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. Unaudited Pro Forma Condensed Combined Statement of Operations of Mer
Telemanagement Solutions Ltd.
2. Business of Teleknowledge Group Ltd. Consolidated Financial Statements for
the Year Ended December 30, 2004.
ITEM 1
UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS OF MER
TELEMANAGEMENT SOLUTIONS LTD.
The following unaudited pro forma condensed combined statement of operations of
Mer Telemanagement Ltd. ("MTS") have been prepared to give effect to the
acquisition of certain assets and liabilities of Teleknowledge Group Ltd.
("Teleknowledge") by MTS as if it had occurred on January 1, 2004. The audited
balance sheet of MTS as of December 31, 2004, includes the acquired certain
assets and certain liabilities from Teleknowledge.
On December 30, 2004, MTS and Teleknowledge consummated an asset purchase
agreement (the "Agreement"). Teleknowledge was a leading provider of
carrier-class billing and rating solutions. The integration of Teleknowledge's
billing solution enables MTS to offer an end-to-end customer care and billing
solution. Under the terms of the Agreement, MTS acquired certain assets and
liabilities of Teleknowledge for the following consideration:
1. An initial consideration of $2,374,000 in cash at the closing date.
2. Additional contingent consideration of up to an amount of $3,650,000
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 will be recorded as additional goodwill, during
the contingency period, when actual revenue performance will be
evaluated.
3. In addition, MTS incurred transaction costs totaling $71,000.
Prior to the acquisition, MTS and Teleknowledge had an OEM relationship. The
commercial arrangements and transactions were settled before the date of the
acquisition. The acquisition was accounted for under the purchase method of
accounting in accordance with SFAS 141, "Business Combination". Accordingly, the
purchase price has been allocated to the assets acquired and the liabilities
assumed based on the estimated fair value at the date of acquisition. The excess
of the purchase price over the estimated fair value of the net assets acquired
has been recorded as goodwill. Based upon a valuation of the fair value of
tangible and intangible assets acquired and the liabilities assumed, MTS has
allocated the total cost of the acquisition to Teleknowledge's net assets at
December 31, 2004 the date of acquisition, as follows:
U.S. dollars in
thousands
---------------
Trade receivables $ 100
Property and equipment 40
Intangible assets:
Developed technology (four-year useful life) 690
Customer relationship (six-year useful life) 300
Goodwill 1,391
-------
Total assets acquired 2,521
-------
Liabilities assumed:
Deferred revenues (76)
-------
Total liabilities assumed (76)
-------
Net assets acquired $ 2,445
=======
The valuation of the developed technology was based on the income approach,
which reflects the future economic benefits from Teleknowledge products. The
value assigned to customer relationship was based on the cost approach. Under
this approach, the customer relationship was valued by calculating the savings
realized by MTS through obtaining a pre-existing customer relationship of
Teleknowledge. In accordance with Statement of Financial Accounting Standards
No. 142 "Goodwill and Other Intangible Assets," the goodwill resulting from the
acquisition of Teleknowledge will not be amortized but rather will be tested at
least annually for impairment.
The unaudited pro forma consolidated statement of operations is for information
purposes only and is not necessarily indicative of the results of future
operations of the combined company or the actual results that would have been
achieved had MTS and Teleknowledge been consummated the agreement during the
period indicated. You should read the unaudited pro forma statement of
operations data in conjunction with the consolidated historical financial
statements of MTS and Teleknowledge, including the notes to all sets of
financial statements.
UNAUDITED PRO-FORMA CONDENSED COMBINED STATEMENTS OF OPERATIONS
--------------------------------------------------------------------------------
FOR THE YEAR ENDED DECEMBER 31, 2004
U.S. Dollars in thousands (except per share data)
HISTORICAL
------------------------------ PRO FORMA PRO FORMA
MTS TELEKNOWLEDGE ADJUSTMENTS COMBINED
------------
FOR THE YEAR
ENDED
DECEMBER 30,
------------
2004
------------
Prior To
Acquisition
----------- ------------ ----------- -----------
Revenues from products and services $ 9,413 $ 1,334 (160) (4) $ 10,587
223 (1)
Cost of revenues from products and (160) (4)
services 2,814 364 3,241
----------- ----------- -----------
Gross profit 6,599 970 7,346
----------- ----------- -----------
Operating expenses:
Research and development 2,362 595 2,957
Selling and marketing 6,300 498 6,798
General and administrative 2,101 634 2,735 (2)
Restructuring income -- (147) (147)
----------- ----------- -----------
Total operating expenses 10,763 1,580 12,343
----------- ----------- -----------
Operating loss (4,164) (610) (4,997)
Financial income, net 78 4 (47) (3) 35
Other income (expenses), net -- 8 8
----------- ----------- -----------
Loss before taxes on income (4,086) (598) (4,954)
Taxes on income 266 -- 266
----------- ----------- -----------
Net loss before equity in earnings of
affiliate (4,352) (598) (5,220)
Equity in earnings of affiliate 225 -- 225
----------- ----------- -----------
Net loss $ (4,127) $ (598) $ (4,995)
=========== =========== ===========
Net loss per share:
Basic and diluted net loss per Ordinary
share $ (0.89) $ (1.08)
=========== ===========
Weighted average number of Ordinary shares
used in computing basic and diluted net
loss per share 4,634,413 4,634,413
=========== ===========
NOTES TO UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS
(1) To record the amortization of the fair value of the developed technology
and customer relationship acquired in the transaction. MTS has estimated
the acquired developed technology has useful life of four years and the
customer relationship has useful life of six years.
(2) The unaudited pro forma condensed combined statement of operations does
not include nonrecurring expenses of both $ 220 payroll expenses to the
Chief Executive Officer ("CEO") of Teleknowledge that were paid in the
first quarter of 2005 and $ 87 stock based compensation related to
warrants issued to the CEO.
(3) Adjustment to reduce interest income that would not have been earned had
the acquisition taken place on January 1, 2004.
(4) To eliminate transactions between MTS and Teleknowledge that would not
have been recorded had the acquisition taken place on January 1, 2004.
- - - - - - - - -
ITEM 2
BUSINESS OF TELEKNOWLEDGE GROUP LTD.
CONSOLIDATED FINANCIAL STATEMENTS
AS OF DECEMBER 30, 2004
IN U.S. DOLLARS
INDEX
Page
------
Report of Independent Auditors 2
Consolidated Balance Sheets 3 - 4
Consolidated Statements of Operations 5
Statements of Changes in Shareholders' Equity (Deficiency) 6
Consolidated Statements of Cash Flows 7
Notes to Consolidated Financial Statements 8 - 17
- - - - - - - - - - - - -
[LOGO] ERNST & YOUNG
REPORT OF INDEPENDENT AUDITORS
To the Shareholders of
BUSINESS OF TELEKNOWLEDGE GROUP LTD.
We have audited the accompanying consolidated balance sheets of Business
of Teleknowledge Group Ltd. ("the Company") and its subsidiaries as of December
30, 2004 and December 31, 2003, and the related consolidated statements of
operations, changes in shareholders' equity (deficiency) and cash flows for each
of the two years in the period ended December 30, 2004. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with the standards of the Public
Company Accounting Oversight Board (United States). Those standards require that
we plan and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. We were not engaged to
perform an audit on the Company's internal control over financial reporting. Our
audits included consideration of internal control over financial reporting as a
basis for designing audit procedures that are appropriate in the circumstances,
but not for the purpose of expressing an opinion on the effectiveness of the
Company's internal control over financial reporting. Accordingly, we express no
such opinion. An audit also includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements, assessing
the accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position of
the Company and its subsidiaries as of December 30, 2004 and December 31, 2003
and the consolidated results of their operations and their cash flows for each
of the two years in the period ended December 30, 2004, in conformity with U.S.
generally accepted accounting principles.
/s/ Kost, Forer, Gabbay & Kasierer
Tel-Aviv, Israel KOST FORER GABBAY & KASIERER
August 14, 2005 A Member of Ernst & Young Global
-2-
BUSINESS OF TELEKNOWLEDGE GROUP LTD.
CONSOLIDATED BALANCE SHEETS
--------------------------------------------------------------------------------
U.S. dollars in thousands
December 30, December 31,
2004 2003
------------ ------------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 188 $ 524
Restricted cash 32 102
Trade receivables 220 445
Other accounts receivable and prepaid expenses 47 104
------------ ------------
Total current assets 487 1,175
----- ------------ ------------
SEVERANCE PAY FUND 123 160
------------ ------------
PROPERTY AND EQUIPMENT:
Cost 2,486 2,473
Less - accumulated depreciation 2,408 2,358
------------ ------------
78 115
------------ ------------
Total assets $ 688 $ 1,450
----- ============ ============
The accompanying notes are an integral part of the consolidated financial
statements.
-3-
BUSINESS OF TELEKNOWLEDGE GROUP LTD.
CONSOLIDATED BALANCE SHEETS
--------------------------------------------------------------------------------
U.S. dollars in thousands
December 30, December 31,
2004 2003
------------ ------------
LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIENCY)
CURRENT LIABILITIES:
Trade payables $ 120 $ 199
Other accounts payable and accrued expenses 501 535
Financing leases - short-term -- 2
------------ ------------
Total current liabilities 621 736
----- ------------ ------------
ACCRUED SEVERANCE PAY 133 184
------------ ------------
SHAREHOLDERS' EQUITY (DEFICIENCY):
Owners of equity 51,502 51,500
Accumulated deficit (51,568) (50,970)
------------ ------------
Total shareholders' equity (deficiency) (66) 530
----- ------------ ------------
Total liabilities and shareholders' equity (deficiency) $ 688 $ 1,450
----- ============ ============
The accompanying notes are an integral part of the consolidated financial
statements.
-4-
BUSINESS OF TELEKNOWLEDGE GROUP LTD.
CONSOLIDATED STATEMENTS OF OPERATIONS
--------------------------------------------------------------------------------
U.S. dollars in thousands
Year ended Year ended
December 30, December 31,
2004 2003
------------ ------------
Revenues:
Software license $ 412 $ 126
Services 922 772
------------ ------------
1,334 898
------------ ------------
Cost of revenues:
Software license 25 10
Services 339 623
------------ ------------
364 633
------------ ------------
Gross profit 970 265
------------ ------------
Operating expenses:
Research and development 595 1,617
Selling and marketing 498 971
General and administrative 634 758
Restructuring income (147) (41)
------------ ------------
Total operating expenses 1,580 3,305
----- ------------ ------------
Operating loss 610 3,040
Other income (expenses), net 8 (67)
Financial income (expenses), net 4 (2)
------------ ------------
Net loss $ (598) $ (3,109)
============ ============
The accompanying notes are an integral part of the consolidated financial
statements.
-5-
BUSINESS OF TELEKNOWLEDGE GROUP LTD.
STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY (DEFICIENCY)
--------------------------------------------------------------------------------
U.S. dollars in thousands
Total
shareholders'
Owners of Accumulated equity
equity deficit (deficiency)
---------------- ---------------- ----------------
Balance as of January 1, 2003 $ 51,500 $ (47,861) $ 3,639
Net loss -- (3,109) (3,109)
---------------- ---------------- ----------------
Balance as of December 31, 2003 51,500 (50,970) 530
Exercise of options 2 -- 2
Net loss -- (598) (598)
---------------- ---------------- ----------------
Balance as of December 30, 2004 $ 51,141 $ (51,568) $ (66)
================ ================ ================
The accompanying notes are an integral part of the consolidated financial
statements.
-6-
BUSINESS OF TELEKNOWLEDGE GROUP LTD.
CONSOLIDATED STATEMENTS OF CASH FLOWS
--------------------------------------------------------------------------------
U.S. dollars in thousands
Year ended Year ended
December 30, December 31,
2004 2003
-------------- --------------
Cash flows from operating activities
------------------------------------
Net loss $ (598) $ (3,109)
Adjustments to reconcile net loss to net cash used in operating
activities:
Depreciation 50 312
Loss on sale of property and equipment -- 67
Decrease in trade receivables 225 609
Decrease in other accounts receivable and prepaid expenses 57 239
Increase (decrease) in trade payables (79) 89
Decrease in other accounts payable and accrued expenses (34) (1,148)
Decrease in accrued severance pay, net (14) (24)
-------------- --------------
Net cash used in operating activities (393) (2,965)
-------------- --------------
Cash flows from investing activities
------------------------------------
Purchase of property and equipment (13) (3)
Proceeds from sale of property and equipment -- 79
Restricted cash 70 (102)
-------------- --------------
Net cash provided by (used in) investing activities 57 (26)
-------------- --------------
Cash flows from financing activities
------------------------------------
Exercise of options 2 --
Repayment of lease obligation (2) (100)
-------------- --------------
Net cash used in financing activities -- (100)
-------------- --------------
Decrease in cash and cash equivalents (336) (3,091)
Cash and cash equivalents at the beginning of the year 524 3,615
-------------- --------------
Cash and cash equivalents at the end of the year $ 188 $ 524
============== ==============
The accompanying notes are an integral part of the consolidated financial
statements.
-7-
BUSINESS OF TELEKNOWLEDGE GROUP LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
U.S. dollars in thousands
NOTE 1:- GENERAL
a. Business of Teleknowledge Group Ltd. ("the Company") is a
provider of advanced billing and revenues management
software solutions.
The Company markets and sells its products in North America
and Europe, through its wholly-owned subsidiaries.
b. In January 2002, the Company decided to accelerate the
strategic realignment started in August 2001. As part of
this effort, the Company underwent further restructuring,
including reductions in human resources and replacement of
key members of management. Additionally, the Company closed
its European branch offices. In 2003, the Company closed
its office in the U.S.
c. On December 5, 2004, the Company signed an asset purchase
agreement, accordingly as of December 31, 2004 (Closing
date) the Company has sold to Mer Telemanagement Solutions
Ltd. ("MTS") substantially all of the assets, properties,
rights and claims of the Company and certain liabilities of
the Company related to the assets acquired thereby. The
consideration to be paid by MTS to the Company shall be
comprised of the following:
1. Payment at closing date of the aggregate amount of
$2,374.
2. An additional contingent consideration of (a) 20% of
all of MTS's future revenues from any product or
service which contains any elements or components of
the Company's technology or a billing solution for a
period of three years following the closing date and
(b) 10% of all the renewal maintenance fees for a
period of three years following the closing date up
to a maximum aggregate amount of $ 3,650.
Prior to the acquisition, MTS and Teleknowledge had an OEM
relationship. The commercial arrangements and transactions
were settled before the date of the acquisition. During the
year ended December 30, 2004 the Company has generated
revenues in the amount of $160 from transactions with MTS.
As part of the agreement, MTS was obligated to pay for most
of the balance of the trade receivables, net of deferred
revenues, of the Company as of December 31, 2004, in
exchange for their fair value. The total amount that was
paid by MTS for those trade receivable was $ 145, net of
deferred revenues. Should MTS fail to collect any of the
trade receivable, within 120 days of the Closing Date, the
Company shall pay MTS such uncollected amount, and MTS
shall assign to the Company the rights to collect such
funds from the applicable customers. $ 51 of the amount was
not collected by MTS and the Company returned that amount
to MTS in mid-2005.
The financial statements as of December 30, 2004 and for
the year then ended do not reflect such acquisition.
d. On May 11, 2005, the Company's shareholders filed an
application to the Israeli Registrar of Companies,
according to which and as a result of the above acquisition
by MTS, the Company has started a process of a voluntary
liquidation. Such liquidation is not reflected in these
financial statements.
-8-
BUSINESS OF TELEKNOWLEDGE GROUP LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
U.S. dollars in thousands
NOTE 2:- SIGNIFICANT ACCOUNTING POLICIES
a. Use of estimates:
The preparation of financial statements, in conformity with
generally accepted accounting principles, requires
management to make estimates and assumptions that affect
the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those
estimates.
b. Financial statements in U.S. dollars:
The majority of the Company's sales is made outside Israel
in U.S. dollars ("dollars"). In addition, a substantial
portion of the company and certain portion of its
subsidiaries costs are incurred in dollars. Since the
Company's management believes that the dollar is the
primary currency of the economic environment in which the
company and certain of its subsidiaries operate, the dollar
is their functional and reporting currency.
Accordingly, monetary accounts maintained in currencies
other than the dollar are remeasured into U.S. dollars in
accordance with Statement of Financial Accounting Standard
No. 52, "Foreign Currency Translation" ("SFAS No. 52"). All
effects of foreign currency remeasurement of monetary
balance sheet items are reflected in the statements of
operations as financial income or expenses, as appropriate.
c. Principles of consolidation:
The consolidated financial statements include the accounts
of the Company and its subsidiaries listed below.
Intercompany transactions and balances have been eliminated
upon consolidation.
Subsidiaries included in consolidation:
December 30, 2004 and
December 31, 2003
-------------------------------
Shares conferring
-------------------------------
Voting Rights to
rights profits
------------ ------------
Teleknowledge Inc. 100% 100%
Teleknowledge BV 100% 100%
d. Cash equivalents:
The Company considers all highly liquid investments,
originally purchased with maturities of three months or
less, to be cash equivalents.
e. Restricted cash:
Restricted cash is primarily invested in highly liquid
deposits, which are used as security for the Company's rent
facilities.
-9-
BUSINESS OF TELEKNOWLEDGE GROUP LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
U.S. dollars in thousands
NOTE 2:- SIGNIFICANT ACCOUNTING POLICIES (Cont.)
f. Trade receivables:
Trade receivables include amounts billed to clients and
various amounts due from transactions arising in the
ordinary course of business. Management periodically
evaluates the collectability of these receivables.
g. Property and equipment:
Property and equipment are stated at cost net of
accumulated depreciation. Depreciation is calculated using
the straight-line method over the estimated useful lives of
the assets at the following annual rates:
%
-----------------------------------------
Computers and related equipment 33
Motor vehicles 15
Office furniture and equipment 7 - 15 (mostly 15)
Leasehold improvements Over the term of the lease or the life of
the asset, by shorter of
h. Impairment of long-lived assets:
Long-lived assets of the Company are reviewed for
impairment in accordance with Statement of Financial
Accounting Standard No. 144, "Accounting for the Impairment
or Disposal of Long- Lived Assets" ("SFAS No. 144"),
whenever events or changes in circumstances indicate that
the carrying amount of an asset may not be recoverable.
Recoverability of assets to be held and used is measured by
a comparison of the carrying amount of an asset to the
future undiscounted cash flows expected to be generated by
the assets. If such assets are considered to be impaired,
the impairment to be recognized is measured by the amount
by which the carrying amount of the assets exceeds the fair
value of the assets. As of December 30, 2004 and December
31, 2003 no impairment was required.
i. Research and development cost:
Statement of Financial Accounting Standards ("SFAS") 86
"Accounting for the Costs of Computer Software to be Sold,
Leased or Otherwise Marketed", requires capitalization of
certain software development costs subsequent to the
establishment of technological feasibility.
Based on the Company's product development process,
technological feasibility is established upon completion of
a working model. The Company does not incur material costs
between the completion of the working model and the point
at which the products are ready for general release.
Therefore, research and development costs are charged to
the statement of operations as incurred.
-10-
BUSINESS OF TELEKNOWLEDGE GROUP LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
U.S. dollars in thousands
NOTE 2:- SIGNIFICANT ACCOUNTING POLICIES (Cont.)
j. Accounting for stock-based compensation:
The Company has elected to follow Accounting Principles
Board Opinion 25, "Accounting for Stock Issued to
Employees" ("APB 25") and FASB Interpretation 44,
"Accounting for Certain Transactions Involving Stock
Compensation" ("FIN 44") in accounting for its employee
stock option plans. Under APB 25, when the exercise price
of the Company's share options is equivalent to or above
the market price of the underlying shares on the date of
grant, no compensation expense is recognized.
Pro forma information regarding net loss is required by
Financial Accounting Standard No. 123 "Accounting for
Stock-Based Compensation" ("SFAS No. 123"), and has been
determined as if the Company had accounted for its employee
share options under the fair value method prescribed by
that Statement. The fair value for these options was
estimated at the date of grant, using a minimum-value
option pricing model. Due to immateriality the pro forma
information is not presented.
k. Revenue recognition:
The Company generates revenues from licensing the rights to
use its software products directly to end-users and
indirectly through sub-license fees to resellers. The
Company also generates revenues from sales of professional
services, including consulting, implementation, training
and maintenance.
Revenues from software licenses that require significant
customization, integration and installation are recognized
based on SOP 81-1, "Accounting for Performance of
Construction-Type and Certain Production-Type Contracts",
using contract accounting on a percentage of completion
method based on the relationship of actual costs incurred
to total costs estimated to be incurred over the duration
of the contract. The Company believes that the use of the
percentage of completion method is appropriate as the
Company has the ability to make reasonably dependable
estimates of the extent of progress towards completion,
contract revenues and contract costs. In addition,
contracts executed include provisions that clearly specify
the enforceable rights regarding services to be provided
and received by the parties to the contracts, the
consideration to be exchanged and the manner and terms of
settlement. In all cases the Company expects to perform its
contractual obligations and its licensees are expected to
satisfy their obligations under the contract. A provision
for estimated losses on uncompleted contracts is recorded
in the period when such losses are first identified, in the
amount of the estimated loss on the entire contract.
Revenues from maintenance are recognized over the term of
the maintenance agreement or at the time that services are
rendered.
l. Royalty-bearing grants:
Royalty-bearing grants from the Government of Israel for
funding certain approved research projects are recognized
at the time when the Company is entitled to such grants, on
the basis of the related costs incurred.
-11-
BUSINESS OF TELEKNOWLEDGE GROUP LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
U.S. dollars in thousands
NOTE 2:- SIGNIFICANT ACCOUNTING POLICIES (Cont.)
m. Income taxes:
The Company and its subsidiaries accounts for income taxes
in accordance with Statement of Financial Accounting
Standards (SFAS) No. 109, "Accounting for Income Taxes".
This statement prescribes the use of the liability method,
whereby deferred tax asset and liability account balances
are determined based on differences between financial
reporting and tax bases of assets and liabilities and are
measured using the enacted tax rates and laws that will be
in effect when the differences are expected to reverse. The
Company and its subsidiaries provide a valuation allowance,
if necessary, to reduce deferred tax assets to their
estimated realizable value.
m. Concentration of credit risks:
Financial instruments that potentially subject the Group to
concentrations of credit risk consist principally of cash,
cash equivalents, restricted cash and trade receivables.
Cash and cash equivalents and restricted cash are deposited
with major banks in Israel and the United States. Such
deposits in the United States may be in excess of insured
limits and are not insured in other jurisdictions.
Management believes that the financial institutions that
hold the Company's investments are financially sound, and,
accordingly, minimal credit risk exists with respect to
these investments.
n. Fair value of financial instruments:
The carrying amounts of cash and cash equivalents,
restricted cash, trade receivables, other accounts
receivable and trade payables approximate their fair value,
due to the short-term maturity of such instruments.
o. Severance pay:
The Company's liability for severance pay is calculated
pursuant to Israeli severance pay law based on the most
recent salary of the employees multiplied by the number of
years of employment, as of the balance sheet date.
Employees are entitled to one month's salary for each year
of employment or a portion thereof. The Company's liability
for all of its employees is fully provided by monthly
deposits with insurance policies and by an accrual. The
value of these policies is recorded as an asset in the
Company's balance sheet.
The deposited funds include profits accumulated up to the
balance sheet date. The deposited funds may be withdrawn
only upon the fulfillment of the obligation pursuant to
Israeli severance pay law or labor agreements. The value of
the deposited funds is based on the cash surrendered value
of these policies, and includes immaterial profits.
Severance expenses for the years ended December 30, 2004
and December 31, 2003 were immaterial.
-12-
BUSINESS OF TELEKNOWLEDGE GROUP LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
U.S. dollars in thousands
NOTE 3:- OTHER ACCOUNTS RECEIVABLE AND PREPAID EXPENSES
December 30, December 31,
2004 2003
------------ ------------
Government authorities $ 3 $ 43
Employees -- 7
Prepaid expenses 4 11
Other accounts receivable 40 43
------------ ------------
$ 47 $ 104
============ ============
NOTE 4:- PROPERTY AND EQUIPMENT
December 30, December 31,
2004 2003
------------ ------------
Cost:
Computers and peripheral equipment $ 1,409 $ 1,396
Motor vehicles 2 2
Office furniture and equipment 341 341
Leasehold improvements 734 734
------------ ------------
2,486 2,473
------------ ------------
Accumulated depreciation:
Computers and peripheral equipment 1,409 1,369
Motor vehicles 2 2
Office furniture and equipment 341 335
Leasehold improvements 656 652
------------ ------------
2,408 2,358
------------ ------------
Depreciated cost $ 78 $ 115
============ ============
Depreciation expenses amounted to $ 50 and $ 312 for the years
ended December 30, 2004 and December 31, 2003, respectively.
NOTE 5:- OTHER ACCOUNTS PAYABLE AND ACCRUED EXPENSES
December 30, December 31,
2004 2003
------------ ------------
Government authorities $ 133 $ 145
Employees and payroll accruals 133 109
Accrued vacation pay 31 42
Accrued expenses 106 72
Restructuring charges (Note 9) 61 158
Others -- 9
------------ ------------
$ 464 $ 535
============ ============
-13-
BUSINESS OF TELEKNOWLEDGE GROUP LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
U.S. dollars in thousands
NOTE 6:- COMMITMENTS AND CONTINGENCIES
a. The Company is committed to pay royalties at the rate of 3%
to 5% to the Government of Israel, on sale proceeds from
products in which the Government participates in their
research and development by way of grants. The commitment
is determined on a product-by-product basis, in an amount
not to exceed the total of the grants received (linked to
the U.S. dollar).
Grants received during the years 2004 and 2003 amounted to
$ 0 and royalties paid amounted to $ 0. At December 30,
2004, the Company has a remaining contingent obligation of
approximately $ 1,800.
b. The Company provided a bank guarantee to secure the lease
of its building, in the amount of $ 32.
c. As of December 30, 2004 the Company has no future
commitments under operating leases.
Total rent and lease expenses for the years ended December
30, 2004 and December 31, 2003, amounted to $ 58 and $ 410,
respectively.
NOTE 7:- SHARE OPTION PLAN
The Company has authorized through its Share Option Plan
the grant of options to the founders and employees of up to
20,979,384 shares of the Company's Ordinary shares. The
options granted have four-year vesting terms, become fully
exercisable after four consecutive years of employment and
expire seven years subsequent to the date of grant. Until
December 30, 2004, the Company granted to employees a total
of 17,884,100 options at the exercise price of NIS 0.01. As
of December 30, 2004 a total 1,300,000 options are
outstanding.
During the years 2003 and 2004, no options were granted to
any of the employees.
During the years 2003 and 2004 4,769,557 and 10,374,828
options were forfeited, respectively.
As of December 30, 2004 17,757,151 shares are still
available for future grants.
In October 2004, 482,518 options were exercised into
Ordinary shares of NIS 0.01 par value each, in a total
consideration of $ 2.
NOTE 8:- INCOME TAXES
a. Measurement of results for tax purposes under the Income
Tax Law (Inflationary Adjustments), 1985:
Results for tax purposes are measured in real terms of
earnings in NIS after certain adjustments for increases in
the Israeli Consumer Price Index ("CPI"). The financial
statements are presented in U.S. dollars. The difference
between the annual change in the Israeli CPI and in the
NIS/dollar exchange rate causes a difference between
taxable income and the income before taxes shown in the
financial statements. In accordance with paragraph 9(f)
with statement of Financial Accounting Standards No. 109,
"Accounting for income taxes" ("SFAS No. 109"), the Company
has not provided deferred income taxes on this difference
between the reporting currency and the tax bases of assets
and liabilities.
-14-
BUSINESS OF TELEKNOWLEDGE GROUP LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
U.S. dollars in thousands
NOTE 8:- INCOME TAXES (Cont.)
b. Carryforward losses:
As of December 30, 2004, the Company had an available
carryforward tax loss amounting to approximately $ 21,297,
which may be carried forward, in order to offset taxable
income in the future, for an indefinite period.
The Company's U.S. subsidiary has a carryforward tax loss
as of December 30, 2004 in the amount of approximately $
20,592, which may be carried forward and offset against
taxable income in the future for 20 years.
Management currently believes that since the Company has a
history of losses it is more likely tan not that the
deferred tax regarding the loss carry forwards will not be
utilized in the foreseeable future and therefore a full
valuation allowance was recorded for the deferred tax asset
related to all the temporary differences and carryforward
tax losses
Utilization of U.S. net operating losses may be subject to
substantial annual limitation due to the "change in
ownership" provisions of the Internal Revenue Code of 1986
and similar state provisions. The annual limitation may
result in the expiration of net operating losses before
utilization.
c. Tax benefits under the Law for the Encouragement of Capital
Investments, 1959 ("the law"):
During 1998, the Company obtained approval for an
investment under the "alternative track", based on the law.
The "Approved Enterprise" status will allow the Company a
tax holiday on undistributed Israeli income for a period of
two years and 25% tax rate for the five remaining years.
Those benefits are limited to 12 years from the year that
the enterprise began operations, or 14 years from the year
in which the approval was granted, whichever is earlier.
Hence, this approved program will expire in 2012.
The Company has not yet generated taxable income and, thus,
the tax benefits have not yet been utilized.
The tax-exempt income attributable to the "Approved
Enterprise" cannot be distributed to shareholders without
subjecting the Company to taxes. If these retained
tax-exempt profits are distributed, the Company would be
taxed at the corporate tax rate applicable to such profits
as if the Company had not elected the alternative system of
benefits, currently 25% for an "Approved Enterprise". As of
December 30, 2004, the accumulated deficit of the Company
does not include tax-exempt profits earned by the Company's
"Approved Enterprise".
The benefits from the Company's Approved Enterprise
programs are dependent upon the Company fulfilling the
conditions stipulated by the Law for Encouragement of
Capital Investments, 1959 and the regulations published
under this law, as well as the criteria in the approval for
the specific investment in the Company's "Approved
Enterprise" programs. If the Company does not comply with
these conditions, the tax benefits may be canceled, and the
Company may be required to refund the amount of the
canceled benefits, with the addition of linkage differences
and interest. As of the date of these financial statements,
the Company's management believes that it has complied with
these conditions.
-15-
BUSINESS OF TELEKNOWLEDGE GROUP LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
U.S. dollars in thousands
NOTE 8:- INCOME TAXES (Cont.)
By virtue of this law, the Company is entitled to claim
accelerated depreciation on equipment used by the "Approved
Enterprise" during five tax years.
Income from sources other than the "Approved Enterprise"
during the benefit period will be subject to tax at the
regular corporate tax rate of 35%.
d. Loss (income) before taxes consists of the following:
December 30, December 31,
2004 2003
------------ ------------
Domestic $ (298) $ 105
Foreign 896 3,004
------------ ------------
$ 598 $ 3,109
============ ============
e. The main reconciling items between items between the
statutory tax rate of the Company and the effective tax
rate are the non-recognition of the benefits from
accumulated net operating losses carryforward among the
various subsidiaries worldwide due to the uncertainty of
the realization of such tax benefits.
f. Reduction in corporate tax rate:
In June 2004, the Israeli Parliament approved an amendment
to the Income Tax Ordinance (No. 140 and Temporary
Provision) (the "Amendment"), which progressively reduces
the corporate tax rate from 36% to 35% in 2004 and to a
rate of 30% in 2007. The amendment was signed and published
in July 2004 and is, therefore, considered enacted in July
2004. As the Company currently has no taxable income, and
no deferred taxes were recorded, the amendment does not
have an impact on the results of operation or the financial
position.
-16-
BUSINESS OF TELEKNOWLEDGE GROUP LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
U.S. dollars in thousands
NOTE 9:- RESTRUCTURING CHARGES
In the year 2002, the Company recorded a charge of approximately $
3,265, primarily relating to severance costs associated with a
workforce reduction and facilities costs as part of its plan to
reduce operating expenses. As of December 30, 2004, the remaining
reserve balance of approximately $ 61 is included in other
payables and accrued expenses in the balance sheet.
Severance
payments Facilities Others Total
----------- ----------- ----------- -----------
Restructuring reserve at January 1, 2003 $ 70 $ 796 $ 45 $ 911
Payments made (70) (699) -- (769)
Sublease payments received -- 180 -- 180
Non-cash addition (reduction) of
restructuring -- (180) 16 (164)
----------- ----------- ----------- -----------
Restructuring reserve at December 31, 2003 -- 97 61 158
Payments made -- (97) -- (97)
Sublease payments received -- 147 -- 147
Non-cash reduction of restructuring -- (147) -- (147)
----------- ----------- ----------- -----------
Restructuring reserve at December 30, 2004 $ -- $ -- $ 61 $ 61
=========== =========== =========== ===========
- - - - - - - - - - -
-17-
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