RNS Number:6462A
Tescom Software Systems Testing Ltd
30 March 2006
30 March 2006
Tescom Software Systems Testing Ltd. ("Tescom" or "the Company")
Preliminary Results
Tescom Software Systems Testing Ltd. (Symbol: TSCM), the international quality
assurance and software testing service provider, announces its full-year results
for the 12 months ended 31 December 2005.
Highlights
* Revenues were marginally higher at $46.5m (2004: $45.8m)
* Gross margins were 36.2% (2004: 39.5%)
* Loss before tax was $0.1m (2004: profit of $2.8m), after one-off charges
of $2.7m mainly arising from its introduction to AIM and write-off of
goodwill related to its US businesses
* Diluted loss per share was $0.07 (2004 earnings per share: $0.13)
* Successful introduction to AIM in July 2005
* Landmark transaction as main contractor with the Ministry of Finance in
France
* New contract wins in the UK, Australia, Singapore and the US
* Strengthening of senior sales and marketing management in the UK and
Israel
Ofer Albeck, CEO of Tescom, said: "Tescom has had a challenging year in 2005, as
reflected in the financial results. In particular, a number of our major
contracts in Israel were successfully concluded, which led to a short-term
reduction in our utilisation of staff. This market continues to be extremely
competitive. In addition, we incurred significant costs in completing our
successful introduction to AIM.
"Despite this, Tescom has won a number of major new contracts, including
long-term fixed contracts in the public sector, from which we expect to benefit
in 2006. We have also taken the opportunity to reorganise and strengthen our
management team and we look forward to 2006 with confidence."
Enquiries:
Tescom
Ofer Albeck, CEO + 972 3 535 0990
Corfin Communications
Harry Chathli, Clare Irvine +44 (0)20 7929 8989
Chief Executive's Review
Tescom made steady progress, generating $46.5m in revenues. 2005 was a year of
change, where major contracts in Israel ended and were replaced by new large
contracts in the UK, Continental Europe and the US. Tescom's strategy is to
focus its efforts on large projects with fixed-price contracts, mainly in Europe
and the US. Towards the end of the year, the Company was awarded a three-year
contract with the French Ministry of Finance. For Tescom, this is a major
project in France that clearly demonstrates Tescom's leadership in this area,
and ideally positions the Company to benefit from other public sector projects
throughout Europe.
In the UK, Tescom has been successful at gaining contracts in the public sector,
working for the Governmental departments that perform testing on projects being
carried out by systems integrators such as EDS. In early 2006, BSkyB made Tescom
their principal supplier for testing across the UK.
Tescom has made significant progress in the US, winning a number of long-term
contracts, including one for the Centre for Disease Control and Prevention, as
well as contracts for the Georgia Department of Transportation and the City of
Atlanta. These latter two contracts represent an important first step in the
state and local government sector in the US.
In the Asia-Pacific region, Tescom Singapore has been contracted by Abacus
International, Asia-Pacific's leading travel facilitator, to perform system
testing aligning its new pricing system to the pricing systems of the airlines.
In Australia, Tescom won a major contract with Monash University, one of the
largest universities in Australia, to establish automated testing for the
university's IT using IBM-Rational tools.
Tescom has experienced a downturn in Israel, primarily due to the successful
completion of a major project with the Israeli Ministry of Defence in the early
part of this year. It has taken time to replace such a large project. The
Company has begun aggressively targeting the ERP sector for strong growth
because of its complexity and strategic importance to businesses and hence its
need for software testing and quality assurance. In the middle of the year,
Tescom commenced working with IBM Israel to provide configuration management and
ERP implementation services at Bromine Industries, the world's largest producer
of bromine from the Dead Sea. There were further contracts involving clients in
the telecoms, metal industry and agronomy sectors. In parallel, the Company has
also succeeded in extending several significant projects that commenced last
year, including Comverse, Amdocs and ECI Telecom.
In 2005, Tescom also strengthened its management team significantly in a number
of key territories. Mrs Shirley Cohen was appointed as the new head of the
Company's operations in Israel. Mrs Cohen joined Tescom in 1998 as a project
manager and immediately prior to her appointment as Managing Director, was the
COO of the Company's Israeli operations.
Early in 2006, Phil Serlin was appointed as Vice-President, Finance. Mr Serlin
joined Tescom from Chiaro Networks Ltd. in Israel, where he served as Global
Controller and Finance Manager since 2000. He brings extensive experience in
financial reporting and regulatory affairs to Tescom.
Also in the first quarter, the International operations outside Israel were
consolidated in one division and David Oates was appointed to head it. Based in
Tescom's London office, he takes up his position on 3 April 2006. Mr. Oates
joins Tescom from Primavera, where he was the Vice-President in charge of its
international operations. Primavera is a privately owned software company
specialising in project portfolio and resource management applications and
services, with a global customer base spanning 85 countries. Mr. Oates'
appointment has coincided with the departure of Neil Goodall from the London
office.
Financial Review
Results
Revenues increased marginally to $46.5m (2004: $45.8m), following the conclusion
of some major contracts. Although the Company has won new contracts, revenues
from these are not expected to contribute significantly until the latter part of
2006.
Pre-tax profit reflected a loss of $0.1m (2004: profit of $2.8m), due to several
one-off items that management felt were prudent and appropriate to record. These
were as follows:
Write-off of goodwill in the US $1,000,000
Total costs associated with AIM introduction $1,300,000
Tax audit expenses related to prior years $200,000
Relocation of offices in UK $200,000
Despite the reported loss resulting from these items, the Company generated
$1.6m in cash from operations (2004: $2.6m). Sales and marketing expenditure
fell to $2.7m from $3.5m in 2004, due to a partial restructuring of the
Company's sales force in the latter half of 2005. General and administrative
expenses increased to $13.4m from $11.0m, primarily due to the write-off of
goodwill in the US and costs related to the AIM introduction in the UK. Gross
margins for the full year were 36.2%, which were slightly lower than
expectations primarily as a result of decreased margins in Israel.
The Company's cash balance at 31 December 2005 was $2.7m (2004: $4.6m), which
also reflects the full repayment of $4.5m of convertible debentures in the first
quarter of 2005.
Share Buyback
The Board of Tescom announced in July 2005 that it had approved a share buyback
of its ordinary shares on the open market. The total amount approved for the
share repurchase was approximately $550,000. From the July approval to
31 December 2005, 113,326 shares were bought back by the Company for a total sum
of approximately $173,000. These shares are held as treasury shares by the
Company.
Dividends
The Company has a policy to pay a dividend, subject to the future performance of
the Company and its funding requirements. The Company declared a total interim
dividend of approximately $1m in the fourth quarter of 2005, which was paid in
January 2006. In view of the financial results, the Board has decided not to
award a final dividend.
Outlook
Tescom has won a number of significant long-term contracts in 2005 from which it
expects to benefit in 2006. The businesses in the UK, US, France and Singapore
have all started the year well. While the Israeli market continues to be very
competitive, there are signs of improving performance.
In addition, the Board of Tescom has looked at a number of strategic
opportunities to expand its businesses in other regions and will continue to
look at further opportunities to enhance shareholder value.
CONSOLIDATED BALANCE SHEETS
In thousands of US dollars, except share data
December 31,
---------------------------------
Note 2003 2004 2005
------ ------- ------- -------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents 5,872 4,581 2,653
Short-term bank deposits 3 - 1,801 -
Trade receivables 4 10,214 11,606 11,363
Other current assets and prepaid 5 1,218 1,129 636
expenses ------- ------- -------
Total current assets 17,304 19,117 14,652
------- ------- -------
NON-CURRENT ASSETS:
Severance pay fund 1,945 2,187 2,155
Property and equipment, net 6 738 507 1,100
Deferred income taxes 12 108 841 1,008
Goodwill and other intangible assets 7 1,594 1,552 462
------- ------- -------
Total non-current assets 5,180 5,087 4,725
------- ------- -------
Total assets 22,484 24,204 19,377
------------ ======= ======= =======
The accompanying notes are an integral part of the consolidated financial
statements.
CONSOLIDATED BALANCE SHEETS
In thousands of US dollars, except share data
December 31,
---------------------------------
Note 2003 2004 2005
------ ------- ------- -------
LIABILITIES AND EQUITY
CURRENT LIABILITIES:
Short-term bank credit 8 2,636 2,063 1,650
Trade payables 594 790 849
Other current liabilities and accrued
expenses 9 5,434 6,200 7,876
Convertible debentures 10 - 4,451 -
Dividend payable - - 1,021
------- ------- -------
Total current liabilities 8,664 13,504 10,375
------- ------- -------
LONG-TERM LIABILITIES:
Accrued severance pay 2,075 2,372 2,427
Long-term loan - - 17
Convertible debentures 10 4,186 - -
------- ------- -------
Total long-term liabilities 6,261 2,372 2,444
------- ------- -------
EQUITY: 13
Issued capital 48 48 51
Share premium 2s 8,482 8,676 10,881
Treasury shares, at cost - - (173)
Foreign currency translation reserve (1,053) (582) (1,331)
Equity component of convertible 958 958 -
instrument
Accumulated deficit 2s (876) (772) (2,870)
------- ------- -------
Total equity 7,559 8,328 6,558
------- ------- -------
Total liabilities and equity 22,484 24,204 19,377
---------------------------- ======= ======= =======
The accompanying notes are an integral part of the consolidated financial
statements.
CONSOLIDATED STATEMENTS OF OPERATIONS
In thousands of US dollars, except share data
Year ended December 31,
-------------------------------------
Note 2003 2004 2005
---- ----------- ----------- -----------
Revenues 36,253 45,759 46,461
Cost of revenues 15a 20,925 27,676 29,649
----------- ----------- -----------
Gross profit 15,328 18,083 16,812
----------- ----------- -----------
Operating expenses:
Selling and marketing 15b 2,491 3,452 2,699
General and administrative 15c 10,944 11,049 13,398
----------- ----------- -----------
Total operating expenses 13,435 14,501 16,097
Operating income 1,893 3,582 715
Financial income (expenses), net 15d (342) (284) 181
Other income (expenses), net 31 (450) (1,035)
----------- ----------- -----------
Profit (loss) before taxes
on income 1,582 2,848 (139)
Taxes on income 12 566 1,071 938
----------- ----------- -----------
Net profit (loss) 1,016 1,777 (1,077)
=========== =========== ===========
Basic and diluted earnings
(loss) per share 14 0.07 0.13 (0.07)
=========== =========== ===========
Weighted average number of
shares used for computing
basic earnings (loss) per
share 14 15,084,389 15,132,264 15,522,414
=========== =========== ===========
The accompanying notes are an integral part of the consolidated financial
statements.
STATEMENTS OF CHANGES IN EQUITY
In thousands of US dollars
Share Share Treasury Foreign
capital premium shares, currency
at cost translation
reserve
------- ------- ------- -------
Balance as of January 1, 2003 48 8,461 - (1,762)
Effect of adopting IFRS 2 (**) - 9 - -
Issue of shares - 12 - -
Foreign currency translation
adjustments - - - 709
Dividends - - - -
Net profit - - - -
------- ------- ------- -------
Balance as of December 31, 2003 48 8,482 - (1,053)
Effect of adopting IFRS 2 (**) - 194 - -
Issuance of shares (*) - - - -
Shares repurchased by the Company - - (*) - -
Exercise of options (*) - - - -
Foreign currency translation
adjustments - - - 471
Dividends - - - -
Net profit - - - -
------- ------- ------- -------
Balance as of December 31, 2004 48 8,676 (*) - (582)
Share compensation expenses - 446 - -
Shares repurchased by the Company - - (173) -
Exercise of options 3 801 - -
Foreign currency translation
adjustments - - - (749)
Repayment of convertible debentures - 958 - -
Dividends - - - -
Net loss - - - -
------- ------- ------- -------
Balance as of December 31, 2005 51 10,881 (173) (1,331)
======= ======= ======= =======
STATEMENTS OF CHANGES IN EQUITY (Continued)
In thousands of US dollars
Equity
component
of Accum- Total
convertible ulated Total income
instrument deficit equity (expense)
------- ------- ------- --------
Balance as of January 1, 2003 958 (1,288) 6,417 -
Effect of adopting IFRS 2 (**) - - 9 -
Issue of shares - - 12 -
Foreign currency translation
adjustments - - 709 709
Dividends - (604) (604) -
Net profit - 1,016 1,016 1,016
------- ------- ------- --------
Balance as of December 31, 2003 958 (876) 7,559 -
Effect of adopting IFRS 2 (**) - - 194 -
Issuance of shares - - (*) - -
Shares repurchased by the Company - - (*) - -
Exercise of options - - (*) - -
Foreign currency translation
adjustments - - 471 471
Dividends - (1,673) (1,673) -
Net profit - 1,777 1,777 1,777
------- ------- ------- --------
Balance as of December 31, 2004 958 (772) 8,328 -
Share compensation expenses - - 446 -
Shares repurchased by the Company - - (173) -
Exercise of options - - 804 -
Foreign currency translation
adjustments - - (749) (749)
Repayment of convertible debentures (958) - - -
Dividends - (1,021) (1,021) -
Net loss - (1,077) (1,077) (1,077)
------- -------- ------- --------
Balance as of December 31, 2005 - (2,870) 6,558
======= ======== ======= ========
(*) Represents an amount lower than $1.
(**) See Note 2s
The accompanying notes are an integral part of the consolidated financial
statements.
CONSOLIDATED STATEMENTS OF CASH FLOWS
In thousands of US dollars
Year ended December 31,
-----------------------------
2003 2004 2005
------- ------- -------
Cash flows from operating activities
------------------------------------
Net profit (loss) 1,016 1,777 (1,077)
Adjustments to reconcile net (loss) to net cash
provided by (used in) operating activities:
Share compensation expenses 9 194 446
Loss on sale of investment - 4 -
Gain from forward transactions - (31) (50)
Accrued interest on short-term deposit - (13) 13
Depreciation and amortisation 817 667 357
Impairment of goodwill - - 945
Increase (decrease) in accrued severance pay, net (506) 51 101
Exchange differences on convertible debentures (354) (71) 182
Gain on sale of property and equipment (33) (5) -
Deferred income taxes, net 193 68 (206)
Increase in trade receivables (975) (968) (588)
Decrease in other current assets and
prepaid expenses 331 154 426
Increase (decrease) in trade payables (401) 159 122
Increase (decrease) in other current
liabilities and accrued expenses (1,307) 562 905
------- ------- -------
Net cash provided by (used in) operating
activities (1,210) 2,548 1,576
------- ------- -------
Cash flows from investing activities
------------------------------------
Additions to property and equipment (247) (140) (979)
Payments related to forward transactions - - (24)
Proceeds from sale of forward transactions - 31 74
Proceeds from sale of property and equipment 28 9 128
Proceeds from maturity of short-term bank
deposits 1,982 - 1,710
Investment in short-term bank deposits - (1,718) -
Acquisition of newly consolidated
subsidiary (d) (272) - -
------- ------- -------
Net cash provided by (used in) investing
activities 1,491 (1,818) 909
------- ------- -------
Cash flows from financing activities
------------------------------------
Short-term bank credit, net (1,936) (600) (300)
Repayment of convertible debentures - - (4,500)
Exercise of options - - 804
Shares repurchased by the Company - - (173)
Proceeds of long-term bank loan - - 40
Repayments of long-term bank loan - - (10)
Dividends paid (604) (1,673) -
------- ------- -------
Net cash used in financing activities (2,540) (2,273) (4,139)
------- ------- -------
Effect of exchange rate changes on cash
and cash equivalents 561 252 (274)
------- ------- -------
Decrease in cash and cash equivalents (1,698) (1,291) (1,928)
Cash and cash equivalents at the beginning
of the year 7,570 5,872 4,581
------- ------- -------
Cash and cash equivalents at the end of
the year 5,872 4,581 2,653
======= ======= =======
The accompanying notes are an integral part of the consolidated financial
statements.
CONSOLIDATED STATEMENTS OF CASH FLOWS
In thousands of US dollars
Year ended December 31,
-----------------------------
2003 2004 2005
------- ------- -------
(a) Supplemental disclosure of cash flows:
--------------------------------------
Cash paid during the year for
Interest 106 173 23
======= ======= =======
Income taxes 429 640 483
======= ======= =======
(b) Cash received during the year for interest 263 105 55
------------------------------------------ ======= ======= =======
(c) Supplemental disclosure of non-cash
transactions:
------------------------------------
Dividends declared - - 1,021
======= ======= =======
Issuance of shares in exchange for
investmentin subsidiary as part of
an acquisition agreement 12 - -
======= ======= =======
Purchase of property and equipment on credit 27 - -
======= ======= =======
(d) Acquisition of newly consolidated subsidiary:
---------------------------------------------
Working capital deficiency (excluding cash) 2 - -
Intangible assets (274) - -
------- ------- -------
(272) - -
======= ======= =======
The accompanying notes are an integral part of the consolidated financial
statements.
NOTE 1:- GENERAL
a. Tescom Software Systems Testing Ltd. ("the Company"), incorporated under the
laws of Israel, commenced its operations in 1990. The Company and its
subsidiaries ("the Group") are providers of quality assurance and testing
services for electronic, business and other software applications. The
Company's shares are traded on both the AIM market in London and on the Tel
Aviv Stock Exchange.
NOTE 2:- SIGNIFICANT ACCOUNTING POLICIES
a. Basis of preparation:
The consolidated financial statements of the Group herein have been prepared
in accordance with International Financial Reporting Standards ("IFRS") on
the historical cost basis. The Group also prepares its consolidated financial
statements in accordance with accounting principles generally accepted in
Israel ("Israeli GAAP"). See Note 17 for the material differences between
profit and loss reported under Israeli GAAP and the profit and loss under
IFRS.
The results for the year ended 31 December 2005, in accordance with IFRS, are
based on the Israeli-GAAP financial statements for such year, which have been
audited and will be filed with the Israel Securities Authority ("ISA"). The
results for the years ended 31 December 2004 and 2003, in accordance with
IFRS, are based on the Company's Israeli-GAAP full accounts for those years,
which have been filed with the ISA. The auditors' opinions on the above
accounts were unqualified.
A copy of the Annual Report and Accounts for the year ended 31 December 2005
is expected to be posted to shareholders in due course and will be available
at Teather & Greenwood, the Company's Nominated Advisors.
b. Use of estimates:
The preparation of financial statements in accordance with IFRS requires
estimates and assumptions by management that affect the reported amounts of
assets and liabilities, disclosure of contingent assets and liabilities at
the date of the financial statements, the reported amounts of revenues and
expenses during the reported period and the amounts stated in the income
statements. The actual results could differ from those estimates.
c. Foreign currency translation:
The majority of the revenues of the Company and its subsidiaries that operate
in Israel ("the Israeli companies") are received in New Israeli Shekels
("NIS"). The NIS is the currency of the primary economic environment of the
Israeli companies and, therefore, the functional currency of the Israeli
companies.
The Group has selected the US dollar as the presentation currency, rather
than using its functional currency, since the Group believes that most of the
readers of its financial statements are more familiar with the US dollar than
the NIS.
Since the Group selected the presentation currency to be the US dollar, the
financial statements of the Group have been translated from the functional
currency to the presentation currency in accordance with the principles set
forth in IAS 21, as follows:
Assets and liabilities of the Israeli companies and of the foreign
subsidiaries whose functional currency is not the US dollar are translated
into US dollars at the closing rate at the date of each balance sheet. Issued
capital, share premium and other reserves are translated into US dollars
using the exchange rate on the date of the transaction. Income and expenses
are translated at average monthly exchange rates. Translation differences
resulting from the translation are recognized as a separate component of
equity ("foreign currency translation reserve").
d. Scope of consolidation:
The consolidated financial statements as of December 31, 2005 include the
financial statements of the parent Company and the following wholly owned
subsidiaries (except for Manna which is 99.9%-owned and Tescom Singapore,
which is 76%-owned):
Tescom (UK) Software Systems Testing Limited Tescom UK
Tescom (USA) Software Systems Testing Inc. Tescom USA
Tescom (Singapore) Software Systems Testing PTE Ltd. Tescom Singapore
Tescom (Spain) Software Systems Testing S.L. Tescom Spain
Tescom Australia Pty Ltd. Tescom Australia
Tescom (France) Software Systems Testing SARL Tescom France
Tescom Software Systems Testing (Deutschland) GmbH Tescom Germany
Manna Network Technologies Ltd. Manna
Since the minority share of Tescom Singapore's losses exceed the minority
interest in its equity and the minority is not obligated to cover the losses,
the Company records 100% of Tescom Singapore's losses in its consolidated
financial statements.
e. Principles of consolidation:
Subsidiaries are consolidated from the date on which control is transferred
to the Company and cease to be consolidated from the date on which control is
transferred out of the Company. Acquisition of subsidiaries is accounted for
using the purchase method of accounting.
Intercompany balances and transactions, including profits from intercompany
transactions not yet realized outside the Group, have been eliminated upon
consolidation.
The financial statements of the subsidiaries are prepared for the same
reporting periods as the parent company, using consistent accounting
policies.
f. Cash equivalents:
The Group considers all highly liquid investments purchased with original
maturities of three months or less to be cash equivalents.
g. Short-term deposits:
The Group classifies deposits with original maturities of more than three
months and less than one year as short-term deposits. The short-term deposits
are presented at cost, including accrued interest.
h. Trade receivables:
Trade receivables are recognized and carried at original invoice amount less
an allowance for any uncollectible amounts. An allowance for doubtful debts
is made when there is objective evidence that the Company will not be able to
collect the full amount. Bad debts are written-off when identified by
management.
i. Property and equipment:
Property and equipment are presented at cost, net of accumulated
depreciation. Depreciation is calculated using the straight-line method over
the estimated useful lives of the assets, at the following annual rates:
%
--------------------------
Computers and peripheral equipment 33
Office furniture and equipment 6 - 15 (mainly 7%)
Motor vehicles 15
Leasehold improvements Over the term of the lease
The Group periodically assesses the recoverability of the carrying amount of
property and equipment and provides for any possible impairment loss based
upon the difference between the carrying amount and recoverable amount of
such assets in accordance with IAS 36, "Impairment of Assets". As of
December 31, 2005, no impairment losses have been identified.
j. Recoverable amount of non-current assets:
The carrying values of non-current assets are reviewed for impairment when
events or changes in circumstances indicate the carrying value may not be
recoverable. If any such indication exists and where the carrying values
exceed the estimated recoverable amount, the assets or cash-generating units
are written down to their recoverable amount. The recoverable amount is the
higher of net selling price and value in use. In assessing value in use, the
estimated future cash flows are discounted to their present value using a
pre-tax discount rate that reflects current market assessments of the time
value of money and the risks specific to the asset. For an asset that does
not generate largely independent cash inflows, the recoverable amount is
determined for the cash-generating unit to which the asset belongs.
An assessment is made at each reporting date as to whether there is any
indication that previously recognized impairment losses may no longer exist
or may have decreased. If such indication exists, the recoverable amount is
estimated. A previously recognized impairment loss is reversed only if there
has been a change in the estimates used to determine the asset's recoverable
amount since the last impairment loss was recognized.
If that is the case, the carrying amount of the asset is increased to its
recoverable amount. That increased amount cannot exceed the carrying amount
that would have been determined, net of depreciation, had no impairment loss
been recognized for the asset in prior years. Such reversal is recognized in
profit or loss unless the asset is carried at the revalued amount, in which
case the reversal is treated as a revaluation increase.
After such a reversal the depreciation charge is adjusted in future periods
to allocate the asset's revised carrying amount, less any residual value, on
a systematic basis over its remaining useful life.
k. Exchange rates:
Assets and liabilities in or linked to foreign currency are translated into
the functional currency, according to the representative exchange rate as
published by the Bank of Israel on balance sheet date.
Data regarding rates of the New Israeli Shekel ("NIS") and the Pound Sterling
in relation to the US dollar are as follows:
Exchange rate of Exchange rate of
As of one US dollar one Pound Sterling
--------------------- ------------- ------------
December 31, 2005 NIS 4.603 NIS 7.940
December 31, 2004 NIS 4.308 NIS 8.308
December 31, 2003 NIS 4.379 NIS 7.950
l. Deferred income taxes:
The Group provides for deferred income taxes using the liability method of
accounting. Under the liability method, deferred taxes are recognized for
temporary differences between the tax basis of assets and liabilities and
their carrying amounts for financial reporting purposes. Deferred taxes are
measured based on enacted tax rates that will be in effect in the year in
which the differences are expected to reverse. Deferred tax assets in respect
of carryforward losses and other temporary deductible differences are
recognized to the extent that it is probable that they will be utilized.
Deferred income tax liabilities are not recognized in respect of taxable
temporary differences associated with investments in subsidiaries, when the
timing of the reversal of the temporary differences can be controlled and it
is probable that the temporary differences will not reverse in the
foreseeable future.
m. Derivative financial instruments:
The Group uses derivative financial instruments such as forward exchange rate
currency contracts to control its risks associated primarily with foreign
currency fluctuations. Such derivative financial instruments are stated at
fair value. The fair value of forward exchange contracts is calculated by
reference to current forward exchange rates for contracts with similar
maturity profiles.
As the derivatives do not qualify for special hedge accounting, any gains or
losses arising from changes in fair value are recognized in the statement of
income.
n. Revenue recognition:
Most of the Group's revenues are derived from services provided under
time-and-material contracts, which are billed at contract rates, and are
recognized as the services are rendered over the duration of the contract.
Some of the Group's revenues are generated from fixed-price contracts which
are recognized under the percentage of completion method.
The percentage of completion is measured by monitoring progress using records
of actual time incurred to date in the project compared to the total
estimated project requirement. Estimates of total project requirements are
based on prior experience and are reviewed and updated regularly by
management.
A provision for estimated losses on uncompleted contracts is recorded in the
period in which such losses are first identified.
o. Goodwill and other intangible assets:
Goodwill on acquisition is initially measured at cost, defined as the excess
of the cost of the business combination over the acquirer's interest in the
net fair value of the identifiable assets, liabilities and contingent
liabilities. Following initial recognition, goodwill is measured at cost
less any accumulated impairment losses. Goodwill related to acquisitions
prior to January 1, 2002, is not amortized after January 1, 2002, the date of
transition to IFRS. Goodwill relating to acquisitions from January 1, 2002,
is not amortized. Goodwill is reviewed for impairment, annually or more
frequently if events or changes in circumstances indicate that the carrying
value may be impaired.
At the acquisition date, any goodwill acquired is allocated to each of the
cash-generating units expected to benefit from the combination's synergies.
Impairment is determined by assessing the recoverable amount of the
cash-generating unit, to which the goodwill relates. Where recoverable amount
of the cash-generating unit is less than the carrying amount, an impairment
loss is recognized. Where goodwill forms part of a cash-generating unit and
part of the operation within that unit is disposed of, the goodwill
associated with the operation disposed of is included in the carrying amount
of the operation when determining the gain or loss on disposal of the
operation. Goodwill disposed of in this circumstance is measured on the basis
of the relative values of the operation disposed of and the portion of the
cash-generating unit retained.
Other intangible assets are presented at cost and are amortized using the
straight-line method over the estimated useful lives of the assets (five
years).
p. Basic and diluted earnings per share:
Basic earnings per share have been computed using the weighted average number
of participating equity instruments (Ordinary and Preferred shares)
outstanding during the period. Diluted earnings per share are computed based
on the weighted average number of participating equity instruments
outstanding during each period, plus dilutive potential Ordinary shares
considered outstanding during the period.
q. Convertible debentures:
Upon issuance of convertible debentures, the liability and equity components
are measured separately. The fair value of the liability component is
determined using the market rate for an equivalent non-convertible bond
(which was 6.25% at the date of issuance). The fair value of the conversion
option (equity component) is determined using an option pricing model. The
proceeds received upon issuance, net of issuance costs, are allocated
pro-rata to the liability and equity components based on the calculated fair
value.
The liability component, as determined above, is carried as a long-term
liability on the amortized cost basis until extinguished on conversion or
redemption. The equity component is recognized and included in equity. The
value of the conversion option is not changed in subsequent years.
Issuance costs are apportioned between the liability and equity components of
the convertible debentures based on the allocation of proceeds to the
liability and equity components when the instruments are first recognized.
r. Accrued severance pay:
The liability for severance pay for Israeli resident employees is calculated
pursuant to the Israeli Severance Pay Law, based on the most recent salary of
the employees multiplied by the number of years of employment as of the
balance sheet date. Employees are entitled to one month's salary for each
year of employment (or a relative portion thereof). The liability is covered
by monthly deposits with severance pay funds, the purchase of insurance
policies and by the accrual recorded on the balance sheet.
The cash surrender values of insurance policies purchased on behalf of
employees and the related severance pay liabilities are not reflected on the
balance sheet as they are not under the control and management of the Group.
The deposited funds may be withdrawn only in accordance with the Israeli
Severance Pay Law or labour agreements.
s. Share-based payment transactions:
On 1 January 2005, the Company adopted IFRS 2, "Share-based Payments". IFRS 2
requires an expense to be recognized where the Company buys goods or services
in exchange for shares or rights over shares ("equity-settled transactions"),
or in exchange for other assets equivalent in value to a given number of
shares or rights over shares ("cash-settled transactions"). The main impact
of IFRS 2 on the Company is the expensing of employees' and directors' share
options (equity-settled transactions).
The cost of equity-settled transactions is measured by reference to the fair
value at the date on which they are granted. The fair value is determined by
using the Black-Scholes option-pricing model, taking into account the terms
and conditions upon which the instruments were granted. In valuating equity-
settled transactions, no account is taken of any performance conditions,
other than conditions linked to the share price of the Company, if
applicable.
The cost of equity-settled transactions is recognized, together with a
corresponding increase in equity, over the period in which the performance
and/or service conditions are fulfilled, ending on the date on which the
relevant employees become fully entitled to the award ("the vesting date").
The cumulative expense recognized for equity-settled transactions at each
reporting date until the vesting date reflects the extent to which the
vesting period has expired and the Company's best estimate of the number of
equity instruments that will ultimately vest. No expense is recognized for
awards that do not ultimately vest.
The effect of the adoption of IFRS 2 on the years ended December 31, 2004 and
2005 is an increase in employee benefits expense in the amount of $194 and
$446, respectively, with a corresponding increase in additional paid-in
capital.
- ENDS -
This information is provided by RNS
The company news service from the London Stock Exchange
END
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