SECURITIES AND EXCHANGE COMMISSION
Washington D.C. 20549
FORM 20-F/A
[ ] REGISTRATION STATEMENT PURSUANT TO SECTION 12(b)
OR (g) OF THE SECURITIES EXCHANGE ACT OF 1934
OR
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2004
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from _________ to _________
Commission file number: 0-28950
MER TELEMANAGEMENT SOLUTIONS LTD.
(Exact name of Registrant as specified in its charter
and translation of Registrant's name into English)
Israel
(Jurisdiction of incorporation or organization)
22 Zarhin Street, Ra'anana 43662, Israel
(Address of principal executive offices)
Securities registered or to be registered pursuant to Section 12(b) of the Act:
None
Securities registered or to be registered pursuant to Section 12(g) of the Act:
Ordinary Shares, NIS 0.01 Par Value
(Title of Class)
Securities for which there is a reporting obligation pursuant to Section 15(d)
of the Act: None
Indicate the number of outstanding shares of each of the issuer's classes of
capital or common stock as of the close of the period covered by the annual
report:
Ordinary Shares, par value NIS 0.01 per share ............ 4,638,004
(as of December 31, 2004)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
---
Indicate by check mark which financial statement item the registrant has elected
to follow:
Item 17 Item 18 X
---
This Report on Form 20-F/A is incorporated by reference into our Form S-8
Registration Statements File No. 333-12014 and 333-123321.
EXPLANATORY NOTE
----------------
This Amendment No. 1 on Form 20-F/A is being filed solely to correct an
omission in Item 18 of Mer Telemanagement Solutions Ltd.'s Annual Report on Form
20-F for the fiscal year ended December 31, 2004, which was filed on June 30,
2005.
Item 18 has been corrected to include the audited financial statements of
Jusan, S.A. ("Jusan"), the Registrant's 50% owned affiliate in Spain, as of
December 31, 2002, 2003 and 2004 and for the three years ended December 31,
2004, which financial statements were not filed with the original Form 20-F.
This Amendment is not intended to revise other information presented in
the Registrant's Annual Report on Form 20-F for the fiscal year ended December
31, 2004 as originally filed and all such other information in the original
filing, which remains unchanged.
This Amendment does not reflect events occurring after the filing of the
original Form 20-F and does not modify or update the disclosure therein in any
way other than as required to reflect the amendments discussed above. As a
result, this Amendment continues to speak as of June 30, 2005.
i
TABLE OF CONTENTS
Page
----
PART III..............................................................1
ITEM 17. FINANCIAL STATEMENTS.....................................1
ITEM 18. FINANCIAL STATEMENTS.....................................1
ITEM 19. EXHIBITS.................................................1
S I G N A T U R E S...................................................4
ii
PART III
ITEM 17. FINANCIAL STATEMENTS
--------------------
We have elected to furnish financial statements and related information
specified in Item 18.
ITEM 18. FINANCIAL STATEMENTS
--------------------
Consolidated Financial Statements of Mer Telemanagement Solutions Ltd.
Index to Consolidated Financial Statements ...........................F-1
Report of Independent Registered Public Accounting Firm......F-2
Consolidated Balance Sheets..................................F-3-4
Consolidated Statements of Operations........................F-5
Statements of Changes in Shareholders' Equity................F-6
Consolidated Statements of Cash Flows........................F-7-8
Notes to Consolidated Financial Statements...................F-9-38
Financial Statements of Jusan, S.A. as of December 31, 2002,
2003 and 2004 and for the three years than ended
Index to Financial Statements of Jusan, S.A..................F-39
Report of Registered Public Accounting Firm..................F-40
Report of Independent Auditors...............................F-41
Balance Sheets...............................................F-42
Statements of Income.........................................F-43
Statements of Changes in Shareholders' Equity................F-44
Statements of Cash Flows.....................................F-44
Notes to Financial Statements................................F-46-55
ITEM 19. EXHIBITS
--------
Index to Exhibits
1
Exhibit Description
1.1 Memorandum of Association of the Registrant (1)
1.2 Articles of Association of the Registrant (1)
2.1 Specimen of Ordinary Share Certificate (1)
4.1 Asset Purchase Agreement dated December 30, 2004 among the
Registrant and Teleknowledge Group Ltd. (5)
4.2 1996 Employee Stock Option Plan (1)
4.3 Section 102 Stock Option Plan (1)
4.4 2003 Israeli Share Option Plan (2)
4.5 Form of Consultant's Warrant (3)
8.1 List of Subsidiaries of the Registrant *
10.1 Consent of Kost Forer Gabbay & Kasierer, a Member of Ernst &
Young Global (relating to Mer Telemanagement Ltd.)
10.2 Consent of BDO Audiberia Auditores, S.L.
10.3 Consent of Kost Forer Gabbay & Kasierer, a Member of Ernst &
Young Global (relating to Jusan, S.A.)
14.1 Code of Ethics (4)
12.1 Certification of Chief Executive Officer pursuant to Rule
13a-14(a) and Rule 15d-14(a) of the Securities Exchange Act,
as amended.
12.2 Certification of Chief Financial Officer pursuant to Rule
13a-14(a) and Rule 15d-14(a) of the Securities Exchange Act,
as amended.
13.1 Certification of Chief Executive Officer pursuant to 18 U.S.C.
Section1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
13.2 Certification of Chief Financial Officer pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
-----------------
(1) Filed as an exhibit to our registration statement on Form F-1,
registration number 333-05814, filed with the Securities and
Exchange Commission, and incorporated herein by reference.
2
(2) Filed as Exhibit 10.3 to our Annual Report on Form 20-F for
the year ended December 31, 2003, and incorporated herein by
reference.
(3) Filed as Exhibit 10.5 to our Annual Report on Form 20-F for
the year ended December 31, 2002, and incorporated herein by
reference.
(4) Filed as Exhibit 14.1 to our Annual Report on Form 20-F for
the year ended December 31, 2003, and incorporated herein by
reference.
(5) Filed as Exhibit 4.1 to our Annual Report on Form 20-F for the
year ended December 31, 2004, and incorporated herein by
reference.
*Previously filed.
3
MER TELEMANAGEMENT SOLUTIONS LTD. AND ITS SUBSIDIARIES
CONSOLIDATED FINANCIAL STATEMENTS
AS OF DECEMBER 31, 2004
U.S. DOLLARS IN THOUSANDS
INDEX
Page
--------------
Report of Independent Registered Public Accounting Firm F-2
Consolidated Balance Sheets F-3 - F-4
Consolidated Statements of Operations F-5
Statements of Changes in Shareholders' Equity F-6
Consolidated Statements of Cash Flows F-7 - F-8
Notes to Consolidated Financial Statements F-9 - F-38
- - - - - - - - - -
F-1
[ERNST & YOUNG LOGO]
Kost Forer Gabbay & Kasierer Phone: 972-3-6232525
3 Aminadav St. Fax: 972-3-5622555
Tel-Aviv 67067, Israel
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Shareholders of
Mer Telemanagement Solutions Ltd.
We have audited the accompanying consolidated balance sheets of Mer
Telemanagement Solutions Ltd. ("the Company") and its subsidiaries as of
December 31, 2003 and 2004, and the related consolidated statements of
operations, changes in shareholders' equity and cash flows for each of the three
years in the period ended December 31, 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 did not audit the
financial statements of Jusan SA, a 50% owned affiliate, for the year ended
December 31, 2004, whose Company's investments constitute $ 2,119 thousand as of
December 31, 2004 and its equity in revenues constitute $ 225 thousand. Those
statements were audited by other auditors whose report has been furnished to us
and our opinion, insofar as it relates to amounts emanating from the financial
statements of such investee companies, is based solely on the said reports of
the other auditors.
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 of 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 and the report of other auditors provide a reasonable basis for our
opinion.
In our opinion, based on our audit and the report of the other auditors,
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 31, 2003 and 2004, and the consolidated results of
their operations and their cash flows for each of the three years in the period
ended December 31, 2004, in conformity with U.S. generally accepted accounting
principles.
/s/Kost Forer Gabbay and Kasierer
Tel-Aviv, Israel KOST FORER GABBAY & KASIERER
February 7, 2005 A Member of Ernst & Young Global
F-2
MER TELEMANAGEMENT SOLUTIONS LTD.
AND ITS SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
--------------------------------------------------------------------------------
U.S. dollars in thousands
December 31,
-----------------------
2003 2004
--------- ---------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 8,684 $ 3,814
Marketable securities (Note 3) 1,644 1,057
Trade receivables (net of allowance for doubtful accounts of $350 and
$370 as of December 31, 2003 and 2004, respectively) 1,391 1,348
Other accounts receivable and prepaid expenses (Note 4) 566 391
Inventories (Note 5) 193 178
--------- ---------
Total current assets 12,478 6,788
----- --------- ---------
LONG-TERM INVESTMENTS:
Investments in an affiliate (Note 6) 1,859 2,119
Long-term loans, net of current maturities (Note 7) 95 45
Severance pay fund 564 535
Other investments (Note 8) 368 373
--------- ---------
Total long-term investments 2,886 3,072
----- --------- ---------
PROPERTY AND EQUIPMENT, NET (Note 9) 482 581
--------- ---------
OTHER ASSETS:
Goodwill (Note 10a) 2,024 3,415
Other intangible assets, net (Note 10b) 206 1,394
Deferred income taxes (Note 13) 106 73
--------- ---------
Total other assets 2,336 4,882
----- --------- ---------
Total assets $ 18,182 $ 15,323
----- ========= =========
The accompanying notes are an integral part of the consolidated financial
statements.
F-3
MER TELEMANAGEMENT SOLUTIONS LTD.
AND ITS SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
--------------------------------------------------------------------------------
U.S. dollars in thousands (except share and per share data)
December 31,
------------------------
*) 2003 2004
--------- ---------
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Current maturities of long-term loans $ 8 $ --
Trade payables 393 719
Accrued expenses and other liabilities (Note 11) 1,421 2,042
Deferred revenues 1,219 1,254
--------- ---------
Total current liabilities 3,041 4,015
----- --------- ---------
LONG-TERM LIABILITIES:
Accrued severance pay 677 651
--------- ---------
Total long-term liabilities 677 651
----- --------- ---------
COMMITMENTS AND CONTINGENT LIABILITIES (Note 12)
SHAREHOLDERS' EQUITY (Note 15):
Share capital -
Ordinary shares of NIS 0.01 par value - Authorized: 12,000,000 shares
as of December 31, 2003 and 2004; Issued: 4,631,471 and 4,648,804
shares as of December 31, 2003 and 2004, respectively; Outstanding:
4,624,471 and 4,638,004 shares as of December 31, 2003 and 2004,
respectively 14 14
Additional paid-in capital 12,877 12,879
Treasury shares (7,000 and 10,800 shares as of December 31, 2003 and
2004, respectively) (20) (29)
Deferred stock compensation (274) (208)
Accumulated other comprehensive income 87 348
Retained earnings (accumulated deficit) 1,780 (2,347)
--------- ---------
Total shareholders' equity 14,464 10,657
----- --------- ---------
Total liabilities and shareholders' equity $ 18,182 $ 15,323
----- ========= =========
*) Reclassification.
The accompanying notes are an integral part of the consolidated financial
statements.
F-4
MER TELEMANAGEMENT SOLUTIONS LTD.
AND ITS SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
--------------------------------------------------------------------------------
U.S. dollars in thousands (except share and per share data)
Year ended December 31,
---------------------------------------------
2002 2003 2004
----------- ----------- -----------
Revenues (Note 16):
Products sales $ 7,397 $ 6,944 $ 7,070
Services 2,390 2,286 2,343
----------- ----------- -----------
Total revenues 9,787 9,230 9,413
----- ----------- ----------- -----------
Cost of revenues:
Products sales 1,655 1,523 2,407
Services 241 326 407
----------- ----------- -----------
Total cost of revenues 1,896 1,849 2,814
----- ----------- ----------- -----------
Gross profit 7,891 7,381 6,599
----------- ----------- -----------
Operating expenses:
Research and development 2,127 1,825 2,362
Selling and marketing 3,954 3,916 6,300
General and administrative 1,858 1,830 2,101
----------- ----------- -----------
Total operating expenses 7,939 7,571 10,763
----- ----------- ----------- -----------
Operating loss (48) (190) (4,164)
Financial income, net (Note 17a) 134 124 78
Other income (expenses), net (Note 17b) (140) 6 --
----------- ----------- -----------
Loss before taxes on income (54) (60) (4,086)
Taxes on income (Note 13) 52 198 266
----------- ----------- -----------
Loss before equity in earnings of affiliate (106) (258) (4,352)
Equity in earnings of affiliate 236 345 225
----------- ----------- -----------
Net income (loss) $ 130 $ 87 $ (4,127)
=========== =========== ===========
Net earnings (loss) per share:
Basic net earnings (loss) per Ordinary share $ 0.03 $ 0.02 $ (0.89)
=========== =========== ===========
Diluted net earnings (loss) per Ordinary share $ 0.03 $ 0.02 $ (0.89)
=========== =========== ===========
Weighted average number of Ordinary shares used in
computing basic net earning (loss) per share 4,709,796 4,617,099 4,634,413
=========== =========== ===========
Weighted average number of Ordinary shares used in
computing diluted net earning (loss) per share 4,709,796 4,628,249 4,634,413
=========== =========== ===========
The accompanying notes are an integral part of the consolidated financial
statements.
F-5
MER TELEMANAGEMENT SOLUTIONS LTD.
AND ITS SUBSIDIARIES
STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
-----------------------------------------------------------------------------------------------------------------------------
U.S. dollars in thousands
Accumulated
Additional Deferred other
Share paid-in Treasury stock comprehensive
capital capital shares compensation income (loss)
------------ ------------ ------------ ------------ ------------
Balance as of January 1, 2002 $ 15 $ 12,846 $ (158) $ -- $ (410)
Purchase of treasury shares -- -- (172) -- --
Other comprehensive income:
Unrealized losses on available-for-sale
marketable securities, net -- -- -- -- (3)
Foreign currency translation adjustments -- -- -- -- 202
Total other comprehensive income
Net income -- -- -- -- --
------------ ------------ ------------ ------------ ------------
Total comprehensive income
Balance as of December 31, 2002 15 12,846 (330) -- (211)
Exercise of options *) -- -- -- -- --
Employee stock based compensation -- **) 487 -- **) (487) --
Amortization of deferred stock compensation -- -- -- 213 --
Retirement of treasury shares (1) (456) 457 -- --
Purchase of treasury shares -- -- (147) -- --
Other comprehensive income:
Unrealized gains on available-for-sale
marketable securities, net -- -- -- -- 109
Foreign currency translation adjustments -- -- -- -- 196
Loss from cash flows hedging transaction -- -- -- -- (7)
Total other comprehensive income
Net income -- -- -- -- --
------------ ------------ ------------ ------------ ------------
Total comprehensive income
Balance as of December 31, 2003 14 12,877 (20) (274) 87
Exercise of options *) -- 2 -- -- --
Amortization of deferred stock compensation -- -- -- 66 --
Purchase of treasury shares -- -- (9) -- --
Other comprehensive income:
Unrealized gains on available-for-sale
marketable securities, net -- -- -- -- 83
Foreign currency translation adjustments -- -- -- -- 171
Gain from cash flows hedging transaction -- -- -- -- 7
Total other comprehensive income
Net loss -- -- -- -- --
------------ ------------ ------------ ------------ ------------
Total comprehensive loss
Balance as of December 31, 2004 $ 14 $ 12,879 $ (29) (208) $ 348
============ ============ ============ ============ ============
Accumulated unrealized gains from
available-for-sale marketable securities $ 86
Accumulated foreign currency
translation adjustments 262
------------
$ 348
============
Retained
earnings Total Total
(accumulated comprehensive shareholders'
Deficit) income (loss) equity
------------ ------------ ------------
Balance as of January 1, 2002 $ 1,563 $ 13,856
Purchase of treasury shares -- (172)
Other comprehensive income:
Unrealized losses on available-for-sale
marketable securities, net -- $ (3) (3)
Foreign currency translation adjustments -- 202 202
------------
Total other comprehensive income 199
Net income 130 130 130
------------ ------------ ------------
Total comprehensive income $ 329
============
Balance as of December 31, 2002 1,693 14,013
Exercise of options *) --
Employee stock based compensation -- --
Amortization of deferred stock compensation -- 213
Retirement of treasury shares -- --
Purchase of treasury shares -- (147)
Other comprehensive income:
Unrealized gains on available-for-sale
marketable securities, net -- $ 109 109
Foreign currency translation adjustments -- 196 196
Loss from cash flows hedging transaction -- (7) (7)
------------
Total other comprehensive income 298
Net income 87 87 87
------------ ------------ ------------
Total comprehensive income $ 385
============
Balance as of December 31, 2003 1,780 14,464
Exercise of options -- 2
Amortization of deferred stock compensation -- 66
Purchase of treasury shares -- (9)
Other comprehensive income:
Unrealized gains on available-for-sale
marketable securities, net -- $ 83 83
Foreign currency translation adjustments -- 171 171
Gain from cash flows hedging transaction -- 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 $ (2,347) $ 10,657
============ ============
*) Represents an amount lower than $1.
**) Reclassification.
The accompanying notes are an integral part of the consolidated financial
statements.
F-6
MER TELEMANAGEMENT SOLUTIONS LTD.
AND ITS SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
--------------------------------------------------------------------------------
U.S. dollars in thousands
Year ended December 31,
---------------------------------------
2002 2003 2004
--------- --------- ---------
Cash flows from operating activities:
-------------------------------------
Net income (loss) $ 130 $ 87 $ (4,127)
Adjustments required to reconcile net income (loss) to net cash
provided by (used in) operating activities:
Loss (gain) on sale of available-for-sale and trading
marketable securities, net 140 (6) --
Loss on sale of property and equipment 6 39 1
Equity in earnings of affiliate (236) (345) (225)
Proceeds from trading securities, net 81 -- --
Depreciation and amortization 501 401 399
Deferred income taxes, net 29 23 33
Employee stock-based compensation -- 213 66
Accrued severance pay, net (2) (47) 2
Decrease (increase) in trade receivables (87) (132) 144
Decrease (increase) in other accounts receivable and
prepaid expenses 215 (89) 175
Decrease in inventories 82 47 15
Increase (decrease) in trade payables (149) 43 326
Increase (decrease) in accrued expenses and other
liabilities (419) (99) 611
Increase (decrease) in deferred revenues 187 35 (41)
Others 11 (7) --
--------- --------- ---------
Net cash provided by (used in) operating activities 489 163 (2,621)
--------- --------- ---------
Cash flows from investing activities:
-------------------------------------
Changes in related parties account, net 108 -- 20
Proceeds from sale of property and equipment 26 5 22
Purchase of property and equipment (166) (171) (293)
Capitalization of research and development costs -- -- (386)
Investment in leasing deposit -- -- (5)
Proceeds from realization of short-term bank deposits 1,942 -- --
Investment in available for sale marketable securities (1,512) (969) (220)
Investment in held-to-maturity marketable securities (476) -- --
Proceeds from sale of available-for-sale marketable securities 2,508 318 891
Proceeds from redemption of held-to-maturity marketable
securities 201 275 --
Acquisition of certain assets and liabilities of Teleknowledge
(a) -- -- (2,445)
Dividend from an affiliate 190 100 136
Others (12) 16 50
--------- --------- ---------
Net cash provided by (used in) investing activities 2,809 (426) (2,230)
--------- --------- ---------
The accompanying notes are an integral part of the consolidated financial
statements.
F-7
MER TELEMANAGEMENT SOLUTIONS LTD.
AND ITS SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
--------------------------------------------------------------------------------
U.S. dollars in thousands
Year ended December 31,
---------------------------------------
2002 2003 2004
--------- --------- ---------
Cash flows from financing activities:
-------------------------------------
Changes in related parties, net 4 51 --
Repayment of long-term loans (55) (8) (8)
Proceeds from exercise of options and warrants -- *) -- 2
Purchase of treasury shares (172) (147) (9)
--------- --------- ---------
Net cash used in financing activities (223) (104) (15)
--------- --------- ---------
Effect of exchange rate changes on cash and cash
equivalents -- (11) (4)
--------- --------- ---------
Increase (decrease) in cash and cash equivalents 3,075 (378) (4,870)
Cash and cash equivalents at the beginning of the year 5,987 9,062 8,684
--------- --------- ---------
Cash and cash equivalents at the end of the year $ 9,062 $ 8,684 $ 3,814
========= ========= =========
Supplemental disclosure of cash flows activities:
-------------------------------------------------
Cash paid during the year for:
Interest $ 10 $ 1 $ 1
========= ========= =========
Income taxes $ 58 $ 49 $ 25
========= ========= =========
(a) In conjunction with acquisition,
the fair values of assets acquired
and liabilities assumed at the date
of acquisition were as follow (see
Note 1c):
Working capital (excluding cash and cash
equivalents) $ 24
Estimated fair value of assets acquired and
liabilities assumed at the acquisition date:
Property and equipment 40
Goodwill 1,391
Developed technology 690
Customer relationship 300
---------
$ 2,445
=========
*) Represents an amount lower than $ 1.
The accompanying notes are an integral part of the consolidated financial
statements.
F-8
MER TELEMANAGEMENT SOLUTIONS LTD.
AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
U.S. dollars in thousands (except share data)
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. As for MTS's
subsidiaries, see Note 18.
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. In 2002, 2003 and
2004, one major customer generated 36%, 40% and 38% of the Group's
revenues, respectively.
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.
c. On December 30, 2004, the Company and Teleknowledge Group Ltd.
("Teleknowledge") consummated an Assets Purchase Agreement ("the
Agreement"). TeleKnowledge is 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, the Company
acquired certain assets and liabilities of Teleknowledge for the
following consideration:
1. An initial consideration of $2,374 in cash.
2. Additional 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 will be
recorded as additional goodwill, during the contingency
period, when actual revenue performance will be evaluated.
F-9
MER TELEMANAGEMENT SOLUTIONS LTD.
AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
U.S. dollars in thousands (except share data)
NOTE 1:- GENERAL (Cont.)
3. In addition, the Company incurred transaction costs totaling
$71.
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"
("SFAS 141"). 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 tangible and intangible assets
acquired and the liabilities assumed, the Company has allocated the
total cost of the acquisition to Teleknowledge's net assets at the
date of acquisition, as follows:
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 Company's 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 the
Company through obtaining a pre-existing customer relationship of
Teleknowledge.
F-10
MER TELEMANAGEMENT SOLUTIONS LTD.
AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
U.S. dollars in thousands (except share data)
NOTE 1:- GENERAL (Cont.)
Pro forma results:
The following unaudited proforma information does not purport to
represent what the Company's results of operations would have been
had the acquisitions occurred on January 1, 2003 and 2004, nor does
it purport to represent the results of operations of the Company for
any future period.
Year ended December 31,
---------------------------
2003 2004
----------- -----------
Revenues $ 10,128 $ 10,542
=========== ===========
Net loss from continuing operations $ (10,247) $ *) (4,931)
=========== ===========
Basic and diluted net loss per share for continuing
operations $ (2.22) $ (1.06)
=========== ===========
Weighted average number of Ordinary shares in
computation of basic and diluted net loss per share 4,617,099 4,634,413
=========== ===========
*) Net of capital gain from sale of Teleknowledge to MTS.
NOTE 2:- SIGNIFICANT ACCOUNTING POLICIES
The consolidated financial statements have been prepared in accordance
with generally accepted accounting principles in the United States ("U.S.
GAAP").
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 revenues of the Company and certain of its
subsidiaries are generated in U.S. dollars ("dollar") or linked to
the dollar. In addition, a substantial portion of the Company's and
certain of its subsidiaries' costs is incurred in dollars. 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. Thus, the functional and reporting currency of
the Company and certain of its subsidiaries is the dollar.
Accordingly, monetary accounts maintained in currencies other than
the dollar are remeasured into dollars in accordance with SFAS No.
52, "Foreign Currency Translation". All transaction gains and losses
of the remeasurement of monetary balance sheet items are reflected
in the consolidated statements of operations as financial income or
expenses, as appropriate.
F-11
MER TELEMANAGEMENT SOLUTIONS LTD.
AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
U.S. dollars in thousands (except share data)
NOTE 2:- SIGNIFICANT ACCOUNTING POLICIES (Cont.)
The financial statements of foreign subsidiaries and affiliates,
whose functional currency has been determined to be their local
currency, have been translated into dollars. Assets and liabilities
have been translated using the exchange rates in effect at the
balance sheet date. Statements of operations amounts have been
translated using the average exchange rate for the period. The
resulting translation adjustments are reported as a component of
shareholders' equity in accumulated other comprehensive income
(loss).
c. Principles of consolidation:
The consolidated financial statements include the accounts of MTS
and its wholly-owned subsidiaries. Intercompany transactions and
balances, including profits from intercompany sales not yet realized
outside the Group, have been eliminated upon consolidation.
d. Cash equivalents:
The Company considers all short-term highly liquid investments that
are readily convertible to cash with original maturities of three
months or less to be cash equivalents.
e. Marketable securities:
The Company accounts for investments in debt and equity securities
(other than those accounted for under the equity method of
accounting) in accordance with Statement of Financial Accounting
Standard No. 115, "Accounting for Certain Investments in Debt and
Equity Securities" ("SFAS No. 115").
Management determines the classification of investments in
marketable debt and equity securities at the time of purchase and
reevaluates such designations as of each balance sheet date.
As of December 31, 2004 and 2003, all marketable securities were
designated as available-for-sale. Accordingly, these securities are
stated at fair value, with unrealized gains and losses reported in
accumulated other comprehensive income (loss), a separate component
of shareholders' equity, net of taxes. Realized gains and losses on
sales of investments, as determined on a specific identification
basis, are included in the consolidated Statement of Operations.
f. Inventories:
Inventories are stated at the lower of cost or market value.
Inventories write-offs are provided to cover risks arising from slow
moving items or technological obsolescence. Cost is determined as
follows: Raw materials - using the "first in, first out" method with
the addition of allocable indirect manufacturing costs. Finished
products are recorded on the basis of direct manufacturing costs
with the addition of allocable indirect manufacturing costs.
F-12
MER TELEMANAGEMENT SOLUTIONS LTD.
AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
U.S. dollars in thousands (except share data)
NOTE 2:- SIGNIFICANT ACCOUNTING POLICIES (Cont.)
g. Investments in an affiliate:
In these financial statements, affiliated company is company held
50% (which is not a subsidiary), where the Company can exercise
significant influence over operating and financial policy of the
affiliate.
The investment in affiliated company is accounted for by the equity
method, in accordance with Accounting Principle Board Opinion No.18,
"The Equity Method of Accounting for Investments in Common Stock",
("APB No.18"). Profits on intercompany sales, not realized through
sales to third parties, were eliminated. The excess of the purchase
price over the fair value of net tangible assets acquired has been
attributed to goodwill.
Goodwill is no longer amortized, but is reviewed annually (or more
frequently if circumstances indicate impairment has occurred) for
impairment in accordance with the provisions of Statement of
Financial Accounting Standard No. 142, "Goodwill and Other
Intangible Assets" ("SFAS No. 142"). Before the adoption of SFAS No.
142, goodwill was amortized on a straight-line basis over 10 years,
in accordance with APB Opinion No.17, "Intangible Assets".
Under APB 18, a loss in value of an investment accounted for under
the equity method, which is other than a temporary decline, should
be recognized as a realized loss, establishing a new carrying value
for the investment. Factors the Company considers in making this
evaluation include: the length of time and the extent to which the
market value has been less than cost, the financial condition and
near-term prospects of the issuer, including cash flows of the
investee and any specific events which may influence the operations
of the issuer and the intent and ability of the Company to retain
its investments for a period of time sufficient to allow for any
anticipated recovery in market value. A current fair value of an
investment that is less than its carrying amount may indicate a loss
in value of the investment. No impairment losses were recorded
during 2004.
h. Investment in other companies:
The investment in these companies is stated at cost, since the Group
does not have the ability to exercise significant influence over
operating and financial policies of those investments. The Company's
investments in other companies are reviewed for impairment whenever
events or changes in circumstances indicate that the carrying amount
of an investment may not be recoverable, in accordance with APB
No.18. As of December 31, 2004, based on management's most recent
analyses, no impairment losses have been identified.
F-13
MER TELEMANAGEMENT SOLUTIONS LTD.
AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
U.S. dollars in thousands (except share data)
NOTE 2:- SIGNIFICANT ACCOUNTING POLICIES (Cont.)
i. 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 depreciation rates:
%
--------------------------
Computers and peripheral equipment 33
Office furniture and equipment 6 - 20
Motor vehicles 15
Leasehold improvements Over the shorter term of
the lease agreement or the
life of the asset
j. Impairment of long-lived assets:
The Company's long-lived assets and certain identifiable intangibles
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 31, 2004, no
impairment losses have been identified.
k. Goodwill and other intangible assets:
Goodwill represents excess of the costs over the net assets of
business acquired. Under SFAS No. 142, goodwill acquired in a
business combination on or after July 1, 2001, will not be
amortized. Goodwill that arose from acquisitions prior to July 1,
2001 was amortized until December 31, 2001, by the straight-line
method, over 10 years.
SFAS No. 142 requires goodwill to be tested for impairment on
adoption and at least annually thereafter or between annual tests in
certain circumstances, and written down when impaired, rather than
being amortized as previous accounting standards required. Goodwill
is tested for impairment by comparing the fair value of the
reporting unit with its carrying value. Fair value is determined
using discounted cash flows. Significant estimates used in the
methodologies include estimates of future cash flows, future
short-term and long-term growth rates, and weighted average cost of
capital. As of December 31, 2004, no impairment losses have been
identified. As for application of SFAS No. 142, see Note 10a.
Developed technology is amortized over a weighted average of four
years and customer relationship is amortized over a weighted average
of six years .
F-14
MER TELEMANAGEMENT SOLUTIONS LTD.
AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
U.S. dollars in thousands (except share data)
NOTE 2:- SIGNIFICANT ACCOUNTING POLICIES (Cont.)
l. Revenue recognition:
The Company generates revenues from licensing the rights to use its
software products directly to end-users and indirectly through
resellers and OEM's (who are considered end users). The Company also
generates revenues from rendering maintenance, service bureau and
support.
Revenues from software license agreements are recognized when all
criteria outlined in Statement of Position No. 97-2, "Software
Revenue Recognition" ("SOP No. 97-2") as amended are met. Revenue
from license fees is recognized when persuasive evidence of an
agreement exists, delivery of the product has occurred, no
significant obligations with regard to implementation remain, the
fee is fixed or determinable and collectibility is probable. The
Company generally does not grant a right of return to its customers.
Where software arrangements involve multiple elements, revenue is
allocated to each undelivered element based on vendor specific
objective evidence ("VSOE") of the fair values of each undelivered
element in the arrangement, in accordance with the "residual method"
prescribed by SOP No. 98-9, "Modification of SOP No. 97-2, Software
Revenue Recognition With Respect to Certain Transactions". The VSOE
used by the Company to allocate the sales price to support services
and maintenance is based on the renewal rate charged when these
elements are sold separately. License revenues are recorded based on
the residual method. Under the residual method, revenue is
recognized for the delivered elements when (1) there is VSOE of the
fair values of all the undelivered elements, and (2) all revenue
recognition criteria of SOP No. 97-2, as amended, are satisfied.
Under the residual method any discount in the arrangement is
allocated to the delivered element.
Revenues from maintenance and support services are recognized over
the life of the maintenance agreement or at the time that support
services are rendered.
Deferred revenues include unearned amounts received under
maintenance and support contracts, not yet recognized as revenues.
m. Research and development costs:
Statement of Financial Accounting Standards No. 86, "Accounting for
the Costs of Computer Software to be Sold, Leased or Otherwise
Marketed" ("SFAS No. 86"), requires capitalization of certain
software development costs subsequent to the establishment of
technological feasibility. Based on the Company's and its
subsidiaries product development process, technological feasibility
is established upon completion of a working model.
F-15
MER TELEMANAGEMENT SOLUTIONS LTD.
AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
U.S. dollars in thousands (except share data)
NOTE 2:- SIGNIFICANT ACCOUNTING POLICIES (Cont.)
Research and development costs incurred in the process of developing
product improvements or new products, are generally charged to
expenses as incurred, net of participation of the Office of the
Chief Scientist of Israel's Ministry of Industry and Trade.
Significant costs incurred by the Company and its subsidiaries
between completion of the working model and the point at which the
product is ready for general release, have been capitalized.
Capitalized software costs are amortized by the greater of the
amount computed using the: 1) ratio of the current gross revenues
from sales of the software to the total of current and anticipated
future gross revenues from sales of that software, or 2) the
straight-line method over the estimated useful life of the product
(three years). The Company assesses the recoverability of this
intangible asset on a regular basis by determining whether the
amortization of the asset over its remaining life can be recovered
through undiscounted future operating cash flows from the specific
software product sold. Based on its most recent analyses, management
believes that no impairment of capitalized software development
costs exists as of December 31, 2004.
n. Government grants:
Royalty-bearing grants from the Government of Israel for funding
certain approved research and development projects are recognized at
the time the Company is entitled to such grants, on the basis of the
related costs incurred and recorded as a deduction of research and
development costs.
o. Income taxes:
The Company accounts for income taxes, in accordance with Statement
of Financial Accounting Standard No. 109, "Accounting for Income
Taxes" ("SFAS No. 109"). This statement prescribes the use of the
liability method whereby deferred tax assets 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. Valuation allowances are
provided to reduce deferred tax assets to their estimated realizable
value.
p. Accounting for stock-based compensation:
The Company has elected to follow Accounting Principles Board
Opinion No. 25, "Accounting for Stock Issued to Employees" ("APB No.
25") and FASB Interpretation No. 44, "Accounting for Certain
Transactions Involving Stock Compensation" ("FIN No. 44") in
accounting for its employee stock option plans. Under APB No. 25,
when the exercise price of the Company's stock options is less than
the market price of the underlying shares on the date of grant,
compensation expense is recognized.
F-16
MER TELEMANAGEMENT SOLUTIONS LTD.
AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
U.S. dollars in thousands (except share data)
NOTE 2:- SIGNIFICANT ACCOUNTING POLICIES (Cont.)
The Company adopted the disclosure provisions of Financial
Accounting Standards Board Statement No. 148, "Accounting for
Stock-Based Compensation - Transition and Disclosure" ("SFAS No.
148"), which amended certain provisions of SFAS 123 to provide
alternative methods of transition for an entity that voluntarily
changes to the fair value based method of accounting for stock-based
employee compensation, effective as of the beginning 2003. The
Company continues to apply the provisions of APB No. 25, in
accounting for stock-based compensation.
Pro forma information regarding the Company's net income (loss) and
net earnings (loss) per share is required by SFAS No. 123 and has
been determined as if the Company had accounted for its employee
stock options under the fair value method prescribed by SFAS No.
123.
The fair value for options granted in 2002, 2003 and 2004 is
amortized over their vesting period and estimated at the date of
grant using a Black-Scholes options pricing model with the following
weighted average assumptions:
Year ended December 31,
-----------------------------------------
2002 2003 2004
--------- --------- ---------
Dividend 0% 0% 0%
Average risk-free interest rates 2% 2% 2.79%
Average expected life (in years) 4 2.5 4.71
Volatility 66.8% 71.8% 53.37%
Pro forma information under SFAS No. 123, is as follows:
Year ended December 31,
-----------------------------------------
2002 2003 2004
--------- --------- ---------
Net income (loss), available to
ordinary shares as reported $ 130 $ 87 $ (4,127)
Add: Stock-based employee compensation
- intrinsic value -- 213 66
Deduct: Total stock-based compensation
expense determined under fair value
method for all awards, net of related
tax effect (177) (346) (274)
--------- --------- ---------
Pro forma net loss $ (47) $ (46) $ (4,335)
========= ========= =========
Basic and diluted net earnings (loss)
per share, as reported $ 0.03 $ 0.02 $ (0.89)
========= ========= =========
Basic and diluted net loss per share,
pro forma $ (0.01) $ -- $ (0.94)
========= ========= =========
F-17
MER TELEMANAGEMENT SOLUTIONS LTD.
AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
U.S. dollars in thousands (except share data)
NOTE 2:- SIGNIFICANT ACCOUNTING POLICIES (Cont.)
The Company applies Statement of Financial Accounting Standard No.
123, "Accounting for Stock-Based Compensation" ("SFAS No. 123") and
Emerging Issues Task Force No. 96-18 ("EITF No. 96-18"), "Accounting
for Equity Instruments That are Issued to Other Than Employees for
Acquiring, or in Conjunction with Selling, Goods or Services" with
respect to options issued to non-employees. SFAS No. 123 requires
use of an option valuation model to measure the fair value of the
options at the measurement date.
q. Warranty costs:
The Company provides free warranty for up to one year for end-users
and up to 15 months for the "OEM" distributors. A provision is
recorded for probable costs in connection with these services based
on the Company's experience.
The Company estimates the costs that may be incurred under its basic
limited warranty and records a liability in the amount of such costs
at the time product revenue is recognized. Factors that affect the
Company's warranty liability include the number of sold units,
historical and anticipated rates of warranty claims, and cost per
claim. The Company periodically assesses the adequacy of its
recorded warranty liabilities and adjusts the amounts as necessary.
No changes in the Company's product liability were recorded during
the period and the provision for the year ending December 31, 2004
amounted to $ 22.
r. Fair value of financial instruments:
The following methods and assumptions were used by the Group in
estimating its fair value disclosures for financial instruments:
The carrying amounts of cash and cash equivalents, trade
receivables, other accounts receivable and trade payables
approximate their fair value, due to the short-term maturity of such
instruments.
The fair value for marketable securities is based on quoted market
prices (see Note 3).
Long-term loans - The carrying amounts of the Company's borrowings
under its long-term agreements, both as a lender and as a borrower,
approximate their fair value.
s. Severance pay:
The Company's liability for severance pay is calculated pursuant to
Israel's 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.
F-18
MER TELEMANAGEMENT SOLUTIONS LTD.
AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
U.S. dollars in thousands (except share data)
NOTE 2:- SIGNIFICANT ACCOUNTING POLICIES (Cont.)
The deposited funds may be withdrawn only upon the fulfillment of
the obligation pursuant to Israel's 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 31, 2002, 2003 and
2004 amounted to approximately $ 104, $ 13 and $ 164, respectively.
t. Concentrations of credit risk:
Financial instruments that potentially subject the Company to
concentrations of credit risk consist principally of cash and cash
equivalents, trade receivables, marketable securities and long-term
loans.
Cash and cash equivalents are deposited with major banks in Israel
and major banks in United States. Such deposits in the U.S. may be
in excess of insured limit 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.
The trade receivables of the Company are mainly derived from sales
to customers in the U.S. and Europe (see Note 16). The Company
performs ongoing credit evaluations of its customers. The allowance
for doubtful accounts is determined with respect to specific debts
that are doubtful of collection according to management estimates.
In certain circumstances, the Company may require letters of credit,
other collateral or additional guarantees.
The Company's marketable securities include mainly investments in
corporate debts and mutual funds. Management believes that the
portfolio is well diversified, and accordingly, minimal credit risk
exists with respect to these marketable securities.
The Company has no off-balance-sheet concentration of credit risk
such as foreign exchange contracts, option contracts or other
foreign hedging arrangements.
u. Basic and diluted net earnings (loss) per share:
Basic net earnings (loss) per share is computed based on the
weighted average number of Ordinary shares outstanding during each
year. Diluted net earnings (loss) per share is computed based on the
weighted average number of Ordinary shares outstanding during each
year, plus potential Ordinary shares considered outstanding during
the year, in accordance with Statement of Financial Accounting
Standard No. 128, "Earnings Per Share" ("SFAS No. 128").
The total number of shares related to the outstanding options
excluded from the calculation of diluted net earnings (loss) per
share was 757,580 766,141 and 667,101 for the years ended December
31, 2002, 2003 and 2004, respectively.
F-19
MER TELEMANAGEMENT SOLUTIONS LTD.
AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
U.S. dollars in thousands (except share data)
NOTE 2:- SIGNIFICANT ACCOUNTING POLICIES (Cont.)
v. Derivatives and hedging:
To protect against the reduction in value of forecasted foreign
currency cash flows resulting from export sales over the next year,
the Company hedged portions of its forecasted revenue denominated in
foreign currencies with forward contracts. During 2004, the Company
realized all its forward derivatives.
Financial Accounting Standards Board Statement No. 133, "Accounting
for Derivative Instruments and Hedging Activities" ("SFAS No. 133"),
requires companies to recognize all of their derivative instruments
as either assets or liabilities in the statement of financial
position at fair value. The accounting for changes in the fair value
(i.e., gains or losses) of a derivative instrument depends on
whether it has been designated and qualifies as part of a hedging
relationship and further, on the type of hedging relationship. For
those derivative instruments that are designated and qualify as
hedging instruments, a company must designate the hedging
instrument, based upon the exposure being hedged, as a fair value
hedge, cash flow hedge or a hedge of a net investment in a foreign
operation.
For derivative instruments that are designated and qualify as a cash
flow hedge (i.e., hedging the exposure to variability in expected
future cash flows that is attributable to a particular risk), the
effective portion of the gain or loss on the derivative instrument
is reported as a component of other comprehensive income and
reclassified into earnings in the same line item associated with the
forecasted transaction in the same period or periods during which
the hedged transaction affects earnings. The remaining gain or loss
on the derivative instrument in excess of the cumulative change in
the present value of future cash flows of the hedged item, if any,
is recognized in other income/expense in current earnings during the
period of change.
During 2004 and 2003, there were no significant gains or losses
recognized in earning for hedge ineffectivness.
w. Impact of recently issued accounting standards:
On December16, 2004, the FASB issued FASB Statement No. 123 (revised
2004), "Share Based Payment", which is a revision of FASB Statement
No. 123, "Accounting for Stock Based Compensation". SFAS 123(R)
supersedes APB Opinion No. 25, "Accounting for Stock Issued to
Employees", and amends FASB Statement No. 95, "Statement of Cash
Flow". Generally, the approach adopted by SFAS 123(R) is similar to
the approach described in Statement 123. However, SFAS 123(R)
requires all share-based payments to employees, including grants of
employee stock options, to be recognized in the income statement
based on their fair value. Pro forma disclosure is no longer an
alternative.
SFAS 123(R) must be adopted by no later than July 1, 2005. Early
adoption is permitted in periods in which financial statements have
not yet been issued. The Company expects to adopt SFAS 123(R) on
July 1, 2005.
F-20
MER TELEMANAGEMENT SOLUTIONS LTD.
AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
U.S. dollars in thousands (except share data)
NOTE 2:- SIGNIFICANT ACCOUNTING POLICIES (Cont.)
SFAS 123(R) permits companies to adopt its requirement using one of
the two methods:
1. A "modified prospective" method in which compensation cost is
recognized beginning with the effective date (a) based on the
requirements of SFAS 123(R) for all share-based payments
granted after the effective date and (b) based on the
requirements of SFAS 123(R) for all awards granted to
employees prior to the effective date of SFAS 123R that remain
unvested on the effective date.
2. A "modified retrospective" method which includes the
requirements of the modified prospective method described
above, but also permits entities to restate based on the
amounts previously recognized under SFAS 123(R) for purposes
of pro forma disclosures either: (a) all prior periods
presented or (b) prior interim period of the year of adoption.
As permitted by SFAS 123, the Company currently accounts for
share based payments to employees using the APB 25 intrinsic
value method and, as such, generally recognizes no
compensation cost for employee stock options. Accordingly, the
adoption of SFAS 123(R) fair value method will have a
significant impact on the Company's result of operations,
although it will have no impact on the Company's overall
financial position. The impact of the adoption of SFAS 123(R)
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 SFAS 123(R) in prior periods, the
impact of that Standard would have approximated the impact of
SFAS 123 as described in the disclosure of pro forma net
income and earnings (loss) per share in above.
In November 2004, the FASB issued Statement of Financial
Accounting Standard No. 151, "Inventory Costs, an Amendment of
ARB No. 43, Chapter 4" ("SFAS151"). SFAS 151 amends Accounting
Research Bulletin ("ARB") No. 43, Chapter 4, to clarify that
abnormal amounts of idle facility expense, freight handling
costs and wasted materials (spoilage) should be recognized as
current-period charges. In addition, SFAS 151 requires that
allocation of fixed production overheads to the costs of
conversion be based on normal capacity of the production
facilities. SFAS 151 is effective for inventory costs incurred
during fiscal years beginning after June 15, 2005. The Company
does not expect that the adoption of SFAS 151 will have a
material effect on its financial position or results of
operations.
Reclassification:
Certain amounts from prior years referring to the employee
stock based compensation have been reclassified to conform
current periods representation.
F-21
MER TELEMANAGEMENT SOLUTIONS LTD.
AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
U.S. dollars in thousands (except share data)
NOTE 3:- MARKETABLE SECURITIES
The following is a summary of the Company's investment in marketable
securities:
December 31, 2003 December 31, 2004
--------------------------------------------------- -------------------------------------------------
Gross Gross Gross Gross
Amortized unrealized unrealized Fair market Amortized unrealized unrealized Fair market
cost gains losses value cost gains losses value
---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
Available-for-sale:
Mutual funds $ 623 $ 5 $ -- $ 628 $ 506 $ 60 $ -- $ 566
Equity securities 51 12 -- 63 25 8 33
Corporate bonds 702 -- (8) 694 368 8 -- 376
Israeli Government
debts 265 -- (6) 259 72 10 82
---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
$ 1,641 $ 17 $ (14) $ 1,644 $ 971 $ 86 $ -- $ 1,057
========== ========== ========== ========== ========== ========== ========== ==========
The gross realized gains (losses) on sales of available-for-sale
securities totaled $ 6 and $ 0 in 2003 and 2004, respectively. The net
adjustment to unrealized holding gains (losses) on available-for-sale
securities included as a separate component of shareholders' equity,
"Accumulated other comprehensive gains (losses)" amounted to $ 109 and $
83 in 2003 and 2004, respectively.
The amortized cost and fair value of debt and marketable equity securities
as of December 31, 2004, by contractual maturity, are shown below.
December 31, 2004
-----------------------
Amortized Fair market
cost value
---------- ----------
Matures in one year $ 368 $ 376
Matures after one year through nine years 72 82
Equity securities and mutual funds 531 599
---------- ----------
Total $ 971 $ 1,057
========== ==========
F-22
MER TELEMANAGEMENT SOLUTIONS LTD.
AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
U.S. dollars in thousands (except share data)
NOTE 4:- OTHER ACCOUNTS RECEIVABLE AND PREPAID EXPENSES
December 31,
-----------------------
2003 2004
---------- ----------
Government authorities $ 232 $ 117
Prepaid expenses 103 149
Deferred income taxes (1) 66 66
Others 165 59
---------- ----------
$ 566 $ 391
========== ==========
(1) See Note 13f
NOTE 5:- INVENTORIES
Raw materials $ 73 $ 76
Finished products 120 102
---------- ----------
$ 193 $ 178
========== ==========
The Company 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 6:- INVESTMENTS IN AFFILIATE
a. Composed as follows:
December 31,
---------------------
2003 2004
--------- ---------
Investment in Jusan S.A. (50% owned)
Equity, net (1) $ 1,824 $ 2,084
Goodwill 35 35
--------- ---------
$ 1,859 $ 2,119
========= =========
(1) Investment as of purchase date $ 1,171 $ 1,171
Foreign currency translation adjustments 143 316
Accumulated net earnings 510 597
--------- ---------
$ 1,824 $ 2,084
========= =========
Dividend received from Jusan S.A. during the year $ 100 $ 136
========= =========
F-23
MER TELEMANAGEMENT SOLUTIONS LTD.
AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
U.S. dollars in thousands (except share data)
NOTE 6:- INVESTMENTS IN AFFILIATE (Cont.)
b. Summarized financial information of Jusan S.A. (50% owned):
December 31,
----------------------
2003 2004
--------- ---------
Current assets $ 5,266 $ 5,552
Non-current assets $ 99 $ 68
Current liabilities $ (1,861) $ (1,438)
Year ended December 31,
------------------------------------
2002 2003 2004
---------- ---------- ----------
Revenues $ 6,848 $ 6,049 $ 6,892
Gross profit $ 3,260 $ 3,079 $ 3,158
Net income $ 708 $ 594 $ 444
NOTE 7:- LONG-TERM LOANS
a. Composed as follows:
December 31,
-----------------------
2003 2004
---------- ----------
Loans to others in NIS - unlinked (1) $ 131 $ 84
Less - current maturities (2) 36 39
---------- ----------
$ 95 $ 45
========== ==========
(1) The weighted average interest rate for the year ended December
31, 2004 and 2003 is 6.375%.
(2) Included in other accounts receivable.
b. As of December 31, 2004, the aggregate annual maturities of
long-term loans are as follows:
December 31,
-----------
2005 (current maturities) $ 39
2006 36
2007 9
-----------
$ 84
===========
F-24
MER TELEMANAGEMENT SOLUTIONS LTD.
AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
U.S. dollars in thousands (except share data)
NOTE 8:- OTHER INVESTMENTS
December 31,
-----------------------
2003 2004
---------- ----------
Long-term leasing deposits (1) $ 21 $ 26
Investment in other companies 347 347
---------- ----------
$ 368 $ 373
========== ==========
(1) Linked to the Israeli CPI.
NOTE 9:- PROPERTY AND EQUIPMENT, NET
Cost:
Computers and peripheral equipment $ 2,528 $ 2,838
Office furniture and equipment 536 558
Motor vehicles 96 62
Leasehold improvements 100 112
---------- ----------
3,260 3,570
---------- ----------
Accumulated depreciation:
Computers and peripheral equipment 2,300 2,454
Office furniture and equipment 358 407
Motor vehicles 64 55
Leasehold improvements 56 73
---------- ----------
2,778 2,989
---------- ----------
Depreciated cost $ 482 $ 581
========== ==========
The depreciation expense for the years ended December 31, 2002, 2003
and 2004 was $ 347, $ 247 and $ 211, respectively.
F-25
MER TELEMANAGEMENT SOLUTIONS LTD.
AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
U.S. dollars in thousands (except share data)
NOTE 10:- GOODWILL AND OTHER ASSETS
a. Goodwill:
The changes in the carrying amount of goodwill for the year ended
December 31, 2004 are as follows:
Balance as of December 31, 2003 $ 2,024
Goodwill acquired during year (see Note 1c) 1,391
Impairment losses --
----------
Balance as of December 31, 2004 $ 3,415
==========
b. Other intangibles consist of the following:
December 31,
-----------------------
2003 2004
---------- ----------
Cost:
Development technology $ 750 $ 1,440
Capitalized software developed costs -- 386
Customer relationship -- 300
---------- ----------
750 2,126
---------- ----------
Accumulated amortization:
Development technology 544 700
Capitalized software developed costs -- 32
Customer relationship -- --
---------- ----------
544 732
---------- ----------
$ 206 $ 1,394
========== ==========
c. Amortization expenses amounted to $ 154, $ 154 and $ 188 for each of
the years ended December 31, 2002, 2003 and 2004.
d. Estimated amortization expenses for the years ended:
December 31,
------------
2005 273
2006 223
2007 222
2008 222
2009 and further 100
F-26
MER TELEMANAGEMENT SOLUTIONS LTD.
AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
U.S. dollars in thousands (except share data)
NOTE 11:- ACCRUED EXPENSES AND OTHER LIABILITIES
December 31,
-----------------------
2003 2004
---------- ----------
Employees and payroll accruals $ 473 $ 799
Income tax payable 242 330
Accrued expenses 456 646
Customer advances 203 204
Related parties 47 63
---------- ----------
$ 1,421 $ 2,042
========== ==========
NOTE 12:- COMMITMENTS AND CONTINGENT LIABILITIES
a. Lease commitments:
The facilities of the Company are rented under operating leases for
periods ending in 2006.
Future minimum lease commitments under non-cancelable operating
leases as of December 31 are as follows:
2005 $ 399
2006 130
-------
$ 529
=======
Lease expenses for the years ended December 31, 2002, 2003 and 2004,
were approximately $ 446, $ 372 and $ 334, respectively.
b. 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 December 31, 2004, the Company has
a contingent liability to pay royalties in the amount of $
7,429. 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.
The Company has paid or accrued royalties in its cost of
revenues relating to the repayment of such grants in the
amount of $ 132, $ 146 and $ 181 for the years ended December
31, 2002, 2003 and 2004, respectively.
F-27
MER TELEMANAGEMENT SOLUTIONS LTD.
AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
U.S. dollars in thousands (except share data)
NOTE 12:- COMMITMENTS AND CONTINGENT LIABILITIES (Cont.)
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 December 31, 2004, the
Company has a contingent obligation to pay royalties in the
amount of $ 259. During the three years ending on December 31,
2004, the Company accrued royalties in the amount of $129.
c. Claim and demand:
In April 2000, the tax authorities in Israel issued to the Company a
demand for a tax payment, for the period of 1997-1999, in the amount
of approximately NIS 6 million ($ 1,350).
The Company has appealed to the Israeli district court in respect of
the abovementioned tax demand. Based on the opinion of its legal
counsel, the Company believes that certain defenses can be raised
against the demand of the tax authorities. The Company believes that
the outcome of this matter will not have a material adverse effect
on its financial position or results of operations and, the Company
provided a provision in the amount of $464 , based on the current
evidence and on the basis of the said opinion of its legal counsel
that, in the opinion of Company, is an adequate provision.
NOTE 13:- TAXES ON INCOME
a. Tax benefits under the Law for the Encouragement of Capital
Investments, 1959 ("the Law"):
MTS was granted the status of an "Approved Enterprise" under the Law
in respect of expansion projects. According to the provisions of the
Law, MTS elected to enjoy the "alternative benefits " - the waiver
of grants in return for a tax exemption and, accordingly, income
derived from the "Approved Enterprise" is tax-exempt for a period of
two years, commencing with the year it first earns taxable income,
and subject to corporate tax at the rate of 10%- 25%, for additional
periods of five to eight years.
The expansion programs which are assigned to MTS are as follows:
1. One program entitled MTS to tax-exemption for a two-year
period ended December 31, 1999, and is subject to a reduced
tax rate of 10%-25% for a five to eight years period ending
December 31, 2004.
2. The current program entitles MTS to tax exemption for a two
year period and it is subject to a tax rate of 10%-25% for an
additional period of five to eight years . The benefits in
respect of this program have not yet commenced.
3. During 2004 the Company received an additional expansion
program which entitles MTS to tax exemption for a two year
period and to a reduced tax rate of 10%-25% for a five year
period. The benefits in respect of this program have not yet
commenced.
F-28
MER TELEMANAGEMENT SOLUTIONS LTD.
AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
U.S. dollars in thousands (except share data)
NOTE 13:- TAXES ON INCOME (Cont.)
The period of tax benefits detailed above is subject to a limit of
the earlier of 12 years from the commencement of production or 14
years from receiving the approval.
The entitlement to the above benefits is conditional upon MTS's
fulfilling the conditions stipulated by the above Law, regulations
published thereunder and the letters of approval for the specific
investment in "Approved Enterprises". In the event of failure to
comply with these conditions, the benefits may be canceled and MTS
may be required to refund the amount of the benefits, in whole or in
part, including interest. As of December 31, 2004, management
believes that MTS is meeting all of the aforementioned conditions.
The tax-exempt income attributable to the "Approved Enterprise",
amounting to $2,250 as of December 31, 2004, can be distributed to
shareholders without subjecting MTS to taxes only upon the complete
liquidation of MTS. MTS has determined that such tax-exempt income
will not be distributed as dividends and permanently re-invested
these profits. Accordingly, no deferred taxes have been nor will be
provided on income attributable to MTS's "Approved Enterprise".
Should the retained tax-exempt income be distributed in a manner
other than in the complete liquidation of MTS, it would be taxed at
the corporate tax rate applicable to such profits as if MTS had not
elected the alternative tax benefits (currently - 10%-25% for an
"Approved Enterprise").
Should MTS and its Israeli subsidiary derive income from sources
other than an "Approved Enterprise", they will be subject to tax at
the regular rate of 35%.
Since MTS is operating more than one "Approved Enterprise" and since
part of its taxable income is not entitled to tax benefits under the
abovementioned law and is taxed at the regular corporate tax rate,
its effective tax rate is the result of a weighted combination of
the various applicable rate and tax exemptions, and the computation
is made for income derived from each program on the basis of
formulas specified in the law and in the approvals.
b. Measurement of results for tax purposes under the Income Tax Law
(Inflationary Adjustments), 1985:
Results for tax purposes are measured in terms of earnings in NIS
after certain adjustments for increases in the Israeli Consumer
Price Index ("CPI"). As explained in Note 2b, the financial
statements are presented in dollars. The difference between the
annual change in the CPI and in the NIS/dollar exchange rate causes
a further difference between taxable income and the income before
taxes presented in the financial statements. In accordance with
paragraph 9(f) of SFAS 109, MTS and its Israeli subsidiary have not
provided for deferred income taxes on the difference between the
functional currency and the tax bases of assets and liabilities.
F-29
MER TELEMANAGEMENT SOLUTIONS LTD.
AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
U.S. dollars in thousands (except share data)
NOTE 13:- TAXES ON INCOME (Cont.)
c. Tax benefits under the Law for the Encouragement of Industry
(Taxation), 1969:
MTS is currently qualified as an "industrial company" under the
above law and, as such, is entitled to certain tax benefits, mainly
accelerated depreciation of machinery and equipment, as prescribed
by regulations published under the Inflationary Adjustments Law, the
right to claim public issuance expenses and amortization of
intangible property rights as a deduction for tax purposes.
d. Net operating losses carryforwards:
As of December 31, 2004, the Company and its subsidiaries in Israel,
Asia, U.S. and Holland have an estimated total amount of available
carryforward tax losses of $5,717, $ 290, $210 and $ 0, respectively
to offset against future taxable profits.
The tax loss carryforward in Israel may be offset indefinitely
against operating income. The operating loss carryforwards of MTS
and its Israeli subsidiary, which can be used indefinitely, amounted
to approximately $5,717.
e. Tax assessments:
Regarding the claim from the tax authorities in Israel, see Note
12c. The Company has received final tax assessments until the 1996
tax year.
f. Deferred income taxes:
Deferred taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial
reporting purposes and the amounts used for income tax purposes.
Significant components of the Company's deferred tax liabilities and
assets are as follows:
December 31,
------------------------
2003 2004
---------- ----------
Tax loss carryforwards of the Company $ 845 $ 1,291
Allowances for doubtful accounts and accruals for employee
benefits 121 122
In respect of marketable securities 84 76
Capitalized software and other intangible assets 134 93
Other 5 190
---------- ----------
Net deferred tax asset before valuation allowance 1,189 1,772
Valuation allowance (1,017) (1,633)
---------- ----------
Net deferred income taxes $ 172 $ 139
========== ==========
Presented as follows:
Current assets - foreign $ 66 $ 66
========== ==========
Other assets - foreign $ 73 $ 73
========== ==========
Other assets - domestic $ 33 $ --
========== ==========
F-30
MER TELEMANAGEMENT SOLUTIONS LTD.
AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
U.S. dollars in thousands (except share data)
NOTE 13:- TAXES ON INCOME (Cont.)
MTS and certain of its subsidiaries have provided valuation
allowances in respect of deferred tax assets resulting from tax loss
carryforward and other temporary differences, since they have a
history of losses over the past years. Management currently believes
that it is more likely than not that part of the deferred tax
regarding the loss carryforward in the Company and other temporary
differences will not be realized in the foreseeable future.
g. A reconciliation between the theoretical tax expense, assuming all
income is taxed at the statutory tax rate applicable to income of
the Company and the actual tax expense as reported in the statements
of operations, is as follows:
Year ended December 31,
----------------------------------------
2002 2003 2004
---------- ---------- ----------
Loss before taxes as reported in the statements
of operations $ (54) $ (60) $ (4,086)
========== ========== ==========
Tax rates 36% 36% 35%
========== ========== ==========
Theoretical tax benefit $ (19) $ (22) $ (1,430)
Increase in taxes resulting from:
Effect of different tax rates and "Approved
Enterprise" benefit 200 -- 2
Tax adjustment in respect of inflation in
Israel and others (61) (22) 12
Utilization of carryforward tax losses for
which valuation allowance was provided (246) (86) (21)
Non-deductible expenses and tax exempt income (24) 9 --
Taxes in respect of previous years -- 175 223
Deferred taxes for which valuation allowance
was provided 202 144 1,480
---------- ---------- ----------
Taxes on income as reported in the
statements of operations $ 52 $ 198 $ 266
========== ========== ==========
h. Loss before income taxes is comprised as follows:
Domestic $ (841) $ (312) $ (3,918)
Foreign 787 252 (168)
---------- ---------- ----------
$ (54) $ (60) $ (4,086)
========== ========== ==========
F-31
MER TELEMANAGEMENT SOLUTIONS LTD.
AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
U.S. dollars in thousands (except share data)
NOTE 13:- TAXES ON INCOME (Cont.)
i. Taxes on income are comprised as follows:
Year ended December 31,
-------------------------------------
2002 2003 2004
---------- ---------- ----------
Current taxes $ 23 $ -- $ 10
Deferred taxes 29 23 33
Taxes in respect of previous years -- 175 223
---------- ---------- ----------
$ 52 $ 198 $ 266
========== ========== ==========
Domestic $ 29 $ 322 $ 256
Foreign 23 (124) 10
---------- ---------- ----------
$ 52 $ 198 $ 266
========== ========== ==========
NOTE 14:- RELATED PARTIES TRANSACTIONS
a. On November 8, 1999, the board of directors and the audit committee
approved, subject to shareholders' approval, an increase in the
monthly salary of the Chairman of the Board of Directors from $ 5 to
$ 7 per month and the grant of options to purchase 98,824 ordinary
shares. The options were granted to him at his request in lieu of
salary for the twelve month period ending December 31, 2000. The
exercise price of the options is $ 6 per share, expected dividend
yield is 0%, and the risk free interest rate is 6%. The options will
vest ratably over an eight-month period beginning January 1, 2000
and will terminate five years from the date of grant. The options
were forfeited by the end of the year 2004.
The wife of the Chairman of the Board of Directors provides ongoing
legal services to the Company and receives a monthly retainer of $
5. The conditions for retaining her services were approved by the
Company's Board of Directors and audit committee.
MTS's subsidiaries, MTS Asia Ltd. and MTS IntegraTRAK, entered into
an agreement with C. Mer, pursuant to which they distribute and
support certain of C. Mer's (company under common control) products
and provide certain services on behalf of C. Mer. Generally, C. Mer
compensates MTS Asia Ltd. for these activities at cost plus 10% and
compensates MTS IntegraTRAK at cost plus 5%.
F-32
MER TELEMANAGEMENT SOLUTIONS LTD.
AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
U.S. dollars in thousands (except share data)
NOTE 14:- RELATED PARTIES TRANSACTIONS (Cont.)
b. In 2003 and 2004, the balance with C. Mer reflects short-term debt
and other receivable. Due to the short-term nature, no interest was
charged by or paid to C. Mer through December 31, 2003 and 2004.
c. Transactions with related parties were as follows:
Year ended December 31,
--------------------------------------
2002 2003 2004
---------- ---------- ----------
Sales through related parties $ 65 $ 28 $ 15
========== ========== ==========
Amounts charged by related parties:
Cost of revenues $ 239 $ 34 $ 32
Research and development 8 -- --
Selling and marketing 2 -- --
General and administrative 4 5 7
---------- ---------- ----------
$ 253 $ 39 $ 39
========== ========== ==========
Amounts charged by MTS Integra TRAK
and MTS Asia to related parties:
Selling and marketing $ 2 $ -- $ 18
========== ========== ==========
Payments from (repayments to) the related
parties, net $ (172) $ (48) $ 20
========== ========== ==========
d. Amounts due from an affiliate:
December 31,
------------------------
2003 2004
---------- ----------
Jusan S.A $ (2) $ (21)
========== ==========
NOTE 15:- SHAREHOLDERS' EQUITY
a. Share capital:
The Ordinary shares entitle their holders the right to receive
notice to participate and vote in general meetings of MTS and the
right to receive cash dividends, if declared.
b. Share Option Plan:
MTS has authorized, through its 1996 Incentive Share Option plan,
the grant of options to officers, management, employees and
directors of MTS or any subsidiary of up to 1,900,000 of MTS's
Ordinary shares. Up to 1,500,000 options shall be granted under the
option plan pursuant to section 102 of the Israel Income Tax
Ordinance. Any option, which is canceled or forfeited before
expiration, will become available for future grants.
F-33
MER TELEMANAGEMENT SOLUTIONS LTD.
AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
U.S. dollars in thousands (except share data)
NOTE 15:- SHAREHOLDERS' EQUITY (Cont.)
Each option granted under the Plan is exercisable until the earlier
of four years from the date of the grant of the option or the
expiration dates of the option plan. The exercise price of the
options granted under the plans may not be less than the nominal
value of the shares into which such options were exercised. The
options vest primarily gradually over three or four years of
employment.
In 2003, Section 102 of the Israeli Income Tax Ordinance was amended
effective as of January 1, 2003. Therefore MTS has rolled-over the
remaining options available, at that time for grant into a new plan
that conforms with the newly amended provisions of Section 102 of
the Israel Income Tax Ordinance. The Incentive Share Option Plan
will terminate in 2013, unless cancelled earlier by MTS's board of
directors.
As of December 31, 2004, 672,025 options are available for future
grant.
Summary of MTS's stock options activity and related information for
the three years ended December 31 is as follows:
Options Number Weighted
available of options Options average
for grant outstanding exercisable exercise price
-------------- ------------- -------------- ---------------
Options exercisable at January 1, 2002 800,887 $ 4.48
===========
Balance on January 1, 2002 531,609 1,227,141 $ 3.74
Options granted (35,000) 35,000 $ 1.2
Options forfeited 504,561 (504,561) $ 4.19
----------- -----------
Options exercisable at December 31, 2002 502,644 $ 3.76
===========
Balance on December 31, 2002 1,001,170 757,580 $ 3.32
Options granted (434,500) 434,500 $ 1.85
Options exercised -- (133,333) $ --
Options forfeited 260,106 (260,106) $ 2.91
----------- -----------
Options exercisable at December 31, 2003 355,413 $ 3.68
=========== ===========
Balance on December 31, 2003 826,776 798,641 $ 2.85
Options granted (226,000) 226,000 $ 2.29
Options exercised -- (17,333) $ 0.08
Options forfeited 251,708 (251,708) $ 4.62
Options forfeited from old plan (180,459) -- $ --
----------- ----------- -----------
Options exercisable at December 31, 2004 301,812 $ 2.01
=========== ===========
Balance on December 31, 2004 672,025 755,600 $ 2.11
=========== =========== ===========
F-34
MER TELEMANAGEMENT SOLUTIONS LTD.
AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
U.S. dollars in thousands (except share data)
NOTE 15:- SHAREHOLDERS' EQUITY (Cont.)
The options outstanding as of December 31, 2004 have been separated
into ranges of exercise prices, as follows:
Options Weighted Weighted
outstanding average Weighted average
as of remaining average exercise price
Exercise December 31, contractual exercise Options of exercisable
price 2004 life (in years) price exercisable options
----------------- ----------------- --------------- --------------- --------------- ---------------
$ 0.93-1.3 31,500 1.08 $ 1.18 20,998 $ 1.18
$ 1.844 250,000 3.92 $ 1.844 62,500 $ 1.844
$ 1.9-2.05 186,300 0.39 $ 1.95 186,300 $ 1.95
$ 2.2-2.35 184,000 4.71 $ 2.27 - $ -
$ 2.9-2.95 98,800 3.92 $ 2.9 27,014 $ 2.9
$ 4.5 2,000 0.08 $ 4.5 2,000 $ 4.5
$ 5.9375 3,000 0.75 $ 5.9375 3,000 $ 5.9375
------------ ------------
755,600 $ 2.11 301,812 $ 2.01
============ ============ ============ ============
c. The weighted average fair value of options granted during 2003 and
2004, whose exercise price equals the fair value of the stock on the
date of grant, was $ 1.20 and $ 0.781 per option, respectively.
During 2004, the Company granted 226,000 options at a weighted
average exercise price of $ 2.29 per share (the fair market value of
the shares on the date of grant).
The Company has recorded deferred stock compensation expense for
options issued in 2003 with an exercise price below the fair market
value of the shares; the deferred stock compensation expense has
been amortized and recorded as compensation expense ratably over the
vesting period of the options. Compensation expense of approximately
$ 60 and $ 66 was recognized during 2003 and 2004, respectively.
During 2003 the Company reduced the exercise price of 83,000 options
to zero resulting in a compensation expense of approximately $ 153.
d. In January 2000, MTS granted 98,824 options to Mr. Chaim Mer,
chairman of the Company, having an exercise price of $ 6.00 per
share. These options were granted in lieu of Mr. Mer's salary ($ 7
per month) in 2000. The options were exercisable for five years
commencing January 1, 2000 and forfeited by the end of year 2004
(see Note 14a).
e. On February 7, 2001, MTS issued five-year warrants to purchase
25,000 Ordinary shares of MTS to Investec Bank (Mauritius) Ltd. in
connection with certain financial services performed on MTS's
behalf. The warrants have an exercise price of $ 4.95 per share for
warrants exercised until February 2004 and $ 5.625 per share for
warrants exercised until February 2006. The fair value of the
warrants, at the date of the grant, using a Black-Scholes option
pricing model was immaterial and therefore no compensation expenses
were recorded.
F-35
MER TELEMANAGEMENT SOLUTIONS LTD.
AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
U.S. dollars in thousands (except share data)
NOTE 15:- SHAREHOLDERS' EQUITY (Cont.)
f. Treasury shares:
During 2002, 2003 and 2004, the Company purchased 195,183, 130,510
and 3,800 treasury shares in consideration of $ 172, $ 147 $ 9 and
respectively, according to the stock repurchase program, which
authorized the Company's officers to repurchase up to 600,000
Ordinary shares of MTS and was approved by the Company's Board of
Directors.
During 2003, MTS cancelled $457 of its treasury shares, which
represent 384,610 Ordinary shares.
g. Dividends:
Dividends, if any, will be paid in NIS. Dividends paid to
shareholders outside Israel will be converted into dollars, on the
basis of the exchange rate prevailing at the date of payment.
NOTE 16:- GEOGAPHIC INFORMATION AND CLASSES OF PRODUCTS
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:
Year ended December 31,
------------------------------------
2002 2003 2004
---------- ---------- ----------
Revenues from sales:
Israel $ 217 $ 186 $ 256
United States 6,449 4,917 4,967
Germany 1,130 1,826 1,724
Holland 756 924 798
Europe (excluding Germany and Holland) 296 516 471
Asia 469 364 635
South America 328 368 423
Others 142 129 139
---------- ---------- ----------
$ 9,787 $ 9,230 $ 9,413
========== ========== ==========
F-36
MER TELEMANAGEMENT SOLUTIONS LTD.
AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
U.S. dollars in thousands (except share data)
NOTE 16:- GEOGAPHIC INFORMATION AND CLASSES OF PRODUCTS(Cont.)
December 31,
------------------------------------
2002 2003 2004
---------- ---------- ----------
Long-lived assets:
Israel $ 624 $ 394 $ 3,103
United States 2,302 2,268 2,244
Holland 10 8 7
Asia 29 16 9
South America 22 27 27
---------- ---------- ----------
$ 2,987 $ 2,713 $ 5,390
========== ========== ==========
Total revenues from external customers divided on the basis of the
Company's product lines are as follows:
Year ended December 31,
------------------------------------
2002 2003 2004
---------- ---------- ----------
TABS $ 9,787 $ 9,230 $ 9,327
Application suite -- -- 86
---------- ---------- ----------
$ 9,787 $ 9,230 $ 9,413
========== ========== ==========
NOTE 17:- SELECTED STATEMENTS OF OPERATIONS DATA
a. Financial income, net
Year ended December 31,
--------------------------------------
2002 2003 2004
---------- ---------- ----------
Financial expenses:
Interest expenses $ (205) $ (64) $ --
Other expenses (7) -- (24)
Foreign currency translation differences -- (11) --
---------- ---------- ----------
(212) (75) (24)
---------- ---------- ----------
Financial income:
Interest income 310 186 83
Other income 1 13 --
Foreign currency translation differences 35 -- 19
---------- ---------- ----------
346 199 102
---------- ---------- ----------
$ 134 $ 124 $ 78
========== ========== ==========
Other income (expenses):
Gain (loss) on marketable securities, net $ (140) $ 6 $ --
========== ========== ==========
F-37
MER TELEMANAGEMENT SOLUTIONS LTD.
AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
U.S. dollars in thousands (except share data)
NOTE 18:- SUBSIDIARIES AND AFFILIATES
Percentage of Jurisdiction of
ownership incorporation
------------- ---------------
Subsidiaries:
-------------
MTS IntegraTRAK Inc. 100% Delaware
MER Fifth Avenue Realty Inc. (a subsidiary of
MTS IntegraTRAK Inc.) 100% New York
MTS Asia Ltd. 100% Hong Kong
Telegent Ltd. 100% Israel
Jaraga B.V. 100% The Netherlands
Verdura B.V. (a subsidiary of Jaraga B.V.) 100% The Netherlands
Voltera Technologies V.O.F. (a partnership held
99% by Jaraga B.V. and 1% by Verdura B.V.) 100% The Netherlands
Bohera B.V. (a subsidiary of Jaraga B.V.) 100% The Netherlands
Tabs Brazil Ltd. (a subsidiary of Jaraga B.V.) 100% Brazil
Affiliate:
----------
Jusan S.A. (a subsidiary of Jaraga B.V.) 50% Spain
NOTE 19:- SUBSEQUENT EVENTS
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 $3,360). Due to
the preliminary stage of the litigation, the Company and its legal
advisors cannot currently advise as to its outcome or its possible
adverse effect on the Company's financial position or results of
operations. The company intends to vigorously defend this action.
- - - - - - - - - - -
F-38
JUSAN, S.A.
FINANCIAL STATEMENTS
EUROS IN THOUSANDS
INDEX
Page
---------------
Report of Registered Public Accounting Firm F-40
Report of Independent Auditors F-41
Balance Sheets as of December 31, 2002, 2003 and 2004 F-42
Statements of Income for the three years ended December 31, 2004 F-43
Statements of Changes in Shareholders' Equity for the three
years ended December 31, 2004 F-44
Statements of Cash Flows for the three years ended December 31, 2004 F-45
Notes to Financial Statements F-46 - F-55
F-39
[LOGO] BDO BDO Audiberia Juan Bravo, 3-B, 6a 28006 Madrid - Espana
Auditores Telefono: 00 34-914 364 190
Fax: 00 34-914 364 191/192
Email: bdo@bdo.es
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
-------------------------------------------------------
Board of Directors and Stockholders of Jusan, S.A.:
1. We have audited the accompanying balance sheet of Jusan, S.A. as of
December 31, 2004 and the related statements of income, stockholders'
equity and cash flows for the year ended December 31, 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 audit. The consolidated financial statements of the Company
as of December 31, 2003 were audited by other auditors whose report dated
January 14, 2004, expressed an unqualified opinion on those statements.
2. We conducted our audit 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.
Our audit 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, as well as
evaluating the overall financial statement presentation. We believe that
our audit provide a reasonable basis for our opinion.
3. In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Jusan, S.A. as of
December 31, 2004 and the results of its operations and its cash flows for
the year then ended in conformity with accounting principles generally
accepted in the United States of America.
BDO Audiberia
/s/ Peter D. Cook
------------------------
Peter D. Cook
Madrid, March 3, 2005
F-40
[LOGO] ERNST & YOUNG |X| Kost Forer Gabbay & Kasierer
3 Aminadav St. |X| Phone: 972-3-6232525
Tel-Aviv 67067, Israel Fax: 972-3-5622555
REPORT OF INDEPENDENT AUDITORS
To the Shareholders of
JUSAN, S.A.
We have audited the accompanying balance sheets of JUSAN, S.A. ("the
Company") as of December 31, 2003 and 2002, and the related statements of
income, changes in shareholders' equity and cash flows for each of the two years
in the period ended December 31, 2003. 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 audit.
We conducted our audit 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. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our
audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of the Company as of December
31, 2003 and 2002, and the results of its operations and its cash flows for each
of the two years in the period ended December 31, 2003, in conformity with
accounting principles generally accepted in the United States.
/s/ Kost Forer Gabbay and Kasierer
Tel-Aviv, Israel KOST FORER GABBAY & KASIERER
January 14, 2004 A Member of Ernst & Young Global
F-41
JUSAN, S.A.
BALANCE SHEETS
--------------------------------------------------------------------------------
Euros in thousands
December 31,
---------------------------------------------
2002 2003 2004
------------ ------------ -------------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents (euro) 338 (euro) 953 (euro) 589
Short-term bank deposits 402 450 450
Trade receivables (net of allowance for doubtful
accounts of 6 euros as of December 31, 2002 and
2003 and 43 euros as of December 31, 2004, and
net of provision for returns of 7 euros as of
December 31, 2003, and 4 euros as of December 31, 2004) 1,578 1,732 2,065
Other accounts receivable and prepaid expenses (Note 3) 262 240 178
Inventories (Note 4) 900 793 912
------------ ------------- -------------
Total current assets 3,480 4,168 4,194
----- ------------ ------------- -------------
PROPERTY AND EQUIPMENT, NET (Note 5) 118 78 50
------------ ------------- -------------
Total assets (euro) 3,598 (euro) 4,246 (euro) 4,244
----- ============ ============= =============
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Short-term bank debt (Note 6) (euro) 16 (euro) 38 (euro) 18
Trade payables 623 795 659
Accrued expenses and other liabilities (Note 7) 386 408 361
Deferred revenues 126 232 60
------------ ------------- -------------
Total current liabilities 1,151 1,473 1,098
----- ------------ ------------- -------------
COMMITMENTS (NOTE 8)
SHAREHOLDERS' EQUITY (Note 11):
Share capital -
15,052 Ordinary shares of (euro) 0.0042 par value -
Authorized, issued and outstanding as of December 31,
2002, 2003 and 2004 63 63 63
Retained earnings 2,384 2,710 3,083
------------ ------------- -------------
Total shareholders' equity 2,447 2,773 3,146
----- ------------ ------------- -------------
Total liabilities and shareholders' equity (euro) 3,598 (euro) 4,246 (euro) 4,244
----- ============ ============= =============
The accompanying notes are an integral part of the financial statements.
F-42
JUSAN, S.A.
STATEMENTS OF INCOME
--------------------------------------------------------------------------------
Euros in thousands (except share and per share data)
Year ended December 31,
-------------------------------------------------------
2002 2003 2004
---------------- --------------- ----------------
Revenues (Note 12):
Product sales (euro) 6,060 (euro) 5,353 (euro) 5,154
Services 819 707 640
---------------- --------------- ----------------
Total revenues 6,879 6,060 5,794
---------------- --------------- ----------------
Cost of revenues:
Product sales 3,336 2,797 2,658
Services 658 538 447
---------------- --------------- ----------------
Total cost of revenues 3,994 3,335 3,105
---------------- --------------- ----------------
Gross profit 2,885 2,725 2,689
---------------- --------------- ----------------
Operating expenses:
Research and development 470 425 454
Selling and marketing 718 770 872
General and administrative 892 882 849
---------------- --------------- ----------------
Total operating expenses 2,080 2,077 2,175
---------------- --------------- ----------------
Operating income 805 648 514
Financial income, net (Note 13) 7 9 2
---------------- --------------- ----------------
Income before taxes on income 812 657 516
Income taxes (Note 9) 185 131 143
---------------- --------------- ----------------
Net income (euro) 627 (euro) 526 (euro) 373
================ =============== ================
Basic and diluted net earnings per share (euro) 41.7 (euro) 34.95 (euro) 24.78
================ =============== ================
Weighted average number of shares used in
computing basic and diluted net earnings
per share 15,052 15,052 15,052
================ =============== ================
The accompanying notes are an integral part of the financial statements.
F-43
JUSAN, S.A.
STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
--------------------------------------------------------------------------------
Euros in thousands
Number Total
of Ordinary Share Retained shareholders'
Shares Capital earnings Equity
------------- ------------- --------------- -----------------
Balance as of January 1, 2002 15,052 (euro) 63 (euro) 2,437 (euro) 2,500
Dividends - - (680) (680)
Net income - - 627 627
------------- ------------- --------------- -----------------
Balance as of December 31, 2002 15,052 63 2,384 2,447
Dividends - - (100) (100)
Accrued dividend - - (100) (100)
Net income - - 526 526
------------- ------------- ---------------- -----------------
Balance as of December 31, 2003 15,052 63 2,710 2,773
Net income - - 373 373
------------- ------------- ---------------- -----------------
Balance as of December 31, 2004 15,052 (euro) 63 (euro) 3,083 (euro) 3,146
============= ============= ================ =================
The accompanying notes are an integral part of the financial statements.
F-44
JUSAN, S.A.
STATEMENTS OF CASH FLOWS
--------------------------------------------------------------------------------
Euros in thousands
Year ended December 31,
-------------------------------------------------------
2002 2003 2004
---------------- --------------- ----------------
Cash flows from operating activities:
-------------------------------------
Net income (euro) 627 (euro) 526 (euro) 373
Adjustments to reconcile net income to net cash provided by
(used in) operating activities:
Depreciation 63 64 47
Increase in trade receivables (236) (154) (333)
Decrease (increase) in other accounts receivable and prepaid
expenses (51) 22 62
Decrease (increase) in inventories (252) 107 (119)
Increase (decrease) in trade payables (264) 172 (136)
Increase (decrease) in accrued expenses and other liabilities (218) (78) 53
Increase (decrease) in deferred revenues 126 106 (172)
---------------- --------------- ----------------
Net cash provided by (used in) operating activities (205) 765 (225)
---------------- --------------- ----------------
Cash flows from investing activities:
-------------------------------------
Investment in short-term bank deposits 702 (48) -
Purchase of property and equipment (94) (24) (19)
---------------- --------------- ----------------
Net cash provided by (used in) investing activities 608 (72) (19)
---------------- --------------- ----------------
Cash flows from financing activities:
-------------------------------------
Dividend paid (680) (100) (100)
Short-term bank debt (61) 22 (20)
---------------- --------------- ----------------
Net cash used in financing activities (741) (78) (120)
---------------- --------------- ----------------
Increase (decrease) in cash and cash equivalents (338) 615 (364)
Cash and cash equivalents at the beginning of the year 676 338 953
---------------- --------------- ----------------
Cash and cash equivalents at the end of the year (euro) 338 (euro) 953 (euro) 589
================ =============== ================
Non-cash financing information:
-------------------------------
Accrued dividend - (euro) 100 -
================ =============== ================
Supplemental disclosure of cash flows activities:
-------------------------------------------------
Cash paid during the year for:
Interest (euro) 9 (euro) 8 (euro) 2
================ =============== ================
Income taxes (euro) 183 (euro) 184 (euro) 143
================ =============== ================
The accompanying notes are an integral part of the financial statements.
F-45
JUSAN, S.A.
NOTES TO FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
Euros in thousands
NOTE 1:- ORGANIZATION AND OPERATIONS
a. JUSAN, S.A. ("the Company") was incorporated in Spain on June
19, 1959. The Company is engaged in development, manufacturing
and assembly, sales and distribution, and maintenance of vocal
server and call billing applications, as well as is in the
television rental business.
b. The Company has two major customers (see also Note 12a).
c. In accordance with company law the administrators present, for
comparative purposes, each of the balance sheet and profit and
loss account, the figures for the previous financial year, in
addition to those for the financial year 2004. The financial
statements refer exclusively to the annual accounts for the
financial year 2004.
NOTE 2:- SIGNIFICANT ACCOUNTING POLICIES
The financial statements have been prepared in accordance with
generally accepted accounting principles in the United States ("US
GAAP").
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 euros
Monetary accounts maintained in currencies other than the Euro
are remeasured into Euros 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. Cash equivalents:
The Company considers all highly liquid investments originally
purchased with maturities of three months or less to be cash
equivalents.
There are no restrictions for cash and cash equivalents.
d. Short-term bank deposits:
Short-term bank deposits are deposits with maturities of more
than three months but less than one year. The deposits are in
Euro and bear interest at an average rate of 2%. The
short-term deposits are presented at their cost, including
accrued interest.
F-46
JUSAN, S.A.
NOTES TO FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
Euros in thousands
NOTE 2:- SIGNIFICANT ACCOUNTING POLICIES (Cont.)
e. Inventories:
Inventories are stated at the lower of cost or market value.
Cost is determined as follows: Raw materials, parts and
supplies -using the weighted average cost method. Work in
progress and finished products are recorded on the basis of
direct manufacturing costs. Inventories write-offs are
provided to cover risks arising from slow moving items or
technological obsolescence.
f. 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 depreciation rates:
%
----------
Computers and peripheral equipment 33
Office furniture and equipment 20
Motor vehicles 20
The Company's long-lived assets 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.
g. Research and development costs:
Research and development costs are charged to the Statement of
Operations as incurred. Statement of Financial Accounting
Standard No. 86 "Accounting for the Costs of Computer Software
to be Sold, Leased or Otherwise Marketed" ("SFAS No. 86"),
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. Costs incurred by the Company between
completion of the working models and the point at which the
products are ready for general release have been
insignificant. Therefore, all research and development costs
have been expensed.
F-47
JUSAN, S.A.
NOTES TO FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
Euros in thousands
NOTE 2:- SIGNIFICANT ACCOUNTING POLICIES (Cont.)
h. Income taxes:
The Company accounts for income taxes in accordance with
Statement of Financial Accounting Standard No. 109,
"Accounting for Income Taxes" ("SFAS No. 109"). This statement
prescribes the use of the liability method whereby deferred
tax assets 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. Valuation allowances are provided to
reduce deferred tax assets to their estimated realizable
value.
i. Revenue recognition:
The Company generates revenues from selling software-based
products through resellers and distributors who are considered
end-users. The Company also generates revenues from rendering
maintenance and support services.
Revenues are recognized when all criteria outlined in
Statement of Position No. 97-2 "Software Revenue Recognition"
("SOP No. 97-2") as amended are met. Revenue from products is
recognized when persuasive evidence of an agreement exists,
delivery of the product has occurred, no significant
obligations with regard to implementation remain, the fee is
fixed or determinable and collectibility is probable.
Where the arrangements involve multiple elements, revenue is
allocated to each element based on vendor specific objective
evidence ("VSOE") of the relative fair values of each element
in the arrangement, in accordance with the "residual method"
prescribed by SOP No. 98-9, "Modification of SOP No. 97-2,
Software Revenue Recognition With Respect to Certain
Transactions". The VSOE used by the Company to allocate the
sales price to support services and maintenance is based on
the renewal rate charged when these elements are sold
separately. Revenues from products are recorded based on the
residual method. Under the residual method, revenue is
recognized for the delivered elements when (1) there is VSOE
of the fair values of all the undelivered elements, and (2)
all revenue recognition criteria of SOP No. 97-2, as amended,
are satisfied. Under the residual method any discount in the
arrangement is allocated to the delivered element.
Provision for returns in the amount of (euro) 4 is determined
principally on the basis of past experience.
Revenues from maintenance and support services are recognized
over the life of the maintenance agreement or at the time
support services are rendered.
Deferred revenues include unearned amounts received under
maintenance and support contracts, not yet recognized as
revenues.
F-48
JUSAN, S.A.
NOTES TO FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
Euros in thousands
NOTE 2:- SIGNIFICANT ACCOUNTING POLICIES (Cont.)
j. Warranty costs:
The Company provides free warranty for up to one year. A
provision in the amount of (euro) 20 as of December 31, 2004
((euro) 18 in 2003 and 2002) is recorded for probable costs in
connection with these services based on the Company's
experience.
The Company estimates the costs that may be incurred under its
basic limited warranty and records a liability in the amount
of such costs at the time product revenue is recognized.
Factors that affect the Company's warranty liability include
the number of installed units, historical and anticipated
rates of warranty claims, and cost per claim. The Company
periodically assesses the adequacy of its recorded warranty
liabilities and adjusts the amounts as necessary.
k. Fair value of financial instruments:
The carrying amounts of cash and cash equivalents, short-term
bank deposits, trade receivables, other accounts receivable
and trade payables approximate their fair value, due to the
short-term maturity of such instruments.
There are short term fixed-rate securities as an amount of
(euro) 450.000 as of December 31, 2004.
l. Concentrations of credit risk:
Financial instruments that potentially subject the Company to
concentrations of credit risk consist principally of cash and
cash equivalents, short-term bank deposits and trade
receivables.
Cash and cash equivalents and short-term bank deposits are
deposited with major banks in Spain. 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.
The trade receivables of the Company are mainly derived from
sales to customers in Spain and Europe (see Note 12a). The
Company performs ongoing credit evaluations of its customers.
The allowance for doubtful accounts is determined with respect
to specific debts that are doubtful of collection according to
management estimates (the ageing of account receivable is more
than 180 days). In certain circumstances, the Company may
require letters of credit, other collateral or additional
guarantees.
The Company has no off-balance-sheet concentration of credit
risk such as foreign exchange contracts, option contracts or
other foreign hedging arrangements.
F-49
JUSAN, S.A.
NOTES TO FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
Euros in thousands
NOTE 2:- SIGNIFICANT ACCOUNTING POLICIES (Cont.)
m. Basic and diluted net earnings per share:
Basic net earnings per share is computed based on the weighted
average number of ordinary shares outstanding during each
year. Diluted earnings per share is computed based on the
weighted average number of ordinary shares outstanding during
each year, plus potential ordinary shares considered
outstanding during the year, in accordance with Statement of
Financial Accounting Standard No. 128, "Earnings Per Share"
("SFAS No. 128").
NOTE 3:- OTHER ACCOUNTS RECEIVABLE AND PREPAID EXPENSES
December 31,
----------------------------------------------------------
2002 2003 2004
---------------- ---------------- -----------------
Government authorities (euro) 201 (euro) 191 (euro) 137
Employee advances 34 33 25
Deposits 16 16 16
Other 11 - -
---------------- ---------------- -----------------
(euro) 262 (euro) (euro) 178
================ ================ =================
NOTE 4:- INVENTORIES
December 31,
----------------------------------------------------------
2002 2003 2004
---------------- ---------------- -----------------
Raw materials (euro) 551 (euro) 489 (euro) 670
Work in progress 38 23 31
Finished products 311 281 211
---------------- ---------------- -----------------
(euro) 900 (euro) 793 (euro) 912
================ ================ =================
The provision for obsolescence for the years ended 31, 2002, 2003
and 2004 were (euro) 0, 0 and 12, respectively.
F-50
JUSAN, S.A.
NOTES TO FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
Euros in thousands
NOTE 5:- PROPERTY AND EQUIPMENT
December 31,
---------------------------------------------------------
2002 2003 2004
---------------- ---------------- ----------------
Cost:
Computers and peripheral equipment (euro) 140 (euro) 152 (euro) 132
Office furniture and equipment 285 294 291
Motor vehicles 100 103 103
Leasehold improvements 140 140 -
---------------- ---------------- ----------------
665 689 526
Accumulated depreciation:
Computers and peripheral equipment 97 127 118
Office furniture and equipment 243 265 266
Motor vehicles 67 79 92
Leasehold improvements 140 140 -
---------------- ---------------- ----------------
547 611 476
Depreciated cost (euro) 118 (euro) 78 (euro) 50
================ ================ ================
Depreciation expenses for the years ended December 31, 2002, 2003
and 2004 were (euro) 63, (euro) 64 and (euro) 47, respectively.
NOTE 6:- SHORT-TERM BANK DEBT
The Company has a short-term bank debt as of December 31, 2004 in
the amount of (euro)18, bearing interest of 3.75%.
NOTE 7:- ACCRUED EXPENSES AND OTHER LIABILITIES
December 31,
---------------------------------------------------------
2002 2003 2004
---------------- ---------------- ----------------
Employees and payroll accruals (euro) 53 (euro) 55 (euro) 45
Income tax payable 184 131 122
Deferred tax - - 21
Government authorities 131 104 119
Accrued dividends - 100 -
Current Accounts - - 34
Warranty costs 18 18 20
---------------- ---------------- ----------------
(euro) 386 (euro) 408 (euro) 361
================ ================ ================
F-51
JUSAN, S.A.
NOTES TO FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
Euros in thousands
NOTE 8:- COMMITMENTS
The facilities of the Company are rented under operating leases for
periods ending in 2009.
Future minimum lease commitments under non-cancelable operating
leases as of December 31, 2004, are as follows:
2005 (euro) 100
2006 43
2007 8
2008 8
2009 5
------------
(euro) 164
============
Rent expenses for years ended December 31, 2002, 2003, and 2004,
were approximately (euro) 142, (euro) 152 and (euro) 152,
respectively.
NOTE 9:- TAXES ON INCOME
Reconciliation between the theoretical tax expense, assuming all
income is taxed at the statutory tax rate applicable to income of
the Company and the actual tax expense as reported in the statements
of operations, is as follows:
Year ended December 31,
------------------------------------------------
2002 2003 2004
--------------- -------------- --------------
Income before taxes as reported in the statements
of operations (euro) 812 (euro) 657 (euro) 516
Adjustments for tax purposes - - (euro) 82
Decrease in the taxable base - Profit in sales to term - - (62)
=============== ============== ==============
812 657 536
Statutory tax rates 35% 35% 35%
=============== ============== ==============
Theoretical tax expense (euro) 284 (euro) 230 (euro) 188
Decrease in taxes resulting from:
Tax deduction for development (99) (99) (66)
Deferred Tax - - 21
--------------- -------------- --------------
Taxes on income as reported in the
statements of income (euro) 185 (euro) 131 (euro) 143
=============== ============== ==============
Under the current tax legislation, 35% of development expense can be
deducted from the income tax with the limits of 35% of the
theoretical tax benefits. In 2002 this limit was 35% and 2003 this
limit was 45%.
F-52
JUSAN, S.A.
NOTES TO FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
Euros in thousands
All the income before income taxes is domestic. Income taxes include
only current tax expenses.
There is a currently tax inspection at the date of the issue of
financial statements. The managers do not consider it will arise
significative impacts as a result of this inspection.
NOTE 10:- RELATED PARTIES TRANSACTIONS
The balances with and the revenues derived from related parties were
as follows:
a. Payments to related parties:
Year ended December 31,
-----------------------------------------------
2002 2003 2004
-------------- ------------- --------------
Wages (euro) 274 (euro) 308 (euro) 255
============== ============= ==============
In 2002, 2003 and 2004, the balance with personnel reflects
short-term debt.
In 2004 the payments of wages to related parties are based on the
payments to the managers ((euro) 161), the bonus of the president
((euro) 45), arised from the 10% of the year profit result, the
social security paid to the directors ((euro) 26) and 20% from the
leases ((euro) 23).
b. Transactions with related parties were as follows:
Year ended December 31,
------------------------------------------------------
2002 2003 2004
--------------- ---------------- ------------------
Sales through related parties (euro) - (euro) 15 (euro) 18
=============== ================ ==================
Amounts charged by related parties:
Cost of revenues (euro) 80 (euro) 205 (euro) 100
=============== ================ ==================
c. Amounts receivable from and payables to related parties:
December 31,
-----------------------------------------------------
2002 2003 2004
-------------- -------------- -----------------
Receivables:
Mer Telemanagement Solutions (euro) 1 (euro) 9 (euro) 17
MTS Asia - - 11
MTS IntegraTRAK - - 3
============== ============== =================
Payables:
Beheer - Jaraga BV (euro) - (euro) 128 (euro) 31
============== ============== =================
F-53
JUSAN, S.A.
NOTES TO FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
Euros in thousands
NOTE 11:- SHAREHOLDERS' EQUITY
a. Share capital:
The ordinary shares entitle their holders the right to receive
notice, to participate and vote in general meetings of the
Company and the right to receive dividends, if declared.
b. Legal reserve
As established by the Spanish Companies' Act, 10% of profits
must be allocated to the legal reserve, until such reserve is
equal to 20% of share capital. The legal reserve shall not be
distributed and may only be used for compensation of losses or
to increase capital.
c. Shareholding
There are 15,052 ordinary shares of (euro) 0.0042 par value,
authorized, issued and outstanding as of December 31, 2004.
The shareholders at December 31, 2004 are:
Jaraga, B.V. 50%
Jose Lasry Nahon 25%
Mauricio Toledano Marques 25%
NOTE 12:- SEGMENTS, CUSTOMERS AND GEOGRAPHIC INFORMATION
a. Major customers as a percentage of total revenues:
Year ended December 31,
---------------------------------------------------
2002 2003 2004
-------------- -------------- ---------------
%
---------------------------------------------------
Customer A 3% 13% 14%
Customer B 3% 10% 8%
b. The following is a summary of revenues within geographic areas
based on end customer location:
Year ended December 31,
---------------------------------------------------
2002 2003 2004
-------------- -------------- ---------------
Spain (euro) 4,335 (euro) 3,360 (euro) 2,287
European Community 2,067 2,179 2,796
Other 477 521 711
-------------- -------------- ---------------
(euro) 6,879 (euro) 6,060 (euro) 5,794
============== ============== ===============
F-54
JUSAN, S.A.
NOTES TO FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
Euros in thousands
NOTE 13:- SELECTED STATEMENTS OF OPERATIONS DATA
Financial income, net
Year ended December 31,
---------------------------------------------------
2002 2003 2004
-------------- -------------- ---------------
Financial expenses:
Interest expenses (euro) 9 (euro) 5 (euro) 3
Other expenses 13 8 11
-------------- -------------- ---------------
22 13 14
-------------- -------------- ---------------
Financial income:
Interest income 29 22 16
-------------- -------------- ---------------
Financial income, net (euro) 7 (euro) 9 (euro) 2
============== ============== ===============
-------------------------
F-55
S I G N A T U R E S
The registrant hereby certifies that it meets all of the requirements for
filing on Form 20-F/A and that it has duly caused and authorized the undersigned
to sign this annual report on its behalf.
MER TELEMANAGEMENT SOLUTIONS LTD.
By: /s/Eytan Bar
------------
Eytan Bar
Chief Executive Officer
By: /s/Shlomi Hagai
---------------
Shlomi Hagai
Chief Financial Officer
Dated: October 7, 2005
4