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Ness Technologies 10-Q 2010

Documents found in this filing:

  1. 10-Q
  2. Ex-10.1
  3. Ex-31.1
  4. Ex-31.2
  5. Ex-32.1
  6. Ex-32.2
  7. Ex-32.2

UNITED STATES
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 June 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 July 30, 2010, 38,001,090 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 June 30, 2010 (Unaudited)
3
   
Consolidated Statements of Income – Three and six months ended June 30, 2009 and 2010 (Unaudited)
5
   
Consolidated Statements of Cash Flows – Six months ended June 30, 2009 and 2010 (Unaudited)
6
   
Notes to Interim Consolidated Financial Statements – June 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
25
   
Three Months Ended June 30, 2010 Compared to the Three Months Ended June 30, 2009
26
   
Six Months Ended June 30, 2010 Compared to the Six Months Ended June 30, 2009
28
   
Results by Business Segment
31
   
Liquidity and Capital Resources
32
       
 
Item 3. Quantitative and Qualitative Disclosures About Market Risk
35
     
 
Item 4. Controls and Procedures
35
     
   
Evaluation of Disclosure Controls and Procedures
35
   
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)
38
  Item 5. Other Information
38
  Item 6. Exhibits
38
   
SIGNATURES
39
   
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

   
December
31, 2009
   
June 30,
2010
 
         
(Unaudited)
 
ASSETS
           
             
CURRENT ASSETS:
           
Cash and cash equivalents
  $ 40,218     $ 35,093  
Restricted cash
    2,470       2,474  
Short-term bank deposits
    25,939       15,556  
Trade receivables, net of allowance for doubtful accounts of $2,789 at December 31, 2009 and $2,519 at June 30, 2010
    131,452       136,725  
Unbilled receivables
    28,012       32,625  
Other accounts receivable and prepaid expenses
    27,832       26,677  
Work in progress
    9,690       7,111  
Total assets attributed to discontinued operations
    43,212       28,391  
Total current assets
    308,825       284,652  
                 
LONG-TERM ASSETS:
               
Long-term prepaid expenses and other assets
    6,083       6,575  
Unbilled receivables
    4,654       4,417  
Deferred income taxes, net
    3,608       2,442  
Severance pay fund
    53,145       53,726  
Property and equipment, net
    35,739       34,019  
Intangible assets, net
    10,016       11,672  
Goodwill
    263,541       265,039  
Total long-term assets
    376,786       377,890  
                 
Total assets
  $ 685,611     $ 662,542  

The accompanying notes are an integral part of the interim consolidated financial statements.

 
– 3 –

 

NESS TECHNOLOGIES, INC. AND ITS SUBSIDIARIES
Interim Consolidated Balance Sheets

U.S. dollars in thousands (except share and par value data)

   
December
31, 2009
   
June 30,
2010
 
         
(Unaudited)
 
LIABILITIES AND STOCKHOLDERS’ EQUITY
           
             
CURRENT LIABILITIES:
           
Short-term bank credit
  $ 500     $ 8,792  
Current maturities of long-term debt
    21,332       24,035  
Trade payables
    30,914       40,573  
Advances from customers and deferred revenues
    40,639       36,134  
Other accounts payable and accrued expenses
    99,464       94,256  
Total liabilities attributed to discontinued operations
    25,461       14,561  
Total current liabilities
    218,310       218,351  
                 
LONG-TERM LIABILITIES:
               
Long-term debt, net of current maturities
    50,836       46,965  
Other long-term liabilities
    6,689       7,276  
Deferred income taxes
    2,045       2,489  
Accrued severance pay
    56,443       57,311  
Total long-term liabilities
    116,013       114,041  
                 
COMMITMENTS AND CONTINGENT LIABILITIES
               
                 
STOCKHOLDERS’ EQUITY:
               
Preferred stock of $0.01 par value –
Authorized: 8,500,000 shares at December 31, 2009 and at June 30, 2010;
Issued and outstanding: none at December 31, 2009 and June 30, 2010
           
Common stock of $0.01 par value –
Authorized: 76,500,000 shares at December 31, 2009 and at June 30, 2010;
Issued: 39,628,994 at December 31, 2009 and at June 30, 2010;
Outstanding: 38,399,290 at December 31, 2009 and 38,001,090 at June 30, 2010
    396       396  
Additional paid-in capital
    332,928       334,528  
Accumulated other comprehensive income
    16,176       253  
Retained earnings
    6,476       1,830  
Treasury stock, at cost (1,229,704 shares at December 31, 2009 and 1,627,904 at June 30, 2010)
    (4,688 )     (6,857 )
Total stockholders’ equity
    351,288       330,150  
                 
Total liabilities and stockholders’ equity
  $ 685,611     $ 662,542  

The accompanying notes are an integral part of the interim consolidated financial statements.

 
– 4 –

 

NESS TECHNOLOGIES, INC. AND ITS SUBSIDIARIES
Interim Consolidated Statements of Income

U.S. dollars in thousands (except per share data)

   
Three months ended
June 30,
   
Six months ended
June 30,
 
    
2009
   
2010
   
2009
   
2010
 
   
(Unaudited)
   
(Unaudited)
   
(Unaudited)
   
(Unaudited)
 
                         
Revenues
  $ 126,887     $ 139,701     $ 253,168     $ 273,034  
Cost of revenues
    92,542       102,275       186,901       198,796  
Gross profit
    34,345       37,426       66,267       74,238  
                                 
Selling and marketing
    9,681       9,838       18,893       19,891  
General and administrative
    21,233       24,551       44,818       48,893  
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
    30,914       34,389       58,567       68,784  
                                 
Operating income
    3,431       3,037       7,700       5,454  
Financial expenses, net
    (666 )     (442 )     (1,822 )     (651 )
Income before taxes on income
    2,765       2,595       5,878       4,803  
                                 
Taxes on income
    537       1,707       1,179       3,217  
Net income from continuing operations
  $ 2,228     $ 888     $ 4,699     $ 1,586  
                                 
Net loss from discontinued operations
    (1,186 )     (845 )     (2,129 )     (6,232 )
Net income (loss)
  $ 1,042     $ 43     $ 2,570     $ (4,646 )
                                 
Basic net earnings per share from continuing operations
  $ 0.06     $ 0.02     $ 0.12     $ 0.04  
Diluted net earnings per share from continuing operations
  $ 0.06     $ 0.02     $ 0.12     $ 0.04  
                                 
Basic and diluted net loss per share from discontinued operations
  $ (0.03 )   $ (0.02 )   $ (0.05 )   $ (0.16 )
                                 
Basic net earnings (loss) per share
  $ 0.03     $ 0.00     $ 0.07     $ (0.12 )
Diluted net earnings (loss) per share
  $ 0.03     $ 0.00     $ 0.07     $ (0.12 )
 

(*) 
Includes stock-based compensation, as follows:
 
   
Three months ended
June 30,
   
Six months ended
June 30,
 
   
2009
   
2010
   
2009
   
2010
 
   
(Unaudited)
   
(Unaudited)
   
(Unaudited)
   
(Unaudited)
 
                         
Cost of revenues
  $ 57     $ 102     $ 120     $ 155  
Selling and marketing
    46       41       103       85  
General and administrative
    725       188       1,533       920  

The accompanying notes are an integral part of the interim consolidated financial statements.

 
– 5 –

 

NESS TECHNOLOGIES, INC. AND ITS SUBSIDIARIES
Interim Consolidated Statements of Cash Flows

U.S. dollars in thousands

   
Six months ended
June 30,
 
   
2009
   
2010
 
   
(Unaudited)
   
(Unaudited)
 
Cash flows from operating activities:
           
Net income (loss)
  $ 2,570     $ (4,646 )
Adjustments required to reconcile net income (loss) to net cash provided by (used in) operating activities:
               
Net loss from discontinued operations
    2,129       6,232  
Stock-based compensation
    1,756       1,600  
Currency fluctuation of restricted cash and short-term bank deposits
          (415 )
Depreciation and amortization
    8,423       8,631  
Loss (gain) on sale of property and equipment and impairment and sale of cost investments
    (205 )     79  
Commissions related to the sale of Israeli SAP sales and distribution operations
    (2,534 )      
Decrease (increase) in trade receivables, net
    38,709       (6,719 )
Decrease (increase) in unbilled receivables
    894       (5,680 )
Decrease (increase) in other accounts receivable and prepaid expenses
    (1,949 )     1,423  
Decrease (increase) in work-in-progress
    (343 )     1,393  
Increase in long-term prepaid expenses
    (346 )     (540 )
Deferred income taxes, net
    513       847  
Increase (decrease) in trade payables
    (13,387 )     11,473  
Decrease in advances from customers and deferred revenues
    (1,200 )     (2,851 )
Decrease in other accounts payable and accrued expenses
    (14,810 )     (8,369 )
Increase in other long-term liabilities
    472       882  
Increase (decrease) in accrued severance pay, net
    (1,384 )     266  
Net cash used in discontinued operations
    (1,853 )     (3,712 )
Net cash provided by (used in) operating activities
    17,455       (106 )
                 
Cash flows from investing activities:
               
Consideration from sale of a consolidated subsidiary
          1,711  
Net cash paid for acquisition of a consolidated subsidiary
          (16,259 )
Cash paid for acquisition of intangible assets
          (513 )
Additional payments in connection with acquisitions of subsidiaries in prior periods
    (14,395 )     (1,330 )
Proceeds from maturity of (investment in) short-term bank deposits, net
    (15,778 )     10,791  
Proceeds from sale of property and equipment
    703        
Purchase of property and equipment and capitalization of software developed for internal use
    (4,864 )     (5,287 )
Net cash used in discontinued operations
    (1,808 )      
Net cash used in investing activities
    (36,142 )     (10,887 )
                 
Cash flows from financing activities:
               
Repurchase of shares
    (2,037 )     (2,169 )
Acquired subsidiary’s dividend to its former shareholder
    (683 )      
Short-term bank loans and credit, net
    (4,560 )     6,361  
Proceeds from long-term debt
    15,000       13,364  
Principal payments of long-term debt
    (2,161 )     (8,701 )
Net cash provided by financing activities
    5,559       8,855  

The accompanying notes are an integral part of the interim consolidated financial statements.

 
– 6 –

 

NESS TECHNOLOGIES, INC. AND ITS SUBSIDIARIES
Interim Consolidated Statements of Cash Flows

U.S. dollars in thousands

   
Six months ended
June 30,
 
   
2009
   
2010
 
   
(Unaudited)
   
(Unaudited)
 
             
Effect of exchange rate changes on cash and cash equivalents
    (1,101 )     (2,987 )
Decrease in cash and cash equivalents
    (14,229 )     (5,125 )
Cash and cash equivalents at the beginning of the period
    44,585       40,218  
Cash and cash equivalents at the end of the period
  $ 30,356     $ 35,093  
 

 
Non-cash activity
           
             
Gain (loss) from mark-to-market of foreign exchange forward contracts and interest rate swap
  $ 326     $ (333 )
 
The accompanying notes are an integral part of the interim consolidated financial statements.

 
– 7 –

 
 
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 June 30, 2010, consolidated statements of income for the three and six months ended June 30, 2009 and 2010 and consolidated statements of cash flows for the six months ended June 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 June 30, 2010, our consolidated results of operations for the three and six months ended June 30, 2009 and 2010 and our consolidated cash flows for the six months ended June 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 six months ended June 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.
 
 
b.
Reclassification
 
Certain prior period amounts have been reclassified to conform to the current period presentation.
 
 
c.
Use of estimates
 
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.

 
– 8 –

 
 
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 June 30, 2010 were presented on our Consolidated Balance Sheet as follows:

 
– 9 –

 
 
NESS TECHNOLOGIES, INC. AND ITS SUBSIDIARIES
Notes to Interim Consolidated Financial Statements

U.S. dollars in thousands (except share and per share data) (Unaudited)
 
   
Total
   
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)
  $ 7     $     $ 7     $  
Goodwill and intangible assets, net (non-recurring basis)
  $ 276,711             $     $ 276,711  
Total assets
  $ 276,718     $     $ 7     $ 276,711  
                                 
Derivative instruments (recurring basis)
  $ 1,106     $     $ 1,106     $  
Total liabilities
  $ 1,106     $     $ 1,106     $  
 
Assets and liabilities measured at fair value under ASC 820 as of December 31, 2009 were presented on our Consolidated Balance Sheet as follows:
 
   
Total
   
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 June 30, 2010 and December 31, 2009 due to the short-term maturity of these instruments.

 
– 10 –

 
 
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 this standard 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 these standards 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. 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.

 
– 11 –

 
 
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
    9,498  
Property and equipment
    113  
Customer relations
    4,477  
Backlog
    313  
Goodwill
    14,305  
Current liabilities
    (8,116 )
Accrual for additional consideration to be paid subsequent to the balance sheet date
    (1,292 )
Long-term deferred tax liability
    (3,039 )
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 amounted to $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 deferred tax liability is a 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.
 
 
b.
Goodwill
 
In the six months ended June 30, 2010, we increased our goodwill by $14,305 due to the Gilon acquisition and decreased our goodwill by $12,807 on account of 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 six months ended June 30, 2010, we updated our analysis and performed an impairment test as of June 30, 2010. As a result of the analysis, we concluded that goodwill was not impaired.

 
– 12 –

 
 
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 six months ended June 30, 2009 and 2010 as if our 2010 acquisition of Gilon had occurred on January 1of each respective year, after giving effect to purchase accounting adjustments, including amortization of identifiable intangible assets:
 
   
Six months ended
June 30,
 
   
2009
   
2010
 
   
(Unaudited)
   
(Unaudited)
 
             
Revenues
  $ 263,385     $ 278,784  
Net earnings (loss)
  $ 2,162     $ (4,884 )
                 
Earnings (loss) per share:
               
Basic
  $ 0.06     $ (0.13 )
Diluted
  $ 0.05     $ (0.13 )
 
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.

 
– 13 –

 
 
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 operates as part of our System Integration and Application Development segment and is engaged primarily in providing IT professional services in Singapore, Thailand and Malaysia. The sale, which is expected to close during the third quarter of 2010, will be 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 its 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 six months ended June 30, 2010, and the results of operations for Ness Benelux, Ness Asia Pacific and NessPRO Europe for the three and six months ended June 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 June 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 six months ended June 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 six months ended June 30, 2009 and 2010, which were reported separately as discontinued operations in the consolidated statements of income, are summarized as follows:
 
   
Three months ended
June 30,
   
Six months ended
June 30,
 
   
2009
   
2010
   
2009
   
2010
 
   
(Unaudited)
   
(Unaudited)
   
(Unaudited)
   
(Unaudited)
 
                         
Revenues
  $ 3,861     $     $ 7,463     $ 4,783  
Operating loss
  $ (435 )   $ (386 )   $ (1,096 )   $ (2,672 )
Net loss from discontinued operations
  $ (368 )   $ (386 )   $ (1,132 )   $ (2,691 )
                                 
Basic and diluted net loss per share from discontinued operations
  $ (0.01 )   $ (0.01 )   $ (0.03 )   $ (0.07 )
 
The results of operations for NessPRO Europe for the three and six months ended June 30, 2009 and 2010, which were reported separately as discontinued operations in the consolidated statements of income, are summarized as follows:

 
– 14 –

 
 
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
June 30,
   
Six months ended
June 30,
 
   
2009
   
2010
   
2009
   
2010
 
   
(Unaudited)
   
(Unaudited)
   
(Unaudited)
   
(Unaudited)
 
                         
Revenues
  $ 4,870     $ 4,026     $ 9,793     $ 7,813  
Operating loss
  $ (1,001 )   $ (376 )   $ (1,358 )   $ (3,367 )
Net loss from discontinued operations
  $ (958 )   $ (459 )   $ (1,235 )   $ (3,541 )
                                 
Basic and diluted net loss per share from discontinued operations
  $ (0.02 )   $ (0.01 )   $ (0.03 )   $ (0.09 )
 
The results of operations for Ness Benelux for the three and six months ended June 30, 2009, which were reported separately as discontinued operations in the consolidated statements of income, are summarized as follows:
 
   
Three months 
ended
   
Six months 
ended
 
    
June 30, 2009
   
June 30, 2009
 
   
(Unaudited)
   
(Unaudited)
 
             
Revenues
  $ 1,625     $ 3,253  
Operating income
  $ 143     $ 258  
Net income from discontinued operations
  $ 140     $ 238  
                 
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 six months ended June 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.
 
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.

 
– 15 –

 
 
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 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 June 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 six months ended June 30, 2010. At June 30, 2010, the aggregate notional amount of the interest rate swaps was $20,481, 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 June 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 denominated in Indian Rupees. At June 30, 2010, the notional amount of foreign exchange forward contracts we entered into was $49,500 and there was no ineffectiveness related to these foreign exchange forward contracts for the six months ended June 30, 2010, with all unrealized losses being deferred in accumulated other comprehensive income. The liability is presented within other accounts receivable and prepaid expenses on the balance sheet at June 30, 2010, as foreign exchange forward contracts expire through June 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:

 
– 16 –

 
 
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
 
 
Assets
 
Liabilities
 
 
Balance Sheet
Item
 
December
31, 2009
   
June 30,
2010
 
Balance Sheet
Item
 
December
31, 2009
   
June 30,
2010
 
           
(Unaudited)
           
(Unaudited)
 
Cash flow hedging:
                           
Foreign exchange forward contracts
“Other accounts receivable and prepaid expenses”
  $ 928     $  
“Other accounts payable and accrued expenses”
  $ 77     $ 440  
Interest rate swap
             
“Other long-term liabilities”
    480       484  
Total cash flow hedging
    $ 928     $       $ 557     $ 924  
Derivatives not designated as hedging:
                                   
Foreign exchange forward contracts
“Other accounts receivable and prepaid expenses”
    293       7  
“Other accounts payable and accrued expenses”
    108       182  
Total derivatives
    $ 1,221     $ 7       $ 665     $ 1,106  
 
   
Loss 
Recognized in 
Other 
 
 
 
Gain (loss) Recognized in Statements of Income
 
   
Comprehensive 
      
Three months ended
   
Six months ended
 
    
Income 
 
Statements of >
 
June 30,
   
June 30,
 
   
June 30, 2010
 
Income Item
 
2009
   
2010
   
2009
   
2010
 
    
(Unaudited)
     
(Unaudited)
   
(Unaudited)
   
(Unaudited)
   
(Unaudited)
 
Cash flow hedging:
                               
Foreign exchange forward contracts
  $ (277 )
“Cost of revenues” and
“Total operating expenses”
  $ (1,093 )   $ 793     $ (2,953 )   $ 1,546  
Interest rate swap
    (240 )
“Financial expenses, net”
    (66 )     (116 )     (103 )     (247 )
Total cash flow hedging
  $ (517 )     $ (1,159 )   $ 677     $ (3,056 )   $ 1,299  
Derivatives not designated as hedging:
                                         
Foreign exchange forward contracts
       
“Financial expenses, net”
    420       1,198       (553 )     218  
Total derivatives
            $ (739 )   $ 1,875     $ (3,609 )   $ 1,517  

 
– 17 –

 
 
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
 
 
a.
Litigation
 
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 $5,300, using the exchange rate prevailing at June 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 $20,500, using the exchange rate prevailing at June 30, 2010. The MOJ and our subsidiary have filed answers to the respective claims. Both claims were transferred to the Israeli District Court located in Tel Aviv and the first pretrial hearing for both claims is set for September 7, 2010. 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.
 
 
b.
Guarantees
 
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 June 30, 2010 is $36,650 and $34,490, respectively. We do not hold collateral to support guarantees except when deemed necessary.
 
 
c.
Liens and charges
 
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 $2,474 held by our Indian subsidiary related to the mark-to-market of foreign exchange forward contracts.
 
 
d.
Covenants
 
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.

 
– 18 –

 
 
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 June 30, 2010, we were in compliance and expect to remain in compliance with these 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 June 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
June 30,
   
Six months ended
June 30,
 
   
2009
   
2010
   
2009
   
2010
 
   
(Unaudited)
   
(Unaudited)
   
(Unaudited)
   
(Unaudited)
 
                         
Net income (loss)
  $ 1,042     $ 43     $ 2,570     $ (4,646 )
Foreign currency translation adjustments, net
    21,220       (13,475 )     (1,513 )     (14,957 )
Unrealized income (loss) on foreign exchange forward contracts and interest rate swap
    3,150       (1,760 )     3,382       (966 )
Comprehensive income (loss)
  $ 25,412     $ (15,192 )   $ 4,439     $ (20,569 )
 
 
b.
Changes in accumulated other gain (loss) due to cash flow hedging strategy:
 
   
Six months ended
June 30,
 
   
2009
   
2010
 
   
(Unaudited)
   
(Unaudited)
 
             
Balance at the beginning of the period
  $ (4,000 )   $ 449  
Mark to market of foreign exchange forward contracts and interest rate swap
    326       333  
Loss (gain) recognized in earnings during the period
    3,056       (1,299 )
Balance at the end of the period
  $ (618 )   $ (517 )
 
 
c.
Option exercises:
 
In the six months ended June 30, 2009 and 2010, no options to purchase our common stock were exercised.

 
– 19 –

 
 
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.
Treasury stock:
 
During the six months ended June 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:
 
 
 
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.

 
– 20 –

 
 
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 June 30, 2010
 
   
Software
Product
Engineering
   
System
Integration &
Application
Development
   
Unallocated
Expenses
   
Total
 
   
(Unaudited)
 
       
Revenues from external customers
  $ 28,060     $ 111,641     $     $ 139,701  
Operating income (loss)
  $ 4,388     $ 2,746     $ (4,097 )     3,037  
Financial expenses, net
                            (442 )
Income before taxes on income
                          $ 2,595  
                                 
   
Three months ended June 30, 2009
 
   
Software
Product
Engineering
   
System
Integration &
Application
Development
   
Unallocated
Expenses
   
Total
 
   
(Unaudited)
 
       
Revenues from external customers
  $ 25,688     $ 101,199     $     $ 126,887  
Operating income (loss)
  $ 4,096     $ 3,228     $ (3,893 )     3,431  
Financial expenses, net
                            (666 )
Income before taxes on income
                          $ 2,765  
                                 
   
Six months ended June 30, 2010
 
   
Software
Product
Engineering
   
System
Integration &
Application
Development
   
Unallocated
Expenses
   
Total
 
   
(Unaudited)
 
       
Revenues from external customers
  $ 54,457     $ 218,577     $     $ 273,034  
Operating income (loss)
  $ 8,241     $ 5,973     $ (8,760 )     5,454  
Financial expenses, net
                            (651 )
Income before taxes on income
                          $ 4,803  
                                 
   
Six months ended June 30, 2009
 
   
Software
Product
Engineering
   
System
Integration &
Application
Development
   
Unallocated
Expenses
   
Total
 
   
(Unaudited)
 
       
Revenues from external customers
  $ 50,654     $ 202,514     $     $ 253,168  
Operating income (loss)
  $ 8,210     $ 8,539     $ (9,049 )     7,700  
Financial expenses, net
                            (1,822 )
Income before taxes on income
                          $ 5,878  

 
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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 six months ended June 30, 2009 and 2010, and long-lived assets as of December 31, 2009 and June 30, 2010:
 
   
Three months ended
June 30,
   
Six months ended
June 30,
 
   
2009
   
2010
   
2009
   
2010
 
   
(Unaudited)
   
(Unaudited)
   
(Unaudited)
   
(Unaudited)
 
Revenues from sales to unaffiliated customers:
                       
Israel
  $ 42,371     $ 51,327     $ 87,641     $ 98,966  
North America
    43,544       48,381       86,023       93,630  
Europe (excluding Czech Republic)
    19,903       20,986       39,939       41,082  
Czech Republic
    18,698       17,178       35,135       36,083  
Asia Pacific
    2,371       1,829       4,430       3,273  
    $ 126,887     $ 139,701     $ 253,168     $ 273,034  
 
   
December
31, 2009
   
June 30,
2010
 
         
(Unaudited)
 
Long-lived assets:
           
Israel
  $ 21,983     $ 21,857  
India
    6,812       6,198  
Europe
    4,184       3,376  
North America
    2,760       2,588  
    $ 35,739     $ 34,019  
 
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 June 30, 2010 the total of our unrecognized tax benefits was $4,455, 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 $722 at June 30, 2010. During the six months ended June 30, 2010, we recorded $128 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 June 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
    (288 )
Additions related to tax positions taken during the period
    851  
Balance as of June 30, 2010
  $ 4,455  
 
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.

 
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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 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
June 30,
   
Six months ended
June 30,
 
    
2009
   
2010
   
2009
   
2010
 
   
(Unaudited)
   
(Unaudited)
   
(Unaudited)
   
(Unaudited)
 
Numerator:
                       
Net income from continuing operations, numerator for basic and diluted earnings per share from continuing operations
  $ 2,228     $ 888     $ 4,699     $ 1,586  
                                 
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
    38,590       38,161       38,755       38,230  
Effect of dilutive securities: