SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
----------------------
F O R M 6-K
REPORT OF FOREIGN PRIVATE ISSUER PURSUANT TO RULE 13a-16 OR 15d-16
UNDER THE SECURITIES EXCHANGE ACT OF 1934
For the month of September 2006
MER TELEMANAGEMENT SOLUTIONS LTD.
(Name of Registrant)
22 Zarhin Street, Ra'anana 43662, Israel
(Address of Principal Executive Office)
Indicate by check mark whether the registrant files or will
file annual reports under cover of Form 20-F or Form 40-F.
Form 20-F [X] Form 40-F [ ]
Indicate by check mark if the registrant is submitting the
Form 6-K in paper as permitted by Regulation S-T Rule 101(b)(1): [ ]
Indicate by check mark if the registrant is submitting the
Form 6-K in paper as permitted by Regulation S-T Rule 101(b)(7): [ ]
Indicate by check mark whether by furnishing the information
contained in this Form, the registrant is also thereby furnishing the
information to the Commission pursuant to Rule 12g3-2(b) under the Securities
Exchange Act of 1934.
Yes [ ] No [X]
If "Yes" is marked, indicate below the file number assigned to
the registrant in connection with Rule 12g3-2(b): 82-__________
This Form 6-K is being incorporated by reference into the Registrant's Form F-3
Registration Statement File No. 333-128225 and Form S-8 Registration Statements
File Nos. 333-12014 and 333-123321.
MER Telemanagement Solutions Ltd.
6-K Items
1. Interim Condensed Consolidated Financial Statements of MER Telemanagement
Solutions Ltd. and its subsidiaries as of June 30, 2006 and Management's
Discussion and Analysis of Financial Condition and Results of Operations
for the six months ended June 30, 2006.
ITEM 1
MER TELEMANAGEMENT SOLUTIONS LTD. AND ITS SUBSIDIARIES
INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
AS OF JUNE 30, 2006
U.S. DOLLARS IN THOUSANDS
UNAUDITED
INDEX
Page
----
Interim Condensed Consolidated Balance Sheets 2 - 3
Interim Condensed Consolidated Statements of Operations 4
Interim Condensed Statements of Changes in Shareholders' Equity 5
Interim Condensed Consolidated Statements of Cash Flows 6 - 7
Notes to Interim Condensed Consolidated Financial Statements 8 - 19
- - - - - - - - - -
MER TELEMANAGEMENT SOLUTIONS LTD.
AND ITS SUBSIDIARIES
INTERIM CONDENSED CONSOLIDATED BALANCE SHEETS
--------------------------------------------------------------------------------
U.S. dollars in thousands
June 30, December 31,
2006 2005
--------- -----------
Unaudited
---------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 1,635 $ 3,191
Marketable securities 142 132
Trade receivables, net 2,280 1,895
Unbilled receivables 448 104
Other accounts receivable and prepaid expenses 690 491
Inventories 152 181
------- -------
Total current assets 5,347 5,994
----- ------- -------
LONG-TERM INVESTMENTS:
Investment in an affiliate 1,777 1,615
Long-term loans, net of current maturities - 3
Severance pay fund 607 478
Other investments 365 347
------- -------
Total long-term investments 2,749 2,443
----- ------- -------
PROPERTY AND EQUIPMENT, NET 500 571
------- -------
OTHER ASSETS:
Goodwill 3,877 3,700
Other intangible assets, net 817 993
Deferred income taxes 115 115
------- -------
Total other assets 4,809 4,808
----- ------- -------
Total assets $13,405 $13,816
----- ======= =======
The accompanying notes are an integral part of the consolidated financial
statements.
2
MER TELEMANAGEMENT SOLUTIONS LTD.
AND ITS SUBSIDIARIES
INTERIM CONDENSED CONSOLIDATED BALANCE SHEETS
--------------------------------------------------------------------------------
U.S. dollars in thousands (except share and per share data)
June 30, December 31,
2006 2005
--------- ------------
Unaudited
---------
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Trade payables $ 605 $ 735
Accrued expenses and other liabilities 2,395 2,306
Deferred revenues 891 888
-------- --------
Total current liabilities 3,891 3,929
----- -------- --------
LONG-TERM LIABILITIES:
Accrued severance pay 876 713
-------- --------
Total long-term liabilities 876 713
----- -------- --------
SHAREHOLDERS' EQUITY:
Share capital -
Ordinary shares of NIS 0.01 par value -
Authorized: 12,000,000 shares at
June 30, 2006 and December 31, 2005;
Issued: 5,774,645 and 5,744,304
shares at June 30, 2006 and December 31, 2005;
Outstanding: 5,763,845 and 5,733,504 shares at
June 30, 2006 and December 31, 2005 17 17
Additional paid-in capital 16,016 15,966
Treasury shares (10,800 Ordinary shares) (29) (29)
Deferred stock compensation - (142)
Accumulated other comprehensive income (loss) 130 (75)
Accumulated deficit (7,496) (6,563)
-------- --------
Total shareholders' equity 8,638 9,174
----- -------- --------
Total liabilities and shareholders' equity $ 13,405 $ 13,816
----- ======== ========
The accompanying notes are an integral part of the consolidated financial
statements.
3
MER TELEMANAGEMENT SOLUTIONS LTD.
AND ITS SUBSIDIARIES
INTERIM CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
--------------------------------------------------------------------------------
U.S. dollars in thousands (except share and per share data)
Six months ended Three months ended
June 30, June 30,
------------------------- --------------------------
2006 2005 2006 2005
----------- ---------- ---------- -----------
Unaudited
--------------------------------------------------------
Revenues:
Product sales $ 4,138 $ 3,983 $ 1,870 $ 1,835
Services 1,380 1,555 834 977
----------- ----------- ----------- -----------
Total revenues 5,518 5,538 2,704 2,812
Cost of revenues:
Product sales 1,476 1,530 700 764
Services 352 363 194 242
----------- ----------- ----------- -----------
Total cost of revenues (*) 1,828 1,893 (**) 894 1,006
----------- ----------- ----------- -----------
Gross profit 3,690 3,645 1,810 1,806
----------- ----------- ----------- -----------
Operating expenses:
Research and development, net (*) 1,958 2,324 (**) 898 1,030
Selling and marketing (*) 1,583 2,897 (**) 753 1,370
General and administrative (*) 1,208 1,722 (**) 630 677
----------- ----------- ----------- -----------
Total operating expenses 4,749 6,943 2,281 3,077
----------- ----------- ----------- -----------
Operating loss (1,059) (3,298) (471) (1,271)
Financial income (expenses), net 11 104 (26) 83
----------- ----------- ----------- -----------
Loss before taxes on income (1,048) (3,194) (497) (1,188)
Taxes on income 3 - - -
----------- ----------- ----------- -----------
Loss before equity in earnings of affiliate (1,051) (3,194) (497) (1,188)
Equity in earnings of affiliate 118 11 49 39
----------- ----------- ----------- -----------
Net loss $ (933) $ (3,183) $ (448) $ (1,149)
=========== =========== =========== ===========
Basic and diluted net loss per share $ (0.16) $ (0.68) $ (0.08) $ (0.24)
=========== =========== =========== ===========
Weighted average number of Ordinary shares used in
computing basic and diluted net loss per share 5,754,186 4,675,283 5,763,845 4,712,561
=========== =========== =========== ===========
(*) Including stock-based employee compensation in the amounts of $ 15, $ 60,
$ 10 and $ 46 in cost of revenues, research and development, selling and
marketing and general and administrative, respectively.
(**) Including stock-based employee compensation in the amounts of $ 5, $ 45,
$ (3) and $ 21 in cost of revenues, research and development, selling and
marketing and general and administrative, respectively.
The accompanying notes are an integral part of the consolidated financial
statements.
4
MER TELEMANAGEMENT SOLUTIONS LTD.
AND ITS SUBSIDIARIES
INTERIM CONDENSED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
--------------------------------------------------------------------------------
U.S. dollars in thousands
Accumulated
Share capital Additional Deferred other Accumulated Total Total
----------------- paid-in Treasury stock comprehensive earnings comprehensive shareholders'
Number Amount capital shares compensation income (loss) (deficit) income (loss) equity
--------- ------ ---------- -------- ------------ ------------- ----------- ------------- ------------
Balance as of
January 1, 2005 4,638,004 $ 14 $ 12,879 $ ( 29) $ (208) $ 348 $ (2,347) $ 10,657
Issuance of shares, net 937,500 2 2,623 - - - - 2,625
Exercise of options 158,000 1 308 - - - - 309
Stock based compensation
related to
warrants issued
to non employees - - 156 - - - - 156
Amortization of deferred
stock compensation - - - - 66 - - 66
Other comprehensive loss:
Unrealized losses on
available-for-sale
marketable
securities, net - - - - - (76) - $ (76) (76)
Foreign currency
translation
adjustments - - - - - (347) - (347) (347)
-------------
Total other
comprehensive loss (423)
Net loss - - - - - - (4,216) (4,216) (4,216)
--------- ------ ---------- -------- ------------ ------------- ----------- ------------- ------------
Total comprehensive
loss $ (4,639)
=============
Balance as of
December 31, 2005 5,733,504 17 15,966 (29) (142) (75) (6,563) 9,174
Exercise of options 30,341 *) - 57 - - - - 57
Stock based compensation
related to
warrants issued to
non employees - - 4 - - - - 4
Stock based compensation
related to
options issued to
employees - - 131 - - - - 131
Cancellation of deferred
stock compensation - - (142) - 142 - - -
Other comprehensive loss:
Unrealized losses on
available-for-sale
marketable
securities, net - - - - - (6) - $ (6) (6)
Foreign currency
translation
adjustments - - - - - 211 - 211 211
-------------
Total other
comprehensive loss 205
Net loss - - - - - - (933) (933) (933)
--------- ------ ---------- -------- ----------- ------------- ----------- ------------- ------------
Total comprehensive loss $ (728)
=============
Balance as of
June 30, 2006
(unaudited) 5,763,845 $ 17 $ 16,016 $ (29) $ - $ 130 $ (7,496) $8,638
========= ====== ========== ======== ============ ============= ========== ============
*) Represents an amount lower than $ 1.
The accompanying notes are an integral part of the consolidated financial
statements.
5
MER TELEMANAGEMENT SOLUTIONS LTD.
AND ITS SUBSIDIARIES
INTERIM CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
--------------------------------------------------------------------------------
U.S. dollars in thousands
Six months ended
June 30,
-------------------
2006 2005
-------- --------
Unaudited
-------------------
Cash flows from operating activities:
-------------------------------------
Net loss $ (933) $(3,183)
Adjustments to reconcile net loss to net cash used in operating activities:
Gain on sale of available-for-sale marketable securities, net (7) (74)
Equity in earnings of affiliate (118) (11)
Depreciation and amortization 296 366
Employee stock based compensation 131 33
Stock based compensation related to warrants issued to non-employees 4 107
Accrued severance pay, net 34 26
Increase in trade receivables and unbilled receivables (734) (505)
Increase in other accounts receivable and prepaid expenses (228) (18)
Decrease (increase) in inventories 29 (2)
Increase (decrease) in trade payables (130) 8
Increase in accrued expenses and other liabilities 109 81
Increase (decrease) in deferred revenues 3 (110)
Increase (decrease) in related parties, net 20 (40)
Loss on sale of property and equipment - 2
------- -------
Net cash used in operating activities (1,524) (3,320)
------- -------
Cash flows from investing activities:
-------------------------------------
Proceeds from sale of property and equipment - 6
Purchase of property and equipment (49) (151)
Investment in lease deposits (18) -
Investment in available-for-sale marketable securities (86) (55)
Proceeds from sale of available-for-sale marketable securities 77 981
Dividend from an affiliate 154 181
Additional investment in goodwill in consideration of TeleKnowledge acquisition (204) (7)
Other 8 19
------- -------
Net cash provided by (used in) investing activities (118) 974
------- -------
The accompanying notes are an integral part of the consolidated financial
statements.
6
MER TELEMANAGEMENT SOLUTIONS LTD.
AND ITS SUBSIDIARIES
INTERIM CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
--------------------------------------------------------------------------------
U.S. dollars in thousands
Six months ended
June 30,
-------------------
2006 2005
-------- --------
Unaudited
-------------------
Cash flows from financing activities:
-------------------------------------
Proceeds from exercise of options and warrants 86 282
------- -------
Net cash provided by financing activities 86 282
------- -------
Decrease in cash and cash equivalents (1,556) (2,064)
Cash and cash equivalents at the beginning of the period 3,191 3,814
------- -------
Cash and cash equivalents at the end of the period $ 1,635 $ 1,750
======= =======
(a) Supplemental disclosure of non-cash activities:
-----------------------------------------------
Additional investment in goodwill in consideration of TeleKnowledge
acquisition $ 177 $ 89
======= =======
The accompanying notes are an integral part of the consolidated financial
statements.
7
MER TELEMANAGEMENT SOLUTIONS LTD.
AND ITS SUBSIDIARIES
NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
U.S. dollars in thousands
NOTE 1:- GENERAL
MER Telemanagement Solutions Ltd. ("MTS") was incorporated on December
27, 1995. MTS and its subsidiaries (the "Company") 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
Company's 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.
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 Company markets its products worldwide through distributors,
business telephone switching systems manufacturers and vendors and its
direct sales force. Several international private automated branch
exchange ("PBX") manufacturers market the Company's products as part
of their PBX selling efforts or on an Original Equipment Manufacturer
("OEM") basis. The Company is highly dependent upon the active
marketing and distribution of its OEMs.
MTS's shares are listed for trade on the Nasdaq Capital Market.
NOTE 2:- SIGNIFICANT ACCOUNTING POLICIES
a. The significant accounting policies followed in the preparation
of these financial statements are identical to those applied in
the preparation of the latest annual financial statements except
as detailed in c below.
b. 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.
c. On January 1, 2006, the Company adopted Statement of Financial
Accounting Standards No. 123 (revised 2004), "Share-Based
Payment" ("SFAS 123(R)") which requires the measurement and
recognition of compensation expense based on estimated fair
values for all share-based payment awards made to employees and
directors. SFAS 123(R) supersedes Accounting Principles Board
Opinion No. 25, "Accounting for Stock Issued to Employees" ("APB
25"), for periods beginning in fiscal 2006. In March 2005, the
Securities and Exchange Commission issued Staff Accounting
Bulletin No. 107 ("SAB 107") relating to SFAS 123(R). The Company
has applied the provisions of SAB 107 in its adoption of SFAS
123(R).
8
MER TELEMANAGEMENT SOLUTIONS LTD.
AND ITS SUBSIDIARIES
NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
U.S. dollars in thousands
NOTE 2:- SIGNIFICANT ACCOUNTING POLICIES (Cont.)
SFAS 123(R) requires companies to estimate the fair value of
equity-based payment awards on the date of grant using an
option-pricing model. The value of the portion of the award that
is ultimately expected to vest is recognized as an expense over
the requisite service periods in the Company's consolidated
income statement. Prior to the adoption of SFAS 123(R), the
Company accounted for equity-based awards to employees and
directors using the intrinsic value method in accordance with APB
25 as allowed under Statement of Financial Accounting Standards
No. 123, "Accounting for Stock-Based Compensation" ("SFAS 123").
The Company adopted SFAS 123(R) using the modified prospective
transition method, which requires the application of the
accounting standard starting from January 1, 2006, the first day
of the Company's fiscal year 2006. Under that transition method,
compensation cost recognized in the six months period ended June
30, 2006, includes: (a) compensation cost for all share-based
payments granted prior to, but not yet vested as of January 1,
2006, based on the grant date fair value estimated in accordance
with the original provisions of Statement 123, and (b)
compensation cost for all share-based payments granted subsequent
to January 1, 2006, based on the grant-date fair value estimated
in accordance with the provisions of Statement 123(R). Results
for prior periods have not been restated.
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. Any option, which is canceled or forfeited
before expiration, will become available for future grants.
Each option granted under the Plan is exercisable until the
earlier of five 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. The Incentive Share Option Plan will
terminate in 2013, unless cancelled earlier by MTS's board of
directors.
As of June 30, 2006, 488,300 options are available for future
grant.
The Company recognizes compensation expenses for the value of its
awards, which have graded vesting, granted prior to January 1,
2006, based on the accelerated attribution method and for awards
granted subsequent to January 1, 2006, based on the straight line
method over the requisite service period of each of the awards,
net of estimated forfeitures. The net income for the 3 months and
6 months periods ending June 30, 2006 was $ 5 and $ 6 higher than
if the Company had continued to account for share-based
compensation according to the accelerated attribution method.
Estimated forfeitures are based on actual historical pre-vesting
forfeitures.
9
MER TELEMANAGEMENT SOLUTIONS LTD.
AND ITS SUBSIDIARIES
NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
U.S. dollars in thousands
NOTE 2:- SIGNIFICANT ACCOUNTING POLICIES (Cont.)
As a result of adopting SFAS 123(R) on January 1, 2006, the
Company's income before income taxes and net income for the six
months ended June 30, 2006, is $ 98 lower than if it had
continued to account for stock-based compensation under APB 25.
Basic and diluted net loss per share for the six months ended
June 30, 2006, are $ 0.017 lower, than if the Company had
continued to account for share-based compensation under APB 25.
Prior to January 1, 2006, the Company applied the intrinsic value
method of accounting for stock options as prescribed by APB 25,
whereby compensation expense is equal to the excess, if any, of
the quoted market price of the stock over the exercise price at
the grant date of the award. During the six months ended June 30,
2005, the Company recognized stock-bases compensation expense
related to employee stock options in the amount of $ 33.
The Company estimates the fair value of stock options granted
using the Black-Scholes-Merton option-pricing model. The
option-pricing model requires a number of assumptions, of which
the most significant are, expected stock price volatility, and
the expected option term. Expected volatility was calculated
based upon actual historical stock price movements over the most
recent periods ending at the grant date, equal to the expected
option term. The expected option term represents the period that
the Company's stock options are expected to be outstanding and
was determined based on historical experience of similar options,
giving consideration to the contractual terms of the stock
options. The Company has historically not paid dividends and has
no foreseeable plans to issue dividends. The risk-free interest
rate is based on the yield from U.S. Treasury zero-coupon bonds
with an equivalent term.
The fair value of the Company's stock options granted to
employees and directors for the six and three months ended June
30, 2006 and 2005 was estimated using the following weighted
average assumptions:
Six months ended Three months ended
June 30, June 30,
------------------------ -------------------------
2006 2005 2006 2005
--------- -------- --------- --------
Unaudited
---------------------------------------------------------
Risk free interest 4.62% 3.53% 4.62% 3.52%
Dividend yields 0% 0% 0% 0%
Volatility 74.50% 61.3% 74.45% 61.4%
Expected term (in years) 3.34 3.7 3.96 3.7
Forfeiture rate 6.88% - 7.50% -
10
MER TELEMANAGEMENT SOLUTIONS LTD.
AND ITS SUBSIDIARIES
NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
U.S. dollars in thousands
NOTE 2:- SIGNIFICANT ACCOUNTING POLICIES (Cont.)
A summary of employee option activity under the Company's Stock
Option as of June 30, 2006 and changes during the six months
ended June 30, 2006 are as follows:
Weighted-
average
Weighted- remaining
average contractual Aggregate
Number of exercise term (in intrinsic
options price years) value
------- ----- ------ -----
Unaudited
--------------------------------------------
Outstanding at December 31, 2005 725,500 $ 2.66
Granted 60,000 $ 3.34
Exercised (30,341) $ 1.84
Forfeited (88,334) $ 3.17
-------
Outstanding at June 30, 2006 666,825 $ 2.69 3.34 $ 236
======= ======== ==== =======
Exercisable at June 30, 2006 224,000 $ 2.05 2.59 $ 143
======= ======== ==== =======
Vested and expected to vest 623,199 $ 2.68 3.33 $ 223
======= ======== ==== =======
The weighted-average grant-date fair value of options granted
during the six months ended June 30, 2005 and 2006 was $1.48 and
$ 1.94, respectively. The aggregate intrinsic value in the table
above represents the total intrinsic value (the difference
between the Company's closing stock price on the last trading day
of the second quarter of fiscal 2006 and the exercise price,
multiplied by the number of in-the-money options) that would have
been received by the option holders had all option holders
exercised their options on June 30, 2006. This amount changes
based on the fair market value of the Company's stock. Total
intrinsic value of options exercised for the six months ended
June 30, 2006 was $ 43. As of June 30, 2006, there was $ 398 of
total unrecognized compensation cost related to non-vested
share-based compensation arrangements granted under the Company's
stock option plans. That cost is expected to be recognized over a
weighted-average period of 2.69 years. Total fair value of
options vested for the six months ended June 30, 2006 was $ 48.
The options granted to employees outstanding as of June 30, 2006
have been separated into ranges of exercise prices, as follows:
Options Weighted Weighted
outstanding average Weighted average
as of remaining average exercise price
Exercise June 30, contractual exercise Options of exercisable
price 2006 life (in years) price exercisable options
----------------- ---------------- --------------- --------------- --------------- ----------------
$ 0.93 10,000 1.17 $ 0.93 10,000 $ 0.93
$ 1.844 250,000 2.44 $ 1.844 156,250 $ 1.844
$ 2.2-2.35 93,375 3.22 $ 2.32 26,125 $ 2.27
$ 2.9-2.95 15,950 2.45 $ 2.91 13,000 $ 2.91
$ 3.01 15,000 4.85 $ 3.01 - $ -
$ 3.27-3.49 167,500 4.22 $ 3.42 18,625 $ 3.42
$ 3.87 115,000 4.24 $ 3.87 - $ -
-------- -------
666,825 $ 2.69 224,000 $ 2.05
======== =========== ========= ==========
11
MER TELEMANAGEMENT SOLUTIONS LTD.
AND ITS SUBSIDIARIES
NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
U.S. dollars in thousands
NOTE 2:- SIGNIFICANT ACCOUNTING POLICIES (Cont.)
The pro-forma table below reflects the Company's stock based
compensation expense, net income and basic and diluted earnings
per share for the six months ended June 30, 2005, had the Company
applied the fair value recognition provisions of SFAS 123, as
follows:
Six months Three months
ended ended
June 30, 2005 June 30, 2005
----------------- ------------------
Unaudited Unaudited
----------------- ------------------
Net income as reported $ (3,183) $ (1,149)
Add: stock-based compensation expense recognized under
APB 25 32 17
Deduct: stock-based compensation expense determined
under fair value method for all awards (151) (72)
----------------- ------------------
Pro forma net income $ (3,302) $ (1,204)
================= ==================
Basic and diluted earnings per share, as reported $ (0.68) $ (0.24)
================= ==================
Pro forma basic and diluted earnings per share $ (0.71) $ (0.26)
================= ==================
Weighted average number of shares used in computing pro
forma basic and diluted earnings per share 4,675,283 4,712,561
================= ==================
For purpose of pro-forma disclosures stock based compensation is
amortized over the vesting period using the accelerated
attribution method.
Pro-forma compensation expense under SFAS 123, among other
computational differences, does not consider potential
pre-vesting forfeitures. Because of these differences, the
pro-forma stock based compensation expense presented above for
the prior six months period ended June 30, 2005 under SFAS 123
and the stock based compensation expense recognized during the
current six months ended June 30, 2006 under SFAS 123(R) are not
directly comparable.
d. Options and warrants to non-employees:
Number of Options Exercise
In connection options Options Options forfeited price per Exercisable
Issuance date with granted exercised exercisable or expired share through
--------------- ---------------- ------------ ---------- ----------- ----------- --------- --------------
February 2001 Service provider 25,000 - - 25,000 $ 5.625 February 2006
January 2005 Service provider 70,000 - 70,000 - $ 3.250 January 2008
May 2005 Service provider 10,000 - 10,000 - $ 3.490 May 2010
August 2005 Service provider 37,000 - 37,000 - $ 4.000 August 2009
September 2005 Service provider 10,000 - - - $ 3.870 September 2010
December 2005 Service provider 100,000 - 56,944 - $ 3.120 December 2006
------- ---------- -------- ------
252,000 - 173,944 25,000
======= ========== ======== ======
12
MER TELEMANAGEMENT SOLUTIONS LTD.
AND ITS SUBSIDIARIES
NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
U.S. dollars in thousands
NOTE 2:- SIGNIFICANT ACCOUNTING POLICIES (Cont.)
The Company had accounted for its options to non-employees under the
fair value method of SFAS No. 123 and EITF 96-18. The fair value for
these options was estimated at the measurement date using the
Black-Scholes option-pricing model with the following weighted-average
assumptions for 2006: risk-free interest rates of 5.23%, dividend
yields of 0%, volatility factors of the expected market price of the
Company's Ordinary shares of 23.22% and a contractual life of 0.85
years.
Compensation expenses related to the granting of stock options to
consultants amounted to $ 20, $ 107, $ (16) and $ 4 for the three and
six months periods ending June 2005 and June 2006, respectively.
e. Recently issued accounting pronouncements:
In July 2006, the FASB issued FASB Interpretation No. 48
"Accounting for Uncertainty in Income Taxes an Interpretation of
FASB Statement No. 109" ("FIN 48"). FIN 48 clarifies the
accounting for income taxes by prescribing the minimum
recognition threshold a tax position is required to meet before
being recognized in the financial statements. FIN 48 utilizes a
two-step approach for evaluating tax positions. Recognition (step
one) occurs when an enterprise concludes that a tax position,
based solely on its technical merits, is more-likely-than-not to
be sustained upon examination. Measurement (step two) is only
addressed if step one has been satisfied (i.e., the position is
more-likely-than-not to be sustained). Under step two, the tax
benefit is measured as the largest amount of benefit, determined
on a cumulative probability basis that is more-likely-than-not to
be realized upon ultimate settlement.
FIN 48 applies to all tax positions related to income taxes
subject to the Financial Accounting Standard Board Statement No.
109, "Accounting for income taxes" ("FAS 109"). This includes tax
positions considered to be "routine" as well as those with a high
degree of uncertainty.
FIN 48 has expanded disclosure requirements, which include a
tabular roll forward of the beginning and ending aggregate
unrecognized tax benefits as well as specific detail related to
tax uncertainties for which it is reasonably possible the amount
of unrecognized tax benefit will significantly increase or
decrease within twelve months. These disclosures are required at
each annual reporting period unless a significant change occurs
in an interim period.
FIN 48 is effective for fiscal years beginning after December 15,
2006. The cumulative effect of applying FIN 48 will be reported
as an adjustment to the opening balance of retained earnings.
Because the guidance was recently issued, the Company has no yet
determined the impact, if any, of adopting the provisions of FIN
48 on its financial position and result of operations.
13
MER TELEMANAGEMENT SOLUTIONS LTD.
AND ITS SUBSIDIARIES
NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
U.S. dollars in thousands
NOTE 3:- UNAUDITED INTERIM CONSOLIDATED FINANCIAL STATEMENTS
The accompanying unaudited interim consolidated financial statements
have been prepared in accordance with generally accepted accounting
principles in the Unites States for interim financial information.
Accordingly, they do not include all the information and footnotes
required by generally accepted accounting principles for complete
financial statements. In the opinion of management, all adjustments
(consisting of normal recurring accruals) considered necessary for a
fair presentation have been included. Operating results for the six
months ended June 30, 2006 are not necessarily indicative of the
results that may be expected for the year ended December 31, 2006.
NOTE 4:- INVENTORIES
June 30, December 31,
2006 2005
--------- ------------
Unaudited
---------
Raw materials $ 58 $ 58
Finished products 94 123
------- --------
$ 152 $ 181
======= ========
The Group periodically assesses its inventory valuation in accordance
with its revenues forecasts, technological obsolescence, and the
market conditions. Marked down inventory that is expected to be sold
at a price lower than the carrying value is not material.
14
MER TELEMANAGEMENT SOLUTIONS LTD.
AND ITS SUBSIDIARIES
NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
U.S. dollars in thousands
NOTE 5:- GOODWILL
Goodwill represents excess of the costs over the net assets of
businesses acquired. Statement of Financial Accounting Standard No.
142, "Goodwill and Other Intangible Assets" ("SFAS No. 142") requires
goodwill to be tested for impairment annually or between annual tests
in certain circumstances, and written down when impaired. No
indications of impairment were identified during the six months ended
June 30, 2006.
The changes in the carrying amount of goodwill for the year ended
December 31, 2005 and for the period ended June 30, 2006 are as
follows:
Balance as of December 31, 2005 $ 3,700
Additional consideration based on post-contract billing revenues 177
(see also Note 7.e(3)) -------
Balance as of June 30, 2006 $ 3,877
=======
NOTE 6:- GEOGRAPHIC INFORMATION AND MAJOR CUSTOMER
The Company adopted Statement of Financial Accounting Standard No.
131, "Disclosures About Segments of an Enterprise and Related
Information" ("SFAS No. 131"). The Company operates in one reportable
segment (see Note 1 for a brief description of the Company's
business). The total revenues are attributed to geographic areas based
on the location of the customer.
The following is a summary of revenues within geographic areas based
on end customer location and long-lived assets:
Six months ended Three months ended
June 30, June 30,
-------------------------------- ---------------------------------
2006 2005 2006 2005
-------------- -------------- -------------- ---------------
Unaudited
--------------------------------------------------------------------
Customer location:
------------------
United States $ 2,613 $ 3,029 $ 1,329 $ 1,376
Germany 936 903 418 490
Europe (excluding Germany) 375 938 182 536
Asia 640 136 368 59
Others 954 532 407 351
-------------- -------------- -------------- ---------------
$ 5,518 $ 5,538 $ 2,704 $ 2,812
============== ============== ============== ===============
15
MER TELEMANAGEMENT SOLUTIONS LTD.
AND ITS SUBSIDIARIES
NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
U.S. dollars in thousands
NOTE 6:- GEOGRAPHIC INFORMATION AND MAJOR CUSTOMER (Cont.)
June 30, December 31,
2006 2005
------------ ----------------
Unaudited
------------
Long-lived assets:
------------------
Israel $ 2,977 $ 3,013
United States 2,166 2,194
Other 51 57
------------ ----------------
$ 5,194 $ 5,264
============ ================
Major customer data as percentage of total revenues:
Six months ended Three months ended
June 30, June 30,
-------------------------- ---------------------------
2006 2005 2006 2005
----------- ----------- ------------ -----------
Unaudited
---------------------------------------------------------
Customer A: 28% 33% 25% 33%
NOTE 7:- COMMITMENTS AND CONTINGENCIES
a. 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 6,000 thousand ($ 1,350).
The Company has appealed to the Israeli Tel Aviv District Court
in respect of the abovementioned tax demand. 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. The Company has provided a provision
for the amount considered probable.
b. On April 18, 2005, Amdocs (Israel) Ltd. and Amdocs Ltd. ("the
plaintiffs") filed a complaint with the Tel-Aviv District Court
against the Company, its Chief Executive Officer and others ("the
Defendants") alleging, among other things, that professional and
commercial information belonging to the plaintiffs was
transferred to the defendants for use in the Company's activity.
The plaintiffs are seeking an injunction prohibiting the
defendants from making any use of the information and trade
secrets that were allegedly transferred, injunctions requiring
the return of such information and estimated damages of NIS
14,775 thousand (approximately $ 3,330).
On June 27, 2005, the defendants filed a statement of defense, in
which the defendants claim that the factual and legal allegations
by the plaintiffs are baseless, and the causes of action and
relief requested are without merit.
A preliminary hearing in the Tel Aviv District Court was set for
April 26, 2007.
Due to the preliminary stage of the litigation, the Company and
its legal advisors cannot currently assess its outcome or a
possible adverse effect on the Company's financial position or
results of operations.
16
MER TELEMANAGEMENT SOLUTIONS LTD.
AND ITS SUBSIDIARIES
NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
U.S. dollars in thousands
NOTE 7:- COMMITMENTS AND CONTINGENCIES (Cont.)
There were no further developments in respect to the claim
through September 2006.
c. On November 22, 2005, the Company received a letter from one of
its customer's legal counsel alleging, among other things, that
the Company materially breached the agreement that was entered
into with the customer on March 9, 2005, as subsequently amended
on June 6, 2005. The customer is seeking full repayment of the
amounts that were paid by him under the agreement, in the amount
of $ 100 plus interest and indemnification for damages that he
claims to have suffered as a result of the Company's alleged
breach. On February 19, 2006, the Company submitted a response
letter to the customer in which it denied these allegations and
claimed that the customer's refusal to fulfill his contractual
undertakings constitute a breach of the agreement and entitles
the Company to remedies under applicable law. On June 12, 2006
the customer submitted additional letter in which he offered to
set a meeting in order to resolve the outstanding issues. The
Company cannot currently assess the outcome of this claim or its
adverse effect on the Company's financial position or results of
operations.
d. On July 3, 2006, the Company received letter from one of its
supplier's legal counsel, in which he demands payment of $ 42
with respect to electronic components that were ordered by the
Company. The abovementioned demand is related to the claims
raised in note 7c.
e. Royalty commitments:
1. The Company is committed to pay royalties to the Office of
the Chief Scientist of the Ministry of Trade ("OCS") of the
Government of Israel on proceeds from sales of products
resulting from the research and development projects in
which the Government participated. In the event that
development of a specific product in which the OCS
participated is successful, the Company will be obligated to
repay the grants through royalty payments at the rate of 3%
to 5% based on the sales of the Company, up to 100%-150% of
the grants received linked to the dollar. As of June 30,
2006, the Company has a contingent liability to pay
royalties in the amount of $ 9,539. The obligation to pay
these royalties is contingent upon actual sales of the
products and, in the absence of such sales, no payment is
required.
2. The Israeli Government, through the Fund for Encouragement
of Marketing Activities, awarded the Company grants for
participation in foreign marketing expenses. The Company is
committed to pay royalties at the rate of 3% of the increase
in export sales, up to the amount of the grants received
linked to the U.S. dollar. As of June 30, 2006, the Company
has a contingent obligation to pay royalties in the amount
of $ 259.
3. As part of the Teleknowledge acquisition of December 30,
2004, the Company committed to pay contingent consideration
of up to amount of $ 3,650 based on post acquisition revenue
performance (calculated as 10% of renewal maintenance fees
and 20% of all other revenues from sales which included
Teleknowledge products), over a period of three years. Such
payments are recorded as additional goodwill, during the
contingency period. As of June 30, 2006 the Company has a
contingent obligation to pay an additional consideration in
the amount of $ 3,188.
17
MER TELEMANAGEMENT SOLUTIONS LTD.
AND ITS SUBSIDIARIES
NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
U.S. dollars in thousands
NOTE 7:- COMMITMENTS AND CONTINGENCIES (Cont.)
f. Guarantees:
1. The Company provided a bank guarantee through April 2007 in
the amount of $ 60 to secure its obligations under one of
its leasing agreement.
2. The Company provided a bank guarantee through February 2007
in the amount of $ 55 in favor of one of its customers to
secure its obligations under the agreement that was signed
by the parties.
NOTE 8:- RELATED PARTY TRANSACTIONS
The Company sells services to a related party with the same principal
owners. Such sales amounted to $ 0 and $ 180 in the six months ended
June 30 2005 and 2006, respectively. Accounts receivable and unbilled
receivables at June 30, 2006 include $ 180 due from the related party.
NOTE 9:- SUBSEQUENT EVENTS
On July 25, 2006, the Company and Telsoft Solutions, Inc. ("Telsoft")
consummated an Asset Purchase Agreement ("the Agreement"). Under the
terms of the Agreement, the Company acquired certain assets and
assumed certain enumerated liabilities of Telsoft for the following
consideration:
1. An initial consideration of $ 1,100 in cash.
2. Additional earn-out payments based on revenue milestones for the
12 months period following the acquisition.
The acquisition was completed on July 31, 2006.
In order to finance the acquisition, the Company signed a loan
agreement with Bank Hapoalim (the "Bank"), according to which the Bank
granted the Company a loan in the amount of approximately $ 1,000. The
loan principal shall be repaid in twelve equal monthly installments
commencing August 31, 2007. The loan bears annual interest at a rate
of the monthly LIBOR + 2%, payable on a monthly basis on the
outstanding loan amount commencing August 31, 2006.
The loan agreement includes the following covenants:
(i) The ratio between shareholders equity and total shareholders
equity and liabilities shall not be less than 40% and in no event
shall the Company's shareholders equity decrease below $ 5,000
thousand.
(ii) The Company will generate operating income for each of the two
subsequent quarters commencing the second quarter of 2007 and
onwards.
(iii) The Company's cash and cash equivalents shall not decrease below
$ 1,000 at any given time.
18
MER TELEMANAGEMENT SOLUTIONS LTD.
AND ITS SUBSIDIARIES
NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
U.S. dollars in thousands
NOTE 9:- SUBSEQUENT EVENTS (Cont.)
To secure the loan, the Company provided the Bank a floating charge on
all its current and long term assets and a fixed charge on its
goodwill and on its authorized but not outstanding shareholders
equity.
- - - - - - - - -
19
RuManagement's Discussion and Analysis of Financial Condition
-------------------------------------------------------------
and Results of Operations
-------------------------
The following discussion of our results of operations should be read
together with our interim condensed consolidated financial statements and the
related notes, which appear elsewhere in this report and the audited
consolidated financial statements and notes thereto and Item 5. "Operating and
Financial Review and Prospects" contained in our Annual Report on Form 20-F for
the year ended December 31, 2005. The discussion and analysis which follows may
contain trend analysis and other "forward-looking statements" within the meaning
of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the
Securities Exchange Act of 1934, and within the Private Securities Litigation
Reform Act of 1995, as amended. Such forward-looking statements reflect our
current views with respect to future events and financial results. These include
statements regarding our earnings, projected growth and forecasts, and similar
matters that are not historical facts. Forward-looking statements usually
include the verbs, "anticipates," "believes," "estimates," "expects," "intends,"
"plans," "projects," "understands" and other verbs suggesting uncertainty. We
remind shareholders that forward-looking statements are merely predictions and
therefore are inherently subject to uncertainties and other factors that could
cause the actual results, performance, levels of activity, or our achievements,
or industry results, to differ materially from those expressed or implied by the
forward-looking statements. Readers are cautioned not to place undue reliance on
these forward-looking statements, which speak only as of the date hereof. We
undertake no obligation to publicly release any revisions to these
forward-looking statements to reflect events or circumstances after the date
hereof or to reflect the occurrence of unanticipated events. We have attempted
to identify significant uncertainties and other factors affecting
forward-looking statements in the section entitled "Risk Factors" and elsewhere
in our 2005 Annual Report on Form 20-F.
Background
We were incorporated under the laws of the State of Israel in December
1995, as a subsidiary of C.Mer Industries Ltd., an Israeli public company. Since
our initial public offering in May 1997, our ordinary shares have been listed on
the NASDAQ Stock Market. In June 1999, C.Mer Industries Ltd. distributed to its
shareholders all of its remaining shares in our company as a dividend.
We have wholly owned subsidiaries in the United States, Hong Kong, the
Netherlands and Brazil, MTS IntegraTRAK Inc., MTS Asia Ltd., JARAGA B.V. and
TABS Brazil Ltda., respectively, which act as marketing and customer service
organizations in those countries. We also have a 50% owned affiliate in Spain,
Jusan S.A., which is engaged in the development, manufacture, assembly, sales,
distribution and maintenance of vocal server and call billing applications.
Overview
We design, develop, market and support a comprehensive line of
telecommunication management and customer care and billing, or CC&B, solutions,
that
enable business organizations and other enterprises to improve the efficiency
and performance of all Internet Protocol, or IP, operations, and to
significantly reduce associated costs. Our products include call accounting and
management products, fault management systems and web-based management solutions
for converged voice, voice over IP, IP data and video and CC&B solutions. These
products are designed to provide telecommunication and information technology
managers with tools to reduce communication costs, recover charges payable by
third parties, detect and report the abuse and misuse of telephone networks,
monitor and detect hardware and software faults in telecommunications networks
and generate telecommunications usage information for use in the management of
an enterprise. We were among the first to offer PC-based call accounting systems
when we introduced our TABS product in 1985. To date, over 70,000 TABS call
accounting systems have been sold to end-users in more than 80 countries. In the
service provider and carrier market, our billing solutions provide for retail
billing, interconnect billing and partner revenue management.
On July 31, 2006, we completed the acquisition of certain assets and
liabilities of TelSoft Solutions, Inc., or TelSoft, a California corporation, a
provider of call accounting and telecom billing services and solutions. The
TelSoft products offer a complementary solution to our products. In connection
with the acquisition, we paid an initial consideration of $1.1 million and
agreed to pay additional contingent consideration based on post acquisition
revenue performance during the 12 month period following the acquisition. We
believe that the acquisition of TelSoft's telecom expense management and call
accounting software will enable us to expand our telecommunications expense
management solution and will assist us to strengthen our growing business in the
United States.
General
Our consolidated financial statements are prepared in U.S. dollars and
in accordance with generally accepted accounting principles in the United
States, or U.S. GAAP. Transactions and balances originally denominated in
dollars are presented at their original amounts. Transactions and balances in
other currencies are remeasured into dollars in accordance with the principles
set forth in Financial Accounting Standards Board Statement No. 52. The majority
of our sales are made outside Israel in dollars. In addition, substantial
portions of our costs are incurred in dollars. Since the dollar is the primary
currency of the economic environment in which we and certain of our subsidiaries
operate, the dollar is our functional and reporting currency and, accordingly,
monetary accounts maintained in currencies other than the dollar are remeasured
using the foreign exchange rate at the balance sheet date. Operational accounts
and non-monetary balance sheet accounts are measured and recorded at the
exchange rate in effect at the date of the transaction. The financial statements
of certain subsidiaries and an affiliate whose functional currency is not the
dollar, have been translated into dollars. All balance sheet accounts have been
translated using the exchange rates in effect at the balance sheet date.
Statement of operations amounts have been translated using the average exchange
rate for the period. The resulting translation adjustments are reported as a
component of shareholders' equity in accumulated other comprehensive income
(loss).
Discussion of Critical Accounting Policies and Estimations
There has been no change to our critical accounting policies and
estimates, contained in Item 5. "Operating and Financial Review and Prospects"
of our Annual Report on Form 20-F filed for the year ended December 31, 2005.
Recently Issued Accounting Standards
In July 2006, the Financial Accounting Standards Board, or FASB, issued
FASB Interpretation No. 48 "Accounting for Uncertainty in Income Taxes an
Interpretation of FASB Statement No. 109," or FIN 48. FIN 48 clarifies the
accounting for income taxes by prescribing the minimum recognition threshold a
tax position is required to meet before being recognized in the financial
statements. FIN 48 utilizes a two-step approach for evaluating tax positions.
Recognition (step one) occurs when it has been determined that a tax position,
based solely on its technical merits, is more-likely-than-not to be sustained
upon examination. Measurement (step two) is only addressed if step one has been
satisfied (when it has been determined that the tax position meets the
more-likely than-not recognition). Under step two, the tax benefit is measured
as the largest amount of benefit, determined on a cumulative probability basis
that is more-likely-than-not to be realized upon ultimate settlement.
FIN 48 applies to all tax positions related to income taxes subject to
FASB No. 109, "Accounting for Income Taxes," or FAS 109. This includes tax
positions considered to be "routine" as well as those with a high degree of
uncertainty.
FIN 48 has also expanded disclosure requirements, which include a
tabular roll forward of the beginning and ending aggregate unrecognized tax
benefits as well as specific detail related to tax uncertainties for which it is
reasonably possible the amount of unrecognized tax benefit will significantly
increase or decrease within 12 months. These disclosures are required at each
annual reporting period unless a significant change occurs in an interim period.
FIN 48 is effective for fiscal years beginning after December 15, 2006,
and is required to be adopted by our company on January 1, 2007. The cumulative
effect of applying FIN 48 will be reported as an adjustment to the opening
balance of retained earnings. We are currently assessing the impact of the
adoption of FIN 48.
Operating Results
The following table presents certain financial data expressed as a
percentage of total revenues for the periods indicated:
Six months ended June 30, Three months ended June 30,
----------------------------------- -----------------------------------
2005 2006 2005 2006
-------------- ----------------- -------------- -----------------
Revenues from products and services ............... 100.0% 100.0% 100.0% 100.0%
Cost of revenues from products and services ....... (34.2) (33.1) (35.8) (33.1)
-------------- ----------------- -------------- -----------------
Gross profit....................................... 65.8 66.9 64.2 66.9
Operating expenses:
Selling and marketing.............................. (52.3) (28.7) (48.7) (27.8)
Research and development, net...................... (42.0) (35.5) (36.6) (33.2)
General and administrative......................... (31.1) (21.9) (24.1) (23.3)
-------------- ----------------- -------------- -----------------
Operating loss..................................... (59.6) (19.2) (45.2) (17.4)
Financial income (expenses), net................... 1.9 0.2 3.0 (1.0)
-------------- ----------------- -------------- -----------------
Loss before taxes.................................. (57.7) (19.0) (42.2) (18.4)
Taxes on income.................................... 0 (0.1) 0 0
-------------- ----------------- -------------- -----------------
Net loss before equity in earnings of affiliate.... (57.7) (19.1) (42.2) (18.4)
Equity in earnings of affiliate.................... 0.2 2.1 1.4 1.8
-------------- ----------------- -------------- -----------------
Net loss........................................... (57.5)% (17.0)% (40.8)% (16.6)%
============== ================= ============== =================
Six Months Ended June 30, 2006 and 2005
Revenues from Products and Services. Revenues consist primarily of
software license fees sales, hardware sales and revenues from services,
including service bureau, maintenance, training, professional services and
support. Revenues decreased slightly to $5.52 million in the six months ended
June 30, 2006 from $5.54 million reported for the first six months of 2005.
Revenues in the second quarter of 2006 decreased by 3.8% to $2.70 million from
$2.81 million reported in the second quarter of 2005. Revenues from our wholly
owned U.S. subsidiary, MTS IntegraTRAK, decreased by 13.7 % in the six months
ended June 30, 2006 compared to the six months ended June 30, 2005 and accounted
for 47.4% of our total revenues in the six months ended June 30, 2006. The
slight decrease in revenues in the 2006 period is primarily attributable to a
longer sales cycle for our solutions during the six months ended June 30, 2006
compared to the six months ended June 30, 2005.
Cost of Revenues from Products and Services . Cost of revenues consists
primarily of (i) production costs (including hardware, media, packaging, freight
and documentation); (ii) certain royalties and licenses payable to third parties
(including the Office of the Chief Scientist of the Ministry of Industry and
Trade of the State of Israel), (iii) professional services costs; and (iv)
warranty and support costs for up to one year for
end-users and up to 15 months for our original equipment manufacturer, or OEM,
distributors. Cost of revenues decreased by 3.4% to $1.83 million in the six
months ended June 30, 2006 from $1.89 million reported in the six months ended
June 30, 2005. Cost of revenues decreased by 11.1% to $894,000 in the second
quarter of 2006 from $1.01 million reported in the second quarter of 2005. This
decrease is consistent with the decrease in revenues and principally a result of
a reduction in the number of employees in professional services and tech support
departments and their related expenditures.
Research and Development, net. Research and development expenses
consist primarily of salaries of employees engaged in on-going research and
development activities, outsourcing subcontractor development and other related
costs, net of grants that were approved by the Office of the Chief Scientist.
Research and development costs decreased by 15.7% to $1.96 million in the six
months ended June 30, 2006 (net of an approved grant from the Office of the
Chief Scientist in the amount of $287,000) from $2.32 million reported in the
six months ended June 30, 2005. Research and development, net costs decreased by
12.8% to $898,000 in the second quarter of 2006 from $1.03 million reported in
the second quarter of 2005. Total research and development expenses decreased in
the 2006 period primarily due to the grant from the Office of the Chief
Scientist during such period. We did not receive a grant from the Office of the
Chief Scientist in the 2005 period.
Selling and Marketing. Selling and marketing expenses consist primarily
of costs relating to sales representatives and their travel expenses, trade
shows and marketing exhibitions, advertising and presales support. Selling and
marketing expenses were $1.58 million in the six months ended June 30, 2006, a
decrease of approximately 45.4% from $2.90 million reported in the six months
ended June 30, 2005. Selling and marketing expenses were $753,000 in the second
quarter of 2006, reflecting a decrease of 45% from $1.37 million reported in the
second quarter of 2005. This decrease in selling and marketing expenses during
2006 is primarily attributable to our focus on investing in growth markets and
targeted geographic areas, as well as our ability to form partnerships with
leading OEMs and vendors for various initiatives.
General and Administrative. General and administrative expenses consist
primarily of compensation costs for administration, finance and general
management personnel, professional fees and office maintenance and
administrative costs. General and administrative expenses decreased by 29.8% to
$1.21 million in the six months ended June 30, 2006 from $1.72 million reported
in the six months ended June 30, 2005. General and administrative expenses
decreased by 6.9% to $630,000 in the second quarter of 2006 from $677,000
reported in the second quarter of 2005. This decrease in general and
administrative expenses in the 2006 period is primarily attributable to the
decrease in expenses that were recorded in the 2005 period with respect to the
integration of the activity of Teleknowledge Group Ltd., or Teleknowledge.
Financial Income (Expenses), net. Financial income, net consists
primarily of gains on marketable securities, interest income on bank deposits,
bank commissions, bank interest and foreign currency translation adjustments.
Financial income decreased by 89.4% to $11,000 in the six months ended June 30,
2006 from $104,000 reported in
the six months ended June 30, 2005. Financial expenses in the second quarter of
2006 were $26,000 compared to financial income of $83,000 in the second quarter
of 2005. The decrease in our financial income in the 2006 period is primarily
attributable to the decrease in our holdings of cash and cash equivalents and
decrease in gains on marketable securities.
Net Loss. Net loss for the six months ended June 30, 2006 was $933,000,
or $0.16 per ordinary share on a basic and diluted basis, compared to a net loss
of $3.18 million, or $0.68 per ordinary share on a basic and diluted basis,
reported for the six months ended June 30, 2005. Net loss for the second quarter
of 2006 was $448,000, or $0.08 per ordinary share on a basic and diluted basis,
compared to $1.15 million, or $0.24 per ordinary share on a basic and diluted
basis, reported in the second quarter of 2005. The decrease in net loss in the
2006 period compared to the 2005 period is primarily attributable to our cash
management efforts and our on-going monitoring and reduction of expenses in
order to achieve sustainable growth.
Seasonality
Our operating results are generally not characterized by a seasonal
pattern except that our volume of sales in Europe are generally lower in the
summer months.
Liquidity and Capital Resources
On June 30, 2006, we had $1.64 million in cash and cash equivalents, $
142,000 in marketable securities and working capital of $1.46 million as
compared to $3.19 million in cash and cash equivalents, $132,000 in marketable
securities and working capital of $2.07 million on December 31, 2005. The
decrease in working capital in the 2006 period was primarily due to our losses
in such period.
The following table summarizes our cash flows for the periods
presented:
Six Months ended June 30,
-------------------------
2006 2005
--------- ---------
($ in thousands)
Net cash used in operating activities................ $ (1,524) $ (3,320)
Net cash provided by (used in) investing activities.. $ (118) $ 974
Net cash provided by financing activities............ $ 86 $ 282
Net decrease in cash and cash equivalents............ $ (1,556) $ (2,064)
Cash and cash equivalents at beginning of period..... $ 3,191 $ 3,814
Cash and cash equivalents at end of period........... $ 1,635 $ 1,750
One of the principal factors affecting our working capital is the
payment cycle on our sales. Any material change in the aging of our accounts
receivable could have an adverse effect on our working capital.
Our operations used $1.52 million during the six months ended June 30,
2006, compared to $3.32 million that was used in the six months ended June 30,
2005. The decrease in the use of our funds in the 2006 period is primarily
attributable to our cash
management efforts and our on-going monitoring and reduction of expenses in
order to achieve sustainable growth.
Subsequent to June 30, 2006, we obtained a loan from Bank Hapoalim in
the amount of $1 million in order to facilitate the funding of the TelSoft
acquisition. The loan principal is payable in 12 equal monthly installments
commencing August 31, 2007. The loan bears annual interest at a rate of the
monthly London Inter Bank Offered Rate (LIBOR) plus 2%, payable on a monthly
basis on the outstanding loan amount commencing August 31, 2006. Under the terms
of the loan, we are required to maintain (i) shareholders' equity of not less
than $5 million and 40% of our total assets; (ii) operating profit over two
consecutive quarters as of the second quarter of 2007; and (iii) cash and cash
equivalents of not less than $1 million. As a security interest for the
repayment of the loan, we agreed to grant Bank Hapoalim a floating-charge over
all of our company's assets, a fixed charge over our company's share capital,
goodwill and rights to an exemption from taxation or reduced tax, and a fixed
charge over all of the securities, documents and notes in the possession of Bank
Hapoalim.
We currently do not have significant capital spending or purchase
commitments, but we expect to continue to engage in capital spending consistent
with the level of our operations. We anticipate that our cash on hand and cash
flow from operations will be sufficient to meet our working capital and capital
expenditure requirements for at least 12 months. However, if we do not generate
sufficient cash from operations, we may be required to obtain additional
financing or to reduce level of expenditure. There can be no assurance that such
financing will be available in the future, or, if available, will be on terms
satisfactory to us.
Off-Balance Sheet Arrangements
We are not a party to any material off-balance sheet arrangements. In
addition, we have no unconsolidated special purpose financing or partnership
entities that are likely to create material contingent obligations.
Quantitative and Qualitative Disclosures about Market Risks
We are exposed to a variety of risks, including changes in interest
rates affecting primarily the interest received on short-term deposits, and
foreign currency fluctuations. We do not use derivative financial instruments to
hedge against such exposure.
Interest Rate Risk
Our exposure to market risk for changes in interest rates relates
primarily to our short term deposits. Our short term deposits are held in
dollars and bear annual interest of 3.5% to 4.5%, which is based upon the London
Inter Bank Offered Rate (LIBOR). We place our short term deposits with major
financial center U.S. banks. For purposes of specific risk analysis, we use
sensitivity analysis to determine the impact that market risk exposure may have
on the financial income derived from our short term deposits. The potential loss
to us over one year that would result from a hypothetical change of 10% in the
LIBOR rate would be approximately $30,000.
Foreign Currency Exchange Risk
We have operations in several countries in connection with the sale of
our products. A substantial portion of our sales and expenditures are
denominated in dollars. We have mitigated, and expect to continue to mitigate, a
portion of our foreign currency exposure through salaries, marketing and support
operations in which all costs are local currency based. As a result, our results
of operations and cash flows can be affected by fluctuations in foreign currency
exchange rates (primarily the Euro and NIS). A hypothetical 10% movement in
foreign currency rates (primarily the Euro and NIS) against the dollar, with all
other variables held constant on the expected sales, would result in a decrease
or increase in expected 2006 sales revenues of $200,000.
Risk Factors
Other than as reflected below, there have been no material changes in
our risk factors reported in our Annual Report on Form 20-F for the year ended
December 31, 2005.
On July 31, 2006, we acquired certain assets and liabilities of TelSoft
Solutions, Inc. and we may not be able to successfully exploit the acquired
solutions.
On July 31, 2006, we completed the acquisition of certain assets and
liabilities of TelSoft Solutions, Inc., or TelSoft, a California corporation, a
provider of call accounting and telecom billing services and solutions. We
believe that the acquisition of TelSoft's telecom expense management and call
accounting software will enable us to expand our telecommunications expense
management solution and will assist us to strengthen our growing business in the
United States. We may not be able to successfully integrate the operations of
TelSoft into our business or successfully exploit the solutions that we acquired
from TelSoft.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
MER TELEMANAGEMENT SOLUTIONS LTD.
(Registrant)
By: /s/Eytan Bar
------------
Eytan Bar
President and
Chief Executive Officer
Date: September 29, 2006