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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 September 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 September 30, 2003, there were 26,467,685 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 SEPTEMBER 30, 2003
PART I. FINANCIAL INFORMATION
ITEM 1. Financial Statements
(a) Condensed Consolidated Balance Sheets as of September 30, 2003 and December 31, 2002.............1
(b) Condensed Consolidated Statements of Operations for the three and nine months ended
September 30, 2003 and September 30, 2002...................................................2
(c) Condensed Consolidated Statements of Cash Flows for the nine months ended
September 30, 2003 and September 30, 2002...................................................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.................................29
ITEM 4. Controls and Procedures....................................................................30
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
SIGNATURES..........................................................................................32
Exhibit 31.1........................................................................................33
Exhibit 31.2........................................................................................34
Exhibit 32.1........................................................................................35
Exhibit 32.2........................................................................................36
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CLICKSOFTWARE TECHNOLOGIES LTD.
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
SEPTEMBER 30, DECEMBER 31,
2003 2002
---------------------------------------
(UNAUDITED)
---------------------------------------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 4,847 $ 3,400
Short-term investments 5,008 2,949
Trade receivables, net 3,247 4,043
Other receivables and prepaid expenses 1,523 1,254
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Total current assets 14,625 11,646
---------------------------------------
Long-term investments 218 280
Property and equipment, net 1,027 1,250
Severance pay deposits 763 781
---------------------------------------
Total assets $ 16,633 $ 13,957
=======================================
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Short-term debt $ - $ 17
Accounts payable and accrued expenses 4,530 5,369
Deferred revenues 2,649 411
---------------------------------------
Total current liabilities 7,179 5,797
---------------------------------------
LONG-TERM LIABILITIES:
Accrued severance pay 1,465 1,476
---------------------------------------
Total long-term liabilities 1,465 1,476
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Total liabilities 8,644 7,273
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SHAREHOLDERS' EQUITY:
Special preferred shares NIS 0.02 par value:
Authorized - 5,000,000 as of September 30, 2003 and December 31, 2002; no
issued and outstanding shares as of September 30, 2003 and December 31,
2002
Ordinary shares of NIS 0.02 par value:
Authorized - 100,000,000 as of September 30, 2003 and December 31, 2002
Issued - 26,506,685 shares as of September 30, 2003 and 26,412,249 shares as
of December 31, 2002.
Outstanding - 26,467,685 shares as of September 30, 2003 and 26,373,249
shares as of December 31, 2002.
104 102
Additional paid-in capital 69,380 69,196
Deferred stock compensation - (101)
Accumulated deficit (61,452) (62,470)
Treasury stock, at cost: 39,000 shares (43) (43)
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Total shareholders' equity 7,989 6,684
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Total liabilities and shareholders' equity $ 16,633 $ 13,957
=======================================
The accompanying notes are an integral part of these condensed consolidated financial statements.
-1-
CLICKSOFTWARE TECHNOLOGIES LTD.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
(UNAUDITED)
THREE MONTHS ENDED SEPTEMBER 30,
-----------------------------------------
2003 2002
-----------------------------------------
Revenues:
Software license $ 3,116 $ 2,335
Services 2,786 2,274
-----------------------------------------
Total revenues 5,902 4,609
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Cost of revenues:
Software license 347 337
Services 1,670 1,539
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Total cost of revenues 2,017 1,876
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Gross profit 3,885 2,733
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Operating expenses:
Research and development expenses, net 414 729
Selling and marketing expenses 1,998 2,599
General and administrative expenses 1,007 1,154
Amortization of deferred Stock-based compensation (1) - 75
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Total operating expenses 3,419 4,557
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Operating income (loss) 466 (1,824)
Interest and other income (expenses), net 221 (9)
-----------------------------------------
Net income (loss) $ 687 $ (1,833)
-----------------------------------------
Basic net income (loss) per share $ 0.03 $ (0.07)
-----------------------------------------
Diluted net income (loss) per share $ 0.03 $ (0.07)
-----------------------------------------
Shares used in computing basic net income (loss) per share 25,729,470 25,329,521
-----------------------------------------
Shares used in computing diluted net income (loss) per share 27,046,509 25,329,521
-----------------------------------------
(1) Amortization of deferred stock-based compensation would be further classified as follows:
THREE MONTHS ENDED
SEPTEMBER 30,
-----------------------------------------
2003 2002
-----------------------------------------
Cost of revenues $ - $ 5
Research and development expenses - 11
Selling and marketing expenses - 3
General and administrative expenses - 56
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Total $ - $ 75
-----------------------------------------
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)
NINE MONTHS ENDED
SEPTEMBER 30,
-----------------------------------------
2003 2002
-----------------------------------------
Revenues:
Software license $ 7,671 $ 4,711
Services 8,432 6,465
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Total revenues 16,103 11,176
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Cost of revenues:
Software license 783 654
Services 4,769 4,330
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Total cost of revenues 5,552 4,984
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Gross profit 10,551 6,192
-----------------------------------------
Operating expenses:
Research and development expenses, net 1,408 2,136
Selling and marketing expenses 5,780 7,979
General and administrative expenses 2,504 2,046
Amortization of deferred Stock-based compensation (1) 101 225
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Total operating expenses 9,793 12,386
-----------------------------------------
Operating income (loss) 758 (6,194)
Interest and other income, net 260 183
-----------------------------------------
Net income (loss) $ 1,018 $ (6,011)
-----------------------------------------
Basic net income (loss) per share $ 0.04 $ (0.24)
-----------------------------------------
Diluted net income (loss) per share $ 0.04 $ (0.24)
-----------------------------------------
Shares used in computing basic net income (loss) per share 25,664,058 25,550,633
-----------------------------------------
Shares used in computing diluted net income (loss) per share 26,201,352 25,550,633
-----------------------------------------
(1) Amortization of deferred stock-based compensation would be further classified as follows:
NINE MONTHS ENDED
SEPTEMBER 30,
-----------------------------------------
2003 2002
-----------------------------------------
Cost of revenues $ 7 $ 15
Research and development expenses 15 33
Selling and marketing expenses 4 9
General and administrative expenses 75 168
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Total $ 101 $ 225
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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)
NINE MONTHS ENDED
SEPTEMBER 30,
-----------------------------------------
2003 2002
-----------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ 1,018 $(6,011)
Adjustments to reconcile net income (loss) to net cash provided by (used in)
operating activities Expenses not affecting operating cash flows:
Depreciation 348 609
Amortization of deferred compensation 101 225
Unrealized loss from investments 2 79
Severance pay, net 7 (68)
Changes in operating assets and liabilities:
Trade receivables 796 1,639
Other receivables and prepaid expenses (269) (275)
Accounts payable and accrued expenses (839) 730
Changes in investments, net - (636)
Deferred revenues 2,238 447
-----------------------------------------
Net cash provided by (used in) operating activities 3,402 (3,261)
-----------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of investments (1,999) -
Purchases of equipment (125) (230)
-----------------------------------------
Net cash used in investing activities (2,124) (230)
-----------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Short-term debt, net (17) (106)
Repayments of long-term debt - (21)
Employee options exercised and employees stock purchase plan shares purchased 186 44
-----------------------------------------
Net cash provided by (used in) financing activities 169 (83)
-----------------------------------------
Increase (decrease) in cash and cash equivalents 1,447 (3,574)
Cash and cash equivalents at beginning of period 3,400 8,125
-----------------------------------------
Cash and cash equivalents at end of period 4,847 4,551
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Supplemental cash flow information:
Cash paid for interest 7 10
=========================================
The accompanying notes are an integral part of these condensed consolidated financial statements.
-4-
CLICKSOFTWARE TECHNOLOGIES LTD.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(INFORMATION AS OF SEPTEMBER 30, 2003 AND FOR THE THREE AND NINE MONTHS
ENDED SEPTEMBER 30, 2003 AND SEPTEMBER 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 September 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 "2002 10-K"). 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.
-5-
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.
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 NINE MONTHS ENDED
SEPTEMBER 30 SEPTEMBER 30
-----------------------------------------------------------------
2003 2002 2003 2002
-----------------------------------------------------------------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
-----------------------------------------------------------------
Net Income (loss)
As reported $ 687 $ (1,833) $ 1,018 $ (6,011)
Add - stock based compensation determined under
SFAS 123 - 75 101 225
Deduct - stock based compensation determined
under SFAS 123 (120) (133) (317) (399)
Pro-forma $ 567 $ (1,891) $ 802 $ (6,185)
Basic net income (loss) per share
As reported $ 0.03 $ (0.07) $ 0.04 $ (0.24)
Pro-forma $ 0.02 $ (0,07) $ 0.03 $ (0,24)
Diluted net income (loss) per share
As reported $ 0.03 $ (0.07) $ 0.04 $ (0.24)
Pro-forma $ 0.02 $ (0.07) $ 0.03 $ (0.24)
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 INCOME (LOSS) PER SHARE
Basic and diluted net income (loss) per share are presented in conformity
with SFAS No. 128 "Earnings per Share" for all years presented. Basic and
diluted net income (loss) per share have been computed using the
weighted-average number of ordinary shares outstanding during the year.
Outstanding share options and shares issued and reserved for outstanding
share options have been excluded from the calculation of basic and diluted
net income (loss) per share to the extent such securities are
anti-dilutive. The total number of shares excluded from the calculations of
basic net income (loss) per share were 3,674,679 and 3,917,265 for the
three and nine months ended September 30, 2003 and September 30, 2002,
respectively. The total number of shares excluded from the calculations of
diluted net income (loss) per share were 5,047,585 for the three months
ended September 30, 2003 and 4,230,390 for the nine months ended September
30, 2003.
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
-7-
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 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" included in the 2002 10-K.)
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 Office of the Chief Scientist
of the Ministry of Industry and Trade of the State of Israel (the "Chief
Scientist"). Cost of services consists of
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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 Chief Scientist pursuant to grant agreements 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.
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 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
-9-
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-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.
-10-
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. FIN 46 was originally
effective for the quarter ending June 30, 2003 for variable interest entities in
which the company held a variable interest that it acquired before February 1,
2003. However, in October 2003, the FASB deferred the effective date for
implementation of FIN 46 until December 31, 2003. The adoption of FIN 46 did not
have an impact on the Company's 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. The
Company adopted SFAS No. 149 effective July 1, 2003. The adoption of SFAS No.
149 did not 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 nine-month periods ended September 30, 2003 and 2002 are as
follows:
------------------------------------------------------------------------
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30 SEPTEMBER 30
------------------------------------------------------------------------
2003 2002 2003 2002
------------------------------------------------------------------------
Revenues:
Software license 53% 51% 48% 42%
Services 47% 49% 52% 58%
------------------------------------------------------------------------
Total revenues 100% 100% 100% 100%
Cost of revenues:
Software license 6% 7% 5% 6%
Services 28% 34% 29% 39%
Total cost of revenues 34% 41% 34% 45%
------------------------------------------------------------------------
Gross profit 66% 59% 66% 55%
------------------------------------------------------------------------
Operating expenses:
Research and development expenses, net 7% 16% 9% 19%
Selling and marketing expenses 34% 56% 36% 71%
General and administrative expenses 17% 25% 15% 18%
Amortization of deferred Stock-based compensation - 2% 1% 2%
------------------------------------------------------------------------
Total operating expenses 58% 99% 61% 110%
------------------------------------------------------------------------
Operating income (loss) 8% (40%) 5% (55%)
Interest and other income(expenses), net 4% - 1% 1%
------------------------------------------------------------------------
Net income (loss) 12% (40%) 6% (54%)
========================================================================
RESULTS OF OPERATIONS FOR THREE MONTHS ENDED SEPTEMBER 30, 2003 AND 2002
REVENUES: Company revenues increased $1.3 million or 28% to $5.9 million
for the three months ended September 30, 2003 from $4.6 million for the three
months ended September 30, 2002. This increase in revenues was the result of
increased demand for our products and services, particularly in the utilities
and energy industries. For the three months ended September 30, 2003, 40% of our
revenues were generated in North America, 41% in Europe, 19% in Asia Pacific and
Africa. For the three months ended September 30, 2002, 31% of our revenues were
generated in North America, 34% in Europe, 35% in Asia Pacific and Africa.
SOFTWARE LICENSE REVENUES: Software license revenues increased $0.8 million or
33% to $3.1 million for the three months ended September 30, 2003 from $2.3
million for the three months ended September 30, 2002. Software license revenues
were $3.1 million or 53% of total revenues for the three months ended September
30, 2003, and $2.3 million or 51% of total revenues for the three months ended
September 30, 2002. The increase in software license revenues resulted from new
orders.
-12-
SERVICES: Services revenues were $2.8 million or 47% of revenues for the
three months ended September 30, 2003, and $2.3 million or 49% of total revenues
in the three months ended September 30, 2002. The increase in services revenues
by $0.5 million or 23% from the three months ended September 30, 2002 was
primarily due to the increase in the number of customers under annual support
agreements as well an increase in professional services fees during the third
quarter of 2003.
COST OF REVENUES: Cost of revenues were $2.0 million or 34% of revenues for
the three months ended September 30, 2003, and $1.9 million or 41% of revenues
for the three months ended September 30, 2002. The increase in the cost of
revenues by $0.1 million from the three months ended September 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 by the
Company to the Chief Scientist Office.
COST OF SOFTWARE LICENSES: Cost of software licenses was $347,000 or 6% of
revenues for the three months ended September 30, 2003 and $337,000 or 7% of
revenues in the three months ended September 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.
COST OF SERVICES: Cost of services revenues was $1.7 million or 28% of
revenues for the three months ended September 30, 2003, and $1.5 million or 34%
of revenues for the three months ended September 30, 2002. The increase in the
cost of services by $131,000 or 9% from the three months ended September 30,
2002 on an absolute basis was primarily due to higher costs associated with
professional services performed by the Company.
GROSS PROFIT: Gross profit was $3.9 million, or 66% of revenues for the
three months ended September 30, 2003 and $2.7 million, or 59% of revenues for
the three months ended September 30, 2002. The increase in gross profit by $1.2
million or 42% 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 $3.4 million or 58% of
revenues for the three months ended September 30, 2003, and $4.6 million or 99%
of revenues for the three months ended September 30, 2002. The decrease in
operating expenses by $1.2 million or 25% from the three months ended September
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
September 30, 2002 to 123 at September 30, 2003.
RESEARCH AND DEVELOPMENT EXPENSES, NET: Research and development expenses,
net of related grants, were $414,000 or 7% of revenues for the three months
ended September 30, 2003, and $729,000 or 16% of revenues for the three months
ended September 30, 2002. The decrease in research and development expenses by
$0.3 million or 43% from the three months ended September 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 $2.0
million or 34% of revenues for the three months ended September 30, 2003, and
$2.6 million or 56% of revenues for the three months ended September 30, 2002.
The decrease in selling and marketing expenses by $0.6 million or 23% from the
three months ended September 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 $1.0 million or 17% of revenues for the three months ended September 30,
2003, and $1.2 million or 25% of revenues for the three months ended September
30, 2002. The decrease in general and administrative expenses by $0.2 million
-13-
or 15% from the three months ended September 30, 2002 was due primarily to a
decrease in legal and consultancy expenses, which was partially offset by an
increase in payroll expenses.
INTEREST AND OTHER INCOME (EXPENSES), NET: Interest and other income was
$221,000 for the three months ended September 30, 2003 and an expense of $9,000
for the three months ended September 30, 2002. The increase in interest and
other income by $230,000 was primarily due to currency gains and the
strengthening of European currencies against the United States dollar.
AMORTIZATION OF STOCK-BASED COMPENSATION: The Company had no stock-based
compensation expenses in the three month ended September 30, 2003, since the
underlying options were fully vested in May 2003. Stock-based compensation
expenses were $75,000 for the three months ended September 30, 2002.
NET INCOME (LOSS): Net Income was $0.7 million, or 12% of revenues for the
three months ended September 30, 2003 and $1.8 million net loss, or negative 40%
of revenues for the three months ended September 30, 2002. The increase in Net
Income by $2.5 million was primarily due to an increase in total revenues
coupled with the reduced cost basis.
RESULTS OF OPERATIONS FOR NINE MONTHS ENDED SEPTEMBER 30, 2003 AND 2002
REVENUES: Company revenues increased $4.9 million or 44% to $16.1 million
for the nine months ended September 30, 2003 from $11.2 million for the nine
months ended September 30, 2002. This increase in revenues was the result of
increased demand for our products and services, particularly in the utilities
and energy, computer and office equipment and communications industries. For the
nine months ended September 30, 2003, 42% of our revenues were generated in
North America, 43% in Europe, 15% in Asia Pacific and Africa. For the nine
months ended September 30, 2002, 31% of our revenues were generated in North
America, 34% in Europe, 35% in Asia Pacific and Africa.
SOFTWARE LICENSE REVENUES: Software license revenues increased $3.0 million
or 63% to $7.7 million for the nine months ended September 30, 2003 from $4.7
million for the nine months ended September 30, 2002. Software license revenues
were $7.7 million or 48% of total revenues for the nine months ended September
30, 2003, and $4.7 million or 42% of total revenues for the nine months ended
September 30, 2002. The increase in software license revenues by $3.0 million or
63% from the nine months ended September 30, 2002 was primarily the result of
repeat orders.
SERVICES: Services revenues were $8.4 million or 52% of revenues for the
nine months ended September 30, 2003, and $6.5 million or 58% of total revenue
in the nine months ended September 30, 2002. The increase in services revenues
by $1.9 million or 30% from the nine months ended September 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 $5.6 million or 34% of revenues for
the nine months ended September 30, 2003, and $5.0 million or 45% of revenues
for the nine months ended September 30, 2002. The increase in the cost of
revenues by $0.6 million or 11% from the nine months ended September 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.
-14-
COST OF SOFTWARE LICENSES: Cost of software licenses was $783,000 or 5% of
revenues for the nine months ended September 30, 2003 and $654,000 or 6% of
revenues in the nine months ended September 30, 2002. The increase in the cost
of software licenses on an absolute basis was primarily due to an increase in
royalties paid to the Chief Scientist.
COST OF SERVICES: Cost of services revenues was $4.8 million or 29% of
revenues for the nine months ended September 30, 2003, and $4.3 million or 39%
of revenues for the nine months ended September 30, 2002. The increase in the
cost of services by $0.5 million or 10% from the nine months ended September 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 $10.6 million or 66% of revenues for the
nine months ended September 30, 2003 and $6.2 million, or 55% of revenues for
the nine months ended September 30, 2002. The increase in the gross profit by
$4.4 million or 70% 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 $9.8 million or 61% of
revenues for the nine months ended September 30, 2003, and $12.4 million or 110%
of revenues for the nine months ended September 30, 2002. The decrease in
operating expenses by $2.6 million or 21% from the nine months ended September
30, 2002 was 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 September 30, 2002 to 123 at September 30, 2003.
RESEARCH AND DEVELOPMENT EXPENSES, NET: Research and development expenses,
net of related grants, were $1.4 million or 9% of revenues for the nine months
ended September 30, 2003, and $2.1 million or 19% of revenues for the nine
months ended September 30, 2002. The decrease in research and development
expenses by $0.7 million or 34% from the nine months ended September 30, 2002 is
primarily due to the impact of cost cutting measures implemented during 2002.
SELLING AND MARKETING EXPENSES: Selling and marketing expenses were $5.8
million or 36% of revenues for the nine months ended September 30, 2003, and
$8.0 million or 71% of revenues for the nine months ended September 30, 2002.
The decrease in selling and marketing expenses by $2.2 million or 28% from the
nine months ended September 30, 2002 was primarily due to cost cutting measures
implemented during 2002.
GENERAL AND ADMINISTRATIVE EXPENSES: General and administrative expenses
were $2.5 million or 15% of revenues for the nine months ended September 30,
2003, and $2.0 million or 18% of revenues for the nine months ended September
30, 2002. The increase in general and administrative expenses by $0.5 million or
21% from the nine months ended September 30, 2002 was due primarily to an
increase in payroll expenses and bad debts partially offset by a decrease in
legal and consultancy expenses.
INTEREST AND OTHER INCOME, NET: Interest and other income was $260,000 for
the nine months ended September 30, 2003 and $183,000 for the nine months ended
September 30, 2002. The increase in interest and other income by $77,000 was
primarily due to currency gains and the strengthening of European currencies
against the United States dollar.
AMORTIZATION OF STOCK-BASED COMPENSATION: Stock-based compensation expenses were
$101,000 for the nine months ended September 30, 2003 and $225,000 for the nine
months ended September 30, 2002. The decrease in stock-based compensation
expenses by $124,000 was due to the fact that the options underlying the
stock-based compensation expenses for the nine months ended September 30, 2003
were fully vested in May 2003 NET INCOME (LOSS): Net income was
-15-
$1.0 million, or 6% of revenues for the nine months ended September 30, 2003,
and $6.0 million net loss, or negative 54% of revenues for the nine months ended
September 30, 2002. The increase in net income by $7.0 million was primarily due
to an increase in total revenues coupled with the reduced cost BASIS.
LIQUIDITY AND CAPITAL RESOURCES
As of September 30, 2003 we had cash and cash equivalents of $4.9 million,
short-term investments of $5.0 million and long-term investments of $0.2 million
for a total of $10.1 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 nine months ended September 30, 2003, cash provided by operations
was $3.4 million, comprised of our net income of $1.0 million, a decrease in
trade receivables of $0.8 million, an increase in other receivables of $0.3
million, a decrease in accounts payable of $0.8 million, an increase in deferred
revenues of $2.2 million and non-cash charges of $0.5 million. For the nine
months ended September 30, 2002, cash used in operations was $3.3 million,
comprised of our net loss of $6.0 million, a decrease in trade receivables of
$1.6 million, an increase in other receivables of $0.3 million, an increase in
accounts payable of $0.7 million, an increase in deferred revenues of $0.4
million, partially offset by non-cash charges of $0.8 million and an increase in
short term investments of $0.6 million.
Net cash used in investing activities for the nine months ended September
30, 2003 was $2.1 million, of which $2.0 million was primarily invested in bank
deposits and short term investments, and of which $125,000 was invested in
purchases of computer equipment and vehicles. Net cash used in investing
activities for the nine months ended September 30, 2002 was $230,000 and was
invested primarily in leasehold improvements and purchases of equipment and
systems, including computer equipment and fixtures and furniture.
As of September 30, 2003 we had outstanding trade receivables of
approximately $3.2 million, which represented approximately 55% of revenues for
the three months ended September 30, 2003. Our trade receivables typically have
30 to 60 day terms, although we have also negotiated longer payment plans with
some of our clients. For the three months ended September 30, 2003 our DSO (Day
Sales Outstanding) was 50 days, an increase of 1 day from 49 for the three
months ended June 30, 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 September 30, 2003, contingent liabilities on
outstanding letters of credit agreements aggregated approximately $1.5 million,
of which all but $218,000 are scheduled to expire during next the twelve months.
It is possible that some of these letters of credit will be renewed following
their expiration. The letters of credit are secured by $1.6 million in deposits
with the banks, to cover any potential payments under the guarantees.
Since inception, we have received aggregate research and development grants 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 $6.7 million. Pursuant to
the terms of these grants, we are committed to pay royalties at a rate of 3% to
5% of sales of the developed product up to cumulative royalties ranging from
100% to 150% of the amount of the grants. The grants also accrue annual interest
at the rate of LIBOR as of the date of approval for programs approved from 1999
and thereafter. As of September 30, 2003 we have paid or accrued royalties
related to the results of research and development in the amount of $2.9
million. The estimated current net
-16-
commitment is approximately $3.9 million. The repayment of the grant, through
the aforementioned royalties, is contingent on future sales. We have no
obligation to repay 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 and in the three months period ending
September 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 fourth quarter of 2003 will grow
approximately 5% from the previous quarter, although actual revenues may differ.
Assuming this level of revenues for the fourth quarter is achieved, we believe
that we will be able to maintain profitability in the upcoming quarter, although
no assurances can be made in that regard. If we are able to maintain our
quarterly revenues at a level similar to that expected in the fourth 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.
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.
-17-
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.
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.
On August 25, 2003, a substantially similar complaint to the one filed in
December 2002 was filed in the United States District Court for the District of
Massachusetts against us, one of our officers and one of our former officers.
The complaint is purportedly brought on behalf of investors who purchased our
securities between June 22, 2000 and October 21, 2002 and seeks unspecified
damages. The complaint contains various allegations, including violations of the
Securities Exchange Act of 1934 and common law claims with respect to our
financial results for 2000, 2001 and the first six months of 2002. None of the
defendants has been served, and the case is in the preliminary states. It is not
possible for us to quantify the extent of our potential liability, if any. An
unfavorable outcome in this or any other case could have a material adverse
effect on our business, financial condition, results of operations, cash flow
and the trading price of our ordinary shares. In addition, defending any
litigation may be costly and divert management's attention from the day-to-day
operations of our business. 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
-18-
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;
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.
THE ECONOMIC OUTLOOK MAY ADVERSELY AFFECT THE DEMAND FOR OUR CURRENT PRODUCTS
AND OUR RESULTS OF OPERATIONS.
Predictions regarding general economic conditions remain uncertain. Unless
the economic outlook improves significantly, information technology spending may
not grow. Consequently, the demand for our products may not grow or may
decrease, which would adversely affect our results of operations. In addition,
predictions regarding economic conditions is difficult, 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.
-19-
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
ClickAnalyze, ClickPlan and ClickMobile 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. This increases the scalability of our products
by enabling our customers to optimize additional resources by adding hardware to
this group of ClickSoftware servers. On October 2002, we added ClickForecast to
our Service Optimization suite. 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
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.
-20-
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 to ninety 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.
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
-21-
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.
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.
-22-
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.
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.
-23-
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 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
-24-
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 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. The current state of peace talks between Israel and its
Arab neighbors 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. 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
-25-
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. 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.
-26-
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 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 September 30, 2003, our executive officers, directors and entities
affiliated with them beneficially owned approximately 32.6% 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 September 30, 2003, we had 26,467,685 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 September 30, 2003, we
had 3,107,242 ordinary shares issuable upon exercise of outstanding options, and
1,640,881 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.
-27-
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;
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.
-28-
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. We do not participate in any speculative
investments.
INTEREST RATE RISK. As of September 30, 2003, we had cash and cash
equivalents of $9.9 million, which consist of cash and highly liquid short-term
investments. A substantial decrease in market interest rates would have
immaterial impact on our financial condition.
The following table provides information about our investment portfolio,
cash, and long-term debts as of September 30, 2003 and presents principal cash
flows and related weighted averages interest rates by expected maturity dates.
YEAR OF MATURITY 2003 2004
(in thousands of dollars)
A) CASH AND CASH EQUIVALENTS AND INVESTMENT PORTFOLIO:
------------------------------------------------------
Cash and Cash equivalents $4,847 -
Average interest rate 0.8% -
Short Term Bonds $1,500 -
Average interest rate 1.13% -
Bank deposits $1,914 $1,812
Average interest rate 1.1% 1.2%
B) LONG-TERM DEBTS:
-------------------
None.
-29-
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", (as defined in the
Securities Exchange Act of 1934, as amended (the "Exchange Act") Rules 13a-15(e)
or 15d-15(e))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 identified in connection witih the evaluation required by paragraph (d)
of Exchange Act Rules 13a-15 or 15d-15 that could significantly affect these
controls subsequent to the date of their evaluation.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
On August 25, 2003, a substantially similar complaint to the one filed in
December 2002 was filed in the United States District Court for the District of
Massachusetts against the Comapny, one of its officers and one of its former
officers. The complaint is purportedly brought on behalf of investors who
purchased the Company's securities between June 22, 2000 and October 21, 2002
and seeks unspecified damages. The complaint contains various allegations,
including violations of the Securities Exchange Act of 1934 and common law
claims with respect to the Company's financial results for 2000, 2001 and the
first six months of 2002, which were restated. None of the defendants has been
served, and the case is in the preliminary states. It is not possible for us to
quantify the extent of its potential liability, if any.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
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ITEM 5. OTHER INFORMATION
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
EXHIBIT INDEX
(a) Exhibit Number Description
- ------------------------ ------------------------------------------------------
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.
(b) Reports on Form 8-K:
On August 4, 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 June 30, 2003.
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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: November 13, 2003
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