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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
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X ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
- ----- EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2004
Or
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
- ----- EXCHANGE ACT OF 1934
For the transition period from ___________________________ to _________________
Commission file number 000-30827
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CLICKSOFTWARE TECHNOLOGIES LTD.
(Exact name of registrant as specified in its charter)
Israel Not Applicable
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
34 Habarzel Street
Tel Aviv, Israel 69710
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (972-3) 765-9400
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Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Ordinary Shares, NIS 0.02 par value
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(Title of class)
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10-K ClickSoftware Technologies Ltd. Page 1
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.
|X| Yes |_| No
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K (ss. 229.405 of this chapter) is not contained herein, and
will not be contained, to the best of registrant's knowledge, in definitive
proxy or information statements incorporated by reference in Part III of this
Form 10-K or any amendment to this Form 10-K.
|_|
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act).
|_| Yes |X| No
The aggregate market value of the Ordinary Shares held by non-affiliates of the
Registrant on June 30, 2004, the last business day of the Registrant's most
recently completed second fiscal quarter, was $35.8 million (based on the
closing market sales price of the Ordinary Shares on that date). Ordinary
shares held by each executive officer and director and by each person who owns
5% or more of the outstanding voting stock have been excluded in that such
persons may be deemed to be affiliates. This determination of affiliate status
is not necessarily a conclusive determination for other purposes.
As of March 14, 2005, there were 27,480,809 Ordinary Shares of the Registrant
outstanding.
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10-K ClickSoftware Technologies Ltd. Page 2
INDEX
PART I
Item 1. Business
Item 2. Properties
Item 3. Legal Proceedings
Item 4. Submission of Matters to a Vote of Security Holders
PART II
Item 5. Market for the Registrant's Common Equity and Related Stockholder
Matters
Item 6. Selected Consolidated Financial Data
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
Item 8. Financial Statements
Item 8A. Unaudited Consolidated Quarterly Financial Data
Item 9. Changes In and Disagreement with Accountants on Accounting and
Financial Disclosure
Item 9A. Controls and Procedures
PART III
Item 10. Directors and Executive Officers of the Registrant
Item 11. Executive Compensation
Item 12. Security Ownership of Certain Beneficial Owners and Management and
Related Stockholder Matters
Item 13. Certain Relationships and Related Transactions
Item 14. Principal Accounting Fees and Services
Item 15. Exhibits, Financial Statement Schedules
SIGNATURES.
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10-K ClickSoftware Technologies Ltd. Page 3
PART I
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
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 Annual Report on Form 10-K with respect to future
events, the outcome of which are subject to certain risks that may have a
significant impact on our business, operating results or financial condition,
including the risk factors described in the Section of this Report entitled
"Management Discussion and Analysis of Financial Condition and Results of
Operations - FACTORS THAT MAY AFFECT FUTURE RESULTS." Investors are cautioned
that our forward-looking statements are inherently uncertain. Should one or
more of the risks that we describe in this Annual Report and our Quarterly
Reports on Form 10-Q or other uncertainties materialize, or should underlying
assumptions prove incorrect, actual results or outcomes may vary materially
from those described herein. We undertake no obligation to update
forward-looking statements, whether as a result of new information, future
events or otherwise.
ITEM 1. BUSINESS
We provide software products for optimizing service operations, which are
designed to improve customer responsiveness and the utilization of service
resources. Our products allow our clients to respond quickly to customers'
demands for service and efficiently handle planned maintenance, while improving
utilization of service personnel and reducing operational costs.
We offer solutions to support the various levels of clients' management and
operations, including execution, operational planning, tactical planning and
strategic planning levels. Our Service Optimization suite of products allows
clients to concentrate on both micro and macro level scheduling, service
execution, real time monitoring, short term resource planning, and long term
capacity planning. Our solution is designed to enable our clients to increase
the productivity of their service resources, resulting in reduced costs and
increased revenue opportunities that would otherwise be lost.
We were incorporated in Israel in 1979. Our directly and indirectly held
principal operating wholly-owned subsidiaries and their countries of
incorporation are:
o Clicksoftware Technologies Inc. (United States)
o Clicksoftware Central Europe GmbH (Germany)
o Clicksoftware Europe Limited (United Kingdom)
o Clicksoftware Belgium N.V. (Belgium)
o Clicksoftware Australia Pty Limited (Australia)
Our product development efforts are conducted primarily in Israel. Our sales
and marketing and implementation efforts in North America, Europe, and Asia
Pacific and Africa are conducted for the most part by our subsidiaries.
PRODUCTS
We provide solutions for end-to-end service chain optimization that are
designed to increase revenue and customer responsiveness while reducing costs.
Our Service Optimization suite includes strategic and tactical workforce
planning, optimized service scheduling, intelligent problem resolution, mobile
workforce management, and business analytics, connecting various organizational
levels and all functions, from executive strategy to operational execution.
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10-K ClickSoftware Technologies Ltd. Page 4
Our service optimization solutions are utilized by leading service organizations
in a number of service industry segments, including: telecommunications,
utilities and energy, insurance, high-technology, computer and office equipment,
industrial equipment, medical equipment, building automation, aerospace &
defense, and home services. ClickSoftware's solutions can deliver improvements
in:
o field workforce productivity
o responsiveness to customers
o quality of service delivered
o profitability of the service operation
o reduction in missed customer commitments
We have developed our service chain optimization solutions through years of
experience in a variety of service operations. The result is a highly advanced
technology with the flexibility to model and accommodate varying business types
and processes. The ease with which it can be integrated with leading customer
relationship management (CRM) and enterprise resource planning (ERP) solutions,
often with standard interface adaptors, enables ClickSoftware customers to
accelerate the deployment of the solution.
Service Optimization Suite of Products
Our Service Optimization suite includes:
ClickSchedule optimizes service scheduling and routing for improving workforce
productivity by balancing customer, service and asset resources, and
organizational preferences including contractual commitments, priority, drive
time, skills, and service and asset resources availability. Configuration
capabilities, a high degree of scalability and use of standard eXtensible
Markup Language (XML) interfaces are designed to improve integration with
enterprise systems and deployment according to organizational business policies
and processes. ClickSchedule accounts for more than 15% of our annual revenues.
ClickAnalyze provides service business analytics for workforce performance
measurement and strategic decision support. ClickAnalyze enables drill-down
analysis of key performance indicators including resource productivity,
operational costs, and responsiveness to customers. Integrated within the
Service Optimization suite, ClickAnalyze provides executive level summaries as
well as detailed analysis by territory, job type, time frame and other
criteria.
ClickPlan provides interactive and automated workforce planning for staffing
and deployment of the field workforce based on forecasted workload. ClickPlan
enables service organizations to resolve workforce shortages and surpluses
weeks and months in advance. Comparing available resources to forecasted
workloads, ClickPlan helps determine the best strategy to ensure the right
people are in the right place, at the right time.
ClickForecast provides field service workload forecasting to help companies
project workforce capacity. ClickForecast can combine historical service
workload with future business events to create a forecast for each territory,
job type, or business unit. ClickForecast enables service managers, marketing,
and sales to collaboratively determine the demand levels of their customers,
and create multiple forecast scenarios, each with different business
assumptions.
ClickFix provides intelligent diagnostics and problem resolution for reducing
service costs. ClickFix enables faster resolution of customer issues at
multiple levels of service contact, from the call center to the field. Based on
an intelligent engine that utilizes specific knowledge about our customers'
equipment, ClickFix diagnoses and resolves problems independent of the user's
skills, experience and knowledge. Accessibility via the Web empowers customers
to resolve problems themselves at any time of day, and often without a service
resource, requiring fewer onsite visits.
ClickMobile provides wireless workforce management for monitoring field
workforce activities and reducing the labor of dispatching personnel.
ClickMobile enables job detail notification from the field and allows for field
updates even when service resources are out of wireless coverage. Assignments
created in ClickSchedule are dispatched to field devices based on configurable
workflows while enabling real-time visibility into workforce activity including
job status, start and end time.
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10-K ClickSoftware Technologies Ltd. Page 5
In January 2005 we released version 7.5 of our Service Optimization Suite that
expands on previous versions of the product suite with feature and user
interface enhancements, including a more configurable schedule optimizer, real
time key performance indicator monitor, and enhanced support for multi-lingual
implementations.
Our ClickRoster product is currently in the development stage. ClickRoster is
expected to provide interactive and automated workforce shift planning based on
forecasted workload, planning decisions, working contracts, rules and
regulations and engineer preferences.
TECHNOLOGY
The Service Optimization suite utilizes a foundation of core technologies that
we developed over a period of more than 10 years in the service industry.
Originally brought to market as W-6 Service Scheduler and TechMate, these
technologies include sophisticated algorithms and business process
representation tools. Our research and development personnel have been working
on optimization technology solutions since 1985, including algorithmic software
solutions, system integration and implementations. The Service Optimization
suite, with its depth and breadth, reflects our experience and investment into
the complex optimization and decision support troubleshooting needs of service
organizations.
Analogous to, but more complex than the supply chain, the service chain
involves different variables and challenges including the scheduling of
personnel with varying skills in different locations to complete both simple
and complex tasks. These variables must be considered in constantly changing
conditions to meet the fast pace typical of service-level and profit driven
organizations.
Our applications are standards-based, facilitating integration with related
CRM, ERP or supply chain functions. The application server supports leading
database management systems, including Oracle (Microsoft technology based and
non-Microsoft technology based) and Microsoft SQL Server, and is scalable to
meet the demands of large service organizations. Our service optimization suite
of applications delivers inherent scalability based on a dynamic load balancing
architecture that uses a stateless server model, multi-threaded application
servers and relational databases.
Our proprietary optimization algorithms provide efficient solutions for complex
problems arising from, among others, the following:
o the vast number of possible solutions for evaluation when optimizing
the scheduling of personnel;
o the number of service organization-specific resources and variables
including skills, availability, location, customer preference, workload
balancing, contractual commitments, employee preferences, customer
priority, and others;
o the need to instantly respond to concurrent users' service requests in
a highly dynamic decision-making environment;
o the vast number of potential routes within a specific geographic area,
each having an impact on the cost of service; and
o various time zone considerations in large service organizations.
The Service Optimization suite also includes sophisticated service business
scenario modeling power. We have developed models based on a vast number of
variables and resource characteristics common to service organizations. By
employing these models, the Service Optimization suite addresses the market
needs of different segments of the service industry and broadens the potential
customer base for our products.
The Service Optimization suite incorporates several critical technologies to
provide intelligent decision support in a scalable and open architecture:
o Application software and web servers capable of performing
optimization, problem resolution, and HTTP-based access to the
application host system; and
o Application Programming Interfaces (APIs) based on eXtensible Markup
Language (XML), enable other applications to integrate and access
Service Optimization data and services without additional training or
applications for users to adopt.
Our optimization applications merge mathematical disciplines and experience
with real-life service operations. The result is an algorithm that combines the
traits of several optimization disciplines including adaptive learning, genetic
algorithms, taboo search, and geographic clustering. ClickFix's diagnostic and
problem resolution engine includes algorithms for problem resolution based on
equipment design and field knowledge, a knowledge base with self-learning
capabilities, and an intelligent component that creates new trouble shooting
solutions based on modeling both equipment structure and historic data.
Our development methodology involves direct analysis of customers' business
requirements, software module design to meet these requirements, software
development and coding, testing, and quality assurance. Our research and
development group and their processes are ISO 9001 certified.
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10-K ClickSoftware Technologies Ltd. Page 6
PROFESSIONAL SERVICES AND CUSTOMER SUPPORT
Our professional services organization is staffed by qualified employees with
experience in the resource optimization field. We provide our clients, as well
as our implementation partners, with consulting and deployment services,
upgrades, and comprehensive training and support to help achieve business goals
with a quicker return on investment. Our consulting services include:
o Business Analysis. Our consultants assess current or planned service
optimization needs and develop and document the Functional Requirement
Specification. We provide a configuration and implementation roadmap to
help meet business goals, including an analysis of return on investment
and business change management. Such services often include
establishing a benchmark of the then-current organizational key
performance indicators (KPIs) to measure the improvement to these KPIs
following the delivery of our solutions.
o Project Implementations. Our professional services consultants
individually, or as members of our project teams, implement and assist
in the configuration of our solutions to accelerate the project
deployment schedule and ensure a successful implementation process.
Such activities include the design, configuration and testing of our
deliverables as well as training and supporting the customer
organization during the rollout and when the applications go live. The
implementation activities also include the development and
configuration of interfaces to other enterprise solutions - either
commercial or in-house legacy systems, as needed based on the project.
o Project Advisory Services. We offer a packaged set of reviews and
consulting services targeted at ensuring the ability of our
implementation partners to deliver a working solution. We have provided
this service to date to support relatively simple implementations of
specific niche customers such as utilities.
o "ClickSoftware University." We offer a series of high-level management
workshops that convey proven methods and principles for improving the
efficiency and effectiveness of the field service operation. These
courses share lessons learned from years of best practice research and
field experience implementing service optimization solutions.
Customer support is available by telephone and over the Internet. Customer
support is typically billed as a percentage of license fees depending upon the
level of support coverage requested by the customer. Support is provided by the
technical support team located within our development facility, ensuring
detailed product knowledge and access to experts and testing facilities when
required. The customer support team works closely with the professional
services organization to provide technical support during two distinct phases:
(a) supporting the project team during delivery phase and (b) supporting the
customer IT organization after the project has gone live and has moved to
production.
SALES AND MARKETING
We market and sell our products mostly through our direct sales force, which is
located in North America, Europe and the Asia Pacific region, as well as
through reseller agreements with partners. Over the past twelve months, we have
significantly increased our efforts to create and strengthen partner relations.
Our multidisciplinary sales teams consist of field sales executives, sales
support engineers and internal sales staff. The internal sales staff is
responsible for generating leads and qualifying prospective clients. Sales
support engineers assist the sales executives in the technical aspects of the
sales process, including preparing demonstrations and technical proposals. Our
sales executives are responsible for completing the sales process and managing
the post-sale client relationship, which consists of ongoing relationship
management and the sale of additional licenses and products, as clients require
additional resources. Our management also takes an active role in our sales
efforts. The knowledge gained by our sales and marketing force is also
communicated to our product marketing group, which guides our development team.
This enables our organization to align the functionality of our products with
customer needs.
We typically direct our sales and marketing efforts to the client's executive
officers, including the vice president of customer service, the chief
information officer, the chief financial officer and other senior executives
responsible for improving customer service at our clients' organizations. We
target our marketing efforts on identifying potential new clients, generating
new sales opportunities, and creating awareness in our target markets about the
value of our products and their applications. Our programs target prospective
clients across a wide variety of industries, business relationships and
geographies. In order to effectively promote product awareness, we engage in
marketing activities in a wide variety of areas including public relations and
analyst relations, email campaigns, web seminars with our customers and
industry analysts, newsletters and advertising creation and placement, direct
mailings and trade shows. As of December 31, 2004, we employed 43 individuals
in our sales and marketing department.
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10-K ClickSoftware Technologies Ltd. Page 7
Our business development organization supports joint marketing activities with
our business partners. Our business relationships with large ERP and CRM
vendors, such as SAP A.G., enable us to use our partners' market presence and
sales channels to create additional revenue opportunities. Our strategy is
based on having approved certified adaptors that enable rapid integration and
implementation of our products into certain ERP and CRM systems.
We also market our products and services through resellers. Our reseller
agreements generally provide the parties with the right to use each other's
name in marketing and advertising materials, and to conduct joint marketing
programs. We provide sales materials and training to resellers on the
marketing, selling and implementation of our software solutions. We believe
these relationships will extend our presence and brand name in new and existing
markets.
We have also established relationships with large System Integrator (SI)
organizations such as Accenture Ltd. and International Business Machines
Corporation (IBM). These partners have committed various levels of resources to
integrate, customize and implement our solutions. Depending on the strength of
the relationship, we have co-invested in jointly developing industry-specific
solutions, training and certifying their professional services teams,
developing co-marketing programs, and incorporating our products into their
marketing/referral strategies.
At the end of the second quarter of 2004, we formalized a strategic alliance
with IBM pursuant to which we will team with IBM in providing state-of-the-art
workforce optimization solutions. We believe that this teaming relationship
with IBM marks a significant step towards our partner channel strategy. In
connection with this strategic alliance, we issued 100,000 of our ordinary
shares to IBM for a purchase price of 0.02 NIS (New Israel Shekels) per share
and agreed to issue an additional 100,000 of our ordinary shares to IBM for a
purchase price of 0.02 NIS per share upon the first anniversary of the initial
issuance, unless the contract is Earlier terminated by either IBM or the
Company. We also issued IBM 250,000 warrants that are exercisable into our
ordinary shares with an exercise price of $2.38 per share. Immediately upon
entering into the strategic alliance 62,500 of these warrants became
exercisable. At the end of each of the three years following the warrant
issuance, up to 62,500 warrants may become exercisable based on the attainment
of certain revenue targets relating to revenue generated from the strategic
alliance. If all performance milestones are met, approximately 1.7% of
ClickSoftware's outstanding share capital would be issued to IBM. We continue
to value our relationships with our other channel partners, and believe that
these channel relationships will be key contributors to our future growth,
although no assurances can be given in that regard.
As part of our strategic alliance with IBM, we have established a Project
Office to manage the day-to-day affairs in connection with the relationship.
Both IBM and ClickSoftware have designated employees to manage and foster the
relationship. Under our teaming agreement, in the first year of the strategic
alliance we will reimburse IBM for a portion of the expenses related to
implementation of the Project Office.
See exhibits 10.25, 10.26 and 10.27 to this annual report that are incorporated
herein by reference.
BACKLOG
Our product order backlog (excluding deferred revenues of approximately $3
million) as of December 31, 2004 was approximately $8.0 million (including $1.5
million long term order backlog that is not expected to be realized in 2005),
as compared with $8.8 million (including $3.7 million long term backlog) at
December 31, 2003. Our backlog includes undelivered orders for licenses and
professional services, as well as multi-year customer contracts. Backlog levels
vary with demand, product and service availability and our delivery lead times
and are subject to significant decreases as a result of, among other things,
customer order delays, changes or cancellations. As such, backlog levels may
not be a reliable indicator of future operating results.
CUSTOMERS
We sell our products to a broad base of customers representing a variety of
industries with unique needs, including telecommunications, utilities and
energy and high-technology service providers, and insurance and home equipment
retailers.
Sales to each of T-Systems, a subsidiary of Deutsche Telecom (Germany), and
Telstra Corporation accounted for more than 10% of revenues during the year
ended December 31, 2004.
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10-K ClickSoftware Technologies Ltd. Page 8
RESEARCH AND DEVELOPMENT
We have invested significant time and resources in creating a structured
process for undertaking all product development projects. These include
documenting product requirements, specifying product features and workflow,
developing the software, performing quality assurance and creating
documentation and packaging. Our research and development center in Israel is
ISO 9001 compliant and continuously updates its software development procedures
to maintain an ongoing improvement process and high quality products.
Our future research and development strategies will concentrate on
strengthening our product offerings in decision support, forecasting, capacity
planning and monitoring and schedule optimization; continuing to enhance the
technology and scalability of our products; and continuing the development of
offerings for specific vertical industries.
COMPETITION
The market for our products is competitive and rapidly changing. Competition
may increase in the future as the service optimization market gains size and
increased business focus, current competitors expand their product offerings,
and new companies enter the market.
The principal competitive factors in the service optimization industry are:
o The technological capabilities and performance of the solution;
o Installed base, domain expertise and experience with large-scale
implementations; and
o The acceptance and adaptability of the service optimization solution to
the solution offerings of large system integrators and CRM/ERP vendors,
and the ability to form marketing alliances with the foregoing.
We believe that our solutions compare favorably based on these competitive
factors. We believe that key competitive factors include a broad base of users,
strategic alliances, key reference customers, interoperability, integration of
complementary products and services, technological leadership, product
performance, price, customer support, name recognition, relationships with
partners and distribution channels and the ability to respond quickly to
emerging opportunities.
Our current and potential competitors include:
o Direct competitors in the service optimization space, including Service
Power Technologies plc. Vidus Limited, which was acquired by @Road, and
Wishbone, which was acquired by Indus International Inc.
o Software application vendors that offer field force management
solutions with certain optimization modules, including Viryanet Ltd.
and MDSI Mobile Data Solutions Inc.
o Traditional ERP and CRM software application vendors, including Siebel
and Oracle; and
o Systems integrators and internal information technology departments
that may elect to develop a solution in-house.
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 we do.
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. In addition, our market is characterized by rapid
technological change, dynamic client needs, mergers and acquisitions, and
frequent introductions of new products and product enhancements, which can make
existing products, including ours, obsolete or unmarketable.
INTELLECTUAL PROPERTY
We believe that the improvement of existing products, our technologies and the
development of new products are important in establishing and maintaining a
competitive advantage. We rely on a combination of trade secrets, copyrights,
trademarks, patents and intellectual property law, together with non-disclosure
and invention assignment agreements, to establish and protect the technology
used in our products.
We have two patent applications pending. As we continue to develop new
applications of our products, we will consider additional patent applications.
We can offer no assurance that patents will issue from any of these pending
applications or, if patents do issue, that the claims allowed will be
sufficiently broad to protect our technology. In addition, we can offer no
assurance that any patents issued to us will not be challenged, invalidated or
circumvented, or that the rights granted thereunder will adequately protect us.
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10-K ClickSoftware Technologies Ltd. Page 9
We own U.S. trademark registrations for the marks AITEST, CLICKANALYZE,
CLICKFIX, CLICKFORECAST and CLICKPLAN, and have filed applications for
registration of the mark CLICKSCHEDULE. In the European Community, we own
trademark registrations for CLICKFIX, CLICKSCHEDULE, CLICKANALYZE,
CLICKFORECAST, and CLICKPLAN, and a U.K. trademark for CLICKSOFTWARE.
Although we rely on copyright, trade secret and trademark law to protect our
technology, we believe that factors such as the technological and creative
skills of our personnel, new product developments, frequent product
enhancements and reliable product maintenance are more essential to
establishing and maintaining a technology leadership position. We can give no
assurance that others will not develop technologies that are similar or
superior to our technology. See "Risks Related to Our Business" and
"Competition".
We generally enter into nondisclosure agreements with our customers, partners,
employees and consultants and generally control access to and distribution of
our software, documentation and other proprietary information.
Our end-user licenses are designed to prohibit unauthorized use, copying and
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.
From time to time, we may encounter disputes over rights and obligations
concerning intellectual property. We also indemnify most of our customers
against any future claim that our products infringe the intellectual property
rights of others. We believe that our products do not infringe upon the
intellectual property rights of third parties. However, we cannot assure you
that we will prevail in all future intellectual property disputes. We have not
conducted an exhaustive 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.
Substantial litigation regarding technology rights exists in the software
industry, and we expect that software products may be increasingly subject to
third-party infringement and ownership claims as the number of competitors in
our industry segment grows and the functionality of products in different
industry segments overlap. In addition, our competitors may file or have filed
patent applications, which are covering aspects of their technology that they
may claim our technology infringes. Third parties may assert infringement or
competing ownership claims with respect to our products and technology. Any
such claims, with or without merit, could be time-consuming to defend, result
in costly litigation, and divert management's attention and resources or cause
product shipment delays. In the event of an adverse ruling in any such
litigation, we might be required to pay substantial damages, discontinue the
use and sale of infringing products, expand significant resources to develop
non-infringing technology or obtain licenses to or pay royalties to use a third
party's technology. Such royalty or licensing agreements may not be available
on terms acceptable to us, if at all. A successful claim of patent or copyright
infringement against us could significantly harm our business.
EMPLOYEES
As of December 31, 2004, we had 154 full-time employees: 34 engaged in
research and development, 43 in sales, marketing and business development,
55 in professional services and technical support and 22 in finance,
administration and operations. None of our employees is represented by a
labor union. We consider our relations with our employees to be good.
Israeli law and certain provisions of the nationwide collective bargaining
agreements between the Histadrut (General Federation of Labor in Israel) and
the Coordinating Bureau of Economic Organizations (the Israeli federation of
employers' organizations) apply to our Israeli employees. These provisions
principally concern the maximum length of the work day and the work week,
minimum wages, paid annual vacation, contributions to a pension fund,
insurance for work-related accidents, procedures for dismissing employees,
determination of severance pay and other conditions of employment. We
provide our employees with benefits and working
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10-K ClickSoftware Technologies Ltd. Page 10
conditions above the required minimums. Furthermore, pursuant to such
provisions, the wages of most of our employees are subject to cost of living
adjustments, based on changes in the Israeli CPI. The amounts and frequency of
such adjustments are modified from time to time. Israeli law generally requires
the payment of severance pay upon the retirement or death of an employee or
upon termination of employment by the employer or, in certain circumstances, by
the employee. We currently fund our ongoing severance obligations for our
Israeli employees by making monthly payments for insurance policies and
severance funds. Severance payment expenses amounted to $336,000 in 2004,
$234,000 in 2003 and $283,000 in 2002.
ITEM 2. PROPERTIES
We have a lease for approximately 8,800 square feet of office space in
Burlington, Massachusetts that expires in May 2009, which are used for sales,
marketing and implementation activities for the North American market. We also
have a lease for approximately 20,000 square feet of office space in Tel Aviv,
Israel that expires in June 2006, which are used for management, marketing,
sales, research and development. Of this amount, approximately 17,000 square
feet are currently being used by our company.
Our U.K. subsidiary currently operates from a leased facility of approximately
3,800 square feet in Slough, near London, which are used for sales, marketing
and implementation activities for the European market. We also lease additional
smaller offices in various sites throughout Europe and Asia. We consider that
our current office space is sufficient to meet our anticipated needs for the
foreseeable future and is suitable for the conduct of our business.
ITEM 3. LEGAL PROCEEDINGS
On August 25, 2003, a complaint was filed against us, one of our officers and
one of our former officers in the United States District Court for the District
of Massachusetts. None of the defendants have been served. According to an
electronic search of the court documents, the case is in the preliminary
stages. To date, we have not received any further formal documentation from the
court or the plaintiffs. The complaint is substantially similar to a complaint
previously filed in the same court against these parties and dismissed by the
court for failure to perfect service on the defendants in a timely manner. The
complaint is purportedly brought on behalf of investors who purchased our
securities between June 22, 2000 and October 21, 2002 and seeks unspecified
damages. The complaint contains various allegations, including violations of
the Securities Exchange Act of 1934 and common law claims with respect to our
financial results for 2000, 2001 and the first six months of 2002. It is not
possible for us to quantify the extent of our potential liability, if any. An
unfavorable outcome in this or any other case could have a material adverse
effect on our business, financial condition, results of operations, cash flow
and the trading price of our ordinary shares. In addition, defending any
litigation may be costly and divert management's attention from the day-to-day
operations of our business.
From time to time, we are involved in various routine legal proceedings
incidental to the ordinary course of our business. We do not believe that the
outcome of these pending legal proceeding will have a material adverse effect
on our business or consolidated financial condition.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS
Market for Ordinary Shares
Our ordinary shares have been quoted on the NASDAQ SmallCap Market under the
symbol "CKSW" since August 29, 2002 (except between November 6, 2002 and March
6, 2003, when they were quoted under the symbol "CKSWE"). The following table
sets forth for the periods indicated the high and low sales prices of our
ordinary shares as quoted by the NASDAQ SmallCap Market for the last two fiscal
years. These prices are over-the-counter market quotations which reflect
inter-dealer prices, without retail mark-up, mark-down or commission and may
not necessarily represent actual transactions.
- --------------------------------------------------------------------------------
10-K ClickSoftware Technologies Ltd. Page 11
Fiscal year ended December 31, 2004 HIGH LOW
- ----------------------------------- ------- --------
First Quarter $5.28 $ 3.25
Second Quarter $4.14 $ 2.06
Third Quarter $3.01 $ 1.20
Fourth Quarter $3.02 $ 1.73
Fiscal year ended December 31, 2003 HIGH LOW
- ----------------------------------- ----- -------
First Quarter $0.23 $ 0.12
Second Quarter $2.33 $ 0.19
Third Quarter $2.85 $ 1.52
Fourth Quarter $4.95 $ 1.95
As of March 14, 2005, 27,480,809 of our ordinary shares were issued and
outstanding. At such date, the last reported sale price of the ordinary shares
was $2.35 per share.
Holders of Record
As of March 14, 2005, there were approximately 47 stockholders of record of our
Ordinary Shares.
Dividends
We currently intend to retain earnings, if any, for use in our business. We
have never declared or paid cash dividends and have no intention to pay any
cash dividends on our capital stock in the foreseeable future.
Recent Sale of Unregistered Securities
In connection with the strategic alliance we formed with IBM in June, 2004, we
issued 100,000 of our ordinary shares to IBM for a purchase price of 0.02 NIS
(New Israel Shekels) per share and agreed to issue an additional 100,000 of our
ordinary shares to IBM for a purchase price of 0.02 NIS per share upon the
first anniversary of the initial issuance, unless the contract is Earlier
terminated by either IBM or the Company. We also issued IBM 250,000 warrants
that are exercisable into our ordinary shares with an exercise price of $2.38
per share. Immediately upon entering into the strategic alliance 62,500 of
these warrants became exercisable. At the end of each of the three years
following the warrant issuance, up to 62,500 warrants may become exercisable
based on the attainment of certain revenue targets relating to revenue
generated from the strategic alliance. If all performance milestones are met,
approximately 1.7% of ClickSoftware's outstanding share capital would be issued
to IBM.
- --------------------------------------------------------------------------------
10-K ClickSoftware Technologies Ltd. Page 12
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
The selected consolidated statement of operations data for the years ended
December 31, 2004, 2003, 2002, 2001 and 2000, and the selected consolidated
balance sheet data as of December 31, 2004, 2003, 2002, 2001 and 2000 have been
derived from our audited financial statements (as restated in 2003 with respect
to the years ended December 31, 2000 and 2001). The consolidated statements of
operations data for the years ended December 31, 2001 and 2000, selected
consolidated balance sheet data as of December 31, 2002, 2001 and 2000 are
derived from audited consolidated financial statements that are not included
herein (as restated in 2003 with respect to the years ended December 31, 2000
and 2001). These financial statements have been prepared in accordance with
accounting principles generally accepted in the United States. The following
selected financial data are qualified by reference to and should be read in
conjunction with the Consolidated Financial Statements and the Notes thereto
and "Management's Discussion and Analysis of Financial Condition and Results of
Operations" included elsewhere in this Report.
CONSOLIDATED STATEMENT OF OPERATIONS DATA:
YEAR ENDED DECEMBER 31,
------------------------------------------------------------------------------------
2004 2003 2002 2001 2000
---- ---- ---- ---- ----
(In thousands except share and per share data)
Revenues:
Software license $10,603 $10,622 $7,113 $11,734 $ 7,412
Services 12,102 11,788 8,640 6,441 5,178
------------------------------------------------------------------------------------
Total Revenues 22,705 22,410 15,753 18,175 12,590
------------------------------------------------------------------------------------
Cost of Revenues:
Software License 1,109 955 949 798 454
Services 6,395 6,631 5,804 5,498 5,301
------------------------------------------------------------------------------------
Total cost of revenues 7,504 7,586 6,753 6,296 5,755
------------------------------------------------------------------------------------
Gross Profit 15,201 14,824 9,000 11,879 6,835
------------------------------------------------------------------------------------
Operating Expenses:
Research and Development expenses, net 2,710 1,911 2,806 3,246 4,300
Selling and Marketing expenses 8,939 7,836 10,473 12,499 13,654
General and Administrative Expenses 2,809 3,494 3,106 4,048 3,717
Restructuring and assets impairment - - 2,665 294 -
Amortization of deferred Stock-based
Compensation 9 101 300 437 1,237
------------------------------------------------------------------------------------
Total Operating Expenses 14,467 13,342 19,350 20,524 22,908
------------------------------------------------------------------------------------
Operating Profit (loss) 734 1,482 (10,350) (8,645) (16,073)
Interest and other income, net 179 259 252 649 679
------------------------------------------------------------------------------------
Net Income (Loss) $ 913 $1,741 $(10,098) $(7,996) $(15,394)
====================================================================================
Basic net Income (loss) per ordinary share $ 0.03 $0.07 $(0.40) $(0.32) $ (0.68)
Diluted net Income (loss) per ordinary share $ 0.03 $0.06 $(0.40) $(0.32) $(0.68)
Shares used in computing basic net income
(loss) per share 27,202,804 25,847,758 25,553,891 25,322,771 22,501,563
====================================================================================
Shares used in computing diluted net
income (loss) per share 28,336,450 26,874,351 25,553,891 25,322,771 22,501,563
====================================================================================
- --------------------------------------------------------------------------------
10-K ClickSoftware Technologies Ltd. Page 13
CONSOLIDATED BALANCE SHEET DATA:
DECEMBER 31,
------------------------------------------------------------------------
2004 2003 2002 2001 2000
---- ---- ---- ---- ----
(in thousands)
Cash and cash equivalents $4,196 $7,695 $3,400 $8,125 $4,438
Short-term Investments 7,533 3,394 2,949 1,846 16,878
Working capital 10,328 8,821 5,849 14,191 21,398
Total assets 20,249 17,455 13,957 20,700 28,645
Long-term liabilities, net of
current portion 1,677 1,490 1,476 1,400 1,446
Shareholders' equity 10,872 9,613 6,684 16,428 23,773
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
OVERVIEW
We are specialists in the area of service optimization solutions and derive
revenues from the licensing of our software products and the provision of
consulting and support services.
Software license revenues are comprised of perpetual software license fees
primarily derived from contracts with our direct sales clients and our indirect
distribution channels. We recognize revenues in accordance with the AICPA
Statement of Position 97-2, "Software Revenue Recognition," or SOP 97-2, as
amended. (See note 2 of the notes to our consolidated financial statements
attached hereto).
Service revenues are comprised of revenues from consulting, training, and
post-contract customer support. Consulting services are billed at an
agreed-upon rate plus incurred expenses. Clients licensing our products
generally purchase consulting agreements from us. Post-contract customer
support arrangements provide technical support and the right to software
updates. Post-contract customer support revenues are charged as a percentage of
license fees depending upon the level of support coverage requested by the
customer. Our support contracts typically renew automatically for successive
twelve-month periods unless the customer informs us of its desire not to renew
annual support.
During the course of 2004, we had a second profitable year and our revenues
grew by 1%. However, revenues did not reach our original growth plans for the
year. We believe that the main reasons for the slower-than-expected growth were
lower revenues in North America due to longer sales cycles, and that channel
sales are ramping up slower than anticipated.
In 2005, we anticipate growth in our business based on our backlog, current
sales prospects, pilot projects that may develop into full-scale contracts and
expectations of expanding channel relationships. As in 2004, we believe that
our performance in 2005 will primarily depend on our ability to continue
attracting customers and implementing service optimization solutions. We
believe that we can manage the level of our expenses so as to maintain annual
profitability if we achieve our revenue targets. This projection is subject to
many risk factors, including those described in the section of this Report
entitled "FACTORS THAT MAY AFFECT FUTURE RESULTS."
We restated our financial statements for 1999, 2000, 2001 and for the first six
months of 2002 and filed an amendment to our Forms 10-K for the three years
ended 1999, 2000 and 2001 on January 24, 2003. The financial results provided
in this annual report reflect this restatement. See note 3 of the notes to our
consolidated financial statements that are included on the Form 10-K/A for the
year December 31, 2001 that we filed the U.S. Securities and Exchange
Commission on January 24, 2003.
As of December 31, 2004, our cash and cash-equivalents, and short and long-term
investments increased to $12.0 million from $11.7 million as of December 31,
2003.
With more transactions involving larger customers and generating larger
transactions, and with the greater involvement of our channel partners in
many of the transactions, the results of any quarter will be more
- --------------------------------------------------------------------------------
10-K ClickSoftware Technologies Ltd. Page 14
difficult to predict and will not necessarily be indicative of full-year
performance. Because a significant portion of our expenses, such as
administrative and management, payroll and rent and utilities, are fixed in the
short term and cannot be quickly reduced to respond to decreases in revenues,
if revenue levels fall below expectations, net income may be disproportionately
affected. All of our projections are subject to many risk factors, including
those described in the section of this Report entitled "FACTORS THAT MAY AFFECT
FUTURE RESULTS."
The reporting currency of the Company is the U.S. dollar, which is the
functional currency of the Company and its subsidiaries. A significant portion
of our research and development expenses and other expenses are incurred in New
Israeli Shekels, or NIS, and a portion of our revenues and expenses are
incurred in British pounds, European Community euros and Australian dollars.
The results of our operations are subject to fluctuations in these exchange
rates, which are influenced by various global economic factors.
RESULTS OF OPERATIONS
Our operating results for each of the five years ended December 31, 2004, 2003,
2002, 2001 and 2000 expressed as a percentage of revenues are as follows:
YEAR ENDED DECEMBER 31,
-----------------------------------------------------
2004 2003 2002 2001 2000
Revenues:
Software license 47% 47% 45% 65% 59%
Services 53% 53% 55% 35% 41%
-----------------------------------------------------
Total Revenues 100 100 100 100 100
-----------------------------------------------------
Cost of Revenues:
Software License 5 4 6 4 4
Services 28 30 37 31 42
-----------------------------------------------------
Total cost of revenues 33 34 43 35 46
-----------------------------------------------------
Gross Profit 67 66 57 65 54
-----------------------------------------------------
Operating Expenses:
Research and Development
expenses, net 12 8 18 18 34
Selling and Marketing expenses 39 35 66 69 108
General and Administrative
Expenses 13 16 20 22 30
Restructuring and assets impairment - - 17 2 -
Amortization of deferred Stock-based
Compensation 0 0 2 2 10
-----------------------------------------------------
Total Operating Expenses 64 59 123 113 182
-----------------------------------------------------
Operating Profit (loss) 3 7 (66) (48) (128)
Interest and other income, net 1 1 2 4 5
-----------------------------------------------------
Net Income (loss) 4% 8% (64%) (44%) (123%)
-----------------------------------------------------
- --------------------------------------------------------------------------------
10-K ClickSoftware Technologies Ltd. Page 15
Revenues
Revenue Breakdown
-----------------
------------------------------------------------------------------
2004 % Change 2003 % Change 2002
---- -------- ---- -------- ----
(In thousands)
Revenues:
Software license $10,603 0% $10,622 49% $7,113
Percentage of total revenues 47% 47% 45%
Services 12,102 3% 11,788 36% 8,640
Percentage of total revenues 53% 53% 55%
------------- ------------ ---------
Total Revenues $ 22,705 1% $ 22,410 42% $15,753
------------- ------------ ---------
Revenues increased $0.3 million or 1% to $22.7 million in 2004, from $22.4
million in 2003 because our channel sales did not grow as anticipated and there
were weak sales in North America due to longer sales cycles. In 2003 revenues
increased $6.6 million or 42% to $22.4 million from $15.8 million in 2002. The
increase in revenues from 2002 through 2003 was the result of our ability to
increasingly attract and implement large-scale projects. In particular, we
expanded our presence in the utilities and telecommunications industries.
Revenues By Territory
---------------------
-------------------------------------------------------------------------------
2004 % 2003 % 2002 %
Revenues Revenues Revenues
(In thousands)
Revenues:
North America $6,998 31% $10,239 46% $7,600 48%
Europe 12,056 53% 9,155 41% 4,734 30%
Israel 12 0% 71 0% 297 2%
Asia Pacific
and Africa 3,639 16% 2,945 13% 3,122 20%
------------ ------------ ---------
Total
Revenues $22,705 100% $22,410 100% $15,753 100%
------------ ------------ ---------
In 2004, 53% of our revenues were generated in Europe (with 22% in the U.K.,
20% in Germany), 31% in North America (with 23% in the U.S.), and 16% in Asia
Pacific and Africa. The increase in the percentage of revenues from the
European region in 2004 is the result of a few large projects that we sold
directly and through our channel partners, and the sale of our products into
new vertical market industries. In 2003, 46% of our revenues were generated in
North America (with 36% in the U.S.), 41% in Europe (with 19% in the U.K., 11%
in Germany and 8% in the Netherlands), 0% in Israel and 13% in Asia Pacific and
Africa. In 2002, 48% of our revenues were generated in North America (with 37%
in the U.S.), 30% in Europe (with 12% in the U.K., 8% in the Netherlands and 7%
in Germany), 2% in Israel and 20% in Asia Pacific and Africa. The increase in
the percentage of revenues from the Europe region in 2003 is the result of a
few large projects that we sold directly and through our channel partners.
We believe that our North American sales will increase in relative terms over
other geographic regions in 2005.
- --------------------------------------------------------------------------------
10-K ClickSoftware Technologies Ltd. Page 16
Software Licenses As reflected in the table entitled "Revenue Breakdown",
above, software license revenues were $10.6 million or 47% of revenues in 2004,
$10.6 million or 47% of revenues in 2003, and $7.1 million or 45% of revenues
in 2002. The increase in software license revenues from 2002 to 2003 by $3.5
million or 49% was primarily the result of our ability to attract and implement
large-scale projects in 2003 through direct sales and our channel partners.
Services Service revenues in 2004 increased by $0.3 million or 3% to $12.1
million or 53% of revenues, compared with $11.8 million or 53% of revenues in
2003, and $8.6 million or 55% of revenues in 2002. The slight increase in
services revenues from 2003 to 2004 was primarily due to an increase in
post-contract support agreements, partially offset by a decrease in consulting
revenues. The increase in services revenues from 2002 to 2003 by $3.2 million
or 36% was primarily due to an increased base of customers with implementations
that went "live," which contributed to a substantial increase in post-contract
support agreements, together with a smaller increase in revenues from
consulting services.
Cost of Revenues
Cost of revenues consists of cost of software license revenues and cost of
services. Cost of software license revenues consists of expenses related to
media duplication and packaging of our products, costs of software purchased or
licensed for resale and royalties payments to the Chief Scientist. Cost of
services consists of expenses related to salaries and expenses of our
professional services organizations, costs related to third-party consultants,
equipment costs and royalties payments to the Chief Scientist.
Cost of revenues was $7.5 million or 33% of revenues in 2004, $7.6 million or
34% of revenues in 2003, and $6.8 million or 43% of revenues in 2002. The
slight decrease in the cost of revenues from 2003 to 2004 by $82,000 or 1% was
primarily due to a decrease in our consulting activities partially offset by an
increase in third-party licenses and adaptors costs. The increase in the cost
of revenues from 2002 to 2003 by $0.8 million or 12% on an absolute basis was
primarily due to higher costs associated with professional services performed
by the Company and an increase in royalties paid to the Chief Scientist. We
expect our cost of revenues on an absolute basis to continue to increase in
2005 as a natural consequence of the projected growth of our revenues.
Cost of Software Licenses
Cost of software license revenues were $1.1 million or 5% of revenues in 2004,
$955,000 or 4% of revenues in 2003, and $949,000 or 6% of revenues in 2002. The
increase in cost of software license revenues in 2004 from 2003 by $0.2 million
was primarily due to an increase in third party licenses and adaptors to other
ERP and CRM systems sold during 2004. The increase in royalty payments to the
Chief Scientist by $0.2 million from 2002 to 2003 was fully offset by a
decrease in third party licenses and adaptors to other ERP and CRM systems sold
during 2003.
Cost of Services
Cost of service revenues were $6.4 million or 28% of revenues in 2004, $6.6
million or 30% of revenues in 2003, and $5.8 million or 37% of revenues in
2002.
The decrease in the cost of services from 2003 to 2004 by $0.2 million or 4%
was primarily due to the decrease of our consulting activities during 2004 and
primarily resulted from $0.1 million in decreased related payroll expenses and
$0.1 million from other implementation related costs. The increase in the cost
of services from 2002 to 2003 by $0.8 million or 14% on an absolute basis was
primarily due to the increased demand for our professional services and an
increase in royalties paid to the Chief Scientist.
Gross profit
Gross profit was $15.2 million, or 67% of revenues, in 2004, $14.8 million, or
66% of revenues, in 2003 and $9 million, or 57% of revenues, in 2002.
The increase in gross profit from 2003 to 2004 by $0.4 million, or 3%, was due
to higher service revenues and higher margins on service revenues. The slight
increase in gross margins from 2003 to 2004 resulted from higher-margin from
services activities due to higher revenues from post-contract support
agreements. The increase in gross profit from 2002 to 2003 by $5.8 million, or
65%, was due to higher revenues and margins. The increase in gross margins from
2002 to 2003 was due to a change in the revenue mix in favor of higher-margin
license revenues and due to more profitable generation of service revenues.
If we meet our software license revenue target in 2005, we believe that we will
be able to maintain our current gross profitability.
- --------------------------------------------------------------------------------
10-K ClickSoftware Technologies Ltd. Page 17
Operating Expenses
Operating expenses are categorized into research and development expenses,
selling and marketing expenses, general and administrative expenses, and share
based compensation.
Operating Expenses
------------------
------------------------------------------------------------------
2004 % Change 2003 % Change 2002
(In thousands)
Operating Expenses:
Research and Development $ 2,710 42% $ 1,911 (32)% $ 2,806
Expenses, net
Selling and Marketing Expenses 8,939 14% 7,836 (25)% 10,473
General and Administrative Expenses 2,809 (20)% 3,494 12% 3,106
Restructuring and assets impairment - N.A - N.A 2,665
Amortization of deferred Stock-based
Compensation 9 (91)% 101 (66)% 300
------------ ------------ -----------
Total Operating Expenses $14,467 8% $13,342 (31)% $19,350
------------ ------------ -----------
Average No. of Employees 142 118 150
------------ ------------ -----------
Total operating expenses were $14.4 million or 64% of revenues in 2004, $13.3
million or 59% of revenues in 2003, and $19.4 million or 123% of revenues in
2002.
The increase in operating expenses from 2003 to 2004 by $1.1 million or 8%
mainly reflects an increase in our selling and marketing expenses activities as
we expand our activities and personnel to support these efforts and an increase
in the number of employees engaged in research and development activities. The
increase in operating expenses was partially offset by a decrease in general
and administrative expenses.
The decrease in operating expenses from 2002 to 2003 by $6.0 million or 31%
(excluding restructuring and impairment costs of $2.7 million, the decrease was
$3.3 million or 20%) was primarily due to cost-cutting measures implemented
during 2002.
We anticipate an increase in our operating expenses in 2005, particularly our
selling, marketing and R&D expenses, as we expand our sales and R&D efforts.
Research and Development Expenses, Net
Research and development expenses consist primarily of personnel costs to
support product development, net of grants received from the Chief
Scientist. In return for some of these grants, we are obligated to pay the
Israeli Government royalties as described below which are included in cost
of revenues. Software research and development costs incurred prior to the
establishment of technology feasibility are included in research and
development expenses as incurred. Software development costs incurred
subsequent to the establishment of technological feasibility through the
period of general market availability of the products are capitalized, if
material, after consideration of various factors, including net realizable
value. To date, software development costs that are eligible for
capitalization have not been material and have been expensed.
Research and development expenses, net of related grants, were $2.7 million
or 12% of revenues in 2004, $1.9 million or 8% of revenues in 2003, and $2.8
million or 18% of revenues in 2002. Research and development expenses, prior
to participation grants from the Office of the Chief Scientist of the
Government of Israel, totaled $3.1 million for the year ended December 31,
2004, $2.4 million for the year ended December 31, 2003, and $3.8 million
for the year ended December 31, 2002. We received or accrued grants from the
Chief Scientist in the amount of $0.4 million in 2004, $0.5 million in 2003
and $1.0 million in 2002. The increase in research and development expenses
from 2003 to 2004 by $0.8 million, or 42%, was primarily due to an increase
in the number of our research and development personnel and related payroll
costs, which resulted in an increase of $0.5 million in payroll, a decrease
of $0.2 million in grants received from the Office of the Chief Scientist
and an increase of $0.1 million in other costs. The decrease in research and
development expenses from 2002 to 2003 by $0.9 million, or 32%, was
primarily due to the impact of cost cutting measures
- --------------------------------------------------------------------------------
10-K ClickSoftware Technologies Ltd. Page 18
implemented during 2002 which reduced expenses by $1.4 million. This expense
reduction was partially offset by a decrease of $0.5 million in grants received
from the Office of the Chief Scientist.
We anticipate an increase in our research and development expenses in 2005 as
we expand our R&D efforts.
Selling and Marketing Expenses
Selling and marketing expenses consist primarily of personnel and related costs
for marketing and sales functions, including related travel, direct advertising
costs, expenditures on trade shows, market research and promotional printing.
Selling and marketing expenses were $8.9 million or 39% of revenues in 2004,
$7.8 million or 35% of revenues in 2003, and $10.5 million or 66% of revenues
in 2002. The increase in the selling and marketing expenses from 2003 to 2004
by $1.1 million or 14% was due to an increase in the number of employees that
resulted in an increase of $0.5 in related payroll expenses and an increase in
our selling and marketing expenses activities by $0.6 million. The decrease in
the selling and marketing expenses from 2002 to 2003 by $2.6 million or 25% was
primarily due to cost cutting measures implemented during 2002.
We expect selling and marketing expenses to increase in 2005 as we expand our
direct and indirect sales efforts, particularly in the market for large-scale
service optimization solutions.
General and Administrative Expenses
General and administrative expenses consist primarily of personnel and related
costs for corporate functions, including information services, finance, legal,
accounting, human resources, facilities, provision for doubtful accounts and
costs related to our status as a public company.
General and administrative expenses were $2.8 million or 13% of revenues in
2004, $3.5 million or 16% of revenues in 2003, and $3.1 million or 20% of
revenues in 2002. General and administrative expenses included the amount of
$180,000 as a reduction in provision in bad debt charges in 2004, $220,000 in
bad debt charges in 2003 and $130,000 in 2002. General and administrative
expenses without bad debts were $3.0 million in 2004, $3.3 million in 2003 and
$3.0 million in 2002. The decrease of $0.3 million in general and
administrative expenses from 2003 to 2004, excluding bad debt charges, was
primarily due to a decrease in payroll expenses of $0.4 million and a decrease
of $0.1 million in other general and administrative expenses offset by an
increase of $0.2 million in legal and consultancy costs. The increase of $0.3
million in general and administrative expenses from 2002 to 2003, excluding bad
debt charges, was primarily due to an increase in payroll expenses of $0.7
million offset by a decrease of $0.4 million in legal and consultancy costs.
Amortization of stock-based compensation
Amortization of stock-based compensation represents the aggregate difference,
at the date of grant, between the respective exercise prices of stock options
and the deemed fair market value of the underlying stock. Deferred Stock-based
compensation is amortized over the vesting period of the underlying options,
generally four years.
Stock-based compensation expenses for the year ended December 31, 2004 amounted
to $9,000 of 2004 recorded deferred stock-compensation. Stock-based
compensation expenses for the year ended December 31, 2003 amounted to $101,000
of previously recorded deferred stock-compensation. Stock-based compensation
expenses for the year ended December 31, 2002 amounted to $300,000 of
previously recorded deferred stock-compensation. The decrease in share-based
compensation expenses over the years is attributed to the fact that the
amortization of the share-based compensation progressively decreases over the
four-year amortization period.
Due to the grant of shares and exercisable options to IBM, we recorded a
deferred stock compensation charge of $342,000 of which $56,000 was amortized
during 2004 as a deduction of revenues.
Restructuring and assets impairment
Restructuring and assets impairment costs consist of write-down of equipment
and leasehold improvements related to office space reduction, termination of
lease contract and employees severance and benefits costs in connection with
the termination of employment of employees.
There were no restructuring costs in 2004 and 2003. Restructuring costs were
$2.7 million or 17% of revenues in 2002. The restructuring expenses in 2002
consisted mainly of write-down of equipment and leasehold
- --------------------------------------------------------------------------------
10-K ClickSoftware Technologies Ltd. Page 19
improvements related to office space reduction and termination of lease
contracts in connection mainly to the closing of our California office and
employee severance and benefits costs incurred by us in connection with the
restructuring.
Interest and Other Income, Net
Interest and other income includes interest income earned on our cash, cash
equivalents and short and long-term investments, offset by interest expense,
and also include the effects of foreign currency fluctuations.
Interest income net of interest expenses, was $179,000 or 1% of revenues in
2004; $259,000 or 1% of revenues in 2003; and $252,000 or 2% of revenues in
2002. The decrease in interest income from 2003 to 2004 is attributable to the
lower gains from currency fluctuations in 2004 compared to 2003, which was
partially mitigated by an increase in interest income in 2004.
Income Taxes
Our tax rate will mainly reflect a mix of the U.S. statutory tax rate on our
U.S. income, the U.K statutory tax rate on our U.K. income, the Belgium
statutory tax rate on our Belgium income, the German statutory tax rate on our
German income, the Australian tax rate on our Australian income and the Israeli
tax rate discussed below.
Israeli companies are generally subject to income tax at the rate of 35% of
taxable income. The regular Company Tax rate is to be gradually reduced to 34%
in 2005, 32% in 2006 and 30% in 2007. The majority of our income, however, is
derived from our capital investment program with "Approved Enterprise" status
under the Law for the Encouragement of Capital Investments, and is eligible
therefore for tax benefits. As a result of these benefits, we will have a tax
exemption on income derived during the first two years in which this investment
program produces taxable income and a reduced tax rate of 15-25% for the next 5
to 8 years. In the event of a distribution of a cash dividend out of retained
earnings that were exempt from tax due to its Approved Enterprise status, we
would be required to pay 25% corporate income tax on income from which the
dividend was distributed. All of these tax benefits are subject to various
conditions 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.
As of December 31, 2004, net operating loss carry forwards in Israel amounted
to approximately $21.6 million. Additional tax loss carry forwards of
approximately $26.4 million and $8.6 million remain attributable to the U.S.
subsidiary and the European subsidiaries, respectively. The Israeli and the
European net operating loss carry forwards have no expiration date. The U.S.
net operating loss carry forwards will expire gradually over the years 2008
through 2024.
Net Income (Loss)
Net income was $0.9 million or 4% of revenues in 2004, net income was $1.7
million or 8% of revenues in 2003, and net loss was ($10.1) million or (64%) of
revenues in 2002.
LIQUIDITY AND CAPITAL RESOURCES
Our cash and investments increased by $0.3 million or 3% to $12.0 million as of
December 31, 2004 from $11.7 million as of December 31, 2003. Our cash and
investments increased by $5.0 million or 76% to $11.7 million as of December
31, 2003 from $6.6 million as of December 31, 2002. Our primary sources of cash
and investments, net during 2004 were cash flows generated from operations in
the amount of $0.7 million and $0.3 million from exercises of employee stock
options and employee share purchase plans ("ESPP") purchases. Our primary
sources of cash and investments during 2003 were cash flows generated from
operations of $4.2 million and $1.1 million from exercises of employee stock
options and ESPP purchases.
As of December 31, 2004 we had cash and cash equivalents of approximately $4.2
million, short-term investments of approximately $7.5 million and long-term
investments of approximately $0.3 million. As of December 31, 2004,
approximately $0.3 million in long-term investments had been deposited with
banks to secure letters of credit totaling approximately $0.5 million, which
are described below. Our cash, short-term investments and long-term investments
are invested or deposited in low-risk and predominantly U.S-denominated
investments and bank deposits.
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10-K ClickSoftware Technologies Ltd. Page 20
Cash and Investments
--------------------
------------------------------------------------------------------------
2004 % Change 2003 % Change 2002
---- -------- ---- -------- ----
(In thousands)
Cash and cash equivalents $ 4,196 $ 7,695 $ 3,400
Short-term investments 7,533 3,394 2,949
Long-term investments 264 580 280
------------ ------------- -------------
Total Cash and
investments $11,993 3% $ 11,669 76% $ 6,629
------------ ------------- ------------
For the year ended December 31, 2004, net cash provided by operations was $0.7
million, comprised of our net income of $0.9 million, an increase in trade
receivables of $2.0 million, an increase in other receivables of $0.3 million,
an increase in accounts payable of $0.7 million, and an increase in deferred
revenues of $0.7 million, which was partially offset by non-cash charges of
$0.7 million.
For the year ended December 31, 2003, net cash provided by operations was $4.2
million, comprised of our net income of $1.7 million, a decrease in trade
receivables of $0.7 million, a decrease in other receivables of $0.5 million, a
decrease in accounts payable of $1.3 million, and an increase in deferred
revenues of $1.9 million, which was partially offset by non-cash charges of
$0.7 million.
For the year ended December 31, 2002, net cash used in operations was $1.1
million, comprised of our net loss of $10.1 million, a decrease in short term
investments of $1.8 million, a decrease in trade receivables of $1.6 million, a
decrease in other receivables of $200,000, an increase in accounts payable of
$2.7 million, and an increase in deferred revenues of $0.3 million, which was
partially offset by non-cash charges of $2.3 million (including a one-time
impairment charge of $1.2 million).
Net cash used in investment activities was $4.5 million in 2004, of which $3.9
million was primarily invested in bank deposits and $0.6 million invested in
leasehold improvements and purchases of equipment and systems, including
computer equipment and fixtures and furniture. Net cash used in investment
activities was $0.9 million in 2003, of which $0.7 million was primarily
invested in bank deposits and $0.2 million invested in leasehold improvements
and purchases of equipment and systems, including computer equipment and
fixtures and furniture. Net cash used in investing activities was $3.5 million
in 2002, of which $3.2 million was primarily invested in bank deposits and $0.3
million invested in leasehold improvements and purchases of equipment and
systems, including computer equipment, fixtures and furniture.
Net cash provided by financing activities was $0.3 million in 2004, as a result
of the employee options exercises and ESPP purchases. Net cash provided by
financing activities was $1.1 million in 2003, as a result of the employee
options exercises and ESPP purchases. There were no material financing
activities in 2002.
As of December 31, 2004, we had outstanding trade receivables of approximately
$5.3 million, which represented approximately 23% of 2004 total revenues. As of
December 31, 2003, we had outstanding trade receivables of approximately $3.4
million, which represented approximately 15% of 2003 total revenues. As of
December 31, 2002 we had outstanding trade receivables of approximately $4.0
million, which represented approximately 26% of 2002 total revenues. Our trade
receivables are typically between 30 and 60 days, although we also negotiate
longer payment plans with some of our clients. Days sales outstanding ("DSO"),
calculated based on revenues for the most recent quarter and accounts
receivable at the balance sheet date, increased to 70 DSO as of December 31,
2004 from 48 DSO as of December 31, 2003. The increase in DSO from 2003 to 2004
is due to the timing of invoicing of new orders in the quarter, which are
occurring near the end of the quarter. DSO decreased to 48 days as of December
31, 2003 from 79 days as of December 31, 2002.
As of December 31, 2004, we had no material commitments for capital
expenditures.
We have various commitments primarily related to guarantees, letters of credit
and capital lease obligations. The following table provides details regarding
our contractual cash obligations and other commercial commitments subsequent to
December 31, 2004:
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10-K ClickSoftware Technologies Ltd. Page 21
- --------------------------------------------------------------------------------
Amount of Commitment Expiration
Commercial Commitments Total Amounts Per Period (in thousands)
Committed (in --------------------------------
thousands) 2005 2009
- ----------------------------- ----------------- ----------------- --------------
Guarantees/Letters of Credit $532 $491 $41
- ----------------------------- ----------------- ----------------- --------------
------------------- ------------------------------------------------
Contractual
Obligations Payments Due By Period (in thousands)
------------------- ------------------------------------------------
Total 2005 2006 2007
------------------- ----------- ------------- ------------ ---------
Lease Obligations $1,252 $636 $486 $130
------------------- ----------- ------------- ------------ ---------
We have entered into standby letter of credit agreements with banks and
financial institutions primarily relating to the guarantee of future
performance on certain contracts. As of December 31, 2004, contingent
liabilities on outstanding letter of credit agreements aggregated approximately
$0.5 million. Most of these obligations are scheduled to expire during 2005. We
expected to renew most of these letters of credit in 2005. The letters of
credit are secured by $0.3 million in deposits to cover potential payments
under the guarantees.
As permitted under Israeli law, we have agreements whereby we indemnify our
officers and directors for certain events or occurrences while the officer or
director is, or was serving, at our request in such capacity. The
indemnification period covers all pertinent events and occurrences during the
officer's or director's lifetime. We have director and officer insurance
coverage that may limit our exposure and may enable us to recover a portion of
any future amounts paid. In addition to the insurance coverage, the Company has
agreed to indemnify its directors in an amount not to exceed $20 million, for
all persons and all events to be indemnified, for certain events and
occurrences while the director is, or was serving, at our request in such
capacity in accordance with the Indemnification Agreements entered into with
the directors of the Company, which are substantially in the form of the
Amended Form of Indemnification Agreement filed as Exhibit 10.18 to this annual
report.
Since inception, we have received aggregate payments from the Government of the
State of Israel through the Office of the Chief Scientist of the Ministry of
Industry and Trade in the amount of $7.6 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 December 31, 2004, we had paid or accrued royalties related
to the results of research and development in the amount of $3.9 million. The
estimated current net commitment is approximately $3.7 million. The refund of
the grant is contingent on future sales, and we have no obligation to refund
these grants, if sufficient sales are not generated.
Our capital requirements depend on numerous factors, including market demand
and acceptance of our products, the resources we devote to developing,
marketing, selling and supporting our products, the timing and extent of
establishing additional international operations and investments in computers
and office equipment. We intend to continue investing significant resources in
our selling and marketing, research and development operations in the future
and investments in computers and office equipment. We attained profitability in
the three months ending March 31, 2003 and maintained profitability in the next
seven quarters. Our ability to maintain profitability will depend on our
ability to increase our revenues while continuing to control our expenses.
However, we cannot assure you that we will be able to maintain profitability,
as our ability to maintain our profitability on a quarterly basis is largely
dependent on the receipt of large orders in each quarter. If we are not
successful in doing so, we will be required to seek new, external sources of
financing, which may not be available to us on favorable terms or at all. If
additional funds are raised through the issuance of equity or debt securities,
these securities could have rights, preferences and privileges senior to those
of holders of ordinary shares, and the terms of these securities could impose
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10-K ClickSoftware Technologies Ltd. Page 22
restrictions on our operations. The sale of additional equity or convertible
debt securities could result in additional dilution to out shareholders.
We believe that we will have sufficient cash to fund our operations for at
least the next twelve months although there is no assurance that we will be
able to do so.
CRITICAL ACCOUNTING POLICIES
In preparing our consolidated financial statements, we are required to make
estimates, judgments and assumptions that affect the reported amounts of
revenues and expenses, assets and liabilities and contingent assets and
liabilities at the date of the financial statements.
On an ongoing basis, we evaluate our estimates, judgments and assumptions,
including those related to revenue recognition, and bad debt provisions. We
base our estimates, judgments and assumptions on historical experience and
forecasts, and on various other factors that are believed to be reasonable
under the circumstances. Actual results may differ from these estimates under
different assumptions or conditions. We believe that the following critical
accounting policies affect our more significant estimates, judgments and
assumptions used in the preparation of our consolidated financial statements.
Revenue Recognition
Revenue results are difficult to predict, and any shortfall in revenues or
delay in recognizing revenues could cause our operating results to vary
significantly from quarter to quarter and could result in future operating
losses. In addition, the timing of our revenue recognition influences the
timing of certain expenses, such as commissions and royalties. We follow very
specific and detailed guidelines in measuring revenues; however, certain
judgments affect the application of our revenue policy.
Our revenues are principally derived from the licensing of our software and the
provision of related services. We recognize revenues in accordance with SOP
97-2. Revenues from software license fees are recognized when persuasive
evidence of an arrangement exists, either by written agreement or a purchase
order signed by the customer, the software product has been delivered, the
license fees are fixed and determinable, and collection of the license fees is
considered probable. License fees from software arrangements which involve
multiple elements, such as post-contract customer support, consulting and
training, are allocated to each element of the arrangement based on the
relative fair values of the elements. We determine the fair value of each
element in multiple-element arrangements based on vendor specific objective
evidence, or VSOE. We determine the VSOE for each element according to the
price charged when the element is sold separately. In judging the probability
of collection of software license fees we continuously monitor collection and
payments from our customers and maintain a provision for estimated credit
losses based upon our historical experience and any specific customer
collection issues that we have identified. In connection with customers with
whom we have no previous experience, we may utilize independent resources to
evaluate the creditworthiness of those customers. For some customers, typically
those with whom we have long-term relationships, we may grant extended payment
terms. We perform on-going credit evaluations of our customers. If the
financial situation of any of our customers were to deteriorate, resulting in
an impairment of their ability to pay the indebtedness they incur with us,
additional allowances may be required.
Our software products generally do not require significant customization or
modification. Revenue from software licenses that require significant
customization, integration and implementation are recognized based on SOP 81-1
"Accounting for Performance of Construction-Type and Certain Production-Type
Contracts," using contract accounting on the percentage-of-completion method,
based on the relationship of actual labor costs incurred, to total labor costs
estimated to be incurred over the duration of the contract. In recognizing
revenues based on the percentage-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.
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.
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10-K ClickSoftware Technologies Ltd. Page 23
Allowance for Doubtful Accounts
We maintain an allowance for doubtful accounts using estimates that we make
based on factors we believe appropriate such as the composition of the accounts
receivable aging, historical bad debts, changes in payment patterns, customer
creditworthiness and current economic trends. If we used different assumptions,
or if the financial condition of customers were to deteriorate, resulting in an
impairment of their ability to make payments, additional provisions for
doubtful accounts would be required and would increase our bad debt expense.
RECENT ACCOUNTING PRONOUNCEMENTS
SFAS NO. 123 (REVISED 2004) "SHARE BASED PAYMENTS" - In December 2004,
the FASB issued SFAS No. 123 (revised 2004) "Share Based Payments" ("SFAS
123(R)"). This Statement is a revision of FASB Statement No. 123, "Accounting
for Stock-Based Compensation", which supersedes APB Opinion No. 25, "Accounting
for Stock Issued to Employees" and its authoritative interpretations. SFAS
123(R) will be implemented in the U.S. GAAP reconciliation Note. SFAS 123(R)
establishes standards for the accounting for transactions in which an entity
exchanges its equity instruments for goods or services; focuses primarily on
accounting for transactions in which an entity obtains employee and directors
services in share-based payment transactions; and does not change the
accounting guidance for share-based payment transactions with parties other
than employees or directors.
SFAS 123(R) eliminates the alternative to use APB 25's intrinsic value
method of accounting that was provided in SFAS 123 as originally issued and
requires to measure the cost of employee services received in exchange for an
award of equity instruments based on the grant-date fair value of the award.
The fair-value-based method in this Statement is similar to the
fair-value-based method in SFAS 123 in most respects. The costs associated with
the awards will be recognized over the period during which an employee is
required to provide service in exchange for the award - the requisite service
period (usually the vesting period).
The grant-date fair value of employee share options and similar
instruments will be estimated using option-pricing models adjusted for the
unique characteristics of those instruments (unless observable market prices
for the same or similar instruments are available). If an equity award is
modified after the grant date, incremental compensation cost will be recognized
in an amount equal to the excess of the fair value of the modified award over
the fair value of the original award immediately before the modification.
The provisions of SFAS 123(R) apply to all awards to be granted by the
Company after June 30, 2005 and to awards modified, repurchased, or cancelled
after that date. When initially applying the provisions of SFAS 123(R), in the
third quarter of 2005, the Company will be required to elect between using
either the "modified prospective method" or the "modified retrospective
method". Under the modified prospective method, the Company is required to
recognize compensation cost for all awards granted after the adoption of SFAS
123(R) and for the unvested portion of previously granted awards that are
outstanding on that date.
Under the modified retrospective method, the Company is required to
restate its previously issued financial statements to recognize the amounts
previously calculated and reported on a pro forma basis, as if the original
provisions of SFAS 123 had been adopted. Under both methods, it is permitted to
use either a straight line or an accelerated method to amortize the cost as an
expense for awards with graded vesting.
Management has recently commenced identifying the potential future
impact of applying the provisions of SFAS 123(R), including each of its
proposed transition methods, yet is currently unable to fully quantify the
effect of this Standard on the Company's future financial position and results
of operations in accordance with U.S. GAAP. Nonetheless, it is expected that
the adoption of SFAS 123(R) will increase the stock-based-award expenses the
Company is to record in the future in comparison to the expenses recorded under
the guidance currently applied by the Company.
SFAS 153, EXCHANGE OF NON-MONETARY ASSETS - In December 2004, the
FASB issued SFAS No. 153, "Exchanges of Nonmonetary Assets an amendment of
APB No. 29". This Statement amends Opinion 29 to eliminate the exception for
nonmonetary exchanges of similar productive assets and replaces it with a
general exception for exchanges of nonmonetary assets that do not have
commercial substance. The Statement specifies that a nonmonetary exchange
has commercial substance if the future cash flows of the entity are expected
to change significantly as a result of the exchange. This Statement is
effective for nonmonetary asset exchanges occurring in fiscal periods
beginning after June 15, 2005. Earlier application is
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10-K ClickSoftware Technologies Ltd. Page 24
permitted for nonmonetary asset exchanges occurring in fiscal periods beginning
after the date this Statement is issued. Retroactive application is not
permitted. The Company is assessing the impact of the adoption of this
Standard, and currently estimates that its adoption in not expected to have a
material effect on the Company's financial position and results of operations.
Off-Balance Sheet Arrangements
Except as expressly disclosed in the Liquidity Section - Item 7, we do not have
any Off-Balance Sheet Arrangements.
FACTORS THAT MAY AFFECT FUTURE RESULTS
You should carefully consider the following factors and other information in
this statement before you decide to invest in our ordinary shares. If any of
the negative events referred to below occur, our business, financial condition
and results of operations could suffer. In any such case, the trading price of
our ordinary shares could decline, and you may lose all or part of your
investment.
RISKS RELATED TO OUR BUSINESS
WE MAY NOT BE ABLE TO MAINTAIN PROFITABILITY.
We expect to continue to incur significant sales and marketing and research and
development expenses. Some of our expenses, such as administrative and
management payroll and rent and utilities, are fixed in the short term and
cannot be quickly reduced if we experience revenue declines. As a result, we
need to generate and maintain growing revenues in order to remain profitable,
which we may not be able to do.
OUR QUARTERLY OPERATING RESULTS ARE SUBJECT TO FLUCTUATIONS AND IF WE FAIL TO
MEET THE EXPECTATIONS OF SECURITIES ANALYSTS OR INVESTORS, OUR SHARE PRICE MAY
DECREASE.
Our quarterly operating results are difficult to predict and are not a good
measure for comparison. Our operating history shows that a significant
percentage of our quarterly revenues comes from orders placed towards the end
of a quarter. Frequently, we are reliant upon a sale of significant size to a
single customer. A delay in the completion of any such sale past the end of a
particular quarter could negatively impact results for that quarter, and such
negative impact could be significant. Because of our expenses, such as
administrative and management payroll and rent and utilities, are fixed in the
short term and cannot be quickly reduced to respond to decreases in revenues,
if revenue levels fall below expectations, net income may be disproportionately
affected. Even without the delay of a significant sale, our future quarterly
operating results may fluctuate significantly and may not meet the expectations
of securities analysts or investors. If this occurs, the price of our ordinary
shares may decrease. The factors that may cause fluctuations in our quarterly
operating results include the following:
o the volume and timing of customer orders, including a trend toward
larger customers generating larger transactions;
o the general seasonality of the enterprise software industry;
o internal budget constraints and approval processes of our current and
prospective clients;
o the length and unpredictability of our sales cycle;
o the indirect nature of our sales efforts through our channel and
strategic partners;
o the mix of revenue generated by product licenses and professional
services;
o the geographic mix of revenue;
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10-K ClickSoftware Technologies Ltd. Page 25
o announcements or introductions of new products or product enhancements
by us or our competitors;
o changes in prices of and the adoption of different pricing strategies
for our products and those of our competitors;
o timing and amount of sales and marketing expenses;
o changes in the composition and success of our business and partner
relationships;
o technical difficulties or "bugs" affecting the operation of our
software;
o foreign currency exchange rate fluctuations; and
o general economic conditions.
Because of the numerous factors that may cause fluctuations in our quarterly
operating results, we believe that period-to-period comparisons of our results
of operations are not necessarily meaningful and that such comparisons should
not be relied upon as an indication of future performance.
OUR STOCK PRICE COULD BE VOLATILE AND COULD DECLINE SUBSTANTIALLY.
The stock market has experienced significant price and volume fluctuations, and
the market prices of technology companies have been highly volatile. The price
at which our ordinary shares trades is likely to be volatile and may fluctuate
substantially due to factors such as:
o announcements of technological innovations;
o announcements relating to strategic relationships, including
developments in our recently announced relationship with IBM;
o conditions affecting the software industries;
o trends related to the fluctuations of stock prices of companies such as
ours;
o our historical and anticipated quarterly and annual operating results;
o variations between our actual results and the expectations of investors
or published reports or analyses regarding our business;
o announcements by us or others affecting our business, systems or
expansion plans; and
o general conditions and trends in technology industries.
THE ECONOMIC OUTLOOK MAY ADVERSELY AFFECT THE DEMAND FOR OUR CURRENT PRODUCTS
AND OUR RESULTS OF OPERATIONS.
Predictions regarding general economic conditions remain uncertain. Unless the
economic outlook continues to improve, the rate of growth of information
technology spending may stagnate. Consequently, the demand for our products may
not grow or may decrease, which would adversely affect our results of
operations. In addition, it is difficult to predict economic conditions, and
further predicting the effects of the changing economy is even more difficult.
We may not accurately gauge the effect of the general economy on our business.
As a result, we may not react to such changing conditions in a timely manner
and this may result in an adverse impact on our results of operations. Any such
adverse impacts to our results of operations from a changing economy may cause
the price of our ordinary shares to decline.
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10-K ClickSoftware Technologies Ltd. Page 26
FAILURE OF THE MARKET TO ACCEPT OUR PRODUCTS WOULD ADVERSELY AFFECT OUR
PROFITABILITY.
Historically, all of our operating revenue has come from sales of, and services
related to, our Service Optimization Suite, which enables efficient
provisioning of services in enterprise environments. Our Service Optimization
Suite includes ClickSchedule, ClickFix, ClickAnalyze, ClickPlan, ClickMobile
and ClickForecast. We continually improve and enhance our Service Optimization
Suite to meet market requirements. Our growth depends on the development of
market acceptance of these products. We have no guarantee that the sales of our
products will continue to develop as we anticipate, or at all. Lack of
long-term demand for our products would have a material adverse effect on our
business and operating results.
IF WE FAIL TO EXPAND OUR RELATIONSHIPS WITH THIRD PARTIES THAT CAN PROVIDE
IMPLEMENTATION AND PROFESSIONAL SERVICES TO OUR CLIENTS, WE MAY BE UNABLE TO
INCREASE OUR REVENUES AND OUR BUSINESS COULD BE HARMED.
In order for us to focus more effectively on our core business of developing
and licensing software solutions, we need to continue to establish
relationships with third parties that can provide implementation and
professional services to our clients. Third-party implementation and consulting
firms can also be influential in the choice of resource optimization
applications by new clients. If we are unable to establish and maintain
effective, long-term relationships with implementation and professional
services providers, such as our recently announced strategic alliance with IBM,
or if these providers do not meet the needs or expectations of our clients, we
may be unable to grow our revenues and our business could suffer. As a result
of the limited resources and capacities of many third-party implementation
providers, we may be unable to attain sufficient focus and resources from the
third-party providers to meet all of our clients' needs, even if we establish
relationships with these third parties. If sufficient resources are
unavailable, we will be required to provide these services internally, which
could limit our ability to meet other demands. Even if we are successful in
developing relationships with third-party implementation and professional
services providers, we will be subject to significant risk, as we cannot
control the level and quality of service provided by third-party implementation
and professional services partners.
IF WE ARE UNABLE TO MAINTAIN OUR RELATIONSHIPS WITH OUR DISTRIBUTORS, VALUE
ADDED RESELLERS OR IF OUR DISTRIBUTORS' BUSINESSES ARE ADVERSELY AFFECTED BY
DEVELOPMENTS UNRELATED TO US, OUR SALES COULD BE HARMED.
Our marketing strategy includes sales through distributors and value added
resellers, as well as direct sales by our own sales force. There is no
assurance that we will be successful in extending the terms of our various
agreements or in establishing similar relationships with other distributors or
value added resellers if our current agreements are not extended, and changes
in our relationships with our distributors, value added resellers and agents,
or other changes to their respective businesses could have a material adverse
effect on our business, financial condition or results of operations.
OUR NEED FOR ADDITIONAL FINANCING IS UNCERTAIN, AS IS OUR ABILITY TO OBTAIN
FURTHER FINANCING IF REQUIRED.
Our ability to maintain or increase profitability using our currently available
balance of cash, cash equivalents and available credit will depend on our
ability to maintain or increase our revenues while continuing to control our
expenses. We cannot assure you that we will be successful in doing so. If we
are not successful in doing so, particularly given the uncertainties regarding
future information technology spending by our current and prospective
customers, we will need to raise additional capital to finance our operations.
There can be no assurances that we will be able to sell additional equity or
debt securities. If we are able to issue equity or debt securities, these
securities could have rights, preferences and privileges senior to those of
holders of our ordinary shares, and the terms of these securities could impose
restrictions on our operations. The sale of additional equity or convertible
debt securities would result in additional dilution to the stock holdings of
our shareholders. Additionally, prior to the issuance of additional equity or
convertible debt securities to entities outside of Israel, we will need to
obtain approval from the Chief Scientist and there can be no assurance that we
will be able to obtain this consent in the future.
Alternatively, we may seek other forms of financing, such as credit from banks
or institutional lenders. We cannot be certain that additional financing will
be available to us in amounts or on terms acceptable to us, if at all. If we
are unable to obtain this additional financing, we may be required to reduce
the scope of our planned product development and marketing efforts, which could
harm our business, financial condition or operating results.
OUR MARKET IS HIGHLY COMPETITIVE AND ANY REDUCTION IN DEMAND FOR, OR PRICES OF,
OUR PRODUCTS COULD NEGATIVELY IMPACT OUR REVENUES, REDUCE OUR GROSS MARGINS AND
CAUSE OUR SHARE PRICE TO DECLINE.
The market for our products is competitive and rapidly changing. Competition
may increase in the future as current competitors expand their product
offerings and new companies attempt to enter the market. Because
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10-K ClickSoftware Technologies Ltd. Page 27
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