SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
----------------------
F O R M 6-K
REPORT OF FOREIGN PRIVATE ISSUER PURSUANT TO RULE 13a-16 OR 15d-16 UNDER THE
SECURITIES EXCHANGE ACT OF 1934
For the month of September 2005
MER TELEMANAGEMENT SOLUTIONS LTD.
(Name of Registrant)
22 Zarhin Street, Ra'anana 43662, Israel
(Address of Principal Executive Office)
Indicate by check mark whether the registrant files or will file
annual reports under cover of Form 20-F or Form 40-F.
Form 20-F |X| Form 40-F |_|
Indicate by check mark if the registrant is submitting the Form 6-K
in paper as permitted by Regulation S-T Rule 101(b)(1): |_|
Indicate by check mark if the registrant is submitting the Form 6-K
in paper as permitted by Regulation S-T Rule 101(b)(7): |_|
Indicate by check mark whether by furnishing the information
contained in this Form, the registrant is also thereby furnishing the
information to the Commission pursuant to Rule 12g3-2(b) under the Securities
Exchange Act of 1934.
Yes |_| No |X|
If "Yes" is marked, indicate below the file number assigned to the
registrant in connection with Rule 12g3-2(b): 82- ____________
This Form 6-K is being incorporated by reference into the Registrant's Form S-8
Registration Statements File Nos. 333-12014 and 333-123321.
MER Telemanagement Solutions Ltd.
6-K Items
1. Interim Condensed Consolidated Financial Statements of MER Telemanagement
Solutions Ltd. as of June 30, 2005 and Management's Discussion and
Analysis of Financial Condition and Results of Operations for the six
months ended June 30, 2005.
ITEM 1
MER TELEMANAGEMENT SOLUTIONS LTD.
AND ITS SUBSIDIARIES
INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
AS OF JUNE 30, 2005
U.S. DOLLARS IN THOUSANDS
UNAUDITED
INDEX
Page
----
Interim Condensed Consolidated Balance Sheets 2 - 3
Interim Condensed Consolidated Statements of Operations 4
Interim Condensed Statements of Changes in Shareholders' Equity 5
Interim Condensed Consolidated Statements of Cash Flows 6 - 7
Notes to Interim Condensed Consolidated Financial Statements 8 - 13
- - - - - - - - - -
MER TELEMANAGEMENT SOLUTIONS LTD.
AND ITS SUBSIDIARIES
INTERIM CONDENSED CONSOLIDATED BALANCE SHEETS
--------------------------------------------------------------------------------
U.S. Dollars in thousands
June 30, December 31,
2005 2004
------- -------
Unaudited
------- -------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 1,750 $ 3,814
Marketable securities 126 1,057
Trade receivables, net 1,853 1,348
Other accounts receivable and prepaid expenses 408 391
Inventories 180 178
------- -------
Total current assets 4,317 6,788
----- ------- -------
LONG-TERM INVESTMENTS:
Investment in an affiliate 1,707 2,119
Long-term loans, net of current maturities 26 45
Severance pay fund 518 535
Other investments 373 373
------- -------
Total long-term investments 2,624 3,072
----- ------- -------
PROPERTY AND EQUIPMENT, NET 583 581
------- -------
OTHER ASSETS:
Goodwill 3,511 3,415
Other intangible assets, net 1,169 1,394
Deferred income taxes 73 73
------- -------
Total other assets 4,753 4,882
----- ------- -------
Total assets $12,277 $15,323
----- ======= =======
The accompanying notes are an integral part of the consolidated financial
statements.
- 2 -
MER TELEMANAGEMENT SOLUTIONS LTD.
AND ITS SUBSIDIARIES
INTERIM CONDENSED CONSOLIDATED BALANCE SHEETS
--------------------------------------------------------------------------------
U.S. Dollars in thousands (except share data)
June 30, December 31,
2005 2004
-------- --------
Unaudited
-------- --------
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Trade payables $ 727 $ 719
Accrued expenses and other liabilities 2,197 2,042
Deferred revenues 1,144 1,254
-------- --------
Total current liabilities 4,068 4,015
----- -------- --------
LONG-TERM LIABILITIES:
Accrued severance pay 660 651
-------- --------
Total long-term liabilities 660 651
----- -------- --------
SHAREHOLDERS' EQUITY:
Share capital -
Ordinary shares of NIS 0.01 par value - Authorized: 12,000,000
shares; Issued: 4,796,304 shares at June 30, 2005 and 4,648,804
shares at December 31,2004; Outstanding: 4,785,504 shares at
June 30, 2005 and 4,638,004 at December 31, 2004 15 14
Additional paid-in capital 13,267 12,879
Treasury shares (29) (29)
Deferred stock compensation (176) (208)
Accumulated other comprehensive income 2 348
Accumulated deficit (5,530) (2,347)
-------- --------
Total shareholders' equity 7,549 10,657
----- -------- --------
Total liabilities and shareholders' equity $ 12,277 $ 15,323
----- ======== ========
The accompanying notes are an integral part of the consolidated financial
statements.
- 3 -
MER TELEMANAGEMENT SOLUTIONS LTD.
AND ITS SUBSIDIARIES
INTERIM CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
--------------------------------------------------------------------------------
U.S. Dollars in thousands (except share data)
Six months ended Three months ended
June 30, June 30,
----------------------------- -----------------------------
2005 2004 2005 2004
----------- ----------- ----------- -----------
Unaudited
-----------------------------------------------------------------
Revenues from products and services $ 5,538 $ 4,351 $ 2,812 $ 1,992
Cost of revenues from products and services 1,707 1,047 869 506
----------- ----------- ----------- -----------
Gross profit 3,831 3,304 1,943 1,486
----------- ----------- ----------- -----------
Operating expenses:
Research and development 2,510 1,103 1,167 569
Selling and marketing 2,897 2,522 1,370 1,397
General and administrative 1,722 887 677 490
----------- ----------- ----------- -----------
Total operating expenses 7,129 4,512 3,214 2,456
----------- ----------- ----------- -----------
Operating loss (3,298) (1,208) (1,271) (970)
Financial income, net 30 19 11 (8)
Other income (expenses), net 74 (30) 72 2
----------- ----------- ----------- -----------
Loss before taxes on income (3,194) (1,219) (1,188) (976)
Taxes on income -- 2 -- 2
----------- ----------- ----------- -----------
(3,194) (1,221) (1,188) (978)
Equity in earnings of affiliate 11 95 39 49
----------- ----------- ----------- -----------
Net loss $ (3,183) $ (1,126) $ (1,149) $ (929)
=========== =========== =========== ===========
Net loss per share:
Basic and diluted net loss per Ordinary share $ (0.68) $ (0.24) $ (0.24) $ (0.20)
=========== =========== =========== ===========
Weighted average number of Ordinary shares used
in computing basic and diluted net loss per
share 4,675,283 4,629,082 4,712,561 4,633,471
=========== =========== =========== ===========
The accompanying notes are an integral part of the consolidated financial
statements.
- 4 -
MER TELEMANAGEMENT SOLUTIONS LTD.
AND ITS SUBSIDIARIES
INTERIM CONDENSED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
--------------------------------------------------------------------------------
U.S. Dollars in thousands
Accumulated Retained Total
Number Additional Deferred other earnings comprehensive Total
of shares Share paid-in Treasury stock comprehensive (accumulated income shareholders'
outstanding Capital capital shares compensation Income deficit) (loss) equity
----------- ------- -------- ------ ------------ --------- ---------- --------- ----------
Balance as of January 1, 2004 4,624,471 $ 14 $ 12,613 $ (20) $ (10) $ 87 $ 1,780 $ 14,464
Exercise of options 17,333 *) -- 2 -- -- -- 2
Employee stock based
compensation -- -- 264 -- (264) -- -- --
Amortization of deferred stock
based compensation -- -- -- -- 66 -- -- 66
Purchase of treasury shares (3,800) -- -- (9) -- -- -- (9)
Other comprehensive income:
Unrealized gains on
available-for-sale
marketable securities, net -- -- -- -- -- 83 -- $ 83 83
Foreign currency translation
adjustments -- -- -- -- -- 171 -- 171 171
Gain from cash flows hedging
transaction -- -- -- -- -- 7 -- 7 7
----------
Total other comprehensive income 261
Net loss -- -- -- -- -- -- (4,127) (4,127) (4,127)
----------- ------- -------- ------ ---------- --------- ---------- --------- ----------
Total comprehensive loss $ (3,866)
==========
Balance as of December 31, 2004 4,638,004 14 12,879 (29) (208) 348 (2,347) 10,657
Exercise of options (Unaudited) 147,500 1 281 -- -- -- -- 282
Amortization of deferred stock
based compensation (Unaudited) -- -- -- -- 32 -- -- 32
Stock based compensation
related to warrants issued to
non employees (Unaudited) -- -- 107 -- -- -- -- 107
Other comprehensive loss:
Unrealized gains on available
for sale marketable
securities, net (Unaudited) -- -- -- -- -- (79) -- $ (79) (79)
Foreign currency translation
adjustments (Unaudited) -- -- -- -- -- (267) -- (267) (267)
----------
Total other comprehensive
loss (Unaudited) -- -- -- -- -- -- -- (346)
Net loss (Unaudited) -- -- -- -- -- -- (3,183) (3,183) (3,183)
----------- ------- -------- ------ ---------- --------- ---------- --------- ----------
Total comprehensive loss
(Unaudited) $ (3,529)
==========
Balance as of June 30, 2005
(Unaudited) 4,785,504 $ 15 $ 13,267 $ (29) $ (176) $ 2 $ (5,530) $ 7,549
=========== ======= ======== ====== ======= ======== ========== ==========
Accumulated unrealized gains from
available-for-sale marketable
securities $ 7
Accumulated foreign currency
translation adjustments (5)
--------
$ 2
========
*) Represents an amount lower than $ 1.
The accompanying notes are an integral part of the consolidated financial
statements.
- 5 -
MER TELEMANAGEMENT SOLUTIONS LTD.
AND ITS SUBSIDIARIES
INTERIM CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
--------------------------------------------------------------------------------
U.S. Dollars in thousands
Six months ended
June 30,
-----------------------------
2005 2004
-------------- -------------
Unaudited
-----------------------------
Cash flows from operating activities:
-------------------------------------
Net loss $ (3,183) $ (1,126)
Adjustments to reconcile net loss to net cash used in operating
activities:
Loss (gain) on sale of available-for-sale marketable securities, net (74) 31
Loss on sale of property and equipment 2 2
Undistributed earnings of an affiliate (11) (95)
Dividend from affiliate 181 *) 122
Depreciation and amortization 366 173
Amortization of stock based compensation 33 33
Stock based compensation related to warrants issued to non employees 107 --
Accrued severance pay, net 26 (31)
Decrease (increase) in trade receivables (505) 324
Increase in other accounts receivable and prepaid expenses (18) (11)
Increase in inventories (2) --
Increase (decrease) in trade payables 8 (82)
Increase in accrued expenses and other liabilities 81 318
Decrease in deferred revenues (110) (1)
-------------- -------------
Net cash used in operating activities (3,099) (343)
-------------- -------------
Cash flows from investing activities:
-------------------------------------
Changes in related parties account, net (40) (7)
Proceeds from sale of property and equipment 6 19
Purchase of property and equipment (151) (94)
Additional investment in goodwill in consideration of TeleKnowledge
acquisition (7) --
Capitalization of research and development costs -- --
Investment in available-for-sale marketable securities (55) (153)
Proceeds from sale of available-for-sale marketable securities 981 340
Other 19 16
-------------- -------------
Net cash provided by investing activities 753 *) 121
-------------- -------------
*) Reclassified
The accompanying notes are an integral part of the consolidated financial
statements.
- 6 -
MER TELEMANAGEMENT SOLUTIONS LTD.
AND ITS SUBSIDIARIES
INTERIM CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
--------------------------------------------------------------------------------
U.S. Dollars in thousands
Six months ended
June 30,
--------------------
2005 2004
------- -------
Unaudited
--------------------
Cash flows from financing activities:
-------------------------------------
Repayment of long-term loans -- (4)
Proceeds from exercise of options 282 2
------- -------
Net cash provided by (used in) financing activities 282 (2)
------- -------
Effect of exchange rate changes on cash and cash equivalents -- 1
------- -------
Decrease in cash and cash equivalents (2,064) (223)
Cash and cash equivalents at the beginning of the period 3,814 8,684
------- -------
Cash and cash equivalents at the end of the period $ 1,750 $ 8,461
======= =======
(a) Supplemental disclosure of non-cash activities:
Additional investment in goodwill in consideration of
TeleKnowledge acquisition $ 89 $ --
The accompanying notes are an integral part of the consolidated financial
statements.
- 7 -
MER TELEMANAGEMENT SOLUTIONS LTD.
AND ITS SUBSIDIARIES
NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
U.S. dollars in thousands
NOTE 1:- GENERAL
a. Mer Telemanagement Solutions Ltd. (the "Company" or "MTS") was
incorporated on December 27, 1995. MTS and its subsidiaries
("the Group") designs, develops, markets and supports a
comprehensive line of telecommunication management and
customer care & billing ("CC&B") solutions that enable
business organizations and other enterprises to improve the
efficiency and performance of all IP operations, and reduce
associated costs. The Group products include call accounting
and management products, fault management systems and web
based management solutions for converged voice, voice over
Internet Protocol, IP data and video and CC&B solutions.
b. MTS's products are designed to provide telecommunication and
information technology managers with tools to reduce
communication costs, recover charges payable by third parties,
and to detect and prevent abuse and misuse of telephone
networks including fault telecommunication usage.
The Group markets its products worldwide through distributors,
business telephone switching systems manufacturers and vendors
and its direct sales force. Several international private
automatic branch exchange ("PBX") manufacturers market the
Group's products as part of their PBX selling efforts or on an
Original Equipment Manufacturer ("OEM") basis. The Group is
highly dependent upon the active marketing and distribution of
its OEM's. If the Group is unable to effectively manage and
maintain a relationship with its OEM or any event negatively
affecting such dealer's financial condition, could cause a
material adverse effect on the Group's results of operations
and financial position.
Certain components and subassemblies included in the Group's
products are obtained from a single source or a limited group
of suppliers and subcontractors. If such supplier fails to
deliver the necessary components or subassemblies, the Company
may be required to seek alternative sources of supply. A
change in supplier could result in manufacturing delays, which
could cause a possible loss of sales and, consequently, could
adversely affect the Company's results of operations and
financial position.
MTS's shares are listed for trade on the Nasdaq SmallCap
Market.
NOTE 2:- SIGNIFICANT ACCOUNTING POLICIES
The significant accounting policies applied in the annual
consolidated financial statements of the Company as of December 31,
2004, are applied consistently in these financial statements.
NOTE 3:- UNAUDITED INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
The accompanying unaudited interim condensed consolidated financial
statements have been prepared in accordance with generally accepted
accounting principles in the Unites States for interim financial
information. Accordingly, they do not include all the information
and footnotes required by generally accepted accounting principles
for complete financial statements. In the opinion of management, all
adjustments (consisting of normal recurring accruals) considered
necessary for a fair presentation have been included. Operating
results for the six months ended June 30, 2005 are not necessarily
indicative of the results that may be expected for the year ended
December 31, 2005. For further information, reference is made to the
consolidated financial statements and footnotes thereto included in
the Company's Annual Report on Form 20-F for the year ended December
31, 2004.
- 8 -
MER TELEMANAGEMENT SOLUTIONS LTD.
AND ITS SUBSIDIARIES
NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
U.S. dollars in thousands
NOTE 4:- INVENTORIES
June 30, December 31,
2005 2004
--------- --------
Unaudited
---------
Raw materials $ 78 $ 76
Finished products 102 102
-------- --------
$ 180 $ 178
======== ========
The Group periodically assesses its inventory valuation in
accordance with its revenues forecasts, technological obsolescence,
and the market conditions. Marked down inventory that is expected to
be sold at a price lower than the carrying value is not material.
NOTE 5:- GOODWILL
Goodwill represents excess of the costs over the net assets of
businesses acquired. Statement of Financial Accounting Standard No.
142, "Goodwill and Other Intangible Assets" ("SFAS No. 142")
requires goodwill to be tested for impairment annually or between
annual tests in certain circumstances, and written down when
impaired. No indications of impairment were identified during the
six months ended June 30, 2005.
The changes in the carrying amount of goodwill for the year ended
December 31, 2004 and for the period ended June 30, 2005 are as
follows:
Balance as of December 31, 2004 $ 3,415
Additional amount ascribed to goodwill resulting from
realization of contingent consideration (see also note 7c(3)) 96
-------
Balance as of June 30, 2005 $ 3,511
=======
- 9 -
MER TELEMANAGEMENT SOLUTIONS LTD.
AND ITS SUBSIDIARIES
NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
U.S. dollars in thousands
NOTE 6:- GEOGRAPHIC INFORMATION AND MAJOR CUSTOMER
The Company adopted Statement of Financial Accounting Standard No.
131, "Disclosures About Segments of an Enterprise and Related
Information" ("SFAS No. 131"). The Company operates in one
reportable segment (see Note 1 for a brief description of the
Company's business). The total revenues are attributed to geographic
areas based on the location of the customer.
The following is a summary of revenues within geographic areas based
on end customer location and long-lived assets:
Six months ended Three months ended
June 30, June 30,
------------------------ ------------------------
2005 2004 2005 2004
---------- ----------- ---------- ----------
Unaudited
---------------------------------------------------
Customer location:
------------------
Israel $ 107 $ 98 $ 62 $ 46
United States 3,029 2,422 1,376 1,097
Germany 903 775 490 387
Holland 430 387 218 179
Europe (excluding Germany and
Holland) 508 209 318 60
Asia 136 195 59 79
South America 232 221 124 118
Others 193 44 165 26
---------- ----------- ---------- ----------
$ 5,538 $ 4,351 $ 2,812 $ 1,992
========== =========== ========== ==========
June 30, December 31,
---------- ------------
2005 2004
---------- ------------
Unaudited
---------- ------------
Long-lived assets:
------------------
Israel $ 3,000 $ 3,103
United States 2,211 2,244
Holland 7 7
Asia 7 9
South America 38 27
---------- ------------
$ 5,263 $ 5,390
========== ============
Major customer data as percentage of total revenues:
Six months ended Three months ended
June 30, June 30,
------------------------ ------------------------
2005 2004 2005 2004
---------- ----------- ---------- ----------
Unaudited
---------------------------------------------------
Customer A: 33% 43% 33% 44%
- 10 -
MER TELEMANAGEMENT SOLUTIONS LTD.
AND ITS SUBSIDIARIES
NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
U.S. dollars in thousands
NOTE 7:- COMMITMENTS AND CONTINGENCIES
a. In April 2000, the tax authorities in Israel issued a demand
for a tax payment for the period of 1997-1999, in the amount
of approximately NIS 6.0 million ($ 1,350). The Company has
appealed to the Israeli District Court in respect of such tax
demand. Based on the opinion of the Company's legal counsel,
it believes that certain defenses can be raised against the
demand of the tax authorities. The Company made a provision
based on its current estimate of the potential liability. An
evidentiary hearing has been scheduled for January 2, 2006.
b. On April 18, 2005, Amdocs (Israel) Ltd. and Amdocs Ltd. (the
"Plaintiffs") filed a complaint with the Tel Aviv District
Court against the Company, its Chief Executive Officer and
others (the "Defendants") alleging, among other things, that
professional and commercial information belonging to the
plaintiffs was transferred to the defendants for use in the
Company's activity. The Plaintiffs are seeking an injunction
prohibiting the Defendants from making any use of the
information and trade secrets that were allegedly transferred,
injunctions requiring the return of such information and
estimated damages of NIS 14,775 (approximately $ 3,280), as of
June 30, 2005.
On June 27, 2005, the defendants filed a statement of defense,
in which the defendants claim that the factual and legal
allegations by the plaintiffs are baseless, and the causes of
action and relief requested are without merit.
Due to the preliminary stage of the litigation, the Company
and its legal advisors cannot currently assess its outcome or
its possible adverse effect on the Company's financial
position or results of operations, and therefore no accrual
has been recorded at this time.
c. Royalty commitments:
1. The Company is committed to pay royalties to the Office
of the Chief Scientist of the Ministry of Trade ("OCS")
of the Government of Israel on proceeds from sales of
products resulting from the research and development
projects in which the Government participated. In the
event that development of a specific product in which
the OCS participated is successful, the Company will be
obligated to repay the grants through royalty payments
at the rate of 3% to 5% based on the sales of the
Company, up to 100%-150% of the grants received linked
to the dollar. As of June 30, 2005, the Company has a
contingent obligation to pay royalties in the amount of
$ 9,229. The obligation to pay these royalties is
contingent upon actual sales of the products and, in the
absence of such sales, no payment is required.
2. The Israeli Government, through the Fund for
Encouragement of Marketing Activities, awarded the
Company grants for participation in foreign marketing
expenses. The Company is committed to pay royalties at
the rate of 3% of the increase in export sales, up to
the amount of the grants received linked to the U.S.
dollar. As of June 30, 2005, the Company has a
contingent obligation to pay royalties in the amount of
$ 259.
3. As part of the Teleknowledge acquisition of December 30,
2004 the Company commited to pay contingent
consideration of up to an amount of $3,650 based on post
acquisition revenue performance (calculated as 10% of
renewal maintenance fees and 20% of all other revenues
from sales which included Teleknowledge products), over
a period of three years. Such payments are recorded as
additional goodwill, during the contingency period. As
of June 30, 2005 the Company has a contingent obligation
to pay and additional consideration in the amount of $
3,554.
- 11 -
MER TELEMANAGEMENT SOLUTIONS LTD.
AND ITS SUBSIDIARIES
NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
U.S. dollars in thousands
NOTE 8: ACCOUNTING FOR STOCK-BASED COMPENSATION
The Company accounts for stock-based compensation in accordance with the
provisions of Accounting Principles Board Opinion No. 25, "Accounting
for Stock Issued to Employees" ("APB No. 25") and Financial Accounting
Standards Board Interpretation No. 44, "Accounting for Certain
Transactions Involving Stock Compensation" ("FIN No. 44"). Under APB No.
25, when the exercise price of an employee's options equals or is higher
than the market price of the underlying Common Stock on the date of
grant, no compensation expense is recognized. Under Statement of
Financial Accounting Standard No. 123, "Accounting for Stock-Based
Compensation" ("SFAS No. 123"), pro-forma information regarding net
income and income per share is required, and has been determined as if
the Company had accounted for its employee stock options under the fair
value method of SFAS No. 123.
The fair value of these options is amortized over their vesting period
and estimated at the date of grant using a Black-Scholes multiple option
pricing model with the following weighted average assumptions for the
three and the six months periods ended June 30, 2005 and 2004:
Six months ended Three months ended
June 30, June 30,
------------------------ ------------------------
2005 2004 2005 2004
---------- ---------- ----------- ----------
Unaudited
---------------------------------------------------
Risk free interest 3.53% 2.79% 3.52% 2.79%
Dividend yields 0% 0% 0% 0%
Volatility 61.3% 53.37% 61.4% 53.37%
Expected life 3.7 4.71 3.7 4.71
The following table illustrates the effect on net income and earnings
per share, assuming that the Company had applied the fair value
recognition provision of SFAS No. 123 on its stock-based employee
compensation (in thousands, except per share amounts):
Six months ended Three months ended
June 30, June 30,
------------------------ ----------------------
2005 2004 2005 2004
---------- ----------- ---------- ---------
Unaudited
-------------------------------------------------
Net income (loss) as reported $ (3,183) $ (1,126) $ (1,149) $ (929)
========== =========== ========== =========
Add: Stock-based employee
compensation - intrinsic value 32 33 17 17
Less - stock-based compensation
expense determined under fair
value method for all awards: (151) (148) (72) (84)
========== =========== ========== =========
Pro forma net loss $ (3,302) $ (1,241) $ (1,204) $ (996)
========== =========== ========== =========
Basic and diluted net earnings
(loss) per share, as reported $ (0.68) $ (0.24)
========== =========== ========== =========
Basic and diluted net loss per
share, pro forma $ (0.71) $ (0.27) $ (0.26) $ (0.22)
========== =========== ========== =========
- 12 -
MER TELEMANAGEMENT SOLUTIONS LTD.
AND ITS SUBSIDIARIES
NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
U.S. dollars in thousands
NOTE 9: RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
On December 16, 2004, the Financial Accounting Standards Board
issued Statement No. 123R (revised 2004 Share Based Payment
("Statement 123R")), which is a revision of SFAS No. 123,
"Accounting for Stock-Based Compensation" ("SFAS No. 123").
Generally, the approach in Statement 123R is similar to the approach
described in SFAS No. 123. However, SFAS No. 123 permitted, but did
not require, share-based payments to employees to be recognized in
income based on their fair values while Statement 123R requires all
share-based payments to employees to be recognized in income based
on their fair values. Statement 123R also revises, clarifies and
expands guidance in several areas, including measuring fair value,
classifying an award as equity or as a liability and attributing
compensation cost to reporting periods.
The Company will adopt the accounting provisions of Statement 123R
Effective January 1, 2006. As permitted by Statement 123, the
company currently accounts for share-based payments to employees
using Opinion 25's intrinsic value method and, as such, generally
recognizes no compensation cost for employee stock options. In
addition, non-compensatory plans under APB 25 will be considered
compensatory for FAS 123(R) purposes. Accordingly, the adoption of
Statement 123(R)'s fair value method may have a significant impact
on the Company's result of operations in the future, however, the
impact of its adoption cannot be predicted at this time because it
will depend on levels of share-based payments granted in the future.
However, had the Company adopted Statement 123(R) in prior periods,
the impact of that standard would have approximated the impact of
Statement 123 as described in the disclosure of pro forma net income
and earnings per share in Note 8 to the consolidated financial
statements.
In May 2005, the FASB issued FASB Statement No. 154, "Accounting
Changes and Error Corrections: a replacement of APB Opinion No. 20
("APB 20") and FASB Statement No. 3" ("SFAS No. 154") which requires
companies to apply voluntary changes in accounting principles
retrospectively whenever it is practicable. The retrospective
application requirement replaces APB 20's requirement to recognize
most voluntary changes in accounting principle by including the
cumulative effect of the change in net income during the period the
change occurs. Retrospective application will be the required
transition method for new accounting pronouncements in the event
that a newly-issued pronouncement does not specify transition
guidance. SFAS No. 154 is effective for accounting changes made in
fiscal years beginning after December 15, 2005.
NOTE 10: SUBSEQUENT EVENTS
On August 10, 2005, the Company entered into definitive agreements
and consummated a transaction with institutional and private
investors for a private placement of ordinary shares and warrants to
purchase ordinary shares for a total consideration of $2.8 million.
Pursuant to the agreements, MTS issued an aggregate 937,500 ordinary
shares at $3.00 per share. In addition, the Company provided the
investors with warrants to purchase an aggregate 375,000 additional
ordinary shares of MTS at an exercise price of $4.00 per share. Each
investor received warrants to purchase two ordinary shares for each
five ordinary shares purchased. The warrants will become exercisable
six months after their issuance and may be exercised within three
and a half years after they become exercisable.
- - - - - - - - - - - - - - - - - - - - - -
- 13 -
Management's Discussion and Analysis of Financial Condition and Results of
Operations
The following discussion of our results of operations should be read
together with our interim consolidated financial statements and the related
notes, which appear elsewhere in this report. The following discussion contains
forward-looking statements that reflect our current plans, estimates and beliefs
and involve risks and uncertainties. Our actual results may differ materially
from those discussed in the forward-looking statements. Factors that could cause
or contribute to such differences include those discussed below and elsewhere in
this report.
Overview
We are a total solutions provider in the telecom expense and billing
arenas. We design, develop, market and support a comprehensive line of
telecommunication management and customer care and billing, or CC&B, solutions
that enable business organizations and other enterprises to improve the
efficiency and performance of all IP operations, and to significantly reduce
associated costs. Our products include call accounting and management products,
fault management systems and Web-based management solutions for converged voice,
voice over IP, IP data and video and CC&B solutions. These products are designed
to provide telecommunication and information technology managers with tools to
reduce communication costs, recover charges payable by third parties, detect and
report the abuse and misuse of telephone networks, monitor and detect hardware
and software faults in telecommunications networks and generate
telecommunications usage information for use in the management of an enterprise.
We were among the first to offer PC-based call accounting systems when we
introduced our TABS product in 1985. To date, over 60,000 TABS call accounting
systems have been sold to end-users in more than 60 countries.
General
Our consolidated financial statements are stated in U.S. dollars and
prepared in accordance with U.S. generally accepted accounting principles.
Transactions and balances originally denominated in dollars are presented at
their original amounts. Transactions and balances in other currencies are
remeasured into dollars in accordance with the principles set forth in Financial
Accounting Standards Board Statement No. 52. The majority of our sales are made
outside Israel in dollars. In addition, substantial portions of our costs are
incurred in dollars. Since the dollar is the primary currency of the economic
environment in which we and certain of our subsidiaries operate, the dollar is
our functional and reporting currency and, accordingly, monetary accounts
maintained in currencies other than the U.S. dollar are remeasured using the
foreign exchange rate at the balance sheet date. The resulting translation
adjustments are reported as a financial income (loss) in the statement of
operations. Operational accounts and non-monetary balance sheet accounts
maintained in currencies other than the U.S. dollar are remeasured and recorded
at the exchange rate in effect at the date of the transaction. The financial
statements of certain foreign subsidiaries and an affiliate whose functional
currency is not the U.S. dollar, have been translated into dollars. All balance
sheet accounts have been translated using the exchange rates in effect at the
balance sheet date. Statement of operations amounts have been translated using
the weighted average exchange rate for the period. The resulting translation
adjustments are reported as a component of shareholders' equity in accumulated
other comprehensive income (loss).
Critical Accounting Policies and Estimations
There has been no change to our critical accounting policies and
estimates, contained in Item 5. "Operating and Financial Review and Prospects"
of our Annual Report on Form 20-F filed for the year ended December 31, 2004.
Recently Issued Accounting Standards
On December 16, 2004, the Financial Accounting Standards Board, or FASB,
issued Statement of Financial Accounting Standards No. 123 (revised 2004),
"Share-Based Payment", or SFAS 123(R), which is a revision of Statement of
Financial Accounting Standards No. 123, "Accounting for Stock Based
Compensation", or SFAS 123. Generally, the approach in SFAS 123(R) is similar to
the approach described in SFAS 123. However, SFAS 123 permitted, but did not
require, share-based payments to employees to be recognized based on their fair
values while SFAS 123(R) requires all share-based payments to employees to be
recognized based on their fair values. SFAS 123(R) also revises, clarifies and
expands guidance in several areas, including measuring fair value, classifying
an award as equity or as a liability and attributing compensation cost to
reporting periods. The new standard will be effective for us commencing January
1, 2006.
As permitted by SFAS 123, we currently account for share-based payments to
employees using APB 25, the intrinsic value method, and, as such, recognize no
compensation cost for employee stock options. The impact of the adoption of SFAS
123(R) cannot be predicted at this time, as it depends on levels of share-based
payments for future grant. Had we adopted Statement 123(R) in prior periods, the
impact of that standard would have approximated the impact of Statement 123 as
described in the disclosure of pro forma net income and earnings per share in
our consolidated financial statements.
In May 2005, the FASB issued FASB Statement No. 154, "Accounting Changes
and Error Corrections: a replacement of APB Opinion No. 20 ("APB 20") and FASB
Statement No. 3" ("SFAS No. 154") which requires companies to apply voluntary
changes in accounting principles retrospectively whenever it is practicable. The
retrospective application requirement replaces APB 20's requirement to recognize
most voluntary changes in accounting principle by including the cumulative
effect of the change in net income during the period the change occurs.
Retrospective application will be the required transition method for new
accounting pronouncements in the event that a newly-issued pronouncement does
not specify transition guidance. SFAS No. 154 is effective for accounting
changes made in fiscal years beginning after December 15, 2005.
Operating Results
The following table presents certain financial data expressed as a
percentage of total revenues for the periods indicated:
Six months ended June 30, Three months ended June 30,
--------------------------- ---------------------------
2004 2005 2004 2005
---------- ---------- ---------- ----------
Revenues from products and services ........... 100.0% 100.0% 100.0% 100.0%
Cost of revenues from products and services ... (24.1) (30.8) (25.4) (30.9)
---------- ---------- ---------- ----------
Gross profit .................................. 75.9 69.2 74.6 69.1
Operating expenses:
Selling and marketing ......................... (58.0) (52.3) (70.1) (48.7)
Research and development ...................... (25.4) (45.3) (28.6) (41.5)
General and administrative .................... (20.4) (31.1) (24.5) (24.1)
---------- ---------- ---------- ----------
Operating loss ................................ (27.9) (59.5) (48.6) (45.2)
Financial income, net ......................... 0.4 0.5 (0.5) 0.4
Other income (expenses), net .................. (0.7) 1.3 0.1 2.6
---------- ---------- ---------- ----------
Loss before taxes ............................. (28.2) (57.7) (49.0) (42.2)
---------- ---------- ---------- ----------
Taxes on income ............................... 0 0 (0.1) 0
---------- ---------- ---------- ----------
Net loss before equity in earnings of affiliate (28.2) (57.7) (49.1) (42.2)
Equity in earnings of affiliate ............... 2.2 0.2 2.5 1.4
---------- ---------- ---------- ----------
Net loss ...................................... (26.0)% (57.5)% (46.6)% (40.8)%
========== ========== ========== ==========
Six Months Ended June 30, 2004 and 2005
Revenues from products and services. Revenues consist primarily of
software license fees sales, hardware sales and revenues from services,
including service bureau, maintenance, training, professional services and
support. Revenues increased 27.3% to $5.54 million in the six months ended June
30, 2005, compared to $4.35 million reported in the first six months of 2004.
Revenues in the second quarter of 2005 increased 41% to $2.81 million, compared
to $2.0 million in the second quarter of 2004. Revenues from our wholly owned
U.S. subsidiary, MTS IntegraTRAK, increased 25.7 % from the six months ended
June 30, 2004 and accounted for 54.7% of our total revenues in the six months
ended June 30, 2005. The increase in revenues was primarily attributable to
revenues from billing solutions that we started to recognize in January 2005 as
a result of the inclusion of the technology acquired from Teleknowledge and
revenues from sales of our new telemanagement solutions.
Cost of Revenues from products and services. Cost of revenues consists
primarily of (i) production costs (including hardware, media, packaging, freight
and documentation); (ii) certain royalties and licenses payable to third parties
(including the Office of the Chief Scientist of the Ministry of Industry and
Trade of the State of Israel), (iii) professional services costs; and (iv)
warranty and support costs for up to one year for end-users and up to 15 months
for our "OEM" distributors. Cost of revenues increased by 63.0% to $1.70 million
in the six months ended June 30, 2005 from $1.05 million in the six months ended
June 30, 2004. Cost of revenues increased by 71.7% to $869,000 thousand in the
second quarter of 2005 from $506,000 in the second quarter of 2004. This
increase is in accordance with the increase in revenues and principally a result
of the significant number of new employees recruitments in professional services
and tech support departments and their travel expenditures.
Research and Development. Research and development expenses consist
primarily of salaries of employees engaged in on-going research and development
activities, outsourcing subcontractor development and other related costs.
Research and development costs increased by 128.2% to $2.51 million in the six
months ended June 30, 2005 from $1.10 million in the six months ended June 30,
2004. Research and development costs increased by 206% to $1.17 million in the
second quarter of 2005 from $569,000 in the second quarter of 2004. Total
research and development expenses increased in the 2005 period primarily due to
the continued integration of TeleKnowledge's research and development group, as
well as to our continuing investment in products development.
Selling and Marketing. Selling and marketing expenses consist primarily of
costs relating to sales representatives and their travel expenses, trade shows
and marketing exhibitions, advertising and presales support. Selling and
marketing expenses were $2.90 million in the six months ended June 30, 2005, an
increase of approximately 14.9% from $2.52 million in the six months ended June
30, 2004. This increase in selling and marketing expenses is primarily
attributable to the increase in our personnel globally across our sales
division. We reduced our selling and marketing expenditures in the second
quarter of 2005 compared to the first quarter of 2005 as part of our commitment
to focus on the growing areas of our business. Selling and marketing expenses
were $1.37 million in the second quarter of 2005, reflecting a modest decline
from $1.40 million reported in the second quarter of 2004.
General and Administrative. General and administrative expenses consist
primarily of compensation costs for administration, finance and general
management personnel, professional fees and office maintenance and
administrative costs. General and administrative expenses increased by 95.5% to
$1.72 million in the six months ended June 30, 2005 from $887,000 in the six
months ended June 30, 2004. General and administrative expenses increased by
38.45% to $677,000 in the second quarter of 2005 compared to $489,000 in the
second quarter of 2004. This increase is attributable to the increase in our
overall activity. .
Financial Income, Net. Financial income consists primarily of interest
income on bank deposits and foreign currency translation adjustments. Financial
income increased by 57.9% to $30,000 in the six months ended June 30, 2005 from
$19,000 in the six months ended June 30, 2004. Financial income in the second
quarter of 2005 was $11,000 compared to financial expenses of $9,000 in the
second quarter of 2004.
Net Loss. Net loss for the six months ended June 30, 2005 was $3.18
million, or $0.68 per ordinary share on a basic and diluted basis, compared to a
net loss $1.13 million, or $0.24 per ordinary share on a basic and diluted
basis, reported for the six months ended June 30, 2004. Net loss for the second
quarter of 2005 was $1.15 million, or $0.24 per ordinary share on a basic and
diluted basis, compared to $929,000, or $0.20 per ordinary share on a basic and
diluted basis in the second quarter of 2004. The increased loss is primarily
attributable to increased expenses associated with our growth strategy and the
further integration of the TeleKnowledge acquisition.
Seasonality
Our operating results are generally not characterized by a seasonal
pattern except that our volume of sales in Europe are generally lower in the
summer months.
Liquidity and Capital Resources
On June 30, 2005, we had $1.75 million in cash and cash equivalents, $
126,000 in marketable securities and working capital of $249,000 as compared to
$3.8 million in cash and cash equivalents, $1.1 million in marketable securities
and working capital of $2.8 million on December 31, 2004. The decrease in
working capital was mainly due to our losses in the period, research and
development expenses associated with the integration of the Teleknowledge
activity, as well as for the increase in our business activity that resulted in
increased trade payables and accrued expenses and other liabilities. We improved
our cash position on August 10, 2005 when we entered into definitive agreements
and consummated a transaction with institutional and private investors for a
private placement of our ordinary shares and warrants to purchase ordinary
shares that raised $2.8 million. If the warrants are exercised in full we will
raise an additional $1.5 million.
One of the principal factors affecting our working capital is the payment
cycle on our sales. Payment for goods shipped is generally received from 60 to
70 days after shipment. Any material change in the aging of our accounts
receivable could have an adverse effect on our working capital.
Our operations used $ 3.3 million during the six months ended June 30,
2005, compared to $ 465,000 that was used in the six months ended June 30 ,
2004, due to our research and development expenses associated with the
integration of the TeleKnowledge activity, as well as to our continuing
investment in products development. The increase also relates to increased
selling and marketing expenses that are primarily attribute to the increase in
our personnel globally across our sales division.
We currently do not have significant capital spending or purchase
commitments, but we expect to continue to engage in capital spending consistent
with the level of our operations. We anticipate that our cash on hand and cash
flow from operations will be sufficient to meet our working capital and capital
expenditure requirements for at least 12 months. However, if we do not generate
sufficient cash from operations, we may be required to obtain additional
financing or to reduce level of expenditure. There can be no assurance that such
financing will be available in the future, or, if available, will be on terms
satisfactory to us.
We are not a party to any material off-balance sheet arrangements. In
addition, we have no unconsolidated special purpose financing or partnership
entities that are likely to create material contingent obligations.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
MER TELEMANAGEMENT SOLUTIONS LTD.
(Registrant)
By: /s/ Eytan Bar
-------------
Eytan Bar
President and
Chief Executive Officer
Date: September 9, 2005