F.T.S-Formula Telecom Solutions Ltd
19 March 2008
F.T.S - FORMULA TELECOM SOLUTIONS LIMITED
Report and Financial Statements
Year Ended December 31, 2007
Formula Telecom Solutions Ltd. (FTS) Announces Annual Report and Financial
Statements for the Year Ended December 31, 2007
London, UK | 19 March, 2008: FTS (LSE: FTS), a global provider of Business
Control, Billing and CRM solutions for communications and content service
providers, today announced its results for the twelve months ended December 31,
2007.
Highlights:
- 2007 second half net profit of US$1,793,000 compared to net loss of
US$240,000 in the first half of 2007.
- 2007 second half gross profit up by 10% to US$8,188,000 compared to
US$7,450,000 in the first half of 2007.
- 2007 second half revenues up by 9% to US$16,754,000 compared to
US$15,351,000 in the first half of 2007.
- Twelve month net profit US$2,033,000 (2006: net loss US$1,430,000)
- Twelve month gross profit up by 16% to US$15,638,000 (2006:
US$13,522,000)
- Twelve month operating income US$630,000 (2006: operating loss
US$3,355,000)
- Twelve month revenues down by 2% to US$32,105,000 (2006:
US$32,760,000,)
- Three new customers announced during 2007: Vodafone Iceland,
Globalcom Inc., USA, and a contract in a West African country.
- New partnerships in 2007 included HP, Tech Mahindra, Allot, Sandvine
and a major Chinese network solutions provider.
- Acquired Danet Inc. and its customers' contracts.
Commenting on the results, FTS' Chief Financial Officer, Alon Raz, said: 'In
2007, FTS focused substantial efforts on recovering from the losses incurred
during 2006 by the toll-road project. We have also completed a highly efficient,
widespread reorganization, enabling us to cope more efficiently with the
challenges of a changing market. We are pleased to announce that we have been
successful in both these endeavors, bringing the company back to substantial
profitability. This turnaround is testament to the management's experience and
dedication, and to the company's ability to overcome major obstacles. Our
management team can now focus its attention on growing the business, and we
strongly believe that with our current pipeline of orders, FTS can return to
consistent growth, in terms of both profitability and revenues.'
'Our 2007 financial results have proven the strength of our management strategy.
While comparable vendors have reported growth at any cost, often incurring heavy
losses, FTS' conservative strategy resulted in profitability in 2007,' said Amos
Sivan, FTS' Chief Executive Officer. 'In line with this approach and following
our track record of successful M&As in the past, we are now turning our focus to
growth and examining potential mergers and acquisitions, based on our long-term
strategy of non-organic growth parallel to organic growth. We expect to continue
on the path of strong, stable growth in the future, as we have an extensive
pipeline and a consolidated roadmap of products and solutions.'
About FTS
FTS (LSE: FTS) is a leading provider of Business Control, Billing and CRM
solutions for communications and content service providers. By analyzing events
from a business standpoint rather than just billing them, FTS allows providers
to better understand their customer base and leverage business value from every
event and interaction. FTS deploys its full range of end-to-end, stand-alone and
add-on solutions to customers in over 40 countries and has implemented solutions
in wireless, wireline, cable, content and broadband markets including multiple
cross-network installations. Serving the evolving needs of both traditional and
next generation service providers, the company's operations comprise four
international R&D locations and strategically-located sales support offices
worldwide.
FTS is one of EMEA's fastest growing technology companies, consistently earning
a place within the Deloitte Technology Fast-500 EMEA listing. In 2007, FTS was
voted the 'Most Promising Company' at the prestigious TeleStrategies Billing and
OSS World industry event.
For more information please visit http://www.fts-soft.com/.
Enquiries:
Sonus PR for FTS
Patrick Smith, Tel. +44 20 7903 5454, patrick.smith@sonuspr.com
Seymour Pierce Limited
Mark Percy, Tel: +44 (0) 207 107 8000, markpercy@seymourpierce.com
FTS
investors@fts-soft.com
Annual report and financial statements for the year ended December 31, 2007
Directors
Dan Goldstein, Non-executive Chairman
Amos Sivan, Chief Executive Officer
Ronnen Yitzhak, Non-executive Director
Eliyahu Shushan, Non-executive Director
Yael Hershtik, Non-executive Director*
David Joel Rubin, Non-executive Director*
John Robert Camber Porter, Non-executive Director*
* Independent directors
Company Secretary:
Alon Raz (Chief financial Officer)
Registered office:
8 Maskit Street
Herzliya 46120
Israel
Chairman's Statement
I am pleased to report FTS' 2007 annual results for the twelve months to 31
December 2007.
FTS sells Next Generation Business Control and infrastructure software solutions
for communications service providers. Our solutions enable providers to address
the key issues of today's communication market: customer retention and revenue
growth. By analyzing events from a business standpoint rather than just billing
them, FTS allows providers to better understand their customer base and leverage
business value from every event and interaction. FTS deploys its full range of
solutions to customers worldwide and has implemented solutions in wireless, wir
eline, cable, content and broadband markets. The Company targets Tier-1
operators in developed markets with its business control solutions as well as
operators in emerging markets.
FTS has managed to overcome the issues related to the toll-road project as
reported in our trading update issued on 22 June 2006. The increase in revenues,
as well as the expense-cutting process which was approved by the board of FTS
and was implemented during, have created the turnaround in the financial results
which brought FTS from 2006's annual net loss of $1.430m to annual net income of
$2.033m in 2007.
The integration of Viziqor, acquired in December 2005 to improve FTS' footprint
in the North American market, is progressing well above our expectations,
showing financial results significantly higher than planned. FTS' US sales team
is currently involved in a number of bid proposals which are at various stages
of the sales cycle. In January 2007 FTS concluded a successful acquisition of
contracts and employees of US based Danet Inc., as part of its strategy to grow
in the US market through M&A activity. On May 2007, FTS declared a new contract
win at a Globalcom, a fast-growing, privately held service provider in the USA.
A year and a half after acquiring Viziqor we can proudly announce that this
acquisition and its integration into the group was highly successful.
The telecoms market is evolving with the growth in IP based communication and
continuing consolidation in the market. In response to market changes, providers
are restructuring their businesses and aligning vendors to their future needs.
This is both a challenge and long-term opportunity for FTS. FTS predicted these
transformations in the industry and has been working aggressively to adapt the
Company to the new market environment as well as developing new products and
services that meet the customers' ever changing requirements.
FTS is in the midst of repositioning and re-branding its product line. This
repositioning requires additional development investment in adapting the product
to address future market requirements. Initial market response is highly
positive with strong feedback from industry analysts, industry press, potential
partners, and customers stressing the real market need the Company is addressing
and the superiority of the solutions it presents. FTS expects to continue its
marketing efforts during 2008 to leverage this new momentum with a marketing and
sales campaign to launch the new strategy and products. The Company anticipates
this new positioning and the associated marketing campaign will result in market
interest in it's products and lead to new bid proposals. It is expected that
some of these will materialize into contracts in 2008, although it is difficult
to predict the exact timing.
Results
In the twelve months to 31 December 2007 total revenue decrease by 2% to
$32.105m (2006: $32.760m).
Gross profit for the twelve months was $15.638m (2006: $13.522m), an increase of
16%, gross margin was 49% compared to 41% in 2006. The increase in both the
gross profit and the gross margin were the result of a successful implementation
of expense cutting process, which brought the turnaround in FTS results.
Research and development expenditure in the twelve months to 31 December 2007
was $4.856m (2006: $5.144m), a decrease of 6%. This decrease was due to
diversion of R&D efforts towards delivery of projects and a result of our R&D
teams' quality and efficiency.
Sales and marketing costs in the twelve months to 31 December 2007 were $4.413m
(2006: $6.150m), a decrease of 28% mainly due to the implementation of the
reorganization process.
General and administrative costs in the twelve months to 31 December 2007 were
$5.739m (2006: $5.583m), an increase of 3%.
The Company's operating income in the twelve months to 31 December 2007 was
$0.630m (2006: operating loss of US$3.355m).
The net financial income for the twelve months to 31 December 2007 was $0.673m
(2006: financial income of $0.290m) which resulted from gains on securities and
bonds, less interest paid on bank loans.
Net income for the twelve months to 31 December 2007 was $2.033m (2006: net loss
of $1.430m).
Outlook
The management's extensive efforts which resulted in the ability to recognize
revenue in both the ongoing and non continuing projects, as well as the
implementation of the expense-cutting plan brought FTS back into profitability
in the second half of 2006 and 2007. We believe that this positive momentum will
continue in the forthcoming years and will increase the Company's profitability
as well.
The board continues to believe that FTS is ideally placed to exploit the
opportunities offered in both developed and emerging markets. The acquisition of
Viziqor in December 2005 provides an excellent platform to further develop and
expand our footprint in the United States and this, combined with the very
positive response we have received from the repositioning and re-branding of our
product line, gives us the confidence to believe that FTS can develop the
business further in the future.
The Company is involved in a number of bid proposals which are at various stages
of the sales cycle. We expect some of these to crystallize into contracts in the
near future although it is difficult to predict the exact timing.
We also believe that our business control solutions based on our Leap BCE
product will enable us to penetrate Tier-1 service providers in developed
markets. We expect to continue on the path of strong, stable growth in the
future, as we have an extensive pipeline and a consolidated roadmap of products
and solutions.
Dan Goldstein
Chairman
The amounts are stated in U.S. dollars ($).
Report of the independent auditors
To the shareholders of F.T.S - Formula Telecom Solutions Limited
Report on the consolidated financial statements
We have audited the accompanying consolidated financial statements of F.T.S -
Formula Telecom Solutions Limited(hereafter- 'the company'), which comprise of
the balance sheet as at 31 December 2007, and the consolidated income statement,
statement of changes in equity and consolidated cash flow statement for the year
then ended, and a summary of significant accounting policies and other
explanatory notes.
Management's responsibility for the consolidated financial statements
Management is responsible for the preparation and fair presentation of these
consolidated financial statements in accordance with International Financial
Reporting Standards. This responsibility includes: designing, implementing and
maintaining internal control relevant to the preparation and fair presentation
of consolidated financial statements that are free from material misstatement,
whether due to fraud or error; selecting and applying appropriate accounting
policies; and making accounting estimates that are reasonable in the
circumstances.
Auditor's responsibility
Our responsibility is to express an opinion on these consolidated financial
statements based on our audit. We conducted our audit in accordance with Israeli
Standards of Auditing. Those standards require that we comply with ethical
requirements and plan and perform the audit to obtain reasonable assurance
whether the consolidated financial statements are free from material
misstatement.
An audit involves performing procedures to obtain audit evidence about the
amounts and disclosures in the consolidated financial statements. The procedures
selected depend on the auditor's judgment, including the assessment of the risks
of material misstatement of the consolidated financial statements, whether due
to fraud or error. In making those risk assessments, the auditor considers
internal control relevant to the entity's preparation and fair presentation of
the consolidated financial statements in order to design audit procedures that
are appropriate in the circumstances, but not for the purpose of expressing an
opinion on the effectiveness of the entity's internal control. An audit also
includes evaluating the appropriateness of accounting policies used and the
reasonableness of accounting estimates made by management, as well as evaluating
the overall presentation of the consolidated financial statements.
We believe that the audit evidence we have obtained is sufficient and
appropriate to provide a basis for our audit opinion.
Opinion
In our opinion, the consolidated financial statements give a true and fair view
of the financial position of the company as of December 31, 2007, and of its
financial performance, its cash flows and its equity for the year then ended in
accordance with International Financial Reporting Standards.
Tel-Aviv, Israel March 18, 2008
Ziv Haft
Certified Public Accountants
(Isr.)
BDO Member Firm
Year ended December 31,
2007 2006
Notes $'000 $'000
Revenues 2, 5 32,105 32,760
Cost of sales (16,467) (19,238)
Gross profit 15,638 13,522
Research and development expenses (4,856) (5,144)
Distribution costs (4,413) (6,150)
General and administrative expenses, net (5,739) (5,583)
Profit (loss) from operations 3 630 (3,355)
Finance expense 6 (484) (586)
Finance income 6 1,157 876
Other operating income - 16
Profit (loss) before tax 1,303 (3,049)
Tax income 730 1,619
Profit (loss) for the year 2,033 (1,430)
Earnings per share:
Basic (dollars per share) 8 0.0623 (0.0439)
Diluted (dollars per share) 8 0.0622 (0.0439)
The accompanying notes form an integral part of the financial statements.
Share Additional Retained Treasury Total
capital paid in earnings share
capital reserves
$'000 $'000 $'000 $'000 $'000
Balance at January 1, 2006 1 9,943 12,305 - 22,249
Changes in equity for 2006:
Net Loss - - (1,430) - (1,430)
Company's purchase - - - (463) (463)
of Company shares
Dividend distributed - - (1,812) - (1,812)
Balance at December 31, 1 9,943 9,063 (463) 18,544
2006
Changes in equity for 2007:
Profit for the year - - 2,033 - 2,033
Issuance of employees' - 82 - - 82
stock options
Balance at December 31, 1 10,025 11,096 (463) 20,659
2007
The accompanying notes form an integral part of the financial statements.
As at December 31, As at December 31,
2007 2007 2006 2006
Notes $'000 $'000 $'000 $'000
ASSETS
Non-current assets:
Property, plant and equipment 10 925 1,317
(PPE)
Intangible assets 11 7,646 7,360
Rental deposits 62 134
Long term unbilled receivables - 309
Deferred tax assets 20 3,258 2,533
Total non-current assets 11,891 11,653
Current assets:
Other receivables and prepaid 13 1,161 1,217
expenses
Current tax assets 7 1,786 1,319
Trade receivables 14 9,629 10,014
Other financial assets 15 5,165 5,436
Cash and cash equivalents 16 9,707 10,691
Total current assets 27,448 28,677
TOTAL ASSETS 39,339 40,330
LIABILITIES
Non-current liabilities:
Employee benefits, net 19 448 353
Total Non-current liabilities 448 353
Current Liabilities:
Other payables 17 3,760 4,273
Trade payables 4,040 3,256
Customer advances and deferred 18 4,525 6,670
revenue
Short-term borrowings 5,907 7,234
Total current liabilities 18,232 21,433
Total liabilities 18,680 21,786
TOTAL NET ASSETS 20,659 18,544
The accompanying notes form an integral part of the financial statements.
As at December 31, As at December 31,
2007 2007 2006 2006
Notes $'000 $'000 $'000 $'000
Capital and reserves 21
attributable to
equity holders of the
company
Share capital 1 1
Additional paid-in capital 10,025 9,943
Treasury share reserve (463) (463)
Retained earnings 11,096 9,063
TOTAL EQUITY 20,659 18,544
The financial statements were approved by the Board of Directors on March 18, 2008,
and were signed on it's behalf by:
March 18, 2008
Date of approval Dan Goldstein Alon Raz Amos Sivan
of financial Chairman Chief Financial Chief Executive
statements of the Board Officer Officer and Director
The accompanying notes form an integral part of the financial statements.
For the year ended For the year ended
December 31, December 31,
2007 2007 2006 2006
$'000 $'000 $'000 $'000
Operating Activities:
Net profit (loss) 2,033 (1,430)
Adjustments for:
Depreciation and amortization 2,716 1,730
Gain from sale of property, plant and - (1)
equipment
Deferred taxes (725) (1,943)
Employees' stock options 82 -
Cash flows from activities before changes
in working capital and provisions:
Decrease (increase) in short-term 271 (67)
investments, net
Decrease (increase) in trade receivables 704 4,817
Decrease (increase) in other receivables 135 342
prepaid expenses
and rental deposits
Decrease (increase) in tax balances (467) (194)
Increase (decrease) in trade payables 754 (1,077)
Increase (decrease) in other payables (558) (1,444)
Increase in employee benefits 95 98
Increase (decrease) in customer advances (2,225) (639)
and deferred revenues
Cash generated from operations 2,815 192
For the year ended For the year ended
December 31, December 31,
2007 2007 2006 2006
$'000 $'000 $'000 $'000
Cash flows from operating activities 2,815 192
brought forward
Investing Activities:
Acquisition of business enterprise (Annex (52) -
A)
Capitalization of software development (2,203) (1,921)
costs
Proceeds from sale of PPE - 5
Purchase of PPE (217) (797)
(2,472) (2,713)
Financing Activities:
Dividend distribution - (1,812)
Company's purchase of Company shares - (463)
Short-term bank borrowing, net (1,497) 3,678
Other short-term credit 170 -
(1,327) 1,403
Increase (decrease) in cash and cash (984) (1,118)
equivalents
Cash and cash equivalents at beginning of 10,691 11,809
year
Cash and cash equivalents at end of year 9,707 10,691
As at As at
December December
31, 2007 31, 2006
$'000 $'000
Cash paid during the year for:
Income tax 661 740
Dividend - 1,812
661 2,552
Non-cash activities:
Purchase of property and equipment against trade 50 20
payables
Annex 'A' - Acquisition of business enterprise:
As at As at
December December
31, 2007 31, 2006
$'000 $'000
Customer contracts and related customer 143 -
relationships
Property and equipment 17 -
Working Capital (108) -
52 -
The directors of the Company are responsible for the financial information set
out below.
NOTE 1 - ACCOUNTING POLICIES:
General:
F.T.S. - Formula Telecom Solutions Ltd (the 'Company') was founded in January
1997 under the law of the state of Israel.
The Company is a global provider of convergent telecom management solutions for
mobile, fixed-line and advanced services operators. The Company provides a range
of versatile solutions to the market, which include convergent real-time prepaid
and postpaid billing and Customer Relationship Management ('CRM') order
management, infrastructure management, Electronic Bill Presentation software, as
well as call center implementations.
The Company operates in one operating segment.
Definitions:
In this financial information:
The Company - F.T.S - Formula Telecom Solutions Limited.
The Group - The Company and its subsidiaries.
Related parties - As defined in IAS 24.
Basis of preparation:
The principal accounting policies adopted in the preparation of the financial
statements are set out below. The policies have been consistently applied to all
the years presented, unless otherwise stated.
This is the first time the company has prepared its financial statements in
accordance with IFRSs, having previously prepared its financial statements in
accordance with US GAAP. Details of how the transition from US accounting
standards to EU adopted IFRS has affected the group's reported financial
position, financial performance and cash flows are given in note 26.
These financial statements have been prepared in accordance with International
Financial Reporting Standards (IFRSs and IFRIC interpretations) issued by the
International Accounting Standards Board (IASB) and with those parts of the
Companies Law 1999 in Israel applicable to companies preparing their accounts
under IFRS. The financial statements have been prepared under the historical
cost convention, as modified by the revaluation of financial assets and
financial liabilities at fair value through profit or loss.
Changes in accounting policies:
(a) First-time adoption:
In preparing these financial statements, the group has elected to apply the
following transitional arrangements permitted by IFRS 1 'First-time Adoption of
International Financial Reporting Standards':
- Business combinations effected before 1 January 2006, have not been restated.
- The carrying amount of capitalized goodwill under IFRS on 31 December 2005 is
the same as it was under US GAAP. This amount was frozen and tested for
impairment under IFRS at 1 January 2006. The carrying amount was adjusted for
intangible assets that would have been required to be recognized in the
acquirer's separate financial statements in accordance with IAS 38 'Intangible
Assets', such as development costs.
- Actuarial gains and losses of employee defined benefit plans have been
recognized in full in equity at 1 January 2006.
- IFRS 2 'Share-based payments' has been applied to employee options granted
after 7 November 2002 that had not vested by 1 January 2006.
The group has made estimates under IFRSs at the date of transition, which are
consistent with those estimates made for the same date under US GAAP unless
there is objective evidence that those estimates were in error, i.e. the group
has not reflected any new information in its opening IFRS balance sheet but
reflected that new information in its income statement for subsequent periods.
(b) New standards, amendments to published standards and interpretations to
existing standards effective in 2007 adopted by the group.
- IFRS 7, Financial Instruments: disclosures and complementary amendments to IAS
1, Presentation of Financial Statements - capital disclosures (effective for
accounting periods beginning on or after 1 January 2007). IFRS 7 introduces new
requirements aimed at improving the disclosure of information about financial
instruments. It requires the disclosure of qualitative and quantitative
information about exposure to risks arising from financial instruments,
including specified minimum disclosures about credit risk, liquidity risk and
market risk. Where those risks are deemed to be material to the group it
requires disclosures based on the information used by key management. It
replaces the disclosure requirements in IAS 32 'Financial Instruments:
disclosure and presentation'. It is applicable to all entities that report under
IFRS.
The amendment to IAS 1 introduces disclosures about the level and management of
an entity's capital. The Group has applied IFRS 7 and the amendment to IAS 1 to
the accounts for the period beginning on 1 January 2007.
- IFRIC 8, Scope of IFRS 2 (effective for accounting periods beginning on or
after 1 May 2006). IFRIC 8 requires consideration of transactions involving the
issue or grant of equity instruments to establish whether or not they fall
within the scope of IFRS 2. It applies to situations where the identifiable
consideration received is or appears to be less than the fair value of the
equity instruments issued. There was no impact on the group's account from its
adoption.
- IFRRIC 9, Reassessment of embedded derivative (effective for accounting
periods beginning on or after 1 June 2006). IFRIC 9 requires an assessment of
whether an embedded derivative is required to be separated from the host
contract and accounted for as a derivative when an entity becomes a party to the
contract. Subsequent reassessment is prohibited unless there is a change in the
terms of the contract that significantly modifies the cash flows that otherwise
would be required under the contract, in which case reassessment is required.
There was no impact on the group's account from its adoption.
- IFRRIC 10, Interim Financial Reporting and Impairment (effective for
accounting periods beginning on or after 1 November 2006). IFRIC 10 prohibits
impairment losses recognized in an interim period on goodwill and investments in
equity instruments an on financial assets carried at cost to be revered at a
subsequent sheet date. There was no impact on the group's accounts from its
adoption.
(c) Standards, interpretations and amendments to published standards effective
in 2007 but which are not relevant to the group.
The following standards, amendments and interpretations to published standards
are mandatory for accounting periods beginning on or after 1 January 2007 but
are currently not relevant o the group's operations:
-- IFRIC 7, Applying the restatements approach under IAS 29, Financial Reporting
in Hyperinflationary Economies (effective for accounting periods beginning on or
after 1 March 2006). IFRIC 7 provides guidance on the application of IAS 29
requirements in a reporting period in which entity identifies the existence of
hyperinflation in the economy of its functional currency, when the company was
not hyperinflationary in the prior period. IFRIC 7 is not relevant to the group
as none of the group companies has a hyperinflationary economy as its functional
currency.
Basis of consolidation:
Where the company has the power, either directly or indirectly, to govern the
financial and operating policies of another entity or business so as to obtain
benefits from its activities, it is classified as a subsidiary. The consolidated
financial statements present the results of the company and its subsidiaries
('the group') as if they formed a single entity. Intercompany transactions and
balances between group companies are therefore eliminated in full.
Business combination:
The consolidated financial statements incorporate the results of business
combinations using the purchase method. In the consolidated balance sheet, the
acquiree's identifiable assets, liabilities and contingent liabilities are
initially recognized at their fair value at the acquisition date. The results of
acquired operations are included in the consolidated income statement from the
date on which control is obtained. This policy was not applied in the
acquisition of Viziqor according to IFRS 3 due to application of IFRS 1- see (a)
above.
Goodwill:
Goodwill represents the excess of the cost of a business combination over the
interest in the fair value of identifiable assets, liabilities and contingent
liabilities acquired. Cost comprises the fair values of assets given,
liabilities assumed and equity instruments issued, plus any direct costs of
acquisition.
Goodwill is capitalized as an intangible asset with any impairment in carrying
value being charged to the income statement. Where the fair value of
identifiable assets, liabilities and contingent liabilities exceed the fair
value of consideration paid, the excess is credited in full to the consolidated
income statement on the acquisition date.
Revenue recognition:
1. Revenues from services are recognized as follows:
In fixed fee contracts - according to International Accounting Standard No. 11
'Construction Contracts' pursuant to which revenues and costs are reported by
the 'percentage of completion' method.
The percentage of completion is determined by dividing actual completion costs
by the anticipated completion costs.
Amounts billed in advance of services being performed are recorded as deferred
revenue. Unbilled receivables represent revenue earned but not yet billable
under the term of the fixed price contracts and all such amounts are expected to
be billed and collected during the succeeding 12 months.
In cases where a loss from a project is anticipated, a provision is made in the
period in which it first becomes evident, for the entire loss anticipated until
completion, as assessed by the Company's management.
Estimated gross profit or loss from long-term contracts may change due to
changes in estimates resulting from differences between actual performance and
original forecasts. Such changes in estimated gross profit are recorded in
results of operations when they are reasonably determinable by management, on a
cumulative catch-up basis.
2. Revenues from sales of products are recognized upon delivery, provided no
significant vendor obligations remain.
3. Revenues from maintenance services are recognized based on the proportionate
share of the maintenance services under the contract to be provided in each year
of account.
4. Revenues from professional services are recognized based on actual time
incurred.
Impairment of non-financial assets:
Impairment tests on goodwill and other intangible assets with indefinite useful
economic lives are undertaken annually on December 31. Other non-financial
assets are subject to impairment tests whenever events or changes in
circumstances indicate that their carrying amount may not be recoverable. Where
the carrying value of an asset exceeds its recoverable amount (i.e. the higher
of value in use and fair value less costs to sell), the asset is written down
accordingly.
Where it is not possible to estimate the recoverable amount of an individual
asset, the impairment test is carried out on the asset's cash-generating unit
(i.e. the lowest group of assets in which the asset belongs for which there are
separately identifiable cash flows). Goodwill is allocated on initial
recognition to each of The Company's cash-generating units that are expected to
benefit from the synergies of the combination giving rise to the goodwill.
Impairment charges are included in the administrative expenses line item in the
income statement, except to the extent they reverse gains previously recognized
in the statement of recognized income and expense. During the years 2007 and
2006 no impairment charges of non-financial assets were required.
Functional and reporting currency:
The majority of the revenues of the Company are generated in U.S. dollars. In
addition, a substantial portion of the Company's costs is incurred in U.S.
dollars. The Company's management believes that the U.S. dollar is the primary
currency of the economic environment in which the Company and its subsidiaries
operate. Thus, the functional and reporting currency of the Company is the U.S.
dollar.
Foreign currency:
Transactions entered into by group entities in a currency other than the
currency of the primary economic environment in which they operate (the
'functional currency') are recorded at the rates ruling when the transactions
occur. Foreign currency monetary assets and liabilities are translated at the
rates ruling at the balance sheet date. The majority of revenue and expenses are
translated at historical rate and the rest are translated at average rates of
exchange prevailing during the quarters. Exchange differences arising on the
retranslation of unsettled monetary assets and liabilities are recognized
immediately in the consolidated income statement.
Financial assets:
The group classifies its financial assets into one of the following categories,
depending on the purpose for which the asset was acquired.
Company's accounting policy for each category is as follows:
Fair value through profit or loss: This category comprises only in-the-money
derivatives. They are carried in the balance sheet at fair value with changes in
fair value recognized in the consolidated income statement, in finance income or
expense line.
Loans and receivables: These assets are non-derivative financial assets with
fixed or determinable payments that are not quoted in an active market. They
arise principally through the provision of goods and trade receivables, but also
incorporate other types of contractual monetary asset. They are carried at
amortized cost less any allowance for impairment.
Held-to-maturity investments: These assets are non-derivative financial assets
with fixed or determinable payments and fixed maturities that The Company's
management has the positive intention and ability to hold to maturity. These
assets are measured at amortized cost, with changes through the income
statement. As of December 31, 2007, no such assets are held by the Company.
Available-for-sale:
Non-derivative financial assets not included in the above categories are
classified as available-for-sale and comprise The Company's strategic
investments in entities not qualifying as subsidiaries, associates or jointly
controlled entities. They are carried at fair value with changes in fair value
recognized directly in equity. Where a decline in the fair value of an
available-for-sale financial asset constitutes objective evidence of impairment,
the amount of the loss is removed from equity and recognized in the income
statement. As of December 31, 2007, no such assets are held by the Company.
Financial liabilities:
The group classifies its financial liabilities into one of two categories,
depending on the purpose for which the asset was acquired.
The group's accounting policy for each category is as follows:
Fair value through profit or loss: This category comprises only out-of-the-money
derivatives) (see Financial assets for in the money derivatives). They are
carried in the balance sheet at fair value with changes in fair value recognized
in the consolidated income statement.
As of December 31, 2007 no such liabilities are held by the Company.
Other financial liabilities: Other financial liabilities include the following
items:
• Bank borrowings are initially recognized at fair value net of any
transaction costs directly attributable to the issue of the instrument. Such
interest bearing liabilities are subsequently measured at amortized cost
using the effective interest rate method, which ensures that any interest
expense over the period to repayment is at a constant rate on the balance of
the liability carried in the balance sheet. Interest expense in this context
includes initial transaction costs payable on redemption, as well as any
interest or coupon payable while the liability is outstanding.
• Trade payables and other short-term monetary liabilities, which are
initially recognized at fair value and subsequently carried at amortized
cost using the effective interest method.
Internally generated intangible assets (research and development costs):
Expenditure on internally developed products is capitalized if it can be
demonstrated that:
• it is technically feasible to develop the product for it to be sold;
• adequate resources are available to complete the development;
• there is an intention to complete and sell the product;
• The Company is able to sell the product;
• sale of the product will generate future economic benefits; and
• expenditure on the project can be measured reliably.
Capitalized development costs are amortized over the periods The Company expects
to benefit from selling the products developed. The amortization expense is
included within the cost of sales line in the income statement.
Development expenditure not satisfying the above criteria and expenditure on the
research phase of internal projects are recognized in the income statement as
incurred.
Development costs are recognized in the consolidated statement of income seeing
as the Company does not meet the abovementioned conditions.
• Rights in software:
The annual amortization of rights in software is based on the straight-line
method over the remaining estimated economic life of the product including the
period being reported on. Amortization starts when the product is available for
general release to customers.
The Company is using the straight-line method over the useful life, which is
three years.
The Company periodically evaluates the recoverability of rights in software and
take into account events or circumstances that warrant revised estimates of
useful lives or that indicate that impairment exists.
• Patents and trademarks:
The Company is using the straight-line method over the useful life, which is 18
years.
• Customer lists:
The Company is using the straight-line method over the useful life, which is 4
years.
Deferred taxation:
Deferred tax assets and liabilities are recognized where the carrying amount of
an asset or liability in the balance sheet differs to its tax base, except for
differences arising on:
• the initial recognition of goodwill;
• goodwill for which amortization is not tax deductible;
• the initial recognition of an asset or liability in a transaction which
is not a business combination and at the time of the transaction affects
neither accounting or taxable profit; and
• investments in subsidiaries and jointly controlled entities where The
Company is able to control the timing of the reversal of the difference and
it is probable that the difference will not reverse in the foreseeable
future.
Recognition of deferred tax assets is restricted to those instances where it is
probable that taxable profit will be available against which the difference can
be utilized.
The amount of the asset or liability is determined using tax rates that have
been enacted or substantially enacted by the balance sheet date and are expected
to apply when the deferred tax liabilities/(assets) are settled/(recovered).
Deferred tax balances are not discounted.
Property, plant and equipment:
Items of property, plant and equipment are initially recognized at cost. As well
as the purchase price, cost includes directly attributable costs and the
estimated present value of any future costs of dismantling and removing items.
The corresponding liability is recognized within provisions. Depreciation is
computed by the straight line method, based on the estimated useful lives of the
assets, as follows:
Rate of
depreciation
Motor vehicles 15%
Leasehold improvements 10%
Computers and equipment 33%
Office furniture and equipment 15%-16%
Leasehold improvements are depreciated over the expected term of the lease
including optional extension, or over the estimated useful lives of the
improvements, whichever is shorter.
Cash and cash equivalents:
Cash equivalents are considered by the Company to be highly-liquid investments,
including, inter alia, short-term deposits with banks, the maturity of which did
not exceed three months at the time of deposit and which are not restricted.
Company shares held by the Company:
Shares of the Company that are held by the Company are presented as a reduction
of shareholders' equity, at their cost to the Company. Gains and losses upon the
sale of these shares, net of related income taxes, are carried to additional
paid-in capital.
Share-based payments:
Where equity settled share options are awarded to employees, the fair value of
the options at the date of grant is charged to the consolidated income statement
over the vesting period. Non-market vesting conditions are taken into account by
adjusting the number of equity instruments expected to vest at each balance
sheet date so that, ultimately, the cumulative amount recognized over the
vesting period is based on the number of options that eventually vest. Market
vesting conditions are factored into the fair value of the options granted. As
long as all other vesting conditions are satisfied, a charge is made
irrespective of whether the market vesting conditions are satisfied. The
cumulative expense is not adjusted for failure to achieve a market vesting
condition.
Provision for warranty:
Based on past experience, the Company does not record any provision for warranty
of its products and services.
Employee benefits:
According to Israeli work laws, employment agreements in Israel and the
Company's practice, the Company is obligated to pay severance payments to its
employees upon dismissal and in some circumstances, even if the employee has
resigned or retired. The company's obligation for severance pay is dealt as a
'defined benefit plan'.
The severance pay's provision, as shown in the balance sheet, represents the
present value of the defined benefit plan as of the balance sheet's date. The
provision is calculated by independent actuaries based on the 'Projected Unit
Credit' method. The provision's present value is determined by the
capitalization of future expected cash flows (after taking in consideration
future wages growth's rate) on the basis of government bonds' interest rates
stated in the same currency as the benefits' payments.
With their occurrence, the company credits the actuary gains or losses, that
have derived as a result of actuary assumptions and as a result of changes
between previous assumptions and the actual results, to the income statement.
The company acquires insurance polices and deposits in severances funds
according to its obligation.
The privilege to severance pay by the insurance policies is considered a return
of expenses, whereas it is certain that the insurance company will, fully or
partially, return the expenses needed to cover the severance pay obligation.
Transactions with controlling parties:
Transactions with controlling shareholders are disclosed in conformity with the
provisions of the International Accounting Standard 24 (related party
disclosures and transactions).
Earnings per Share (EPS):
Earnings per Share is determined and presented in accordance with IAS 33.
Basic net earnings per share are computed based on the weighted average number
of common shares outstanding during each year. Diluted earnings per share is
computed based on the weighted average number of common shares outstanding
during each year, plus dilutive potential common shares considered outstanding
during the year.
Critical accounting estimates and judgements
The Group makes certain estimates and assumptions regarding the future.
Estimates and judgements are continually evaluated based on historical
experience and other factors, including expectations of future events that are
believed to be reasonable under the circumstances. In the future, actual
experience may differ from these estimates and assumptions. The estimates and
assumptions that have a significant risk of causing a material adjustment to the
carrying amounts of assets and liabilities within the next financial year are
discussed below.
(a) Revenue recognition
The group has recognized part of its revenue according to IAS 11 'construction
contracts.' The revenue recognition depends on the percentage of completion
method which is determined on estimates of anticipated completion costs. A
change in these estimates may affect the revenue recognized in the income
statement.
(b) Fair value of financial instruments
The group determines the fair value of financial instruments that are not
quoted, using valuation techniques. Those techniques are significantly affected
by the assumptions used, including discount rates and estimates of future cash
flows. In that regard, the derived fair value estimates cannot always be
substantiated by comparison with independent markets and, in many cases, may not
be capable of being immediately.
(c) Employee Benefits
The costs, assets and liabilities of the defined benefit schemes operating by
the group are determined using methods relying on actuarial estimates and
assumptions. Details of the key assumptions are set out in note 34. The group
takes advice from independent actuaries relating to the appropriateness of the
assumptions. Changes in the assumptions used may have a significant effect on
the consolidated income statement and the balance sheet.
NOTE 2 - REVENUES:
As at % As at %
December December
31, 2007 31, 2006
$'000 $'000
Revenues
Customer A 9,971 31 5,600 17
Customer B 1,918 6 3,272 10
Customer C 1,764 5 2,597 8
Customer D 1,464 5 2,287 7
Customer E 1,392 4 1,998 6
Customer F 1,375 4 - -
Customer G 1,310 4 450 1
Others 12,911 41 16,556 51
32,105 100 32,760 100
Sources of revenues
Maintenance contracts 12,053 38 6,456 20
Professional services 10,362 32 222 -
Fixed fee contracts 9,690 30 26,082 80
32,105 100 32,760 100
NOTE 3 - PROFIT FROM OPERATIONS:
This has been arrived at after charging:
For the year ended
December 31,
2007 2006
$'000 $'000
Staff costs (see note 4) 14,439 16,182
Material and subcontractors 5,922 6,530
Deprecation of property, plant and equipment 2,706 1,587
Travels 2,516 2,929
Operating lease expense 2,043 2,136
Impairment of receivables 1,925 876
Commissions 737 1,800
Consultants 601 953
Advertising 325 470
Others 261 2,652
31,475 36,115
NOTE 4 - STAFF COSTS:
For the year ended
December 31,
2007 2006
$'000 $'000
Staff costs (including directors) comprise:
Wages and salary 12,195 13,316
Pension costs 1,352 1,597
Employees' national insurance and similar taxes 660 816
Bonuses 232 453
14,439 16,182
Directors and key management personal
remuneration:
Wages and salary 1,413 1,151
Pension costs 181 146
Employees' national insurance and similar taxes 63 49
Bonuses 110 254
1,767 1,600
NOTE 5 - SEGMENTS:
Segment information:
The Company operates in four principal geographic segments: Europe, Asia, Africa
and United States. Revenue and cost of sale are attributed to geographic region
based on the location of the customers.
It is impossible to reliably allocate assets, liabilities, depreciations and
non-cash expenses to each segment because the Company develops and gives
services to customers on a world wide basis.
Europe Asia Africa United Total
States
2007 2007 2007 2007 2007
$'000 $'000 $'000 $'000 $'000
Revenue 16,077 2,171 6,181 7,676 32,105
Gross Profit 6,745 59 3,456 5,378 15,638
Europe Asia Africa United Total
States
2006 2006 2006 2006 2006
$'000 $'000 $'000 $'000 $'000
Revenue 11,121 6,321 7,277 8,041 32,760
Gross Profit 575 2,193 4,336 6,418 13,522
NOTE 6 - Finance income and expense:
2007 2007 2006 2006
$'000 $'000 $'000 $'000
Finance income
Bank interest received 151 440
Foreign exchange 464 252
Gains from marketable securities 542 184
1,157 876
Finance expense
Bank borrowings (373) (361)
Bank charges (111) (225)
(484) (586)
673 290
NOTE 7 - TAXES ON INCOME:
A. Tax Laws in Israel:
1. Law for the Encouragement of Capital Investments, 1959:
Pursuant to the provisions of the said law, the Company is eligible for tax
benefits resulting from implementation of programs for investment in assets, in
accordance with the letters of approval the Company received ('approved
enterprises'), which grant the Company the rights to exemption from tax for a
period of two years and subsequent to that period - to tax at a reduced rate of
25% of five years on income derived from the approved enterprise, subject to
fulfillment of the conditions stipulated in the letter of approval. Moreover,
the Company was approved an additional exemption and received a second approved
enterprise ('the expansion') for the part of revenues exceeding the Company's
2003 revenues.
The period in which the company will enjoy the tax exemption or reduced tax rate
is limited in the letter of approval to seven years from the first year in which
taxable income is earned. If the percentage of the company's share capital held
by foreign shareholders exceeds 25%, then it will be entitled to reduced tax
rates for a further three years, under certain conditions.
If the Company distributes dividends out of the exempt income of the first two
years of approved enterprise, it will be subject to tax at the rate of 25% on
the distributed income. If the Company distributes dividends from the income of
approved enterprise, the receivable will be subject to tax at the rate of
maximum 15% on the distributed income.
The Company intends to permanently reinvest the amounts of tax-exempt income and
it does not intend to cause distribution of such dividends. Therefore, no
deferred income taxes have been provided in respect of such tax-exempt income.
The periods of benefits relating to the Company's Approved Enterprise were
started on 2002 and will expire in 2008 and, with respect to the expansion, in
2010.
2. Recent Israeli Tax Reform Legislation:
In July 2002, the Israeli parliament approved a law enacting extensive changes
to Israel's tax law generally effective January 1, 2003 (the 'Tax Reform
Legislation'). An Israeli company that is subject to Israeli taxes on the income
of its non-Israeli subsidiaries will receive a credit for income taxes paid by
the subsidiary in its country of residence.
3. Tax rates:
The tax rate used for computing the provision for current taxes is 29%, with the
exception of approved enterprises - see 1. above.
On July 25, 2005, the corporate tax rate was reduced to 35% for the 2004 tax
year, 34% for the 2005 tax year, 31% for the 2006 tax year, 29% for the 2007,
27% for the 2008 tax year, 26% for the 2009 tax year and 25% for the 2010 tax
year and thereafter.
B. Subsidiaries outside Israel:
Subsidiaries that are not Israeli resident are taxed in the countries where they
are resident, according to the tax laws in the respective countries.
C. Income tax assessments:
The Company has final tax assessments until 2002, including 2002.
D. Tax-exempt income attributable to the 'Approved Enterprise' cannot be
distributed to shareholders without subjecting the Company to taxes except upon
complete liquidation of the Company. Out of the Company's retained earnings as
of December 31, 2007 and 2006 approximately $15,791 thousand, is tax-exempt. If
such retained tax-exempt income is distributed in a manner other than upon the
complete liquidation of the Company, it would be taxed at the reduced corporate
tax rate applicable to such profits and an income tax liability of up to
approximately $3,948 thousand would be incurred as of December 31, 2007 and 2006
, respectively. The Company currently intends to reinvest the amount of its
tax-exempt income and not to distribute such income as a dividend. Accordingly,
no deferred income taxes have been provided on income attributable to the
Company's 'Approved Enterprise'.
The entitlement to the above benefits is conditional upon the Company's
fulfilling the conditions stipulated by the Law, regulations published
thereunder and the certificates of approval for the specific investments in
approved enterprises.
Should the Company fail to meet such requirements in the future, income
attributable to its 'Approved Enterprise' programs could be subject to the
regular Israeli corporate tax rate of 36%, 35%, 34% or 31%, depending on the
year income earned, and the Company could be required to refund a portion of the
tax benefits already received, with respect to such programs.
E. After the balance sheet date, on March 2008, the coming into effect of the
income tax law (co-ordinations cook an inflation)-1985 (henceforth- 'the law of
the co-ordinations') was stopped as of the beginning of the tax year 2008. In
this amendment, certain transitional instructions were determined regarding
specific instructions in the law of the co-ordinations. Following this
amendment, a company will pay taxes on it's nominal profit in accordance with
the instructions in the income tax act, while cancelling the calculation
mechanism of real profit in accordance with the instructions of the law of the
co-ordinations until the end of the tax year 2007.
F. Composition:
2007 2007 2006 2006
$'000 $'000 $'000 $'000
Current tax expense:
Israeli income tax on profits for the (57) (237)
year
Taxes from previous years 62 (87)
5 (324)
Deferred tax expense:
Origination and reversal of temporary 725 1,943
differences
725 1,943
Total tax charge 730 1,619
G. The reasons for the difference between the actual tax charge for the year and
the standard rate of corporation tax in Israel applied to profits for the year
are as follows:
2007 2006
$'000 $'000
Profit (loss) before tax 1,303 (3,049)
Expected tax charge based on the standard rate (378) 945
of corporation tax in Israel of 29% (2006 - 31%)
Expenses not deductible for tax purposes 914 676
(tax-exempt income), net
Tax benefit for an approved enterprise 473 347
Losses and temporary differences for which deferred (382) (200)
taxes
were not recorded
Taxes in respect of previous years 360 (87)
Different tax rates for subsidiaries (257) 5
Other - (67)
Total tax income 730 1,619
NOTE 8 - EARNINGS PER SHARE:
2007 2006
$'000 $'000
Earnings used in basic EPS 2,033 (1,430)
Earnings used in diluted EPS 2,033 (1,430)
Weighted average number of shares used in 32,660,900 32,552,593
basic EPS
Effects of:
Diluted securities 35,112 184,241
Weighted average number of shares used in 32,696,012 32,736,834
diluted EPS
Basic net EPS 0.0623 (0.0439)
Diluted net EPS 0.0622 (0.0439)
NOTE 9 - DIVIDENDS:
2007 2006
$'000 $'000
Final dividend of 5.57 cents per ordinary - 1,812
share proposed and paid
during the year relating to the previous
year's results
NOTE 10 - PROPERTY, PLANT AND EQUIPMENT:
Motor Office Leasehold Computer Total
vehicles furniture Improvements &
& software
equipment
$'000 $'000 $'000 $'000 $'000
At 31 December 2006
Cost 72 1,469 1,448 9,803 12,792
Accumulated (27) (1,273) (1,227) (8,948) (11,475)
depreciation
Net book value 45 196 221 855 1,317
At 31 December 2007
Cost 72 1,371 1,279 7,234 9,956
Accumulated (39) (1,197) (1,097) (6,698) (9,031)
depreciation
Net book value 33 174 182 536 925
Year ended 31 December
2006
Opening net book value 55 232 256 1,122 1,665
Additions - 24 15 508 547
Amortization (10) (60) (50) (775) (895)
Closing net book value 45 196 221 855 1,317
Year ended 31 December
2007
Opening net book value 45 196 221 855 1,317
Additions - 16 1 247 264
Amortization (12) (38) (40) (566) (656)
Closing net book value 33 174 182 536 925
NOTE 11 - Intangible assets:
Rights in Development Patents Customer Goodwill Total
Software Cost and list
Trademarks
$'000 $'000 $'000 $'000 $'000 $'000
At 31 December 2006
Cost 635 3,577 142 772 3,535 8,661
Accumulated (159) (854) (38) (250) - (1,301)
amortization
Net book value 476 2,723 104 522 3,535 7,360
At 31 December 2007
Cost 635 5,780 142 915 3,535 11,007
Accumulated (318) (2,405) (45) (593) - (3,361)
amortization
Net book value 317 3,375 97 322 3,535 7,646
Year ended 31
December 2006
Opening net book 635 1,224 112 772 3,535 6,278
value
Additions - 1,921 - - - 1,921
Amortization (159) (422) (8) (250) - (839)
Closing net book 476 2,723 104 522 3,535 7,360
value
Year ended 31
December 2007
Opening net book 476 2,723 104 522 3,535 7,360
value
Additions - 2,203 - 143 - 2,346
Amortization (159) (1,551) (7) (343) - (2,060)
Closing net book 317 3,375 97 322 3,535 7,646
value
NOTE 12 - SUBSIDIARIES:
Listed below are details relating to the Company's subsidiaries which are being
held directly by the Company as at:
Percentage of ownership
and control
As at As at
December December
31, 2007 31, 2006
$'000 $'000
F.T.S. Global Limited 100 100
Formula Telecom Limited (Russia) 100 100
Formula Telecom Solutions Inc. 100 100
(Formerly known as Viziqor Solutions Inc.)*
Formula Telecom Solutions (China) Co., Ltd 80 80
* On December 2005, the company has completed the acquisition of U.S. based
Formula Telecom Solutions Inc. ('F.T.S Inc', a privately-held, leading provider
of billing and business support systems (BSS), for a total of 2 million dollars.
The acquisition positions the company as a leading provider of billing and BSS
solutions in the North American market. The products of F.T.S Inc., some of
which are specifically intended for the US market, will complement the company
industry leading portfolio of solutions.
As of December 31, 2005 F.T.S Inc. consolidated balance sheet is consolidate in
the company balance sheet, starting January 1,2006 the results of operations of
F.T.S Inc. are consolidated in the company consolidate income statement.
NOTE 13 - OTHER RECEIVABLES AND PREPAID EXPENSES:
As at As at
December December
31, 2007 31, 2006
$'000 $'000
Prepaid expenses and other 892 1,101
Government departments 264 28
Employees 5 88
Total 1,161 1,217
NOTE 14 - TRADE RECEIVABLES:
As at As at
December December
31, 2007 31, 2006
$'000 $'000
Trade accounts receivables 6,903 5,149
Unbilled receivables 5,778 6,381
Less impairment of receivables (3,052) (1,516)
9,629 10,014
Balance of
Customer A 1,691 1,942
Customer B 1,582 2,173
Customer C 1,130 826
Customer D 975 -
Customer E 830 -
Customer F 576 304
Others 2,845 4,769
9,629 10,014
Unbilled receivables:
As at As at
December December 31,
31, 2007 2006
$'000 $'000
Actual completion costs 6,957 7,218
Profit earned 2,521 5,622
Billed revenue (4,996) (6,473)
Total Unbilled receivables - Projects 4,482 6,367
Other Unbilled receivables 1,296 14
Total Unbilled receivables 5,778 6,381
Movement in impairment of receivables:
As at As at
December December
31, 2007 31, 2006
$'000 $'000
Balance at beginning of the year 1,516 1,360
Impairment for the year 1,536 1,123
3,052 2,483
Write off - (967)
Balance at end of the year 3,052 1,516
NOTE 15 - OTHER FINANCIAL ASSETS:
As at As at
December December
31, 2007 31, 2006
$'000 $'000
Fair value through profit or loss- held for trading 5,165 5,436
* The other financial assets consist of marketable securities
NOTE 16 - CASH AND CASH EQUIVALENTS:
As at As at
December December
31, 2007 31, 2006
$'000 $'000
In NIS *
Cash on hand and in banks 348 224
Deposits (a) 3 3,111
351 3,335
In other currency
Cash on hand and in banks 9,267 6,301
Deposits in Euro 88 91
Deposits in US dollars 1 964
9,356 7,356
9,707 10,691
(a) Most of the deposits are not linked and bear interest of 2% - 5% as of
December 31, 2007.
* New Israeli Shekel.
NOTE 17 - OTHER PAYABLES:
As at As at
December December
31, 2007 31, 2006
$'000 $'000
Accrued expense 1,965 2,058
Employees and other wage and salary related 1,692 1,675
liabilities
Government departments 28 540
Other 75 -
3,760 4,273
NOTE 18 - CUSTOMER ADVANCES AND DEFERRED REVENUE:
As at As at
December December
31, 2007 31, 2006
$'000 $'000
Amount received 4,937 7,125
Less - revenue recognized to date (412) (455)
4,525 6,670
NOTE 19 - EMPLOYEE BENEFITS:
A. Composition:
As at As at
December December
31, 2007 31, 2006
$'000 $'000
Liabilities for employee benefits 1,749 1,609
Plan assets (1,301) (1,256)
448 353
B. Movement in plan assets:
As at As at
December December
31, 2007 31, 2006
$'000 $'000
At beginning of year 1,255 1,068
Exchange gain 125 95
Expected return 79 72
Contributions by group 518 609
Benefits paid (738) (473)
Actuarial gain (loss) 62 (115)
1,301 1,256
C. Movement in liabilities:
As at As at
December December
31, 2007 31, 2006
$'000 $'000
At beginning of year 1,608 1,324
Exchange loss 158 120
Interest cost 88 67
Current service cost 438 535
Benefits paid (706) (595)
Actuarial loss 163 158
1,749 1,609
D. The expenses and income in the income statement from employee benefits are
included as salary and wage expenses in the relevant clauses.
E. Supplementary information:
1. The Company's liabilities for severance pay retirement and pension pursuant
to Israeli law are fully covered - in part by managers' insurance policies, for
which the Company makes monthly payments and accrued amounts in severance pay
funds and the rest by the liabilities which are included in the financial
statements.
2. The amounts accrued in managers' insurance funds are registered under the
name of the employees, and therefore such amounts are not stated in the
financial information as liability for termination of employee-employer
relationships or amounts funded.
3. The amounts funded displayed above include amounts deposited in severance pay
funds with the addition of accrued income. According to the Severance Pay Law,
the aforementioned amounts may not be withdrawn or mortgaged as long as the
employer's obligations have not been fulfilled in compliance with Israeli law.
F. Principal nominal actuarial assumptions:
As at As at
December December
31, 2007 31, 2006
Discount rate on plan liabilities 6.44% 5.70%
Expected rate of return on plan assets 6.17% 5.84%
Expected increase in pensionable salary 5.83% 5.06%
NOTE 20 - DEFERRED TAX:
Deferred tax is calculated on temporary differences under the liability method
using the tax rate of 15%-38% (2006 - 15%-38%) at the year the deferred tax
assets are recovered.
The movement on the deferred tax account is as shown below:
2007 2006
$'000 $'000
At 1 January 2,533 590
Exchange difference 725 1,943
At 31 December 3,258 2,533
Deferred tax assets have been recognized in respect of all differences giving
rise to deferred tax assets because it is probable that these assets will be
recovered.
Deferred tax assets and liabilities are only offset where there is a legally
enforceable right of offset and there is an intention to settle the balances
net.
Details of the deferred tax amounts charged to reserves are as follows:
Composition:
As at As at
December December
31, 2007 31, 2006
$'000 $'000
Allowances and reserves 916 277
Research and development 217 439
Vacation accrual 138 136
Employee severance liabilities 112 88
Net operating losses carried forward 1,875 1,593
Total 3,258 2,533
Unrecognized deferred tax assets:
Loses carried forward 816 106
Others 178 1,083
Total 994 1,189
NOTE 21 - SHARE CAPITAL:
Authorized
2007 2006
Number Number
Ordinary shares of no par value 261,504,012 261,504,012
Issued and fully paid
2007 2006
Number Number
Ordinary shares of no par value each at 32,812,012 32,524,012
beginning of the year
Employee share options exercised 144,000 288,000
At end of the year 32,956,012 32,812,012
NOTE 22 - EMPLOYEE STOCK OPTION PLAN:
In August 1999, the Company adopted an option plan ('1999 Options'). The 1999
Options are fully vested and exercisable for a period of 24 months as of the
date of the initial public offering of the Company ('Exercise Period'). 1999
Options that are not exercised within the Exercise Period will expire.
In May 2003, the Company adopted another share option plan ('2003 Option'). The
2003 Options shall be fully vested and exercisable in accordance with this plan
upon the initial public offering of the Company. The 2003 Options that are not
exercised by July 1, 2011 will expire.
In accordance with section 102 of the Israeli Tax Ordinance and in order to
benefit from this provision, the 1999 Options and 2003 Options were deposited
with a trustee approved by the Israeli tax authority for a period of 2 years and
for a period of 2 years from the end of the tax year in which the option were
granted, respectively.
On March 6, July 21 and August 10, 2005, the Company granted 36, 72 and 9
options respectively to purchase 288,000 ,576,000 and 72,000 (see note 12)
ordinary shares of the Company.
The Company has elected to accelerate the vesting period of all its employee
share options. As of December 31, 2005 all of the Company's options were fully
vested.
On February 15, 2007, the board of directors approved a maximum pool of up to
975,000 shares reserved for issuance upon exercise of options that may be
granted pursuant to the 2005 share option plan. In July 2007, the Company's
Board of Directors adopted an option plan pursuant to which the Company will
grant options to employees of the Company to purchase up to an aggregate of
855,000 Ordinary Shares. In accordance with this plan, employees of FTS and its
subsidiaries were granted on August 19th, 2007, for no consideration, 741,700
options, each of which may be exercised for one Ordinary Share of the Company at
an exercise price of GBP 0.6-0.97 per share. Any option not exercised within 10
years will expire. 50% of the options will be exercisable from January 1st, 2008
and 50% will be exercisable from January 1st, 2009.
Most of the options were granted as part of a plan that was adopted in
accordance with the provision of section 102 of the Israeli Income Tax
Ordinance.
A summary of the status of the Company stock option plan as of December 31, 2007
and 2006 is as follows:
Year ended Year ended
December 31, 2007 December 31, 2006
Number of Weighted Number of Weighted
options average options average
exercise exercise
price price
$ $
Options outstanding at beginning of 928,000 1.288 1,360,000 1.084
year
Changes during the year
Granted 741,700 1.553 - -
Exercised (144,000) - (288,000) -
Expired (233,400) 1.910 (144,000) 1.940
Options outstanding at end of year 1,292,300 1.471 928,000 1.288
Options exercisable at year-end 576,000 1.375 928,000 1.288
NOTE 23 - FINANCIAL INSTRUMENTS - RISK MANAGEMENT:
The Company is exposed through its operations to one or more of the following
financial risks:
• Liquidity risk.
• Foreign currency risk.
• Credit risk.
• Other risks.
Liquidity risk:
Liquidity risk arises from the group's management of working capital and the
finance charges and principal repayments on its debt instruments. It is the risk
that the group will encounter difficulty in meeting its financial obligations as
they fall due.
The group's policy is to ensure that it will always have sufficient cash to
allow it to meet its liabilities when they become due. To achieve this aim, it
seeks to maintain cash balances and other credit facilities to meet expected
requirements for a period of at least 90 days. The group also seeks to reduce
liquidity risk by fixing interest rates (and hence cash flows) on a portion of
its long-term borrowings, this is further discussed in the 'interest rate risk'
section above.
The Board receives rolling 12-month cash flow projections on a quarterly basis
as well as information regarding cash balances and (as noted above) the value of
the group's investments in corporate bonds.
The liquidity risk of each group entity is managed centrally by the group
treasury function. Each operation has a facility with group treasury, the amount
of the facility being based on budgets. The budgets are set locally and agreed
by the board in advance, enabling the group's cash requirements to be
anticipated. Where facilities of group entities need to be increased, approval
must be sought from the group finance director. Where the amount of the facility
is above a certain level agreement of the board is needed
Foreign currency risk:
Foreign exchange risk arises when company operations enter into transactions
denominated in a currency other than their functional currency. Management does
not mitigate that risk.
Credit risks:
Financial instruments which have the potential to expose the Company to credit
risks are mainly cash and cash equivalents, bank deposit accounts, trade
receivables, other receivables and long term debts.
Most of the Company's cash and cash equivalents and short-term investment as of
December 31, 2007, and 2006 were deposited in Israeli and European banks. The
Company is of the opinion that the credit risk in respect of these balances is
minimal.
Trade receivables are customer obligations due under normal trade terms. The
Company performs continuing credit evaluations of its customers' financial
condition and although the Company generally does not require collateral,
letters of credit may be required from our customers in certain circumstances.
Senior management reviews trade receivables on a monthly basis to determine if
any receivable will potentially be unrecoverable. The Company includes any trade
receivable balances that are determined to be unrecoverable in the company's
allowance for doubtful accounts. After all attempts to collect a receivable have
failed, the receivable is written off against the allowance.
In general, the exposure to the concentration of credit risks relating to trade
receivables is limited, due to the strength of the Company's customers. The
Company performs ongoing credit evaluations of its customers for the purpose of
determining the appropriate allowance for doubtful receivables. An appropriate
allowance for doubtful receivables is included in the accounts.
-Other risks:
The price risk consists mainly of the fluctuation in value of trade receivables
due to changes in exchange rates.
NOTE 24 - COMMITMENTS AND CONTINGENCIES:
Lawsuits:
1. On December 5, 2001, a class action complaint was filed in the United States
District Court for the Southern District of New York against Formula Telecom
Solutions Inc. (Formerly known as Viziqor Solutions Inc.) On April 22, 2002 an
amended complaint was filed by two plaintiffs purportedly on behalf of persons
purchasing Daleen Technologies, Inc.'s common stock between September 20, 1999
and December 6, 2000. The individual defendants, Messrs. Corey, Schell and
Daleen, have entered into tolling agreements with the plaintiffs resulting in
their dismissal from the case without prejudice. The remaining defendants
include Daleen Technologies, Inc. (now known as Formula Telecom Solutions, Inc.)
(the 'Company') and certain of the underwriters from the Company's initial
public offering ('IPO'). More than 300 similar class action lawsuits filed in
the Southern District of New York against numerous companies and their
underwriters have been consolidated for pretrial purposes before one judge under
the caption 'In re Initial Public Offering Securities Litigation.' The complaint
includes allegations of violations of (i) Section 11 of the Securities Act of
1933 by all named defendants, (ii) Section 15 of the Securities Act of 1933 by
the individual defendants and (iii) Section 10(b) of the Securities Exchange Act
of 1934 and Rule 10b-5 promulgated there under by the underwriter defendants.
Specifically, the plaintiffs allege in the complaint that, in connection with
the IPO, the defendants failed to disclose 'excessive commissions' purportedly
solicited by and paid to the underwriter defendants in exchange for allocating
shares of the Company's common stock in the IPO to the underwriter defendants'
preferred customers Plaintiffs further allege that the underwriter defendants had
agreements with preferred customers tying the allocation of shares sold in the IPO
to the preferred customers'agreements to make additional aftermarket purchases at
pre-determined prices.Plaintiffs further allege that the underwriters used their
analysts to issue favourable reports about the Company to further inflate the
Company's share price following the IPO. Plaintiffs claim that the defendants knew
or should have known of the underwriters' actions and that the failure to disclose
these alleged arrangements rendered the prospectus included in the Company's
registration statement on Form S-1 filed with the SEC in September 1999
materially false and misleading. Plaintiffs seek unspecified damages and other
relief. In June 2003, the Company approved the terms of a proposed settlement
involving the plaintiffs, the insurance companies and numerous issuers,
including the Company and the individual defendants, that includes a waiver by
the insurance companies of any retention amounts under the policies. Court
approval of the settlement is required and has been in process for some time.
The insurance company has taken responsibility for payment of all attorney fees
since June of 2003. In accordance with the terms of the Stock Purchase
Agreement, Woodmont Holdings, Inc. (formerly known as Viziqor Holdings, Inc.) is
obligated to indemnify the Company for all costs associated with this matter. In
October 2004, the district court granted the plaintiffs' motion for class
certification in six 'focus' cases out of the more than 300 consolidated class
actions.
In February 2005, the district court also preliminarily approved the terms of a
proposed settlement involving the plaintiff classes, the insurance companies and
the issuers, including the Company and the individual defendants, that included
a waiver by the insurance companies of any retention amounts under the policies.
In December 2006, however, the United States Court of Appeals for the Second
Circuit ruled on the underwriter defendants' appeal from the district court's
October 2004 order and reversed, concluding that none of the six 'focus' cases
could be certified as a class action. As a result of the Second Circuit's order
denying class certification, the plaintiff classes, the insurance companies and
the issuers were forced to terminate the proposed settlement in June 2007.
Subsequently, the company renewed the terms of an agreement among the issuer
defendants and their insurance companies under which the insurance companies
have agreed to pay the issuers' defence costs on a pooling basis. While
settlement still remains a possibility, the company intends to defend vigorously
against the plaintiffs' claims. As limited discovery has just begun in the six
'focus' cases, none of which include the Company, the amount of a loss, if any,
cannot be determined at this time.
2. On March 2006, Mr. Gordon Quick ('Plaintiff'), has filed a claim against
several defendants including Formula telecom solutions Inc. ('Company') pursuant
to which the plaintiff asserted a breach of agreement by the Company relating to
an employment agreements and bonus retention agreement executed solely between the
Plaintiff and a former related company of the Company known as Woodmont Holdings Inc.
Since Plaintiff seeks to impose liability against the Company for the breach of
contract by Woodmont and based on additional claims that Company is of the opinion
in high probability that the claim will be rejected.
3. Due to a dispute revealed between the Company and its customer in connection
with a toll road project performed by the Company for the customer ('Customer'
and 'Project' respectively), the Company has been notified by the Customer of
the termination of the Project. Currently, both parties have raised certain
claims and demands one against the other, mainly with respect to the scope of
the Project, payments due to the Company, damages incurred by each party in
connection with the Project and the fulfillment (or non fulfillment) of the
parties' obligations relating to the Project. The Company rejects the Customer's
claims. The Parties have notified each other of their intention to refer the
dispute to an arbitrator according to the Agreement. At this stage, the effect
of the Project's termination and related dispute on the Company's financials, if
any, is undetermined. In addition, Customer has demanded the forfeiting of a
certain bank guarantees (performance bonds) provided by the Company as part of
its contractual obligations in a total sum of approximately 0.5 million US$
'Bonds').
The Company has submitted to the district court in Jerusalem with a motion to
prevent the forfeiting of the Bonds and its motion was granted until such time
where an arbitrator shall be appointed by the parties and shall provide its
ruling in this matter. Customer has submitted an appeal to the decision granted
by the district court but no decision was made by the supreme court in this
matter to the date hereof.
Guarantees:
The Company obtained performance guarantees in the amount of $1,027 thousand in
order to secure its contractual commitments.
Lease commitments:
Future minimum lease commitments under non-cancellable operating leases as at
December 31, 2007 are as follows:
As at
December
31, 2007
$'000
2008 1,097
2009 125
Rent expenses for the years ended December 31, 2007, and 2006 were approximately
$1,245 thousand and $1,580 thousand, respectively.
NOTE 25 - TRANSACTIONS WITH RELATED PARTIES:
As at As at
December December
31, 2007 31, 2006
$'000 $'000
Subcontract cost paid or payable to a company - 1,790
related to principal shareholder and other
shareholders
NOTE 26 - FIRST TIME ADOPTION OF INTERNATIONAL FINANCIAL REPORTING
STANDARDS (IFRS):
Reconciliations and explanatory notes on how the transition to IFRS has affected
profit and net assets previously reported under US Generally Accepted Accounting
Principles are given below:
Profit and loss account reconciliation for the year ended December 31, 2006:
US GAAP Adjustments IFRS
Sub-note $'000 $'000 $'000
Revenue 32,760 - 32,760
Cost of sales (19,238) - (19,238)
Gross profit 13,522 - 13,522
Research and development costs (5,144) - (5,144)
Distribution costs (6,150) - (6,150)
General and administrative expenses B, C (4,546) (1,037) (5,583)
Loss from operations (2,318) (1,037) (3,355)
Finance costs (586) - (586)
Finance income 876 - 876
Other income 16 - 16
Loss before tax (2,012) (1,037) (3,049)
Tax income D 1,360 259 1,619
Loss for the year (652) (778) (1,430)
Balance sheet reconciliation as at January 1, 2006 - transition date:
US GAAP Adjustments IFRS
Sub-note $'000 $'000 $'000
ASSETS
Non-current assets:
Property, plant and equipment 1,665 - 1,665
Intangible assets A 6,362 (84) 6,278
Severance pay fund B 203 (203) -
Rental deposits 232 - 232
Long term unbilled receivables - - -
Deferred tax assets A, D - 590 590
Total non-current assets 8,462 303 8,765
Current assets:
Other receivables and prepaid A,E 3,112 (1,651) 1,461
expenses
Current tax assets E - 1,125 1,125
Trade receivables 15,140 - 15,140
Other financial assets 5,369 - 5,369
Cash and cash equivalents 11,809 - 11,809
Total current assets 35,430 (526) 34,904
TOTAL ASSETS 43,892 (223) 43,669
LIABILITIES
Non-current liabilities:
Employee benefits B 539 (284) 255
Total Non-current liabilities 539 (284) 255
Current Liabilities:
Other payables 5,717 - 5,717
Trade payables 4,583 - 4,583
Customer advances and deferred 7,309 - 7,309
revenue
Short-term borrowings 3,556 - 3,556
Total current liabilities 21,165 - 21,165
Total liabilities 21,704 (284) 21,420
TOTAL NET ASSETS AND EQUITY 43,892 (223) 43,669
Balance sheet reconciliation as at December 31, 2006:
US GAAP Adjustments IFRS
Sub-note $'000 $'000 $'000
ASSETS
Non-current assets:
Property, plant and equipment 1,317 - 1,317
Intangible assets A 8,052 (692) 7,360
Severance pay fund B 164 (164) -
Rental deposits 134 - 134
Long term unbilled receivables 309 - 309
Deferred tax assets A, D - 2,533 2,533
Total non-current assets 9,976 1,677 11,653
Current assets:
Other receivables and prepaid A,E 4,138 (2,921) 1,217
expenses
Current tax assets E - 1,319 1,319
Trade receivables C 11,014 (1,000) 10,014
Short-term investments 5,436 - 5,436
Cash and cash equivalents 10,691 - 10,691
Total current assets 31,279 (2,602) 28,677
TOTAL ASSETS 41,255 (925) 40,330
LIABILITIES
Non-current liabilities:
Employee benefits B 561 (208) 353
Total Non-current liabilities 561 (208) 353
Current Liabilities:
Other payables 4,273 - 4,273
Trade payables 3,256 - 3,256
Customer advances and deferred 6,670 - 6,670
revenue
Short-term borrowings 7,234 - 7,234
Total current liabilities 21,433 - 21,433
Total liabilities 21,994 (208) 21,786
TOTAL NET ASSETS AND EQUITY 41,255 (925) 40,330
Adjustments:
Explanations of the adjustments made to the US GAAP income statement and balance
sheets are as follows:
A. Deferred taxes in current assets were classified to non current assets in
separate line in accordance with IAS 1.
B. Employee benefits were calculated according to actuarial assumptions based on
the 'projected unit credit' method in accordance with IAS 19. In addition,
assets and liabilities were presented in net value.
C. The company estimated its allowance for doubtful debts in accordance with IAS
39 - treatment in impairment of financial assets.
D. The effect on deferred taxes due to changes made in employee benefits and
allowance for doubtful debts.
E. Current tax assets were classified from other receivables and prepaid
expenses in separate line in accordance with IAS 1.
This information is provided by RNS
The company news service from the London Stock Exchange