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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 March 31, 2004
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _________________ to _______________________
COMMISSION FILE NUMBER: 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 March 31, 2004, there were 27,134,819 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 MARCH 31, 2004
TABLE OF CONTENTS
Page
----
PART I. FINANCIAL INFORMATION........................................................................................1
ITEM 1. Financial Statements................................................................................1
Condensed Consolidated Balance Sheets...............................................................1
Condensed Consolidated Statements of Operations.....................................................2
Condensed Consolidated Statements of Cash Flows.....................................................3
Notes to the Condensed Consolidated Financial Statements............................................4
ITEM 2. Management's Discussion and Analysis of Financial Condition and Results of Operations...............6
ITEM 3. Quantitative and Qualitative Disclosures About Market Risk.........................................27
ITEM 4. Controls and Procedures............................................................................28
PART II. OTHER INFORMATION..........................................................................................29
ITEM 1. Legal Proceedings..................................................................................29
ITEM 2. Changes in Securities and Use of Proceeds..........................................................29
ITEM 4. Submission of Matters to a Vote of Security Holders................................................29
ITEM 5. Other Information..................................................................................29
ITEM 6. Exhibits and Reports on Form 8-K...................................................................29
SIGNATURES...........................................................................................................30
Exhibit 31.1.........................................................................................................31
Exhibit 31.2.........................................................................................................32
Exhibit 32.1.........................................................................................................33
Exhibit 32.2.........................................................................................................34
-i-
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CLICKSOFTWARE TECHNOLOGIES LTD.
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
MARCH 31, DECEMBER 31,
2004 2003
------------ ------------
(UNAUDITED)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents.......................................... $ 6,871 $ 7,695
Short-term investments............................................. 5,252 3,394
Trade receivables, net............................................. 2,864 3,362
Other receivables and prepaid expenses............................. 1,581 722
------------ ------------
Total current assets........................................... 16,568 15,173
------------ ------------
Long-term investments.............................................. 550 580
Severance pay deposits............................................. 788 779
Property and equipment, net........................................ 937 923
------------ ------------
Total assets................................................... $ 18,843 $ 17,455
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable and accrued expenses.............................. 3,530 4,077
Deferred revenues.................................................. 4,039 2,275
------------ ------------
Total current liabilities...................................... 7,569 6,352
------------ ------------
LONG-TERM LIABILITIES:
Accrued severance pay.............................................. 1,500 1,490
------------ ------------
Total liabilities ............................................. 9,069 7,842
------------ ------------
SHAREHOLDERS' EQUITY:
Special preferred shares NIS 0.02 par value: Authorized -
5,000,000 as of March 31, 2004 and December 31, 2003; no
issued and outstanding shares as of March 31, 2004 and
December 31, 2003............................................
Ordinary shares of NIS 0.02 par value: Authorized - 100,000,000
as of March 31, 2004 and December 31, 2003; Issued -
27,173,819 shares as of March 31, 2004 and 27,119,955 shares
as of December 31, 2003. Outstanding - 27,134,819 shares as
of March 31, 2004 and 27,080,955 shares as of December 31,
2003......................................................... 109 109
Additional paid-in capital......................................... 70,397 70,276
Deferred stock compensation........................................ (32) -
Accumulated deficit................................................ (60,657) (60,729)
------------ ------------
9,817 9,656
Treasury stock, at cost: 39,000 shares................................. (43) (43)
------------ ------------
Total shareholders' equity..................................... 9,774 9,613
------------ ------------
Total liabilities and shareholders' equity..................... $ 18,843 $ 17,455
============ ============
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 MARCH 31,
-----------------------------------
2004 2003
------------- -------------
Revenues:
Software license......................................................... $ 2,270 $ 2,245
Services................................................................. 2,738 2,896
------------- -------------
Total revenues........................................................ 5,008 5,141
============= =============
Cost of revenues:
Software license......................................................... 207 131
Services................................................................. 1,402 1,677
------------- -------------
Total cost of revenues................................................ 1,609 1,808
============= =============
Gross profit.......................................................... 3,399 3,333
============= =============
Operating expenses:
Research and development expenses, net................................... 741 486
Selling and marketing expenses........................................... 1,954 1,955
General and administrative expenses...................................... 673 730
Amortization of deferred Stock-based compensation (1).................... - 75
------------- -------------
Total operating expenses.............................................. 3,368 3,246
============= =============
Operating income...................................................... 31 87
Interest and other income, net ............................................. 41 71
------------- -------------
Net income............................................................... $ 72 $ 158
============= =============
Basic net income per share.................................................. $0.00 $0.01
============= =============
Diluted net income per share................................................ $0.00 $0.01
============= =============
Shares used in computing basic net income per share......................... 27,036,273 25,616,410
============= =============
Shares used in computing diluted net income per share....................... 28,696,878 25,616,410
============= =============
Amortization of deferred stock-based compensation would be further classified as follows:
Three Months Ended March 31,
-----------------------------------
2004 2003
------------- -------------
Cost of revenues............................................................ $ -- $ 5
Research and development expenses........................................... -- 11
Selling and marketing expenses.............................................. -- 3
General and administrative expenses......................................... -- 56
------------- -------------
Total.................................................................... $ -- $ 75
============= =============
The accompanying notes are an integral part of these condensed consolidated financial statements.
-2-
CLICKSOFTWARE TECHNOLOGIES LTD.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
THREE MONTHS ENDED MARCH 31,
-----------------------------------
2004 2003
------------- -------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income................................................................ $ 72 $ 158
Adjustments to reconcile net income to net cash provided by operating
activities:
Depreciation.......................................................... 94 132
Amortization of deferred compensation................................. -- 75
Unrealized loss from investments...................................... 16 11
Severance pay, net.................................................... 1 (62)
Trade receivables..................................................... 498 1,569
Other receivables and prepaid expenses............................... (859) (208)
Accounts payable and accrued expenses................................. (547) (461)
Deferred revenues..................................................... 1,764 778
------------- -------------
Net cash provided by operating activities................................. 1,039 1,992
============= =============
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of investments............................................... (1,844) (176)
Purchases of equipment................................................ (108) (5)
------------- -------------
Net cash used in investing activities..................................... (1,952) (181)
============= =============
CASH FLOWS FROM FINANCING ACTIVITIES:
Short-term debt, net.................................................. -- (4)
Employee options exercised............................................ 89 --
------------- -------------
Net cash provided by (used in) financing activities....................... 89 (4)
============= =============
Increase (decrease) in cash and cash equivalents.......................... (824) 1,807
Cash and cash equivalents at beginning of period.......................... 7,695 3,400
------------- -------------
Cash and cash equivalents at end of period................................ $ 6,871 $ 5,207
============= =============
Supplemental cash flow information:
Cash paid for interest.................................................... $ 5 $ 2
============= =============
The accompanying notes are an integral part of these condensed consolidated financial statements.
-3-
CLICKSOFTWARE TECHNOLOGIES LTD.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(INFORMATION AS OF MARCH 31, 2004 AND FOR THE THREE MONTHS ENDED
MARCH 31, 2004 AND MARCH 31, 2003)
(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
March 31, 2004 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, 2003 that are included in ClickSoftware's Form 10-K filed
with the Securities and Exchange Commission on March 22, 2004 (the "2003 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,
2004. The balance sheet at December 31, 2003 has been derived from the audited
financial statements as of and for the year ended December 31, 2003, but does
not include all the information and footnotes required by generally accepted
accounting principles for annual financial statements.
2. 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, which 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 is 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
-4-
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 time 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.
3. 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.
If stock-based compensation had 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 income
(loss) and basic and diluted net income (loss) per share would have increased or
decreased to the following pro-forma amounts:
THREE MONTHS ENDED MARCH 31,
-------------------------------------
2004 2003
------------ ------------
(IN THOUSANDS, EXCEPT PER
SHARE AMOUNTS)
Net Income
As reported.............................................................. $ 72 $ 158
Add - stock based compensation determined under SFAS 123................. -- 75
Deduct - stock based compensation determined under SFAS 123.............. (217) (82)
------------ ------------
Pro-forma................................................................ $ (145) $ 151
============ ============
Basic net income per share
As reported.............................................................. $ 0.00 $ 0.01
Pro-forma................................................................ $ (0.01) $ 0.01
Diluted net income per share
As reported.............................................................. $ 0.00 $ 0.01
Pro-forma................................................................ $ (0.01) $ 0.01
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 152% (corresponding period
prior year 149%); and (4) risk-free interest rate of 3.1% (corresponding period
prior year 4%).
4. BASIC AND DILUTED NET INCOME PER SHARE
Basic and diluted net income per share are presented in conformity with
SFAS No. 128 "Earnings per Share" for all years presented. Basic and diluted net
income per share have been computed using the weighted-average number of
ordinary shares outstanding during the year.
-5-
Outstanding share options and shares issued and reserved for outstanding
share options have been excluded from the calculation of basic and diluted net
income per share to the extent such securities are anti-dilutive. The total
number of shares excluded from the calculations of basic net income per share
were 3,526,245 and 3,504,756 for the three months ended March 31, 2004 and March
31, 2003, respectively. The total number of shares excluded from the
calculations of diluted net income per share were 1,851,909 for the three months
ended March 31, 2004.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
This report contains certain forward-looking statements (as such term is
defined in Section 27A of the Securities Act of 1933 and Section 21E of the
Securities Exchange Act of 1934) and information relating to us that are based
on the beliefs of our management as well as assumptions made by and information
currently available to our management, including statements related to products,
markets, and future results of operations and profitability, and may include
implied statements concerning market acceptance of our products, and our growing
leadership role in the marketplace. In addition, when used in this report, the
words "likely," "will," "suggests," "may," "would," "could," "anticipate,"
"believe," "estimate," "expect," "intend," "plan, "predict" and similar
expressions and their variants, as they relate to us or our management, may
identify forward-looking statements. Such statements reflect our judgment as of
the date of this quarterly report on Form 10-Q with respect to future events,
the outcome of which is subject to certain risks, including the risk factors set
forth herein which may have a significant impact on our business, operating
results or financial condition. Investors are cautioned that these
forward-looking statements are inherently uncertain. Should one or more of these
risks or uncertainties materialize, or should underlying assumptions prove
incorrect, actual results or outcomes may vary materially from those described
herein. We undertake no obligation to update forward-looking statements, whether
as a result of new information, future events or otherwise.
OVERVIEW
We are specialists in the area of service optimization solutions and derive
revenues from the licensing of our software products and the provision of
consulting and support services.
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 2 of the notes to our consolidated financial statements
attached hereto).
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 software updates. 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 support
contracts typically renew automatically for successive twelve-month periods
unless the customer informs us of its desire not to renew annual support.
Revenues for the first quarter of 2004 amounted to $5 million, a shortfall
of approximately $1.3 million from our projections for this quarter. Despite the
shortfall in revenues, we have maintained operational profitability for the
fifth consecutive quarter. We attribute the shortfall in revenues primarily to
delays in the closing of certain new contracts due to a number of factors,
including the types of organizations that we are selling to and our indirect
sales efforts through our channel partners, as well as to the seasonality of the
enterprise software industry. We believe that most of the revenues from the
contracts that we had
-6-
expected to close in the first quarter will be recognized later this year,
although no assurances can be given in that regard.
The Company's cash and cash-equivalents, and short and long-term
investments increased to approximately $12.7 million at the end of the first
quarter of 2004 from $11.7 million at the end of the fourth quarter of 2003.
We believe that our future performance will primarily depend on our ability
to continue selling and implementing service optimization solutions. We believe
that we can manage the level of our expenses so as to maintain annual
profitability if we achieve our revenue targets.
With larger customers generating larger transactions, and with the greater
involvement of our channel partners in many of the transactions, the results of
any one quarter will be more difficult to predict and will not necessarily be
indicative of full-year performance. Because a significant portion 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, if revenue levels fall below expectations, net income may
be disproportionately affected. All of our projections are subject to many risk
factors, including those described in the section of this Report entitled
"FACTORS THAT MAY AFFECT FUTURE RESULTS."
The functional currency of our operations is the U.S. dollar, which is the
primary currency in the geographic regions in which we conduct our business. A
significant portion of our research and development expenses and other expenses
are incurred in New Israeli Shekels, or NIS and a portion of our revenues and
expenses are incurred in British pounds, European Community euros and Australian
dollars. The results of our operations are subject to fluctuations in these
exchange rates, which are influenced by various global economic factors.
RESULTS OF OPERATIONS
Our operating results, expressed as a percentage of revenues, for each of
the three month periods ended March 31, 2004 and 2003 are as follows:
QUARTER ENDED
MARCH 31,
---------------------
2004 2003
-------- --------
Revenues:
Software license...................................... 45% 44%
Services.............................................. 55 56
-------- --------
Total Revenues...................................... 100 100
Cost of Revenues:
Software License...................................... 4 2
Services.............................................. 28 33
-------- --------
Total cost of revenues.............................. 32 35
-------- --------
Gross Profit 68 65
======== ========
Operating Expenses:
Research and Development expenses, net................ 15 10
Selling and Marketing expenses........................ 39 38
General and Administrative Expenses.................. 13 14
Amortization of deferred Stock-based Compensation..... 0 1
-------- --------
Total Operating Expenses................................. 67 63
======== ========
Operating Profit......................................... 1 2
======== ========
Interest and other income, net........................... 0 1
======== ========
Net Income............................................... 1% 3%
======== ========
-7-
REVENUES
REVENUE BREAKDOWN
----------------------------------------
Q1/2004 % CHANGE Q1/2003
--------- --------- ---------
(IN THOUSANDS)
Revenues:
Software license................... $ 2,270 1% $ 2,245
Percentage of total revenues....... 45% 44%
Services........................... 2,738 (5)% 2,896
Percentage of total revenues....... 55% 56%
Total Revenues..................... $ 5,008 (3)% $ 5,141
Revenues decreased $0.1 million, or 3%, to $5.0 million for the three
months ended March 31, 2004, from $5.1 million for the three months ended March
31, 2003. The decrease in revenues was the result of delay in closing certain
new contracts.
In the coming quarters of 2004, we continue to project growth in our
business based on our recurring revenue stream, current sales prospects, pilot
projects that may develop into full-scale contracts and expectations of
expanding channel relationships. This projection is subject to many risk
factors, including those described in the section of this Report entitled
"FACTORS THAT MAY AFFECT FUTURE RESULTS.
REVENUE BY TERRITORY
----------------------------------------
Q1/2004 % CHANGE Q1/2003
--------- --------- ---------
(IN THOUSANDS)
Revenues:
North America...................... $ 1,792 (17)% $ 2,152
Europe............................. 2,573 14% 2,257
Asia Pacific and Africa............ 643 (12)% 732
Total Revenues..................... $ 5,008 (3)% $ 5,141
For the three months ended March 31, 2004, 36% of our revenues were
generated in North America (with 27% in the U.S.), 51% in Europe (with 21% in
Germany and 19% in Netherlands) and 13% in Asia Pacific and Africa. For the
three months ended March 31, 2003, 42% of our revenues were generated in North
America (with 33% in the U.S.), 44% in Europe (with 20% in the Netherlands and
13% in the U.K.) and 14% in Asia Pacific and Africa. We do not anticipate
material variances from our historical geographic breakdown for the full year of
2004 as compared to 2003 and will continue our sales efforts in each territory.
SOFTWARE LICENSES
As reflected in the table entitled "Revenue Breakdown", above, software
license revenues were $2.3 million or 45% of revenues for the three months ended
March 31, 2004 and $2.2 million or 44% of revenues for the three months ended
March 31, 2003.
SERVICES
Service revenues were $2.7 million or 55% of revenues for the three months
ended March 31, 2004 and $2.9 million or 56% of revenues for the three months
ended March 31, 2003. The decrease in services
-8-
revenues by $0.2 million or 5% from the three months ended March 31, 2003 was
primarily due to a decrease in consulting services partially offset by an
increase in post-contract support agreements.
COST OF REVENUES
Cost of revenues consists of cost of software license revenues and cost of
services. Cost of software license revenues consists of expenses related to
media duplication and packaging of our products, costs of software purchased or
licensed for resale and royalties payments to the Chief Scientist. Cost of
services consists of expenses related to salaries and expenses of our
professional services organizations, costs related to third-party consultants,
equipment costs and royalties payments to the Chief Scientist.
Cost of revenues was $1.6 million or 32% of revenues for the three months
ended March 31, 2004 and $1.8 million or 35% of revenues for the three months
ended March 31, 2003. The decrease in cost of revenues by $0.2 million or 11%
from the three months ended March 31, 2003 was primarily due decrease in our
professional services activities in the first quarter.
We expect our cost of revenues on an absolute basis to continue to increase
in the coming quarters of 2004 as a natural consequence of the projected growth
of our revenues. We expect our fixed cost of revenues to increase moderately and
our variable cost of revenues to grow in proportion to the extent that our
revenues grow.
COST OF SOFTWARE LICENSES
Cost of software license revenues were $0.2 million or 4% of revenues for
the three months ended March 31, 2004 and $0.1 million or 2% for the three
months ended March 31, 2003. The increase in the cost of software license
revenues by $76,000 or 58% from the three months ended March 31, 2003 was
primarily due to costs that we incurred in obtaining third-party licenses and
adaptors to other Enterprise Resource Planning (ERP) and Customer Relationship
Management (CRM) systems sold during the first quarter of 2004.
COST OF SERVICES
Cost of service revenues was $1.4 million or 28% of revenues for the three
months ended March 31, 2004 and $1.7 million or 33% of revenues for the three
months ended March 31, 2003. The decrease in the cost of service revenues by
$0.3 million or 16% from the three months ended March 31, 2003 was primarily due
to the decrease of our professional services activities in the first quarter of
2004.
GROSS PROFIT
Gross profit was $3.4 million, or 68% of revenues for the three months
ended March 31, 2004 and $3.3 million, or 65% of revenues for the three months
ended March 31, 2003.
The slight increase in gross profit by $0.1 million or 2% and the increase
in gross margins by 3% from the three months ended March 31, 2003 was due to
more profitable generation of service revenues.
If we achieve our revenue target in 2004, we believe that we will be able
to manage our level of expenses to maintain our current level of gross profit.
-9-
OPERATING EXPENSES
Operating expenses are categorized into research and development expenses,
selling and marketing expenses, general and administrative expenses, and share
based compensation.
OPERATING EXPENSES
----------------------------------------
Q1/2004 % CHANGE Q1/2003
--------- --------- ---------
(IN THOUSANDS)
Operating Expenses:
Research and development
expense, net.................. $ 741 52% $ 486
Selling and marketing expenses.. 1,954 0% 1,955
General and administrative
expense....................... 673 (8)% 730
Amortization of deferred
stock-based compensation...... -- n/a 75
Total Operating Expenses........... $ 3,368 4% $ 3,246
Average No. of employees........... 134 112
Total operating expenses were $3.4 million or 67% of revenues for the three
months ended March 31, 2004 and $3.2 million or 63% of revenues for the three
months ended March 31, 2003. The slight increase in operating expenses
(excluding amortization of deferred stock-based compensation) by $0.2 million or
6% from the three months ended March 31, 2003 reflects mainly an increase in our
research and development expenses, due to an increase in the number of employees
engaged in research and development activities, offset by a decrease in general
and administrative expenses due to a decrease in bad debt charges.
We anticipate a moderate increase in our operating expenses on an absolute
basis in the coming quarters of 2004, particularly our selling and marketing
expenses, as we expand our sales efforts. We expect our fixed operating expenses
to increase moderately and our variable operating expenses to grow in proportion
to the extent that our revenues grow.
RESEARCH AND DEVELOPMENT EXPENSES, NET
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 below 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.
Software development costs incurred subsequent to the establishment of
technological feasibility through the period of general market availability of
the products are capitalized, if material, after consideration of various
factors, including net realizable value. To date, software development costs
that are eligible for capitalization have not been material and have been
expensed.
Research and development expenses, net of related grants, were $0.7 million
or 15% of revenues for the three months ended March 31, 2004 and $0.5 million or
10% of revenues for the three months ended March 31, 2003. Research and
development expenses, prior to participation grants from the Office of the Chief
Scientist of the Government of Israel, were $0.7 million for the three months
ended March 31, 2004 and $0.5 million for the three months ended March 31, 2003.
We neither received nor accrued any grants from the Chief Scientist for the
three months ended March 31, 2004, and we received grants of $14,000 for the
three months ended March 31, 2003. The increase in research and development
expenses by $0.2 million or 52% from the three months ended March 31, 2003 was
primarily due to an increase in number of our research and development
personnel.
We anticipate a moderate increase in our gross research and development
expenses on an absolute basis in the coming quarters of 2004 as we expand our
overall activities. This expense may decrease if we are
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awarded research and development grants, which are subject to the approval of
the Office of the Chief Scientist.
SELLING AND MARKETING EXPENSES
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.
Selling and marketing expenses were $2.0 million or 39% of revenues for the
three months ended March 31, 2004 which is consistent with $2.0 million or 38%
of revenues for the three months ended March 31, 2003. We expect selling and
marketing expenses to increase moderately in the remaining quarters of 2004 as
we expand our sales efforts, particularly in the market for large-scale service
optimization solutions.
GENERAL AND ADMINISTRATIVE EXPENSES
General and administrative expenses consist primarily of personnel and
related costs for corporate functions, including information services, finance,
legal, accounting, human resources, facilities, provision for doubtful accounts
and costs related to our status as a public company.
General and administrative expenses were $0.7 million or 13% of revenues
for the three months ended March 31, 2004 and $0.7 million or 14% of revenues
for the three months ended March 31, 2003. The decrease in general and
administrative expenses by $57,000 or 8% from the three months ended March
31, 2003 was primarily due to a decrease in bad debt charges.
AMORTIZATION OF STOCK-BASED COMPENSATION
Amortization of stock-based compensation represents the aggregate
difference, at the date of grant, between the respective exercise prices 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.
Stock-based compensation expenses for the three months ended March 31, 2003
amounted to $75,000 of previously recorded deferred stock-compensation. There
were no stock-based compensation expenses for the three months ended March 31,
2004. As of March 31, 2004, there was only a minimal deferred compensation
balance.
INTEREST AND OTHER INCOME, NET
Interest and other income includes interest income earned on our cash, cash
equivalents and short and long-term investments, offset by interest expense, and
also include the effects of foreign currency fluctuations.
Interest income, net of interest expenses, was $41,000 for the three months
ended March 31, 2004 and $71,000 for the three months ended March 31, 2003. The
decrease in interest income resulted from decreased gains realized from currency
fluctuations.
INCOME TAXES
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
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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 currently generally subject to income tax at the rate
of 36% of taxable income. The majority of our income, however, is derived from
our 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 its Approved Enterprise status, we would be required
to pay 25% corporate income tax on income from which the dividend was
distributed. All of these tax benefits are subject to various conditions and
restrictions. There can be no assurance that we will obtain approval for
additional Approved Enterprise Programs, or that the provisions of the law will
not change.
There was no material change from the December 31, 2003 operating loss
carryforwards. As of December 31, 2003, the Company had approximately $18.5
million of Israeli net operating loss carryforwards, approximately $27.5 million
of U.S. federal net operating loss carryforwards and approximately $8.3 million
of the European subsidiaries net operating loss carryforwards available to
offset future taxable income. The Israeli and the European net operating loss
carryforwards have no expiration date. The U.S. net operating loss carryforwards
will expire gradually over the years 2008 through 2022.
NET INCOME
Net income was $0.1 million or 1% of revenues for the three months ended
March 31, 2004 and $0.2 million or 3% of revenues for the three months ended
March 31, 2003.
LIQUIDITY AND CAPITAL RESOURCES
Our cash and investments increased by $1.0 million or 9% to $12.7 million
as of March 31, 2004 from $11.7 million as of December 31, 2003. Our primary
sources of cash and investments during the three months ended March 31, 2004
were cash flows generated from operations of $1.0 million and $0.1 million from
exercises of employee stock options.
As of March 31, 2004 we had cash and cash equivalents of approximately $6.9
million, short-term investments of approximately $5.2 million and long-term
investments of approximately $0.6 million. As of March 31, 2004 approximately
$1.5 million in short-term and long-term investments had been deposited with
banks to secure letters of credit totaling approximately $1.3 million, which are
described below. Our cash, short-term investments and long-term investments are
invested or deposited in low-risk and predominantly U.S.-denominated investments
and bank deposits.
CASH AND INVESTMENTS
----------------------------------------
Q1/2004 % CHANGE Q1/2003
--------- --------- ---------
(IN THOUSANDS)
Cash and cash equivalents.......... $ 6,871 $ 7,695
Short-term investments............. 5,252 3,394
Long-term investments.............. 550 580
Total cash and investments......... $ 12,673 9% $ 11,669
For the three months ended March 31, 2004, net cash provided by operations
was $1.0 million, comprised of our net income of $0.1 million, a decrease in
trade receivables of $0.5 million, an increase in other receivables of $0.9
million, a decrease in accounts payable of $0.5 million, an increase in deferred
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revenue of $1.8 million and non-cash charges of $0.1 million. For the three
months ended March 31, 2003, net cash provided by operations was $2.0 million,
comprised of our net income of $0.2 million, a decrease in trade receivables of
$1.6 million, an increase in other receivables of $0.2 million, a decrease in
accounts payable of $0.5 million, an increase in deferred revenue of $0.8
million and non-cash charges of $0.2 million.
Net cash used in investment activities was $1.9 million for the three
months ended March 31, 2004, of which $1.8 million was primarily invested in
bank deposits and $0.1 million invested in leasehold improvements and purchases
of equipment and systems, including computer equipment and fixtures and
furniture. Net cash used in investment activities was $0.2 million for the three
months ended March 31, 2003, of which $0.2 million was primarily invested in
bank deposits.
There were no material financing activities for the three months ended
March 31, 2004 and 2003.
As of March 31, 2004, we had outstanding trade receivables of approximately
$2.9 million, which represented approximately 57% of revenues for the three
months ended March 31, 2004. Our trade receivables typically have 30 to 60 day
terms; although we also negotiate longer payment plans with some of our clients.
Days sales outstanding ("DSO"), calculated based on revenues for the most recent
quarter and accounts receivable at the balance sheet date, increased slightly to
51 days as of March 31, 2004 from 48 days as of December 31, 2003.
We have various commitments primarily related to guarantees, letters of
credit and capital lease obligations. The following table provides details
regarding our contractual cash obligations and other commercial commitments
subsequent to March 31, 2004:
TOTAL
AMOUNTS
COMMITTED AMOUNT OF COMMITMENT EXPIRATION
(IN PER PERIOD (IN THOUSANDS)
THOUSANDS) ----------------------------------------
COMMERCIAL COMMITMENTS 2004 2005 AFTER 2005
- ----------------------------------------------------------- ----------- ---------- ---------- ----------
Guarantees/Letters of Credit............................. $ 1,308 $ 798 $ 469 $ 41
PAYMENTS DUE BY PERIOD (IN THOUSANDS)
--------------------------------------------------------
CONTRACTUAL OBLIGATIONS TOTAL 2004 2005 2006-7
- ----------------------------------------------------------- ----------- ---------- ---------- ----------
Lease Obligations........................................ $ 1,030 $ 492 $ 285 $ 253
We have entered into standby letter of credit agreements with banks
primarily relating to the guarantee of future performance on certain contracts.
As of March 31, 2004, contingent liabilities on outstanding letter of credit
agreements aggregated approximately $1.3 million (of which $0.4 million expired
in April 2004). Most of these obligations are scheduled to expire during 2004.
We expected to renew some of these letters of credit in 2004. The letters of
credit are secured by $1.5 million in deposits to cover potential payments under
the guarantees.
As permitted under Israeli law, we have agreements whereby we indemnify our
officers and directors for certain events or occurrences while the officer or
director is, or was serving, at our request in such capacity. The
indemnification period covers all pertinent events and occurrences during the
officer's or director's lifetime. We have director and officer insurance
coverage that may limit our exposure and may enable us to recover a portion of
any future amounts paid.
Since inception, we have received aggregate payments from the Government of
the State of Israel through the Office of the Chief Scientist of the Ministry of
Industry and Trade in the amount of $6.8 million (full commitment including
LIBOR and 150% for some projects) related to research and development. In return
for the Government of Israel participation, we are committed to pay royalties at
a rate of 3% to 5% of sales of the developed product, up to 100%-150% of the
amount of grants received with annual interest of
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LIBOR as of the date of approval for programs approved from 1999 and thereafter.
As of March 31, 2004, we had paid or accrued royalties related to the results of
research and development in the amount of $3.3 million. The estimated current
net commitment is approximately $3.5 million. The refund of the grant is
contingent on future sales, and we have no obligation to refund these grants, if
sufficient sales are not generated.
Our capital requirements depend on numerous factors, including market
demand and acceptance of our products, the resources we devote to developing,
marketing, selling and supporting our products, the timing and extent of
establishing additional international operations and investments in computers
and office equipment. We intend to continue investing significant resources in
our selling and marketing, research and development operations in the future and
investments in computers and office equipment. We attained profitability in the
three months ending March 31, 2003 and have maintained profitability for the
subsequent four quarters. Our ability to maintain profitability 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 a potential reduction in
information technology spending by our current and prospective customers.
Moreover, the trend towards larger customers generating larger transactions, and
the increased involvement of our channel partners in many of our transactions
make it more difficult for us to predict the revenues of each quarter, but a
significant percentage of our expenses are fixed in the short term. If we are
not successful in maintaining profitability, we will be required to seek new,
external sources of financing, which may not be available to us on favorable
terms or at all. 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 out
shareholders.
We believe that we will have sufficient cash to fund our operations for at
least the next twelve months although there is no assurance that we will be able
to do so.
CRITICAL ACCOUNTING POLICIES
In preparing our consolidated financial statements, we are required to make
estimates, judgments and assumptions that affect the reported amounts of
revenues and expenses, assets and liabilities and contingent assets and
liabilities at the date of the financial statements.
On an ongoing basis, we evaluate our estimates, judgments and assumptions,
including those related to revenue recognition, and bad debt provisions. We base
our estimates, judgments and assumptions on historical experience and forecasts,
and on various other factors that are believed to be reasonable under the
circumstances. Actual results may differ from these estimates under different
assumptions or conditions. We believe that the following critical accounting
policies affect our more significant estimates, judgments and assumptions used
in the preparation of our consolidated financial statements.
REVENUE RECOGNITION
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
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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
which 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 the indebtedness they incur with 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. Consulting services are recognized on a time and
material basis, or in a fixed price contract, on a percentage of completion
basis. Revenues from training are recognized as the services are provided.
In recognizing revenues based on the rate of completion method, we estimate
time to completion with revisions to estimates reflected in the period in which
changes become known. If we do not accurately estimate the resources required or
the scope of work to be performed, or do not 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.
ALLOWANCE FOR DOUBTFUL ACCOUNTS
We maintain an allowance for doubtful accounts using estimates that we make
based on factors we believe appropriate such as the composition of the accounts
receivable aging, historical bad debts, changes in payment patterns, customer
creditworthiness and current economic trends. If we used different assumptions,
or if the financial condition of customers were to deteriorate, resulting in an
impairment of their ability to make payments, additional provisions for doubtful
accounts would be required and would increase our bad debt expense.
RECENT ACCOUNTING PRONOUNCEMENTS
None.
FACTORS THAT MAY AFFECT FUTURE RESULTS
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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, cash equivalents and short term loans will depend on
our ability to maintain or 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 the uncertainties regarding
future information technology spending by our current and prospective customers,
we will need to raise additional capital to finance our operations. There can be
no assurances that we will be able to sell 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 our ordinary
shares, and the terms of these securities could impose restrictions on our
operations. The sale of additional equity or convertible debt securities would
result in additional dilution to the stock holdings of our shareholders.
Additionally, prior to the issuance of additional equity or convertible debt
securities to entities outside of Israel, we will need to obtain approval from
the Chief Scientist and there can be no assurance that we will be able to obtain
this consent in the future.
Alternatively, we may seek other forms of financing, such as credit from
banks or institutional lenders. We cannot be certain that additional financing
will be available to us in amounts or on terms acceptable to us, if at all. If
we are unable to obtain this additional financing, we may be required to reduce
the scope of our planned product development and marketing efforts, which could
harm our business, financial condition or operating results.
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.
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. Because 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, if
revenue levels fall below expectations, net income may be disproportionately
affected. 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:
-16-
o the volume and timing of customer orders, including a trend toward
larger customers generating larger transactions;
o the general seasonality of the enterprise software industry;
o internal budget constraints and approval processes of our current and
prospective clients;
o the length and unpredictability of our sales cycle;
o the indirect nature of our sales efforts through our channel partners;
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.
Because of the numerous factors that may cause fluctuations in our quarterly
operating results, we believe that period-to-period comparisons of our results
of operations are not necessarily meaningful and that such comparisons should
not be relied upon as an indication of future performance.
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 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;
-17-
o variations between our actual results and the expectations of
investors or published reports or analyses regarding our business;
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.
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, the rate of growth of information
technology spending may stagnate. Consequently, the demand for our products may
not grow or may decrease, which would adversely affect our results of
operations. In addition, it is difficult to predict economic conditions, 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.
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 Service Optimization Suite, which enables efficient
provisioning of services in enterprise environments. Our Service Optimization
Suite includes ClickSchedule, ClickFix, ClickAnalyze, ClickPlan, ClickMobile and
ClickForecast. We continually improve and enhance our Service Optimization Suite
to meet market requirements. Our growth depends on the development of market
acceptance of these products. We have no guarantee that the sales of our
products will continue to develop as we anticipate, or at all. Lack of long-term
demand for our products would have a material adverse effect on our business and
operating results.
IF WE FAIL TO EXPAND OUR RELATIONSHIPS WITH THIRD PARTIES THAT CAN PROVIDE
IMPLEMENTATION AND PROFESSIONAL SERVICES TO OUR CLIENTS, WE MAY BE UNABLE TO
INCREASE OUR REVENUES AND OUR BUSINESS COULD BE HARMED.
In order for us to focus more effectively on our core business of
developing and licensing software solutions, we need to continue to establish
relationships with third parties that can provide implementation and
professional services to our clients. Third-party implementation and consulting
firms can also be influential in the choice of resource optimization
applications by new clients. If we are unable to establish and maintain
effective, long-term relationships with implementation and professional services
providers, or if these providers do not meet the needs or expectations of our
clients, we may be unable to grow our revenues and our business could suffer. As
a result of the limited resources and capacities of many third-party
implementation providers, we may be unable to attain sufficient focus and
resources from the third-party providers to meet all of our clients' needs, even
if we establish relationships with these third parties. If sufficient resources
are unavailable, we will be required to provide these services internally, which
could limit our ability to meet other demands. Even if we are successful in
developing relationships with third-party implementation and professional
services providers, we will be subject to significant risk, as we cannot
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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.
Competition may increase in the future as current competitors expand their
product offerings and new companies attempt to 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 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.
-19-
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.
WE FACE RISKS RELATING TO OUR FINANCIAL STATEMENTS RESTATEMENT.
Following a reaudit of our financial statements conducted in the third and
fourth quarters of 2002 and the first quarter of 2003, we restated our financial
statements for 1999, 2000, 2001 and the first six months of 2002. On January 24,
2003, we filed an amendment to our annual report on Form 10-K for the fiscal
year ended December 31, 2001.
The restatement of our prior financial statements may lead to litigation
claims against us. The defense of claims may cause the diversion of management's
attention and resources, and we may be required to pay damages if any such
claims are not resolved in our favor. Any litigation, even if resolved in our
favor, could cause us to incur significant legal and other expenses.
In this regard, on August 25, 2003, a complaint 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. None of the defendants have been
served, and the case is in the preliminary stages. The complaint is
substantially similar to a complaint previously filed in the same court against
these parties and dismissed by the court for failure to perfect service on the
defendants in a timely manner. 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. 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.
-20-
In addition, we have provided information regarding our financial statement
restatement to the staff of the Securities and Exchange Commission on a
voluntary basis, and the SEC has requested additional information. Any
additional inquiry by the SEC may result in a diversion of our management's
attention and resources and require additional expenses for professional
services. In addition, any claims against us or any inquiry by the SEC may cause
the price of our ordinary shares to decline.
OUR MARKET MAY EXPERIENCE RAPID TECHNOLOGICAL CHANGES THAT COULD CAUSE OUR
PRODUCTS TO FAIL OR REQUIRE US TO REDESIGN OUR PRODUCTS, WHICH WOULD RESULT IN
INCREASED RESEARCH AND DEVELOPMENT EXPENSES.
Our market is characterized by rapid technological change, dynamic client
needs and frequent introductions of new products and product enhancements. If we
fail to anticipate or respond adequately to technology developments and client
requirements, or if our product development or introduction is delayed, we may
have lower revenues. Client product requirements can change rapidly as a result
of computer hardware and software innovations or changes in and the emergence,
evolution and adoption of new industry standards. For example, we offer Windows
2000 versions of our products due to the market acceptance of Windows 2000 over
the last several years. While we interface smoothly with UNIX systems, we
currently do not provide UNIX versions of our software. The actual or
anticipated introduction of new products has resulted and will continue to
result in some reformulation of our product offerings. Technology and industry
standards can make existing products obsolete or unmarketable or result in
delays in the purchase of such products. As a result, the life cycles of our
products are difficult to estimate. We must respond to developments rapidly and
continue to make substantial product development investments. As is customary in
the software industry, we have previously experienced delays in introducing new
products and features, and we may experience such delays in the future that
could impair our revenue and operating results.
OUR PRODUCTS COULD BE SUSCEPTIBLE TO ERRORS OR DEFECTS THAT COULD RESULT IN LOST
REVENUES, LIABILITY OR DELAYED OR LIMITED MARKET ACCEPTANCE.
Complex software products such as ours often contain errors or defects,
particularly when first introduced or when new versions or enhancements are
released. In the past, some of our products have contained errors and defects
that have delayed implementation or required us to expend additional resources
to correct the problems. Despite internal testing, testing by current and
potential clients and the history of use by our installed base of customers, our
current and future products may contain as yet undetected serious defects or
errors. Any such defects or errors could result in lost revenues, liability or a
delay in market acceptance of these products, any of which would have a material
adverse effect on our business, operating results and financial condition.
The performance of our products also depends in part upon the accuracy and
continued availability of third-party data. We rely on third parties that
provide information such as street and address locations and mapping functions
that we incorporate into our products. If these parties do not provide accurate
information, or if we are unable to maintain our relationships with them, our
reputation and competitive position in our industry could suffer and we could be
unable to develop or enhance our products as required.
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
-21-
names, and unauthorized parties may attempt to copy or otherwise obtain and use
our products or technology. Policing unauthorized use of our products and
technology is difficult, particularly in countries outside the U.S., and we
cannot be certain that the steps we have taken will prevent infringement or
misappropriation of our intellectual property rights.
Our end-user licenses are designed to prohibit unauthorized use, copying or
disclosure of our software and technology in the United States, Israel and other
foreign countries. However, these provisions may be unenforceable under the laws
of some jurisdictions and foreign countries. Unauthorized third parties may be
able to copy some portions of our products, reverse engineer or obtain and use
information and technology that we regard as proprietary. Third parties could
also independently develop competing technology or design around our technology.
If we are unable to successfully detect infringement and/or to enforce our
rights to our technology, we may lose competitive position in the market. We
cannot assure you that our means of protecting our intellectual property rights
in the United States, Israel or elsewhere will be adequate or that competing
companies will not independently develop similar technology. In addition, some
of our licensed users may allow additional unauthorized users to use our
software, and if we do not detect such use, we could lose potential license
fees.
OUR TECHNOLOGY AND OTHER INTELLECTUAL PROPERTY MAY BE SUBJECT TO INFRINGEMENT
CLAIMS.
Substantial litigation regarding technology rights and other intellectual
property rights exists in the software industry both in terms of infringement
and ownership issues. A successful claim of patent, copyright or trademark
infringement or conflicting ownership rights against us could cause us to make
changes in our business or significantly harm our business. We believe that our
products do not infringe the intellectual property rights of third parties.
However, we cannot assure you that we will prevail in all future intellectual
property disputes.
We expect that software products may be increasingly subject to third-party
infringement or ownership claims as the number of competitors in our industry
segment grows and the functionality of products in different industry segments
overlaps. Third parties may make a claim of infringement or conflicting
ownership rights against us with respect to our products and technology. Any
claims, with or without merit, could:
o be time-consuming to defend;
o result in costly litigation;
o divert management's attention and resources; or
o cause product shipment delays.
Further, if an infringement or ownership claim is successfully brought
against us, we may have to pay damages or royalties, enter into a licensing
agreement, and/or stop selling the product or using the technology 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
-22-
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, the
United Kingdom and Australia, and our executive officers and other key employees
are dispersed throughout the world. This geographic dispersion requires
significant management resources that may place us at a disadvantage compared to
our locally based competitors. In addition, our international operations are
generally subject to a number of risks, including:
o foreign currency exchange rate fluctuations;
o longer sales cycles;
o multiple, conflicting and changing governmental laws and regulations;
o expenses associated with customizing products for foreign countries;
o protectionist laws and business practices that favor local
competition;
o difficulties in collecting accounts receivable; and
o political and economic instability.
We expect international revenues to continue to account for a significant
percentage of total revenues and we believe that we must continue to expand our
international sales and professional services activities in order to be
successful. Our international sales growth will be limited if we are unable to
expand our international sales management and professional services
organizations, hire additional personnel, customize our products for local
markets and establish relationships with additional international distributors,
consultants and other third parties. If we fail to manage our geographically
dispersed organization, we may fail to meet or exceed our business plan and our
revenues may decline.
WE ARE INCORPORATED IN ISRAEL AND HAVE IMPORTANT FACILITIES AND RESOURCES
LOCATED IN ISRAEL, WHICH COULD BE NEGATIVELY AFFECTED DUE TO MILITARY OR
POLITICAL TENSIONS.
We are incorporated under the laws of the State of Israel and our research
and development facilities as well as significant executive offices are located
in Israel. Although substantial portions of our sales currently are to customers
outside of Israel, political, economic and military conditions in Israel could
nevertheless directly affect our operations. Since the establishment of the
State of Israel in 1948, a number of armed conflicts have taken place between
Israel and its Arab neighbors and a state of hostility, varying in degree and
intensity, has led to security and economic problems for Israel. Since September
2000, a continuous armed conflict with hostile elements in 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
-23-
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, and
Hannan Carmeli, our Executive Vice President, Product Services and Operations,
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 are
increasing. In the three month period ended March 31, 2004, 17% of our costs
were incurred in GBP and 7% in the Euro. We incur a portion of our expenses,
principally salaries and related personnel expenses in Israel, in NIS. In the
three month period ended March 31, 2004, 25% of our costs were incurred in NIS.
In the three month period ended March 31, 2004, we incurred 8% 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 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
-24-
manufacture of products or transfer of technology outside Israel will also
require us to pay increased royalties to the Chief Scientist up to 300%. We
currently conduct all of our manufacturing activities in Israel and intend to
continue doing so in the foreseeable future and therefore do not believe there
will be any increase in the amount of royalties we pay to the Chief Scientist.
Currently the office of the Chief Scientist does not consider the licensing of
our software in the ordinary course of business a transfer of technology and we
do not intend to transfer any technology outside of Israel. Consequently, we do
not anticipate having to pay increased royalties to the Chief Scientist for the
foreseeable future. In connection with our grant applications, we have made
representations and covenants to the Chief Scientist regarding our research and
development activities in Israel. The funding from the Chief Scientist is
subject to the accuracy of these representations and covenants. If we fail to
comply with any of these conditions, we could be required to refund payments
previously received together with interest and penalties and would likely be
denied receipt of these grants thereafter.
WE ANTICIPATE RECEIVING TAX BENEFITS FROM THE GOVERNMENT OF THE STATE OF ISRAEL,
HOWEVER THESE BENEFITS MAY BE DELAYED, REDUCED OR TERMINATED IN THE FUTURE.
Pursuant to the Law for the Encouragement of Capital Investments, the
Government of the State of Israel through the Investment Center has granted
"Approved Enterprise" status to three of our existing capital investment
programs. Consequently, we are eligible for certain tax benefits for the first
several years in which we generate taxable income. We have not, however, begun
to generate taxable income for purposes of this law and we do not expect to
utilize these tax benefits for the near future. Once we begin to generate
taxable income, our financial condition could suffer if our tax benefits were
significantly reduced. The benefits available to an approved enterprise are
dependent upon the fulfillment of certain conditions and criteria. If we fail to
comply with these conditions and criteria, the tax benefits that we receive
could be partially or fully canceled and we could be forced to refund the amount
of the benefits we received, adjusted for inflation and interest. From time to
time, the Government of Israel has discussed reducing or limiting the benefits.
We cannot assess whether these benefits will be continued in the future at their
current levels or at all.
IT MAY BE DIFFICULT TO ENFORCE A U.S. JUDGMENT AGAINST US, OUR OFFICERS AND
DIRECTORS AND THE ISRAELI ACCOUNTANTS NAMED AS EXPERTS IN THIS STATEMENT OR TO
ASSERT U.S. SECURITIES LAWS CLAIMS IN ISRAEL OR SERVE PROCESS ON SUBSTANTIALLY
ALL OF OUR OFFICERS AND DIRECTORS AND THESE ACCOUNTANTS.
We are incorporated in Israel and maintain significant operations in
Israel. Some of our executive officers and directors and the Israeli accountants
named as experts in this statement reside outside of the United States and a
significant portion of our assets and the assets of these persons are located
outside the United States. Therefore, it may be difficult for an investor, or
any other person or entity, to effect service of process on us or any of those
persons or to enforce a U.S. court judgment, based upon the civil liability
provisions of the U.S. federal securities laws, against us or any of those
persons, in an Israeli court. Additionally, it may be difficult for an investor,
or any other person or entity, to enforce civil liabilities under U.S. federal
securities laws in original actions instituted in Israel. We have appointed
ClickSoftware Inc., our 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.
-25-
A SIGNIFICANT PORTION OF OUR WORKFORCE IS SUBJECT TO ISRAELI LABOR LAWS, WHICH
MAY LEAD TO CLAIMS FOR ADDITIONAL OVERTIME PAY.
Israeli law provides that employment arrangements with employees not in
senior managerial positions, or whose working conditions and circumstances do
not facilitate employer supervision of their hours of work, must provide for
compensation which differentiates between compensation paid to employees for a
43 hour work week or for maximum daily work hours and compensation for overtime
work. Israeli law also limits the maximum number of hours of overtime. Certain
of our employment compensation arrangements are fixed and do not differentiate
between compensation for regular hours and overtime work. Therefore, we may face
potential claims from these employees asserting that the fixed salaries do not
compensate for overtime work. While there is no certainty that such claims will
prevail, even if they do, we do not believe that these claims would have a
material adverse effect on us.
OUR OFFICERS, DIRECTORS AND AFFILIATED ENTITIES OWN A LARGE PERCENTAGE OF OUR
ORDINARY SHARES AND COULD SIGNIFICANTLY INFLUENCE THE OUTCOME OF ACTIONS.
As of March 31, 2004, our executive officers, directors and entities
affiliated with them beneficially owned approximately 20.9% 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 us. 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 March 31, 2004, we had 27,134,819 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 March 31, 2004, we had 3,198,207
ordinary shares issuable upon exercise of outstanding options, and 1,522,684
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 Registration Statements on Form S-8 to register for resale the
ordinary shares reserved for issuance under our stock option plans.
-26-
IF WE ARE CHARACTERIZED AS A PASSIVE FOREIGN INVESTMENT COMPANY, OUR UNITED
STATES SHAREHOLDERS WILL BE SUBJECT TO ADVERSE TAX CONSEQUENCES.
If, for any taxable year, either, (1) 75% or more of our gross income is
passive income or (2) 50% or more of the fair market value of our assets,
including cash (even if held as working capital), produce or are held to produce
passive income, we may be characterized as a "passive foreign investment
company" ("PFIC") for United States federal income tax purposes. Passive income
includes dividends, interest, royalties, rents annuities and the excess of gains
over losses from the disposition of assets, which produce passive income. For
purposes of the asset test, cash is considered to be an asset that produces
passive income. As a result of our cash position and the decline in the value of
our assets, there is a substantial risk that we are a PFIC for U.S. federal
income tax purposes.
If we are characterized as a PFIC, our shareholders who are residents of
the United States will be subject to adverse United States tax consequences. Our
treatment as a PFIC could result in a reduction in the after-tax return to
shareholders resident in the United States and may cause a reduction in the
value of such shares.
If we were to be treated as a PFIC, our shareholders will be required, in
certain circumstances, to pay an interest charge together with tax calculated at
maximum rates on certain "excess distributions" including any gain on the sale
of ordinary shares. In order to avoid this tax consequence, they (1) may be
permitted to make a "qualified electing fund" election (however we do 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.
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 the three
month period ended March 31, 2004, 57% of our revenues and 42% 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.
-27-
INTEREST RATE RISK
As of March 31, 2004, we had cash and cash equivalents of $12.1 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 March 31, 2004 and presents principal cash flows
and related weighted averages interest rates by expected maturity dates.
YEAR OF MATURITY 2004
(in thousands of dollars)
A) CASH AND CASH EQUIVALENTS AND INVESTMENT PORTFOLIO:
Cash and Cash equivalents $6,871
Average interest rate 0.7%
Short Term Bonds $2,500
Average interest rate 1.06%
Bank deposits $3,302
Average interest rate 1.4%
B) LONG-TERM DEBTS:
None.
ITEM 4. CONTROLS AND PROCEDURES
Based on their evaluation as of March 31, 2004, our Chief Executive Officer
and Chief Financial Officer have concluded that our disclosure controls and
procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities
Exchange Act of 1934, as amended) were sufficiently effective to ensure that the
information required to be disclosed by us in the Quarterly Report on Form 10-Q
was recorded, processed, summarized and reported within the time periods
specified within the SEC's rules and instructions for Form 10-Q.
There were no changes in our internal controls over financial reporting
during the quarter ended March 31, 2004 that have materially affected or are
reasonably likely to materially affect our internal controls over financial
reporting.
Our management, including our Chief Executive Officer and Chief Financial
Officer, does not expect that our disclosure controls and procedures or our
internal controls will prevent all error and all fraud. A control system, no
matter how well conceived and operated, can provide only reasonable, not
absolute, assurance that the objectives of the control system have been met.
Furthermore, the design of a control system must reflect the fact that there are
resource constraints, and the benefits of controls must be considered relative
to their costs. Because of the inherent limitations in all control systems, no
evaluation of controls can provide absolute assurance that all control issues
and instances of fraud, if any, within the Company have been detected.
-28-
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
On August 25, 2003, a complaint was filed against us, one of our officers
and one of our former officers in the United States District Court for the
District of Massachusetts. None of the defendants have been served, and the case
is in the preliminary stages. The complaint is substantially similar to a
complaint previously filed in the same court against these parties and dismissed
by the court for failure to perfect service on the defendants in a timely
manner. 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. 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.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
ITEM 5. OTHER INFORMATION
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
EXHIBIT INDEX
(a) Exhibits
- --------------------- ----------------------------------------------------------
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 February 9, 2004, 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 year and quarter ended December 31, 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: May 12, 2004
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