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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-Q
(MARK ONE)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended June 30, 2003
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: 000-30827
CLICKSOFTWARE TECHNOLOGIES LTD.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
ISRAEL NOT APPLICABLE
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NUMBER)
34 HABARZEL STREET
TEL AVIV, ISRAEL
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (972-3) 765-9400
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 whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act).
Yes [ ] No [X]
As of June 30, 2003, there were 26,418,676 shares of the Registrant's ordinary
shares, par value 0.02 NIS, outstanding (net of treasury stock).
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CLICKSOFTWARE TECHNOLOGIES LTD.
FORM 10-Q
FOR THE QUARTER ENDED JUNE 30, 2003
PART I. FINANCIAL INFORMATION
ITEM 1. Financial Statements
(a) Condensed Consolidated Balance Sheets as of June 30, 2003 and December 31, 2002..................................1
(b) Condensed Consolidated Statements of Operations for the three and six months ended June 30,
2003 and June 30, 2002 ......................................................................................2
(c) Condensed Consolidated Statements of Cash Flows..................................................................4
(d) Notes to the Condensed Consolidated Financial Statements.........................................................5
ITEM 2. Management's Discussion and Analysis of Financial Condition and Results of Operations........................7
ITEM 3. Quantitative and Qualitative Disclosures About Market Risk..................................................28
ITEM 4. Controls and Procedures.....................................................................................29
PART II. OTHER INFORMATION
ITEM 1. Legal Proceedings...........................................................................................30
ITEM 2. Changes in Securities and Use of Proceeds...................................................................30
ITEM 4. Submission of Matters to a Vote of Security Holders.........................................................30
ITEM 5. Other Information...........................................................................................31
ITEM 6. Exhibits and Reports on Form 8-K............................................................................31
Exhibit 3.3..........................................................................................................33
SIGNATURES...........................................................................................................61
Exhibit 31.1.........................................................................................................62
Exhibit 31.2.........................................................................................................63
Exhibit 32.1.........................................................................................................64
Exhibit 32.2.........................................................................................................65
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PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CLICKSOFTWARE TECHNOLOGIES LTD.
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
JUNE 30, DECEMBER 31,
2003 2002
---------------------------------------
(UNAUDITED)
---------------------------------------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 3,910 $ 3,400
Short-term investments 4,143 2,949
Trade receivables, net 2,773 4,043
Other receivables and prepaid expenses 1,522 1,254
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Total current assets 12,348 11,646
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Long-term investments 280 280
Property and equipment, net 1,035 1,250
Severance pay deposits 807 781
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Total assets $ 14,470 $ 13,957
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LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Short-term debt $ -- $ 17
Accounts payable and accrued expenses 4,463 5,369
Deferred revenues 1,365 411
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Total current liabilities 5,828 5,797
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LONG-TERM LIABILITIES:
Accrued severance pay 1,511 1,476
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Total long-term liabilities 1,511 1,476
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Total liabilities 7,339 7,273
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SHAREHOLDERS' EQUITY:
Special preferred shares NIS 0.02 par value:
Authorized - 5,000,000 as of June 30, 2003 and December 31, 2002; no issued
and outstanding shares as of June 30, 2003 and December 31, 2002
Ordinary shares of NIS 0.02 par value:
Authorized - 100,000,000 as of June 30, 2003 and December 31, 2002
Issued - 26,457,676 shares as of June 30, 2003 and 26,412,249 shares as
of December 31, 2002.
Outstanding - 26,418,676 shares as of June 30, 2003 and 26,373,249 shares as
of December 31, 2002. 103 102
Additional paid-in capital 69,210 69,196
Deferred stock compensation -- (101)
Accumulated deficit (62,139) (62,470)
Treasury stock, at cost: 39,000 shares (43) (43)
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Total shareholders' equity 7,131 6,684
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Total liabilities and shareholders' equity $ 14,470 $ 13,957
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The accompanying notes are an integral part of these condensed consolidated financial statements.
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CLICKSOFTWARE TECHNOLOGIES LTD.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
(UNAUDITED)
THREE MONTHS ENDED JUNE 30,
-----------------------------------------
2003 2002
-----------------------------------------
Revenues:
Software license $ 2,310 $ 1,356
Services 2,750 2,105
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Total revenues 5,060 3,461
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Cost of revenues:
Software license 305 281
Services 1,422 1,404
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Total cost of revenues 1,727 1,685
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Gross profit 3,333 1,776
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Operating expenses:
Research and development expenses, net 508 590
Selling and marketing expenses 1,827 2,708
General and administrative expenses 767 403
Amortization of deferred Stock-based compensation (1) 26 75
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Total operating expenses 3,128 3,776
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Operating income (loss) 205 (2,000)
Interest and other income (expenses), net (32) 172
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Net income (loss) $ 173 $ (1,828)
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Basic and diluted earnings (loss) per share $ 0.01 $ (0.07)
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Shares used in computing basic and diluted earnings (loss) per share 25,647,888 25,551,161
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(1) Amortization of deferred stock-based compensation would be further classified as follows:
THREE MONTHS ENDED
JUNE 30,
--------------------------------------
2003 2002
--------------------------------------
Cost of revenues $ 2 $ 5
Research and development expenses 4 11
Selling and marketing expenses 1 3
General and administrative expenses 19 56
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Total $ 26 $ 75
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The accompanying notes are an integral part of these condensed consolidated financial statements.
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CLICKSOFTWARE TECHNOLOGIES LTD.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
(UNAUDITED)
SIX MONTHS ENDED JUNE 30,
-----------------------------------------
2003 2002
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Revenues:
Software license $ 4,555 $ 2,376
Services 5,646 4,191
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Total revenues 10,201 6,567
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Cost of revenues:
Software license 436 317
Services 3,099 2,791
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Total cost of revenues 3,535 3,108
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Gross profit 6,666 3,459
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Operating expenses:
Research and development expenses, net 994 1,407
Selling and marketing expenses 3,782 5,380
General and administrative expenses 1,497 892
Amortization of deferred Stock-based compensation (1) 101 150
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Total operating expenses 6,374 7,829
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Operating income (loss) 292 (4,370)
Interest and other income, net 39 192
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Net income (loss) $ 331 $ (4,178)
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Basic and diluted earnings (loss) per share $ 0.01 $ (0.16)
-----------------------------------------
Shares used in computing basic and diluted earnings (loss) per share 25,632,149 25,105,598
-----------------------------------------
(1) Amortization of deferred stock-based compensation would be further classified as follows:
SIX MONTHS ENDED
JUNE 30,
--------------------------------------
2003 2002
--------------------------------------
Cost of revenues $ 7 $ 10
Research and development expenses 15 22
Selling and marketing expenses 4 6
General and administrative expenses 75 112
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Total $ 101 $ 150
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The accompanying notes are an integral part of these condensed consolidated financial statements.
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CLICKSOFTWARE TECHNOLOGIES LTD.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
SIX MONTHS ENDED
JUNE 30,
-----------------------------------------
2003 2002
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CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) 331 $(4,178)
Adjustments to reconcile net income (loss) to net cash provided by (used in)
operating activities Expenses not affecting operating cash flows:
Depreciation 239 406
Amortization of deferred compensation 101 150
Unrealized (gain)loss from investments 11 104
Severance pay, net 9 (48)
Changes in operating assets and liabilities:
Trade receivables 1,270 2,264
Other receivables and prepaid expenses (268) (58)
Accounts payable and accrued expenses (906) 312
Changes in investments, net -- (2,365)
Deferred revenues 954 392
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Net cash provided by (used in) operating activities 1,741 (3,021)
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CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of investments (1,205) --
Purchases of equipment (24) (231)
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Net cash used in investing activities (1,229) (231)
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CASH FLOWS FROM FINANCING ACTIVITIES:
Short-term debt, net (17) (107)
Repayments of long-term debt -- (21)
Employee options exercised and employees stock purchase plan shares purchased 15 44
-----------------------------------------
Net cash used in financing activities (2) (84)
-----------------------------------------
Increase (decrease) in cash and cash equivalents 510 (3,336)
Cash and cash equivalents at beginning of period 3,400 8,125
-----------------------------------------
Cash and cash equivalents at end of period 3,910 4,789
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Supplemental cash flow information:
Cash paid for interest 8 5
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The accompanying notes are an integral part of these condensed consolidated financial statements.
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CLICKSOFTWARE TECHNOLOGIES LTD.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(INFORMATION AS OF JUNE 30, 2003 AND FOR THE THREE AND SIX MONTHS ENDED
JUNE 30, 2003 AND JUNE 30, 2002)
(IN THOUSANDS, EXCEPT SHARE DATA AND SHARE NUMBERS)
1. BASIS OF PRESENTATION
The accompanying condensed unaudited interim consolidated financial
statements have been prepared by ClickSoftware Technologies Ltd.
("ClickSoftware" or the "Company") in accordance with accounting principles
generally accepted in the United States of America for interim financial
information and the instructions to Form 10-Q and Article 10 of Regulation
S-X. These financial statements reflect all adjustments, consisting of
normal recurring adjustments and accruals, which are, in the opinion of
management, necessary for a fair presentation of the financial position of
the Company as of June 30, 2003 and the results of operations and cash
flows for the interim periods indicated in conformity with generally
accepted accounting principles applicable to interim periods. Accordingly,
certain information and footnote disclosures normally included in annual
financial statements prepared in accordance with generally accepted
accounting principles have been condensed or omitted. These financial
statements should be read in conjunction with the audited financial
statements and notes thereto of ClickSoftware for the year ended December
31, 2002 that are included in ClickSoftware's Form 10-K filed with the
Securities and Exchange Commission on March 24, 2003. The results of
operations presented are not necessarily indicative of the results to be
expected for future quarters or for the year ending December 31, 2003. The
balance sheet at December 31, 2002 has been derived from the audited
financial statements as of and for the year ended December 31, 2002, but
does not include all the information and footnotes required by generally
accepted accounting principles for annual financial statements.
2. RESTATEMENT
During the third quarter of 2002, the Company's audit committee, with the
assistance of outside advisors, conducted a review of its financial
statements for 2000 and 2001 and for the first six months of 2002. On
October 21, 2002, the Company announced that it would restate its financial
statements for 2000 and 2001 and for the first six months of 2002. The
restatement resulted primarily from the recognition of revenue from sales
to reseller customers and other customers, where revenue had been
recognized prematurely or should not have been recognized at all.
Following the re-audit of the Company's financial statements, the Company
restated its financial statements for the announced periods and for the
year ended December 31, 1999 and filed on January 24, 2003 an amendment to
the 10-K for the year ended December 31, 2001 (the "2001 10-K/A").
The restatement is further discussed in note 3 of the notes to the
consolidated financial statements of the Company that are included in the
2001 10-K/A.
3. REVENUE RECOGNITION
The Company recognizes revenues in accordance with the American Institute
of Certified Public Accountants ("AICPA") Statement of Position 97-2,
Software Revenue Recognition, as amended.
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In accordance with SOP 97-2, revenues from software license fees are
recognized when persuasive evidence of an arrangement exists, the software
product covered by written agreement or a purchase order signed by the
customer has been delivered, the license fees are fixed and determinable
and collection of the license fees is considered probable. Revenues from
software product license agreements that require significant customization
and modification of the software product are deferred and recognized using
the percentage-of-completion method of contract accounting in accordance
with AICPA Statement of Position 81-1. When software arrangements involve
multiple elements, the Company allocates revenue to each element based on
the relative fair values of the elements. The Company's determination of
fair value of each element in multiple element arrangements is based on
vendor-specific objective evidence (VSOE). The Company limits its
assessment of VSOE for each element to the price charged when the same
element is sold separately. If VSOE of fair value does not exist for all
elements to support the allocation of the total fee among all delivered and
undelivered elements of the arrangement, revenue is deferred until such
evidence exists for the undelivered elements, or until all elements are
delivered, whichever occurs earlier.
If the fee due from the customer is not fixed or determinable, revenue is
recognized as payments become due from the customer, assuming all other
revenue recognition criteria have been met. Generally, the Company
considers all arrangements with extended payment terms greater than nine
months not to be fixed or determinable.
The Company also enters into license arrangements with resellers whereby
revenues are recognized upon sale through to the end user by the reseller.
Service revenues include consulting services, post-contract customer
support and training. Consulting revenues are generally recognized on a
timely and material basis. However, revenues from certain fixed-price
contracts are recognized on the percentage of completion basis.
Post-contract customer support agreements provide technical support and the
right to unspecified updates on an if-and-when-available basis.
Post-contract customer support revenues are recognized ratably over the
term of the support period (generally one year) and training and other
service revenues are recognized as the related services are provided.
4. STOCK-BASED COMPENSATION
The Company accounts for employee stock-based compensation in accordance
with Accounting Principles Board Opinion No. 25, "Accounting for Stock
Issued to Employees" and in accordance with FASB Interpretation No. 44.
Pursuant to these accounting pronouncements, the Company records
compensation for stock options granted to employees over the vesting period
of the options based on the difference, if any, between the exercise price
of the options and the market price of the underlying shares at that date.
Deferred compensation is amortized to compensation expense over the vesting
period of the options. See below for pro forma disclosures required in
accordance with SFAS No. 123, "Accounting for Stock-Based Compensation", as
amended by SFAS 148.
Had stock-based compensation been measured under the alternative fair value
accounting method provided for under SFAS No. 123, "Accounting for
Stock-Based Compensation", as amended by SFAS 148, the Company's net loss
and basic and diluted net loss per share would have increased or decreased
to the following pro-forma amounts:
-6-
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THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30 JUNE 30
-----------------------------------------------------------------
2003 2002 2003 2002
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(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
-----------------------------------------------------------------
Net Income (loss)
As reported $ 173 $ (1,828) $ 331 $ (4,178)
Add - stock based compensation determined under
SFAS 123 26 75 101 150
Deduct - stock based compensation determined
under SFAS 123 (115) (133) (197) (266)
Pro-forma $ 84 $ (1,886) $ 235 $ (4,294)
Basic and diluted net loss per Share
As reported $ 0.01 $ (0.07) $ 0.01 $ (0.16)
Pro-forma $ 0.00 $ (0.07) $ 0.01 $ (0.17)
Under SFAS 123, the fair market value of each option grant is estimated
on the date of grant using the "Black-Scholes Option Pricing" method
with the following weighted-average assumptions: (1) expected life of 5
years ;(2) dividend yield of 0%; (3) expected volatility of 149%; and
(4) risk-free interest rate of 4%.
5. BASIC AND DILUTED NET LOSS PER SHARE
Basic and diluted net loss per share are presented in conformity with
SFAS No. 128 "Earnings per Share" for all years presented. Basic and
diluted net loss per share have been computed using the weighted-average
number of ordinary shares outstanding during the year.
All outstanding share options and shares issued and reserved for
outstanding share options have been excluded from the calculation of
basic and diluted net loss per share because all such securities are
anti-dilutive for all periods presented. The total number of shares
excluded from the calculations of basic and diluted net income (loss)
per share were 3,892,993 and 4,083,833 for the three and six months
ended June 30, 2003 and June 30, 2002, respectively.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
This report contains certain forward-looking statements (as such term is
defined in Section 27A of the Securities Act of 1933 and Section 21E of
the Securities Exchange Act of 1934) and information relating to us that
are based on the beliefs of our management as well as assumptions made
by and information currently available to our management, including
statements related to products, markets, and future results of
operations and profitability, and may include implied statements
concerning market acceptance of our products, and our growing leadership
role in the marketplace. In addition, when used in this report, the
words "likely," "will," "suggests," "may," "would," "could,"
"anticipate," "believe," "estimate," "expect," "intend," "plan,
"predict" and similar expressions and their variants, as they relate to
us or our management, may identify forward-looking statements. Such
statements reflect our judgment as of the date of this quarterly report
on Form 10-Q with respect to future events, the outcome of which is
subject to certain risks, including the risk factors set forth herein
which may have a significant impact on our business, operating results
or financial condition. Investors are cautioned that these
forward-looking statements are inherently uncertain. Should one or more
of these risks or uncertainties materialize, or should underlying
assumptions prove incorrect, actual results or outcomes may vary
materially from those described herein. We undertake no
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obligation to update forward-looking statements, whether as a result of new
information, future events or otherwise.
OVERVIEW
Since late 1996, we have focused on providing service optimization software
products based on our W-6 Service Scheduler and TechMate technologies. We have
also invested significant resources in developing products based on these
technologies including, until 2001, increasing the number of our employees
involved in research and development, selling and marketing, and professional
services. During 2001 and 2002 the number of our employees decreased due to cost
cutting measures.
We believe that in today's economy successful businesses must constantly
increase the performance of existing service resources. Our products emphasize
the use of optimization tools for performance enhancement in the service
environment. Accordingly, in September 1999, we began marketing our product
lines under new names, CLICKSCHEDULE and CLICKFIX and in May 2000, we changed
our company name to ClickSoftware Technologies Ltd. Currently our product
offering for service optimization applications includes: CLICKSCHEDULE(TM),
CLICKFIX(TM), CLICKANALYZE(TM), CLICKPLAN(TM), CLICKMOBILE(TM), and
CLICKFORECAST(TM).
In the fourth quarter of 2002, in light of continued worldwide economic
recession and ongoing reductions in investments in corporate capital
expenditures, we initiated a reorganization plan aimed at reducing our operating
expenses. As part of the plan, we reduced our workforce by approximately 40
employees, implemented an across-the-board salary reduction, closed our office
in Campbell, California and moved our North American headquarters to Burlington,
Massachusetts. As a result of this plan, we recorded in the fourth quarter of
2002 restructuring costs and asset impairment in the amount of approximately
$2.7 million. (See also note 4 of the notes to our consolidated financial
statements for the year ended December 31, 2002 in "Item 8. Financial
Statements".)
We derive revenues from software licensing and services. Our operating
history shows that a significant percentage of our quarterly revenues results
from orders placed toward the end of a quarter. Software license revenues are
comprised of perpetual software license fees primarily derived from contracts
with our direct sales clients and our indirect distribution channels. We
recognize revenues in accordance with the AICPA Statement of Position 97-2,
"SOFTWARE REVENUE RECOGNITION," or SOP 97-2, as amended (See note 3 of the notes
to our interim consolidated financial statements).
Service revenues are comprised of revenues from consulting, training, and
post-contract customer support. Consulting services are billed at an agreed-upon
rate plus incurred expenses. Clients licensing our products generally purchase
consulting agreements from us. Post-contract customer support arrangements
provide technical support and the right to unspecified upgrades on an if-and
when-available basis. Post-contract customer support revenues are charged as a
percentage of license fees depending upon the level of support coverage
requested by the customer. Our products are marketed worldwide through a
combination of our direct sales force, third-party consultants and various
marketing and distribution relationships we have with implementation and
technology companies and resellers.
Cost of revenues consists of cost of software license revenues and cost of
services. Cost of software license revenues consists of expenses related to
media duplication and packaging of our products, costs of software purchased or
licensed for resale and royalties payments to the Chief Scientist. Cost of
services consists of expenses related to salaries and expenses of our
professional services organizations, costs related to third-party consultants,
and equipment costs and royalty payments to the Office of the Chief Scientist of
the Ministry of Industry and Trade of the State of Israel (the "Chief
Scientist") pursuant to grant agreements
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whereby the Company is committed to pay royalties at a rate of 3% to 5% of sales
of the developed product, up to 100%-150% of the amount of grants received with
annual interest of LIBOR as of the date of approval for programs approved from
1999 and thereafter.
Operating expenses are categorized into research and development expenses,
sales and marketing expenses, general and administrative expenses and
stock-based compensation.
Research and development expenses consist primarily of personnel costs to
support product development, net of grants received from the Chief Scientist. In
return for some of these grants, we are obligated to pay the Israeli Government
royalties, as described above, which are included in cost of revenues. Software
research and development costs incurred prior to the establishment of technology
feasibility are included in research and development expenses as incurred.
Selling and marketing expenses consist primarily of personnel and related
costs for marketing and sales functions, including related travel, direct
advertising costs, expenditures on trade shows, market research and promotional
printing.
General and administrative expenses consist primarily of personnel and
related costs for corporate functions, including information services, finance,
accounting, human resources, facilities, legal and other costs related to
running a public company.
Amortization of stock-based compensation represents the aggregate
difference, at the date of grant, between the respective exercise price of stock
options and the deemed fair market value of the underlying stock. Deferred
stock-based compensation is amortized over the vesting period of the underlying
options, generally four years.
Interest and other income (expenses) include interest income earned on
cash, cash equivalents and short-term investments, offset by interest expense,
and also includes the effects of foreign currency translations.
The functional currency of our operations is the U.S. dollar, which is the
primary currency in the economic environment in which we conduct our business. A
significant portion of our research and development expenses is incurred in New
Israeli Shekels ("NIS") and a portion of our revenues and expenses is incurred
in British Pounds and the European Community Euro. The results of our operations
are subject to fluctuations in these exchange rates, which are influenced by
various global economic factors.
The effects of foreign currency exchange rates on our results of operations
for the three and six months ended June 31, 2003 and 2002 were immaterial.
Our tax rate will mainly reflect a mix of the U.S. statutory tax rate on
our U.S. income, the U.K. statutory tax rate on our U.K. income, the Belgium
statutory tax rate on our Belgium income, the German statutory tax rate on our
German income, the Australian tax rate on our Australian income and the Israeli
tax rate discussed below.
Israeli companies are generally subject to income tax at the rate of 36% of
taxable income. The majority of our income, however, is derived from our
company's capital investment program with "Approved Enterprise" status under the
Law for the Encouragement of Capital Investments, and is eligible therefore for
tax benefits. As a result of these benefits, we will have a tax exemption on
income derived during the first two years in which this investment program
produces taxable income and a reduced tax rate of 15-25% for the next 5 to 8
years. In the event of a distribution of a cash dividend out of retained
earnings that were exempt
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from tax due to our Approved Enterprise status, we would be required to pay 25%
corporate income tax on income from which the dividend was distributed. All of
these tax benefits are subject to various conditions and restrictions. There can
be no assurance that we will obtain approval for additional Approved Enterprise
Programs or that the provisions of the law will not change.
CRITICAL ACCOUNTING POLICIES
This discussion and analysis of our financial condition and results of
operations is based upon our consolidated financial statements, which have been
prepared in accordance with accounting principles generally accepted in the
United States. The preparation of these financial statements requires us to make
estimates and judgments that affect the reported amounts of assets, liabilities,
revenues and expenses, and related disclosure of contingent assets and
liabilities. We evaluate these estimates on an on-going basis. We base our
estimates on our historical experience and on various other assumptions that we
believe to be reasonable under the circumstances. These estimates form the basis
for making judgments about the carrying amount values of assets and liabilities
that are not readily apparent from other sources. Actual results may differ from
these estimates under different assumptions or conditions.
Our recognition of revenue requires judgments and estimates that may
significantly impact our consolidated financial statements.
Revenue results are difficult to predict, and any shortfall in revenues or
delay in recognizing revenues could cause our operating results to vary
significantly from quarter to quarter and could result in future operating
losses. In addition, the timing of our revenue recognition influences the timing
of certain expenses, such as commissions and royalties. We follow very specific
and detailed guidelines in measuring revenues, however, certain judgments affect
the application of our revenue policy.
Our revenues are principally derived from the licensing of our software and
the provision of related services. We recognize revenues in accordance with SOP
97-2. Revenues from software license fees are recognized when persuasive
evidence of an arrangement exists, either by written agreement or a purchase
order signed by the customer, the software product has been delivered, the
license fees are fixed and determinable, and collection of the license fees is
considered probable. License fees from software arrangements that involve
multiple elements, such as post-contract customer support, consulting and
training, are allocated to each element of the arrangement based on the relative
fair values of the elements. We determine the fair value of each element in
multiple-element arrangements based on vendor specific objective evidence, or
VSOE. We determine the VSOE for each element according to the price charged when
the element is sold separately. In judging the probability of collection of
software license fees we continuously monitor collection and payments from our
customers and maintain a provision for estimated credit losses based upon our
historical experience and any specific customer collection issues that we have
identified. In connection with customers with whom we have no previous
experience, we may utilize independent resources to evaluate the
creditworthiness of those customers. For some customers, typically those with
whom we have long-term relationships, we may grant extended payment terms. We
perform on-going credit evaluations of our customers. If the financial situation
of any of our customers were to deteriorate, resulting in an impairment of their
ability to pay amounts owed to us, additional allowances may be required.
Our software products generally do not require significant customization or
modification. However, when such customization or modification is necessary, the
revenue generated by those activities is deferred and recognized using the
percentage of completion method.
Service revenues include post-contract customer support, consulting and
training. Post-contract customer support arrangements provide for technical
support and the right to unspecified updates on an if-
-10-
and-when-available basis. Revenues from those arrangements are recognized
ratably over the term of the arrangement, usually one year. Revenues from
consulting services are recognized on a time and material basis as the services
are provided or, in a fixed price contract, on a percentage of completion basis.
Revenues from training are recognized as the services are provided.
In recognizing revenues based on the rate of completion method, we estimate
time to completion with revisions to estimates made in the period in which the
basis of such revisions becomes known. If we do not accurately estimate the
resources required or scope of work to be performed, manage our projects
properly within the planned periods of time or satisfy our obligations under the
contracts, then future services margins may be significantly and negatively
affected or losses on existing contracts may need to be recognized.
RECENT ACCOUNTING PRONOUNCEMENTS
In January 2003, the Financial Accounting Standards Board (FASB) issued
Interpretation No. 46 (FIN 46), "Consolidation of Variable Interest Entities."
FIN 46 requires an investor with a majority of the variable interests (primary
beneficiary) in a variable interest entity (VIE) to consolidate the entity and
also requires majority and significant variable interest investors to provide
certain disclosures. A VIE is an entity in which the voting equity investors do
not have a controlling interest, or the equity investment at risk is
insufficient to finance the entity's activities without receiving additional
subordinated financial support from other parties. For arrangements entered into
with VIEs created prior to January 31, 2003, the provisions of FIN 46 are
required to be adopted at the beginning of the first interim or annual period
beginning after June 15, 2003. The provisions of FIN 46 were effective
immediately for all arrangements entered into with new VIEs created after
January 31, 2003. The Company is currently considering the effect, if any, of
this Interpretation on its financial statements.
In April 2003, the FASB issued SFAS No. 149, "Amendment of SFAS No. 133 on
Derivative Instruments and Hedging Activities." SFAS No. 149 amends and
clarifies accounting for derivative instruments, including certain derivative
instruments embedded in other contracts, and for hedging activities under SFAS
No. 133. In particular, this Statement clarifies under what circumstances a
contract with an initial net investment meets the characteristic of a
derivative. It also clarifies when a derivative contains a financing component
that warrants special reporting in the statement of cash flows. SFAS No. 149 is
generally effective for contracts entered into or modified after June 30, 2003
and is not expected to have an impact on the Company's financial statements.
In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain
Financial Instruments with Characteristics of both Liabilities and Equity." SFAS
No. 150 establishes standards for how a company classifies and measures certain
financial instruments with characteristics of both liabilities and equity. It
requires that an issuer classify certain financial instruments as a liability
(or as an asset in some circumstances). SFAS No. 150 is effective for financial
instruments entered into or modified after May 31, 2003, and otherwise is
effective at the beginning of the first interim period beginning after June 15,
2003. The adoption of SFAS No. 150 did not have an impact on the Company's
financial statements.
-11-
RESULTS OF OPERATIONS
Our operating results, expressed as a percentage of revenues, for each of
the three and six-month periods ended June 30, 2003 and 2002 are as follows:
------------------------------------------------------------------------
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30 JUNE 30
------------------------------------------------------------------------
2003 2002 2003 2002
------------------------------------------------------------------------
Revenues:
Software license 46% 39% 45% 36%
Services 54% 61% 55% 64%
------------------------------------------------------------------------
Total revenues 100% 100% 100% 100%
Cost of revenues:
Software license 6% 8% 4% 5%
Services 28% 41% 31% 43%
Total cost of revenues 34% 49% 35% 48%
------------------------------------------------------------------------
Gross profit 66% 51% 65% 52%
------------------------------------------------------------------------
Operating expenses:
Research and development expenses, net 10% 17% 10% 21%
Selling and marketing expenses 36% 78% 37% 82%
General and administrative expenses 15% 12% 15% 14%
Reorganization expenses -- -- -- --
Amortization of deferred Stock-based compensation 1% 2% 1% 2%
------------------------------------------------------------------------
Total operating expenses 62% 109% 63% 119%
------------------------------------------------------------------------
Operating income (loss) 4% (58%) 2% (67%)
Interest and other income(expenses), net (1%) 5% 1% 3%
------------------------------------------------------------------------
Net income (loss) 3% (53%) 3% (64%)
========================================================================
RESULTS OF OPERATIONS FOR THREE MONTHS ENDED JUNE 30, 2003 AND 2002
REVENUES: Company revenues increased $1.6 million or 46% to $5.1 million
for the three months ended June 30, 2003 from $3.5 million for the three months
ended June 30, 2002. This increase in revenues was the result of increased
demand for our products and services, particularly in the computer and office
equipment and utilities and energy industries. For the three months ended June
30, 2003, 44% of our revenues were generated in North America, 45% in Europe,
10% in Asia Pacific and Africa and 1% in Israel. For the three months ended June
30, 2002, 62% of our revenues were generated in North America, 20% in Europe,
17% in Asia Pacific and Africa and 1% in Israel.
SOFTWARE LICENSE REVENUES: Software license revenues increased $0.9 million
or 70% to $2.3 million for the three months ended June 30, 2003 from $1.4
million for the three months ended June 30, 2002. Software license revenues were
$2.3 million or 46% of total revenues for the three months ended June 30, 2003,
and $1.4 million or 39% of total revenues for the three months ended June 30,
2002. The increase in software license revenues by $0.9 million or 70% from the
three months ended June 30, 2002 resulted from a mixture of new and follow-on
orders.
SERVICES: Services revenues were $2.7 million or 54% of revenues for the
three months ended June 30, 2003, and $2.1 million or 61% of total revenue in
the three months ended June 30, 2002. The increase in services revenues by $0.6
million or 31% from the three months ended June 30, 2002 was
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primarily due to the increase in the number of customers under annual support
agreements as well an increase in professional services fees during the second
quarter of 2003.
COST OF REVENUES: Cost of revenues were $1.7 million or 34% of revenues for
the three months ended June 30, 2003, and $1.7 million or 49% of revenues for
the three months ended June 30, 2002. The marginal increase in the cost of
revenues by $42,000 from the three months ended March 31, 2002 on an absolute
basis was primarily due to higher costs associated with professional services
performed by the Company and an increase in royalties paid by the Company to the
Chief Scientist Office.
COST OF SOFTWARE LICENSES: Cost of software licenses was $305,000 or 6% of
revenues for the three months ended June 30, 2003 and $281,000 or 8% of revenues
in the three months ended June 30, 2002. The marginal increase in the cost of
software licenses on an absolute basis was due to an increase in royalties paid
by the Company to the Chief Scientist Office and an increase in new third
parties' licenses sold by the Company in the second quarter of 2003.
COST OF SERVICES: Cost of services revenues was $1.4 million or 28% of
revenues for the three months ended June 30, 2003, and $1.4 million or 41% of
revenues for the three months ended June 30, 2002.
GROSS PROFIT: Gross profit was $3.3 million, or 66% of revenues for the
three months ended June 30, 2003 and $1.8 million, or 51% of revenues for the
three months ended June 30, 2002. The increase in gross profit by $1.5 million
or 88% was primarily due to an increase in total revenues. The increase in gross
profit as a percentage of revenues was primarily the result of an increase in
higher margin license revenues and improvement in the profitability of our
professional services.
OPERATING EXPENSES: Total operating expenses were $3.1 million or 62% of
revenues for the three months ended June 30, 2003, and $3.8 million or 109% of
revenues for the three months ended June 30, 2002. The decrease in operating
expenses by $0.7 million or 17% from the three months ended June 30, 2002 was
primarily due to cost cutting measures implemented during the fourth quarter of
2002. Our total number of employees decreased from 152 at June 30, 2002 to 119
at June 30, 2003.
RESEARCH AND DEVELOPMENT EXPENSES, NET: Research and development expenses,
net of related grants, were $508,000 or 10% of revenues for the three months
ended June 30, 2003, and $590,000 or 17% of revenues for the three months ended
June 30, 2002. The decrease in research and development expenses by $0.1 million
or 14% from the three months ended June 30, 2002 is primarily due to the impact
of cost cutting measures implemented during the fourth quarter of 2002.
SELLING AND MARKETING EXPENSES: Selling and marketing expenses were $1.8
million or 36% of revenues for the three months ended June 30, 2003, and $2.7
million or 78% of revenues for the three months ended June 30, 2002. The
decrease in selling and marketing expenses by $0.9 million or 33% from the three
months ended June 30, 2002 was primarily due to cost cutting measures
implemented during the fourth quarter of 2002.
GENERAL AND ADMINISTRATIVE EXPENSES: General and administrative expenses
were $767,000 or 15% of revenues for the three months ended June 30, 2003, and
$403,000 or 12% of revenues for the three months ended June 30, 2002. The
increase in general and administrative expenses by $0.4 million or 90% from the
three months ended June 30, 2002 was due primarily to increase in bad debts,
legal and consultancy and payroll expenses.
AMORTIZATION OF STOCK-BASED COMPENSATION: Stock-based compensation expenses
were $26,000 for the three months ended June 30, 2003 and $75,000 for the three
months ended June 30, 2002.
-13-
RESULTS OF OPERATIONS FOR SIX MONTHS ENDED JUNE 30, 2003 AND 2002
REVENUES: Company revenues increased $3.6 million or 55% to $10.2 million
for the six months ended June 30, 2003 from $6.6 million for the six months
ended June 30, 2002. This increase in revenues was the result of increased
demand for our products and services, particularly in the computer and office
equipment and utilities and energy industries . For the six months ended June
30, 2003, 43% of our revenues were generated in North America, 44% in Europe,
12% in Asia Pacific and Africa and 1% in Israel. For the six months ended June
30, 2002, 59% of our revenues were generated in North America, 26% in Europe,
13% in Asia Pacific and Africa and 2% in Israel.
SOFTWARE LICENSE REVENUES: Software license revenues increased $2.2 million
or 92% to $4.6 million for the six months ended June 30, 2003 from $2.4 million
for the six months ended June 30, 2002. Software license revenues were $4.6
million or 45% of total revenues for the six months ended June 30, 2003, and
$2.4 million or 36% of total revenues for the six months ended June 30, 2002.
The increase in software license revenues by $2.2 million or 92% from the six
months ended June 30, 2002 was primarily the result of repeat orders
SERVICES: Services revenues were $5.6 million or 55% of revenues for the
six months ended June 30, 2003, and $4.2 million or 64% of total revenue in the
six months ended June 30, 2002. The increase in services revenues by $1.4
million or 35% from the six months ended June 30, 2002 resulted from an increase
in project-based professional services and an increase in number of customers
under annual support agreements.
COST OF REVENUES: Cost of revenues were $3.5 million or 35% of revenues for
the six months ended June 30, 2003, and $3.1 million or 48% of revenues for the
six months ended June 30, 2002. The increase in the cost of revenues by $0.4
million or 14% from the six months ended June 30, 2002 on an absolute basis was
primarily due to higher costs associated with professional services performed by
the Company and an increase in royalties paid to the Chief Scientist.
COST OF SOFTWARE LICENSES: Cost of software licenses was $436,000 or 4% of
revenues for the six months ended June 30, 2003 and $317,000 or 5% of revenues
in the six months ended June 30, 2002. The increase in the cost of software
licenses on absolute basis was primarily due to an increase in royalties paid to
the Chief Scientist.
COST OF SERVICES: Cost of services revenues was $3.1 million or 31% of
revenues for the six months ended June 30, 2003, and $2.8 million or 43% of
revenues for the six months ended June 30, 2002. The increase in the cost of
services by $0.3 million or 11% from the six months ended June 30, 2002 on an
absolute basis was primarily due to the increased demand for our professional
services and an increase in royalties paid to the Chief Scientist.
GROSS PROFIT: Gross profit was $6.7 million, or 65% of revenues for the six
months ended June 30, 2003 and $3.5 million, or 52% of revenues for the six
months ended June 30, 2002. The increase in the gross profit by $3.2 million or
93% was primarily due to an increase in total revenues. The increase in gross
profit as a percentage of revenues was the result of an increase in higher
margin license revenues and improvement in the profitability of our professional
services.
OPERATING EXPENSES: Total operating expenses were $6.4 million or 63% of
revenues for the six months ended June 30, 2003, and $7.8 million or 119% of
revenues for the six months ended June 30, 2002. The decrease in operating
expenses by $1.4 million or 19% from the six months ended June 30, 2002 was
-14-
primarily due to cost cutting measures implemented during 2002. Our total number
of employees, who are the primary source of our operating expenses, decreased
from 152 at June 30, 2002 to 119 at June 30, 2003.
RESEARCH AND DEVELOPMENT EXPENSES, NET: Research and development expenses,
net of related grants, were $994,000 or 10% of revenues for the six months ended
June 30, 2003, and $1.4 million or 21% of revenues for the six months ended June
30, 2002. The decrease in research and development expenses by $0.4 million or
29% from the six months ended June 30, 2002 is primarily due to the impact of
cost cutting measures implemented during 2002.
SELLING AND MARKETING EXPENSES: Selling and marketing expenses were $3.8
million or 37% of revenues for the six months ended June 30, 2003, and $5.4
million or 82% of revenues for the six months ended June 30, 2002. The decrease
in selling and marketing expenses by $1.6 million or 30% from the six months
ended June 30, 2002 was primarily due to cost cutting measures implemented
during 2002.
GENERAL AND ADMINISTRATIVE EXPENSES: General and administrative expenses
were $1.5 million or 15% of revenues for the six months ended June 30, 2003, and
$892,000 or 14% of revenues for the six months ended June 30, 2002. The increase
in general and administrative expenses by $0.6 million or 68% from the six
months ended June 30, 2002 was due primarily to increase in bad debts, legal and
consultancy and payroll expenses.
AMORTIZATION OF STOCK-BASED COMPENSATION: Stock-based compensation expenses
were $101,000 for the six months ended June 30, 2003 and $150,000 for the six
months ended June 30, 2002.
LIQUIDITY AND CAPITAL RESOURCES
As of June 30, 2003 we had cash and cash equivalents of $3.9 million,
short-term investments of $4.1 million and long-term investments of $0.3 million
for a total of $8.3 million.
From inception until our IPO in June 2000, we financed our operations
primarily through the private placement of equity securities, which through
December 31, 1999 totaled approximately $32.0 million, net of issuance costs.
Our initial public stock offering of ordinary shares realized $28.3 million, net
of underwriter discount and other issuance costs.
For the six months ended June 30, 2003, cash provided by operations was
$1.7 million, comprised of our net income of $0.3 million, a decrease in trade
receivables of $1.3 million, an increase in other receivables of $0.3 million, a
decrease in accounts payable of $0.9 million, an increase in deferred revenue of
$1.0 million and non-cash charges of $0.4 million. For the six months ended June
30, 2002, cash used in operations was $3.0 million, comprised of our net loss of
$4.2 million, a decrease in trade receivables of $2.3 million, an increase in
accounts payable of $0.3 million, an increase in deferred revenue of $0.4
million, partially offset by non-cash charges of $0.6 million and an increase in
short term investments of $2.4 million.
Net cash used in investing activities for the six months ended June 30,
2003 was $1.2 million of which $1.2 million was primarily invested in bank
deposits and Short term Bonds and $24,000 was invested in purchases of computer
equipment. Net cash used in investing activities for the six months ended June
30, 2002 was $231,000 and was invested primarily in leasehold improvements and
purchases of equipment and systems, including computer equipment and fixtures
and furniture.
As of June 30, 2003 we had outstanding trade receivables of approximately
$2.8 million, which represented approximately 55% of revenues for the three
months ended June 30, 2003. Our trade receivables typically have 30 to 60 day
terms, although we have also negotiated longer payment plans with some of our
-15-
clients. For the three months ended June 30, 2003 our DSO (Day Sales
Outstanding) was 49 days, an increase of 6 days from 43 for the three months
ended March 31, 2003.
We have entered into standby letters of credit agreements with banks
primarily relating to the guarantee of future performance on certain contracts
and office lease payments. As of June 30, 2003, contingent liabilities on
outstanding letters of credit agreements aggregated approximately $3.0 million,
of which all but $394,000 are scheduled to expire during 2003. It is possible
that some of these letters of credit will be renewed following their expiration.
The letters of credit are secured by $3.3 million in deposits with the banks, to
cover any potential payments under the guarantees.
Since inception, we have received aggregate payments from the Government of
the State of Israel through the Office of the Chief Scientist of the Ministry of
Industry and Trade in the amount of $6.6 million related to research and
development. In return for the Government of Israel participation, we are
committed to pay royalties at a rate of 3% to 5% of sales of the developed
product, up to 100%-150% of the amount of grants received with annual interest
of LIBOR as of the date of approval for programs approved from 1999 and
thereafter. As of June 30, 2003, we had paid or accrued royalties related to the
results of research and development in the amount of $2.7 million. The estimated
current net commitment is approximately $3.9 million. The refund of the grant is
contingent on future sales, and we have no obligation to refund these grants if
sufficient sales are not generated.
Our capital requirements depend on numerous factors, including market
demand and acceptance of our products, the resources we devote to developing,
marketing, selling and supporting our products and the timing and extent of
establishing additional international operations. We intend to continue
investing significant resources in our selling and marketing and research and
development operations in the future. We attained profitability in the three
months period ending March 31, 2003 and maintained profitability in three months
period ending June 30, 2003. Our ability to maintain profitability using our
currently available balance of cash and cash equivalents will depend on our
ability to increase our revenues while continuing to control our expenses.
However, we cannot assure you that we will be able to maintain profitability,
particularly given the current economic conditions and potential reduction in
information technology spending by our current and prospective customers. If we
are not successful in doing so, we will be required to seek new external sources
of financing. If additional funds are raised through the issuance of equity or
debt securities, these securities could have rights, preferences and privileges
senior to those of holders of ordinary shares, and the terms of these securities
could impose restrictions on our operations. The sale of additional equity or
convertible debt securities could result in additional dilution to our
shareholders.
We estimate that our revenues in the third quarter of 2003 will be between
$5.5 and $5.8 million, although actual revenues may differ. Assuming this level
of revenues for the third quarter is achieved, we believe that we will be able
to maintain profitability in the upcoming quarter and assuming we can maintain
the anticipated level of expenses, although no assurances can be made in that
regard. Also we will need to use cash during the second half of 2003 for certain
expenses recorded in 2002 in connection with our restructuring in the amount of
approximately $0.6 million. If we are able to maintain our quarterly revenues at
a level similar to that expected in the third quarter of 2003, we believe that
we will have sufficient cash to fund our operations for at least the next twelve
months although there is no assurance we will be able to do so.
FACTORS THAT MAY AFFECT FUTURE RESULTS
You should carefully consider the following factors and other information
in this statement before you decide to invest in our ordinary shares. If any of
the negative events referred to below occur, our business, financial condition
and results of operations could suffer. In any such case, the trading price of
our ordinary shares could decline, and you may lose all or part of your
investment.
-16-
RISKS RELATED TO OUR BUSINESS
OUR NEED FOR ADDITIONAL FINANCING IS UNCERTAIN, AS IS OUR ABILITY TO OBTAIN
FURTHER FINANCING IF REQUIRED.
Our ability to maintain or increase profitability using our currently
available balance of cash and cash equivalents will depend on our ability to
increase our revenues while continuing to control our expenses. We cannot assure
you that we will be successful in doing so. If we are not successful in doing
so, particularly given current economic conditions and potential reductions in
information technology spending by our current and prospective customers, we
will need to raise additional capital to finance our operations. Under current
market conditions, we may not be able to do so by selling additional equity or
debt securities. If we are able to issue equity or debt securities, these
securities could have rights; preferences and privileges senior to those of
holders of ordinary shares, and the terms of these securities could impose
restrictions on our operations. The sale of additional equity or convertible
debt securities would result in additional dilution to the stock holdings of our
shareholders. Additionally, prior to the issuance of additional equity or
convertible debt securities to entities outside of Israel, we will need to
obtain approval from the Chief Scientist and there can be no assurance that we
will be able to obtain this consent in the future.
Alternatively, we may seek other forms of financing, such as credit from
banks or institutional lenders. We cannot be certain that additional financing
will be available to us in amounts or on terms acceptable to us, if at all. If
we are unable to obtain this additional financing, we may be required to reduce
the scope of our planned product development and marketing efforts, which could
harm our business, financial condition or operating results. If the economy
continues to weaken or, for any other reason, we are unable to meet our business
goals, we may have to raise additional funds to respond to business
contingencies, which may include the need to:
o fund additional marketing expenditures;
o develop new or enhance existing products and services;
o enhance our operating infrastructure;
o respond to competitive pressures; or
o acquire complementary businesses or necessary technologies.
THE ECONOMIC OUTLOOK MAY ADVERSELY AFFECT THE DEMAND FOR OUR CURRENT PRODUCTS
AND OUR RESULTS OF OPERATIONS.
Current predictions for the general economy indicate uncertain economic
conditions. Weak economic conditions may cause a reduction in information
technology spending generally. Consequently, there may be an adverse impact on
the demand for our products, which would adversely affect our results of
operations. In addition, predictions regarding economic conditions have a low
degree of certainty, and further predicting the effects of the changing economy
is even more difficult. We may not accurately gauge the effect of the general
economy on our business. As a result, we may not react to such changing
conditions in a timely manner and this may result in an adverse impact on our
results of operations. Any such adverse impacts to our results of operations
from a changing economy may cause the price of our ordinary shares to decline.
-17-
WE MAY NOT BE ABLE TO MAINTAIN PROFITABILITY.
We expect to continue to incur significant sales and marketing and research
and development expenses. Some of our expenses, such as administrative and
management payroll and rent and utilities, are fixed in the short term and
cannot be quickly reduced to respond to decreases in revenues. As a result, we
will need to generate significant revenues to maintain profitability, which we
may not be able to do.
WE FACE RISKS RELATING TO OUR FINANCIAL STATEMENTS RESTATEMENT.
During the third quarter of 2002, our audit committee, with the assistance
of outside advisors, conducted a review of our financial statements for 2000 and
2001 and the first six months of 2002. On October 21, 2002, we announced that we
would restate our financial statements for 1999, 2000 and 2001 and the first six
months of 2002. In addition, we announced that our audit committee had decided
to recommend to our shareholders that we terminate our relationship with
Luboshitz Kasierer, formerly a member firm of Arthur Andersen, as our auditors
and appoint new auditors. At a shareholders' meeting held on December 31, 2002,
our shareholders authorized the engagement of Brightman Almagor & Co., a member
firm of Deloitte Touche Tohmatsu. Following the reaudit of our financial
statements, we restated our financial statements for the announced periods and
for the year ended December 31, 1999 and filed an amendment to the 10-K for the
three years ended 2001 on January 24, 2003.
The restatement of our prior financial statements may lead to litigation
claims against us. The defense of claims may cause the diversion of management's
attention and resources, and we may be required to pay damages if any such
claims are not resolved in our favor. Any litigation, even if resolved in our
favor, could cause us to incur significant legal and other expenses. In this
regard, in December 2002, a lawsuit was filed against us and our current and
former officers in the United States District Court for the District of
Massachusetts asserting securities law claims on behalf of persons who purchased
our ordinary shares between June 22, 2000 and October 21, 2002. The complaint
was not served on any of the defendants, nor did the plaintiffs take any other
action in connection with the matter. On June 12, 2003, the case was dismissed
without prejudice for failure of the plaintiff to serve the complaint and/or
show good cause for its failure to do so. In addition, we have provided
information regarding our financial statement restatement to the staff of the
Securities and Exchange Commission on a voluntary basis, and the SEC has
requested additional information. Any additional inquiry by the SEC may result
in a diversion of our management's attention and resources and require
additional expenses for professional services. In addition, any claims against
us or any inquiry by the SEC may cause the price of our Ordinary Shares to
decline.
OUR QUARTERLY OPERATING RESULTS ARE SUBJECT TO FLUCTUATIONS AND IF WE FAIL TO
MEET THE EXPECTATIONS OF SECURITIES ANALYSTS OR INVESTORS, OUR SHARE PRICE MAY
DECREASE.
Our quarterly operating results are difficult to predict and are not a good
measure for comparison. Our operating history shows that a significant
percentage of our quarterly revenues comes from orders placed towards the end of
a quarter. From time to time, we are reliant upon a sale of significant size to
a single customer. A delay in the completion of any such sale past the end of a
particular quarter could negatively impact results for that quarter, and such
negative impact could be significant, Even without the delay of a significant
sale, our future quarterly operating results may fluctuate significantly and may
not meet the expectations of securities analysts or investors. If this occurs,
the price of our ordinary shares may decrease. The factors that may cause
fluctuations in our quarterly operating results include the following:
o the volume and timing of customer orders;
o internal budget constraints and approval processes of our current and
prospective clients;
-18-
o The length and unpredictability of our sales cycle;
o the mix of revenue generated by product licenses and professional
services;
o the mix of revenue between domestic and foreign sources;
o announcements or introductions of new products or product enhancements
by us or our competitors;
o changes in prices of and the adoption of different pricing strategies
for our products and those of our competitors;
o timing and amount of sales and marketing expenses;
o changes in our business and partner relationships;
o technical difficulties or "bugs" affecting the operation of our
software;
o foreign currency exchange rate fluctuations; and
o general economic conditions.
FAILURE OF THE MARKET TO ACCEPT OUR PRODUCTS WOULD ADVERSELY AFFECT OUR
PROFITABILITY.
Historically, all of our operating revenue has come from sales of, and
services related to, our ClickSchedule and ClickFix products and clients seeking
application software that enables efficient provisioning of services in
enterprise environments. During the year ended December 31, 2000, we introduced
three products that, together with our existing products, constitute a suite of
products that offers a more comprehensive solution to our customers. On November
28, 2001 we released version 7.0 of our Service Optimization Suite that utilizes
dynamic load balancing architecture, which dynamically redirects requests among
a group of ClickSoftware servers running our product applications. On October
2002 we added ClickForecast to our Service Optimization suite. This increases
the scalability of our products by enabling our customers to optimize additional
resources by adding hardware to this group of ClickSoftware servers. Our growth
depends in part on the development of market acceptance of these products. We
have no guarantee that the sales of these products will develop as quickly as we
anticipate, or at all. Lack of long-term demand for our new products would have
a material adverse effect on our business and operating results.
OUR SALES AND IMPLEMENTATION CYCLES DEPEND ON FACTORS OUTSIDE OUR CONTROL, WHICH
MAY CAUSE QUARTERLY LICENSE AND SERVICE FEES REVENUES TO VARY SIGNIFICANTLY FROM
PERIOD TO PERIOD.
To date, our customers have taken typically from three months to nine
months to evaluate our offering before making their purchase decisions. In
addition, depending on the nature and specific needs of a client, the
implementation of our products typically takes three to nine months. Sales of
licenses and implementation schedules are subject to a number of risks over
which we have little or no control, including clients' budgetary constraints,
clients' internal acceptance reviews, the success and continued internal support
of clients' own development efforts, the efforts of businesses with which we
have relationships, the nature, size and specific needs of a client and the
possibility of cancellation of projects by clients. The uncertain outcome of our
sales efforts and the length of our sales cycles could result in substantial
fluctuations in license revenues. Historically, a significant portion of our
sales in any given quarter occur in the last two weeks of the quarter; if sales
forecasted from a specific client for a particular quarter are not realized in
-19-
that quarter, we are unlikely to be able to generate revenues from alternate
sources in time to compensate for the shortfall. As a result, and due to the
relatively large size of some orders, a lost or delayed sale could have a
material adverse effect on our quarterly revenue and operating results.
Moreover, to the extent that significant sales occur earlier than expected,
revenue and operating results for subsequent quarters could be adversely
affected.
IF WE ARE CHARACTERIZED AS A PASSIVE FOREIGN INVESTMENT COMPANY, OUR UNITED
STATES SHAREHOLDERS WILL BE SUBJECT TO ADVERSE TAX CONSEQUENCES.
If, for any taxable year, either, (1) 75% or more of our gross income is
passive income or (2) 50% or more of the fair market value of our assets,
including cash (even if held as working capital), produce or are held to produce
passive income, we may be characterized as a "passive foreign investment
company" ("PFIC") for United States federal income tax purposes. Passive income
includes dividends, interest, royalties, rents annuities and the excess of gains
over losses from the disposition of assets, which produce passive income. For
purposes of the asset test, cash is considered to be an asset that produces
passive income. As a result of our cash position and the decline in the value of
our assets, there is a substantial risk that we are a PFIC for U.S. federal
income tax purposes.
If we are characterized as a PFIC, our shareholders who are residents of
the United States will be subject to adverse United States tax consequences. Our
treatment as a PFIC could result in a reduction in the after-tax return to
shareholders resident in the United States and may cause a reduction in the
value of such shares.
If we were to be treated as a PFIC, our shareholders will be required, in
certain circumstances, to pay an interest charge together with tax calculated at
maximum rates on certain "excess distributions" including any gain on the sale
of ordinary shares. In order to avoid this tax consequence, they (1) may be
permitted to make a "qualified electing fund" election (however the Company does
not currently intend to take the action necessary for our shareholders to make a
"qualified electing fund" election, in which case, in lieu of such treatment
they would be required to include in their taxable income certain undistributed
amounts of our income) or (2) may elect to mark-to-market the ordinary shares
and recognize ordinary income (or possible ordinary loss) each year with respect
to such investment and on the sale or other disposition of the ordinary shares.
Prospective investors should consult with their own tax advisors with respect to
the tax consequences applicable to them of investing in our ordinary shares.
WE DEPEND ON KEY PERSONNEL, AND THE LOSS OF ANY KEY PERSONNEL COULD AFFECT OUR
ABILITY TO COMPETE AND OUR ABILITY TO ATTRACT ADDITIONAL KEY PERSONNEL MAY BE
IMPAIRED.
We believe our future success will depend on the continued service of our
executive officers and other key sales and marketing, product development and
professional services personnel. Dr. Moshe BenBassat, our Chief Executive
Officer, has individually participated in and has been responsible for
overseeing much of the research and development of our core technologies. The
services of Dr. BenBassat and other members of our senior management team and
key personnel would be very difficult to replace and the loss of any of these
employees could harm our business significantly. We have employment agreements
with our executive officers, including Dr. BenBassat. Although these agreements
generally require sixty days notification prior to departure, relationships with
these officers and key employees are at will. The loss of any of our key
personnel could harm our ability to execute our business strategy and compete.
-20-
IF WE FAIL TO EXPAND OUR PROFESSIONAL SERVICES ORGANIZATION, WE MAY NOT BE ABLE
TO SERVICE ADDITIONAL CLIENTS.
We cannot be certain that we can attract or retain a sufficient number of
highly qualified professional services personnel to meet our business needs.
Clients that license our software typically engage our professional services
organization to assist with the installation and operation of our software
applications. Our professional services organization also provides assistance to
our clients related to the maintenance, management and expansion of their
software systems. Future growth in licenses of our software will depend in part
on our ability to provide our clients with these services. In addition, we will
be required to expand our professional services organization to enable us to
continue to support our existing installed base of customers. If we were not
able to maintain our professional services organization, our ability to support
our service business would be limited.
IF WE FAIL TO EXPAND OUR RELATIONSHIPS WITH THIRD PARTIES THAT CAN PROVIDE
IMPLEMENTATION AND PROFESSIONAL SERVICES TO OUR CLIENTS, WE MAY BE UNABLE TO
INCREASE OUR REVENUES AND OUR BUSINESS COULD BE HARMED.
In order for us to focus more effectively on our core business of
developing and licensing software solutions, we need to continue to establish
relationships with third parties that can provide implementation and
professional services to our clients. Third-party implementation and consulting
firms can also be influential in the choice of resource optimization
applications by new clients. If we are unable to establish and maintain
effective, long-term relationships with implementation and professional services
providers, or if these providers do not meet the needs or expectations of our
clients, we may be unable to grow our revenues and our business could suffer. As
a result of the limited resources and capacities of many third-party
implementation providers, we may be unable to attain sufficient focus and
resources from the third-party providers to meet all of our clients' needs, even
if we establish relationships with these third parties. If sufficient resources
are unavailable, we will be required to provide these services internally, which
could limit our ability to meet other demands. Even if we are successful in
developing relationships with third-party implementation and professional
services providers, we will be subject to significant risk, as we cannot control
the level and quality of service provided by third-party implementation and
professional services partners.
OUR MARKET IS HIGHLY COMPETITIVE AND ANY REDUCTION IN DEMAND FOR, OR PRICES OF,
OUR PRODUCTS COULD NEGATIVELY IMPACT OUR REVENUES, REDUCE OUR GROSS MARGINS AND
CAUSE OUR SHARE PRICE TO DECLINE.
The market for our products is competitive and rapidly changing. We expect
competition to increase in the future as current competitors expand their
product offerings and new companies enter the market.
Because the market for service and delivery optimization software is
evolving, it is difficult to determine what portion of the market each
competitor currently controls. However, competition could result in price
reductions, fewer customer orders, reduced gross margin and loss of market
share, any of which could cause our business to suffer. We may not be able to
compete successfully, and competitive pressures may harm our business. Some of
our current and potential competitors have greater name recognition, longer
operating histories, larger customer bases and significantly greater financial,
technical, marketing, public relations, sales, distribution and other resources
than us. In addition, some of our potential competitors are among the largest
and most well capitalized software companies in the world.
-21-
FAILURE TO FULLY DEVELOP OR MAINTAIN KEY BUSINESS RELATIONSHIPS COULD LIMIT OUR
ABILITY TO SELL ADDITIONAL LICENSES, THEREBY DECREASING OUR REVENUES AND
INCREASING OUR SALES AND MARKETING COSTS.
We believe that our success in penetrating our target markets depends in
part on our ability to develop and maintain business relationships with software
vendors, resellers, systems integrators, distribution partners and customers. If
we fail to continue developing these relationships, our growth could be limited.
We have entered into agreements with third parties relating to the integration
of our products with their product offerings, distribution, reselling and
consulting. We are currently deriving revenues from these agreements but we may
not be able to derive significant revenues in the future from these agreements.
In addition, our growth may be limited if prospective clients do not accept the
solutions offered by our strategic partners.
OUR MARKET MAY EXPERIENCE RAPID TECHNOLOGICAL CHANGES THAT COULD CAUSE OUR
PRODUCTS TO FAIL OR REQUIRE US TO REDESIGN OUR PRODUCTS, WHICH WOULD RESULT IN
INCREASED RESEARCH AND DEVELOPMENT EXPENSES.
Our market is characterized by rapid technological change, dynamic client
needs and frequent introductions of new products and product enhancements. If we
fail to anticipate or respond adequately to technology developments and client
requirements, or if our product development or introduction is delayed, we may
have lower revenues. Client product requirements can change rapidly as a result
of computer hardware and software innovations or changes in and the emergence,
evolution and adoption of new industry standards. For example, we offer Windows
2000 versions of our products due to the market acceptance of Windows 2000 over
the last several years. While we interface smoothly with UNIX systems, we
currently do not provide UNIX versions of our software. The actual or
anticipated introduction of new products has resulted and will continue to
result in some reformulation of our product offerings. Technology and industry
standards can make existing products obsolete or unmarketable or result in
delays in the purchase of such products. As a result, the life cycles of our
products are difficult to estimate. We must respond to developments rapidly and
continue to make substantial product development investments. As is customary in
the software industry, we have previously experienced delays in introducing new
products and features, and we may experience such delays in the future that
could impair our revenue and operating results.
OUR PRODUCTS COULD BE SUSCEPTIBLE TO ERRORS OR DEFECTS THAT COULD RESULT IN LOST
REVENUES, LIABILITY OR DELAYED OR LIMITED MARKET ACCEPTANCE.
Complex software products such as ours often contain errors or defects,
particularly when first introduced or when new versions or enhancements are
released. In the past, some of our products have contained errors and defects
that have delayed implementation or required us to expend additional resources
to correct the problems. Despite internal testing, testing by current and
potential clients and the history of use by our installed base of customers, our
current and future products may contain as yet undetected serious defects or
errors. Any such defects or errors could result in lost revenues, liability or a
delay in market acceptance of these products, any of which would have a material
adverse effect on our business, operating results and financial condition.
The performance of our products also depends in part upon the accuracy and
continued availability of third-party data. We rely on third parties that
provide information such as street and address locations and mapping functions
that we incorporate into our products. If these parties do not provide accurate
information, or if we are unable to maintain our relationships with them, our
reputation and competitive position in our industry could suffer and we could be
unable to develop or enhance our products as required.
-22-
OUR INTELLECTUAL PROPERTY COULD BE USED BY THIRD PARTIES WITHOUT OUR CONSENT
BECAUSE PROTECTION OF OUR INTELLECTUAL PROPERTY IS LIMITED.
Our success and ability to compete are substantially dependent upon our
internally developed technology, which we protect through a combination of
copyright, trade secret and trademark law. However, we may not be able to
adequately protect our intellectual property rights, which may significantly
harm our business. Specifically, we may not be able to protect our trademarks
for our company name and our product names, and unauthorized parties may attempt
to copy or otherwise obtain and use our products or technology. Policing
unauthorized use of our products and technology is difficult, particularly in
countries outside the U.S., and we cannot be certain that the steps we have
taken will prevent infringement or misappropriation of our intellectual property
rights.
Our end-user licenses are designed to prohibit unauthorized use, copying or
disclosure of our software and technology in the United States, Israel and other
foreign countries. However, these provisions may be unenforceable under the laws
of some jurisdictions and foreign countries. Unauthorized third parties may be
able to copy some portions of our products, reverse engineer or obtain and use
information and technology that we regard as proprietary. Third parties could
also independently develop competing technology or design around our technology.
If we are unable to successfully detect infringement and/or to enforce our
rights to our technology, we may lose competitive position in the market. We
cannot assure you that our means of protecting our intellectual property rights
in the United States, Israel or elsewhere will be adequate or that competing
companies will not independently develop similar technology. In addition, some
of our licensed users may allow additional unauthorized users to use our
software, and if we do not detect such use, we could lose potential license
fees.
OUR TECHNOLOGY AND OTHER INTELLECTUAL PROPERTY MAY BE SUBJECT TO INFRINGEMENT
CLAIMS.
Substantial litigation regarding technology rights and other intellectual
property rights exists in the software industry both in terms of infringement
and ownership issues. A successful claim of patent, copyright or trademark
infringement or conflicting ownership rights against us could cause us to make
changes in our business or significantly harm our business. We believe that our
products do not infringe the intellectual property rights of third parties.
However, we cannot assure you that we will prevail in all future intellectual
property disputes.
We expect that software products may be increasingly subject to third-party
infringement or ownership claims as the number of competitors in our industry
segment grows and the functionality of products in different industry segments
overlaps. Third parties may make a claim of infringement or conflicting
ownership rights against us with respect to our products and technology. Any
claims, with or without merit, could:
o be time-consuming to defend;
o result in costly litigation;
o divert management's attention and resources; or
o cause product shipment delays.
Further, if an infringement or ownership claim is successfully brought
against us, we may have to pay damages or royalties, enter into a licensing
agreement, and/or stop selling the product or using the technology
-23-
at issue. Any such royalty or licensing agreements may not be available on
commercially reasonable terms, if at all.
From time to time, we may encounter disputes over rights and obligations
concerning intellectual property. We also indemnify some of our customers
against claims that our products infringe the intellectual property rights of
others. We have only conducted a partial search for existing patents and other
intellectual property registrations, and we cannot assure you that our products
do not infringe any issued patents. In addition, because patent applications in
the United States and Israel are not publicly disclosed until the patent is
issued, applications may have been filed which would relate to our products.
OUR BUSINESS MAY BECOME INCREASINGLY SUSCEPTIBLE TO NUMEROUS RISKS ASSOCIATED
WITH INTERNATIONAL OPERATIONS.
Significant portions of our operations occur outside the United States. Our
facilities are located in North America, Israel, the European continent, and the
United Kingdom, and our executive officers and other key employees are dispersed
throughout the world. This geographic dispersion requires significant management
resources that may place us at a disadvantage compared to our locally based
competitors. In addition, our international operations are generally subject to
a number of risks, including:
o foreign currency exchange rate fluctuations;
o longer sales cycles;
o multiple, conflicting and changing governmental laws and regulations;
o expenses associated with customizing products for foreign countries;
o protectionist laws and business practices that favor local
competition;
o difficulties in collecting accounts receivable; and
o political and economic instability.
We expect international revenues to continue to account for a significant
percentage of total revenues and we believe that we must continue to expand our
international sales and professional services activities in order to be
successful. Our international sales growth will be limited if we are unable to
expand our international sales management and professional services
organizations, hire additional personnel, customize our products for local
markets and establish relationships with additional international distributors,
consultants and other third parties. If we fail to manage our geographically
dispersed organization, we may fail to meet or exceed our business plan and our
revenues may decline.
WE ARE INCORPORATED IN ISRAEL AND HAVE IMPORTANT FACILITIES AND RESOURCES
LOCATED IN ISRAEL, WHICH COULD BE NEGATIVELY AFFECTED DUE TO MILITARY OR
POLITICAL TENSIONS.
We are incorporated under the laws of the State of Israel and our research
and development facilities as well as significant executive offices are located
in Israel. Although substantial portions of our sales currently are to customers
outside of Israel, political, economic and military conditions in Israel could
nevertheless directly affect our operations. Since the establishment of the
State of Israel in 1948, a number of armed conflicts have taken place between
Israel and its Arab neighbors and a state of hostility, varying in
-24-
degree and intensity, has led to security and economic problems for Israel.
Since September 2000, a continuous armed conflict with the Palestinian authority
has been taking place.
Despite our history of avoiding adverse effects, in the future we could be
adversely affected by any major hostilities involving Israel, the interruption
or curtailment of trade between Israel and its trading partners, a significant
increase in inflation, or a significant downturn in the economic or financial
condition of Israel. Despite past progress towards peace between Israel and its
Arab neighbors, the future of these peace efforts is uncertain. Several Arab
countries still restrict business with Israeli companies, which may limit our
ability to make sales in those countries. We could be adversely affected by
restrictive laws or policies directed towards Israel or Israeli businesses.
CERTAIN OF OUR OFFICERS AND EMPLOYEES ARE REQUIRED TO SERVE IN THE ISRAEL
DEFENSE FORCES AND THIS COULD FORCE THEM TO BE ABSENT FROM OUR BUSINESS FOR
EXTENDED PERIODS.
David Schapiro, our Executive Vice President, Markets and Products, Hannan
Carmeli, our Executive Vice President, Product Services and Operations, and
Shmuel Arvatz, our Executive Vice President and Chief Financial Officer, as well
as other male employees located in Israel are currently obligated to perform up
to 39-45 days of annual reserve duty in the Israel Defense Forces and are
subject to being called for active military duty at any time. The loss or
extended absence of any of our officers and key personnel due to these
requirements could harm our business.
WE ARE AN INTERNATIONAL COMPANY AND OUR INTERNATIONAL OPERATIONS ARE EXPANDING.
OUR RISK EXPOSURE TO FOREIGN CURRENCY FLUCTUATIONS IS INCREASING, AND WE MAY NOT
BE ABLE TO FULLY MITIGATE THE RISK.
Our revenue from the UK has grown both in absolute dollar basis as well as
a percentage of total revenues. We are expanding operations in other areas of
Europe, and income and expenses recognized in the European Community Euro will
increase. In 2002, 20% of our costs were incurred in GBP and 3% in the Euro. We
incur a portion of our expenses, principally salaries and related personnel
expenses in Israel, in NIS. In 2002, 25% of our costs were incurred in NIS. In
2002 we incurred 2% of our costs in the Australian Dollar. In addition to above,
we have balance sheet exposure related to foreign net assets. So far our risk to
foreign currency fluctuations has been minimal, but we cannot assure you that we
will be able to adequately protect ourselves against such risks.
WE ARE INCURRING ADDITIONAL COSTS AND DEVOTING MORE MANAGEMENT RESOURCES TO
COMPLY WITH INCREASING REGULATION OF CORPORATE GOVERNANCE AND DISCLOSURE.
We are spending an increased amount of management time and external
resources to understand and comply with changing laws, regulations and standards
relating to corporate governance and public disclosure, including the
Sarbanes-Oxley Act of 2002, new SEC regulations and Nasdaq Stock Market rules.
Devoting the necessary resources to comply with evolving corporate governance
and public disclosure standards may result in increased general and
administrative expenses and a diversion of management time and attention to
compliance activities.
THE GOVERNMENT PROGRAMS IN WHICH WE CURRENTLY PARTICIPATE AND TAX BENEFITS WHICH
WE CURRENTLY RECEIVE REQUIRE US TO SATISFY PRESCRIBED CONDITIONS AND MAY BE
DELAYED, TERMINATED OR REDUCED IN THE FUTURE. THIS WOULD INCREASE OUR COSTS AND
TAXES.
We receive grants from the Government of the State of Israel through the
Office of the Chief Scientist of the Ministry of Industry and Trade, or the
Chief Scientist, for the financing of a significant portion of our research and
development expenditures in Israel, and we may apply for additional grants in
the future.
-25-
We cannot assure that we will continue to receive grants at the same rate or at
all. The Chief Scientist budget has been subject to reductions that may affect
the availability of funds for Chief Scientist grants in the future. The
percentage of our research and development expenditures financed using grants
from the Chief Scientist may decline in the future, and the terms of such grants
may become less favorable. In connection with research and development grants
received from the Chief Scientist, we must make royalty payments to the Chief
Scientist on the revenues derived from the sale of products, technologies and
services developed with the grants from the Chief Scientist. From time to time,
the Government of Israel changes the rate of royalties we must pay, so we are
unable to accurately predict this rate. In addition, our ability to manufacture
products or transfer technology outside Israel without the approval of the Chief
Scientist is restricted under law. Any manufacture of products or transfer of
technology outside Israel will also require the Company to pay increased
royalties to the Chief Scientist up to 300%. We currently conduct all of our
manufacturing activities in Israel and intend to continue doing so in the
foreseeable future and therefore do not believe there will be any increase in
the amount of royalties we pay to the Chief Scientist. Currently the office of
the Chief Scientist does not consider the licensing of our software in the
ordinary course of business a transfer of technology and we do not intend to
transfer any technology outside of Israel. Consequently, we do not anticipate
having to pay increased royalties to the Chief Scientist for the foreseeable
future. In connection with our grant applications, we have made representations
and covenants to the Chief Scientist regarding our research and development
activities in Israel. The funding from the Chief Scientist is subject to the
accuracy of these representations and covenants. If we fail to comply with any
of these conditions, we could be required to refund payments previously received
together with interest and penalties and would likely be denied receipt of these
grants thereafter.
WE ANTICIPATE RECEIVING TAX BENEFITS FROM THE GOVERNMENT OF THE STATE OF ISRAEL,
HOWEVER THESE BENEFITS MAY BE DELAYED, REDUCED OR TERMINATED IN THE FUTURE.
Pursuant to the Law for the Encouragement of Capital Investments, the
Government of the State of Israel through the Investment Center has granted
"Approved Enterprise" status to three of our existing capital investment
programs. Consequently, we are eligible for certain tax benefits for the first
several years in which we generate taxable income. We have not, however, begun
to generate taxable income for purposes of this law and we do not expect to
utilize these tax benefits for the near future. Once we begin to generate
taxable income, our financial condition could suffer if our tax benefits were
significantly reduced. The benefits available to an approved enterprise are
dependent upon the fulfillment of certain conditions and criteria. If we fail to
comply with these conditions and criteria, the tax benefits that we receive
could be partially or fully canceled and we could be forced to refund the amount
of the benefits we received, adjusted for inflation and interest. From time to
time, the Government of Israel has discussed reducing or limiting the benefits.
We cannot assess whether these benefits will be continued in the future at their
current levels or at all.
IT MAY BE DIFFICULT TO ENFORCE A U.S. JUDGMENT AGAINST US, OUR OFFICERS AND
DIRECTORS AND THE ISRAELI ACCOUNTANTS NAMED AS EXPERTS IN THIS STATEMENT OR TO
ASSERT U.S. SECURITIES LAWS CLAIMS IN ISRAEL OR SERVE PROCESS ON SUBSTANTIALLY
ALL OF OUR OFFICERS AND DIRECTORS AND THESE ACCOUNTANTS.
We are incorporated in Israel and maintain significant operations in
Israel. Some of our executive officers and directors and the Israeli accountants
named as experts in this statement reside outside of the United States and a
significant portion of our assets and the assets of these persons are located
outside the United States. Therefore, it may be difficult for an investor, or
any other person or entity, to effect service of process on us or any of those
persons or to enforce a U.S. court judgment, based upon the civil liability
provisions of the U.S. federal securities laws, against us or any of those
persons, in an Israeli court. Additionally, it may be difficult for an investor,
or any other person or entity, to enforce civil liabilities under U.S. federal
securities laws in original actions instituted in Israel. We have appointed
ClickSoftware Inc., our
-26-
U.S. subsidiary, as our agent to receive service of process in any action
against us arising out of our original June 22, 2000 initial public offering. We
have not given our consent for our agent to accept service of process in
connection with any other claim. Furthermore, if a foreign judgment is enforced
by an Israeli court, it will be payable in NIS.
OUR OFFICERS, DIRECTORS AND AFFILIATED ENTITIES OWN A LARGE PERCENTAGE OF OUR
COMPANY AND COULD SIGNIFICANTLY INFLUENCE THE OUTCOME OF ACTIONS.
As of June 30, 2003, our executive officers, directors and entities
affiliated with them beneficially owned approximately 35.0% of our outstanding
ordinary shares. These shareholders, if acting together, would be able to
significantly influence all matters requiring approval by our shareholders,
including the election of directors. This concentration of ownership may also
have the effect of delaying or preventing a change of control of our company,
which could have a material adverse effect on our stock price. These actions may
be taken even if our other investors oppose them.
WE ARE SUBJECT TO ANTI-TAKEOVER PROVISIONS THAT COULD DELAY OR PREVENT AN
ACQUISITION OF US, EVEN IF AN ACQUISITION WOULD BE BENEFICIAL TO OUR
SHAREHOLDERS.
Provisions of Israeli corporate and tax law and of our articles of
association may have the effect of delaying, preventing or making more difficult
any merger or acquisition of us, even if doing so would be beneficial to our
shareholders. In addition, any merger or acquisition of us will require the
prior consent of the Chief Scientist. Israeli law regulates mergers, votes
required to approve a merger, acquisition of shares through tender offers and
transactions involving significant shareholders. In addition, our articles of
association provide for a staggered board of directors and for restrictions on
business combinations with interested shareholders. Any of these provisions may
make it more difficult to acquire our company. Accordingly, an acquisition of us
could be delayed or prevented even if it would be beneficial to our
shareholders.
OTHER ORDINARY SHARES MAY BE SOLD IN THE FUTURE. THIS COULD DEPRESS THE MARKET
PRICE FOR OUR ORDINARY SHARES.
As of June 30, 2003, we had 26,418,676 ordinary shares outstanding (net of
39,000 shares held in treasury), including shares held by a trustee for issuance
under outstanding options. In addition, as of June 30, 2003, we had 3,147,920
ordinary shares issuable upon exercise of outstanding options, and 1,649,210
additional ordinary shares reserved for issuance pursuant to our stock option
plans and employee share purchase plan. If we or our existing shareholders sell
a large number of our ordinary shares, the price of our ordinary shares could
fall dramatically. Restrictions under the securities laws limit the number of
ordinary shares available for sale by our shareholders in the public market. We
have filed a Registration Statement on Form S-8 to register for resale the
ordinary shares reserved for issuance under our stock option plans.
OUR STOCK PRICE COULD BE VOLATILE AND COULD DECLINE SUBSTANTIALLY.
The stock market has experienced significant price and volume fluctuations,
and the market prices of technology companies have been highly volatile. The
price at which our ordinary shares trades is likely to be volatile and may
fluctuate substantially due to factors such as:
o announcements of technological innovations;
o announcements relating to strategic relationships;
-27-
o conditions affecting the software and Internet industries;
o trends related to the fluctuations of stock prices of companies such
as ours;
o our historical and anticipated quarterly and annual operating results;
o variations between our actual results and the expectations of
investors or published reports or analyses of ClickSoftware;
o announcements by us or others affecting our business, systems or
expansion plans; and
o general conditions and trends in technology industries.
In the past, securities class action litigation has often been instituted
against companies following periods of volatility in the market price of their
securities. This type of litigation could result in substantial costs and a
diversion of management's attention and resources.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
In the ordinary course of our operations, we are exposed to certain market
risks, primarily changes in foreign currency exchange rates and interest rates.
FOREIGN CURRENCY EXCHANGE RATE RISK. We develop products in Israel and sell
them primarily in North America, Europe, and the Asia Pacific and Africa
regions. As a result, our financial results could be affected by factors such as
changes in foreign currency exchange rates or weak economic conditions in
foreign markets. In 2002, 66% of our revenues and 50% of our expenses were
denominated in U.S. dollars. Since our financial results are reported in our
functional currency, U.S. dollars, fluctuations in the exchange rates between
the dollar and non-dollar currencies may have a material effect on our results
of operations. The exposure to currency exchange rate changes is diversified due
to the number of different countries and currencies in which we conduct
business. The main currencies are US$, NIS, GBP and Euro.
In addition to above, we have balance sheet exposure related to foreign net
assets.
We enter from time to time into forward Contracts related to foreign
currency rates in order to protect against foreign currency accounts receivables
and certain forecasted transactions. The impact of those transactions is
immaterial. We do not participate in any speculative investments.
INTEREST RATE RISK. As of June 30, 2003, we had cash and cash equivalents
of $8.0 million, which consist of cash and highly liquid short-term investments.
Of this amount, a total of $2.0 million is denominated in non-dollar currencies.
A hypothetical 10 percent change in exchange rates against the U.S. dollar
and a substantial decrease in market interest rates will have immaterial impact
on our financial condition.
The following table provides information about our investment portfolio,
cash, and long-term debts as of June 30, 2003 and presents principal cash flows
and related weighted averages interest rates by expected maturity dates.
-28-
YEAR OF MATURITY 2003 2004
(in thousands of dollars)
A) CASH AND CASH EQUIVALENTS AND INVESTMENT PORTFOLIO:
Cash and Cash equivalents $3,910 --
Average interest rate 0.9% --
Short Term Bonds $1,000 --
Average interest rate 1.2% --
Bank deposits $2,283 $1,140
Average interest rate 1.2% 1.2%
B) LONG-TERM DEBTS:
None.
ITEM 4. CONTROLS AND PROCEDURES
EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES
In the last quarter of 2002, we identified a weakness in the process of
recognizing and recording revenues in our books which led to the restatement of
our financial statements for the years 2001, 2000 and 1999 and for the six
months ended June 30, 2002. (See also note 3 of the notes to our consolidated
financial statements on Form 10-K/A for the year ended December 31, 2001, filed
with the Securities and Exchange Commission on January 24, 2003.)
Based on the instructions of the audit committee of our Board of Directors
and with the assistance of its independent auditor, we adopted a new policy for
revenue recognition. The policy includes procedures and practices to assure the
proper recognition of revenue in the future. In addition, to improve the overall
effectiveness of our disclosure controls and procedures, we have expanded the
scope of periodic discussions between our finance department and our other
operational departments, and expanded our formal reporting procedures. We have
also established a Disclosure Committee with a mandate to assist our CEO and CFO
in overseeing the accuracy and timeliness of our public disclosure and in
evaluating regularly our disclosure and control procedures.
Our management evaluated, with the participation of our chief executive
officer and our chief financial officer, the effectiveness of our disclosure
controls and procedures as of the end of the period covered by this Quarterly
Report on Form 10-Q. They did not find any weaknesses not identified previously,
and believe that the changes we began implementing at the end of 2002 and
described above address the weaknesses identified.
CHANGES IN INTERNAL CONTROLS
There have been no significant changes in our internal controls or in other
factors that could significantly affect these controls subsequent to the date of
their evaluation.
-29-
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
During the quarterly period ending June 30, 2003, no material legal
proceeding was filed against the Company. On June 12, 2003, the lawsuit which
had been filed against the Company and certain of its current and former
officers in the United States District Court for the District of Massachusetts
in December 2002 asserting certain securities law claims was dismissed without
prejudice for failure of the plaintiff to file a return of service and /or show
good cause.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
On May 28, 2003, the Annual Meeting of Shareholders of the Company was held
at 11:00 am, local time, at the Company's offices at 34 Habarzel Street, Tel
Aviv, Israel.
1. ELECTION OF CLASS I DIRECTOR, CLASS II
DIRECTORS, CLASS III DIRECTORS AND
EXTERNAL DIRECTORS VOTES FOR VOTES AGAINST
------------ ---------------
James W. Thanos (Class I director) 23,806,259 12,462
Roni Einav (Class II director) 23,806,259 12,462
Gil Weiser (Class II director) 23,806,259 12,462
Moshe BenBassat (Class III director) 23,722,859 83,900
Eddy Shalev (Class III director) 23,806,259 12,462
Naomi Atsmon (External director) 23,806,259 12,462
Dan Falk (External director) 23,806,259 12,462
Other matters voted upon at the meeting and the number of affirmative and
negative votes cast with respect to each such matter were as follows:
2. To ratify the appointment of Brightman Almagor & Co., a member firm of
Deloitte Touche Tohmatsu, independent accountants of the Company for the 2003
fiscal year. The number of affirmative votes for this proposal was 23,776,771,
the number of negative votes was 40,750 and the number of abstentions was 1,200.
3. To ratify and approve, as described in the Company's proxy statement
filed on April 30, 2003 (the "Proxy Statement"), to each of Naomi Atsmon and
Dan Falk, grants of options to purchase 30,000 shares at the fair market value
per share at the date of annual meeting. Also to ratify and approve the grant,
as described in the Company's Proxy Statement, to Moshe BenBassat of an option
to purchase 250,000 shares at the fair market value per share at the date of
annual meeting. The number of affirmative votes for this proposal was
23,318,894, the number of negative votes was 498,720 and the number of
abstentions was 1,106.
4. To ratify and approve grants of cash compensation to outside
directors, as described in the Company's Proxy Statement. The number of
affirmative votes for this proposal was 23,657,765, the number of negative votes
was 160,855 and the number of abstentions was 100.
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5. To ratify and approve adoption of 2003 Israeli Share Option Plan, as
described in the Company's Proxy Statement. The number of affirmative votes for
this proposal was 15,731,437, the number of negative votes was 1,852,598 and the
number of abstentions was 67,105.
6. To ratify and approve, as described in the Company's Proxy Statement,
a revised employment agreement with Moshe BenBassat, the Company's Chairman and
Chief Executive Officer. The number of affirmative votes for this proposal was
23,586,475, the number of negative votes was 163,535 and the number of
abstentions was 68,711.
7. To ratify and approve certain amendments to the Company's articles of
association, as described in the Company's Proxy Statement, to permit the
Company to prospectively exempt directors and officers from damages resulting
from a breach of the duty of care toward the Company. The number of affirmative
votes for this proposal was 21,868,163, the number of negative votes was
1,885,904 and the number of abstentions was 64,653.
8. To ratify and approve the issuance of certain letters of
indemnification, insurance and exemption to directors, as described in the
Company's Proxy Statement. The number of affirmative votes for this proposal was
21,937,733, the number of negative votes was 1,878,381 and the number of
abstentions was 2,606.
ITEM 5. OTHER INFORMATION
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
EXHIBIT INDEX
(a) Exhibit Number Description
- ---------------------------- --------------------------------------------------
3.3 Amended Articles of Association of the Company
10.18 (1) Amended Form of Indemnification Agreement
10.19 (1) Amended Employment Agreement between the Company and Moshe BenBassat
10.20 (1) 2003 Israeli Share Option Plan
31.1 Certification of the Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as
adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2 Certification of the Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as
adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1 Certification of the Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as
adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
32.2 Certification of the 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) Incorporated by reference to the Company's definitive proxy statement filed on April 30,2003.
(b) Reports on Form 8-K:
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On May 14, 2003, the Company filed a current report on Form 8-K pursuant to
the Securities and Exchange Act of 1934, as amended, reporting the Company's
financial results for the quarter ended March 31,2003.
-32-
EXHIBIT 3.3
ARTICLES OF ASSOCIATION
OF
CLICKSOFTWARE TECHNOLOGIES LTD.
AMENDED AND RESTATED AS OF MAY 28, 2003
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ARTICLES OF ASSOCIATION
OF
CLICKSOFTWARE TECHNOLOGIES LTD.
- --------------------------------------------------------------------------------
INTERPRETATION
1. In these Articles, the words in the first column of the following table
shall bear the meanings set opposite them respectively in the second
column thereof, if not inconsistent with the subject or context:
Words Meanings
The Company The above-named Company.
Companies Law The Companies Law 1999 (the "Companies
Law") and all orders and regulations issued
thereunder as amended from time to time,
including any law or statute replacing it.
The Statutes The Companies Law, the Securities
Law of 1968 and every other ordinance or law
for the time being in force concerning
companies and affecting the Company.
These Articles These Articles of Association, as
shall be amended from time to time.
Officer A Director, President, General Manager, Chief
Executive Officer, Vice President, Chief
Financial Officer, any other manager directly
subordinate to the President, and any person
who fills one of the said positions in the
Company, even if he carries a different
title.
Audit Committee As defined in the Companies Law.
The Office The registered office of the Company.
The Seal Any of (i) the rubber stamp of the
Company, (ii) the facsimile signature of the
Company, or (iii) the electronic signature of
the Company as approved by the Board of
Directors.
Shareholders Register The shareholders register required
to be kept according to the Companies Law and
any other shareholders register permitted to
be kept by the Company according to the
Companies Law.
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Month A Gregorian month.
NIS New Israeli Shekel
Writing Printing, lithography, photography and any
other mode or modes of representing or
reproducing words in a visible form.
Words importing the masculine gender shall include the feminine gender,
and words importing person shall include corporations.
Subject as aforesaid, any words or expressions defined in the Statutes
shall, except where the subject or context forbids, bear the same meanings
in these Articles.
PUBLIC COMPANY
3. The Company is a limited public company, consequently:
(a) no limitations will apply to the transfer of its shares;
(b) the number of shareholders will be unlimited;
(c) the Company may issue shares, debentures or any other securities to
the public.
(d) the liability of its shareholders is limited by shares.
SHARE CAPITAL
4. (a) The share capital of the Company is NIS two million (2,100,000),
divided into:
(i) 97,000,000 Ordinary Shares of NIS 0.02 nominal value each
("Ordinary Shares");
(ii) 3,000,000 Non-Voting Ordinary Shares of NIS 0.02 nominal value
each ("Non-Voting Ordinary Shares"), and
(ii) 5,000,000 Special Preferred Shares of NIS 0.02 nominal value
each ("Special Preferred Shares").
Except as otherwise provided herein, the shares of each class will rank
pari passu with all the other shares in that class.
(b) Each Ordinary Share entitles its holder to receive notice of, and to
participate in, all General Meetings of the Company, and to one (1)
vote in such meetings for every share, and the other rights specified
in these Articles.
(c) The Special Preferred Shares may be issued from time to time as
shares of one or more series, with such distinctive serial
designations as may be stated or expressed in the resolution or
resolutions providing for the issuance of such shares from time to
time
-35-
adopted by the Board of Directors of the Company. In the resolution or
resolutions providing for the issuance of such shares, the Board of
Directors of the Company is expressly authorized, without the need for
shareholder action, to fix the terms and preferences of the shares of
such series, including without limitation the dividend rate, number of
shares, and the terms upon which the shares are convertible into or
exchangeable for shares of any other class or classes.
(d) Each Non-Voting Ordinary Share will have the same rights as the
Ordinary Shares except that they will not have any voting rights in
the Company, including the right to receive notice of meetings of
shareholders and to participate in and vote at meetings of
shareholders.
Each Non-Voting Ordinary Share is convertible at any time after
issuance of such share at the option of the holder thereof and without
payment of any additional consideration into one (1) fully-paid and
non-assessable voting Ordinary Share, according to the procedure set
out below. Before any holder of Non-Voting Ordinary Shares shall be
entitled to convert the same into Ordinary Shares to be converted, the
holder shall deliver to the Company written notice specifying the
number of shares to be converted. From and after the date on which the
Company or its transfer agent received such notice, shares included in
such notice shall be deemed converted as specified in the notice, and
the converting holder shall be deemed the owner and shall be treated
for all purposes as the record holder of the number of Ordinary Shares
into which such shares were converted. Promptly after delivery of such
written notice, the holder shall surrender the certificate(s)
therefor, duly endorsed, at the office of the Company or of any
transfer agent for such shares. The Company shall, as soon as
practicable thereafter, issue and deliver at such office to such
holder, certificate(s) for the number of shares to which such holder
shall be entitled as aforesaid.
AMENDMENT OF ARTICLES
5. These Articles (with the exception of Article 100 which may be amended as
provided therein) may be amended by a majority vote at a meeting of
shareholders of the Company, with the exception of Article 100 which may be
amended only by the affirmative vote of two - thirds of the shareholders
present (in person or by proxy) and voting on such resolution at a General
Meeting.
If the Company's shares are divided into classes of shares, then a change
that infringes on the rights of a class of shares shall be made only with
the approval of a General Meeting of that class; the provisions of these
Articles shall apply, mutatis mutandis, to the adoption of decisions by a
class meeting.
Notwithstanding the provisions of this Article , a change of these Articles
that obligates a shareholder to acquire additional shares or to increase
the extent of his liability shall not obligate the shareholder without his
consent.
SHARES
6. Subject to these Articles or to the terms of any resolution creating new
shares, the unissued shares in the registered share capital of the Company
from time to time shall be under the
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control of the Board of Directors, which shall have the power to allot
shares or otherwise dispose of them to such persons, on such terms and
conditions, and either at par or at a premium or, subject to the provisions
of the Statutes, at a discount, and at such times as the Board of Directors
may think fit, and the power to give to any person the option to acquire
from the Company any shares, either at nominal value or at a premium or,
subject as aforesaid, at a discount, during such time and for such
consideration as the Board of Directors may determine.
7. If two or more persons are registered as joint holders of any share, any
one of such persons may give effectual receipts for any dividends or other
monies in respect of such share.
The Company shall not be required to recognize any holder of a share as a
holder other than the registered holder of such share.
8. Every shareholder registered in the Shareholders' Register shall be
entitled, without payment, to receive within thirty days after allotment or
registration of transfer (unless the conditions of issuance provide for a
longer interval), one certificate under the Seal for all the shares
registered in his name, and if the Board of directors so approves, several
certificates, each for one or more of such shares. Each certificate shall
specify the number and denoting numbers of the shares in respect of which
it is issued and may also specify the amount paid up thereon; provided
that, in the case of joint holders, the Company shall not be bound to issue
more than one certificate to all the joint holders, and delivery of such
certificate to one of them shall be sufficient delivery to all. Every
certificate shall be signed by one Director and countersigned by the
Secretary or some other person nominated by the Board of Directors for this
purpose.
9. If any share certificate shall be defaced, worn out, destroyed or lost, it
may be renewed on such evidence being produced, and such indemnity (if any)
being given as the Board of Directors shall require and (in the case of
defacement or wearing out) upon delivery of the old certificate and, in any
case, upon payment of such sum not exceeding NIS 50 (fifty New Israeli
Shekels) as the Board of Directors may from time to time require.
10. The Company may, directly or indirectly, purchase its own shares subject to
the provisions of the Companies Law. If the Company purchases its own
shares, such shares will not have any rights as long as they are owned by
the Company.
11. (a) A subsidiary or some other corporate body under the Company's control
(in this Article: "ACQUIRING CORPORATE BODY") may acquire shares of
the Company subject to the provisions of the Companies Law, on
condition that the subsidiary's Board of Directors or the Directors of
the acquiring corporate body determined that - had the acquisition
been made by the Company - it would have been permitted by the
provisions of the Companies Law.
(b) If the Company's shares were acquired by a subsidiary or by an
acquiring corporate body, such shares shall not grant voting rights as
long as they are owned by the subsidiary or by the acquiring body
corporate.
(c) If a prohibited distribution (as defined in Section 301 to the
Companies Law) was made, then the refund specified in Section 310 to
the Companies Law shall be made to the subsidiary or to the acquiring
body corporate and the provisions of Section 311 shall
apply, mutatis mutandis, to the Directors of the subsidiary and to the
Directors of the
-37-
acquiring body corporate. However, if the Company's Board of Directors
determined that the distribution is permitted, then the responsibility
shall be that of the Company's Directors, as provided in Section 311
to the Companies Law.
(d) Notwithstanding the provisions of Sub-article (a), acquisition by a
subsidiary or by an acquiring corporate body that is not wholly owned
by the Company constitutes a distribution in an amount equal to the
amount of the acquisition, multiplied by the proportion of rights in
the subsidiary's capital or in the capital of the acquiring corporate
body held by the Company.
TRANSFER OF SHARES
12. No transfer of shares shall be registered unless a proper writing or
instrument of transfer (in any customary form or any other form
satisfactory to the Board of Directors) has been submitted to the Company
(or its transfer agent), together with the share certificate(s) and such
other evidence of title as the Board of Directors may reasonably require.
Until the transferee has been registered in the Shareholders Register
(which the Company guarantees to perform promptly from submission to it of
the foregoing) in respect of the shares so transferred, the Company may
continue to regard the transferor as the owner thereof.
13. The Board of Directors may refuse, without giving any reasons therefor, to
register any transfer of shares where the Company has a lien on the shares,
constituting the subject matter of the transfer, but fully paid-up shares
may be transferred freely and such transfers do not require the approval of
the Board of Directors.
All instruments of transfer shall remain in the custody of the Company, but
any such instrument which the Board of Directors refused to register shall
be returned to the person from whom it was received, if such request be
made by him.
14. The Transfer Records and the Shareholders Register and Debenture Holders
(if any) Register and Debenture Stock Holders (if any) Register and other
securities (if any) Register of the Company may be closed during such time
as the Board of Directors may deem fit, not exceeding, in the aggregate,
thirty (30) days in each year.
TRANSMISSION OF SHARES
15. In the case of the death of a shareholder, or a holder of a debenture, the
survivor or survivors, where the deceased was a joint holder, and the
executors and/or administrators and/or the legal heirs of the deceased
where he was a sole or only surviving holder, shall be the only persons
recognized by the Company as having any title to his shares or his
debentures, but nothing herein contained shall release the estate of a
deceased joint holder from any liability in respect of any share or any
debenture jointly held by him.
16. Any person who becomes entitled to a share or a debenture in consequence of
the death or bankruptcy or any shareholder may, upon producing such
evidence of title as the Board of Directors shall require, with the consent
of the Board of Directors, be registered himself as holder of the share or
the debenture or, subject to the provisions as to transfers herein
contained, transfer the same to some other person.
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17. A person entitled to a share or a debenture by transmission shall be
entitled to receive, and may given a discharge for, any dividends or
interest or other monies payable in respect of the share or debenture, but
he shall not be entitled in respect of it to receive notices of, or to
attend or vote at meetings of the Company or, save as aforesaid, to
exercise any of the rights or privileges of a shareholder or a holder of a
debenture unless and until he shall become a shareholder in respect of the
share or a holder of the debenture.
ALTERATIONS OF CAPITAL
18. Subject to the provisions of the Companies Law, the Company may from time
to time by a majority vote at a meeting of shareholders of the Company:
(a) consolidate and divide all or any of its share capital into shares of
larger amount than its existing shares; or
(b) cancel registered share capital that has not yet been issued, on
condition that there are no undertakings of the Company - including
conditional undertakings to issue such shares; or
(c) divide its share capital or any part thereof into shares of smaller
amount than is fixed by its Articles of Association by sub-division of
its existing shares or any of them , and so that as between the
resulting shares, one or more of such shares may, by the Resolution by
which such sub-division is effected, be given any preference or
advantage as regards dividend, return of capital, voting or otherwise
over the others or any other shares; or
(d) reduce its share capital and any capital redemption reserve fund in
any way that may be considered expedient.
19. The Company may, subject to the Companies Law, issue redeemable shares and
redeem the same according to the terms and conditions which the Company
shall determine.
INCREASE OF CAPITAL
20. The Company may from time to time by a majority vote at a meeting of
shareholders, whether all the shares for the time being authorized shall
have been issued or all the shares for the time being issued shall have
been fully called up or not, increase its share capital by the creation of
new shares; such new capital to be of such amount and to be divided into
shares of such respective amounts and (subject to any special rights for
the time being attached to any existing class of shares) to carry such
preferential, deferred or other special rights (if any) or to be subject to
such conditions or restrictions (if any) in regard to dividend, return of
capital, voting or otherwise as the General Meeting deciding upon such
increase directs.
21. Except so far as otherwise provided by or pursuant to these Articles or by
the conditions of issuance, any new share capital shall be considered as
part of the original ordinary share capital of the Company, and shall be
subject to the same provisions with reference to liens, transfer,
transmission and otherwise as the original share capital.
-39-
MODIFICATION OF CLASS RIGHTS
22. If, at any time, the share capital is divided into different classes of
shares, the rights attached to any class (unless otherwise provided by the
terms of issuance of the shares of that class) may be varied with the
consent in writing of the holders of all the issued shares of that class,
or with the sanction of a majority vote at a meeting of the shareholders
passed at a separate meeting of the holders of the shares of the class. The
provisions of these Articles relating to General Meetings shall apply,
mutatis mutandis, to every such separate General Meeting. Any holder of
shares of the class present in person or by proxy may demand a secret poll.
23. Unless otherwise provided by the conditions of issuance, the enlargement of
an existing class of shares, or the issuance of additional shares thereof,
shall not be deemed to modify or abrogate the rights attached to the
previously issued shares of such class or of any other class.
BORROWING POWERS
24. The Board of Directors may from time to time, in its discretion, cause the
Company to borrow or secure the payment of any sum or sums of money for the
purposes of the Company, and may secure or provide for the repayment of
such sum or sums in such manner, at such times and upon such terms and
conditions in all respects as it sees fit and, in particular, by the
issuance of bonds, perpetual or redeemable debentures, debenture stock, or
any mortgages, charges or other securities on the undertaking, or the whole
or any part of the property of the Company, both present and future,
including units uncalled or called but unpaid capital for the time being.
POWERS OF THE GENERAL MEETING
25. Without derogating from the authority of the General Meeting pursuant to
these Articles, the Company's decisions on the following matters shall be
adopted at a General Meeting:
(1) any changes in these Articles;
(2) exercise of the powers of the Board of Directors in accordance with
the provisions of Section 52(a) of the Companies Law;
(3) appointment of the Company's Auditor;
(4) appointment of External Directors, in accordance with the provisions
of the Companies Law;
(5) approval of acts and transactions that require approval by the General
Meeting under the provisions of Articles 255 and 268 to 275 of the
Companies Law;
(6) the increase and reduction of the registered share capital, in
accordance with the provisions of Articles 286 and 287 to the
Companies Law;
(7) a merger, as specified in Article 320(a) to the Companies Law.
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GENERAL MEETINGS
26. (a) General Meetings shall be held at least once in every calendar year at
such time, not being more than fifteen months after the holding of the
last preceding General Meeting, and at such time and place as may be
determined by the Board of Directors. Such Annual General Meetings
shall be called "Annual Meetings", and all other General Meetings of
the shareholders shall be called "Special Meetings". The Annual
Meeting shall receive and consider the Directors' Report, the
Financial Statements, appoint auditors, elect directors, and transact
any other business which, under these Articles or by the Companies
Law, may be transacted at a General Meeting of the Company, provided
that notice of such other business was given to shareholders in
accordance with the provisions of these Articles. At a General
Meeting, decisions shall be adopted only on matters that were
specified on the agenda.
(b) Any reference in these Articles to a "General Meeting" will be either
a General Meeting or a Special Meeting, according to the context.
27. The Board of Directors may, whenever it deems necessary, and shall upon
such requisition in writing as is provided by Section 63(b) of the
Companies Law, convene a General Meeting. Any such request must state the
purposes for which the meeting is to be called, be signed by the requesting
shareholders, and must be deposited at the Office. Such request may consist
of several documents in like form, each signed by one or more requesting
shareholder.
28. Unless a longer period for notice is prescribed by the Companies Law, at
least ten (10) days and not more than sixty (60) days notice of any General
Meeting shall be given, specifying the place, the day and the hour of
meeting and, in the case of special business, the nature of such business,
shall be given in the manner hereinafter mentioned, to such shareholders as
are under the provisions of these Articles, entitled to receive notices
from the Company. Notices shall be given by mail or by personal delivery to
every registered shareholder of the Company, to his address as described in
the Shareholders Register of the Company or such other address as
designated by him in writing for this purpose. Provided that the accidental
omission to give such notice to, or the non-receipt of such notice by, any
such shareholder shall not invalidate any resolution passed or proceeding
held at any such meeting and, with the consent of all the shareholders for
the time being entitled to receive notice of meetings, a meeting may be
convened upon a shorter notice or without notice, and generally in such
manner as such shareholders may approve. Such consent may be given at the
meeting or retrospectively after the meeting. If the shareholder did not
provide the Company any address for the delivery of notices, the
shareholder shall be deemed to have waived his right to receive notices.
29. Only shareholders of record as reflected on the Company's Share Register at
the close of business on the date fixed by the Board of Directors as the
record date determining the then shareholders who will be entitled to vote,
shall be entitled to notice of, and to vote, in person or by proxy, at a
General Meeting and any postponement or adjournment thereof. The Board of
Directors will fix the record date of not less than ten (10) nor more than
sixty (60) days before the date of the General Meeting.
-41-
PROCEEDINGS AT GENERAL MEETINGS
30. No business shall be transacted at any General Meeting unless a quorum is
present when the meeting proceeds to business. The quorum at any Meeting
shall be two shareholders present in person or by proxy, holding or
representing at least thirty three percent (33%) of the total voting rights
in the Company. A company being a shareholder shall be deemed to be
personally present for the purpose of this Article if represented by its
representative duly authorized in accordance with Article 42.
31. If, within half an hour from the time appointed for the holding of a
General Meeting, a quorum is not present, the meeting shall stand adjourned
to the same day in the next week at the same time and place, or any time
and hour as the Board of Directors shall designate and state in a notice to
the shareholders entitled to vote at the original meeting, and if, at such
adjourned meeting, a quorum is not present within half an hour from the
time appointed for holding the meeting any two shareholders present in
person or by proxy shall constitute a quorum. Notwithstanding the
aforesaid, if a General Meeting was convened at the demand of shareholders
as permitted by Section 63(b) of the Companies Law, then a quorum at such
adjourned meeting shall be present only if one or more shareholders are
present who held in the aggregate at least 5% of the issued share capital
of the Company and at least 1% of the voting rights in the Company or one
or more shareholders who hold in the aggregate at least 5% of the voting
rights in the Company.
32. (a) At every General Meeting, a chairman shall be elected for that
meeting.
(b) The election of the meeting's chairman shall be held at the beginning
of the meeting's discussions, which shall be opened by the chairman of
the Board of Directors or by a Director whom the Board of Directors
authorized to do so.
33. The chairman may, with the consent of any meeting at which a quorum is
present, and shall, if so directed by the meeting, adjourn any meeting from
time to time and from place to place as the meeting shall determine.
Whenever a meeting is adjourned pursuant to the provisions of this Article
for more than seven days, notice of the adjourned meeting shall be given in
the same manner as in the case of an original meeting. Save as aforesaid,
no shareholder shall be entitled to any notice of an adjournment, or of the
business to be transacted at an adjourned meeting. No business shall be
transacted at any adjourned meeting other than the business which might
have been transacted at the meeting from which the adjournment took place.
VOTES OF SHAREHOLDERS
34. Except as otherwise provided in these Articles, any resolution at a General
Meeting shall be deemed adopted if approved by the holders of a majority of
the voting rights in the Company represented at the meeting in person or by
proxy and voting thereon. In the case of an equality of votes, either on a
show of hands or a poll, the chairman of the meeting shall not be entitled
to a further or casting vote.
35. At all General Meetings, a resolution put to a vote at the meeting shall be
decided on a show of hands unless, before or upon the declaration of the
result of the show of hands, a poll in writing be demanded by the chairman
(being a person entitled to vote), or by at least two shareholders present,
in person or by proxy, holding at least 5% of the issued share capital of
-42-
the Company and, unless a poll be so demanded, a declaration by the
chairman of the meeting that a resolution has been carried, or has been
carried unanimously or by a particular vote, or lost, or not carried by a
particular vote, shall be conclusive, and an entry to that effect in the
Minute Book of the Company shall be conclusive evidence thereof, without
proof of the number or proportion of the votes recorded in favor of or
against such resolution.
36. If a poll be demanded in manner aforesaid, it shall be taken forthwith, and
the result of the poll shall be deemed to be the resolution of the meeting
at which the poll was demanded. The demand of a poll shall not prevent the
continuance of a meeting for the transaction of any business other than the
question on which a poll has been demanded.
37. Any shareholder which is not a natural person may, by resolution of its
directors or other governing body, authorize such person as it thinks fit
to act as its representative at any General Meeting, and the person so
authorized to the satisfaction of the Company shall be entitled to exercise
the same powers on behalf of such company, which he represents as that
company could exercise if it were an individual shareholder.
38. Subject to any rights or restrictions for the time being attached to any
class or classes of shares, every shareholder shall have one vote for each
share of which he is the holder, whether on a show of hands or on a poll.
39. If any shareholder be a lunatic, idiot, or non compos mentis, he may vote
by his committee, receiver, curator bonis or other legal curator, and such
last-mentioned persons may give their votes either personally or by proxy.
40. If two or more persons are jointly entitled to a share then, in voting upon
any question, the vote of the senior person who tenders a vote, whether in
person or by proxy, shall be accepted to the exclusion of the votes of the
other registered holders of the share and, for this purpose, seniority
shall be determined by the order in which the names stand in the
Shareholders Register.
41. Votes may be given either personally or by proxy. A proxy need not be a
shareholder of the Company.
42. (a) The instrument appointing a proxy shall be in writing in the usual
common form, or such form as may be approved by the Board of
Directors, and shall be signed by the appointor or by his attorney
duly authorized in writing or, if the appointor is a corporation, the
corporation shall vote by its representative, appointed by an
instrument duly signed by the corporation.
(b) The instrument appointing a proxy shall be deemed to include
authorization to demand a poll or to vote on a poll on behalf of the
appointor.
43. A vote given in accordance with the terms of an instrument of proxy shall
be valid notwithstanding the previous death or insanity of the principal,
or revocation of the proxy, or transfer of the share in respect of which
the vote is given, unless an intimation in writing of the death, revocation
or transfer shall have been received at the Office before the commencement
of the meeting or adjourned meetings at which the proxy is used.
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44. The instrument appointing a proxy shall be deposited at the Office or at
such other place or places, whether in Israel or elsewhere, as the Board of
Directors may from time to time, either generally or in a particular case
or class of cases prescribe, at least forty-eight (48) hours before the
time appointed for holding the meeting or adjourned meeting at which the
person named in such instrument proposes to vote; otherwise, the person so
named shall not be entitled to vote in respect thereof; but no instrument
appointing a proxy shall be valid after the expiration of twelve months
from the date of its execution.
45. Subject to the provisions of the Companies Law, a resolution in writing
(approved by letter, telex, facsimile or otherwise) by all the
shareholders, in person or by proxy, for the time being entitled to vote at
a General Meeting of the Company, shall be as valid and as effectual as a
resolution adopted by a General Meeting duly convened, held and constituted
for the purpose of passing such resolution.
46. A shareholder will be entitled to vote at the Meetings of the Company by
several proxies appointed by him, provided that each proxy shall be
appointed with respect to different shares held by the appointing
shareholder. Every proxy so appointed on behalf of the same shareholder
shall be entitled to vote as he sees fit.
47. No person shall be entitled to vote at any General Meeting (or be counted
as a part of the quorum thereof) unless all calls then payable by him in
respect of his shares in the Company shall have been paid.
DIRECTORS POWERS AND RESPONSIBILITIES OF THE BOARD OF DIRECTORS
48. (a) Without derogating from the authority of the General Meeting pursuant
to these Articles and the Companies Law, the Board of Directors shall
formulate the Company's policy and shall supervise the exercise of the
General Manager's office and his acts, and as part thereof it -
(1) shall determine the Company's plans of activity, the principles
for financing such plans and the order of priority among them;
(2) shall examine the Company's financial situation and set the
framework of credit which the Company may take;
(3) shall determine the organizational structure and the compensation
policy of employees;
(4) may decide to issue a series of debentures;
(5) is responsible for the preparation and approval of the financial
reports according to Section 171 to the Companies Law;
(6) shall report to the Annual Meeting about the state of the
Company's affairs and on its business results, as required by
Section 173 to the Companies Law;
(7) shall appoint and dismiss the General Manager, as provided by
Section 250 to the Companies Law;
(8) shall decide on the acts and transactions that require its
approval in accordance with these articles or under the
provisions of Sections 255 and 268 to 275 to the Companies Law;
(9) may issue shares and securities convertible into shares up to the
limit of the Company's registered share capital, under the
provisions of Section 288 to the Companies Law;
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(10) may decide on a distribution according to Sections 307 and 308 to
the Companies Law;
(11) shall express its opinion on a special purchase offer, according
to Section 329 to the Companies Law.
(b) The powers of the Board of Directors under this Article cannot be
delegated to the General Manager.
DIRECTORS
49. The Board of Directors of the Company shall consist of a minimum of two (2)
and a maximum of eleven (11) Directors.
50. (a) Except for External Directors (as defined in the Companies Law), all
directors shall be classified, with respect to the time for which they
severally hold office, into three classes, as nearly equal in number
as possible, one class to hold office initially for a term expiring at
the 2001 Annual Meeting of the Company, another class to hold office
initially for a term expiring at the 2002 Annual Meeting of the
Company, and another class to hold office initially for a term
expiring at the 2003 Annual Meeting of the Company, with the members
of each class to hold office until their successors have been duly
elected and qualified. At each Annual Meeting following the 2001
Annual Meeting, the class of directors whose term expires at that
meeting shall be elected to hold office for a term expiring at the
Annual Meeting of the Company held in the third year following the
year of their election and until their successors have been duly
elected and qualified.
(b) Any director or directors may be removed from office at any time, but
only for "cause" and only by the affirmative vote of (i) the holders
of the majority of the Ordinary Shares present in person or by proxy
and voting thereon, or (ii) a majority of the Board of Directors. For
purposes of this clause (b): "cause" shall mean the willful and
continuous failure of a director substantially to perform such
director's duties to the Company (other than any such failure
resulting from incapacity due to physical or mental illness) or the
willful engaging by a director in gross misconduct materially and
demonstrably injurious to the Company.
(c) The Company shall appoint External Directors as and to the extent
required by, and they shall hold office according to, the Companies
Law, as long as the Company is required by the Companies Law to
appoint External Directors.
51. (a) No person shall be nominated for the office of a director at a General
Meeting, except for directors whose term of office expired at the time
the General Meeting was convened, persons nominated for the office of
a director by the Board of Directors, and as provided for in Article
51(b).
(b) Any shareholder entitled to receive notice of and vote at a General
Meeting desiring to propose a nominee for director to be elected at an
Annual General Meeting of Shareholders has to deliver notice to the
Secretary, at the Company's principal offices, not later than ninety
(90) days prior to the date of the annual General Meeting at which
meeting such election is to occur, whichever date is later. The
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notice shall set forth: (i) the name and address, as they appear on
the Company's share register, of the shareholder proposing such
nominee, (ii) the identity and background of the nominee, (iii) the
class and number of shares of the Company beneficially owned by such
shareholder, (iv) a representation that such shareholder is a
shareholder of record and intends to appear by person or by proxy at
such General Meeting to bring the General Meeting the nominee
specified in the notice, (v) a brief description of the reasons for
wanting to nominate such nominee as a director, (vi) any material
interest that the shareholder has in the election of such nominee and
(vii) the written consent of the nominee to be elected as a director
of the Company.
52. The Directors in their capacity as such, shall be entitled to receive
remuneration and reimbursement of expenses incurred by them in the course
of carrying out their duties as Directors.
53. The office of a Director shall be vacated, ipso facto:
(a) upon his resignation by written notice signed by him and delivered to
the Office;
(b) if he becomes bankrupt or enters into an arrangement with his
creditors;
(c) if he is or becomes of unsound mind;
(d) if he be relieved of his office as provided in Article 50(b) hereof;
(e) if he is prevented by applicable law from serving as a director of the
Company.
(f) if the Board of Directors terminate his office according to Section
231 of the Companies Law;
(g) if court order is given according to Section 233 of the Companies Law.
54. (a) Subject to the provisions of the Companies Law, no Director shall be
disqualified by virtue of his office from holding any office, or
deriving any profit from any other office in the Company or from any
company in which the Company shall be a shareholder or otherwise
interested, or from contracting with the Company as a vendor,
purchaser or otherwise.
(b) Transactions entered into by the Company in which an office holder of
the Company has a personal interest, directly or indirectly, will be
valid in respect of the Company and the office holder only if approved
by the Company's Board of Directors and, if such transactions are
"irregular transactions" as defined in the Companies Law, only if
approved in accordance with the requirements of the Companies Law.
55. A Director who has a personal interest in a matter which is brought for
discussion before the Board of Directors may participate in said
discussion, provided that he shall neither vote in nor attend discussions
concerning the approval of the activities or the arrangements. If said
Director did vote or attend as aforesaid, the approval given to the
aforesaid activity or arrangements shall be invalid.
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56. In the event of one or more vacancies on the Board of Directors, the
continuing Directors may continue to act as long as the Board of Directors
consists of at least a majority of the total number of Directors elected.
However, in the event that the remaining Directors are not a majority of
the total number of Directors elected, the remaining Director or Directors
may call for the convening of a General Meeting for the purpose of the
election of Directors.
57. Subject to the limitation on the number of Directors as specified in
Article 49, the Board of Directors may, at any time and from time to time,
appoint any other person as a Director, whether to fill a vacancy or to add
to their number. Any Director so appointed shall hold office until the next
Annual Meeting at which the term of the class to which they have been
elected expires, and may be re-elected.
58. In case of any increase in the number of directors, the additional director
or directors, and in case of any vacancy in the Board of Directors due to a
death, resignation, removal, disqualification or any other cause, the
successors appointed according to Article 57 to fill the vacancies shall be
elected by a majority of the directors then in office.
CONVENING THE BOARD OF DIRECTORS
59. (a) The Chairman of the Board of Directors may convene a meeting of the
Board of Directors at any time.
(b) The Board of Directors shall hold a meeting on a specified subject on
the demand of two Directors, or if the Board of Directors consists of
up to five Directors one Director;
(c) The Chairman of the Board of Directors shall convene the Board of
Directors upon a demand said in Sub-article (b) of this Article 59 or
if Section 122(d) to the Companies Law applies, due to a notice or
report from the General Manager or due to a notice from the Auditor of
the Company under Section 169 to the Companies Law.
(d) If a meeting of the Board of Directors was not convened within 14 days
after the date of a demand pursuant to Sub-article (b) of this Article
59, or after the date of a notice or report of the General Manager
according to Section 122(d) to the Companies Law, or after notice of
the Auditor under Section 169 to the Companies Law, then each of those
persons enumerated in Sub-articles (b) and (c) may convene a meeting
of the Board of Directors, which shall discuss the subject specified
in the demand, notice or report, as the case may be.
MEETINGS OF THE BOARD OF DIRECTORS AND THEIR CONDUCT
60. The agenda of a meeting of the Board of Directors shall be set by the
Chairman of the Board of Directors, and it shall include:
(1) subjects determined by the Chairman of the Board of Directors;
(2) subjects determined as said in Section 98 to the Companies Law;
(3) any subject which a Director or the General Manager requested at a
reasonable time before the meeting was convened - of the Chairman of
the Board of Directors to include in the agenda
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61. (a) Notice of a meeting of the Board of Directors shall be delivered to
all its members at a reasonable time before the meeting, but not later
than forty eight (48) hours prior to the time set for any such
meeting,
(b) A notice under Sub-article (a) shall be delivered to the Director's
address that was given to the Company in advance, and in it shall be
stated the time of the meeting and the place where it will convene, as
well as reasonable details on all the subjects on the agenda.
62. Notwithstanding the provision of Article 61 hereto, the Board of Directors
may - with the consent of all the Directors - convene for a meeting without
notice.
GENERAL MANAGER
63. The Board of Directors will appoint one or more persons as General Manager,
and they will be titled as President or Chief Executive Officer (CEO) or
Chief Operating Officer (COO). The Board of Directors may from time to time
remove or discharge him or them from office (subject to the provisions of
any agreement between any such person and the Company) and appoint another
or others in his or their place or places.
64. The Board of Directors may from time to time appoint one or more Vice
Presidents for certain functions, to carry out duties delegated to him
(them) by the President, CEO or COO.
65. To the extent permitted by the Companies Law, the Board of Directors may
from time to time confer upon and delegate to a President, CEO, COO or
other Executive Officer then holding office, such authorities and duties of
the Board of Directors as they may deem fit, and they may delegate such
authorities and duties for such period and for such purposes and subject to
such conditions and restrictions which they consider in the bests interests
of the Company, and they may delegate such authorities and duties without
waiving the authorities of the Board of Directors with respect thereto and
it may from time to time revoke, cancel and alter such authorities and
duties in whole or in part.
66. The remuneration of a President, CEO, COO or other Executive Officer shall
be fixed by the Board of Directors, taking into consideration any agreement
between him and the Company, and it may be in whole or in part, in the form
of salary, share options, or commissions or profit sharing or a combination
thereof.
DIRECTOR'S ACTS AND AUTHORITIES
67. The management of the business of the Company shall be vested in the Board
of Directors, which may exercise all such powers and do all such acts and
things as the Company is authorized to exercise and do, and are not hereby
or by law required to be exercised or done by the Company in a General
Meeting. The authority conferred on the Board of Directors by this Article
67 shall be subject to the provisions of the Companies Law, of these
Articles and any regulation or resolution consistent with these Articles
adopted from time to time by the Company in a General Meeting, provided,
however that no such regulation or resolution shall invalidate any prior
act done by or pursuant to a decision of the Board of Directors which would
have been valid if such regulation or resolution had not been adopted.
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68. The Directors may postpone their meetings and otherwise regulate them as
they shall deem fit. The quorum for the dispatch of business by the Board
of Directors shall be determined by the Directors and, if not so
determined, shall be the majority of the Directors then holding office.
69. A resolution in writing signed or otherwise approved in writing (by letter,
telegram, telex, facsimile, electronic mail or otherwise) by all the
Directors then in office shall be as valid and as effectual as a resolution
adopted by the Board of Directors at a meeting of the Board of Directors
duly convened and held.
70. Members of the Board of Directors, or of any committee designated by the
Board of Directors, may participate in a meeting of the Board of Directors,
or of any committee, by means of a telephone conference or similar
communications equipment by means of which all persons participating in the
meeting can hear each other, and such participation in a meeting shall
constitute attendance in person at the meeting.
71. (a) The Board of Directors shall elect a Chairman for the meeting and fix
the term of his office. The CEO shall not serve as Chairman of the
Board of Directors and vice versa unless the holders of two thirds of
the voting rights in the Company represented in person or by proxy and
voting on such resolution at a General Meeting, who are not
controlling shareholders of the Company or their representatives and
who are present at the vote, adopt a decision to appoint the Chairman
of the Board of Directors as the CEO, for a period not exceeding three
years after the date of the adoption of the decision.
(b) In the event that a Chairman was not elected or if the Chairman should
fail to be present at a meeting fifteen (15) minutes after the time
set for its convening, the remaining Directors shall elect one of
those present to be Chairman of the meeting.
(c) All questions that arise at meetings of the Board of Directors shall
be decided by a majority of votes. In the event of a tie vote, the
Chairman of the Board of Directors shall cast the deciding vote.
72. Any meeting of the Board of Directors at which a quorum is present shall
have the authority to exercise all or part of the authorities, powers of
attorney and discretion invested at such time in the Directors or regularly
exercised by them.
73. Subject to the Companies Law, the Board of Directors may delegate its
authorities in whole or in part to committees as it shall deem fit, and it
may from time to time revoke such delegation. Any committee so created
must, in exercising the authorities granted to it, adhere to all the
instructions of the Board of Directors given from time to time and/or to
the provisions of the Companies Law.
74. All acts done bona fide at any meeting of the Board of Directors, or of a
committee of the Board of Directors or by any person(s) acting as
Director(s) shall, notwithstanding that it may afterwards be discovered
that there was some defect in the appointment of the participants in such
meeting or any of them or any person(s) acting as aforesaid, or that they
or any of them or any person(s) acting as aforesaid, or that they or any of
them were disqualified, be as valid as if there were no such defect or
disqualification.
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75. The Board of Directors shall cause proper Minutes to be kept of the
following:
(a) the names of all the Directors present at any meeting of the Board of
Directors and at any meeting of a committee of the Board of Directors;
(b) all proceedings and resolutions of General Meetings of the Company,
Board of Directors' meetings and Committees of the Board of Directors'
meetings.
Any Minutes as aforesaid, if purporting to be signed by the Chairman of
such meeting or by the Chairman of the next succeeding meeting, shall be
accepted as prima facie evidence of the matters therein recorded.
76. [Reserved.]
SHAREHOLDERS REGISTERS
77. Subject to, and in accordance with, the provisions of the Companies Law,
the Company may cause Shareholder Register to be kept at any place in
Israel and may cause a copy of the Shareholder Register to be kept outside
Israel as the Board of Directors may think fit and, subject to all
applicable legal requirements, the Board of Directors may from time to time
adopt such rules and procedures as it may think fit in connection with the
keeping of such registers. In addition to the Shareholders Register, the
Company shall also keep a Register of Substantial Shareholders as defined
in the Companies Law.
SECRETARY
78. The Board of Directors may from time to time appoint a Secretary to the
Company as it deems fit, and may appoint a temporary Assistant Secretary
who shall act as Secretary for the term of his appointment.
RIGHTS OF SIGNATURE - STAMP AND SEAL
79. (a) Authorization to sign on behalf of the Company and thereby bind it
shall be made and granted from time to time by the Board of Directors.
The Company shall have at least one rubber stamp. The Company shall be
bound by the signature of the aforesaid appointees if appearing
together after its stamp or printed name.
(b) The Board of Directors may provide for a seal. If the Board of
Directors so provides, it shall also provide for the safe custody
thereof. Such seal shall not be used except by the authority of the
Board of Directors and in the presence of the person(s) authorized to
sign on behalf of the Company, who shall sign every instrument to
which such seal is affixed.
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DIVIDENDS
80. Subject to any preferential, deferred, qualified or other rights,
privileges or conditions attached to any special class of shares with
regard to dividends, the profits of the Company available for dividend and
resolved to be distributed shall be applied in payment of dividends upon
the shares of the Company in proportion to the amount paid up or credited
as paid up per the nominal value thereon respectively. Unless not otherwise
specified in the conditions of issuance of the shares, all dividends with
respect to shares which were not fully paid up within a certain period, for
which dividends were paid, shall be paid proportionally to the amounts paid
or credited as paid on the nominal value of the shares during any portion
of the abovementioned period.
81. The Board of Directors may declare a dividend to be paid to the
shareholders according to their rights and interests in the profits, and
may fix the record date for eligibility and the time for payment.
82. The Directors may from time to time pay to the shareholders on account of
the next forthcoming dividend such interim dividends as, in their judgment,
the position of the Company justifies.
83. A transfer of shares shall not pass the right to any dividend declared
thereon after such transfer and before the registration of the transfer.
84. Notice of the declaration of any dividend, whether interim or otherwise,
shall be given to the holders of registered shares in the manner
hereinafter provided.
85. Unless otherwise directed, any dividend may be paid by check, bank transfer
or warrant, sent through the post to the registered address of the
shareholder or person entitled or, in the case of joint registered holders,
to that one of them first named in the register in respect of the joint
holding. Every such check shall be made payable to the order of the person
to whom it is sent. The receipt by the person whose name, at the date of
the declaration of the dividend, appears in the register of shareholders as
the owner of any share or, in the case of joint holders, of any one of such
joint holders, shall be a good discharge to the Company of all payments
made in respect of such share. All dividends unclaimed for one year after
having been declared may be invested or otherwise used by the Directors for
the benefit of the Company until claimed. No unpaid dividend or interest
shall bear interest as against the Company.
86. The Board of Directors may determine that, a dividend may be paid, wholly
or partly, by the distribution of specific assets of the Company or by
distribution of paid-up shares, debentures or debenture stock or any other
securities of the Company or of any other companies or in any one or more
of such ways in the manner and to the extent permitted by the Companies
Law.
PROHIBITED DISTRIBUTION
87. (a) If the Company made a prohibited distribution as defined in the
Companies Law, then the shareholder must return to the Company
whatever he received, unless he did not know and did not need to know
that the distribution carried out was prohibited.
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(b) It is assumed that a shareholder in the Company, who at the time of
the distribution is not a Director, General Manager or controlling
member of the Company, did not know and did not need to know that the
distribution carried out was a prohibited distribution.
88. If the Company carried out a prohibited distribution, then every person who
was a Director at the time of the distribution shall be treated as a person
who thereby committed breach of trust against the Company, unless he proved
one of the following:
(1) that he opposed the prohibited distribution and took all reasonable
steps to prevent it;
(2) that he exercised reasonable reliance on information under which - had
it not been misleading - the distribution would have permitted;
(3) that under the circumstances of the case he did not know and did not
need to know of the distribution.
MERGER
89. A merger requires approval by the Board of Directors and by the General
Meeting, in accordance with the provisions of the Companies Law.
90. (a) The Board of Directors of the Company, while considering whether to
approve the merger, shall discuss and determine taking the Company's
financial situation into account - whether in its opinion there is a
reasonable suspicion that in consequence of the merger the merged
Company will not be able to meet the Company's obligations to its
creditors.
(b) If the Board of Directors determined that there is a suspicion as said
in Sub-article (a), then it shall not approve the merger.
91. If each of the Boards of Directors of the merging companies approved the
merger, then they shall jointly draw up a proposal for the approval of the
merger (hereafter: merger proposal) and sign it.
92. (a) The Company shall deliver the merger proposal to the Companies
Registrar within three days after the General Meeting was called.
(b) The Company shall inform the Companies Registrar of the General
Meetings decision within three days after the decision was adopted,
shall inform him that the notice was given to the creditors under
Section 318 to the Companies Law, and shall also deliver to the
Registrar a copy of the Court decision under Sections 319 to 321 to
the Companies Law within three days after the said decision was given.
ACCOUNTS
93. The Board of Directors shall cause accurate books of account to be kept in
accordance with the provisions of the Companies Law and of any other
applicable law. Such books of account shall be kept at the Registered
Office of the Company, or at such other place or places as the
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Board of Directors may think fit, and they shall always be open to
inspection by all Directors. No shareholder not being a Director shall have
any right to inspect any account or book or other similar document of the
Company, except as conferred by law or authorized by the Board of Directors
of the Company.
94. At least once in every fiscal year the accounts of the Company shall be
audited and the correctness of the profit and loss account and balance
sheet certified by one or more duly qualified auditors.
95. The appointment, authorities, rights and duties of the auditor(s) of the
Company shall be regulated by the applicable law.
NOTICES
96. (a) A notice or any other document may be served by the Company upon any
shareholder either personally or by sending it by prepaid mail in
Israel (by air mail if sent to a place outside Israel, other than the
U.S. or Canada, or by first class mail if sent within the U.S. or
Canada) addressed to such shareholder at "his" address as reflected on
the Company's Shareholders Register or such other address as he may
have designated in writing for the receipt of notices and other
documents. Any written notice or other document shall be deemed to
have been served forty-eight (48) hours after it has been mailed
(seven (7) days if sent to a place or mailed at a place outside of
Israel, forty-eight (48) hours if sent within the U.S. or Canada), or
when actually received by the addressee if sooner than forty-eight
(48) hours or seven (7) days, as the case may be, after it has been
mailed, or when actually tendered in person to such shareholder (or to
the Secretary or the President of the Company, as the case may be);
provided, however, that such notice or other document mentioned above
may be sent by facsimile and confirmed by registered mail as
aforesaid, and such notice shall be deemed to have been given
twenty-four (24) hours after such facsimile has been sent or when
actually received by such shareholder (or by the Company), whichever
is earlier. If a notice is, in fact, received by the addressee, it
shall be deemed to have been duly served when received,
notwithstanding that it was defectively addressed or failed in some
respect to comply with the provisions of this Article.
(b) Unless otherwise specified in bearer share warrants, the holders of
such warrants shall not be entitled to receive notice of any General
Meeting of the Company, and the Company is under no obligation to give
notice of General Meetings to a person entitled to a share by virtue
of its delivery to him, unless he is duly registered as a shareholder.
(c) All notices to be given to the shareholders shall, with respect to any
shares to which persons are jointly entitled, be given to whichever of
such persons is named first in the Shareholders Register, and any
notice so given shall be sufficient notice to the holders of such
shares.
(d) Any shareholder whose address is not described in the Shareholders
Register, and who shall not have designated in writing an address for
the receipt of notices, shall not be entitled to receive any notice
from the Company.
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(e) Any notice or other document served upon or sent to any shareholder by
publication in accordance with these Articles shall, notwithstanding
that he be then deceased or bankrupt, and whether or not the Company
has notice of his death or bankruptcy, be deemed to be duly served or
sent in respect of any shares held by him (either alone or jointly
with others) until some other person is registered in his stead as the
holder or joint holder of such shares, and such service or sending
shall be a sufficient service on or sending to his heirs, executors,
administrators or assigns and all other persons (if any) interested in
such share.
(f) Where a given number of days' notice, or notice extending over any
period, is required to be given, the day of service shall be counted
in such number of days or other period.
RECONSTRUCTION
97. On any sale of the undertaking of the Company, the Board of Directors or
the liquidators on a winding-up may, if authorized by a majority vote at a
meeting of shareholders, accept fully paid up shares, debentures or
securities of any other company, whether Israeli or foreign, either then
existing or to be formed, for the purchase, in whole or in part, of the
property of the Company, and the Board of Directors (if the profits of the
Company permit), or the liquidators (on a winding-up), may distribute such
shares or securities, or any other property of the Company, amongst the
shareholders without realization, or vest the same in trustees for them,
and the shareholders of the Company at any General Meeting may provide for
the distribution or appropriation of the cash, shares or other securities,
benefits or property, in accordance with the legal rights of the
shareholders or contributors of the Company, and for the valuation of any
such securities or property at such price and in such manner as the meeting
may approve, and all holders of shares shall be bound to accept and shall
be bound by any valuation or distribution so authorized, and waive all
rights in relation thereto, save only in the case the Company is proposed
to be, or is, in the course of being wound up, such statutory rights (if
any) under the provisions of the Statutes as are incapable of being varied
or excluded by these presents.
INDEMNITY AND INSURANCE OF OFFICERS
98. The Company may, to the maximum extent permitted by the Companies Law:
(a) enter into a contract for the insurance of the liability, in whole or
in part, of any of its Officers,
(b) may indemnify an Officer of the Company post factum;
(c) may indemnify an Officer of the Company in advance for the following
events:
(i) Any financial obligation imposed on an Officer in favor of a
third party by a court judgment, including a compromise judgment
approved by court (provided that the Company approved the
compromise in advance) or an arbitrator's award approved by court
(provided that it was given pursuant to arbitration agreed to by
the Company in advance), for an act or omission performed by an
Officer in his capacity as an Officer; and
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(ii) reasonable legal expenses, including attorneys' fees, expended by
or charged to an Officer or adjudicated against an Officer by a
court in a proceeding commenced against an Officer by the Company
or on its behalf or by another person, or in a criminal charge
from which an Officer was acquitted, or in a criminal charge that
does not require intent, in which an Officer was convicted, all
for an act or omission performed in his capacity as an Officer.
Such indemnity shall apply in certain foreseeable events and up
to a feasible amount under the circumstances, as determined by
the Board of Directors; and
(d) exempt an Officer prospectively from liability, in whole or in part,
for damage resulting from a breach of his or her duty of care toward
the Company.
WINDING-UP
99. If the Company shall be wound up, whether voluntarily or
otherwise, the liquidators may, subject to the provision of the
Statutes, divide among the shareholders in specie any part of the
assets of the Company and may, with like sanction, vest any part
of the assets of the Company in trustees upon such trusts, for
the benefit of the shareholders, as the liquidators with like
sanction shall think fit.
BUSINESS COMBINATIONS WITH INTERESTED SHAREHOLDERS
100. Notwithstanding any other provision of these Articles, the
Company shall not engage in any business combination with any
interested shareholder for a period of three years following the
time that such shareholder became an interested shareholder,
unless:
(a) prior to such time the Board of Directors of the Company
approved either the business combination or the transaction
which resulted in the shareholder becoming an interested
shareholder, or
(b) upon consummation of the transaction which resulted in the
shareholder becoming an interested shareholder, the
interested shareholder owned at least 85% of the voting
shares of the Company outstanding at the time the
transaction commenced, excluding for purposes of determining
the number of shares outstanding those shares owned (i) by
persons who are directors and also officers and (ii)
employee share plans in which employee participants do not
have the right to determine confidentially whether shares
held subject to the plan will be tendered in a tender or
exchange offer, or
(c) at or subsequent to such time the business combination is
approved by the Board of Directors and authorized at a
General Meeting, and not by written consent, by the
affirmative vote of at least 66 2/3% of the outstanding
voting shares which is not owned by the interested
shareholder.
(d) A shareholder becomes an interested shareholder
inadvertently and (i) as soon as practicable diverts itself
of ownership of sufficient shares so that the shareholder
ceases to be an interested shareholder; and (ii) would not,
at any time within the three - year period immediately prior
to a business combination between the Company and such
shareholder, have been an interested shareholder but for the
inadvertent acquisition of ownership; or
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(e) The business combination is proposed prior to consummation or
abandonment of and subsequent to the earlier of the public
announcement or the notice required hereunder of a proposed
transaction which (i) constitutes one of the transactions
described in the second sentence of this paragraph; (ii) is with
or by a person who either was not an interested shareholder
during the previous three years or who became an interested
shareholder with the approval of the Company's Board of
Directors; and (iii) is approved or not opposed by a majority of
the members of the Boards of Directors then in office who were
directors prior to any person becoming an interested shareholder
during the previous three years or were recommended for election
or were elected to succeed such directors by a majority of such
directors. The proposed transactions referred to in the preceding
sentences are limited to (x) a merger or consolidation of Company
(except for merger in respect of which no vote of shareholders of
the Company is required according to the Companies Law); (y) a
sale, lease, exchange, mortgage, pledge, transfer or other
disposition (in one transaction or a series of transactions),
whether as part of a dissolution or otherwise of assets of the
Company or of any direct or indirect majority-owned subsidiary of
the Company (other than to any direct or indirect wholly owned
subsidiary or to the Company) having an aggregate market value
equal to 50% or more of either that aggregate market value of all
of the assets of the Company determined on a consolidated basis
or the aggregate market of all the outstanding shares of the
Company; or (z) a proposed tender or exchange offer for 50% or
more of the outstanding voting shares of the Company. The Company
shall give not less than 20 days notice to all interested
shareholders prior to the consummation of any of the transaction
described in clause (x) or (y) of the second sentence of this
paragraph.
As used in this Article only, the term:
(1) "affiliate" means a person that directly, or indirectly
through one or more intermediaries, controls, is controlled
by or is under common control with another person.
(2) "associate" when used to indicate a relationship with any
person, means (I) any corporation, partnership,
unincorporated association or other entity of which such
person is a director, officer or partner or is, directly or
indirectly, the owner of 20% or more of any class of voting
shares, (ii) any trust or other estate in which such person
has at least a 20% beneficial interest or as to which such
person serves as trustee or in a similar fiduciary capacity,
and (iii) any relative or spouse of such person, or any
relative of such spouse, who has the same residence as such
person.
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(3) "business combination" when used in reference to the Company
and any interested shareholder of the Company, means:
(i) any merger or consolidation of the Company or any
direct or indirect majority owned subsidiary of the
Company with (A) an interested shareholder, or (B) with
any other corporation, partnership, unincorporated
association or other entity if the merger or
consolidation is caused by an interested shareholder
and as a result of such merger or consolidation
Sub-article (a) of this Article 100 is not applicable
to the surviving entity;
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(ii) any sale, lease, exchange, mortgage, pledge, transfer
or other disposition (in one transaction or a series of
transactions), except proportionately as a shareholder
of such Company to or with the interested shareholder,
whether as part of a dissolution or otherwise, of
assets of the Company or of any direct or indirect
majority owner subsidiary of the Company, which assets
have an aggregate market value equal to 10% or more of
either the aggregate market value of all of the assets
of the Company determined on a consolidated basis or
the aggregate market value of all of the outstanding
shares of the Company.
(iii) any transaction which results in the issuance or
transfer by the Company or by any direct or indirect
majority-owned subsidiary of the Company of any shares
of the Company or of such subsidiary to the interested
shareholder, except (A) pursuant to the exercise,
exchange or conversion of securities exercisable for or
convertible into shares of the Company or any such
subsidiary, which securities were outstanding prior to
the time that the interested shareholder became such,
(B) pursuant to a dividend or distribution paid or
made, or the exercise, exchange or conversion of
securities exercisable for, exchangeable for or
convertible into shares of the Company or any such
subsidiary, which security is distributed pro rata to
all holders of a class or series of shares of the
Company subsequent to the time the interested
shareholder became such, (C) pursuant to an exchange
offer by the Company to purchase shares made on the
same terms to all holders of said shares or (D) any
issuance or transfer of shares by the Company;
provided, that in no case under (B)-(D) above shall
there be an increase in the interested shareholder's
proportionate share of the shares of any class or
series of the Company or of the voting shares of the
Company.
(iv) any transaction involving the Company or any direct or
indirect majority owned subsidiary of the Company which
has the effect directly or indirectly of increasing the
proportionate share of the shares of any class or
series or securities convertible into the shares of any
class or series of the Company or of any such
subsidiary which is owned by the interested shareholder
except as a result of immaterial changes due to
fractional share adjustments or as a result of any
purchase or redemption of any shares not caused,
directly or indirectly, by the interested shareholder;
or
(v) any receipt by the interested shareholder of the
benefit, directly or indirectly (except proportionately
as a shareholder of such Company), of any loans,
advances, guarantees, pledges or any other financial
benefits (other than those expressly permitted in
subparagraphs (i)-(iv) above) provided by or through
the Company or any direct or indirect majority owned
subsidiary.
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(4) "control" including the term "controlling," "controlled by"
and "under common control with," means the possession,
directly or indirectly, of the power to direct or cause the
direction of the management and policies of a person,
whether through the ownership of voting shares, by contract
or otherwise. A person who is the owner of 20% or more of
the outstanding voting shares of any company, partnership,
unincorporated association or other entity shall be presumed
to have control of such entity. Notwithstanding the
foregoing, a presumption of control shall not apply where
such person holds voting shares in good faith and not for
the purpose of circumventing this Article as an agent, bank,
broker, nominee, custodian or trustee for one or more owners
who do not individually or as a group have control of such
entity.
(5) "interested shareholder" means any person (other than the
Company and any direct or indirect majority owner subsidiary
of the Company) that (i) is the owner of 15% or more of the
outstanding voting shares of the Company, or (ii) is an
affiliate or associate of the Company and was the owner of
15% or more of the outstanding voting shares of the Company
at any time within the three year period immediately prior
to that date on which it is sought to be determined whether
such person is an interested shareholder and the affiliates
and associates of such person, or (iii) any person whose
ownership of shares in excess of the 15% limitation set
forth herein is the result of action taken solely by the
Company provided that such person shall be an interested
shareholder if thereafter such person acquires additional
voting shares of the Company, except as a result of further
corporate action not caused, directly or indirectly, by such
person. For the purpose of determining whether a person is
an interested shareholder, the voting shares of the Company
deemed to be outstanding shall include shares deemed to be
owned by the person through application of paragraph (8) of
this Sub-article but shall not include any other unissued
shares of the Company which may be issuable pursuant to any
agreement, arrangement or understanding, or upon exercise of
conversion rights, warrants or options, or otherwise.
(6) "person" means any individual, company, partnership,
unincorporated association or other entity.
(7) "share" means with respect to the Company shares of its
capital and with respect to any other entity any equity
interest.
(8) "voting shares" means any class or series entitled to vote
generally in the election of directors of the Company and
generally.
(9) "owner" including the terms "own" and "owned," when used
with respect to any share, means a person that individually
or with or through any of its affiliates or associates:
(i) beneficially owns such share, directly or indirectly;
or
(ii) has (A) the right to acquire such share (whether
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such right is exercisable immediately or only after the
passage of time) pursuant to
any agreement, arrangement or understanding or upon the
exercise of conversion rights, warrants or options, or
otherwise, provided, however, that a person shall not
be deemed the owner of share tendered pursuant to a
tender or exchange; or (B) the right to vote such share
pursuant to any agreement, arrangement or
understanding; provided, however, that a person shall
not be deemed the owner of any share because of such
person's right to vote such share if the agreement,
arrangement, or understanding to vote such share arises
solely from a revocable proxy or consent given in
response to a proxy or consent solicitation made to 10
or more persons: or
(iii) has any agreement, arrangement or understanding for
the purpose of acquiring, holding, voting (except
voting pursuant to a revocable proxy or consent as
described in item (b) of clause (ii) of this paragraph)
or disposing of such share with any other person that
beneficially owns or whose affiliates or associates
beneficially own, directly or indirectly, such share.
**********************
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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.
CLICKSOFTWARE TECHNOLOGIES LTD.
(Registrant)
By: /s/ Shmuel Arvatz
------------------------------------
Shmuel Arvatz
Executive Vice President and
Chief Financial Officer
Date: August 13, 2003
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