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Ness Technologies 10-Q 2010 UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
FORM
10-Q
(Mark
One)
For
the quarterly period ended June 30, 2010
For the
transition period from ________ to ________
Commission
File Number 000-50954
NESS
TECHNOLOGIES, INC.
(Exact
name of registrant as specified in its charter)
(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
Item
1. Financial Statements
NESS
TECHNOLOGIES, INC. AND ITS SUBSIDIARIES
Interim
Consolidated Balance Sheets
U.S.
dollars in thousands
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)
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)
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
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
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
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.
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. – 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)
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.
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:
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)
Assets
and liabilities measured at fair value under ASC 820 as of December 31, 2009
were presented on our Consolidated Balance Sheet as follows:
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)
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
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:
The value
assigned to the tangible assets, intangible assets and liabilities has been
determined as follows:
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.
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:
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:
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)
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:
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)
– 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
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.
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.
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.
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)
Note
9: Stockholders’ Equity
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)
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:
– 21
–
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:
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:
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. – 22
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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:
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