| You should carefully consider the following risk factors and other information in this report before purchasing our common stock |
| Any of the risks described below could result in a material adverse effect on our business, results of operations and financial condition |
| The trading price of our common stock may decline due to any of these risks, and you could lose all or part of your investment |
| 23 ______________________________________________________________________ Risks Relating to Our Business If we fail to manage our growth, our business could be disrupted and our profitability will likely decline |
| We have experienced rapid growth in recent periods through both acquisitions and organic growth |
| The number of our employees increased from approximately 2cmam240 as of December 31, 2001 to approximately 5cmam945 as of December 31, 2005 |
| We expect our growth to continue to significantly strain our management and other operational and financial resources |
| In particular, continued growth increases the integration challenges involved in: · recruiting, training and retaining skilled technical, marketing and management personnel; · maintaining high quality standards; · preserving our corporate culture, values and entrepreneurial environment; · developing and improving our internal administrative infrastructure, particularly our financial, operational, communications and other internal controls; and · maintaining high levels of client satisfaction |
| The rapid execution necessary to exploit the market for our business model requires an effective planning and management process |
| Our systems, procedures or controls may not be adequate to support the growth in our operations, and our management may not be able to achieve the rapid execution necessary to exploit the market for our business model |
| Our future operating results will also depend on our ability to expand our development, sales and marketing organizations |
| If we are unable to manage growth effectively, our profitability will likely decline |
| We may engage in acquisitions, strategic investments, partnerships, alliances or other ventures that are not successful, or fail to integrate acquired businesses into our operations, which may adversely affect our competitive position and growth prospects |
| We have in the past engaged in acquisitions, strategic investments, partnerships and alliances |
| Since our last annual report we acquired three additional significant companies |
| We may acquire or make strategic investments in complementary businesses, technologies, services or products, or enter into strategic partnerships or alliances with third parties in the future in order to expand our business |
| We may be unable to identify suitable acquisition, strategic investment or strategic partnership candidates, or if we do identify suitable candidates, we may not complete those transactions on terms commercially favorable to us or at all, which may adversely affect our competitive position and our growth prospects |
| If we acquire another business, we may face difficulties, including: · integrating that business’ personnel, products, technologies or services into our operations; · retaining the key personnel of the acquired business; · failing to adequately identify or assess liabilities of that business; · failure of that business to fulfill its contractual obligations; · failure of that business to achieve the forecasts we used to determine the purchase price; and · diverting our management’s attention from normal daily operations of our business |
| These difficulties could disrupt our ongoing business and increase our expenses |
| As of the date of this report, we have no agreements to enter into any material acquisition, investment, partnership, alliance or other joint venture transaction |
| 24 ______________________________________________________________________ Because we derive a significant portion of our revenues from the Israeli government, a reduction of government spending in Israel on IT services would reduce, possibly materially, our revenues and profitability; and any delay in its annual budget approval process would negatively impact our cash flows |
| We perform work for a wide range of Israeli governmental agencies, including defense, education, justice and finance, which collectively represented approximately 11prca of our revenues in 2005 |
| The Israeli economy experienced a recession through 2004 |
| Although our revenues derived from agencies of the Israeli government grew each year during that period, the size of the overall Israeli IT services market decreased, putting pressure on our revenue growth rates |
| Israel has since re-entered a period of economic growth, and we do not expect any additional short-term decrease |
| However, any future reduction in Israeli government spending for political or economic reasons would reduce, possibly materially, our revenues and profitability |
| In addition, the government of Israel has experienced significant delays in the approval of its annual budget in recent years |
| Such delays in the future could materially and negatively affect our cash flows by delaying receipt of payment from the government of Israel for services performed |
| Quarterly fluctuations in our results of operations could cause our stock price to decline or fluctuate |
| We have experienced, and expect to continue to experience, significant fluctuations in our quarterly results of operations |
| During the past eight quarters, our net income ranged from approximately dlra2dtta4 million to approximately dlra6dtta8 million |
| In future periods, our operating results could be below public expectations, which would likely cause the market price of our common stock to decline |
| Numerous factors, some of which are beyond our control, may affect our quarterly results of operations, including: · the size, timing and terms and conditions of significant projects; · variations in the duration, size and scope of our projects; · contract terminations or cancellation or deferral of projects; · our ability to manage costs, including personnel and support services costs, and investments required by us to maintain our existing operations and support future growth; · currency exchange fluctuations; · changes in pricing policies by us or our competitors; · the introduction of new services by us or our competitors; · acquisition and integration costs related to possible acquisitions of other businesses; and · changes in accounting standards, such as the implementation of Statement of Financial Accounting Standards Nodtta 123R (revised 2004), “Share-Based Payment” (“SFAS 123R”) |
| During recent periods, our quarterly results have fluctuated as a result of the number of working days in each period and the seasonality of client demand in the IT services industry |
| Typically our fourth quarter is strongest, when client demand is greatest, and the second quarter is weakest, when the number of working days in the quarter is lowest in Israel, currently our largest employee location |
| We expect these factors to continue to be significant in the future, although we believe that the impact of the number of working days on our results of operations will decrease as our international business continues to grow |
| Our clients typically retain our services for set engagements pursuant to contracts that may be terminated by them with little or no notice and without termination fees |
| The termination, cancellation or deferral of one or more significant projects could materially and adversely affect our operating results in any fiscal quarter |
| In addition, we base our current and future expense levels on our internal operating plans and sales forecasts, and our near-term operating costs are, therefore, to a large extent, fixed |
| As a 25 ______________________________________________________________________ result, we may not be able to sufficiently reduce our costs on a timely basis in any quarter to compensate for an unexpected near-term shortfall in revenues |
| If we fail to attract and retain highly skilled IT professionals, we may not have the necessary resources to properly staff projects |
| Our success depends largely on the contributions of our employees and our ability to attract and retain qualified personnel, including technology, consulting, engineering, marketing and management professionals |
| Competition for qualified personnel in the IT services industry, in the markets in which we operate, particularly in India, is intense and, accordingly, we may not be able to retain or hire all of the personnel necessary to meet our ongoing and future business needs |
| If we are unable to attract and retain the highly skilled IT professionals we need, we may have to forego projects for lack of resources or be unable to staff projects optimally |
| In addition, the competition for highly skilled employees may require us to increase salaries of highly skilled employees, and we may be unable to pass on these increased costs to our clients, which would reduce our profitability |
| If our clients terminate significant contracted projects or choose not to retain us for additional projects, or if we are restricted from providing services to our clients’ competitors, our revenues and profitability may be negatively affected |
| Our clients typically retain us on a non-exclusive basis |
| Many of our client contracts, including those that are on a fixed price, fixed timeframe basis, can be terminated by the client with or without cause upon 90 days’ notice or less and generally without termination related penalties |
| Additionally, our contracts with clients are typically limited to discrete projects without any commitment to a specific volume of business or future work and may involve multiple stages |
| In addition, the increased breadth of our service offerings may result in larger and more complex projects for our clients that require us to devote resources to more thoroughly understanding their operations |
| Despite these efforts, our clients may choose not to retain us for additional stages or may cancel or delay planned or existing engagements due to any number of factors, including: · financial difficulties of a current client; · a change in strategic priorities; · a demand for price reductions; and · a decision by our clients to utilize their in-house IT capacity or work with our competitors |
| These potential terminations, cancellations or delays in planned or existing engagements could make it difficult for us to use our personnel efficiently |
| In addition, some of our client contracts restrict us from engaging in business with certain competitors of our clients during the term of the agreements and for a limited period following termination of these agreements |
| Any of the foregoing factors may negatively impact our revenues and profitability |
| If we fail to meet our clients’ performance expectations, our reputation may be harmed, causing us to lose clients or exposing us to legal liability |
| As an IT services provider, our ability to attract and retain clients depends to a large extent on our relationships with our clients and our reputation for high quality professional services and integrity |
| As a result, if a client is not satisfied with our services or solutions, including those of subcontractors we engage, our reputation may be damaged |
| In addition, a number of our contracts provide for incentive based or other pricing terms pursuant to which some of our fees are contingent on our ability to meet revenue enhancement, cost-saving or other contractually defined performance goals |
| Our failure to meet these goals or a client’s expectations in such performance based contracts may result in a less profitable or an unprofitable engagement |
| Moreover, if we fail to meet our clients’ performance expectations, we may lose 26 ______________________________________________________________________ clients and be subject to legal liability, particularly if such failure has a consequential adverse impact on our clients’ businesses |
| In addition, many of our projects are critical to the operations of our clients’ businesses |
| Our exposure to legal liability may be increased in the case of outsourcing contracts in which we become more involved in our clients’ operations |
| While our contracts typically include provisions designed to limit our exposure to legal claims relating to our services and the solutions we develop, these provisions may not adequately protect us or may not be enforceable in all cases |
| The general liability insurance coverage that we maintain, including coverage for errors or omissions, is subject to important exclusions and limitations |
| We cannot be certain that this coverage will continue to be available on reasonable terms or will be available in sufficient amounts to cover one or more large claims, or that the insurer will not disclaim coverage as to any future claim |
| A successful assertion of one or more large claims against us that exceeds our available insurance coverage or changes in our insurance policies, including premium increases or the imposition of large deductible or co-insurance requirements, could adversely affect our profitability |
| We may be required to be responsible for the performance of business partners we do not control, which could lower our margins and reduce profitability |
| In connection with some of our more complex engagements, we have been required, and may in the future be required, to assume contingent responsibility for the performance of business partners |
| Our being required to perform the third party obligations of these commitments could have a material adverse affect on our margins and profitability because we would be required to incur additional costs, possibly without any corresponding recovery against the third parties |
| While we will continue to manage liabilities or risks through rigorous transaction review, we expect that clients may require us to assume certain additional contractual obligations and potential liabilities when we are responsible for the performance of business partners we do not control |
| If we fail to complete fixed price contracts on budget and on time, our reputation may be harmed, causing us to lose clients and negatively affecting our profitability |
| We offer a portion of our services on a fixed price basis, rather than on a time-and-materials basis |
| In 2001, 2002, 2003, 2004 and 2005, revenues from fixed price projects accounted for approximately 24prca, 24prca, 26prca, 19prca and 22prca of our total revenues, respectively |
| Under these contractual arrangements, we bear the risk of cost overruns, completion delays and wage inflation |
| If we fail to estimate accurately the resources and time required to complete a project or fail to complete our contractual obligations within the scheduled timeframe, our profitability may suffer |
| Historically, we have not had any cost overruns that have had a material impact on our profitability |
| However, we cannot be certain that this will continue to be the case |
| Our success depends in part upon the senior members of our management team, and our inability to attract and retain them could have a negative effect on our ability to operate our business |
| We are highly dependent on the senior members of our management team, particularly Aharon Fogel, our chairman, and Raviv Zoller, our president and chief executive officer |
| Fogel has a strong reputation and significant business experience in the public and private sectors in Israel |
| Zoller has been with us since our inception, as our chief financial officer for two years and our president and chief executive officer since 2001, and has been instrumental in securing important client contracts |
| We do not maintain key man life insurance for any of the senior members of our management team |
| Competition for senior management in our industry is intense, and we may not be able to retain our senior management personnel or attract and retain new senior management personnel in the future |
| The loss of one or more members of our senior management team could have a negative effect on our ability to attract and retain clients, execute our business strategy and otherwise operate our business, which could reduce our revenues, increase our expenses and reduce our profitability |
| 27 ______________________________________________________________________ Disruptions in our telecommunications infrastructure could harm our ability to operate and to deliver our services effectively, which could result in client dissatisfaction and a reduction of our revenues and results of operations |
| A significant element of our global delivery model is to continue to leverage and expand our global development centers |
| Our global development centers are linked with a network architecture that uses multiple telecommunication service providers and various links with alternate routing, including some routing via virtual private networks on the internet |
| We may not be able to maintain active voice and data communications between our various global development centers and between our global development centers and our clients’ sites at all times |
| Any significant loss or impairment of our ability to communicate could result in a disruption in our business, which could hinder our performance or our ability to complete client projects on time |
| This, in turn, could lead to client dissatisfaction and have a material adverse effect on our operations |
| Our inability to protect our intellectual property rights may force us to incur unanticipated costs |
| Our success will depend, in part, on our ability to obtain and maintain protection in the United States and other countries for certain intellectual property incorporated into our software solutions and our proprietary methodologies |
| We may be unable to obtain patents relating to our technology |
| Even if issued, patents may be challenged, narrowed, invalidated or circumvented, which could limit our ability to prevent competitors from marketing similar solutions that limit the effectiveness of our patent protection and force us to incur unanticipated costs |
| In addition, existing laws of some countries in which we provide services or solutions may offer only limited protection of our intellectual property rights |
| While we attempt to retain intellectual property rights arising from client engagements, our clients often have the contractual right to such intellectual property |
| For intellectual property that we own, we rely upon a combination of trade secrets, confidentiality, nondisclosure and other contractual arrangements |
| These measures may not adequately prevent or deter infringement or other misappropriation of our intellectual property, and we may not be able to detect unauthorized use of, or take appropriate and timely steps to enforce, our intellectual property rights |
| If we are unable to secure necessary additional financing, we may not be able to fund our operations or strategic growth |
| In order to achieve our strategic business objectives, we may be required to seek additional financing |
| For example, future acquisitions may require additional equity and/or debt financing |
| In addition, we may require further capital to continue to develop our technology and infrastructure and for working capital purposes |
| These financings may not be available on acceptable terms, or at all |
| Our failure to secure additional financing could prevent us from completing acquisitions, developing new technologies and competing effectively, all of which would have a negative impact on our continued development and growth |
| Our clients’ complex regulatory requirements may increase our costs, which could negatively impact our profits |
| Many of our clients, particularly those in the financial services, life sciences, healthcare and defense verticals, are subject to complex and constantly changing regulatory requirements |
| On occasion, these regulatory requirements change unpredictably |
| These regulations may increase our potential liabilities if our services are found to contribute to a failure by our clients to comply with the requirements applicable to them and may increase compliance costs as regulatory requirements increase or change |
| These increased costs could negatively impact our profits |
| 28 ______________________________________________________________________ We will be exposed to risks relating to evaluations of internal control over financial reporting required by Section 404 of the Sarbanes-Oxley Act of 2002 |
| We are spending a substantial amount of management time and resources to comply with changing laws, regulations and standards relating to corporate governance and public disclosure, including the Sarbanes-Oxley Act of 2002, new SEC regulations and the American Stock Exchange rules |
| In particular, Section 404 of the Sarbanes-Oxley Act of 2002 requires management’s annual review and evaluation of our internal control systems, and attestations as to the effectiveness of these systems by our independent registered public accounting firm |
| We have expended and expect to continue to expend significant resources and management time documenting and testing our internal control systems and procedures |
| This process has been complicated by the decentralized nature of our operations and information systems |
| If we fail to maintain the adequacy of our internal controls, as such standards are modified, supplemented or amended from time to time, we may not be able to ensure that we can conclude on an ongoing basis that we have effective internal control over financial reporting in accordance with Section 404 of the Sarbanes-Oxley Act |
| Failure to maintain an effective internal control environment could have a material adverse effect on the market price of our stock |
| Risks Relating to Our International Operations Our international operations subject us to risks inherent in doing business on an international level, any of which could increase our costs and hinder our growth |
| We currently operate in 16 countries and intend to further penetrate key markets, primarily in North America and Europe, while establishing offshore development centers in lower-cost Asian markets |
| We expect to devote significant resources to this effort but may not be successful in this regard |
| Risks inherent in our international business activities include: · difficulties in staffing international projects and managing international operations; · difficulties in collecting accounts receivable; · local competition, particularly in North America and Europe; · imposition of public sector controls; · trade and tariff restrictions; · price or exchange controls; · limitations on repatriation of earnings; · foreign tax consequences; and · the burdens of complying with a wide variety of foreign laws and regulations |
| One or more of these factors may have a material adverse effect on our business, financial condition or results of operations |
| If we fail to achieve planned growth in our offshore facilities, our ability to fulfill client commitments profitably or to fulfill them at all may be compromised |
| Our growth strategy relies in part on the expansion of our offshore development centers |
| If we fail to retain needed employees in India and other offshore locations, or to manage growth in these regions, our business, financial condition and results of operations may be adversely affected |
| Employee attrition rates in India are significantly higher than in other geographies |
| Wage costs in India have historically been significantly lower than wage costs in North America and Western Europe for comparably skilled professionals; however, wages in India are currently increasing at a faster rate than in North America and 29 ______________________________________________________________________ Western Europe, which could result in increased costs for IT professionals, particularly project managers and other mid-level professionals |
| We may need to increase the levels of our employee compensation more rapidly than in the past to remain competitive |
| Compensation increases may hinder our planned growth and could materially adversely affect our business, financial condition and results of operations |
| Regional instability in Israel and India may adversely affect business conditions in those regions, which may disrupt our operations and negatively affect our revenues and profitability |
| In addition, our principal offices and a substantial portion of our employees are located in Israel |
| Therefore, political, economic and military conditions in Israel directly affect our operations |
| Since the establishment of the State of Israel in 1948, a number of armed conflicts have taken place between Israel and its Arab neighbors |
| We cannot predict the effect on our business of any increase in the degree of violence by the Palestinians against Israel or the effect of military action elsewhere in the Middle East |
| The future of peace efforts between Israel and its Arab neighbors remains uncertain |
| Any future armed conflicts or political instability in the region would likely negatively affect business conditions and adversely affect our results of operations |
| Furthermore, several countries restrict or prohibit business with Israel or companies that do business in Israel |
| These restrictive laws and policies may severely limit our ability to provide services in those countries |
| Some of our employees in Israel are currently obligated to perform up to 36 days, depending on rank and position, of military reserve duty annually and are subject to being called for active duty at any time under emergency circumstances |
| If a military conflict or war arises, these individuals could be required to serve in the military for extended periods of time |
| Our operations could be disrupted by the absence for a significant period of one or more of our executive officers or key employees or a significant number of other employees due to military service |
| Any consequent disruption in our operations could adversely affect our profitability |
| We also generate revenues from services we deliver from India |
| India has from time to time experienced instances of civil unrest and hostilities with Pakistan |
| In recent years, there have been military confrontations between India and Pakistan that have occurred in the region of Kashmir and along the India-Pakistan border |
| Although the relations between the two countries are currently improving, military activity or terrorist attacks in the future could adversely affect the Indian economy by disrupting communications and making travel more difficult, which may have a material adverse effect on our ability to deliver services from India |
| Wage inflation in India and Israel could reduce our profitability |
| Annual wage inflation for IT professionals in India over the past several years has exceeded world-wide averages significantly |
| Based on our review of publicly available information, we believe that this trend will continue for the foreseeable future |
| Similarly, wage inflation for IT professionals in Israel has exceeded world-wide averages in the last one to two years |
| If we are unable to provide adequately for such wage increases in our contracts with our customers, or if unexpectedly large wage increases occur, we may experience a material adverse effect on our profitability |
| Our international operations subject us to currency exchange fluctuations, which could negatively impact our profitability |
| To date, most of our sales have been denominated in NIS and dollars, while a significant portion of our expenses is incurred in the local currencies of countries in which we operate |
| For financial reporting purposes, we translate all non-United States denominated transactions into dollars in accordance with United States generally accepted accounting principles |
| Despite our use of certain forward foreign 30 ______________________________________________________________________ currency exchange contracts to hedge our exposure against foreign currencies, we may be exposed to the risk that fluctuations in the value of these currencies relative to the dollar could increase the dollar cost of our operations and therefore have an adverse effect on our profitability |
| Potential anti-outsourcing legislation could impair our ability to service our clients |
| Over the past few years, the issue of outsourcing of services abroad by American companies has become a topic of political discussions in the United States |
| Measures aimed at limiting or restricting outsourcing by United States companies are under discussion in Congress and in as many as one-half of the state legislatures |
| While no substantive anti-outsourcing legislation has been introduced to date, given the intensifying debate over this issue, the introduction of such legislation is possible |
| If introduced, such measures are likely to fall within two categories: (1) measures that extend restrictions on outsourcing by federal government agencies and on government contracts with firms that outsource services directly or indirectly, and (2) measures that affect private industry, such as tax disincentives or intellectual property transfer restrictions |
| If any of these measures become law, our ability to service our clients could be impaired |
| Terrorist attacks or a war could negatively affect our financial results and prospects |
| Terrorist attacks, such as the attacks of September 11, 2001 in the United States, and other acts of violence or war, like the recent conflict in Iraq, could affect us or our clients by disrupting normal business practices for extended periods of time and reducing business confidence |
| In addition, these attacks may make travel more difficult and may effectively curtail our ability to serve our clients’ needs, any of which could negatively affect our financial results and prospects |
| Restrictions on immigration may affect our ability to compete for and provide services in our clients’ countries, which could hamper our growth and cause our revenues to decline |
| A portion of our revenues is derived from offshore outsourcing, which requires some personnel from our offshore locations in India and elsewhere to travel to client sites for rotational assignments |
| The ability of those IT professionals to work in North America, Europe and in other countries depends on their ability to obtain the necessary visas and work permits |
| The United States has recently reduced the number of H-1B visas authorized annually, and has also increased the level of scrutiny in granting H-1B, L-1 and ordinary business visas |
| A number of European countries are considering changes in immigration policies as well |
| The inability of key project personnel to obtain necessary visas could delay or prevent our fulfillment of client projects, which could hamper our growth and cause our revenues to decline |
| If the government of India were to reduce or withdraw tax benefits and other incentives it provides to us, our net income will decrease |
| Currently, we benefit from the tax benefits that India provides to the export of IT services |
| These benefits provide a complete exemption from corporate income tax for exported IT services, compared to an ordinary corporate tax rate of approximately 34prca |
| As a result of these incentives, our operations in India have been subject to relatively low tax rates |
| When these tax benefits are eliminated on March 31, 2009 as scheduled, or if they are eliminated or reduced earlier as the result of political change in India, our tax expense will increase, reducing our profitability |
| 31 ______________________________________________________________________ Risks Relating to Our Stock Our stock price is likely to be highly volatile and could drop unexpectedly |
| The market price of our stock may fluctuate significantly in response to a number of factors, including the following, several of which are beyond our control: · changes in financial estimates or investment recommendations by securities analysts relating to our stock; · changes in market valuations of IT service providers and other high technology companies; · announcements by us or our competitors of significant contracts, acquisitions, strategic partnerships, joint ventures or capital commitments; · loss of a major client or changes in our employee utilization rate; and · changes in key personnel |
| In the past, securities class action litigation has often been brought against a company following periods of volatility in the market price of its securities |
| We could be the target of similar litigation in the future |
| Securities litigation, regardless of merit or ultimate outcome, would likely cause us to incur substantial costs, divert management’s attention and resources, harm our reputation in the industry and the securities markets and reduce our profitability |
| Your ability to influence corporate decisions may be limited because our executive officers, directors and affiliated major stockholders beneficially own approximately 28dtta1prca of our common stock |
| Our executive officers, directors and stockholders who beneficially own 5prca or more of our outstanding common stock and are or were affiliated with Ness beneficially own, in the aggregate, shares representing approximately 28dtta1prca of our outstanding common stock |
| As a result of their stock ownership, if these stockholders were to choose to act together, they would likely be able to control all matters submitted to our stockholders for approval, including the election of directors and approval of any merger, consolidation or sale of all or substantially all of our assets |
| This concentration of voting power could delay or prevent an acquisition of our company on terms that other stockholders may desire |
| Provisions in our charter documents and under Delaware law may prevent or delay a change of control of us and could also limit the market price of our common stock |
| Provisions of our certificate of incorporation and bylaws, as well as provisions of Delaware corporate law, may discourage, delay or prevent a merger, acquisition or other change in control of our company, even if such a change in control would be beneficial to our stockholders |
| These provisions may also prevent or frustrate attempts by our stockholders to replace or remove our management |
| These provisions include: · prohibiting the stockholders from fixing the number of our directors; · authorizing our board of directors to designate the terms of and issue new series of preferred stock without additional stockholder approvals; · limiting the individuals who may call a special meeting to our chairman, chief executive officer, the majority of our board of directors or the majority of our stockholders; · requiring advance notice for stockholder proposals and nominations; and · prohibiting stockholders from acting by written consent, unless unanimous |
| We are subject to the provisions of Section 203 of the Delaware General Corporation Law, which limits business combination transactions with stockholders of 15prca or more of our outstanding voting stock 32 ______________________________________________________________________ that our board of directors has not approved |
| These provisions and other similar provisions make it more difficult for stockholders or potential acquirers to acquire us without negotiation |
| These provisions may apply even if some stockholders may consider the transaction beneficial to them |
| These provisions could limit the price that investors are willing to pay in the future for shares of our common stock |
| These provisions might also discourage a potential acquisition proposal or tender offer, even if the acquisition proposal or tender offer is at a premium over the then current market price for our common stock |