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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------------------
FORM 10-Q
(MARK ONE)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 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 June 30, 2004, there were 27,305,371 shares of the Registrant's
ordinary shares, par value 0.02 NIS, outstanding (net of treasury stock).
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-i-
CLICKSOFTWARE TECHNOLOGIES LTD.
FORM 10-Q
FOR THE QUARTER ENDED JUNE 30, 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..............................4
Notes to the Condensed Consolidated Financial Statements.....................5
ITEM 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations.......................................................7
ITEM 3. Quantitative and Qualitative Disclosures About Market Risk..................32
ITEM 4. Controls and Procedures.....................................................33
PART II. OTHER INFORMATION....................................................................34
ITEM 1. Legal Proceedings...........................................................34
ITEM 2. Changes in Securities and Use of Proceeds...................................34
ITEM 4. Submission of Matters to a Vote of Security Holders.........................35
ITEM 5. Other Information...........................................................35
ITEM 6. Exhibits and Reports on Form 8-K4...........................................35
SIGNATURES....................................................................................36
Exhibit 31.1..................................................................................37
Exhibit 31.2..................................................................................38
Exhibit 32.1..................................................................................39
Exhibit 32.2..................................................................................40
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CLICKSOFTWARE TECHNOLOGIES LTD.
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
JUNE 30, DECEMBER 31,
2004 2003
------------ ------------
(UNAUDITED)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents.......................................... $ 4,378 $ 7,695
Short-term investments............................................. 7,760 3,394
Trade receivables, net............................................. 3,768 3,362
Other receivables and prepaid expenses............................. 1,016 722
------------ ------------
Total current assets........................................... 16,922 15,173
------------ ------------
Long-term investments.............................................. 550 580
Severance pay deposits............................................. 840 779
Property and equipment, net........................................ 999 923
------------ ------------
Total assets................................................... $ 19,311 $ 17,455
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable and accrued expenses.............................. $ 3,661 $ 4,077
Deferred revenues.................................................. 3,946 2,275
------------ ------------
Total current liabilities...................................... 7,607 6,352
------------ ------------
LONG-TERM LIABILITIES:
Accrued severance pay.............................................. 1,564 1,490
------------ ------------
Total liabilities ............................................. 9,171 7,842
------------ ------------
SHAREHOLDERS' EQUITY:
Special preferred shares NIS 0.02 par value: Authorized -
5,000,000 as of June 30, 2004 and December 31, 2003; no
issued and outstanding shares as of June 30, 2004 and
December 31, 2003............................................
Ordinary shares of NIS 0.02 par value: Authorized - 100,000,000
as of June 30, 2004 and December 31, 2003; Issued -
27,344,371 shares as of June 30, 2004 and 27,119,955 shares
as of December 31, 2003. Outstanding - 27,305,371 shares as
of June 30, 2004 and 27,080,955 shares as of December 31,
2003......................................................... 110 109
Additional paid-in capital......................................... 70,871 70,276
Deferred stock compensation........................................ (371) -
Accumulated deficit................................................ (60,427) (60,729)
------------- ------------
10,183 9,656
Treasury stock, at cost: 39,000 shares................................. (43) (43)
------------ ------------
Total shareholders' equity..................................... 10,140 9,613
------------ ------------
Total liabilities and shareholders' equity..................... $ 19,311 $ 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 JUNE 30,
---------------------------
2004 2003
---------- ----------
Revenues:
Software license..................................................... $ 1,912 $ 2,310
Services............................................................. 3,507 2,750
---------- ----------
Total revenues.................................................... 5,419 5,060
========== ==========
Cost of revenues:
Software license..................................................... 169 305
Services............................................................. 1,656 1,422
---------- ----------
Total cost of revenues............................................ 1,825 1,727
========== ==========
Gross profit...................................................... 3,594 3,333
========== ==========
Operating expenses:
Research and development expenses, net............................... 600 508
Selling and marketing expenses....................................... 2,054 1,827
General and administrative expenses.................................. 701 767
Amortization of deferred Stock-based compensation (1)................ 3 26
---------- ----------
Total operating expenses.......................................... 3,358 3,128
========== ==========
Operating income.................................................. 236 205
Interest and other expenses, net ....................................... (6) (32)
---------- ----------
Net income........................................................... $ 230 $ 173
========== ==========
Basic and diluted net income per share.................................. $ 0.01 $ 0.01
========== ==========
Shares used in computing basic net income per share..................... 27,156,999 25,647,888
========== ==========
Shares used in computing diluted net income per share................... 28,360,995 25,942,114
========== ==========
(1) Amortization of deferred stock-based compensation would be further classified as follows:
THREE MONTHS ENDED JUNE 30,
---------------------------
2004 2003
---------- ----------
Cost of revenues........................................................ $ - $ 2
Research and development expenses....................................... - 4
Selling and marketing expenses.......................................... - 1
General and administrative expenses..................................... 3 19
---------- ----------
Total................................................................ $ 3 $ 26
========== ==========
The accompanying notes are an integral part of these condensed consolidated financial statements.
-2-
CLICKSOFTWARE TECHNOLOGIES LTD.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
(UNAUDITED)
SIX MONTHS ENDED JUNE 30,
--------------------------------
2004 2003
---------- ----------
Revenues:
Software license.............................................. $ 4,182 $ 4,555
Services...................................................... 6,245 5,646
---------- ----------
Total revenues............................................. 10,427 10,201
========== ==========
Cost of revenues:
Software license.............................................. 376 436
Services...................................................... 3,058 3,099
---------- ----------
Total cost of revenues..................................... 3,434 3,535
========== ==========
Gross profit............................................... 6,993 6,666
========== ==========
Operating expenses:
Research and development expenses, net........................ 1,341 994
Selling and marketing expenses................................ 4,008 3,782
General and administrative expenses........................... 1,374 1,497
Amortization of deferred Stock-based compensation (1)......... 3 101
---------- ----------
Total operating expenses................................... 6,726 6,374
========== ==========
Operating income........................................... 267 292
Interest and other income, net .................................. 35 39
---------- ----------
Net income.................................................... $ 302 $ 331
========== ==========
Basic and diluted net income per share........................... $ 0.01 $ 0.01
========== ==========
Shares used in computing basic net income per share.............. 27,096,637 25,632,149
========== ==========
Shares used in computing diluted net income per share............ 27,732,069 25,705,706
========== ==========
(1) Amortization of deferred stock-based compensation would be further classified as follows:
SIX MONTHS ENDED JUNE 30,
--------------------------------
2004 2003
---------- ----------
Cost of revenues................................................. $ - $ 7
Research and development expenses................................ - 15
Selling and marketing expenses................................... - 4
General and administrative expenses.............................. 3 75
---------- ----------
Total......................................................... $ 3 $ 101
========== ==========
The accompanying notes are an integral part of these condensed consolidated financial statements.
-3-
CLICKSOFTWARE TECHNOLOGIES LTD.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
SIX MONTHS ENDED JUNE 30,
-----------------------------
2004 2003
------------ ------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income................................................................ $ 302 $ 331
Adjustments to reconcile net income to net cash provided by operating
activities:
Depreciation.......................................................... 190 239
Amortization of deferred compensation................................. 3 101
Unrealized loss from investments...................................... 21 11
Severance pay, net.................................................... 13 9
Trade receivables..................................................... (406) 1,270
Other receivables and prepaid expenses............................... (294) (268)
Accounts payable and accrued expenses................................. (416) (906)
Deferred revenues..................................................... 1,671 954
------------ ------------
Net cash provided by operating activities................................. 1,084 1,741
============ ============
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of investments............................................... (4,357) (1,205)
Purchases of equipment................................................ (266) (24)
------------ ------------
Net cash used in investing activities..................................... (4,623) (1,229)
============ ============
CASH FLOWS FROM FINANCING ACTIVITIES:
Short-term debt, net.................................................. - (17)
Employees' options exercised and employees' stock purchase plan shares
purchased............................................................. 222 15
------------ ------------
Net cash provided by (used in) financing activities....................... 222 (2)
============ ============
Increase (decrease) in cash and cash equivalents.......................... (3,317) 510
Cash and cash equivalents at beginning of period.......................... 7,695 3,400
------------ ------------
Cash and cash equivalents at end of period................................ $ 4,378 $ 3,910
============ ============
Supplemental cash flow information:
Cash paid for interest.................................................... $ 10 $ 8
============ ============
The accompanying notes are an integral part of these condensed consolidated financial statements.
-4-
CLICKSOFTWARE TECHNOLOGIES LTD.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(INFORMATION AS OF JUNE 30, 2004 AND FOR THE THREE AND SIX MONTHS ENDED
JUNE 30, 2004 AND JUNE 30, 2003)
(IN THOUSANDS, EXCEPT SHARE DATA AND SHARE NUMBERS)
(UNAUDITED)
1. BASIS OF PRESENTATION
The accompanying condensed unaudited interim consolidated financial
statements have been prepared by ClickSoftware Technologies Ltd.
("ClickSoftware" or the "Company") in accordance with accounting principles
generally accepted in the United States of America for interim financial
information and the instructions to Form 10-Q and Article 10 of Regulation S-X.
These financial statements reflect all adjustments, consisting of normal
recurring adjustments and accruals, which are, in the opinion of management,
necessary for a fair presentation of the financial position of the Company as of
June 30, 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
-5-
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 and
basic and diluted net income per share would have increased or decreased to the
following pro-forma amounts:
THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30,
--------------------------- ---------------------------
2004 2003 2004 2003
============ ============ ============ ============
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
Net Income
As reported................................ $ 230 $ 173 $ 302 $ 331
Add - stock based compensation
determined under APB 25................. 3 26 3 101
Deduct - stock based compensation
determined under SFAS 123............... (260) (115) (477) (197)
Pro-forma.................................. $ (27) $ 84 $ (172) $ 235
============ ============ ============ ============
Basic net income per share
As reported................................ $ 0.01 $ 0.01 $ 0.01 $ 0.01
Pro-forma.................................. $ (0.00) $ 0.00 $ (0.01) $ 0.01
Diluted net income per share
As reported................................ $ 0.01 $ 0.01 $ 0.01 $ 0.01
Pro-forma.................................. $ (0.00) $ 0.00 $ (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 150% (corresponding period
prior year 149%); and (4) risk-free interest rate of 3.1% (corresponding period
prior year 4%).
-6-
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.
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 3,521,856 and 3,892,993 for the three months ended June 30, 2004 and June
30, 2003, respectively. The total number of shares excluded from the
calculations of diluted net income per share were 2,317,860 and 3,598,767 for
the three months ended June 30, 2004 and June 30, 2003, respectively.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
This report contains certain forward-looking statements (as such term is
defined in Section 27A of the Securities Act of 1933 and Section 21E of the
Securities Exchange Act of 1934) and information relating to us that are based
on the beliefs of our management as well as assumptions made by and information
currently available to our management, including statements related to products,
markets, and future results of operations and profitability, and may include
implied statements concerning market acceptance of our products, and our growing
leadership role in the marketplace. In addition, when used in this report, the
words "likely," "will," "suggests," "may," "would," "could," "anticipate,"
"believe," "estimate," "expect," "intend," "plan, "predict" and similar
expressions and their variants, as they relate to us or our management, may
identify forward-looking statements. Such statements reflect our judgment as of
the date of this quarterly report on Form 10-Q with respect to future events,
the outcome of which is subject to certain risks, including the risk factors set
forth herein which may have a significant impact on our business, operating
results or financial condition. Investors are cautioned that these
forward-looking statements are inherently uncertain. Should one or more of these
risks or uncertainties materialize, or should underlying assumptions prove
incorrect, actual results or outcomes may vary materially from those described
herein. We undertake no 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 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.
-7-
Revenues for the second quarter of 2004 amounted to $5.4 million and we
maintained profitability for the sixth consecutive quarter. We believe that we
can manage the level of our expenses relative to our revenues so as to maintain
annual profitability, although no assurances can be given in that regard.
At the end of the second quarter of 2004, we formalized a strategic
alliance with IBM pursuant to which we will team with IBM in providing
state-of-the-art field-force optimization solutions. We believe that this
teaming relationship with IBM marks a significant step towards our partner
channel strategy. In connection with this strategic alliance, we issued 100,000
of our ordinary shares to IBM for a purchase price of 0.02 NIS (New Israel
Shekels) per share and agreed to issue an additional 100,000 of our ordinary
shares to IBM for a purchase price of 0.02 NIS upon the first anniversary of the
initial issuance. We also issued IBM 250,000 warrants for our ordinary shares
with an exercise price of $2.38 per share. 62,500 of these warrants are
immediately vested and exercisable. At the end of each of the three years
following the warrant issuance, up to 62,500 warrants will vest based upon the
attainment of certain revenue targets relating to revenue generated from the
strategic alliance. If all performance milestones are met, approximately 1.7% of
ClickSoftware's total current equity would be issuable to IBM. We continue to
value our relationships with our other channel partners, and believe that these
channel relationships will be key contributors to our future growth, although no
assurances can be given in that regard.
As part of our strategic alliance with IBM, we have established a
Project Office to manage the day-to-day affairs associated with the
relationship. Both we and IBM have designated employees to manage and foster our
relationship. Under our teaming agreement, in the first year of the strategic
alliance we will reimburse IBM for a portion of the employees and associated
expenses related to the Project Office.
The Company's cash and cash-equivalents, and short and long-term
investments remain approximately the same as the end of the first quarter of
2004.
With larger customers generating larger transactions, and with the
greater involvement of our channel partners in many of the transactions, the
results of any 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.
-8-
RESULTS OF OPERATIONS
RESULTS OF OPERATIONS FOR THREE MONTHS ENDED JUNE 30, 2004 AND 2003
Our operating results, expressed as a percentage of revenues, for each
of the three month periods ended June 30, 2004 and 2003 are as follows:
QUARTER ENDED JUNE 30,
-----------------------
2004 2003
---------- ----------
Revenues:
Software license................................... 35% 46%
Services........................................... 65 54
------ ------
Total revenues................................... 100 100
Cost of revenues:
Software license................................... 3 6
Services........................................... 31 28
------ ------
Total cost of revenues........................... 34 34
------ ------
Gross profit 66 66
====== ======
Operating expenses:
Research and development expenses, net............. 11 10
Selling and marketing expenses..................... 38 36
General and administrative Expenses............... 13 15
Amortization of deferred Stock-based compensation.. 0 1
------ ------
Total operating Expenses.............................. 62 62
====== ======
Operating income...................................... 4 4
====== ======
Interest and other expenses, net...................... 0 (1)
====== ======
Net Income............................................ 4% 3%
====== ======
REVENUES
REVENUE BREAKDOWN
------------------------------
QUARTER ENDED JUNE 30,
------------------------------
2004 % CHANGE 2003
-------- -------- --------
(IN THOUSANDS)
Revenues:
Software license...................................... $ 1,912 (17)% $ 2,310
Percentage of total revenues.......................... 35% 46%
Services.............................................. 3,507 28% 2,750
Percentage of total revenues.......................... 65% 54%
Total Revenues........................................ $ 5,419 7% $ 5,060
-9-
Revenues increased $0.4 million, or 7%, to $5.4 million for the three
months ended June 30, 2004, from $5.1 million for the three months ended June
30, 2003. Revenues from software license were $1.9 million and revenues from
services were $3.5 million, down 17% and up 28% respectively from the same
quarter a year earlier. The increase in revenues from services was the result of
our ability to implement large-scale projects during second quarter of 2004 as
well as an increase in number of customers under post-contract support
agreements resulted in more support revenues. 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
------------------------------
QUARTER ENDED JUNE 30,
------------------------------
2004 % CHANGE 2003
-------- -------- --------
(IN THOUSANDS)
Revenues:
North America......................................... $ 1,573 (29)% $ 2,226
Europe................................................ 3,276 43% 2,287
Asia Pacific and Africa............................... 570 4% 547
-------- --------
Total Revenues........................................ $ 5,419 7% $ 5,060
======== ========
For the three months ended June 30, 2004, 29% of our revenues were
generated in North America (with 22% in the U.S.), 60% in Europe (with 29% in
U.K and 26% in Germany) and 11% in Asia Pacific and Africa. For the three months
ended June 30, 2003, 44% of our revenues were generated in North America (with
35% in the U.S.), 45% in Europe (with 29% in the U.K.) and 11% in Asia Pacific
and Africa. During the second quarter of 2004, revenues in North America
experienced a reduction but we anticipate that revenues in this region will grow
in the second half of 2004.
SOFTWARE LICENSES
As reflected in the table entitled "Revenue Breakdown", above, software
license revenues were $1.9 million or 35% of revenues for the three months ended
June 30, 2004 and $2.3 million or 46% of revenues for the three months ended
June 30, 2003. The decrease in software license revenues by $0.4 million or 17%
from the three months ended June 30, 2003 was due to a decrease in repeat orders
partially offset by an increase in orders from new customers.
SERVICES
Service revenues were $3.5 million or 65% of revenues for the three
months ended June 30, 2004 and $2.8 million or 54% of revenues for the three
months ended June 30, 2003. The increase in services revenues by $0.8 million or
28% from the three months ended June 30, 2003 was due to an increase in
consulting services attributable to large scale implementation projects that we
performed in the second quarter of 2004 as well as from 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.
-10-
Cost of revenues was $1.8 million or 34% of revenues for the three
months ended June 30, 2004 and $1.7 million or 34% of revenues for the three
months ended June 30, 2003. The increase in cost of revenues by $0.1 million or
6% from the three months ended June 30, 2003 was due to an increase in our
professional services activities in the second quarter partially offset by a
decrease in costs of software licenses.
We expect our cost of revenues on an absolute basis 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 3% of revenues
for the three months ended June 30, 2004 and $0.3 million or 6% for the three
months ended June 30, 2003. The decrease in the cost of software license
revenues by $136,000 or 45% from the three months ended June 30, 2003 was
primarily due to a decrease in 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 second quarter of 2004.
COST OF SERVICES
Cost of service revenues was $1.7 million or 31% of revenues for the
three months ended June 30, 2004 and $1.4 million or 28% of revenues for the
three months ended June 30, 2003. The increase in the cost of service revenues
by $0.3 million or 16% from the three months ended June 30, 2003 was primarily
due to the increase of our professional services activities in the second
quarter of 2004 and primarily resulted from $0.2 million in increased related
payroll expenses.
GROSS PROFIT
Gross profit was $3.6 million, or 66% of revenues for the three months
ended June 30, 2004 and $3.3 million, or 66% of revenues for the three months
ended June 30, 2003.
The increase in gross profit by $0.3 million or 8% from the three months
ended June 30, 2003 was due to higher revenues and higher margins generated by
our services activities partially offset by lower gross profits from software
license revenues.
OPERATING EXPENSES
Operating expenses are categorized into research and development
expenses, selling and marketing expenses, general and administrative expenses,
and stock-based compensation.
OPERATING EXPENSES
------------------------------
QUARTER ENDED JUNE 30,
------------------------------
2004 % CHANGE 2003
-------- -------- --------
(IN THOUSANDS)
Operating Expenses:
Research and development expense, net.............. $ 600 18% $ 508
Selling and marketing expenses..................... 2,054 12% 1,827
General and administrative expense................. 701 (9)% 767
Amortization of deferred stock-based compensation.. 3 (88)% 26
-------- --------
Total Operating Expenses.............................. $ 3,358 7% $ 3,128
-------- --------
Average No. of employees.............................. 138 114
-------- --------
-11-
Total operating expenses were $3.4 million or 62% of revenues for the
three months ended June 30, 2004 and $3.1 million or 62% of revenues for the
three months ended June 30, 2003. The increase in operating expenses by $0.2
million or 7% from the three months ended June 30, 2003 reflects an increase in
our selling and marketing expenses as well as research and development expenses
as we expand our activities and add personnel to support these efforts. The
increase in operating expenses was partially offset by a decrease in general and
administrative expenses.
We anticipate a moderate increase in our operating expenses in the
coming quarters of 2004, particularly our selling and marketing expenses, as we
continue to 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 $0.6
million or 11% of revenues for the three months ended June 30, 2004 and $0.5
million or 10% of revenues for the three months ended June 30, 2003. Research
and development expenses, prior to participation grants from the Office of the
Chief Scientist of the Government of Israel, were $0.8 million for the three
months ended June 30, 2004 and $0.6 million for the three months ended June 30,
2003. We received grants of $153,000 from the Chief Scientist for the three
months ended June 30, 2004 compared to $84,000 for the three months ended June
30, 2003. The increase in research and development expenses, prior to
participation grants from the Office of the Chief Scientist of the Government of
Israel, by $0.2 million or 27% from the three months ended June 30, 2003 was
primarily due to an increase in number of our research and development personnel
which resulted in $0.1 million increase in related payroll expenses.
We anticipate a moderate increase in our gross research and development
expenses in the coming quarters of 2004 as we expand our overall activities and
recruit personnel to support these activities.
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 $2.1 million or 38% of revenues for
the three months ended June 30, 2004 and $1.8 million or 36% of revenues for the
three months ended June 30, 2003. The increase in our selling and marketing
expenses by $0.3 million or 12% was due to an increase in the number of
employees which resulted in a $0.1 million increase in related payroll expenses,
increase in selling and marketing efforts which resulted in an increase of $0.2
million in other selling and marketing expenses. 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.
-12-
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 June 30, 2004 and $0.8 million or 15% of revenues for the
three months ended June 30, 2003. The decrease in general and administrative
expenses by $0.1 million or 9% from the three months ended June 30, 2003 was
primarily due to a decrease in bad debt charges by $0.1 million, payroll related
expenses by $0.1 million partially offset by an increase in legal expenses by
$0.1 million.
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 were $3,000 for the three months ended
June 30, 2004 and $26,000 for the three months ended June 30, 2003. As of June
30, 2004, there was an increase in deferred compensation balance by $0.3
million, which will be amortized over the next three years.
INTEREST EXPENSES, NET OF INTEREST INCOME
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 expenses, net of interest income, were $6,000 for the three
months ended June 30, 2004 and $32,000 for the three months ended June 30, 2003.
The decrease in interest expenses resulted from a decrease in losses resulting
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 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 35% of taxable income. On June 29, 2004, the Israeli Knesset passed
Amendment No.140 to the Income Tax Ordinance, according to which the corporate
tax rate would gradually be reduced from 36% in 2003 to 35% in 2004 and 30% in
2007. 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
-13-
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 $0.2 million or 4% of revenues for the three months ended
June 30, 2004 and $0.2 million or 3% of revenues for the three months ended June
30, 2003.
RESULTS OF OPERATIONS FOR SIX MONTHS ENDED JUNE 30, 2004 AND 2003
Our operating results, expressed as a percentage of revenues, for each
of the six month periods ended June 30, 2004 and 2003 are as follows:
SIX MONTHS ENDED JUNE 30,
--------------------------------
2004 2003
---------- ----------
Revenues:
Software license................................... 40% 45%
Services........................................... 60 55
------ ------
Total revenues................................... 100 100
Cost of revenues:
Software license................................... 4 4
Services........................................... 29 31
------ ------
Total cost of revenues........................... 33 35
------ ------
Gross profit 67 65
====== ======
Operating expenses:
Research and development expenses, net............. 13 10
Selling and marketing expenses..................... 38 37
General and administrative expenses............... 13 15
Amortization of deferred Stock-based compensation.. 0 1
------ ------
Total operating Expenses.............................. 64 63
====== ======
Operating income...................................... 3 2
====== ======
Interest and other income, net........................ 0 1
====== ======
Net Income............................................ 3% 3%
====== ======
REVENUES
REVENUE BREAKDOWN
------------------------------
SIX MONTHS ENDED JUNE 30,
------------------------------
2004 % CHANGE 2003
-------- -------- --------
(IN THOUSANDS)
Revenues:
Software license...................................... $ 4,182 (8)% $ 4,555
Percentage of total revenues.......................... 40% 45%
Services.............................................. 6,245 11% 5,646
Percentage of total revenues.......................... 60% 55%
Total Revenues........................................ $ 10,427 2% $ 10,201
-14-
Revenues increased by $0.2 million, or 2%, to $10.4 million for the six
months ended June 30, 2004, from $10.2 million for the six months ended June 30,
2003.
REVENUE BY TERRITORY
------------------------------
SIX MONTHS ENDED JUNE 30,
------------------------------
2004 % CHANGE 2003
-------- -------- --------
(IN THOUSANDS)
Revenues:
North America......................................... $ 3,365 (23)% $ 4,378
Europe................................................ 5,849 29% 4,544
Asia Pacific and Africa............................... 1,213 (5)% 1,279
Total Revenues........................................ $ 10,427 2% $ 10,201
For the six months ended June 30, 2004, 32% of our revenues were
generated in North America (with 26% in the U.S.), 56% in Europe (with 24% in
Germany, 18% in U.K and 11% in Netherlands) and 12% in Asia Pacific and Africa.
For the six months ended June 30, 2003, 43% of our revenues were generated in
North America (with 34% in the U.S.), 45% in Europe (with 21% in U.K, and 12% in
Netherlands) and 12% in Asia Pacific and Africa. During the first half of 2004,
revenues in North America experienced a reduction, but we anticipate that
revenues in this region will grow in the second half of 2004.
SOFTWARE LICENSES
As reflected in the table entitled "Revenue Breakdown", above, software
license revenues were $4.2 million or 40% of revenues for the six months ended
June 30, 2004 and $4.6 million or 45% of revenues for the six months ended June
30, 2003. The decrease in software license revenues by $0.4 million or 8% from
the six months ended June 30, 2003 was primarily due to a decrease in repeat
orders partially offset by an increase in orders from new customers.
SERVICES
Service revenues were $6.2 million or 60% of revenues for the six months
ended June 30, 2004 and $5.6 million or 55% of revenues for the six months ended
June 30, 2003. The increase in services revenues by $0.6 million or 11% from the
six months ended June 30, 2003 was primarily due to the increase in number of
customers under post-contract support agreements which resulted in more support
revenues, partially offset by a decrease in consulting services.
COST OF REVENUES
Cost of revenues were $3.4 million or 33% of revenues for the six months
ended June 30, 2004 and $3.5 million or 35% of revenues for the six months ended
June 30, 2003. The decrease in cost of revenues by $0.1 million or 3% from the
six months ended June 30, 2003 was due to a decrease in the cost of software
licenses as a result of lower license revenues.
COST OF SOFTWARE LICENSES
Cost of software license revenues were $0.4 million or 4% of revenues
for the six months ended June 30, 2004 and $0.4 million or 4% for the six months
ended June 30, 2003. The slight decrease in the cost of software license
revenues by $60,000 or 14% from the six months ended June 30, 2003 was primarily
due to a decrease in 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 six months of 2004.
-15-
COST OF SERVICES
Cost of service revenues was $3.1 million or 29% of revenues for the six
months ended June 30, 2004 and $3.1 million or 31% of revenues for the six
months ended June 30, 2003. The cost of service revenues in the six months ended
June 30, 2004 decreased by $41,000 or 1% from the six months ended June 30,
2003.
GROSS PROFIT
Gross profit was $7.0 million, or 67% of revenues for the six months
ended June 30, 2004 and $6.7 million, or 65% of revenues for the six months
ended June 30, 2003.
The increase in gross margins by 2% from the six months ended June 30,
2003 was due to a higher level of service revenues obtained with increased
service activities and higher service margins.
OPERATING EXPENSES
Operating expenses are categorized into research and development
expenses, selling and marketing expenses, general and administrative expenses,
and stock based compensation.
OPERATING EXPENSES
SIX MONTHS ENDED JUNE 30,
------------------------------
2004 % CHANGE 2003
-------- -------- --------
(IN THOUSANDS)
Operating Expenses:
Research and development expense, net.............. $ 1,341 35% $ 994
Selling and marketing expenses..................... 4,008 6% 3,782
General and administrative expense................. 1,374 (8)% 1,497
Amortization of deferred stock-based compensation.. 3 (97)% 101
-------- --------
Total Operating Expenses.............................. $ 6,726 6% $ 6,374
-------- --------
Average No. of employees.............................. 136 113
-------- --------
Total operating expenses were $6.7 million or 64% of revenues for the
six months ended June 30, 2004 and $6.4 million or 63% of revenues for the six
months ended June 30, 2003. The increase in operating expenses (excluding
amortization of deferred stock-based compensation) by $0.5 million or 7% from
the six months ended June 30, 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 as well as increase in our selling and
marketing expenses activities as we expand our activities and add personnel to
support these efforts. The increase in operating expenses was partially offset
by a decrease in general and administrative expenses.
RESEARCH AND DEVELOPMENT EXPENSES, NET
Research and development expenses, net of related grants, were $1.3
million or 13% of revenues for the six months ended June 30, 2004 and $1.0
million or 10% of revenues for the six months ended June 30, 2003. Research and
development expenses, prior to participation grants from the Office of the Chief
Scientist of the Government of Israel, were $1.5 million for the six months
ended June 30, 2004 and $1.1 million for the six months ended June 30, 2003. We
received grants of $153,000 from the Chief Scientist for the six months ended
June 30, 2004, and we received grants of $98,000 for the six months ended June
30, 2003. The increase in research and development expenses, prior to
participation grants from the Office of the Chief Scientist of the Government of
Israel, by $0.4 million or 37% from the six months ended June 30, 2003 was
primarily due to an increase in number of our research and development personnel
which resulted in $0.3 million increase in related payroll expenses.
-16-
SELLING AND MARKETING EXPENSES
Selling and marketing expenses were $4.0 million or 38% of revenues for
the six months ended June 30, 2004 and $3.8 million or 37% of revenues for the
six months ended June 30, 2003. The increase in our Selling and marketing
expenses by $0.2 million or 6% was due to an increase in the number of employees
which resulted in $0.2 million increase in related payroll expenses.
GENERAL AND ADMINISTRATIVE EXPENSES
General and administrative expenses were $1.4 million or 13% of revenues
for the six months ended June 30, 2004 and $1.5 million or 15% of revenues for
the six months ended June 30, 2003. The decrease in general and administrative
expenses by $0.1 million or 8% from the six months ended June 30, 2003 was
primarily due to a decrease in payroll related expenses by $0.1 million, bad
debt expense by $0.1 million and partially offset by an increase in legal
expenses by $0.1 million.
AMORTIZATION OF STOCK-BASED COMPENSATION
Stock-based compensation expenses were $3,000 for the six months ended June 30,
2004 and $101,000 for the six months ended June 30, 2003. As of June 30, 2004,
there was an increase in deferred compensation balance by $0.4 million, which
will be amortized over the next three years.
INTEREST AND OTHER INCOME, NET
Interest income, net of interest expenses, was $35,000 for the six
months ended June 30, 2004 and $39,000 for the six months ended June 30, 2003.
LIQUIDITY AND CAPITAL RESOURCES
Our cash and investments increased by $1.0 million or 9% to $12.7
million as of June 30, 2004 from $11.7 million as of December 31, 2003. Our
primary sources of cash and investments during the six months ended June 30,
2004 were cash flows generated from operations of $1.1 million and $0.2 million
from exercises of employee stock options and employee share purchase plans
("ESPP") purchases.
As of June 30, 2004 we had cash and cash equivalents of approximately
$4.4 million, short-term investments of approximately $7.8 million and long-term
investments of approximately $0.5 million. As of June 30, 2004 approximately
$1.0 million in short-term and long-term investments had been deposited with
banks to secure letters of credit totaling approximately $0.9 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.
-17-
CASH AND INVESTMENTS
------------------------------
JUNE 30 DECEMBER 31
2004 % CHANGE 2003
-------- -------- --------
Cash and cash equivalents............................. $ 4,378 $ 7,695
Short-term investments................................ 7,760 3,394
Long-term investments................................. 550 580
-------- --------
Total cash and investments............................ $ 12,688 9% $ 11,669
======== ========
For the six months ended June 30, 2004, net cash provided by operations
was $1.1 million, comprised of our net income of $0.3 million, an increase in
trade receivables of $0.4 million, an increase in other receivables of $0.3
million, a decrease in accounts payable of $0.4 million, an increase in deferred
revenue of $1.7 million and non-cash charges of $0.2 million. For the six months
ended June 30, 2003, net cash provided by operations was $1.7 million, comprised
of our net income of $0.3 million, a decrease in trade receivables of $1.3
million, an increase in other receivables of $0.3 million, a decrease in
accounts payable of $0.9 million, an increase in deferred revenue of $1.0
million and non-cash charges of $0.4 million.
Net cash used in investment activities was $4.6 million for the six
months ended June 30, 2004, of which $4.3 million was primarily invested in bank
deposits and $0.3 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 $1.2 million for the six months ended
June 30, 2003, of which $1.2 million was primarily invested in bank deposits.
Net cash provided by financing activities was $0.2 million for the six
months ended June 30, 2004, as a result of the employee options exercises and
ESPP purchases. There were no material financing activities for the six months
ended June 30, 2003.
As of June 30, 2004, we had outstanding trade receivables of
approximately $3.8 million, which represented approximately 36% of revenues for
the six months ended June 30, 2004. Our trade receivables typically have 30 to
60 days 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
to 63 days as of June 30, 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 June 30, 2004:
TOTAL
AMOUNTS AMOUNT OF COMMITMENT EXPIRATION
COMMITTED PER PERIOD (IN THOUSANDS)
(IN ---------------------------------
COMMERCIAL COMMITMENTS THOUSANDS) 2004 2005
- ----------------------------------------------------------- ---------- ---------- ----------
Guarantees/Letters of Credit............................. $ 865 $ 360 $ 505
PAYMENTS DUE BY PERIOD (IN THOUSANDS)
--------------------------------------------------------
CONTRACTUAL OBLIGATIONS TOTAL 2004 2005 2006-7
- ----------------------------------------------------------- ---------- ---------- ---------- ----------
Lease Obligations........................................ $ 904 $ 366 $ 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 June 30, 2004, contingent liabilities on outstanding letter of credit
agreements aggregated approximately $0.9 million (of which $0.3 million expired
in July 2004). Most of these obligations are scheduled to expire during 2004. We
expected to renew some of
-18-
these letters of credit in 2004. The letters of credit are secured by $1.0
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 $7.1 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 LIBOR as of the date of
approval for programs approved from 1999 and thereafter. As of June 30, 2004, we
had paid or accrued royalties related to the results of research and development
in the amount of $3.5 million. The estimated current net commitment is
approximately $3.6 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
ensuing five quarters. Our ability to maintain profitability will depend on our
ability to increase our revenues while keeping expense increases moderate.
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
-19-
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 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,
-20-
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
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
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 if we experience revenue declines. As a result, we
need to generate and maintain growing revenues in order to remain profitable,
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. Frequently, 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:
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;
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o the length and unpredictability of our sales cycle;
o the indirect nature of our sales efforts through our channel and
strategic partners;
o the mix of revenue generated by product licenses and
professional services;
o the geographic mix of revenue;
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 the composition and success of 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, including
developments in our recently announced relationship with IBM;
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;
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.
-22-
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 continues to improve, 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, such as our recently announced strategic alliance with IBM, or if
these providers do not meet the needs or expectations of our clients, we may be
unable to grow our revenues and our business could suffer. As a result of the
limited resources and capacities of many third-party implementation providers,
we may be unable to attain sufficient focus and resources from the third-party
providers to meet all of our clients' needs, even if we establish relationships
with these third parties. If sufficient resources are unavailable, we will be
required to provide these services internally, which could limit our ability to
meet other demands. Even if we are successful in developing relationships with
third-party implementation and professional services providers, we will be
subject to significant risk, as we cannot control the level and quality of
service provided by third-party implementation and professional services
partners.
OUR 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 available credit 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
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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.
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
-24-
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.
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
-25-
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, 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.
-26-
OUR INTELLECTUAL PROPERTY COULD BE USED BY THIRD PARTIES WITHOUT OUR CONSENT
BECAUSE PROTECTION OF OUR INTELLECTUAL PROPERTY IS LIMITED.
Our success and ability to compete are substantially dependent upon our
internally developed technology, which we protect through a combination of
copyright, trade secret and trademark law. However, we may not be able to
adequately protect our intellectual property rights, which may significantly
harm our business. Specifically, we may not be able to protect our trademarks
for our company name and our product names, and unauthorized parties may attempt
to copy or otherwise obtain and use our products or technology. Policing
unauthorized use of our products and technology is difficult, particularly in
countries outside the U.S., and we cannot be certain that the steps we have
taken will prevent infringement or misappropriation of our intellectual property
rights.
Our end-user licenses are designed to prohibit unauthorized use, copying
or disclosure of our software and technology in the United States, Israel and
other foreign countries. However, these provisions may be unenforceable under
the laws of some jurisdictions and foreign countries. Unauthorized third parties
may be able to copy some portions of our products, reverse engineer or obtain
and use information and technology that we regard as proprietary. Third parties
could also independently develop competing technology or design around our
technology. If we are unable to successfully detect infringement and/or to
enforce our rights to our technology, we may lose competitive position in the
market. We cannot assure you that our means of protecting our intellectual
property rights in the United States, Israel or elsewhere will be adequate or
that competing companies will not independently develop similar technology. In
addition, some of our licensed users may allow additional unauthorized users to
use our software, and if we do not detect such use, we could lose potential
license fees.
OUR CHANNEL AND STRATEGIC PARTNER STRATEGY MAY EXPOSE US TO ADDITIONAL
RISK OF INTELLECTUAL PROPERTY INFRINGEMENT.
Our increased reliance on our channel and strategic partners may
increase the likelihood of the infringement of our intellectual property. As we
deepen our ties with our channel and strategic partners, the number of people
who are exposed to and interact with our software and other intellectual
property will increase. Despite our best efforts to protect our intellectual
property, our channel or strategic partners, or their employees or customers,
may copy some portions of our products or otherwise obtain and use information
and technology that we regard as proprietary. Channel or strategic partners
might also improperly incorporate portions of our technology into their own
products or otherwise exceed the authorized scope of their licenses to our
technology. If we are unable to successfully detect and prevent infringement
and/or to enforce our rights to our technology, our revenues may be impacted and
we may lose competitive position in the market.
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:
-27-
o be time-consuming to defend;
o result in costly litigation;
o divert management's attention and resources; or
o cause product shipment delays.
Further, if an infringement or ownership claim is successfully brought
against us, we may have to pay damages or royalties, enter into a licensing
agreement, and/or stop selling the product or using the technology at issue. Any
such royalty or licensing agreements may not be available on commercially
reasonable terms, if at all.
From time to time, we may encounter disputes over rights and obligations
concerning intellectual property. We also indemnify some of our customers
against claims that our products infringe the intellectual property rights of
others. We have only conducted a partial search for existing patents and other
intellectual property registrations, and we cannot assure you that our products
do not infringe any issued patents. In addition, because patent applications in
the United States and Israel are not publicly disclosed until the patent is
issued, applications may have been filed which would relate to our products.
OUR BUSINESS MAY BECOME INCREASINGLY SUSCEPTIBLE TO NUMEROUS RISKS ASSOCIATED
WITH INTERNATIONAL OPERATIONS.
Significant portions of our operations occur outside the United States.
Our facilities are located in North America, Israel, the European continent, 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.
-28-
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 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.
Certain of our officers and employees 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 six month period ended June 30, 2004, 19% of our costs were
incurred in GBP and 6% in the Euro. We incur a portion of our expenses,
principally salaries and related personnel expenses in Israel, in NIS. In the
six month period ended June 30, 2004, 25% of our costs were incurred in NIS. In
the six month period ended June 30, 2004, we incurred 7% 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.
-29-
THE GOVERNMENT PROGRAMS IN WHICH WE CURRENTLY PARTICIPATE AND TAX BENEFITS WHICH
WE CURRENTLY RECEIVE REQUIRE US TO SATISFY PRESCRIBED CONDITIONS AND MAY BE
DELAYED, TERMINATED OR REDUCED IN THE FUTURE. THIS WOULD INCREASE OUR COSTS AND
TAXES.
We receive grants from the Government of the State of Israel through the
Office of the Chief Scientist of the Ministry of Industry and Trade, or the
Chief Scientist, for the financing of a significant portion of our research and
development expenditures in Israel, and we may apply for additional grants in
the future. We cannot assure that we will continue to receive grants at the same
rate or at all. The Chief Scientist budget has been subject to reductions that
may affect the availability of funds for Chief Scientist grants in the future.
The percentage of our research and development expenditures financed using
grants from the Chief Scientist may decline in the future, and the terms of such
grants may become less favorable. In connection with research and development
grants received from the Chief Scientist, we must make royalty payments to the
Chief Scientist on the revenues derived from the sale of products, technologies
and services developed with the grants from the Chief Scientist. From time to
time, the Government of Israel changes the rate of royalties we must pay, so we
are unable to accurately predict this rate. In addition, our ability to
manufacture products or transfer technology outside Israel without the approval
of the Chief Scientist is restricted under law. Any manufacture of products or
transfer of technology outside Israel will also require 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
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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.
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 June 30, 2004, our executive officers, directors and entities
affiliated with them beneficially owned approximately 21.5% 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 June 30, 2004, we had 27,305,371 ordinary shares outstanding (net
of 39,000 shares held in treasury), including shares held by a trustee for
issuance under outstanding options. In addition, as of June
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30, 2004, we had 3,660,514 ordinary shares issuable upon exercise of outstanding
options and warrants, and 1,462,483 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.
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 June 30, 2004, 49% of our revenues and 43% 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.
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In addition to above, we have balance sheet exposure related to foreign
net assets.
We enter from time to time into forward contracts related to foreign
currency rates in order to protect against foreign currency accounts receivables
and certain forecasted transactions. We do not participate in any speculative
investments.
INTEREST RATE RISK
As of June 30, 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 June 30, 2004 and presents principal cash flows
and related weighted averages interest rates by expected maturity dates.
YEAR OF MATURITY
(in thousands of dollars)
- -------------------------------------------------------------------------------
2004 2005
- --------------------------------------------------------- -------- --------
A) CASH AND CASH EQUIVALENTS AND INVESTMENT PORTFOLIO:
Cash and Cash equivalents $ 4,378
Average interest rate 0.8%
Short Term Bonds $ 2,500
Average interest rate 1.9%
Bank deposits $ 3,556 $ 2,254
Average interest rate 1.7% 1.7%
B) LONG-TERM DEBTS:
None
ITEM 4. CONTROLS AND PROCEDURES
Based on their evaluation as of June 30, 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 this 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 June 30, 2004 that have materially affected or are
reasonably likely to materially affect our internal controls over financial
reporting.
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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.
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
On June 30, 2004 we formalized a strategic alliance with IBM pursuant to
which we will team with IBM in providing state-of-the-art field-force
optimization solutions. In connection with this agreement, pursuant to Section
4(2) of the Securities Act of 1933, in a private placement we issued 100,000 of
our ordinary shares to IBM for a purchase price of 0.02 NIS (New Israel Shekels)
per share and in consideration of IBM entering into the strategic alliance. We
have also agreed to issue an additional 100,000 of our ordinary shares to IBM
for a purchase price of 0.02 NIS per share upon the first anniversary of the
initial issuance.
In connection with our IBM strategic alliance, we executed a Warrant
Agreement under which we issued IBM 250,000 warrants for our ordinary shares
with an exercise price of $2.38 per share. 62,500 of these warrants are
immediately vested and exercisable. At the end of each of the three years
following the warrant issuance up to 62,500 warrants will vest based upon the
attainment of certain revenue targets relating to revenue generated from the
strategic alliance. We have also granted IBM certain registration rights for the
ordinary shares issued under the Warrant Agreement.
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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
- ---------------- ---------------------------------------------------------------
10.23+ Teaming Agreement between Clicksoftware Technologies Ltd. and
IBM United Kingdom Limited, dated July 1, 2004
- ---------------- ---------------------------------------------------------------
10.24+ Share Purchase Agreement, dated as of June 30, 2004, between
Clicksoftware Technologies Ltd. and IBM United Kingdom Limited
- ---------------- ---------------------------------------------------------------
10.25+ Warrant Agreement, dated as of June 30, 2004, between
Clicksoftware Technologies Ltd. and IBM United Kingdom Limited
- ---------------- ---------------------------------------------------------------
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.
- ---------------- ---------------------------------------------------------------
+ Confidential treatment has been requested for portions of this
exhibit.
(b) Reports on Form 8-K:
On April 2, 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 preliminary financial results for the quarter ended March 31, 2004.
On April 29, 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 quarter ended March 31, 2004.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
CLICKSOFTWARE TECHNOLOGIES LTD.
(Registrant)
By: /s/ Shmuel Arvatz
----------------------------------------
Shmuel Arvatz
Executive Vice President and
Chief Financial Officer
Date: August 11, 2004
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