Diluted net earnings per share
are computed based on the weighted average number of shares of common stock
outstanding during each period, plus dilutive potential shares of common stock
considered outstanding during the period, in accordance with ASC Topic 260,
“Earnings per Share.”
The
following table sets forth the computation of basic and diluted net earnings per
share of common stock:
|
|
Three
months ended
September
30,
|
|
|
Nine
months ended
September
30,
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Unaudited)
|
|
|
(Unaudited)
|
|
|
(Unaudited)
|
|
|
(Unaudited)
|
|
Numerator:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income from continuing operations, numerator for basic and diluted
earnings per share from continuing operations
|
|
$
|
2,654
|
|
|
$
|
1,567
|
|
|
$
|
7,353
|
|
|
$
|
3,153
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
average number of shares of common stock, denominator for basic net
earnings per share from continuing operations, denominator for basic net
earnings (loss) per share, denominator for diluted net loss per
share
|
|
|
38,451
|
|
|
|
38,001
|
|
|
|
38,653
|
|
|
|
38,230
|
|
Effect
of dilutive securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Employee
stock options and restricted stock units
|
|
|
413
|
|
|
|
347
|
|
|
|
528
|
|
|
|
429
|
|
Denominator
for diluted net earnings per share from continuing operations, denominator
for diluted net earnings per share – weighted average assuming exercise of
options and restricted stock units
|
|
|
38,864
|
|
|
|
38,349
|
|
|
|
39,181
|
|
|
|
38,658
|
|
The total
weighted average number of shares related to the outstanding options excluded
from the calculations of diluted net earnings per share from continuing
operations and diluted net earnings per share, as they would have been
anti-dilutive for all periods presented, was 4,824,498 and 4,927,702,
respectively, for the three and nine months ended September 30, 2009 and
5,475,160 and 4,759,392, respectively, for the three and nine months ended
September 30, 2010.
Item
2. Management’s Discussion and Analysis of Financial Condition and Results of
Operations
The
following discussion and analysis of our financial condition and results of
operations should be read in conjunction with our unaudited consolidated
financial statements and related notes appearing elsewhere in this Quarterly
Report on Form 10-Q.
Forward-Looking
Statements
This
quarterly report on Form 10-Q contains “forward-looking statements” that involve
risks and uncertainties, as well as assumptions that, if they never materialize
or prove incorrect, could cause our results to differ materially from those
expressed or implied by such forward-looking statements. The statements
contained in this Quarterly Report on Form 10-Q that are not purely historical
are forward-looking statements within the meaning of Section 27A of the
Securities Act of 1933, as amended, and Section 21E of the Securities Exchange
Act of 1934, as amended (the “Exchange Act”). Forward-looking statements are
often identified by the use of words such as, but not limited to, “anticipate,”
“believe,” “can,” “continue,” “could,” “estimate,” “expect,” “intend,” “may,”
“will,” “plan,” “project,” “seek,” “should,” “target,” “will,” “would” and
similar expressions or variations intended to identify forward-looking
statements. These statements are based on the beliefs and assumptions of our
management based on information currently available to management. Such
forward-looking statements are subject to risks, uncertainties and other
important factors that could cause actual results and the timing of certain
events to differ materially from future results expressed or implied by such
forward-looking statements. Factors that could cause or contribute to such
differences include, but are not limited to, those identified below, and those
discussed in the section titled “Risk Factors” included in our Annual Report on
Form 10-K for the year ended December 31, 2009 filed with the SEC on March 15,
2010. Furthermore, such forward-looking statements speak only as of the date of
this report. Except as required by law, we undertake no obligation to update any
forward-looking statements to reflect events or circumstances after the date of
such statements.
Overview
We are a
global provider of information technology, or IT, and business services and
solutions with specialized expertise in software product engineering; system
integration, application development, consulting and software distribution. We
deliver our portfolio of services and solutions using a global delivery model
combining offshore, near-shore and local teams. The primary industries, or
verticals, we serve include high-tech companies and independent software
vendors, or ISVs; utilities and public sector; financial services; defense and
homeland security; and life sciences and healthcare.
We have
operations in North America, Europe, Israel and India, serving customers in over
20 countries. We combine our deep expertise in the verticals we serve and strong
technical capabilities to provide a complete range of high quality services on a
global scale. By integrating our local and international personnel in focused
business and project teams, we leverage our corporate knowledge and experience,
intellectual property and global infrastructure to develop innovative solutions
for clients across the geographic areas and verticals we serve. Through our
global delivery model, which includes lower-cost offshore and near-shore
delivery capabilities, we can achieve meaningful cost reductions or other
benefits for our clients.
Our
revenues increased to $141.3 million and $414.4 million for the three and nine
months ended September 30, 2010, from $123.2 million and $376.4 million for the
three and nine months ended September 30, 2009, respectively. Net income from
continuing operations decreased to $1.6 million and $3.2 million for the three
and nine months ended September 30, 2010 from $2.7 million and $7.4 million for
the three and nine months ended September 30, 2009, respectively.
The
dollar weakened by an average of 1% and 5% against the NIS in the three and nine
months ended September 30, 2010 compared to the three and nine months ended
September 30, 2009, respectively, and strengthened by an average of 10% and 1%
against the Czech crown, euro and other relevant European currencies in the
three and nine months ended September 30, 2010 compared to the three and nine
months ended September 30, 2009, respectively. Since approximately 60% of our
revenues and 80% of our expenses are denominated in non-dollar currencies, we
estimate that our revenues were $2.9 million lower and $7.7 million higher, and
our operating income was $0.1 million higher and $0.3 million lower, in the
three and nine months ended September 30, 2010, respectively, as a result of
changes in foreign currency exchange rates versus their average rates for the
three and nine months ended September 30, 2009.
Our
client base is diverse, and we are not dependent on any single client. In the
three and nine months ended September 30, 2010, no client accounted for more
than 4% and 5% of our revenues, respectively, and our largest twenty clients
together accounted for approximately 38% of our revenues. For the three and nine
months ended September 30, 2010, the percentage of our revenues derived in
aggregate from agencies of the government of Israel was approximately 15% and
16%, respectively. Existing clients from prior years generated more than 85% of
our revenues in the three and nine months ended September 30, 2010.
Our
backlog from continuing operations as of September 30, 2010 was $633 million,
compared to $621 million as of September 30, 2009. The difference represents an
increase due to our Gilon acquisition of $16 million, offset by a year-over-year
backlog decrease for continuing operations of $3 million and a decrease in the
dollar value of our non-U.S. backlog due to the stronger dollar of $1 million.
We achieve backlog through new signings of IT services projects and outsourcing
contracts, including for new and repeat customers, and estimations of backlog
associated with ongoing time and materials engagements. We recognize backlog as
revenue when we perform the services related to the backlog.
For the
three and nine months ended September 30, 2010, the percentage of our revenues
derived from clients in Europe was 27% and 28%, respectively; from clients in
Israel, 37% and 36%, respectively; from clients in North America, 34% and 34%,
respectively; and from clients in Asia Pacific, 2% and 1%,
respectively.
As of
September 30, 2010, we had approximately 7,825 employees related to continuing
operations, including approximately 6,815 IT professionals. Of the 7,825
employees, approximately 3,210 were in India, 2,730 were in Israel, 1,330 were
in Europe, 525 were in North America and 30 were in Asia Pacific.
Consolidated
Results of Operations
The
following table sets forth the items in our consolidated statements of income as
a percentage of revenues for the periods presented.
|
|
Three
months ended
September
30,
|
|
|
Nine
months ended
September
30,
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
|
100.0
|
%
|
|
|
100.0
|
%
|
|
|
100.0
|
%
|
|
|
100.0
|
%
|
Cost
of revenues
|
|
|
72.9
|
|
|
|
72.7
|
|
|
|
73.5
|
|
|
|
72.8
|
|
Gross
profit
|
|
|
27.1
|
|
|
|
27.3
|
|
|
|
26.5
|
|
|
|
27.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling
and marketing
|
|
|
8.1
|
|
|
|
6.8
|
|
|
|
7.7
|
|
|
|
7.1
|
|
General
and administrative
|
|
|
15.8
|
|
|
|
18.0
|
|
|
|
17.1
|
|
|
|
17.9
|
|
Insurance
settlement related to 2007 arbitration expense, net of related
expenses
|
|
|
—
|
|
|
|
—
|
|
|
|
(0.7
|
)
|
|
|
—
|
|
Commissions
related to the sale of Israeli SAP sales and distribution
operations
|
|
|
—
|
|
|
|
—
|
|
|
|
(0.7
|
)
|
|
|
—
|
|
Total
operating expenses
|
|
|
24.0
|
|
|
|
24.7
|
|
|
|
23.4
|
|
|
|
25.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
income
|
|
|
3.1
|
|
|
|
2.6
|
|
|
|
3.1
|
|
|
|
2.2
|
|
Financial
expenses, net
|
|
|
(0.3
|
)
|
|
|
(0.3
|
)
|
|
|
(0.6
|
)
|
|
|
(0.3
|
)
|
Income
before taxes on income
|
|
|
2.8
|
|
|
|
2.3
|
|
|
|
2.5
|
|
|
|
1.9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Taxes
on income
|
|
|
0.7
|
|
|
|
1.2
|
|
|
|
0.5
|
|
|
|
1.2
|
|
Net
income from continuing operations
|
|
|
2.2
|
|
|
|
1.1
|
|
|
|
2.0
|
|
|
|
0.8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
loss from discontinued operations
|
|
|
(1.5
|
)
|
|
|
(0.6
|
)
|
|
|
(1.0
|
)
|
|
|
(1.7
|
)
|
Net
income (loss)
|
|
|
0.7
|
|
|
|
0.5
|
|
|
|
0.9
|
|
|
|
(0.9
|
)
|
Three
Months Ended September 30, 2010 Compared to the Three Months Ended September 30,
2009
The
following table summarizes certain line items from our consolidated statements
of income (dollars in thousands):
|
|
Three
months ended
September
30,
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
$
|
123,202
|
|
|
$
|
141,346
|
|
|
|
18,144
|
|
|
|
14.7
|
|
Cost
of revenues
|
|
|
89,780
|
|
|
|
102,716
|
|
|
|
12,936
|
|
|
|
14.4
|
|
Gross
profit
|
|
$
|
33,422
|
|
|
$
|
38,630
|
|
|
|
5,208
|
|
|
|
15.6
|
|
Gross
margin
|
|
|
27.1
|
%
|
|
|
27.3
|
%
|
|
|
|
|
|
|
|
|
Revenues
Our
revenues increased from $123.2 million in the three months ended September 30,
2009 to $141.3 million in the three months ended September 30, 2010,
representing an increase of $18.1 million, or 14.7%. Approximately $5.3 million
of the increase was attributable to our acquisition of Gilon. The remaining
increase was due primarily to an increase in the other revenues of our System
Integration and Application Development segment, representing $12.3 million, and
an increase in revenues of our Software Product Engineering segment,
representing $3.4 million, offset by foreign currency translation effects on our
non-dollar revenues attributable to the stronger dollar, representing $2.9
million, compared to the three months ended September 30, 2009.
Cost
of revenues
Our cost
of revenues, including salaries, wages and other direct and indirect costs,
increased from $89.8 million in the three months ended September 30, 2009 to
$102.7 million in the three months ended September 30, 2010, representing an
increase of $12.9 million, or 14.4%. Approximately $4.2 million of the increase
was attributable to our Gilon acquisition, and the remaining increase was due
primarily to growth in our delivery staff needed to support our increased
revenues, representing $11.8 million, offset by foreign currency translation
effects on non-dollar expenses attributable to the stronger dollar, representing
$2.6 million.
Gross
Profit
Our gross
profit (revenues less cost of revenues) increased from $33.4 million in the
three months ended September 30, 2009 to $38.6 million in the three months ended
September 30, 2010, representing an increase of $5.2 million, or 15.6%.
Approximately $1.2 million of the increase was attributable to our Gilon
acquisition, and the remaining increase was due primarily to our other revenue
growth, representing $3.9 million, offset by foreign currency translation
effects on our non-dollar gross profits attributable to the stronger dollar,
representing $0.4 million. Gross margin increased from 27.1% in the three months
ended September 30, 2009 to 27.3% in the three months ended September 30, 2010
as a result of these factors.
The
following table summarizes certain line items from our consolidated statements
of income (dollars in thousands):
|
|
Three
months ended
September
30,
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling
and marketing
|
|
$
|
10,033
|
|
|
$
|
9,542
|
|
|
|
(491
|
)
|
|
|
(4.9
|
)
|
General
and administrative
|
|
|
19,521
|
|
|
|
25,401
|
|
|
|
5,880
|
|
|
|
30.1
|
|
Total
operating expenses
|
|
|
29,554
|
|
|
|
34,943
|
|
|
|
5,389
|
|
|
|
18.2
|
|
Operating
income
|
|
$
|
3,868
|
|
|
$
|
3,687
|
|
|
|
(181
|
)
|
|
|
(4.7
|
)
|
Selling
and marketing
Selling
and marketing expenses decreased from $10.0 million in the three months ended
September 30, 2009 to $9.5 million in the three months ended September 30, 2010,
representing a decrease of $0.5 million, or 4.9%. The decrease was due primarily
to foreign currency translation effects on our non-dollar expenses attributable
to the stronger dollar, representing $0.3 million.
General
and administrative
General
and administrative expenses increased from $19.5 million in the three months
ended September 30, 2009 to $25.4 million in the three months ended September
30, 2010, representing an increase of $5.9 million, or 30.1%. The increase was
due primarily to salary increases and an increase in our Israeli severance pay
provision due to salary increases, together representing $3.3 million, and the
inclusion of general and administrative expenses from the acquisition,
representing $0.5 million, offset by foreign currency translation effects on
non-dollar expenses attributable to the stronger dollar, representing $0.2
million.
Operating
Income
Operating
income decreased from $3.9 million in the three months ended September 30, 2009
to $3.7 million in the three months ended September 30, 2010, representing a
decrease of $0.2 million, or 4.7%. The major factors contributing to this
decrease were an increase in unallocated expenses, representing $1.0 million,
and retention expenses related to prior acquisitions, representing $0.6 million,
offset by an increase in operating income of our System Integration and
Application Development segment, representing $1.0 million, and foreign currency
translation effects on non-dollar operating income attributable to the stronger
dollar, representing $0.1 million. See also “—Results by Business
Segment.”
The
following table summarizes certain line items from our consolidated statements
of income (dollars in thousands):
|
|
Three
months ended
September
30,
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
income
|
|
$
|
3,868
|
|
|
$
|
3,687
|
|
|
|
(181
|
)
|
|
|
(4.7
|
)
|
Financial
expenses, net
|
|
|
(388
|
)
|
|
|
(489
|
)
|
|
|
(101
|
)
|
|
|
26.0
|
|
Income
before taxes on income
|
|
|
3,480
|
|
|
|
3,198
|
|
|
|
(282
|
)
|
|
|
(8.1
|
)
|
Taxes
on income
|
|
|
826
|
|
|
|
1,631
|
|
|
|
805
|
|
|
|
97.5
|
|
Net
income from continuing operations
|
|
|
2,654
|
|
|
|
1,567
|
|
|
|
(1,087
|
)
|
|
|
(41.0
|
)
|
Net
loss from discontinued operations
|
|
|
(1,812
|
)
|
|
|
(799
|
)
|
|
|
1,013
|
|
|
|
(55.9
|
)
|
Net
income
|
|
$
|
842
|
|
|
$
|
768
|
|
|
|
(74
|
)
|
|
|
(8.8
|
)
|
Financial
expenses, net
Financial
expenses, net, increased from $0.4 million in the three months ended September
30, 2009 to $0.5 million in the three months ended September 30, 2010,
representing an increase of $0.1 million, or 26%. This increase was due
primarily to the increase in our average net debt, representing $0.1 million.
Our average net debt increased from $28.8 million in the three months ended
September 30, 2009 to $36.8 million in the three months ended September 30,
2010.
Taxes
on income
Our taxes
on income increased from $0.8 million in the three months ended September 30,
2009 to $1.6 million in the three months ended September 30, 2010, representing
an increase of $0.8 million, or 97.5%. This increase was due primarily to our
inability to create new deferred tax assets in certain jurisdictions where we
are still experiencing losses, representing $0.8 million. Our effective tax rate
in the three months ended September 30, 2010 was 51.0%, compared to 23.7% in the
three months ended September 30, 2009 mainly as a result of this
factor.
Net
income from continuing operations
Net
income from continuing operations decreased from $2.7 million in the three
months ended September 30, 2009 to $1.6 million in the three months ended
September 30, 2010, representing a decrease of $1.1 million, or 41%. The
decrease was due primarily to our increase in taxes on income, representing $0.8
million, our decrease in operating income of $0.2 million, and an increase in
financial expenses, net, representing $0.1 million.
Net
loss from discontinued operations
Our net
loss from discontinued operations decreased from $1.8 million in the three
months ended September 30, 2009 to $0.8 million in the three months ended
September 30, 2010, representing a decrease of $1.0 million, or 55.9%. The
decrease was due primarily to a decrease in the net loss of our NessPRO Europe
operations, representing $1.2 million, offset by the exclusion of our Ness
Benelux subsidiary, which we sold to a third party on January 15, 2010,
representing $0.1 million. The results of NessPRO Europe were reclassified as
discontinued operations following our March 29, 2010 resolution to sell the
operations.
Net
income
Net
income in the three months ended September 30, 2010 was $0.8 million, similar to
that in the three months ended September 30, 2009. This resulted from an
increase in taxes on income, representing $0.8 million, a decrease in operating
income, representing $0.2 million, and an increase our financial expenses,
representing $0.1 million, offset by a reduction in the net loss from
discontinued operations, representing $1.0 million.
Nine
Months Ended September 30, 2010 Compared to the Nine months Ended September 30,
2009
The
following table summarizes certain line items from our consolidated statements
of income (dollars in thousands):
|
|
Nine
months ended
September
30,
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
$
|
376,370
|
|
|
$
|
414,380
|
|
|
|
38,010
|
|
|
|
10.1
|
|
Cost
of revenues
|
|
|
276,681
|
|
|
|
301,512
|
|
|
|
24,831
|
|
|
|
9.0
|
|
Gross
profit
|
|
$
|
99,689
|
|
|
$
|
112,868
|
|
|
|
13,179
|
|
|
|
13.2
|
|
Gross
margin
|
|
|
26.5
|
%
|
|
|
27.2
|
%
|
|
|
|
|
|
|
|
|
Revenues
Our
revenues increased from $376.4 million in the nine months ended September 30,
2009 to $414.4 million in the nine months ended September 30, 2010, representing
an increase of $38.0 million, or 10.1%. Approximately $10.7 million of the
increase was attributable to our acquisition of Gilon. The remaining increase
was due primarily to an increase in the other revenues of our System Integration
and Application Development segment, representing $12.5 million, foreign
currency translation effects on our non-dollar revenues attributable to the
weaker dollar, representing $7.7 million, and an increase in revenues of our
Software Product Engineering segment, representing $7.1 million.
Cost
of revenues
Our cost
of revenues, including salaries, wages and other direct and indirect costs,
increased from $276.7 million in the nine months ended September 30, 2009 to
$301.5 million in the nine months ended September 30, 2010, representing an
increase of $24.8 million, or 9.0%. Approximately $8.6 million of the increase
was attributable to our Gilon acquisition, and the balance was due primarily to
growth in our delivery staff needed to support our increased revenues,
representing $13.2 million, and foreign currency translation effects on
non-dollar expenses attributable to the weaker dollar, representing $5.2
million.
Gross
Profit
Our gross
profit (revenues less cost of revenues) increased from $99.7 million in the nine
months ended September 30, 2009 to $112.9 million in the nine months ended
September 30, 2010, representing an increase of $13.2 million, or 13.2%.
Approximately $2.0 million of the increase was attributable to our Gilon
acquisition, and the remaining increase was due primarily to the increase in our
other revenues, representing $6.4 million, and foreign currency translation
effects on our non-dollar gross profits attributable to the weaker dollar,
representing $2.5 million. Gross margin increased from 26.5% in the nine months
ended September 30, 2009 to 27.2% in the nine months ended September 30, 2010 as
a result of these factors.
The
following table summarizes certain line items from our consolidated statements
of income (dollars in thousands):
|
|
Nine
months ended
September
30,
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling
and marketing
|
|
$
|
28,926
|
|
|
$
|
29,433
|
|
|
|
507
|
|
|
|
1.8
|
|
General
and administrative
|
|
|
64,339
|
|
|
|
74,294
|
|
|
|
9,955
|
|
|
|
15.5
|
|
Insurance
settlement related to 2007 arbitration expense, net of related
expenses
|
|
|
(2,610
|
)
|
|
|
—
|
|
|
|
2,610
|
|
|
|
(100.0
|
)
|
Commissions
related to the sale of Israeli SAP sales and distribution
operations
|
|
|
(2,534
|
)
|
|
|
—
|
|
|
|
2,534
|
|
|
|
(100.0
|
)
|
Total
operating expenses
|
|
|
88,121
|
|
|
|
103,727
|
|
|
|
15,606
|
|
|
|
17.7
|
|
Operating
income
|
|
$
|
11,568
|
|
|
$
|
9,141
|
|
|
|
(2,427
|
)
|
|
|
(21.0
|
)
|
Selling
and marketing
Selling
and marketing expenses increased from $28.9 million in the nine months ended
September 30, 2009 to $29.4 million in the nine months ended September 30, 2010,
representing an increase of $0.5 million, or 1.8%. The increase was due
primarily to foreign currency translation effects on our non-dollar expenses
attributable to the weaker dollar, representing $0.6 million.
General
and administrative
General
and administrative expenses increased from $64.3 million in the nine months
ended September 30, 2009 to $74.3 million in the nine months ended September 30,
2010, representing an increase of $10.0 million, or 15.5%. The increase was due
primarily to salary increases and an increase in our Israeli severance pay
provision due to salary increases, together representing $3.3 million, foreign
currency translation effects on non-dollar expenses attributable to the weaker
dollar, representing $2.3 million, retention expenses related to prior
acquisitions, representing $1.5 million, the inclusion of general and
administrative expenses from the acquisition, representing $1.2 million, and
acquisition and integration costs of our Gilon acquisition, representing $0.7
million, offset by severance expenses in the nine months ended September 30,
2009 for which there were no corresponding expenses in the nine months ended
September 30, 2010, representing $1.7 million.
Insurance
settlement related to 2007 arbitration expense, net of related
expenses
In the
nine months ended September 30, 2009, we recorded income of $2.6 million, net of
related expenses, representing an insurance settlement we received from our
liability insurance provider related to the arbitration settlement we recognized
in the fourth quarter of 2007. There was no corresponding income in the nine
months ended September 30, 2010.
Commissions
related to the sale of Israeli SAP sales and distribution
operations
In the
nine months ended September 30, 2009, we recorded income of $2.5 million,
representing commissions earned from SAP AG in connection with meeting certain
performance criteria for 2008. There was no corresponding income in the nine
months ended September 30, 2010.
Operating
Income
Operating
income decreased from $11.6 million in the nine months ended September 30, 2009
to $9.1 million in the nine months ended September 30, 2010, representing a
decrease of $2.4 million, or 21.0%. The major factors contributing to this
decrease were income in the nine months ended September 30, 2009 from an
insurance settlement, net of related expenses, recognized by our System
Integration and Application Development segment related to our 2007 arbitration
expense, representing $2.6 million, commissions recognized in the nine months
ended September 30, 2009 by NessPRO Israel (at that time a part of our former
Software Distribution segment and now part of our System Integration and
Application Development segment) related to the August 2008 sale of our SAP
sales and distribution operations, representing $2.5 million, retention expenses
related to prior acquisitions, representing $1.5 million, acquisition and
integration costs of our Gilon acquisition, representing $0.7 million, and
foreign currency translation effects on non-dollar operating income attributable
to the weaker dollar, representing $0.3 million, offset by an increase in
operating income of our System Integration and Application Development segment,
representing $5.2 million. See also “—Results by Business Segment.”
The
following table summarizes certain line items from our consolidated statements
of income (dollars in thousands):
|
|
Nine
months ended
September
30,
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
income
|
|
$
|
11,568
|
|
|
$
|
9,141
|
|
|
|
(2,427
|
)
|
|
|
(21.0
|
)
|
Financial
expenses, net
|
|
|
(2,210
|
)
|
|
|
(1,140
|
)
|
|
|
1,070
|
|
|
|
(48.4
|
)
|
Income
before taxes on income
|
|
|
9,358
|
|
|
|
8,001
|
|
|
|
(1,357
|
)
|
|
|
(14.5
|
)
|
Taxes
on income
|
|
|
2,005
|
|
|
|
4,848
|
|
|
|
2,843
|
|
|
|
141.8
|
|
Net
income from continuing operations
|
|
|
7,353
|
|
|
|
3,153
|
|
|
|
(4,200
|
)
|
|
|
(57.1
|
)
|
Net
loss from discontinued operations
|
|
|
(3,941
|
)
|
|
|
(7,031
|
)
|
|
|
(3,090
|
)
|
|
|
78.4
|
|
Net
income (loss)
|
|
$
|
3,412
|
|
|
$
|
(3,878
|
)
|
|
|
(7,290
|
)
|
|
|
N/A
|
|
Financial
expenses, net
Financial
expenses, net, decreased from $2.2 million in the nine months ended September
30, 2009 to $1.1 million in the nine months ended September 30, 2010,
representing a decrease of $1.1 million, or 48.4%. This decrease was due
primarily to the favorable impact of exchange rate differences, representing
$0.6 million, a reduction in our average net debt, representing $0.3 million,
and lower interest rates on our long-term debt, representing $0.2 million. Our
average net debt decreased from $32.9 million in the nine months ended September
30, 2009 to $17.8 million in the nine months ended September 30,
2010.
Taxes
on income
Our taxes
on income increased from $2.0 million in the nine months ended September 30,
2009 to $4.8 million in the nine months ended September 30, 2010, representing
an increase of $2.8 million, or 141.8%. This increase was due primarily to our
inability to create new deferred tax assets in certain jurisdictions where we
are still experiencing losses, representing $3.4 million, offset by a decrease
of $0.5 million resulting from our lower taxable income. Our effective tax rate
in the nine months ended September 30, 2010 was 60.6%, compared to 21.4% in the
nine months ended September 30, 2009 as a result of these factors.
Net
income from continuing operations
Net
income from continuing operations decreased from $7.4 million in the nine months
ended September 30, 2009 to $3.2 million in the nine months ended September 30,
2010, representing a decrease of $4.2 million, or 57.1%. The decrease was due
primarily to our increase in taxes on income, representing $2.8 million, and our
decrease in operating income of $2.4 million, partially offset by our decrease
in financial expenses, net, representing $1.1 million.
Net
loss from discontinued operations
Our net
loss from discontinued operations increased from $3.9 million in the nine months
ended September 30, 2009 to $7.0 million in the nine months ended September 30,
2010, representing an increase of $3.1 million, or 78.4%. The increase was due
primarily to additional restructuring expenses in our NessPRO Europe and Asia
Pacific operations, representing $2.6 million. The results of NessPRO Europe
were reclassified as discontinued operations following our March 29, 2010
resolution to sell the operations. Also included in discontinued operations are
our Ness Asia Pacific operations, which our board of directors resolved on
February 1, 2010 to sell and in respect of which we signed a definitive asset
transfer agreement with the buyer on April 24, 2010, and our Ness Benelux
subsidiary, which we sold to a third party on January 15, 2010.
Net
income (loss)
Net
income changed from $3.4 million in the nine months ended September 30, 2009 to
a net loss of $3.9 million in the nine months ended September 30, 2010,
representing a change of $7.3 million. The change was due primarily to our
larger net loss from discontinued operations, representing $3.1 million, our
increase in taxes on income, representing $2.8 million, and our decrease in
operating income, representing $2.4 million, partially offset by our decrease in
financial expenses, representing $1.1 million.
Results
by Business Segment
Operating
segments are defined as components of an enterprise engaging in business
activities about which separate financial information is available that is
evaluated regularly by our chief operating decision-maker in deciding how to
allocate resources and assess performance. Our chief operating decision-maker is
our chief executive officer, who evaluates our performance and allocates
resources based on segment revenues and operating profit.
We no
longer report a separate Software Distribution segment, as we reclassified our
European software distribution operations as discontinued operations and we
reclassified our Israeli software distribution operations to our System
Integration and Application Development segment, effective as of January 1,
2010, as a result of the resolution of our board of directors to sell our
European software distribution operations. Segment data for prior periods has
been restated to reflect the current organization of the segments.
Our
operating segments are:
|
1.
|
Software Product
Engineering
, in which, through our Software Product Labs business
unit, we offer software product research and development services. We set
up these labs for clients and operate them on an ongoing basis, enabling
us to collaborate with our clients’ engineering teams to extend their
capacity and budgets throughout the software product life cycle. We locate
our Software Product Labs predominantly in India and in Central and
Eastern Europe and we operate them across multiple locations as needed to
optimize global delivery. They primarily serve customers in North America
and Europe, and may include team members local to the
client.
|
|
2.
|
System Integration and
Application Development
, in which we offer a broad set of IT
services to our clients in the areas of system integration, application
development, consulting and software distribution. We provide these
services to customers in over 20 countries throughout North America,
Europe, Israel and Asia Pacific. We deliver the services through a global
delivery model that includes local teams as well as offshore and
near-shore resources. We provide these services for a wide range of
clients in many verticals, including utilities and government, financial
services, defense and homeland security, life sciences and healthcare,
manufacturing and transportation, retail, and
others.
|
Segment
operating profit is defined as income from operations, excluding unallocated
headquarters costs. Expenses included in segment operating profit consist
principally of direct selling, general, administrative and delivery costs.
Certain general and administrative expenses, stock-based compensation and a
portion of depreciation are not allocated to specific segments as management
believes they are not directly attributable to any specific segment.
Accordingly, these expenses are categorized as “Unallocated Expenses” and
adjusted against our total income from operations. Additionally, our management
has determined that it is not practical to allocate certain identifiable assets
by segment when such assets are used interchangeably among the
segments.
The table
below presents financial information for our reportable segments (dollars in
thousands):
|
|
Three
months ended
September
30,
|
|
|
Nine
months ended
September
30,
|
|
Segment
Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
Software
Product Engineering
|
|
$
|
25,621
|
|
|
$
|
28,879
|
|
|
$
|
76,275
|
|
|
$
|
83,336
|
|
System
Integration and Application Development
|
|
|
97,581
|
|
|
|
112,467
|
|
|
|
300,095
|
|
|
|
331,044
|
|
|
|
$
|
123,202
|
|
|
$
|
141,346
|
|
|
$
|
376,370
|
|
|
$
|
414,380
|
|
Operating
Income (Loss):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Software
Product Engineering
|
|
$
|
3,609
|
|
|
$
|
3,675
|
|
|
$
|
11,819
|
|
|
$
|
11,916
|
|
System
Integration and Application Development
|
|
|
3,159
|
|
|
|
4,002
|
|
|
|
11,698
|
|
|
|
9,975
|
|
Unallocated
Expenses
|
|
|
(2,900
|
)
|
|
|
(3,990
|
)
|
|
|
(11,949
|
)
|
|
|
(12,750
|
)
|
|
|
$
|
3,868
|
|
|
$
|
3,687
|
|
|
$
|
11,568
|
|
|
$
|
9,141
|
|
Liquidity
and Capital Resources
Overview
As of
September 30, 2010, we had cash and cash equivalents, restricted cash and
short-term bank deposits of $52.6 million compared to $68.6 million as of
December 31, 2009. The funds held at locations outside of the United States are
for future operating expenses and capital expenditures. We are not restricted in
repatriating those funds back to the United States, if necessary. While we
expect that cash generated by our non-U.S. subsidiaries will be reinvested in
their respective geographic areas to support expansion of our business, to the
extent that funds were repatriated to the United States in the form of dividend
payments, those payments may be subject to withholding taxes in their respective
countries, and would be subject to tax in the United States.
Cash
Flows
The
following table summarizes our cash flows for the periods presented (dollars in
thousands):
|
|
Nine
months ended
September
30,
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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Net
cash provided by (used in) operating activities
|
|
$
|
34,100
|
|
|
$
|
(13,559
|
)
|
Net
cash used in investing activities
|
|
|
(40,872
|
)
|
|
|
(12,204
|
)
|
Net
cash provided by financing activities
|
|
|
4,162
|
|
|
|
23,162
|
|
Effect
of exchange rate changes on cash and cash equivalents
|
|
|
(1,038
|
)
|
|
|
(2,385
|
)
|
Decrease
in cash and cash equivalents
|
|
|
(3,648
|
)
|
|
|
(4,986
|
)
|
Cash
and cash equivalents at the beginning of the period
|
|
|
44,585
|
|
|
|
40,218
|
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Cash
and cash equivalents at the end of the period
|
|
$
|
40,937
|
|
|
$
|
35,232
|
|
Nine
months ended September 30, 2010 compared to the nine months ended September 30,
2009
Net cash
used in operating activities was $13.6 million in the nine months ended
September 30, 2010, compared to net cash provided of $34.1 million in the nine
months ended September 30, 2009. The major factors contributing to the change
were an increase in our trade receivables and unbilled receivables in the nine
months ended September 30, 2010 compared to a decrease in the nine months ended
September 30, 2009, representing $77.5 million, a larger decrease in advances
from customers and deferred revenues, representing $7.3 million, and lower net
income from continuing operations, representing $4.2 million, offset by an
increase in our trade payables in the nine months ended September 30, 2010
compared to a decrease in the nine months ended September 30, 2009, representing
$19.5 million, and a smaller decrease in other accounts payable and accrued
expenses, representing $15.5 million.
Net cash
used in investing activities was $12.2 million in the nine months ended
September 30, 2010, compared to $40.9 million in the nine months ended September
30, 2009. The major factors contributing to the decrease were proceeds from
maturity of short-term bank deposits in the nine months ended September 30, 2010
compared to investment in short-term bank deposits in the nine months ended
September 30, 2009, representing $28.9 million, and lower payments in connection
with acquisitions of subsidiaries in prior periods, representing $12.3 million,
offset by net cash paid for the acquisition of Gilon, representing $17.2
million.
Net cash
provided by financing activities was $23.2 million in the nine months ended
September 30, 2010, compared to $4.2 million in the nine months ended September
30, 2009. The major factors contributing to the increase were net proceeds from
short-term bank credit in the nine months ended September 30, 2010 compared to
net repayments of short-term bank credit in the nine months ended September 30,
2009, representing $29.6 million, offset by greater principal payments of
long-term debt, representing $10.2 million.
The
effect of exchange rate changes on cash and cash equivalents was ($2.4) million
in the nine months ended September 30, 2010, compared to ($1.0) million in the
nine months ended September 30, 2009. The change was primarily due to the effect
of translation adjustments on our net current assets.
Long-term
and Short-term Debt
At
September 30, 2010, we had a short-term loan in the amount of $5.0 million from
a commercial bank, bearing a variable interest rate and maturing in June 2011.
Additionally, at September 30, 2010, we had the following long-term loans
outstanding in connection with the funding of acquisitions: (i) a long-term loan
from a commercial bank in the amount of €5.5 million, or $7.6 million, taken in
September 2007 to fund the acquisition of NessPRO Italy S.p.A.; (ii) a long-term
loan from a commercial bank in the amount of €9.6 million, or $13.1 million,
taken in November 2007 to fund the acquisition of FMC Consulting and Informatics
Ltd.; (iii) a long-term loan from a commercial bank in the amount of $8.3
million, taken in November 2007 to fund the acquisition of MS9 Consulting LLC;
and (iv) two long-term loans from commercial banks in the amounts of NIS 28.5
million, or $7.8 million, and NIS 20 million, or $5.4 million, taken by one of
our Israeli subsidiaries in April and May 2010 to fund the acquisition of Gilon.
At September 30, 2010, we also had outstanding a long-term loan from a
commercial bank in the amount of €9.2 million, or $12.6 million, taken in March
2008, and a long-term loan from a commercial bank in the amount of $10.3
million, taken in April 2009. The NIS 28.5 million and NIS 20 million loans
taken to fund the acquisition of Gilon mature over six years with principal
payments commencing in the first year. The $10.3 million loan taken in April
2009 matures over four years with principal payments commencing in the first
year. Each of the other long-term loans matures over five years from the
inception of the loan with principal payments commencing in the third year. Each
long-term loan bears interest at fixed or variable rates, and is paid quarterly.
The long-term loans contain covenants which, among other things: require
positive operating income in the last four quarters; require a certain ratio of
total financial obligations to consolidated EBITDA and of total stockholders’
equity to total consolidated assets; and place limitations on our ability to
merge or transfer assets to third parties. Our failure to comply with the
covenants could lead to an event of default under the agreements governing some
or all of this indebtedness, permitting the applicable lender to accelerate all
borrowings under the applicable agreement. As of December 31, 2009, we were not
in compliance with covenants under certain long-term loans requiring positive
operating income and a certain ratio of total financial obligations to EBITDA.
We received a waiver from the banks with respect to the covenants as of December
31, 2009, and the banks agreed to provide, as substitutes, less stringent
covenants to apply through September 30, 2010. As of September 30, 2010, we were
in compliance and expect to remain in compliance with the applicable covenants.
In connection with the above-mentioned covenants, we received the consent of the
commercial banks during 2008 to record a fixed charge on deposits in the amount
of $2.6 million held by our Indian subsidiary related primarily to the
mark-to-market of foreign exchange forward contracts into which we entered to
hedge against the effect of exchange rate fluctuations on cash flows denominated
in Indian Rupees.
In
addition, at September 30, 2010, one of our Israeli subsidiaries had a long-term
loan of NIS 11.6 million, or $3.2 million, from a commercial bank, taken in
March 2008, bearing interest at a fixed rate and maturing over five years, with
principal and interest paid quarterly. This loan and bank guarantees obtained by
this Israeli subsidiary contain covenants which, among other things: require
positive annual net income in a fiscal year; require a certain ratio of total
stockholders’ equity to total consolidated assets and a minimum stockholders’
equity of this Israeli subsidiary; and place limitations on its ability to
merge, transfer or pledge assets to third parties. Our failure to comply with
the covenants could lead to an event of default under the agreements governing
some or all of this indebtedness, permitting the applicable lender to accelerate
all borrowings under the applicable agreement and to foreclose on any
collateral. As of September 30, 2010, we were in compliance and expect to remain
in compliance with these covenants.
At
September 30, 2010, we had on-call borrowings in the aggregate amount of $25.4
million.
We
anticipate funding a portion of our global growth through financing from
commercial banks.
Anticipated
Needs
We intend
to fund future growth through future cash flow from operations and available
bank borrowings. We believe the borrowings and future cash flow from operations
will be sufficient to fund continuing operations for the foreseeable
future.
However,
in order to achieve our strategic business objectives, we may be required to
seek additional financing. For example, future acquisitions may require
additional equity and/or debt financing. In addition, we may require further
capital to continue to enhance our infrastructure and for working capital
purposes. These financings may not be available on acceptable terms, or at
all.
Critical
Accounting Policies and Estimates
Preparation
of our financial statements requires management to make estimates and
assumptions that affect the reported amounts of assets, liabilities, revenues
and expenses. We believe the most complex and sensitive judgments, because of
their significance to our consolidated financial statements, result primarily
from the need to make estimates about the effects of matters that are inherently
uncertain. Management’s Discussion and Analysis and Note 2 to the consolidated
financial statements presented in our 2009 Annual Report on Form 10-K, filed
with the SEC on March 15, 2010, describe the significant accounting estimates
and policies used in preparation of our consolidated financial statements.
Actual results in these areas could differ from management’s estimates. There
were no significant changes in our critical accounting estimates during the
three months ended September 30, 2010.
Contractual
Obligations
As of
September 30, 2010, except for the short-term and long-term loans obtained
through September 30, 2010, as described in the long-term and short-term debt
section above, there have been no material changes to the contractual
obligations we disclosed in our 2009 Annual Report on Form 10-K, filed with the
SEC on March 15, 2010.
Item
3. Quantitative and Qualitative Disclosures About Market Risk
We have
operations in 18 different countries and commercial relationships in many other
parts of the world. Our foreign operations contract with clients using
applicable local currencies, euros or dollars. As a result, we are subject to
adverse movements in foreign currency exchange rates in countries in which we
conduct business. Our earnings are predominantly affected by fluctuations in the
value of the dollar as compared to the New Israeli Shekel, the Indian Rupee, the
Czech Crown and the euro; and to some extent by fluctuations in intra-European
currency rates.
As an
example, a decrease of 10% in the value of the euro relative to the U.S. dollar
in the nine months ended September 30, 2010 would have resulted in an increase
in the U.S. dollar reporting value of our operating income of $0.4 million for
that period, while an increase of 10% in the value of the euro relative to the
U.S. dollar in the nine months ended September 30, 2010 would have resulted in a
decrease in the U.S. dollar reporting value of our operating income of $0.4
million for that period.
In order
to reduce the effect of such movements on our earnings, we utilize certain
foreign exchange forward contracts to hedge our exposure against the Indian
Rupee. In the future, we may enter into additional forward foreign currency
exchange or other derivatives contracts to further hedge our exposure to foreign
currency exchange rates.
We
utilize interest rate swap derivatives to convert certain floating-rate debt to
fixed-rate debt. Our interest rate swap derivatives involve an agreement to pay
a fixed-rate interest and receive a floating-rate interest, at specified
intervals, calculated on an agreed notional amount that matches the amount of
the original loan and paid on the same installments and maturity
dates.
Other
than as described above, we do not engage in trading market risk sensitive
instruments or purchase hedging or “other than trading” instruments that are
likely to expose us to market risk, whether interest rate, commodity price or
equity price risk, nor have we purchased options or entered into swaps or
forward or futures contracts, nor do we use derivative financial instruments for
speculative trading purposes.
In the
future, we may be subject to interest rate risk on our investments and loans,
which would affect their carrying value.
Item
4. Controls and Procedures
Evaluation
of Disclosure Controls and Procedures
As of the
end of the period covered by this report, our principal executive officer and
principal financial officer evaluated the effectiveness of our disclosure
controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the
Exchange Act). Based on their evaluation of our disclosure controls and
procedures, our principal executive officer and principal financial officer,
with the participation of our management, have concluded that our disclosure
controls and procedures were effective as of September 30, 2010 to ensure that
information required to be disclosed by us in the reports that we file or submit
under the Exchange Act is (a) recorded, processed, summarized and reported
within the time periods specified in the SEC’s rules and forms and (b)
accumulated and communicated to management, including our principal executive
officer and principal financial officer, as appropriate to allow for timely
decisions regarding required disclosure.
It should
be noted that any system of controls, however well designed and operated, can
provide only reasonable, and not absolute, assurance that the objectives of the
system are met. In addition, the design of any control system is based in part
upon certain assumptions about the likelihood of future events. Given these and
other inherent limitations of control systems, there is only reasonable
assurance that our controls will succeed in achieving their stated goals under
all potential future conditions. Our principal executive officer and principal
financial officer have concluded that our disclosure controls and procedures
were effective at the reasonable assurance level as of September 30,
2010.
Changes
in Internal Control Over Financial Reporting
As of the
end of the period covered by this report, there were no changes in our internal
controls over financial reporting, or in other factors that could significantly
affect these controls, that materially affected, or are reasonably likely to
materially affect, our internal control over financial reporting.
PART
II – OTHER INFORMATION
Item
1. Legal Proceedings
We are
periodically a party to routine litigation incidental to our business. Other
than as disclosed below, we do not believe that we are a party to or our
property is subject to any pending legal proceeding that is likely to have a
material adverse effect on our business, financial condition or results of
operations.
One of
our Israeli subsidiaries is currently involved in legal proceedings with the
Israeli Ministry of Justice (the “MOJ”). The legal proceedings relate to a
contract for the provision of an information system for the MOJ, executed in
November 2005 (the “MOJ Contract”). Following continued disputes, correspondence
and discussions, on February 9, 2009 we filed a claim with the Israeli District
Court located in Jerusalem claiming, among other things, a breach of the MOJ
Contract by the MOJ, including in connection with the MOJ’s demands for
revisions and changes to the software that were not contemplated in the MOJ
Contract. Our claim is for damages in the amount of NIS 20.7 million, or
approximately $5.6 million, using the exchange rate prevailing at September 30,
2010. On February 11, 2009, the MOJ filed a claim against our Israeli subsidiary
in the Israeli District Court located in Jerusalem claiming, among other things,
that our Israeli subsidiary breached the MOJ Contract and failed to fulfill its
undertakings and obligations set forth therein. The MOJ’s claim is for damages
in the amount of NIS 79.5 million, or approximately $21.7 million, using the
exchange rate prevailing at September 30, 2010. The MOJ and our subsidiary have
filed answers to the respective claims. Both claims were subsequently
transferred to the Israeli District Court located in Tel Aviv. The first
pre-trial hearing for both claims was held on September 7, 2010, at which time
the court transferred the case to non-binding mediation. We believe that we have
a substantial basis with respect to our claim and valid defenses with respect to
the MOJ’s claim. While we intend to vigorously prosecute our claim and defend
against the MOJ’s claim, we cannot at this point predict the outcome of either
claim. Adverse decisions on these claims may materially adversely affect our
financial condition.
Item
1A. Risk Factors
There are
no material changes from the risk factors previously disclosed in our Annual
Report on Form 10-K filed with the SEC on March 15, 2010.
Item
2. Unregistered Sales of Equity Securities and Use of Proceeds
None.
Item
3. Defaults upon Senior Securities
None.
Item
4. (Removed and Reserved)
Item
5. Other Information
On
October 25, 2010, our Board of Directors appointed Satyam Cherukuri, one of our
directors, as Vice Chairman of the Board of Directors to assist Aharon Fogel as
we transition to a new Chairman of the Board. As previously disclosed in a
Current Report on Form 8-K dated September 7, 2010, Mr. Fogel notified us of his
decision not to stand for re-election to the Board at our 2011 annual meeting of
stockholders and that he expects to retire in the beginning of
2011.
Item
6. Exhibits
The
following is a list of exhibits filed as part of this Form 10-Q:
Exhibit Number
|
|
Description
|
31.1
|
|
Certification
of Principal Executive Officer pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.
|
31.2
|
|
Certification
of Principal Financial Officer pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.
|
32.1
|
|
Certification
of Principal Executive Officer pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
|
32.2
|
|
Certification
of Principal Financial Officer pursuant to Section 906 of the
Sarbanes-Oxley Act of
2002.
|
SIGNATURES
Pursuant
to the requirements of the Securities Exchange Act of 1934, as amended, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
|
|
NESS
TECHNOLOGIES, INC.
|
|
|
(Registrant)
|
|
|
|
|
Date:
|
November
4
,
2010
|
By:
|
/s/
Issachar
Gerlitz
|
|
|
|
Issachar
Gerlitz
|
|
|
|
Chief
Executive Officer, President and Director
|
|
|
|
(principal
executive officer)
|
|
|
|
|
Date:
|
November
4
,
2010
|
By:
|
/s/
Ofer
Segev
|
|
|
|
Ofer
Segev
|
|
|
|
Executive
Vice President and Chief Financial Officer
|
|
|
|
(principal
financial and accounting
officer)
|
EXHIBIT
INDEX
Exhibit Number
|
|
Description
|
31.1
|
|
Certification
of Principal Executive Officer pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.
|
31.2
|
|
Certification
of Principal Financial Officer pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.
|
32.1
|
|
Certification
of Principal Executive Officer pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
|
32.2
|
|
Certification
of Principal Financial Officer pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
|
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