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, 2002
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
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Commission File Number: 000-30827
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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 No X
--- ---
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act).
Yes No X
--- ---
As of September 30, 2002, there were 26,338,373 shares of the Registrant's
ordinary shares, par value NIS 0.02, outstanding.
ClickSoftware Technologies Ltd.
FORM 10-Q
FOR THE QUARTER ENDED SEPTEMBER 30, 2002
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
(a) Condensed Consolidated Balance Sheets as of September 30, 2002 and
December 31, 2001 (As restated)........................................ 3
(b) Condensed Consolidated Statements of Operations for the three and nine
months ended September 30, 2002 and September 30, 2001 (As restated)... 4
(c) Condensed Consolidated Statements of Cash Flows for the nine
months ended September 30, 2002 and September 30, 2001 (As restated)... 6
(d) Notes to Condensed Consolidated Financial Statements................... 7
(e) Independent Public Accountants Review Report........................... 10
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations............................................... 11
Item 3. Quantitative and Qualitative Disclosures About Market Risks......... 27
Item 4. Controls and Procedures............................................. 27
PART II. OTHER INFORMATION
Item 1. Legal Proceedings................................................... 29
Item 2. Changes in Securities and Use of Proceeds........................... 29
Item 4. Submission of Matters to a Vote of Security Holders................. 29
Item 6. Exhibits and Reports on Form 8-K.................................... 29
Signatures................................................................... 30
Exhibit 99.1................................................................. 33
Exhibit 99.2................................................................. 34
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,
2002 2001
-----------------------------------------
(UNAUDITED) (AS RESTATED AND
ASSETS RECLASSIFIED -
SEE NOTE 2)
CURRENT ASSETS:
Cash and cash equivalents $ 4,551 $ 8,125
Short-term investments 2,403 1,846
Trade receivables, net 3,968 5,607
Other receivables and prepaid expenses 1,760 1,485
-----------------------------------------
Total current assets 12,682 17,063
Property and equipment, net 2,606 2,985
Severance pay deposits 765 652
-----------------------------------------
Total assets $ 16,053 $ 20,700
=========================================
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Short-term loans $ 34 $ 140
Accounts payable and accrued expenses 3,394 2,664
Deferred revenues 515 68
-----------------------------------------
Total current liabilities 3,943 2,872
-----------------------------------------
LONG-TERM LIABILITIES
Long-term loans - 21
Accrued severance pay 1,424 1,379
-----------------------------------------
Total long-term liabilities 1,424 1,400
-----------------------------------------
Total liabilities 5,367 4,272
-----------------------------------------
SHAREHOLDERS' EQUITY:
Ordinary shares, NIS 0.02 par value:
Authorized -- 100,000,000 as of September 30, 2002
and December 31, 2001; Issued -- 26,377,373 shares
as of September 30, 2002 and 26,285,464 shares as
of December 31, 2001. Outstanding -- 26,338,373
shares as of September 30, 2002 and 26,246,464
shares as of December 31, 2001. 102 101
Additional paid-in capital 69,186 69,143
Deferred stock compensation (176) (401)
Accumulated deficit (58,383) (52,372)
-----------------------------------------
treasury stock, at cost:39,000 shares (43) (43)
-----------------------------------------
Total shareholders' equity 10,686 16,428
-----------------------------------------
Total liabilities and shareholders' equity $ 16,053 $ 20,700
=========================================
The accompanying notes are an integral part of these 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 SEPTEMBER 30,
2002 2001
----------------------------------------
(AS RESTATED
AND
RECLASSIFIED-
REVENUES: SEE NOTE 2)
Software license fees $ 2,335 $ 2,079
Services 2,274 1,697
----------------------------------------
Total revenues 4,609 3,776
----------------------------------------
Cost of revenues:
Software license 337 161
Services 1,539 1,287
----------------------------------------
Total cost of revenues 1,876 1,448
----------------------------------------
Gross profit 2,733 2,328
----------------------------------------
Operating expenses:
Research and development expenses, net 729 801
Selling and marketing expenses 2,599 2,966
General and administrative expenses 1,154 1,242
Amortization of deferred Stock-based compensation (1) 75 134
----------------------------------------
Total operating expenses 4,557 5,143
----------------------------------------
Operating loss (1,824) (2,815)
Interest and other income, net (9) 110
----------------------------------------
Net loss $ (1,833) $ (2,705)
----------------------------------------
Basic and diluted net loss per share $ (0.07) $ (0.11)
----------------------------------------
Shares used in computing basic and diluted net loss per share 25,329,521 25,154,690
----------------------------------------
(1) Amortization of deferred stock-based compensation would be further classified as follows:
THREE MONTHS ENDED
SEPTEMBER 30,
----------------------------------------
2002 2001
----------------------------------------
Cost of revenues $ 5 $ 5
Research and development expenses 11 17
Selling and marketing expenses 3 17
General and administrative expenses 56 95
----------------------------------------
Total $ 75 $ 134
----------------------------------------
The accompanying notes are an integral part of these condensed consolidated financial statements.
4
CLICKSOFTWARE TECHNOLOGIES LTD.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
(UNAUDITED)
NINE MONTHS ENDED SEPTEMBER 30,
2002 2001
----------------------------------------
(AS RESTATED
AND
RECLASSIFIED-
Revenues: See Note 2)
Software license fees $ 4,711 $ 7,026
Services 6,465 5,184
----------------------------------------
Total revenues 11,176 12,210
----------------------------------------
Cost of revenues:
Software license 654 585
Services 4,330 4,374
----------------------------------------
Total cost of revenues 4,984 4,959
----------------------------------------
Gross profit 6,192 7,251
----------------------------------------
Operating expenses:
Research and development expenses, net 2,136 2,460
Selling and marketing expenses 7,979 9,790
General and administrative expenses 2,046 2,976
Reorganization expenses - 294
Amortization of deferred stock-based compensation (1) 225 321
----------------------------------------
Total operating expenses 12,386 15,841
----------------------------------------
Operating loss (6,194) (8,590)
Interest and other income, net 183 580
----------------------------------------
Net loss $ (6,011) $ (8,010)
----------------------------------------
Basic and diluted net loss per share $ (0.24) $ (0.32)
----------------------------------------
Shares used in computing basic and diluted net loss per share 25,298,620 25,070,748
----------------------------------------
1) Amortization of deferred Stock-based compensation would be further classified as follows:
NINE MONTHS ENDED SEPTEMBER 30,
2002 2001
----------------------------------------
Cost of revenues 15 13
Research and development expenses 33 41
Selling and marketing expenses 9 41
General and administrative expenses 168 226
----------------------------------------
Total 225 321
----------------------------------------
The accompanying notes are an integral part of these condensed consolidated financial statements.
5
CLICKSOFTWARE TECHNOLOGIES LTD.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
NINE MONTHS ENDED
SEPTEMBER 30,
2002 2001
-----------------------------------------
(AS RESTATED -
SEE NOTE 2)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (6,011) $ (8,010)
Adjustments to reconcile net loss to net cash used in operating activities
Depreciation 609 560
Amortization of deferred stock-compensation 225 321
Unrealized gain from investments 79 319
Severance pay, net (68) (11)
Changes in operating assets and liabilities:
Trade receivables 1,639 (1,033)
Other receivables and other prepaid
expenses (275) (225)
Accounts payable and accrued expenses 730 (533)
Deferred revenues 447 100
Change in investments, net (636) 14,471
-----------------------------------------
Net cash provided by (used in) operating activities (3,261) 5,959
-----------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of equipment (230) (417)
-----------------------------------------
Net cash provided by (used in) investing activities (230) (417)
-----------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Repayment of short-term loans (106) (76)
Repayment of long-term loans (21) (55)
Exercise of Employees' options 44 180
Purchase of treasury shares - (25)
-----------------------------------------
Net cash provided by (used in) financing activities (83) 24
-----------------------------------------
Increase (decrease) in cash and cash equivalents (3,574) 5,566
Cash and cash equivalents at beginning of period 8,125 4,438
-----------------------------------------
Cash and cash equivalents at end of period $ 4,551 $ 10,004
=========================================
Supplemental cash flow information:
Cash paid for interest $ 10 $ 16
=========================================
The accompanying notes are an integral part of these condensed consolidated financial statements.
6
CLICKSOFTWARE TECHNOLOGIES LTD.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
AS OF SEPTEMBER 30, 2002 (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. The condensed unaudited interim consolidated financial statements
included in this report on Form 10-Q have been reviewed by our independent
auditors consistent with SAS 71. These financial statements reflect all
adjustments, consisting of normal recurring adjustments and accruals, which
are, in the opinion of management, necessary for a fair presentation of the
financial position of the Company as of September 30, 2002 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, 2001 that are included in ClickSoftware's Form
10-K/A filed with the Securities and Exchange Commission on January 24,
2003. The results of operations presented are not necessarily indicative of
the results to be expected for future quarters or for the year ending
December 31, 2002. The balance sheet at December 31, 2001 has been derived
from the audited financial statements as of and for the year ended December
31, 2001, but does not include all the information and footnotes required
by generally accepted accounting principles for annual financial
statements.
2. RESTATEMENT
During the third quarter of 2002, the Company's audit committee, with the
assistance of outside advisors, conducted a review of its financial
statements for 2000 and 2001 and for the first six months of 2002. On
October 21, 2002, the Company announced that it would restate its financial
statements for 2000 and 2001 and for the first six months of 2002.
Following the reaudit of the Company's financial statements, the Company is
restating its financial statements for the announced periods and for the
year ended December 31, 1999. The restatement results primarily from the
recognition of revenue from sales to reseller customers and other
customers, where revenue has been recognized prematurely or should not have
been recognized at all. The Company has also determined to reclassify
royalty expenses related to grants received from the Chief Scientist Office
from Selling and Marketing expenses to Cost of Revenues expenses.
This restatement is further discussed in note 3 of the notes to the
consolidated financial statements of the Company that are included on the
Company's Form 10-K/A for the year ended December 31, 2001, filed with the
Securities and Exchange Commission on January 24, 2003.
The Company applied in these financial statements the SEC staff guidance to
classify royalty expenses related to grants received from Chief Scientist
Office as part of cost of revenues. Accordingly, the Company reclassified
the following amounts from Selling and Marketing expenses to Cost of
Revenues expenses: $462,000 and $76,000 for the nine and three months ended
September 30, 2001, respectively.
The impact of the adjustments on the financial statements of the Company is
set forth below.
7
CLICKSOFTWARE TECHNOLOGIES LTD.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
AS OF SEPTEMBER 30, 2002
(IN THOUSANDS, EXCEPT SHARE DATA)
BALANCE SHEET:
DECEMBER 31, EFFECT OFT DECEMBER 31,
2001 RESTATEMENT 2001
---------------------------------------------------------------
(AS PREVIOUSLY (AS RESTATED)
ASSETS REPORTED)
CURRENT ASSETS:
Cash and cash equivalents $ 8,125 $ 8,125
Short-term investments 1,846 1,846
Trade receivables, net 6,623 (1,016) 5,607
Other receivables and prepaid expenses 1,671 (186) 1,485
---------------------------------------------------------------
Total current assets 18,265 (1,202) 17,063
Property and equipment, net 3,450 (465) 2,985
Severance pay deposits 652 652
---------------------------------------------------------------
Total assets $ 22,367 $ (1,667) $ 20,700
===============================================================
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Short-term loans $ 140 $ 140
Accounts payable and accrued expenses 2,785 (121) 2,664
Deferred revenues 68 68
---------------------------------------------------------------
Total current liabilities 2,993 (121) 2,872
---------------------------------------------------------------
LONG-TERM LIABILITIES
Long-term loans 21 21
Accrued severance pay 1,379 1,379
---------------------------------------------------------------
Total long-term liabilities 1,400 1,400
---------------------------------------------------------------
Total liabilities 4,393 (121) 4,272
---------------------------------------------------------------
SHAREHOLDERS' EQUITY:
Ordinary shares of NIS 0.02 par value: 101 101
Additional paid-in capital 69,143 69,143
Deferred compensation (401) (401)
Accumulated deficit (50,826) (1,546) (52,372)
---------------------------------------------------------------
treasury stock, at cost:39,000 shares (43) (43)
---------------------------------------------------------------
Total shareholders' equity 17,974 (1,546) 16,428
---------------------------------------------------------------
Total liabilities and shareholders' equity $ 22,367 $ (1,667) $ 20,700
===============================================================
8
CLICKSOFTWARE TECHNOLOGIES LTD.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR PERIOD ENDED SEPTEMBER 30, 2002
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
(UNAUDITED)
THREE MONTHS ENDED SEPTEMBER 30,
STATEMENT OF OPERATIONS:
2001 2001 2001 2001
------------------------------------------------------------------------------------
(AS PREVIOUSLY (EFFECT OF (EFFECT OF (AS RESTATED AND
REVENUES: REPORTED) RESTATEMENT) RECLASSFICATION)) RECLASSIFIED)
Software license fees $ 1,042 $ 1,037 $ 2,079
Services 1,697 1,697
------------------------------------------------------------------------------------
Total revenues 2,739 1,037 3,776
------------------------------------------------------------------------------------
Cost of revenues:
Software license 95 37 29 161
Services 1,292 (52) 47 1,287
------------------------------------------------------------------------------------
Total cost of revenues 1,387 (15) 76 1,448
------------------------------------------------------------------------------------
Gross profit 1,352 1,052 (76) 2,328
------------------------------------------------------------------------------------
Operating expenses:
Research and development
expenses, net 801 801
Selling and marketing expenses 3,099 (57) (76) 2,966
General and administrative
expenses 1,575 (333) 1,242
Share-based compensation 134 134
------------------------------------------------------------------------------------
Total operating expenses 5,609 (390) (76) 5,143
------------------------------------------------------------------------------------
Operating loss (4,257) 1,442 (2,815)
Interest and other income, net 110 110
------------------------------------------------------------------------------------
Net loss $ (4,147) $ 1,442 $ (2,705)
------------------------------------------------------------------------------------
Basic and diluted net loss per share $ (0.16) $ (0.11)
------------------------------------------------------------------------------------
Shares used in computing basic and
diluted net loss per share 25,154,690 25,154,690
------------------------------------------------------------------------------------
STATEMENT OF OPERATIONS: NINE MONTHS ENDED SEPTEMBER 30,
2001 2001 2001 2001
------------------------------------------------------------------------------------
(AS PREVIOUSLY (EFFECT OF (EFFECT OF (AS RESTATED AND
REVENUES: REPORTED) RESTATEMENT) RECLASSFICATION)) RECLASSIFIED)
Software license fees $ 7,028 $ (2) $ 7,026
Services 5,271 (87) 5,184
-------------------------------------------------------------------------------------
Total revenues 12,299 (89) 12,210
-------------------------------------------------------------------------------------
Cost of revenues:
Software license 307 278 585
Services 4,242 (52) 184 4,374
-------------------------------------------------------------------------------------
Total cost of revenues 4,549 (52) 462 4,959
-------------------------------------------------------------------------------------
Gross profit 7,750 (37) (462) 7,251
-------------------------------------------------------------------------------------
Operating expenses:
Research and development expenses,
net 2,460 2,460
Selling and marketing expenses 10,411 (159) (462) 9,790
General and administrative
expenses 3,364 (388) 2,976
Reorganization expenses 294 294
Share-based compensation 321 321
-------------------------------------------------------------------------------------
Total operating expenses 16,850 (547) (462) 15,841
-------------------------------------------------------------------------------------
Operating loss (9,100) 510 (8,590)
Interest and other income, net 580 580
-------------------------------------------------------------------------------------
Net loss $ (8,520) 510 $ (8,010)
-------------------------------------------------------------------------------------
Basic and diluted net loss per share $ (0.34) $ (0.32)
-------------------------------------------------------------------------------------
Shares used in computing basic and
diluted net loss per share 25,070,748 25,070,748
-------------------------------------------------------------------------------------
9
3. REVENUE RECOGNITION
The Company recognizes revenues in accordance with the American Institute
of Certified Public Accountants ("AICPA") Statement of Position 97-2,
Software Revenue Recognition, as amended.
In accordance with SOP 97-2, revenues from software license fees are
recognized when persuasive evidence of an arrangement exists, the software
product covered by written agreement or a purchase order signed by the
customer has been delivered, the license fees are fixed and determinable
and collection of the license fees is considered probable. Revenues from
software product license agreements, 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 vendor specific objective
evidence 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 exist 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, we consider all
arrangements with extended payment terms greater than nine months not to be
fixed or determinable.
We also enter 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.
4. 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, or basic EPS, is computed by dividing net loss by the
weighted average number of ordinary shares outstanding, excluding ordinary
shares held by a trustee reserved for allocation against employee options
granted but not yet exercised. Diluted net loss per ordinary share is the
same as basic net loss per ordinary share for all periods presented, as the
effects of options to purchase our ordinary shares were antidilutive.
A total of 3,935,969 and 3,684,869 incremental shares were excluded from
the calculation of diluted net loss per ordinary share for the nine months
periods ended September 30, 2002 and September 30, 2001, respectively.
INDEPENDENT PUBLIC ACCOUNTANTS REVIEW REPORT
--------------------------------------------
To the Shareholders of
ClickSoftware Technologies Ltd
We have reviewed the accompanying interim consolidated balance sheet of
ClickSoftware Technologies Ltd. ("the Company") and its subsidiaries as of
September 30, 2002, and the related interim consolidated statements of
operations for the three-month and nine-month periods ended September 30, 2002
and the related statement of changes in shareholders' equity and statement of
cash flows for the nine-month period ended September 30, 2002. These financial
statements are the responsibility of the Company's management.
We conducted our review in accordance with standards established by the American
Institute of Certified Public Accountants. A review of financial information
consists principally of applying analytical procedures to financial data and
making inquiries of persons responsible for financial and accounting matters. It
is substantially less in scope than an audit conducted in accordance with
generally accepted auditing standards, the objective of which is the expression
of an opinion regarding the financial statements taken as a whole. Accordingly,
we do not express such an opinion.
Based on our review, we are not aware of any material modifications that should
be made to the accompanying financial statements for them to be in conformity
with accounting principles generally accepted in the United States of America.
As discussed in note 2, the consolidated financial statements of the Company for
each of the three years in the period ended December 31, 2001 and for the
six-month period ended June 30, 2002 have been restated.
/s/ Brightman Almagor & Co.
Brightman Almagor & Co.
Certified Public Accountants
A member of Deloitte Touche Tohmatsu
Tel Aviv, Israel
January 16, 2003
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
This report contains certain forward-looking statements (as such term is defined
in Section 27A of the Securities Act of 1933 and Section 21E of the Securities
Exchange Act of 1934) and information relating to us that are based on the
beliefs of our management as well as assumptions made by and information
currently available to our management, including statements related to products,
markets, and future results of operations and profitability, and may include
implied statements concerning market acceptance of our products, and our growing
leadership role in the marketplace. In addition, when used in this report, the
words "likely," "will," "suggests," "may," "would," "could," "anticipate,"
"believe," "estimate," "expect," "intend," "plan, "predict" and similar
expressions and their variants, as they relate to us or our management, may
identify forward-looking statements. Such statements reflect our judgment as of
the date of this quarterly report on Form 10-Q with respect to future events,
the outcome
10
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
Since late 1996, we have focused on providing service optimization software
products based on our W-6 Service Scheduler and TechMate technologies. We have
also invested significant resources in developing products based on these
technologies including, until 2001, increasing the number of our employees
involved in research and development, selling and marketing, and professional
services. During 2001 and the first nine months of 2002, the number of our
employees decreased due to cost cutting measures.
We believe that in today's economy successful businesses must constantly
increase the performance of existing service resources. Our products emphasize
the use of optimization tools for performance enhancement in the service
environment. In September 1999, we began marketing our product lines under new
names, CLICKSCHEDULE and CLICKFIX and in May 2000, we changed our company name
to ClickSoftware Technologies Ltd. Currently our product offering for service
optimization applications includes : CLICKSCHEDULE, CLICKFIX, CLICKANALYZE,
CLICKPLAN, CLICKMOBILE, AND CLICKFORECAST.
We derive revenues from software licensing and services. Our operating history
shows that a significant percentage of our quarterly revenues comes from orders
placed toward the end of a quarter. Software license revenues are comprised of
perpetual software license fees primarily derived from contracts with our direct
sales clients and our indirect distribution channels. We recognize revenues in
accordance with the AICPA Statement of Position 97-2, "Software Revenue
Recognition," or SOP 97-2, as amended (see note 3 of the notes to our interim
consolidated financial statements).
Service revenues are comprised of revenues from consulting, training, and
post-contract customer support. Consulting services are billed at an agreed-upon
rate plus incurred expenses. Clients licensing our products generally purchase
consulting agreements from us. Post-contract customer support arrangements
provide technical support and the right to unspecified upgrades on an if-and
when-available basis. Post-contract customer support revenues are charged as a
percentage of license fees depending upon the level of support coverage
requested by the customer. Our products are marketed worldwide through a
combination of a direct sales force, consultants and various business
relationships we have with implementation and technology companies and
resellers.
Cost of revenues consists of cost of software license revenues and cost of
services. Cost of software license revenues consists of expenses related to
media duplication and packaging of our products, costs of software purchased or
licensed for resale and royalties payments to the Chief Scientist. Cost of
services consists of expenses related to salaries and expenses of our
professional services organizations, costs related to third-party consultants,
equipment costs and royalties payments to the Chief Scientist.
Operating expenses are categorized into research and development expenses,
selling 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 in liquidity and capital resources section which are
included in cost of services expenses. Software research and development costs
incurred prior to the establishment of technology feasibility are included in
research and development expenses as incurred.
Selling and marketing expenses consist primarily of personnel and related costs
for marketing and sales functions, including related travel, direct advertising
costs, expenditures on trade shows, market research and promotional printing.
General and administrative expenses consist primarily of personnel and related
costs for corporate functions, including information services, finance,
accounting, human resources, facilities, provision for doubtful accounts, legal
and other costs related to activity as a public company.
11
Amortization of stock-based compensation represents the aggregate difference, at
the date of grant, between the respective exercise price of stock options and
the deemed fair market value of the underlying stock. Deferred stock-based
compensation is amortized over the vesting period of the underlying options,
generally four years.
Interest and other income include interest income earned on our cash, cash
equivalents and short-term investments, offset by interest expense, and also
includes the effects of foreign currency translations.
The functional currency of our operations is the U.S. dollar, which is the
primary currency in the economic environment in which we conduct our business. A
significant portion of our research and development expenses and other expenses
are incurred in New Israeli Shekels, or NIS and a portion of our revenues and
expenses are incurred in British Pounds and the European Community Euro. The
results of our operations are subject to fluctuations in these exchange rates
which are influenced by various global economic factors.
The effects of foreign currency exchange rates on our results of operations for
the three months and nine months ended September 30, 2002 and 2001 were
immaterial.
Our tax rate will mainly reflect a mix of the U.S. statutory tax rate on our
U.S. income, the U.K statutory tax rate on our U.K income, the Belgium statutory
tax rate on our Belgium income, the German statutory tax rate on our German
income, the Australian statutory tax rate on our Australian income, and the
Israeli tax rate discussed below. Israeli companies are generally subject to
income tax at the rate of 36% of taxable income. The majority of our income,
however, is derived from our company's capital investment program with "Approved
Enterprise" status under the Law for the Encouragement of Capital Investments,
and is eligible therefore for tax benefits. As a result of these benefits, we
will have a tax exemption on income derived during the first two years in which
this investment program produces taxable income, and a reduced tax rate of
15-25% for the next 5 to 8 years. In the event of a distribution of a cash
dividend out of retained earnings that were exempt from tax due to its Approved
Enterprise status, we would be required to pay 25% corporate income tax on
income from which the dividend was distributed. All of these tax benefits are
subject to various conditions and restrictions. There can be no assurance that
we will obtain approval for additional Approved Enterprise Programs, or that the
provisions of the law will not change.
CRITICAL ACCOUNTING POLICIES
The discussion and analysis of our financial condition and results of operations
are based upon our consolidated financial statements, which have been prepared
in accordance with accounting principles generally accepted in the United
States. The preparation of these financial statements requires us to make
estimates and judgments that affect the reported amounts of assets, liabilities,
revenues and expenses, and related disclosure of contingent assets and
liabilities. These estimates are evaluated by us on an on-going basis. We base
our estimates on our historical experience and on various other assumptions that
we believe to be reasonable under the circumstances, the results of which form
the basis for making judgments about the carrying amount values of assets and
liabilities that are not readily apparent from other sources. Actual results may
differ from these estimates under different assumptions or conditions.
Our recognition of revenue requires judgments and estimates which may
significantly impact our consolidated financial statements.
Revenue results are difficult to predict, and any shortfall in revenues or delay
in recognizing revenues could cause our operating results to vary significantly
from quarter to quarter and could result in future operating losses. In
addition, the timing of our revenue recognition influences the timing of certain
expenses, such as commissions and royalties. We follow very specific and
detailed guidelines in measuring revenues, however, certain judgments affect the
application of our revenue policy.
Our revenues are principally derived from the licensing of our software and the
provision of related services. We recognize revenues in accordance with SOP
97-2. Revenues from software license fees are recognized when persuasive
evidence of an arrangement exists, either by written agreement or a purchase
order signed by the customer, the software product has been delivered, the
license fees are fixed and determinable, and collection of the license fees is
considered probable. License fees from software arrangements 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
12
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.
RECENT ACCOUNTING PRONOUNCEMENTS
In April 2002, the FASB issued SFAS No. 145, "Rescission of FASB Statements No.
4, 44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections"
("SFAS 145"). This statement is effective for fiscal years beginning after May
15, 2002. SFAS 145 rescinds Statement 4, which required all gains and losses
from extinguishments of debt to be aggregated and, if material, classified as an
extraordinary item, net of related income tax effect. As a result, the criteria
in Opinion 30 will now be used to classify those gains and losses. SFAS 145 also
amends Statement 13 to require that certain lease modifications that have
economic effects similar to sale-leaseback transactions be accounted for in the
same manner as sale-leaseback transactions. The adoption of this statement did
not have a material impact on our results of operations,financial position or
cash flows.
In July 2002, the Financial Accounting Standards Board issued SFAS 146
(Accounting for Costs Associated with Exit or Disposal Activities). The standard
requires companies to recognize costs associated with exit or disposal
activities when they are incurred rather than at the date of a commitment to an
exit or disposal plan. Examples of costs covered by the standard include lease
termination costs and certain employee severance costs that are associated with
a restructuring, discontinued operation, plant closing, or other exit or
disposal activity. Previous accounting guidance was provided by EITF Issue No.
94-3, (Liability Recognition for Certain Employee Termination Benefits and Other
Costs to Exit an Activity [including Certain Costs Incurred in a
Restructuring]). SFAS 146 replaces Issue 94-3. The Company will apply SFAS 146
prospectively to exit or disposal activities initiated after September 30, 2002.
In December 2002, the Financial Accounting Standards Board (the "FASB") issued
Statement of Financial Accounting Standards Board (" SFAS";) No. 148,
"Accounting for Stock-Based Compensation -- Transition and Disclosure -- an
amendment of FASB Statement No. 123." SFAS No. 148 amends SFAS No. 123,
"Accounting for Stock-Based Compensation," to provide alternative methods of
transition for a voluntary change to the fair value based method of accounting
for stock-based employee compensation. In addition, SFAS No. 148 amends the
disclosure requirements of SFAS No. 123 to require prominent disclosures in both
annual and interim financial statements about the method of accounting for
stock-based employee compensation and the effect of the method used on reported
results. We are required to follow the prescribed format and provide the
additional disclosures required by SFAS No. 148 in our annual financial
statements for the year ended December 31, 2002 and must also provide the
disclosures in its quarterly reports containing condensed financial statements
for interim periods beginning with the quarterly period ending March 31, 2003.
13
RESULTS OF OPERATIONS
Our unaudited operating results for each of the three months and nine months
ended September 30, 2002 and 2001, expressed as a percentage of revenues are as
follows:
THREE MONTHS NINE MONTHS
ENDED SEPTEMBER 30, ENDED SEPTEMBER 30,
--------------------------------------------------------------
2002 2001 2002 2001
(AS RESTATED (AS RESTATED
AND AND
RECLASSIFIED) RECLASSIFIED)
--------------------------------------------------------------
Revenues:
Software license fees 51% 55% 42% 58%
Services 49% 45% 58% 42%
--------------------------------------------------------------
Total revenues 100% 100% 100% 100%
Cost of revenues:
Software license 7% 4% 6% 5%
Services 34% 34% 39% 36%
--------------------------------------------------------------
Total cost of revenues 41% 38% 45% 41%
--------------------------------------------------------------
Gross profit 59% 62% 55% 59%
--------------------------------------------------------------
Operating expenses:
Research and development expenses, net 16% 21% 19% 20%
Selling and marketing expenses 56% 78% 72% 80%
General and administrative expenses 25% 33% 18% 25%
Reorganization expenses - - - 2%
Share-based compensation 2% 4% 2% 3%
--------------------------------------------------------------
Total operating expenses 99% 136% 111% 130%
--------------------------------------------------------------
Operating loss (40%) (74%) (56%) (71%)
Interest and other income, net 0% 3% 2% 5%
--------------------------------------------------------------
Net loss (40%) (71%) (54%) (66%)
==============================================================
RESULTS OF OPERATIONS FOR THREE MONTHS ENDED SEPTEMBER 30, 2002 AND 2001
(AS RESTATED AND RECLASSIFIED)
During the third quarter of 2002, our audit committee, with the assistance of
outside advisors, conducted a review of our financial statements for 2000 and
2001 and for the first six months of 2002. On October 21, 2002, we announced
that we would restate our financial statements for 2000 and 2001 and for the
first six months of 2002. In addition, we announced that our audit committee
decided to recommend to our shareholders that we terminate our relationship with
Luboshitz Kasierer, formerly a member firm of Arthur Andersen, as our auditors
and to appoint new auditors. At a shareholders' meeting held on December 31,
2002, our shareholders authorized the engagement of Brightman Almagor, a member
of Deloitte Touche Tohmatsu.
Following the reaudit of our financial statements, we are restating our
financial statements for the announced periods and for the year ended December
31, 1999. The restatement results primarily from the recognition of revenue from
sales to reseller customers and other customers, where revenue has been
recognized prematurely or should not have been recognized at all. We have also
determined to reclassify royalty expenses related to grants received from Chief
Scientist Office from Selling and Marketing expenses to Cost of Revenues
expenses.
We applied in our financial statements the SEC staff guidance to classify
royalty expenses related to grants received from Chief Scientist Office as part
of cost of revenues. Accordingly, we reclassified the following amounts from
Selling and Marketing expenses to Cost of Revenues expenses: $462,000 and
$76,000 for the nine and three months ended September 30, 2001, respectively.
REVENUES: Company revenues increased $0.8 million or 22% to $4.6 million for the
three months ended September 30, 2002 from $3.8 million for the three months
ended September 30, 2001. This increase was the result of recurring orders by
existing customers and increase in renewal of post-contract support agreements.
14
SOFTWARE LICENSE REVENUES: Software license revenues were $2.3 million, or 51%
of total revenues, for the three months ended September 30, 2002, and $2.1
million, or 55% of total revenues, for the three months ended September 30,
2001. The increase in software license revenues by $0.2 million or 12% was the
result of recurring orders by existing customers during the third quarter of
2002.
SERVICES: Service revenues were $2.3 million, or 49% of total revenues, for the
three months ended September 30, 2002, and $1.7 million, or 45% of total
revenues, in the three months ended September 30, 2001. The increase in service
revenues by $0.6 million or 34% was primarily due to an increase in renewal of
post-contract support agreements in the third quarter of 2002.
COST OF REVENUES: Cost of revenues were $1.9 million, or 41% of revenues, for
the three months ended September 30, 2002, and $1.4 million, or 38% of revenues,
for the three months ended September 30, 2001. The increase in the cost of
revenues by $0.4 million or 30% was primarily due to an increase in consulting
costs and an increase in third party licensing and deployment costs.
COST OF SOFTWARE LICENSES: Cost of software license revenues were $337,000, or
7% of revenues, for the three months ended September 30, 2002, and $161,000, or
4% of revenues, for the three months ended September 30, 2001. The increase in
the cost of software licenses by $176,000 or 110% was due to an increase in new
third parties' licenses and adaptors to other Enterprise Resource Planning (ERP)
and Customer Relationship Management (CRM) systems sold to new customers in the
third quarter of 2002.
COST OF SERVICES: Cost of service and maintenance revenues was $1.5 million, or
34% of revenues, for the three months ended September 30, 2002, and $1.3
million, or 34% of revenues, for the three months ended September 30, 2001. The
increase in the cost of services by $0.3 million or 20% was primarily due to an
increase in demand for consulting services.
GROSS PROFIT: Gross profit as a percentage of revenues was $2.7 million, or 59%
for the three months ended September 30, 2002 and $2.3 million, or 62% for the
three months ended September 30, 2001. The increase in the gross profit by $0.4
million or 17% was primarily due to higher revenues in the three months ended
September 30, 2002.
OPERATING EXPENSES: Total operating expenses were $4.6 million, or 99% of
revenues, for the three months ended September 30, 2002, and $5.1 million, or
136% of revenues, for the three months ended September 30, 2001. The decrease in
operating expenses by $0.6 million or 11% was due to cost cutting measures
implemented during the past twelve months.
RESEARCH AND DEVELOPMENT EXPENSES, NET: Research and development expenses, net
of related grants, were $729,000, or 16% of revenues, for the three months ended
September 30, 2002, and $801,000, or 21% of revenues, for the three months ended
September 30, 2001. The decrease in research and development expenses by $72,000
or 9% is due to cost cutting measures implemented during the past twelve months.
We received or accrued grants from the Chief Scientist in the amount of $340,000
in the three months ended September 30, 2002 and $340,000 in the three months
ended September 30, 2001.
SELLING AND MARKETING EXPENSES: Selling and marketing expenses were $2.6
million, or 56% of revenues, for the three months ended September 30, 2002, and
$3.0 million, or 78% of revenues, for the three months ended September 30, 2001.
The decrease in selling and marketing expenses by $0.4 million or 12% was due to
cost cutting measures implemented during the past twelve months.
GENERAL AND ADMINISTRATIVE EXPENSES: General and administrative expenses were
$1.2 million, or 25% of revenues, for the three months ended September 30, 2002,
and $1.2 million, or 33% of revenues, for the three months ended September 30,
2001. General and administrative expenses were constant.
STOCK-BASED COMPENSATION: Stock-based compensation expenses for the three months
ended September 30, 2002 amounted to $75,000 of previously recorded deferred
stock- compensation. Stock-based compensation expense for the three months ended
September 30, 2001 amounted to $134,000. The decrease in stock-based
compensation expense by $59,000 or 44% is attributed to the fact that the
amortization of the deferred stock-based compensation progressively decreases
over the four-year amortization period.
The U.S. dollar amount of cost of revenues and operating expenses of the Company
incurred in NIS was favorably influenced by the devaluation of the NIS against
the U.S. dollar. This was due to the fact that the rate of devaluation of the
NIS against the U.S. dollar from the three
15
months ended September 30, 2001 until the three months ended September 30, 2002
(as measured by the average exchange rate in each period) exceeded the rate of
increase of these expenses in NIS during this same period.
RESULTS OF OPERATIONS FOR NINE MONTHS ENDED SEPTEMBER 30, 2002 AND 2001
(As restated and reclassified)
REVENUES: Company revenues decreased by $1.0 million or 8% to $11.2 million for
the nine months ended September 30, 2002 from $12.2 million for the nine months
ended September 30, 2001. This decrease was the result of the general economic
downturn. Specifically, increased scrutiny of capital budgets has resulted in
unexpected delays in larger sales and smaller initial orders in sales that did
successfully close.
SOFTWARE LICENSE REVENUES: Software license revenues were $4.7 million, or 42%
of total revenues, for the nine months ended September 30, 2002, and $7.0
million, or 58% of total revenues, for the nine months ended September 30, 2001.
The decrease in software license revenues by $2.3 million or 33% was primarily
the result of the general economic downturn.
SERVICES: Service revenues were $6.5 million, or 58% of total revenues, for the
nine months ended September 30, 2002, and $5.2 million, or 42% of total
revenues, in the nine months ended September 30, 2001. The increase in service
revenues by $1.3 million or 25% was primarily due to an increase in
post-contract support agreements during the first nine months of 2002.
COST OF REVENUES: Cost of revenues were $5.0 million, or 45% of revenues, for
the nine months ended September 30, 2002, and $5.0 million, or 41% of revenues,
for the nine months ended September 30, 2001
COST OF SOFTWARE LICENSES: Cost of software license revenues were $654,000, or
6% of revenues, for the nine months ended September 30, 2002, and $585,000, or
5% of revenues, for the nine months ended September 30, 2001. The increase in
the cost of software licenses by $69,000 or 12% was due to increase in new third
parties' licenses and adaptors to other Enterprise Resource Planning (ERP) and
Customer Relationship Management (CRM) systems sold in the third quarter of
2002.
COST OF SERVICES: Cost of services was $4.3 million, or 39% of revenues, for the
nine months ended September 30, 2002, and $4.4 million, or 36% of revenues, for
the nine months ended September 30, 2001. The slight decrease in the cost of
services by $0.1 million or 1% while service revenues increased by 25% was
primarily due to more efficient consulting and implementation methodologies
which reduced the implementation time associated with our products.
GROSS PROFIT: Gross profit as a percentage of revenues was 55% for the nine
months ended September 30, 2002 and 59% for the nine months ended September 30,
2001. The decrease in the gross profit by $1.1 million or 15% was primarily due
to the smaller revenues in the nine months ended September 30, 2002.
OPERATING EXPENSES: Total operating expenses were $12.4 million, or 111% of
revenues, for the nine months ended September 30, 2002, and $15.8 million, or
130% of revenues, for the nine months ended September 30, 2001. The decrease in
operating expenses by $3.5 million or 22% was due to cost cutting measures
implemented during the past twelve months as well as one-time reorganization
expenses incurred in the first quarter of 2001.
RESEARCH AND DEVELOPMENT EXPENSES, NET: Research and development expenses, net
of related grants, were $2.1 million, or 19% of revenues, for the nine months
ended September 30, 2002, and $2.5 million, or 20% of revenues, for the nine
months ended September 30, 2001. We received or accrued grants from the Chief
Scientist in the amount of $0.7 million in the nine months ended September 30,
2002, and in the amount of $1.0 million in the nine months ended September 30,
2001. The decrease in grants by $0.3 million or 24% was due to lower available
staff to perform R&D projects, as well as lower approved budgets by the Chief
Scientist. The decrease in research and development expenses, gross, by $0.6
million or by $0.3 million or 16% was due to the impact of cost cutting measures
implemented during 2001 and 2002.
SELLING AND MARKETING EXPENSES: Selling and marketing expenses were $8.0
million, or 72% of revenues, for the nine months ended September 30, 2002, and
$9.8 million, or 80% of revenues, for the nine months ended September 30, 2001.
The decrease in selling and marketing expenses by $1.8 million or 18% was due to
the impact of cost cutting measures implemented during 2001 and 2002.
16
GENERAL AND ADMINISTRATIVE EXPENSES: General and administrative expenses were
$2.0 million, or 18% of revenues, for the nine months ended September 30, 2002,
and $3.0 million, or 25% of revenues, for the nine months ended September 30,
2001. The decrease in general and administrative expenses by $1.0 million or 31%
was due primarily to a decrease in bad debt expenses in the nine months ended
September 30,2002 and the impact of cost cutting measures implemented during
2001 and 2002.
REORGANIZATION COSTS: Reorganization costs were $294,000, or 2% of revenues, for
the nine months ended September 30, 2001. These expenses were primarily costs
associated with severance payments to terminated employees. There were no
reorganization costs in the nine months ended September 30, 2002.
AMORTIZATION OF STOCK-BASED COMPENSATION: Share-based compensation for the nine
months ended September 30, 2002 amounted to $225,000 of previously recorded
deferred compensation. Share based compensation for the nine months ended
September 30, 2001 amounted to $321,000. The decrease in share-based
compensation by $96,000 or 30% is attributed to the fact that the amortization
of the share-based compensation progressively decreases over the four-year
amortization period.
The U.S. dollar amount of cost of revenues and operating expenses of the Company
incurred in NIS was favorably influenced by the devaluation of the NIS against
the U.S. dollar. This was due to the fact that the rate of devaluation of the
NIS against the U.S. dollar from the three months ended September 30, 2001 until
the three months ended September 30, 2002 (as measured by the average exchange
rate in each period) exceeded the rate of increase of these expenses in NIS
during this same period.
LIQUIDITY AND CAPITAL RESOURCES
As of September 30, 2002, we had cash and cash equivalents of $4.6 million and
short-term investments of $2.4 million, totaling $7.0 million, as compared to
cash and cash equivalents of $8.1 million and short-term investments of $1.8
million, totaling $10.0 million, as of December 31, 2001. As of September 30,
2001, we had cash and cash equivalents of $10.0 million and short term
investments of $2.1 million, as compared to cash and cash equivalents of $4.4
million and short term investments of $16.9 million as of December 31, 2000. As
of September 30, 2002, approximately $2.3 million of the $4.6 million had been
deposited with banks to secure letters of credit totaling approximately $2.9
million issued on our behalf which are described below.
From inception through our IPO on June 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. We
realized $28.3 million from our initial public stock offering of ordinary
shares, net of underwriter discount and other issuance costs.
Net cash provided (used) in the Company's operating activities primarily
consists of net losses for the period and changes in short term investment
before non-cash expenses consisting of deferred compensation and depreciation,
in addition to net changes in trade receivables, prepaid expenses and changes in
accounts payable. For the nine months ended September 30, 2002, cash used in
operations was $3.3 million, comprised primarily of our net loss of $6.0
million, which was partially offset by a decrease in trade receivables of $1.6
million, an increase in accounts payable of $730,000, an increase in deferred
revenue of $447,000 an increase in short term investments of 636,000, and
non-cash charges of $845,000. For the nine months ended September 30, 2001, net
cash provided by operations was $6.0 million, comprised primarily of our net
loss of $8.0 million, a decrease in short term investments of $14.5 million, an
increase in trade receivables of $1.0 million, a decrease in accounts payable of
$533,000 which were partially offset by an increase in deferred revenue of
$100,000, and non-cash charges of $1.2 million.
Net cash used in investing activities for the nine months ended September 30,
2002 was $230,000 and was primarily invested 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, 2001 was
$417,000 and was primarily invested in leasehold improvements and purchases of
equipment and systems, including computer equipment and fixtures and furniture.
As of September 30, 2002, we had outstanding trade receivables of approximately
$4.0 million. Our trade receivables typically have 30 to 60 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. For the nine
months ended September 30, 2002 our DSO (Day Sales Outstanding) was 77 days.
The Company has various commitments primarily related to long-term debt, capital
lease obligations and short term debt. The following table provides details
regarding the Company's
17
contractual cash obligations and other commercial commitments subsequent to
September 301, 2002:
- --------------------------- ------------------ ----------------------------------------------------------
AMOUNT OF COMMITMENT EXPIRATION
COMMERCIAL COMMITMENTS TOTAL AMOUNTS PER PERIOD (IN THOUSANDS)
COMMITTED (IN ----------------------------------------------------------
THOUSANDS) 2002 2003, 2004 2005, 2006 2007 +
- --------------------------- ------------------ ----------------------------------------------------------
Short Term Bank Debt 34 24 10 - -
- --------------------------- ------------------ ------------- -------------- ----------------- -----------
Guarantees/Letters of 2,931 304 2,421 - 206
Credit
=========================================================================================================
PAYMENTS DUE BY PERIOD (IN THOUSANDS)
----------------------------------------------------------------------
CONTRACTUAL OBLIGATIONS TOTAL 2002 2003, 2004 2005, 2006 2007 +
- ---------------------------------- ----------------------------------------------------------------------
Capital Lease Obligations 3,255 385 1,610 1,000 260
- ---------------------------------- ------------- ----------- ---------------- --------------- -----------
As of September 30, 2002, our banks had issued standby letters of credit on our
behalf in the amount of approximately $331,000 for office leases and in the
amount of approximately $2.6 million for performance of projects for our
customers. We have arrangements with the banks to deposit funds to secure these
letters of credit of 100%-115% of the credit amount. During the forth quarter of
2002, we increased the bank deposit to the total amount of $2.9 million. These
standby letters for performance of projects can be drawn if the project is not
completed according to the agreed-upon specifications.
Since inception, we have received aggregate payments from the Government of the
State of Israel in the amount of $6.1 million related to research and
development. In return for the Government of Israel participation, we are
committed to pay royalties at a rate of 3% to 5% of sales of the developed
product, up to 100%-150% of the amount of grants received with annual interest
of LIBOR as of the date of approval for programs approved from 1999 and
thereafter. As of September 30, 2002, we had paid or accrued royalties related
to the results of research and development in the amount of $2.4 million. The
estimated current net commitment is approximately $3.9 million. The refund of
the grant is contingent on future sales, and we have no obligation to refund
these grants, if sufficient sales are not generated.
Our capital requirements depend on numerous factors, including market demand and
acceptance of our products, the resources we devote to developing, marketing,
selling and supporting our products, the timing and extent of establishing
additional international operations and other factors. We intend to continue
investing significant resources in our selling and marketing and research and
development operations in the future. Our ability to reach profitability using
our currently available balance of cash and cash equivalents will depend on our
ability to increase our revenues while continuing to control our expenses. If we
are not successful in doing so, we will be required to seek new, external
sources of financing.
During the fourth quarter of 2002, we announced the closing of our Campbell,
California offices, and the relocation of our headquarters to our Burlington,
Massachusetts office. We also reduced our workforce by approximately 40 people
and across-the-board salary reductions. We believe that the cost reduction move
was nessesary in order to adjust our expenses to the level of expected revenues.
We also estimate that our expenses in Q1 2003 will be between $4.6 million to
$4.9 million excluding restructuring expenses, although actual expenses may
differ. We expect to incur a one-time charge for restructuring expenses in the
fourth quarter of 2002, the amount of which is not yet known.
We cannot assure you that we will be successful in reaching profitability using
our currently available balance of cash and cash equivalents. See "Factors That
May Affect Future Results - Risks Related to Our Business - The Economic Outlook
May Adversely Affect the Demand for Our Current Products and the Company's
Results of Operations." If we are not successful, we will need to raise
additional capital to finance our operations. Our ability to raise additional
capital may be adversely affected by a number of factors relating to our
company, as well as factors beyond our control, including the continued weakness
of the information technology industry, volatility and uncertainty in the
capital markets, the ongoing U.S. war on terrorism and the potential war with
Iraq. We cannot be certain that additional financing will be available to us in
amounts or on terms acceptable to us, if at all, and any additional capital
raised through the issuance of equity or convertible debt securities may result
in additional, and perhaps significant, dilution.
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.
18
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 continue to indicate uncertain economic conditions. Weak economic
conditions may cause continued reductions in information technology spending
generally. We have experienced and may continue to experience an adverse impact
on the demand for our products, which would adversely affect our results of
operations. 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 which 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
selling and marketing and research and development expenses. Some of our
expenses, such as 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 NEED FOR ADDITIONAL FINANCING IS UNCERTAIN, AS IS OUR ABILITY TO RAISE
FURTHER FINANCING IF REQUIRED. Our ability to reach profitability using our
currently available balance of cash and cash equivalents will depend on our
ability to increase our revenues while continuing to reduce our expenses. We
cannot assure you that we will be successful in doing so. If we are not
successful in doing so, particularly given current economic conditions and
potential reductions in information technology spending by our current and
prospective customers, we will need to raise additional capital to finance our
operations. Under current market conditions, we may not be able to do so by
selling additional equity or debt securities. If we are able to issue equity or
debt securities, these securities could have rights preferences and privileges
senior to those of holders of ordinary shares, and the terms of these securities
could impose restrictions on our operations. The sale of additional equity or
convertible debt securities could result in additional, and perhaps significant,
dilution to 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 of the State of Israel and
there can be no assurance that we will be able to obtain this consent in the
future.
Alternatively we may seek other forms of financing, such as credit from banks or
institutional lenders. We cannot be certain that additional financing will be
available to us in amounts or on terms acceptable to us, if at all. If we are
unable to obtain this additional financing, we may be required to reduce the
scope of our planned product development and marketing efforts, which could harm
our business, financial condition or operating results. If the economy continues
to weaken or, for any other reason, we are unable to meet our business goals, we
may have to raise additional funds to respond to business contingencies,
including the need to:
o fund additional marketing expenditures;
o develop new or enhance existing products and services;
o enhance our operating infrastructure;
o respond to competitive pressures; or
o acquire complementary businesses or necessary technologies.
WE FACE RISKS RELATING TO OUR FINANCIAL STATEMENT RESTATEMENT.
During the third quarter of 2002, our audit committee, with the assistance of
outside advisors, conducted a review of our financial statements for 2000 and
2001 and the first six months of 2002. On October 21, 2002, we announced that we
would restate our financial statements for 2000 and 2001 and the first six
months of 2002. In addition, we announced that our audit committee had decided
to recommend to our shareholders that we terminate our relationship with
Luboshitz Kasierer, formerly a member firm of Arthur Andersen, as our auditors
and appoint new auditors. At a shareholders' meeting held on December 31, 2002,
our shareholders authorized the engagement of Brightman Almagor Brightman
Almagor & Co., a member firm of Deloitte Touche Tohmatsu.
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
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
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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.
IF OUR SHARES ARE DELISTED FROM THE NASDAQ SMALLCAP MARKET, IT MAY BECOME MORE
DIFFICULT TO SELL OUR SHARES AND THE PRICE OF OUR ORDINARY SHARES WILL LIKELY
FALL.
In November 2002, the Nasdaq Listing Qualifications Department notified us that
our ordinary shares are subject to delisting from The Nasdaq Stock Market, Inc.
because we did not file this Quarterly Report on Form 10-Q in a timely manner.
In addition, we did not hold an annual meeting of its shareholders during 2002,
in violation of NASD Marketplace Rules. At a hearing before a Nasdaq Listing
Qualifications Panel, we requested that our shares continue to be listed on the
Nasdaq SmallCap Market. We received notification from Nasdaq that the Panel
determined to continue the listing of our ordinary shares on The Nasdaq SmallCap
Market pursuant to an exception from the requirements of NASD Marketplace Rule
4310(c)(14), which requires that Nasdaq issuers timely file their periodic
reports in compliance with the reporting obligations under the federal
securities laws. The exception requires us to meet certain conditions, including
the filing with the SEC and Nasdaq of this Form 10-Q on or before January 27,
2003 and the filing of certain other amended periodic reports reflecting the
Company's restatement of its financial statements on or before February 28,
2003, as well as compliance with all other requirements for continued listing.
The Nasdaq Panel reserves the right to terminate or modify the exception upon a
review of the Company's reported financial results, and the Nasdaq Listing and
Hearing Review Council may determine to review and modify or reverse the Panel's
decision within the next 45 days. We cannot assure you that our ordinary shares
will continue to be listed on the Nasdaq SmallCap Market or that we will be able
to meet the Nasdaq SmallCap Market continued listing criteria in the future. In
particular, the market price of our shares is below the $1.00 minimum bid price
requirement of Nasdaq, and we may become subject to delisting if the price does
not meet the $1.00 requirement for 10 consecutive trading days prior to May 9,
2003. If our shares are delisted, our ordinary shares may become more difficult
to buy and sell. In addition, the trading market for our ordinary shares will
likely be adversely affected by our shares' delisting, and the decreased trading
volume may cause the price of our ordinary shares to fall.
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. We have experienced from time to time delays in the completion of
sales past the end of a particular quarter that havenegatively impacted results
for particular quarters, 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:
o the volume and timing of customer orders;
o internal budget constraints and approval processes of our current and
prospective clients;
o the length and unpredictability of our sales cycle;
o the mix of revenue generated by product licenses and professional
services;
o the mix of revenue between domestic and foreign sources;
o announcements or introductions of new products or product enhancements
by us or our competitors;
o changes in prices of and the adoption of different pricing strategies
for our products and those of our competitors;
o timing and amount of selling and marketing expenses;
o changes in our business and partner relationships;
o technical difficulties or "bugs" affecting the operation of our
software;
o foreign currency exchange rate fluctuations; and
o general economic conditions.
FAILURE OF THE MARKET TO ACCEPT OUR PRODUCTS WOULD ADVERSELY AFFECT OUR
PROFITABILITY. Historically, most 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.
On November 28, 2001 we released version 7.0 of our Service Optimization Suite
that utilizes dynamic load balancing architecture, which dynamically redirects
requests among a group of ClickSoftware servers running our product
applications. This increases the scalability of our products by enabling our
customers to optimize additional resources by adding hardware to this group of
ClickSoftware servers. 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
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these products will develop as quickly 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.
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 twelve 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 eight months. Sales
of licenses and implementation schedules are subject to a number of risks over
which we have little or no control, including clients' budgetary constraints,
clients' internal acceptance reviews, the success and continued internal support
of clients' own development efforts, the efforts of businesses with which we
have relationships, the nature, size and specific needs of a client and the
possibility of cancellation of projects by clients. The uncertain outcome of our
sales efforts and the length of our sales cycles could result in substantial
fluctuations in license revenues. Historically, a significant portion of our
sales in any given quarter occur in the last two weeks of the quarter; if sales
forecasted from a specific client for a particular quarter are not realized in
that quarter, we are unlikely to be able to generate revenues from alternate
sources in time to compensate for the shortfall. As a result, and due to the
relatively large size of some orders, a lost or delayed sale could have a
material adverse effect on our quarterly revenue and operating results.
Moreover, to the extent that significant sales occur earlier than expected,
revenue and operating results for subsequent quarters could be adversely
affected.
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. Moshe BenBassat. Although these
agreements generally require sixty days notification prior to departure,
relationships with these officers and key employees are at will. The loss of any
of our key personnel could harm our ability to execute our business strategy and
compete.
IF WE FAIL TO MAINTAIN 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.
Future growth in licenses of our software will depend in part on our ability to
provide our clients with these services. In addition, we must maintain and may
be required to expand our professional services organization to enable us to
continue to support our existing installed base of customers. If we were not
able to maintain our professional services organization, our ability to support
our service business would be limited.
IF WE FAIL TO EXPAND OUR RELATIONSHIPS WITH THIRD PARTIES THAT CAN PROVIDE
IMPLEMENTATION AND PROFESSIONAL SERVICES TO OUR CLIENTS, WE MAY BE UNABLE TO
INCREASE OUR REVENUES AND OUR BUSINESS COULD BE HARMED. In order for us to focus
more effectively on our core business of developing and licensing software
solutions, we need to continue to establish relationships with third parties
that can provide implementation and professional services to our clients.
Third-party implementation and consulting firms can also be influential in the
choice of resource optimization applications by new clients. If we are unable to
establish and maintain effective, long-term relationships with implementation
and professional services providers, or if these providers do not meet the needs
or expectations of our clients, we may be unable to grow our revenues and our
business could suffer. As a result of the limited resources and capacities of
many third-party implementation providers, we may be unable to attain sufficient
focus and resources from the third-party providers to meet all of our clients'
needs, even if we establish relationships with these third parties. If
sufficient resources are unavailable, we will be required to provide these
services internally, which could limit our ability to meet other demands. Even
if we are successful in developing relationships with third-party implementation
and professional services providers, we will be subject to significant risk, as
we cannot control the level and quality of service provided by third-party
implementation and professional services partners.
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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 2000 versions of our
products due to the market acceptance of Windows 2000 over the last several
years. While we interface 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 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
22
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 require
us to make changes in our business or significantly harm our business. We
believe that our products do not infringe the intellectual property rights of
third parties. However, we cannot assure you that we will prevail in all future
intellectual property disputes.
We expect that software products may be increasingly subject to third-party
infringement or ownership claims as the number of competitors in our industry
segment grows and the functionality of products in different industry segments
overlaps. Third parties may make a claim of infringement or conflicting
ownership rights against us with respect to our products and technology. Any
claims, with or without merit, could:
o be time-consuming to defend;
o result in costly litigation;
o divert management's attention and resources; or
o cause product shipment delays.
Further, if an infringement or ownership claim is successfully brought against
us, we may have to pay damages or royalties, enter into a licensing agreement,
and/or stop selling the product or using the technology at issue. Any such
royalty or licensing agreements may not be available on commercially reasonable
terms, if at all.
From time to time, we may encounter disputes over rights and obligations
concerning intellectual property. We also indemnify some of our customers
against claims that our products infringe the intellectual property rights of
others. We have only conducted a partial search for existing patents and other
intellectual property registrations, and we cannot assure you that our products
do not infringe any issued patents. In addition, because patent applications in
the United States and Israel are not publicly disclosed until the patent is
issued, applications may have been filed which would relate to our products.
OUR BUSINESS MAY BECOME INCREASINGLY SUSCEPTIBLE TO NUMEROUS RISKS ASSOCIATED
WITH INTERNATIONAL OPERATIONS. Significant portions of our operations occur
outside the United States. Our facilities are located in North America, Israel,
the European continent, and the United Kingdom, and our executive officers and
other key employees are dispersed throughout the world. This geographic
dispersion requires significant management resources that may place us at a
disadvantage compared to our locally based competitors. In addition, our
international operations are generally subject to a number of risks, including:
o foreign currency exchange rate fluctuations;
o longer sales cycles;
o multiple, conflicting and changing governmental laws and regulations;
o expenses associated with customizing products for foreign countries;
o protectionist laws and business practices that favor local
competition;
o difficulties in collecting accounts receivable; and
o political and economic instability.
23
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 past progress towards peace between Israel and its
Arab neighbors, the future of these peace efforts is uncertain. Several Arab
countries still restrict business with Israeli companies, which may limit our
ability to make sales in those countries. We could be adversely affected by
restrictive laws or policies directed towards Israel or Israeli businesses.
CERTAIN OF OUR OFFICERS AND EMPLOYEES ARE REQUIRED TO SERVE IN THE ISRAEL
DEFENSE FORCES AND THIS COULD FORCE THEM TO BE ABSENT FROM OUR BUSINESS FOR
EXTENDED PERIODS. David Schapiro, our Executive Vice President, Markets and
Product, = Hannan Carmeli, our Executive Vice President, Product Services and
Operations and Shmuel Arvatz,our Chief Financial officer, 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.
THE RATE OF INFLATION IN ISRAEL MAY NEGATIVELY IMPACT OUR COSTS IF IT EXCEEDS
THE RATE OF DEVALUATION OF THE NIS AGAINST THE DOLLAR. Substantially all of our
revenues are denominated in dollars or are dollar-linked, but a significant
portion of our research and development expense is incurred in New Israeli
Shekels and a portion of our revenues and expenses is incurred in British Pounds
and the European Community Euro. The results of our operations are subject to
fluctuations in these exchange rates which are influenced by various global
economic factors, including inflation rates and economic growth within each
nation. In 2000, 27%, and in 2001, 24% of our costs were incurred in NIS. As a
result, we are exposed to the risk that the rate of inflation in Israel will
exceed the rate of devaluation of the NIS in relation to the dollar or that the
timing of this devaluation will lag behind inflation in Israel. In that event,
the dollar cost of our operations in Israel will increase and our
dollar-measured results of operations will be adversely affected.
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 on an
absolute dollar basis as well as a percentage of total revenues. We are
expanding operations in other areas of Europe, and income and expenses
recognized in the European Community Euro will increase. In 2001, 26% of our
costs were incurred in GBP and Euro. We incur a portion of our expenses,
principally salaries and related personnel expenses in Israel, in NIS. In 2001,
24% of our costs were incurred in NIS. 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