SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2001
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: 333-30274
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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)
(972-3) 765-9400
(Registrant's telephone number, including area code)
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
--- ---
As of September 30, 2001, there were 26,180,191 shares of the Registrant's
ordinary shares, par value 0.02 NIS, outstanding.
1
ClickSoftware Technologies Ltd.
FORM 10-Q
FOR THE QUARTER ENDED September 30, 2001
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
(a) Condensed Consolidated Balance Sheets as of September 30, 2001 and
December 31, 2000................................................................................................. 3
(b) Condensed Consolidated Statements of Operations for the three and nine
months ended September 30, 2001 and September 30, 2000............................................................ 4
(c) Condensed Consolidated Statements of Cash Flows for nine months ended
September 30, 2001 and September 30, 2000......................................................................... 5
(d) Notes to Condensed Consolidated Financial Statements.............................................................. 6
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations............................................................................................. 7
Item 3. Quantitative and Qualitative Disclosures About Market Risks....................................................... 24
PART II. OTHER INFORMATION
Item 1. Legal Proceedings.................................................................................................. 26
Item 2. Changes in Securities and Use of Proceeds.......................................................................... 26
Item 4. Submission of Matters to a Vote of Security Holders................................................................ 26
Item 6. Exhibits and Reports on Form 8-K................................................................................... 27
Signatures................................................................................................................. 29
2
PART I--FINANCIAL INFORMATION
ITEM 1. Financial Statements
CLICKSOFTWARE TECHNOLOGIES LTD.
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except share data)
September 30, December 31,
2001 2000
-------------------------------- ----------------------------------
ASSETS (Unaudited)
-------------------------------- ----------------------------------
CURRENT ASSETS:
Cash and cash equivalents $ 10,004 $ 4,438
Short-term investments 2,088 16,878
Trade receivables 4,664 4,375
Other receivables and prepaid expenses 1,908 1,466
-------------------------------- ----------------------------------
Total current assets 18,664 27,157
Property and equipment, net 3,646 3,772
Severance pay deposits 593 526
-------------------------------- ----------------------------------
Total assets $ 22,903 $ 31,455
================================ ==================================
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Short-term debt $ 61 $ 146
Accounts payable and accrued expenses 2,741 3,274
Deferred revenues 227 127
-------------------------------- ----------------------------------
Total current liabilities 3,029 3,547
-------------------------------- ----------------------------------
LONG-TERM LIABILITIES
Long-term debt 57 103
Accrued severance pay 1,399 1,343
-------------------------------- ----------------------------------
Total long-term liabilities 1,456 1,446
-------------------------------- ----------------------------------
Total liabilities 4,485 4,993
-------------------------------- ----------------------------------
SHAREHOLDERS' EQUITY:
Preferred shares of NIS 0.02 par value:
Authorized -- 5,000,000 as of December 31, 2000
and September 30, 2001; Issued and outstanding --
none as of December 31, 2000 and September 30, 2001. - -
- -
Ordinary shares of NIS 0.02 par value:
Authorized -- 100,000,000 as of December 31, 2000 and
September 30, 2001; Issued -- 26,064,539 shares as of
December 31, 2000 and 26,202,191 as of September 30,
2001. Outstanding-- 26,064,539 shares as of December
31, 2000 and 26,180,191 shares as of September 30,
2001. 101 100
Additional paid-in capital 69,104 69,169
Deferred compensation (555) (1,120)
Treasury shares - 22,000 shares at cost as of
September 30, 2001, none as of December 31,
2000. (25) -
Accumulated deficit (50,207) (41,687)
-------------------------------- ----------------------------------
Total shareholders' equity 18,418 26,462
-------------------------------- ----------------------------------
Total liabilities and shareholders' equity $ 22,903 $ 31,455
================================ ==================================
See notes to condensed consolidated financial statements.
3
CLICKSOFTWARE TECHNOLOGIES LTD.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except share and per share amounts)
(Unaudited)
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
2001 2000 2001 2000
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Revenues:
Software license $ 1,042 $ 3,320 $ 7,028 $ 8,406
Service and maintenance 1,697 1,469 5,197 4,202
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Total revenues 2,739 4,789 12,225 12,608
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Cost of revenues:
Software license 95 117 307 250
Service and maintenance 1,292 1,353 4,168 3,917
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Total cost of revenues 1,387 1,470 4,475 4,167
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Gross profit 1,352 3,319 7,750 8,441
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Operating expenses:
Research and development expenses, net 801 941 2,460 3,346
Sales and marketing expenses 3,099 3,443 10,411 9,782
General and administrative expenses 1,575 838 3,364 2,595
Reorganization expenses 0 0 294 0-
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Share-based compensation 134 277 321 987
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Total operating expenses 5,609 5,499 16,850 16,710
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Operating loss (4,257) (2,180) (9,100) (8,269)
Interest and other income, net 110 329 580 328
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Net loss $ (4,147) $ (1,851) $ (8,520) $ (7,941)
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Basic and diluted net loss per share $ (0.16) $ (0.07) $ (0.34) $ (0.37)
Shares used in computing basic and diluted
net loss per share 25,154,690 24,699,121 25,070,748 21,554,795
See notes to condensed consolidated financial statements.
4
CLICKSOFTWARE TECHNOLOGIES LTD.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
NINE MONTHS ENDED
SEPTEMBER 30
2001 2000
-------------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (8,520) $ (7,941)
Adjustments to reconcile net loss to net cash used in operating activities
Expenses not affecting operating cash flows:
Depreciation 719 457
Amortization of deferred compensation 321 987
Unrealized gain from investments 319 (426)
Severance pay, net (11) 349
Changes in operating assets and liabilities:
Trade receivables (289) (2,424)
Other receivables and other prepaid
expenses (442) (658)
Accounts payable and accrued expenses (533) 142
Deferred revenues 100 (861)
-------------------------------------------
Net cash used in operating activities (8,336) (10,375)
-------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from (investment in) short term investments, net 14,471 (15,092)
Purchases of equipment (593) (2,153)
-------------------------------------------
Net cash provided by (used in) investing activities 13,878 (17,245)
-------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Repayment of short-term debt (85) (169)
Repayment of long-term debt (46) (99)
Net proceeds from issuance of Ordinary
shares - 28,344
Net proceeds from warrants exercised - 579
Purchase of treasury stock (25) -
Employee options exercised 180 459
-------------------------------------------
Net cash provided by financing activities 24 29,114
-------------------------------------------
Increase in cash and cash
equivalents 5,566 1,494
Cash and cash equivalents at beginning of
period 4,438 7,838
-------------------------------------------
Cash and cash equivalents at end of period $ 10,004 $ 9,332
===========================================
See notes to condensed consolidated financial statements.
5
ClickSoftware Technologies Ltd.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(INFORMATION AS OF SEPTEMBER 30, 2001 AND FOR THE THREE AND NINE MONTHS
ENDED
SEPTEMBER 30, 2001 AND SEPTEMBER 30, 2000)
1. Condensed Consolidated Financial Statements. The accompanying
condensed interim consolidated financial statements have been prepared
by the Company without audit and reflect all adjustments, consisting
of normal recurring adjustments and accruals, which are, in the
opinion of management, necessary for a fair presentation of the
financial position of the Company as of September 30, 2001 and the
results of operations and cash flows for the interim periods
indicated. 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, 2001. The statements have been prepared
in accordance with the regulations of the Securities and Exchange
Commission; 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, 2000 that are included
in ClickSoftware's Form 10-K filed with the Securities and Exchange
Commission.
2. Net Loss Per Share. ClickSoftware computes net loss per share of
ordinary shares in accordance with Statement of Financial Accounting
Standards No. 128, "Earnings per Share" ("SFAS No. 128"). Under the
provisions of SFAS No. 128 basic net loss per share ("Basic EPS") is
computed by dividing net loss by the weighted average number of shares
of common stock outstanding, excluding ordinary shares held by a
trustee reserved for allocation against employee options granted but
not yet exercised. The following is a reconciliation of the numerators
and denominators used in computing basic and diluted net loss per
share (in thousands except per share amounts):
NINE MONTHS
ENDED SEPTEMBER 30
2001 2000
(in thousands except share data and share numbers)
Net loss attributable to ordinary shareholders (8,520) (7,941)
Basic and diluted:
Weighted average shares used in computing
basic and diluted net loss per ordinary
share
25,070,748 21,554,795
Basic and diluted net loss per ordinary
share (0.34) (0.37)
==================================
6
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
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 the judgment of the
Company 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. ClickSoftware undertakes no obligation to update forward-looking
statements, whether as a result of new information, future events or otherwise.
OVERVIEW
ClickSoftware Technologies Ltd. ("ClickSoftware" or the "Company") derives
revenues from software licensing, service and maintenance fees. Software license
revenues are comprised of perpetual or annual software license fees primarily
derived from contracts with our direct sales clients and our indirect
distribution channels. License fees are based on an initial fee determined by
the number of service resources to be scheduled, followed by periodic
maintenance fees.
We recognize revenues in accordance with the American Institute of Certified
Public Accountants Statement of Position 97-2, "Software Revenue Recognition,"
or SOP 97-2, as amended by Statement of Position 98-4. Under SOP 97-2, we
recognize software license revenues when a software license agreement has been
executed or a definitive purchase order has been received and the product has
been delivered to our clients, no significant obligations with regard to
implementation remain, the fee is fixed and determinable, and collectability is
probable.
Service and maintenance revenues are comprised of professional service revenues
from implementation, and revenues from consulting, training, and customer
service support fees. Clients licensing our products generally purchase support
service agreements from us. Professional service and training revenues are
billed at an agreed-upon rate plus incurred expenses, and are recognized when
provided. Consulting revenues are recognized on a straight-line basis over the
life of the agreement. Customer support is charged as a percentage of license
fees depending upon the level of support coverage requested by the customer, and
are recognized over the duration of the support provided. Our products are
marketed worldwide through a combination of a direct sales force, consultants
and various business relationships we have with implementation and technology
companies and resellers.
We also offer software license pricing structures to our clients which include
lower initial license fees followed by monthly payments based on the number of
scheduling transactions conducted. To date, however, no significant revenue has
been recognized on this basis.
7
Cost of revenues consists of cost of software license revenues and cost of
service and maintenance revenues. Cost of software license revenues consists of
expenses related to media duplication and packaging of our products. Cost of
service and maintenance revenues consists of expenses related to salaries,
expenses of our professional services organizations, costs related to
third-party consultants, and equipment costs.
We believe that as our client base reaches maturity, and as existing clients
purchase additional licenses, the trend of percentage of revenues derived from
license fees will increase as a percentage of revenues while the percentage of
revenues derived from service and maintenance fees will increase on an absolute
basis but decrease as a percentage of revenues as compared to historic periods.
Operating expenses are categorized into net research and development expenses
(net of grants), sales and marketing expenses, general and administrative
expenses, and share based compensation.
Research and development expenses consist primarily of personnel costs to
support product development, net of grants received from the Chief Scientist. In
return for some of these grants, we are obligated to pay the Israeli Government
royalties as described below which are included in sales and marketing expenses.
Software research and development costs incurred prior to the establishment of
technology feasibility are included in research and development expenses as
incurred.
Sales 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.
In previous years we received grants from the Fund for the Encouragement of
Marketing Activities established by the Government of Israel. In return for
these grants, we are obligated to pay the Israeli Government royalties as
described below. We expect that sales and marketing expenses will increase on an
absolute basis over the next quarters as we hire additional sales and marketing
personnel, continue to promote our brand, and increase our international sales
efforts.
General and administrative expenses consist primarily of personnel and related
costs for corporate functions, including information services, finance,
accounting, human resources, facilities, bad debt expenses, legal, and directors
and officers liability insurance.
Share-based compensation represents the aggregate difference at the date of
grant between the respective exercise price of stock options and the deemed fair
market value of the underlying stock. Share-based compensation is amortized over
the vesting period of the underlying options, generally four years.
Interest and other income, net, includes interest income earned on our cash and
cash equivalents, offset by interest expense, and also includes the effects of
foreign currency translations.
The functional currency of our operations is the U.S. dollar, which is the
primary currency in the economic environment in which we conduct our business. A
significant portion of our research and development expense is incurred in New
Israeli Shekels ("NIS") and a significant portion of our revenues and expenses
are incurred in British Pounds and the Euro. The results of our operations are
subject to fluctuations in these exchange rates that are influenced by various
global economic factors, including inflation rates and economic growth within
each nation.
The effects of foreign currency exchange rates on our results of operations for
the three and nine months ended September 30, 2000 and 2001 were immaterial.
8
RESULTS OF OPERATIONS
Our operating results for each of the three and nine months ended September 30,
2001 and 2000, expressed as a percentage of revenues are as follows:
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THREE MONTHS NINE MONTHS
ENDED SEPTEMBER 30 ENDED SEPTEMBER 30
------------------------------------------------------------
2001 2000 2001 2000
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Revenues:
Software license 38% 69% 57% 67%
Service and maintenance 62% 31% 43% 33%
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Total revenues 100% 100% 100% 100%
Cost of revenues:
Software license 3% 2% 3% 2%
Service and maintenance 47% 29% 34% 31%
Total cost of revenues 50% 31% 37% 33%
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Gross profit 50% 69% 63% 67%
------------------------------------------------------------
Operating expenses:
Research and development expenses, net 29% 20% 20% 27%
Sales and marketing expenses 113% 72% 85% 77%
General and administrative expenses 58% 17% 28% 21%
Reorganization expenses - - 2% -
Share-based compensation 5% 6% 3% 8%
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Total operating expenses 205% 115% 138% 133%
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Operating loss (155%) (46%) (75%) (66%)
Interest and other income, net 4% 7% 5% 3%
------------------------------------------------------------
Net loss (151%) (39%) (70%) (63%)
============================================================
RESULTS OF OPERATIONS FOR THREE MONTHS ENDED SEPTEMBER 30, 2001 AND 2000
REVENUES: Company revenues decreased $2.1 million or 43% to $2.7 million for the
three months ended September 30, 2001 from $4.8 million for the three months
ended September 30, 2000. This decrease was the result of the general economic
conditions and extraordinary events occurring at the end of the third quarter.
SOFTWARE LICENSE: Software license revenues were $1.0 million or 38% of total
revenues for the three months ended September 30, 2001, and $3.3 million or 69%
of total revenues for the three months ended September 30, 2000. The decrease in
software license revenues was the result of delays in domestic and international
opportunities during the last three weeks of September due to the extraordinary
events occurring on September 11th, 2001.
SERVICE AND MAINTENANCE: Service and maintenance revenues were $1.7 million or
62% of revenues for the three months ended September 30, 2001, and $1.5 million
or 31% of total revenue in the three months ended September 30, 2000. The
increase in service and maintenance revenues was primarily due to an increase in
professional services fees in connection with implementations performed for
clients going into production during the third quarter of 2001.
9
COST OF REVENUES: Cost of revenues were $1.4 million or 50% of revenues for the
three months ended September 30, 2001, and $1.5 million or 31% of revenues for
the three months ended September 30, 2000. The decrease in the cost of revenues
on an absolute basis was primarily due to the decrease in the amount of costs
associated with the decrease in third party license revenues in the third
quarter.
COST OF SOFTWARE LICENSES: Cost of software license revenues were $95,000 or 3%
of total revenues for the three months ended September 30, 2001 and, $117,000 or
2% of revenues for the three months ended September 30, 2000. The decrease in
the cost of software licenses is due to the fewer sales of licenses that
resulted in fewer sales of third parties' licenses.
COST OF SERVICE AND MAINTENANCE: Cost of service and maintenance revenues was
$1.3 million or 47% of revenues for the three months ended September 30, 2001,
and $1.4 million or 29% of revenues for the three months ended September 30,
2000. The decrease in the cost of service and maintenance on an absolute basis
was primarily due to service improvements reducing implementation time
associated with our product.
GROSS PROFIT: Gross profit as a percentage of revenues was 50% for the three
months ended September 30, 2001 as compared to 69% for the three months ended
September 30, 2000. The decrease in the gross profit is due to the decrease in
license revenues.
OPERATING EXPENSES: Total operating expenses were $5.6 million or 205% of
revenues for the three months ended September 30, 2001, and $5.5 million or 115%
of revenues for the three months ended September 30, 2000. The increase in
operating expenses was primarily due to the increase in the provision for
doubtful accounts amounting to $900,000.
RESEARCH AND DEVELOPMENT EXPENSES, NET: Research and development expenses, net
of related grants, were $800,000 or 29% of revenues for the three months ended
September 30, 2001, and $900,000 or 20% of revenues for the three months ended
September 30, 2000. For the third quarter of 2001 we recognized a research and
development grant from Israel's Chief Scientist in the amount of $300,000
compared to $500,000 recognized for the three months ended September 30, 2000.
The decrease in absolute basis is due to cost controls implemented during the
nine months ended September 30, 2001 and is also due to the temporary transfer
of R&D software engineers to professional services to support the implementation
process with several European customers.
SALES AND MARKETING EXPENSES: Sales and marketing expenses were $3.1 million or
113% of revenues for the three months ended September 30, 2001, and $3.4 million
or 72% of revenues for the three months ended September 30, 2000. The absolute
decrease in sales and marketing expenses was due to cost controls implemented
during the year of 2001 as well as the decrease in revenues that reduced related
variable expenses.
GENERAL AND ADMINISTRATIVE EXPENSES: General and administrative expenses were
$1.6 million or 58% of revenues for the three months ended September 30, 2001,
and $800,000 or 17% of revenues for the three months ended September 30, 2000.
The absolute increase in general and administrative expenses was due primarily
to increase in the provision for doubtful accounts amounting to $900,000.
SHARE-BASED COMPENSATION: Share based compensation for the three months ended
September 30, 2001 amounted to $100,000 of previously recorded deferred
compensation. Share based compensation for the three months ended September 30,
2000 amounted to $300,000. The decrease in share-based compensation is due to
termination of options associated with the corporate restructuring during the
first quarter on 2001. Additionally, the amortization of the share-based
compensation progressively decreases over the three-year amortization period.
10
RESULTS OF OPERATIONS FOR NINE MONTHS ENDED SEPTEMBER 30, 2001 AND 2000
REVENUES: Company revenues decreased $400,000 or 3% to $12.2 million for the
nine months ended September 30, 2001 from $12.6 million for the nine months
ended September 30, 2000. This decrease was the result of the general economic
conditions and extraordinary events occurring at the end of the third quarter.
SOFTWARE LICENSE: Software license revenues were $7.0 million or 57% of total
revenues for the nine months ended September 30, 2001, and $8.4 million or 67%
of total revenues for the nine months ended September 30, 2000. The decrease in
software license revenues was the result of delays in domestic and international
opportunities during the last three weeks of September.
SERVICE AND MAINTENANCE: Service and maintenance revenues were $5.2 million or
43% of revenues for the nine months ended September 30, 2001, and $4.2 million
or 33% of total revenue for the nine months ended September 30, 2000. The
increase in service and maintenance revenues was primarily due to the increased
professional services fees in connection with implementation for new clients
going into production during the nine months ended September 30, 2001.
COST OF REVENUES: Cost of revenues were $4.5 million or 37% of revenues for the
nine months ended September 30, 2001, and $4.2 million or 33% of revenues for
the nine months ended September 30, 2000. The increase in the cost of revenues
on an absolute and percentage basis was due to the increase in service and
maintenance revenues as a percentage of total revenues.
COST OF SOFTWARE LICENSES: Cost of software license revenues were $307,000 or 3%
of total revenues for the nine months ended September 30, 2001 and, $250,000 or
2% of revenues for the nine months ended September 30, 2000. The small increase
in the cost of software licenses is due to the costs associated with the
increase in sales of higher cost third parties' licenses.
COST OF SERVICE AND MAINTENANCE: Cost of service and maintenance revenues was
$4.2 million or 34% of revenues for the nine months ended September 30, 2001,
and $3.9 million or 31% of revenues for the nine months ended September 30,
2000. The increase in cost of service and maintenance was primarily due to the
increased amount of services performed for a larger number of clients that went
into production during the nine months ended September 31 of 2001.
GROSS PROFIT: Gross profit as a percentage of revenues was 63% for the nine
months ended September 30, 2001 as compared to 67% for the nine months ended
September 30, 2000. The decrease in the gross profit is due to the change in the
mix between license and services and maintenance revenues.
OPERATING EXPENSES: Total operating expenses were $16.9 million or 138% of
revenues for the nine months ended September 30, 2001, and $16.7 million or 133%
of revenues for the nine months ended September 30, 2000.
11
RESEARCH AND DEVELOPMENT EXPENSES, NET: Research and development expenses, net
of related grants, were $2.5 million or 20% of revenues for the nine months
ended September 30, 2001, and $3.3 million or 27% of revenues for the nine
months ended September 30, 2000. For the nine months ended September 30, 2001,
we recognized a research and development grant from Israel's Chief Scientist in
the amount of $1.0 million. For the nine months ended September 30, 2000, we
recognized $0.6 million of such grant. Research and development costs declined
as a result of cost controls implemented during the nine months ended in
September 30, 2001.
SALES AND MARKETING EXPENSES: Sales and marketing expenses were $10.4 million or
85% of revenues for the nine months ended September 30, 2001, and $9.8 million
or 77% of revenues for the nine months ended September 30, 2000. The absolute
increase in sales and marketing expenses was due to the additional sales and
marketing costs related to the restructuring of our salesforce.
GENERAL AND ADMINISTRATIVE EXPENSES: General and administrative expenses were
$3.4 million or 28% of revenues for the nine months ended September 30, 2001,
and $2.6 million or 21% of revenues for the nine months ended September 30,
2000. The absolute increase in general and administrative expenses was primarily
due to the increase in the provision for doubtful accounts amounting to $1.2
million.
REORGANIZATION EXPENSES: Reorganization expenses were $0.3 million or 2% of
revenues for the nine months ended September 30, 2001. There were no
reorganization expenses for the nine months ended September 30, 2000.
SHARE-BASED COMPENSATION: Share based compensation for the nine months ended
September 30, 2001 amounted to $300,000 of previously recorded deferred
compensation. Share based compensation for the nine months ended September 30,
2000 amounted to $1.0 million. The decrease in share-based compensation is due
to termination of options associated with the corporate restructuring during the
first quarter on 2001. Additionally, the amortization of the share-based
compensation progressively decreases over the three-year amortization period.
LIQUIDITY AND CAPITAL RESOURCES
As of September 30, 2001 we had cash and cash equivalents of $10.0 million and
short-term investments of $2.1 million for a total of $12.1 million.
From inception through our IPO on September 22, 2000, we financed our operations
primarily through the private placement of equity securities, which through
December 31, 1999 totaled approximately $32.0 million, net of issuance costs.
Our initial public stock offering of ordinary shares realized $28.3 million, net
of underwriter discount and other issuance costs.
Net cash used in operating activities primarily consisted of net losses in
addition to increases in trade receivables, prepaid expenses and decreases in
accounts payable, partially offset by amortization of deferred compensation and
depreciation, as applicable. For the nine months ended September 30, 2001, cash
used in operations was $8.3 million, comprised of our net loss of $8.5 million,
an increase in trade receivables of $289,000, an increase in other receivables
of $442,000, a decrease in accounts payable of $533,000, an increase in deferred
revenue of $100,000, partially offset by non-cash charges of $1.3 million. For
the nine months ended September 30, 2000, cash used in operations was $10.4
million, comprised of our net loss of $7.9 million, an increase in trade
receivables of $2.4 million, an increase in other receivables of $658,000, an
increase in accounts payable of $142,000, a decrease in deferred revenue of
$861,000, partially offset by non-cash charges of $1.4 million.
12
Net cash provided from investing activities for the nine months ended September
30, 2001 was $13.9 million, of which $14.5 million was provided from the sale of
short-term investments and $593,000 was invested primarily in purchases of
equipment and systems, including computer equipment and fixtures and furniture.
Net cash used in investing activities for the nine months ended September 30,
2000 was $17.2 million, of which $15.1 million was used to purchase short-term
investments and $2.2 million was invested primarily in leasehold improvements
and purchases of equipment and systems, including computer equipment and
fixtures and furniture.
Net cash provided by financing activities during the nine months ended September
30, 2001 was $23,000 and $29.1 million for the nine months ended September 30,
2000. In June 2000, the Company completed an initial public offering of
4,000,000 ordinary shares at a price of $7.00 per share. In July 2000, the
Underwriters exercised their overallotment option and purchased 600,000
additional ordinary shares at a price of $7.00 per share. The proceeds to the
Company from the offering were approximately $28.3 million (net of underwriters
discount and issuance expenses).
As of September 30, 2001 we had outstanding trade receivables of approximately
$4.7 million. Our trade receivables typically have 30 to 90 day terms, although
we have also negotiated longer payment plans with some of our clients. Current
economic conditions have increased the difficulties in collecting accounts
receivables and the typical collection period has lengthened. As of September
30, 2001 our DSO (Day Sales Outstanding) was 153 days, an increase of 36 days
from 117 at June 30,2001
Since inception, we have received aggregate payments from the Government of the
State of Israel in the amount of $4.8 million related to research and
development and $707,000 related to marketing activities. As of September 30,
2001, we have paid or accrued royalties related to these funds in the amount of
$1.9 million.
We have a $1.0 million unsecured line of credit with an Israeli bank. No amounts
were outstanding under this line of credit as of September 30, 2001.
The Company also has an aggregate of $118,000 in term loans relating to
borrowings for working capital. We have a loan in US Dollars bearing an interest
rate of LIBOR plus 1% and a loan in New Israeli Shekels linked to the Israeli
CPI, currently bearing an interest rate of 9.7%. Additional loans are in British
Pounds bearing an average interest rate of 6.25%, and US dollar loan bearing
interest rate of 7.1%.
Our bank in Israel has issued two standby letters of credit on our behalf. One
is for $125,000 for tenant improvements related to our facilities in Israel. The
other is for $695,000 and secures our performance pursuant to projects with the
Government of Israel. Additionally, Silicon Valley Bank has issued a letter of
credit on our behalf in the amount of $205,560 to assure performance under the
terms of our Campbell, CA lease.
Our capital requirements depend on numerous factors, including market 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 other factors. We intend to continue investing
significant resources in our sales and marketing and research and development
operations in the future. We believe that our current cash balance will be
sufficient to fund our expenses until we reach profitability.
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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
THE ECONOMIC OUTLOOK MAY ADVERSELY AFFECT THE DEMAND FOR OUR CURRENT PRODUCTS
AND THE COMPANY'S RESULTS OF OPERATIONS. Current predictions for the general
economy indicate uncertain economic conditions. Weak economic conditions may
cause a reduction in information technology spending generally. Consequently,
there may be an adverse impact on the demand for our products, which would
adversely affect our results of operations. In addition, predictions regarding
economic conditions have a low degree of certainty, and further predicting the
effects of the changing economy is even more difficult. We may not accurately
gauge the effect of the general economy on our business. As a result, we may not
react to such changing conditions in a timely manner that 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.
We have not achieved profitability. We expect to continue to incur significant
sales and marketing and research and development expenses. Some of our expenses,
such as administrative and management payroll and rent and utilities, are fixed
in the short term and cannot be quickly reduced to respond to decreases in
revenues. As a result, we will need to generate significant revenues to achieve
and maintain profitability, which we may not be able to do.
OUR QUARTERLY OPERATING RESULTS ARE SUBJECT TO FLUCTUATIONS AND IF WE FAIL TO
MEET THE EXPECTATIONS OF SECURITIES ANALYSTS OR INVESTORS, OUR SHARE PRICE MAY
DECREASE. Our quarterly operating results are difficult to predict and are not a
good measure for comparison. Our operating history shows that a significant
percentage of our quarterly revenues come from orders placed toward the end of a
quarter. From time to time, we anticipate a sale of significant size to a single
customer. A delay in the completion of any sale past the end of a particular
quarter could negatively impact results for that quarter, and such negative
impact could be significant for the delay of a sale of significant size. 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:
* the volume and timing of customer orders;
* internal budget constraints and approval processes of our current and
prospective clients;
* the length, unpredictability of our sales cycle;
* the mix of revenue generated by product licenses and professional
services;
* the mix of revenue between domestic and foreign sources;
* announcements or introductions of new products or product enhancements
by us or our competitors;
* changes in prices of and the adoption of different pricing strategies
for our products and those of our competitors;
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* timing and amount of sales and marketing expenses;
* changes in our business and partner relationships;
* technical difficulties or "bugs" affecting the operation of our
software;
* foreign currency exchange rate fluctuations; and
* general economic conditions.
FAILURE OF THE MARKET TO ACCEPT OUR PRODUCTS WOULD ADVERSLY AFFECT OUR
PROFITABILITY. Historically, all of our operating revenue has come from sales
of, and services related to, our ClickSchedule product and our ClickFix product,
to clients seeking application software that enables efficient provisioning of
services in enterprise environments.
During the year ended December 31, 2000, we introduced three products that,
together with our existing products, constitute a suite of products that offers
a more comprehensive solution to our customers. The growth of our company
depends in part on the development of market acceptance of these products. We
have no guarantee that the sales of these products will develop as quickly as we
anticipate, or at all. Lack of long-term demand for our new products would have
a material adverse effect on our business and operating results.
OUR SALES AND IMPLEMENTATION CYCLES DEPEND ON FACTORS OUTSIDE OUR CONTROL, WHICH
MAY CAUSE QUARTERLY LICENSE AND SERVICE FEES REVENUES TO VARY SIGNIFICANTLY FROM
PERIOD TO PERIOD. To date, our customers have taken typically from three months
to nine months to evaluate our offering before making their purchase decisions.
In addition, depending on the nature and specific needs of a client, the
implementation of our products typically takes two to six months. Sales of
licenses and implementation schedules are subject to a number of risks over
which we have little or no control, including clients' budgetary constraints,
clients' internal acceptance reviews, the success and continued internal support
of clients' own development efforts, the efforts of businesses with which we
have relationships, the nature, size and specific needs of a client and the
possibility of cancellation of projects by clients. The uncertain outcome of our
sales efforts and the length of our sales cycles could result in substantial
fluctuations in license revenues. Historically, a significant part 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.
FAILURE TO EXPAND OUR SALES AND MARKETING ORGANIZATIONS COULD LIMIT OUR ABILITY
TO SELL ADDITIONAL PRODUCTS AND SERVICES, WHICH WOULD IMPAIR OUR ABILITY TO GROW
OUR BUSINESS AND INCREASE REVENUES. We are expanding our direct and indirect
sales operations to increase market awareness of our products and generate
increased revenues. We cannot be certain that we will be successful in these
efforts. In addition to normal turnover of personnel, we are attempting to
expand our direct sales force in North America. As of September 30, 2001, we
employed 51 individuals in our sales and marketing organizations. Because 17 of
these sales and marketing personnel joined us within the last twelve months, we
will be required to devote significant resources to the training of these new
sales personnel. In addition, we might not be able to hire or retain the kind
and number of sales and marketing personnel we are targeting because competition
for qualified sales and marketing personnel in our market is intense.
15
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. At the
beginning of 2001, Mr. Shimon Rojany, our CFO, announced his plan to retire, but
has recently decided to indefinitely withdraw his retirement plans. Mr. Rojany
is committed to continue his employment with the Company. 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, among
others, Dr. BenBassat, Mr. Rojany, and Mr. Corey Leibow, our Chief Operating
Officer. Although these agreements request sixty days notification prior to
departure, relationships with these officers and key employees are at will. The
loss of any of our key personnel could harm our ability to execute our business
strategy and compete.
IF WE FAIL TO EXPAND OUR PROFESSIONAL SERVICES ORGANIZATION, WE MAY NOT BE ABLE
TO SERVICE ADDITIONAL CLIENTS AND INSTALL ADDITIONAL LICENSES. 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.
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. As a result, we plan to increase the
number of our service personnel in order to meet these needs. Competition for
qualified services personnel with the relevant knowledge and experience is
intense, and we may not be able to attract and retain necessary personnel. If we
were not able to grow our professional services organization, our ability to
expand our service business would be limited. In addition, we could experience
delays in recognizing revenue if our professional services group fails to
complete implementations in a timely manner.
IF WE FAIL TO EXPAND OUR RELATIONSHIPS WITH THIRD PARTIES THAT CAN PROVIDE
IMPLEMENTATION AND PROFESSIONAL SERVICES TO OUR CLIENTS, WE MAY BE UNABLE TO
INCREASE OUR REVENUES AND OUR BUSINESS COULD BE HARMED. In order for us to focus
more effectively on our core business of developing and licensing software
solutions, we need to continue to establish relationships with third parties
that can provide implementation and professional services to our clients.
Third-party implementation and consulting firms can also be influential in the
choice of resource optimization applications by new clients. If we are unable to
establish and maintain effective, long-term relationships with implementation
and professional services providers, or if these providers do not meet the needs
or expectations of our clients, we may be unable to grow our revenues and our
business could suffer. As a result of the limited resources and capacities of
many third-party implementation providers, we may be unable to attain sufficient
focus and resources from the third-party providers to meet all of our clients'
needs, even if we establish relationships with these third parties. If
sufficient resources are unavailable, we will be required to provide these
services internally, which could limit our ability to meet other demands. Even
if we are successful in developing relationships with third-party implementation
and professional services providers, we will be subject to significant risk, as
we cannot control the level and quality of service provided by third-party
implementation and professional services partners.
16
OUR MARKET IS HIGHLY COMPETITIVE AND ANY REDUCTION IN DEMAND FOR, OR PRICES OF,
OUR PRODUCTS COULD NEGATIVELY IMPACT OUR REVENUES, REDUCE OUR GROSS MARGINS AND
CAUSE OUR SHARE PRICE TO DECLINE. The market for our products is competitive and
rapidly changing. We expect competition to increase in the future as current
competitors expand their product offerings and new companies enter the market.
Because the market for service and delivery optimization software is evolving,
it is difficult to determine what portion of the market each competitor
currently controls. However, competition could result in price reductions, fewer
customer orders, reduced gross margin and loss of market share, any of which
could cause our business to suffer. We may not be able to compete successfully,
and competitive pressures may harm our business.
Some of our current and potential competitors have greater name recognition,
longer operating histories, larger customer bases and significantly greater
financial, technical, marketing, public relations, sales, distribution and other
resources than us. In addition, some of our potential competitors are among the
largest and most well capitalized software companies in the world.
FAILURE TO FULLY DEVELOP OR MAINTAIN KEY BUSINESS RELATIONSHIPS COULD LIMIT OUR
ABILITY TO SELL ADDITIONAL LICENSES THAT COULD DECREASE OUR REVENUES AND
INCREASE OUR SALES AND MARKETING COSTS. We believe that our success in
penetrating our target markets depends in part on our ability to develop and
maintain business relationships with software vendors, resellers, systems
integrators, distribution partners and customers. If we fail to continue
developing these relationships, our growth could be limited. We have entered
into agreements with third parties relating to the integration of our products
with their product offerings, distribution, reselling and consulting. We are
currently deriving revenues from these agreements but we may not be able to
derive significant revenues in the future from these agreements. In addition,
our growth may be limited if prospective clients do not accept the solutions
offered by our strategic partners.
OUR MARKET MAY EXPERIENCE RAPID TECHNOLOGICAL CHANGES THAT COULD CAUSE OUR
PRODUCTS TO FAIL OR REQUIRE US TO REDESIGN OUR PRODUCTS, WHICH WOULD RESULT IN
INCREASED RESEARCH AND DEVELOPMENT EXPENSES. Our market is characterized by
rapid technological change; dynamic client needs and frequent introductions of
new products and product enhancements. If we fail to anticipate or respond
adequately to technology developments and client requirements, or if our product
development or introduction is delayed, we may have lower revenues. Client
product requirements can change rapidly as a result of computer hardware and
software innovations or changes in and the emergence, evolution and adoption of
new industry standards. For example, we offer Windows NT versions of our
products due to the market acceptance of Windows NT 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
17
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 and testing by current and potential clients,
and despite the history of use by our installed base of customers, our current
and future products may contain as yet undetected serious defects or errors. Any
such defects or errors could result in lost revenues, liability or a delay in
market acceptance of these products, any of which would have a material adverse
effect on our business, operating results and financial condition.
The performance of our products also depends in part upon the accuracy and
continued availability of third-party data. We rely on third parties that
provide information such as street and address locations and mapping functions
that we incorporate into our products. If these parties do not provide accurate
information, or if we are unable to maintain our relationships with them, our
reputation and competitive position in our industry could suffer and we could be
unable to develop or enhance our products as required.
OUR INTELLECTUAL PROPERTY COULD BE USED BY THIRD PARTIES WITHOUT OUR CONSENT
BECAUSE PROTECTION OF OUR INTELLECTUAL PROPERTY IS LIMITED. Our success and
ability to compete are substantially dependent upon our internally developed
technology, which we protect through a combination of copyright, trade secret
and trademark law. However, we may not be able to adequately protect our
intellectual property rights, which may significantly harm our business.
Specifically, we may not be able to protect our trademarks for our company name
and our product names, and unauthorized parties may attempt to copy or otherwise
obtain and use our products or technology. Policing unauthorized use of our
products and technology is difficult, particularly in countries outside the
U.S., and we cannot be certain that the steps we have taken will prevent
infringement or misappropriation of our intellectual property rights.
Our end-user licenses are designed to prohibit unauthorized use, copying or
disclosure of our software and technology in the United States, Israel and other
foreign countries. However, these provisions may be unenforceable under the laws
of some jurisdictions and foreign countries. Unauthorized third parties may be
able to copy some portions of our products or reverse engineer or obtain and use
information and technology that we regard as proprietary. Third parties could
also independently develop competing technology or design around our technology.
If we are unable to successfully detect infringement and/or to enforce our
rights to our technology, we may lose competitive position in the market. We
cannot assure you that our means of protecting our intellectual property rights
in the United States, Israel or elsewhere will be adequate or that competing
companies will not independently develop similar technology. In addition, some
of our licensed users may allow additional unauthorized users to use our
software, and if we do not detect such use, we could lose potential license
fees.
OUR TECHNOLOGY AND OTHER INTELLECTUAL PROPERTY MAY BE SUBJECT TO INFRINGEMENT
CLAIMS. Substantial litigation regarding technology rights and other
intellectual property rights exists in the software industry both in terms of
infringement and ownership issues. A successful claim of patent, copyright or
trademark infringement or conflicting ownership rights against us could cause us
to make changes in our business or significantly harm our business. We believe
that our products do not infringe the intellectual property rights of third
parties. However, we cannot assure you that we will prevail in all future
intellectual property disputes.
We expect that software products may be increasingly subject to third-party
infringement or ownership claims as the number of competitors in our industry
segment grows and the functionality of products in different industry segments
overlaps. Third parties may make a claim of infringement or conflicting
18
ownership rights against us with respect to our products and technology. Any
claims, with or without merit, could:
* be time-consuming to defend;
* result in costly litigation;
* divert management's attention and resources; or
* 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.
ANY FUTURE ACQUISITIONS OF COMPANIES OR TECHNOLOGIES MAY RESULT IN DISTRACTION
OF OUR MANAGEMENT AND DISRUPTIONS TO OUR BUSINESS. Although not currently under
consideration, we may acquire or make investments in complementary businesses,
technologies, services or products if appropriate opportunities arise. From time
to time we may engage in discussions and negotiations with companies regarding
our acquiring or investing in such companies' businesses, products, services or
technologies. We cannot make assurances that we will be able to identify future
suitable acquisition or investment candidates, or if we do identify suitable
candidates, that we will be able to make such acquisitions or investments on
commercially acceptable terms or at all. Our management has limited experience
in acquiring companies or technologies. If we acquire or invest in another
company, we could have difficulty assimilating that company's personnel,
operations, technology or products and service offerings. In addition, the key
personnel of the acquired company may decide not to work for us. These
difficulties could disrupt our ongoing business, distract our management and
employees, increase our expenses and adversely affect our results of operations.
Furthermore, we may incur indebtedness to pay for any future acquisitions. As of
the date of this statement, we have neither begun discussions nor entered an
agreement to make any such material investment or acquisition transaction.
FUTURE ACQUISITIONS MAY RESULT IN DILUTION TO OUR CURRENT SHAREHOLDERS. In the
future we may acquire complementary business through the issuance of additional
ordinary shares. Additional issuances of ordinary shares could decrease the
value of our ordinary shares and reduce the net tangible book value per share.
Consequently, an acquisition in which we issue additional shares could actually
decrease the value of your investment in ClickSoftware. As of the date of this
statement, we have neither begun discussions nor entered an agreement to make
any material acquisition that would result in the issuance of additional shares.
OUR BUSINESS MAY BECOME INCREASINGLY SUSCEPTIBLE TO NUMEROUS RISKS ASSOCIATED
WITH INTERNATIONAL OPERATIONS. Significant portions of our operations occur
outside the United States. Our facilities are located in North America, Israel,
the European continent, and the United Kingdom, and our executive officers and
19
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:
* foreign currency exchange rate fluctuations;
* longer sales cycles;
* multiple, conflicting and changing governmental laws and regulations;
* expenses associated with customizing products for foreign countries;
* protectionist laws and business practices that favor local
competition;
* difficulties in collecting accounts receivable; and
* political and economic instability.
We expect international revenues to continue to account for a significant
percentage of total revenues and we believe that we must continue to expand our
international sales and professional services activities in order to be
successful. Our international sales growth will be limited if we are unable to
expand our international sales management and professional services
organizations, hire additional personnel, customize our products for local
markets and establish relationships with additional international distributors,
consultants and other third parties. If we fail to manage our geographically
dispersed organization, we may fail to meet or exceed our business plan and our
revenues may decline.
WE ARE INCORPORATED IN ISRAEL AND HAVE IMPORTANT FACILITIES AND RESOURCES
LOCATED IN ISRAEL, WHICH COULD BE NEGATIVELY AFFECTED DUE TO MILITARY OR
POLITICAL TENSIONS. We are incorporated under the laws of the State of Israel
and our research and development facilities as well as significant executive
offices are located in Israel. Although substantial portions of our sales
currently are to customers outside of Israel, political, economic and military
conditions in Israel could nevertheless directly affect our operations. Since
the establishment of the State of Israel in 1948, a number of armed conflicts
have taken place between Israel and its Arab neighbors and a state of hostility,
varying in degree and intensity, has led to security and economic problems for
Israel. Since September 2000, a continuous armed conflict with the Palestinian
authority has been taking place.
Despite our history of avoiding adverse effects, in the future we could be
adversely affected by any major hostilities involving Israel, the interruption
or curtailment of trade between Israel and its trading partners, a significant
increase in inflation, or a significant downturn in the economic or financial
condition of Israel. Despite the progress towards peace between Israel and its
Arab neighbors, the future of these peace efforts is uncertain. Several Arab
countries still restrict business with Israeli companies, which may limit our
ability to make sales in those countries. We could be adversely affected by
restrictive laws or policies directed towards Israel or Israeli businesses.
CERTAIN OF OUR OFFICERS AND EMPLOYEES ARE REQUIRED TO SERVE IN THE ISRAEL
DEFENSE FORCES AND THIS COULD FORCE THEM TO BE ABSENT FROM OUR BUSINESS FOR
EXTENDED PERIODS. David Schapiro, our Executive Vice President of Worldwide
Markets and Product Group, and Hannan Carmeli, our Senior Vice President of
Worldwide Professional Services and Operations, as well as other male employees
located in Israel are currently obligated to perform up to 39 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.
20
WE ARE SUBJECT TO A RECENTLY ADOPTED NEW COMPANIES LAW, WHICH HAS NOT YET BEEN
INTERPRETED. Because we are incorporated under the laws of the State of Israel,
the Companies Law of Israel, which became effective on February 1, 2000, will
govern your rights as a shareholder. Certain obligations and fiduciary duties of
directors, officers and shareholders under the new Companies Law are new and
have not been interpreted or reviewed by the Israeli courts. In addition, not
all of the regulations have been promulgated to date. As a result, our
shareholders may have more difficulty and uncertainty in protecting their
interests in the case of actions by our directors, officers or controlling
shareholders or third parties than would shareholders of a corporation
incorporated in a state or other jurisdiction in the United States.
WE ARE AN INTERNATIONAL COMPANY AND OUR INTERNATIONAL OPERATIONS ARE EXPANDING.
OUR RISK EXPOSURE TO FOREIGN CURRENCY FLUCTUATIONS IS INCREASING, AND WE MAY NOT
BE ABLE TO FULLY MITIGATE THE RISK. Our revenue from the UK has grown both in
absolute dollar basis as well as a percentage of total revenues. We are
expanding operations in other areas of Europe, and income and expenses
recognized in the European Community Euro will increase. We incur a portion of
our expenses, principally salaries and related personnel expenses in Israel, in
NIS. In 2000, 27% of our costs were incurred in NIS. We are also experiencing a
growth in revenue and expenses in Israel, and we anticipate recognizing revenue
from other international sources. Presently our risk to foreign currency
fluctuations is minimal, but if our foreign accounts receivable balances
increase, the risk will increase. We cannot assure that we will be able to
adequately protect ourselves against such risk.
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, which
does not allow us to accurately predict what this rate will be. In addition, our
ability to manufacture products or transfer technology outside Israel without
the approval of the Chief Scientist is restricted under law. Any manufacture of
products or transfer of technology outside Israel will also require the company
to pay increased royalties to the Chief Scientist up to 300%. We currently
conduct all of our manufacturing activities in Israel and intend to continue
doing so in the foreseeable future and therefore do not believe there will be
any increase in the amount of royalties we pay to the Chief Scientist. Currently
the office of the Chief Scientist does not consider the licensing of our
software in the ordinary course of business a transfer of technology and we do
not intend to transfer any technology outside of Israel. Consequently, we do not
anticipate having to pay increased royalties to the Chief Scientist for the
foreseeable future. In connection with our grant applications, we have made
representations and covenants to the Chief Scientist regarding our research and
development activities in Israel. The funding from the Chief Scientist is
subject to the accuracy of these representations and covenants. If we fail to
comply with any of these conditions, we could be required to refund payments
previously received together with interest and penalties and would likely be
denied receipt of these grants thereafter.
21
WE ANTICIPATE RECEIVING TAX BENEFITS FROM THE GOVERNMENT OF THE STATE OF ISRAEL,
HOWEVER THESE BENEFITS MAY BE DELAYED, REDUCED OR TERMINATED IN THE FUTURE.
Pursuant to the Law for the Encouragement of Capital Investments, the Government
of the State of Israel through the Investment Center has granted "Approved
Enterprise" status to three of our existing capital investment programs.
Consequently, we are eligible for certain tax benefits for the first several
years in which we generate taxable income. We have not, however, begun to
generate taxable income for purposes of this law and we do not expect to utilize
these tax benefits for the near future. Once we begin to generate taxable
income, our financial condition could suffer if our tax benefits were
significantly reduced. The benefits available to an approved enterprise are
dependent upon the fulfillment of certain conditions and criteria. If we fail to
comply with these conditions and criteria, the tax benefits that we receive
could be partially or fully canceled and we could be forced to refund the amount
of the benefits we received, adjusted for inflation and interest. From time to
time, the Government of Israel has discussed reducing or limiting the benefits.
We cannot assess whether these benefits will be continued in the future at their
current levels or at all.
IT MAY BE DIFFICULT TO ENFORCE A U.S. JUDGMENT AGAINST US, OUR OFFICERS AND
DIRECTORS AND THE ISRAELI ACCOUNTANTS NAMED AS EXPERTS IN THIS STATEMENT OR TO
ASSERT U.S. SECURITIES LAWS CLAIMS IN ISRAEL OR SERVE PROCESS ON SUBSTANTIALLY
ALL OF OUR OFFICERS AND DIRECTORS AND THESE ACCOUNTANTS. We are incorporated in
Israel and maintain significant operations in Israel. Some of our executive
officers and directors and the Israeli accountants named as experts in this
statement reside outside of the United States and a significant portion of our
assets and the assets of these persons are located outside the United States.
Therefore, it may be difficult for an investor, or any other person or entity,
to enforce a U.S. court judgment against us or any of those persons or to effect
service of process upon these persons in the United States, based upon the civil
liability provisions of the U.S. federal securities laws in an Israeli court.
Additionally, it may be difficult for an investor, or any other person or
entity, to enforce civil liabilities under U.S. federal securities laws in
original actions instituted in Israel. We have appointed ClickSoftware Inc., our
U.S. subsidiary, as our agent to receive service of process in any action
against us arising out of our original June 22, 2000 initial public offering. We
have not given our consent for our agent to accept service of process in
connection with any other claim. Furthermore, if a foreign judgment is enforced
by an Israeli court, it will be payable in NIS.
OUR OFFICERS, DIRECTORS AND AFFILIATED ENTITIES OWN A LARGE PERCENTAGE OF OUR
COMPANY AND COULD SIGNIFICANTLY INFLUENCE THE OUTCOME OF ACTIONS. As of
September 30, 2001, our executive officers, directors and entities affiliated
with them beneficially owned approximately 33.8% 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
merger or other 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.
22
Israeli law regulates mergers, votes required to approve a merger, acquisition
of shares through tender offers and transactions involving significant
shareholders. In addition, our articles of association provide for a staggered
board of directors and for restrictions on business combinations with interested
shareholders. Any of these provisions may make it more difficult to acquire our
company. Accordingly, an acquisition of us could be delayed or prevented even if
it would be beneficial to our shareholders.
OTHER ORDINARY SHARES MAY BE SOLD IN THE FUTURE. THIS COULD DEPRESS THE MARKET
PRICE FOR OUR ORDINARY SHARES. As of September 30, 2001, we had 26,180,191 (net
of 22,000 shares held in treasury), ordinary shares outstanding, including
shares held by a trustee for issuance under outstanding options. In addition, as
of September 30, 2001, we had 2,862,248 ordinary shares issuable upon exercise
of outstanding options, and 2,321,274 additional ordinary shares reserved for
issuance pursuant to our stock option plans and employee share purchase plan. If
our existing shareholders or we sell a large number of our ordinary shares, the
price of our ordinary shares could fall dramatically. Restrictions under the
securities laws limit the number of ordinary shares available for sale by our
shareholders in the public market. We have filed a Registration Statement on
Form S-8 to register for resale the ordinary shares reserved for issuance under
our stock option plans.
OUR NEED FOR ADDITIONAL FINANCING IS UNCERTAIN, AS IS OUR ABILITY TO RAISE
FURTHER FINANCING IF REQUIRED. We believe that our current cash balances will be
sufficient to fund our expenses until we reach profitability. However, we cannot
assure you that we will attain sufficient revenues to achieve or maintain
profitability, particularly given current economic conditions and potential
reductions in information technology spending by our current and prospective
customers. We may need to raise additional capital to finance our operations or
for strategic purposes, and we may do so by selling additional equity or debt
securities or by increasing the size of our credit facility. If additional funds
are raised through the issuance of equity or debt securities, these securities
could have rights; preferences and privileges senior to those of holders of
ordinary shares, and the terms of these securities could impose restrictions on
our operations. The sale of additional equity or convertible debt securities
could result in additional dilution to our shareholders. In addition, we cannot
be certain that additional financing will be available in amounts or on terms
acceptable to us, if at all. If we are unable to obtain this additional
financing, we may be required to reduce the scope of our planned product
development and marketing efforts, which could harm our business, financial
condition or operating results. If the economy continues to weaken or, for any
other reason, we are unable to meet our business goals, we may have to raise
additional funds to respond to business contingencies and may include the need
to:
* fund additional marketing expenditures;
* develop new or enhance existing products and services;
* enhance our operating infrastructure;
* hire additional personnel;
* respond to competitive pressures;
* acquire complementary businesses or necessary technologies; or
* fund more rapid expansion.
We cannot assure you that additional financing will be available on terms
favorable to us, or at all. If adequate funds are not available or are not
available on acceptable terms, our ability to fund our operations, take
advantage of unanticipated opportunities, develop or enhance our products and
services or otherwise respond to competitive pressures would be significantly
23
limited. 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 of the State of Israel and there can be no assurance
that we will be able to obtain this consent in the future.
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, our passive income, or our assets that produce passive income,
exceeds specified levels, we may be characterized as a passive foreign
investment company for United States federal income tax purposes. We do not
currently anticipate that this will happen, but, if it does, our shareholders
will be subject to adverse United States tax consequences. Prospective investors
should consult with their own tax advisors with respect to the tax consequences
applicable to them of investing in our ordinary shares.
BUSINESS INTERRUPTIONS COULD ADVERSELY AFFECT OUR BUSINESS. Our operations are
vulnerable to interruption by fire, earthquake, power loss, telecommunications
failure and other events beyond our control. In particular, we have operations
in the San Francisco Bay Area, an area that is known to be susceptible to the
risk of earthquakes. We do not have a detailed disaster recovery plan. Our
facilities in the State of California have been subject to electrical blackouts
as a consequence of recent shortages of available electrical power. In the event
these blackouts resume or increase in severity, they could disrupt the
operations of our affected facilities. In addition, we do not carry sufficient
business interruption insurance to compensate us for losses that may occur and
any losses or damages incurred by us could have a material adverse effect on our
business.
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:
* announcements of technological innovations;
* announcements relating to strategic relationships;
* conditions affecting the software and Internet industries;
* trends related to the fluctuations of stock prices of companies such
as ours;
* our historical and anticipated quarterly and annual operating results;
* variations between our actual results and the expectations of
investors or published reports or analyses of ClickSoftware;
* announcements by us or others affecting our business, systems or
expansion plans; and
* general conditions and trends in technology industries.
In the past, securities class action litigation has often been instituted
against companies following periods of volatility in the market price of their
securities. This type of litigation could result in substantial costs and a
diversion of management's attention and resources.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
FOREIGN CURRENCY EXCHANGE RATE RISK. We develop products in Israel and sell them
primarily in North America and Europe. 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. As most of our sales are currently
made in U.S. dollars, a strengthening of the dollar could make our products less
competitive in foreign markets. Our interest income is sensitive to changes in
24
the general level of U.S. interest rates, particularly since the majority of our
investments are in short-term instruments. We regularly assess these risks and
have established policies and business practices to protect against the adverse
effects of these and other potential exposures. As a result, we do not
anticipate material losses as a result of foreign exchange rate fluctuations.
Due to the short-term nature of our term investments, we have concluded that
there is no material market risk exposure. Therefore, no quantitative tabular
disclosures are required. Additionally, although we do not presently participate
in hedging contracts related to foreign currency exchange rates, we may do so in
the future to protect against rate fluctuations affecting our foreign currency
accounts receivable balances. We do not participate in any speculative
investments.
INTEREST RATE RISK. As of September 30, 2001, we had cash and cash equivalents
of $12.1 million that consist of cash and highly liquid short-term investments.
Our investments will decline in value by an immaterial amount if market interest
rates increase, and, therefore, our exposure to interest rate changes has been
immaterial. Declines of interest rates over time will, however, reduce our
interest income from our short-term investments.
As of September 30, 2001, we had total short-term debt of $61,000 and long-term
debt net of current maturities of $57,000 that bear interest at rates that are
linked to LIBOR or the Israeli consumer price index or GBP. We also have a
revolving, accounts receivable-based, secured credit facility of up to $2.5
million for working capital purposes. Amounts outstanding bear interest at the
U.S. prime rate plus 1%. As of September 30, 2001, there were no amounts
outstanding under this facility.
ClickSoftware maintains a short-term investment portfolio primarily consisting
of corporate debt securities with maturities of twelve months or less. These
securities are subject to interest rate risk and will rise and fall in value if
market interest rates change. The extent of this risk is not quantifiable or
predictable due to the variability of future interest rates. ClickSoftware does
not expect any material loss with respect to its investment portfolio.
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The following table provides information about ClickSoftware's investment
portfolio, cash, and long-term debts as of September 30, 2001 and presents
principal cash flows and related weighted averages interest rates by expected
maturity dates.
YEAR OF MATURITY
2001 2002 2002 AFTER 2003 TOTAL CARRYING VALUE
(Dollars in thousands)
A) CASH AND CASH EQUIVALENTS AND INVESTMENT PORTFOLIO:
------------------------------------------------------
Cash and equivalents 7,873 - - - 7,873
Average interest rate 3.0% - - - 3.0%
Commercial Papers 998 - - - 998
Average interest rate 3.1% - - - 3.1%
Euro Dollar Bonds 1,116 - - - 1,116
Average interest rate 4.0% - - - 4.0%
Taxable Auction Securities 1,600 - - - 1,600
Average interest rate 3.7% - - - 3.7%
Asset backed Securities - 506 - - 506
Average interest rate - 3.7% - - 3.7%
A) Long-term debts:
Bank Loan 15 30 - - 45
Average interest rate L+1% L+1% - - L+1%
N.I.S indexed loans 2 5 2 - 9
Average interest rate 9.7% 9.7% 9.7% - 9.7%
Leases US$ 3 7 8 - 18
Average interest rate 7.1% 7.1% 7.1% - 7.1%
Leases GBP 4 18 17 7 46
Average interest rate 6.3% 6.3% 6.3% 6.3% 6.3%
PART II. OTHER INFORMATION
ITEM 1. Legal Proceedings
None
ITEM 2. Changes in Securities and Use of Proceeds
None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
On September 6, 2001, the Annual Meeting of Shareholders of the Company was
held at 4:00 pm, local time, at the Company's offices at 655 Campbell Technology
Parkway, Suite 250, Campbell, California.
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An election of an external director was held with the following individual being
elected to the Board of Directors of the Company:
Votes For Votes Against or Withheld
Janet Schinderman 23,586,660 59,255
Continuing Class II directors are Roni Einav and Nathan Gantcher.
Continuing Class III directors are Dr. Moshe BenBassat, Eddy Shalev and James W.
Thanos. Dr. Israel Borovich is a continuing external director.
Other matters voted upon at the meeting and the number of affirmative and
negative votes cast with respect to each such matter were as follows:
1. To ratify the appointment of Arthur Andersen LLP as independent
accountants of the Company for the 2001 fiscal year. The number of
affirmative votes for this proposal was 23,590,830, the number of
negative votes was 52,050 and the number of abstained votes was 3,035.
2. To approve an amendment to the Company's 2000 Share Option Plan in
order to provide initial grants of 30,000 shares to new, non-employee
directors, other than those directors classified as external
directors, and annual grants of 7,500 shares to all non-employee
directors. The number of affirmative votes for this proposal was
23,545,906, the number of negative votes was 93,374 and the number of
abstained votes was 6,635.
3. To ratify and approve the grant of options, as described in the August
6, 2001 Proxy Statement, to each of Israel Borovich, Roni Einav,
Nathan Gantcher, James Thanos and Janet Schinderman. Grants of options
to purchase 30,000 shares at an exercise price of $1.69 per share to
each of Dr. Borovich and Messrs. Einav, Gantcher and Thanos were
approved, and a grant to Ms. Schinderman that resulted in an option to
purchase 24,036 shares at an exercise price of $1.26 per share was
also approved. The number of affirmative votes for this proposal was
23,534,440, the number of negative votes was 103,453 and the number of
abstained votes was 8,022.
4. To ratify and approve the grant of a loan from the Company to Dr.
BenBassat, as described in the August 6, 2001 Proxy Statement. The
number of affirmative votes for this proposal was 21,688,605, the
number of negative votes was 1,952,882 and the number of abstained
votes was 4,428.
5. To approve of the receipt and consideration by the annual meeting of
the directors' report and the Audited Consolidated Financial
Statements for the Company. The number of affirmative votes for this
proposal was 23,570,830, the number of negative votes was 71,750 and
the number of abstained votes was 3,335.
ITEM 6. Exhibits and Reports on Form 8-K
(a) Exhibits:
None.
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(b) Reports on for 8 - K:
No reports on Form 8-K were filed with the Securities and Exchange Commission
during the three months ended September 30, 2001.
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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/ SHIMON M. ROJANY
--------------------------
Shimon M. Rojany
Senior Vice President and Chief Financial Officer
Date: November 13, 2001
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