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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
---------------
Form 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended: December 31, 2000
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ______ to ______
Commission File Number 000-30828
PRECISE SOFTWARE SOLUTIONS LTD.
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(Exact Name of registrant as specified in its charter)
ISRAEL Not Applicable
------ --------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification
Number)
1 Hashikma Street
P.O. Box 88
Savyon, Israel 56518
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: 972 (3) 635-2566
Securities registered pursuant to Section 12(b) of the Act:
None
Securities registered pursuant to Section 12(g) of the Act:
Ordinary Shares, Par Value 0.03 NIS per share
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 report(s), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [_]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K 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. [_]
The aggregate market value of the voting stock held by non-affiliates of the
registrant, as of March 14, 2001, was approximately $370 million (based on the
closing price of the registrant's Ordinary Shares on March 14, 2001, of $14.69
per share).
The number of the registrant's Ordinary Shares outstanding as of March 14,
2001 was 26,011,761.
DOCUMENTS INCORPORATED BY REFERENCE
The registrant intends to file a proxy statement pursuant to Regulation 14A
within 120 days of the end of its fiscal year ended December 31, 2000. Portions
of such proxy statement are incorporated by reference into Part III of this
Report.
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PRECISE SOFTWARE SOLUTIONS LTD.
ANNUAL REPORT ON FORM 10-K
YEAR ENDED DECEMBER 31, 2000
TABLE OF CONTENTS
Page No.
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PART I
Item 1. Business................................................................................1
Item 2. Properties..............................................................................7
Item 3. Legal Proceedings.......................................................................7
Item 4. Submission of Matters to a Vote of Security Holders.....................................7
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters...................9
Item 6. Selected Consolidated Financial Data...................................................11
Item 7. Management's Discussion and Analysis of Financial Condition and Results of 12
Operations...............................................................................
Item 7A. Quantitative and Qualitative Disclosures About Market Risk.............................29
Item 8. Financial Statements and Supplementary Data............................................29
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial 29
Disclosure...............................................................................
PART III
Item 10. Directors and Executive Officers of the Registrant.....................................30
Item 11. Executive Compensation.................................................................30
Item 12. Security Ownership of Certain Beneficial Owners and Management of Precise..............30
Item 13. Certain Relationships and Related Transactions.........................................30
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K........................30
Index to Consolidated Financial Statements..........................................................F-1
SIGNATURES.........................................................................................II-1
INDEX TO EXHIBITS..................................................................................II-2
PART I
Except for the historical information contained herein, the matters discussed in
this Annual Report on Form 10-K are forward-looking statements that involve
risks and uncertainties. Precise makes such forward-looking statements under the
provision of the "Safe Harbor" section of the Private Securities Litigation
Reform Act of 1995. Any forward-looking statements should be considered in light
of the factors described below in Item 7 under "Factors That May Affect Future
Results." Actual results may vary materially from those projected, anticipated
or indicated in any forward-looking statements. In this Annual Report on Form
10-K, the words "anticipates," "believes," "expects," "intends," "future,"
"could," and similar words or expressions (as well as other words or expressions
referencing future events, conditions or circumstances) identify forward-looking
statements.
ITEM 1. BUSINESS
BUSINESS
OVERVIEW
Precise Software Solutions Ltd. is a provider of software that assists
organizations in monitoring and optimizing the performance of their Information
Technology infrastructure. This IT infrastructure consists of networks,
operating systems, servers, applications, databases and storage devices that
help manage traditional and electronic business activities. Our software allows
an organization to continuously monitor its infrastructure performance and be
alerted when performance parameters exceed user-established thresholds. When our
software detects a performance problem, it also provides technology support
personnel with a thorough set of diagnostic data that pinpoints the specific
cause of performance degradation and offers suggested alternatives to alleviate
the problem. Our software serves businesses that rely on traditional enterprise
applications to cut costs and improve efficiencies, as well as those that have
implemented e-business applications to generate revenues. Whether seeking to cut
costs or increase revenues, businesses have become increasingly reliant on the
proper functioning of their Information Technology infrastructure and our
software assists them in achieving this goal.
We were incorporated in 1990. Our U.S. subsidiary is located at 690 Canton
Street, Westwood, Massachusetts 02090, and our telephone number is (781)
461-0700. Our Israeli office is located at 1 Hashikma Street, Savyon, Israel
56518, and our telephone number is 972 (3) 635-2566. Our Web site is located at
www.precise.com, and information contained on it does not constitute part of
this Annual Report on Form 10-K. The terms "Precise," "we," "us" and "our" as
used in this Annual Report on Form 10-K refer to Precise Software Solutions Ltd.
and its subsidiaries as a combined entity, except where it is made clear that
such term means only the parent company.
INDUSTRY BACKGROUND
Global competitive pressures are driving businesses to continuously seek new
and better ways to develop, market and maintain their products and services, as
well as attract, serve and retain their customers. To enhance their
competitiveness, organizations are using Information Technology to achieve
competitive advantages and to serve business objectives. In particular, an
organization's Information Technology infrastructure, which consists of
networks, operating systems, servers, applications, databases and storage
devices, must proactively support emerging e-business initiatives. E-business
occurs when employees, customers, partners and vendors share information and
conduct business electronically. With the emergence of e-business, this
infrastructure is no longer just a cost center, but has become a means by which
an organization can increase operational and cost efficiencies and drive revenue
generation. The scope of e-business transactions is significant, ranging from
electronic bill presentment and payment transactions (a method of increasing
efficiencies) to connecting a best buyer to a seller in auction transactions (a
means for generating revenue) or through supply chain management.
E-business affects all layers of the Information Technology infrastructure
and all types of organizations. Enterprise Resource Planning, or ERP,
applications have been the means through which an organization controls, manages
and expands its business operations and achieves commonality of data and
process. Historically, organizations used ERP applications only for internal
transactions, such as retrieving records from a human resources database. With
the increasing adoption of e-business initiatives, however, organizations are
extending the use of ERP applications over the Internet to include external
users and to effect data exchange and e-commerce transactions. Not only are
traditional companies embracing these e-business activities by migrating their
businesses
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to the Web, but whole new categories of companies are emerging to take advantage
of these opportunities, including application service providers and management
service providers.
To enable and support e-business activities, a complex and layered
Information Technology infrastructure of technologies and services has evolved.
As technical and operational complexities have increased, so have user demands
for efficiency and performance. An organization must provide hundreds and
thousands of users with uninterrupted access to all of its systems, applications
and information sources. For example, organizations that are selling their
products online are accountable to their customers who can easily switch to a
competitor's Web site if they find a site is unavailable or performing poorly.
In addition, a rapidly growing database makes it difficult for decision makers
throughout the extended enterprise to acquire critical information that helps
them to make both strategic and tactical business decisions on a timely basis.
The management of this heterogeneous, distributed and rapidly-changing
Information Technology environment, which is supporting continuously increasing
transaction and data volumes, has become much more challenging. Efficient
management of the Information Technology infrastructure involves addressing the
needs and problems of all constituencies across the extended enterprise. Each
class of user has different performance requirements and defines, and refers to,
its own performance metrics and problems differently. As a result, technology
support personnel are faced with the ongoing challenge of reconciling these
disparate needs and problems before they can optimize performance across the
entire infrastructure. Equally challenging is the need to manage this
infrastructure without employing techniques or technologies that consume
additional resources and create further burdens on it. In addition,
infrastructure performance must align with business priorities so that, for
example, critical revenue-generating applications, such as completing an online
sale, are processed prior to non-revenue generating applications, such as
posting data to an organization's accounting system. Finally, management of the
infrastructure has become increasingly challenging for an organization due to
the increasing cost to hire and retain the necessary personnel to manage it and
the general shortage of qualified technology professionals.
There are a number of ways that technology support personnel have tried to
tackle the myriad of management issues they face. Technology support personnel
frequently use internally developed software to enhance the performance of their
Information Technology infrastructures. This customized software is often
costly, inflexible and limited in functionality. Organizations have also turned
to products provided by third party vendors to assist them in this management
effort. Although these products can assist in locating certain problems, they
often are costly and time consuming to deploy, unable to pinpoint the specific
cause of the problem and fail to show the impact of this problem on other areas
of the infrastructure. Importantly, many of these software products consume
additional database resources by employing technology that can monitor only by
connecting to the database, and in so doing, often exacerbating the cause of a
service problem. Since they consume resources through the monitoring process,
these software products frequently are limited in the speed and number of
transactions they can capture and they contribute to greater resource
consumption in proportion to the number of users and technology support
personnel involved. In addition, these software products often do not provide
suggested solutions, or suggest a wrong or incomplete solution. Finally, these
products do not proactively monitor the infrastructure in order to avoid
problems before performance is impacted.
Our software solutions provide an integrated end-to-end, correlated view of
infrastructure performance and identify the interrelationships among the
different components of a customer's IT infrastructure - applications, network,
operating systems, servers, databases and storage devices. By monitoring and
analyzing the overall performance of the IT infrastructure - from URL to SQL -
they pinpoint the root causes of performance degradation quickly and proactively
and determine their impacts on the entire IT infrastructure - before they affect
end-users. By identifying trends and deviations, and translating diverse
performance data into a common language, our solutions bridge the gap between
technology and business to facilitate performance optimization and strategic
planning. We call these solutions Precise/i3TM: Insight, Indepth and Inform.
Insight products contain our end-to-end technology; Indepth our drill-down
technology; and Inform our communications technology.
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PRODUCTS
Precise/i3 products include the following:
- ----------------------------------------- ----------------------------------------------------------------------------
PRODUCT FUNCTIONS
- ----------------------------------------- ----------------------------------------------------------------------------
Precise/Insight Monitors the time it takes for transactions to cross a user's Information
Technology infrastructure, giving the user a view of the total time and
the time spent in each technology component, and measures the efficiency
of a business transaction. This software collects response times,
regardless of the database, Oracle-based or otherwise, and is compatible
with our other products that provide the user with detailed information on
performance metrics within specific components of the user's Information
Technology environment.
- ----------------------------------------- ----------------------------------------------------------------------------
Precise/SQL Monitors, analyzes and helps tune Oracle-based applications and databases
to ensure that those applications perform at peak efficiency. After being
alerted to a performance issue, the software assists the user in
identifying the specific causes of slow performance. The product permits
users to view the access path that the database has chosen for a query
from an application, automatically generates Structured Query Language, or
SQL, statements that will access the database in a different manner and
projects the performance improvement if the change is made. In addition,
the software can simulate the result of a change in the way the database
is organized and provide a full cross-reference between database objects
and the statements that access them. Through an internal data warehouse
that we call the Precise Performance Warehouse, Precise/SQL supports
long-term analysis and proactive management by providing historical
performance information.
- ----------------------------------------- ----------------------------------------------------------------------------
Precise/Interpoint Works as an add-on product to Precise/SQL to optimize Oracle-based ERP
application performance by monitoring and helping tune the ERP
application. By tracing a query from the ERP application back to the
person or software that made the request, Precise/Interpoint provides
valuable information to the ERP manager concerning the source of
performance issues. The ERP manager can then implement changes suggested
by Precise/SQL or other changes to the ERP application to improve
performance.
- ----------------------------------------- ----------------------------------------------------------------------------
Precise/Diagnostic Center Provides visual indicators to quickly diagnose the performance of an
enterprise database environment. The software solution detects abnormal
performance events and signals the administrator via a real-time visual
dashboard. Intelligent display objects provide the entry point for drill
down analysis and root cause investigation. By providing "at a glance"
performance management, administrators see more information, more timely,
with more comprehension, minimizing the time to detect and correct
performance degradation. This product was formerly marketed as Savant
Diagnostic Center.
- ----------------------------------------- ----------------------------------------------------------------------------
Precise/Pulse! Monitors performance metrics, triggering alerts and/or tuning activity when
user-defined performance thresholds or baselines are exceeded. Once an alert
is triggered, the user can use other Precise products to locate and fix the
specific problem. This product is compatible with leading monitoring products
provided by other software vendors.
- ----------------------------------------- ----------------------------------------------------------------------------
Precise/Foresight A web based performance infrastructure management solution, released in the
first quarter of 2001, that brings the power of Precise's correlated
performance data to the IT executive via powerful trend and exception
reports. Built-in expert analysis and enterprise wide performance metrics
provide the IT team with the information they need to keep their systems
running at top speed on a 24 by 7 basis.
- ----------------------------------------- ----------------------------------------------------------------------------
Precise/Presto for EMC Extends functionality of Precise/SQL by showing the performance of a
storage device as it is affected by the application software's request for
data. Precise/Presto for EMC provides a consistent view of the data when
viewed from either the database or the storage. This product is marketed
and sold by EMC as DB Tuner.
- ----------------------------------------- ----------------------------------------------------------------------------
We plan to introduce an advanced suite of performance management solutions
targeted at specific market and business segments to answer the call for
business-focused solutions. The flexibility of multi-tier architectures has
increased the complexity of managing the performance of business applications.
We hope to simplify the task of performance improvement by providing an
integrated and correlated suite of products.
Despite our intentions, there can be no assurance that any products
currently under development, including those scheduled for near-term general
availability, or product integration efforts will be successfully completed or
made generally available on dates expected by us, or that when introduced, the
products will be free of defects or achieve market success. Our failure to
timely introduce or integrate products or release of products with defects could
negatively impact our revenue growth and operating results.
The software industry is characterized by rapid technological changes and is
highly competitive with respect to timely product innovation. In order to
maintain the usefulness of our products and their compatibility with modified
and new hardware and software, we must sometimes modify and enhance our products
and incur substantial associated expenses. From time to time, systems vendors
modify existing, or introduce new, hardware, operating
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system, and other system software. We must then adapt our products to
accommodate such changes. To date, we have been able to adapt our products to
such changes; however, there can be no guarantee that we will be able to
continue to do so. Our failure to do so would negatively impact our revenue
growth and operating results.
SALES AND MARKETING
We sell our software through direct sales, indirect channels, international
resellers and strategic relationships. To date, we have licensed our software to
over 1200 customers worldwide including licenses by our acquired subsidiaries
and through our distributors and strategic relationships. Our North American
sales organization is headquartered in Westwood, Massachusetts. We have
additional sales offices in the U.S. metropolitan areas of Atlanta, Bethesda,
Chicago, Costa Mesa, Dallas, Denver, New York and San Francisco and in Ottawa
and Toronto, Canada. Our international sales organization is based in
metropolitan Tel Aviv, Israel, and we have additional sales offices in
Australia, France, Germany, Benelux, and the United Kingdom.
DIRECT SALES. The sales team for each territory is comprised of a sales
manager, in-house account manager and systems engineer. The sales team for each
customer is responsible for qualifying leads, understanding the customer's
problem, providing the appropriate product information, and building and
maintaining relationships with personnel who have purchasing responsibility in
the customer's organization. Strategically, we use our direct sales force to
generate repeat sales from our installed customer base, negotiate site licenses,
sell products and our professional services, and introduce and gain immediate
feedback on our new products. Our sales cycle varies substantially from customer
to customer. When a prospect or an existing customer evaluates one of our
performance products for multiple departments or servers, the sales cycle
typically ranges from one to four months.
INDIRECT SALES. Our Precise Premier Partner Program is designed to attract
vendors that can establish new channels for our products in North and South
America. These vendors include application software vendors, system integrators,
and value-added resellers who market our products in Argentina, Brazil, Chile,
Colombia, Costa Rica, Mexico, Peru, the Unites States, Venezuela, and the West
Indies. The valued-added products and services of these vendors combine with our
products to deliver more complete products to our customers. Outside of North
and South America, we sell our products though resellers that report to our
metropolitan Tel Aviv office. These resellers market our products in Austria,
China, Czech Republic, Denmark, Finland, Hungary, Iceland, India, Israel, Italy,
Japan, Korea, Norway, Poland, Singapore, South Africa, Sweden, Switzerland, and
Taiwan.
STRATEGIC RELATIONSHIPS. We currently have a strategic relationship
established in March 1999 with one OEM, EMC Corporation, which began selling our
products in the fourth quarter of 1999. EMC markets an exclusive bundled version
of our Precise/SQL and Precise/Presto for EMC software, called Database (DB)
Tuner, to its customers for use solely with EMC's storage products. Under the
terms of our agreement with EMC, they pay us a fee on the sales of these
products to end users. The term of our agreement is five years and can be
extended for one-year periods but may be earlier terminated in the event of a
breach by either party. Our relationship with EMC affords us opportunities to
sell our products into the EMC operating environment. Revenue from EMC in 2000
represented more than 10% of our total revenues.
We also currently have a strategic relationship with Amdocs, a provider of
information systems solutions to telecommunications companies, to sell
Precise/SQL along with the Amdocs product offering. Under the terms of our
agreement, Amdocs pays us license and maintenance fees on the sale of these
products to end customers. This agreement expires in June 2001, but
automatically renews for additional one-year terms unless either Precise or
Amdocs notifies the other 30 days in advance of its desire to terminate the
agreement.
MARKETING ACTIVITIES. We undertake various marketing activities to generate
leads for our sales efforts and to enhance market awareness of our software and
services. Our marketing activities include company-sponsored seminars, and print
and electronic advertisements. We also seek to increase market awareness of our
software and services by working with industry analysts, Oracle user groups, and
the trade press to communicate our successful product implementations. We also
engage in targeted marketing through direct-mail lists and participation in
trade shows and speaking engagements. Our software trial program, which
generally runs for a seven day period and covers most of our products, allows us
to demonstrate our technology to potential customers.
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PROFESSIONAL SERVICES
We also provide professional services that deliver the technological
expertise our customers need to optimize the performance of their IT
infrastructures. Our complete suite of professional services offerings includes
remote management, performance audit and accelerator engagements, implementation
services, and training.
CUSTOMER SUPPORT
Our customer support group provides both pre- and post-sales technical
support to our customers and prospects. Our base level of e-mail, Web-, fax-,
and telephone-based support, which we provide during conventional business
hours, includes assistance with installation, configuration and initial product
setup, ongoing product support, and software maintenance and upgrade releases.
For additional fees, we provide support 24 hours per day, seven days per week,
throughout the year.
We provide customer support for North and South America through our
Westwood, Massachusetts office. We provide customer support in the rest of the
world through our office in Israel and our network of international resellers.
Our support agreements are generally 12 months in duration and are renewable at
the customer's option. Support agreements are generally priced at 15% of the
negotiated price of the license fee.
RESEARCH AND DEVELOPMENT
Our research and development organization is responsible for developing new
software products, enhancing core technologies, conducting product testing and
quality assurance, and ensuring the compatibility of our products with hardware
and software platforms. Our research and development staff is focused on
delivering products that will support our product development strategy. The
engineers are market oriented and maintain a close relationship with our sales
personnel as well as our customers to better understand their needs.
As of December 31, 2000, our research and development staff, based in
metropolitan Tel Aviv, Israel, Bethesda, Maryland and Denver, Colorado,
consisted of 66 employees. Our total expenses for research and development were
$4.99 million for the year ended December 31, 2000; $2.9 million for the year
ended December 31, 1999, and $2.2 million for the year ended December 31, 1998.
COMPETITION
The market for infrastructure performance management software is rapidly
evolving and intensely competitive. This market is characterized by rapid
technological change, evolving industry standards and changing customer
requirements. We expect competition to increase in the future. Our primary
competitors are BMC Software, Quest Software and Oracle with their built-in
performance management solution.
Many of our competitors and potential competitors have greater name
recognition, a larger installed customer base and significantly greater
financial, technical, marketing and other resources and experience than we do.
Our competitors may be able to respond more quickly to new or emerging
technologies and changes in customer requirements or devote greater resources to
the development, promotion and sale of their products than we can. In addition,
because there are relatively low barriers to entry in the software market, we
may encounter additional competition as other established and emerging companies
enter our field and introduce new products and technologies.
In addition to the competition that we may face because of the internal
development efforts of our competitors, current and potential competitors may
make strategic acquisitions or establish cooperative relationships among
themselves or with third parties, in turn increasing their ability to address
the needs of our current or prospective customers. Accordingly, it is possible
that new competitors or alliances among current and new competitors may emerge
and rapidly gain market share.
Many of our existing and potential customers evaluate on an on-going basis
whether to develop their own performance management software or purchase it from
outside suppliers. As a result, we must, on an on-going basis,
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educate existing and potential customers on the advantages of our software over
internally developed performance software as well as our competitors' products.
Our existing and potential customers have a pre-set budget for which we
compete along with our competitors. We currently compete primarily on the basis
of the following factors: breadth of functionality; product performance;
scalability; ease of installation and use; and price.
We believe that we currently compete favorably with respect to each of these
factors. However, the performance management market is still rapidly evolving,
and we may not be able to compete successfully against present or future
competitors, which could harm our operating results.
PROPRIETARY RIGHTS AND LICENSING
Our success and ability to compete are dependent on our ability to develop,
maintain and protect the proprietary aspects of our technology. We rely on a
combination of trademark, trade secret and copyright laws and contractual
restrictions to protect the proprietary aspects of our technology. We seek to
protect our source code for our software, documentation and other written
materials under trade secret and copyright law. We license our software to
end-users under signed license agreements and under electronic (shrink-wrap)
agreements that restrict the customer's use to its own operations and prohibit
disclosure to third parties. The enforceability of shrink-wrap licenses is
unproven in certain jurisdictions. Finally, we seek to avoid disclosure of our
intellectual property by requiring employees and consultants with access to our
proprietary information to execute confidentiality and assignment of invention
agreements with us and by restricting access to our source code.
Despite our efforts to protect our proprietary rights, unauthorized parties
may attempt to copy aspects of our technology or products or to obtain and use
information that we regard as proprietary. In addition, we sell our products
throughout the world. The laws of many countries do not protect our proprietary
rights to the same extent as the laws of Israel or the United States. Litigation
may be necessary in the future to enforce our intellectual property rights, to
protect our trade secrets and to determine the validity and scope of the
proprietary rights of others. Any resulting litigation, even if we ultimately
prevail, could result in substantial costs and diversion of resources and could
adversely affect our business and operating results.
A portion of the funding used to develop our Precise/SQL software came from
grants made by the Office of Chief Scientist of the Israel Ministry of Industry
and Commerce. As a result, this software may not be manufactured, nor may the
technology embodied in this software, be transferred outside of Israel without
appropriate governmental approvals. We currently manufacture Precise/SQL in
Israel. These restrictions do not apply to the sale or export from Israel of
Precise/SQL. Under the terms of the grants, we owe royalties to the Israeli
government on sales of Precise/SQL until we have repaid an amount equal to 100%
to 150% of the amount of the grants we received. These restrictions continue to
apply to us even after we have paid the full amount of royalties. If the Office
of Chief Scientist consents to the manufacture of Precise/SQL outside Israel,
the regulations prescribe the payment of increased royalties, ranging from 120%
to 300% of the amount of the grant, depending on the percentage of foreign
manufacture.
Our success and ability to compete are also dependent on our ability to
operate without infringing upon the proprietary rights of others. In the event
of a successful claim of infringement against us and our failure or inability to
license the infringed technology on acceptable terms, our business and operating
results would be significantly harmed.
We integrate various third party software products as components of our
software under the terms of licensing agreements which permit us to do so. To
date, the integrated software components have not been related to the core
elements of our software products. The terms of the license agreements are
generally renewable or we believe we could license or develop alternative
components at a reasonable cost if the need arose.
Precise/SQL, Precise/Pulse! Precise/Interpoint, Precise/Presto for EMC,
Precise/Foresight, Precise/i3, Precise/Diagnostic Center, Precise/Swift-e and
the Precise Software Solutions logo are trademarks or service marks of Precise
Software Solutions Ltd. or our U.S. based subsidiary, Precise Software
Solutions, Inc. This Annual Report
6
on Form 10-K also contains trademarks, trade names and service marks of other
companies that are the property of their respective owners.
EMPLOYEES
At December 31, 2000, we had a total of 261 employees. None of our employees
is subject to a collective bargaining agreement and we believe that our
relations with our employees are good.
Certain provisions of the collective bargaining agreement between the
Histadrut (the General Federation of Labor in Israel) and the Coordination
Bureau of Economic Organizations (including the Industrialists' Association of
Israel) apply to our Israeli employees by virtue of expansion orders of the
Israeli Ministry of Labor and Welfare. These provisions principally concern the
length of the work day and the work week, minimum wages for workers,
contributions to pension funds, insurance for work-related accidents, procedures
for dismissing employees, determination of severance pay and other conditions of
employment. Furthermore, these provisions provide that the wages of most of our
employees are automatically adjusted based on changes in the Israeli Consumer
Price Index. The amount and frequency of these adjustments are modified from
time to time.
Israeli law generally requires the payment of severance pay by employers
upon the retirement or death of an employee or termination of employment without
due cause. Precise currently funds its ongoing severance obligations by making
monthly payments to approved severance funds or insurance policies. In addition,
according to the National Insurance Law, Israeli employees and employers are
required to pay specified sums to the National Insurance Institute, which is
similar to the U.S. Social Security Administration. Since January 1, 1995, these
amounts also include payments for national health insurance. The payments to the
National Insurance Institute are approximately 14.5% of wages (up to a specified
amount), of which the employee contributes approximately 66% and the employer
contributes approximately 34%.
FINANCIAL INFORMATION ABOUT GEOGRAPHIC AREAS
For further information concerning the geographic distribution of our
revenues and assets, please refer to Note 12 to the consolidated financial
statements included in Part II of this Annual Report on Form 10-K.
ITEM 2. PROPERTIES
The headquarters of our U.S. subsidiary, located in Westwood, Massachusetts,
is occupied under a lease which expires in July 2004. We occupy our Israeli
offices, located in metropolitan Tel Aviv, Israel, under leases that expire in
August 2001 and December 2001. In addition, we have also entered into leasing
arrangements for space in Australia, France, Germany, Holland and the United
Kingdom. We believe that our existing facilities are adequate for our current
needs and that suitable additional or alternative space should be available in
the future on commercially reasonable terms as needed.
ITEM 3. LEGAL PROCEEDINGS
We are not a party to any material pending legal proceedings.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of our security holders during the
fourth quarter of the fiscal year ended December 31, 2000.
EXECUTIVE OFFICERS OF THE REGISTRANT
SHIMON ALON has served as our Chief Executive Officer since September 1997
and as one of the Company's directors since December 1998. From September 1997
until December 2000, he also served as President. Mr. Alon served at Scitex
Corporation, a supplier of digital imaging solutions for graphic communication
image processing equipment, and its affiliates in varying executive management,
sales, marketing, and customer support capacities from October 1982 to September
1996. From November 1995 to September 1996, Mr. Alon was Scitex
7
Corporation's Senior Executive Vice President of the Graphic Art Division. From
May 1995 to September 1996, Mr. Alon was Scitex America Corporation's President
and Chief Executive Officer. From January 1993 to May 1995, Mr. Alon served
Scitex Europe Ltd. as Managing Director. Mr. Alon serves as a director of
ORBIT/FR, Inc.
ITZHAK "AKI" RATNER has served as our President since December 2000. Prior
to that, he served as General Manager of our Israeli office from May 1997 to
December 2000 and served as our Vice President of Research and Development from
May 1997 to September 2000. Before joining Precise, Mr. Ratner served in the
Israeli Air Force from August 1981 to June 1996 in various software development
management positions. From February 1993 to June 1996, Mr. Ratner served in the
Israeli Air Force as a lieutenant colonel in charge of client/server project
development.
J. BENJAMIN H. NYE has served as our Vice President of Finance and Chief
Financial Officer since February 2000. Prior to joining Precise, Mr. Nye was a
principal of Allied Capital Corporation, a publicly-traded investment fund,
where he structured and oversaw private debt and equity investments in a
portfolio of operating companies. From February 1993 to June 1997, Mr. Nye was a
senior advisor to U.S. Treasury Secretaries Lloyd Bentsen and Robert Rubin in
the U.S. Department of the Treasury.
JOSEPH R. MCCURDY has served as Executive Vice President of Business
Operations since January 2001. He is responsible for managing our distribution
channels - both direct sales and alliance partnerships. Prior to joining
Precise, from October 1999 to April 2000, Mr. McCurdy served as the President
and Chief Executive Officer of Tempest Software, Inc. From September 1991 to
June 1999, Mr. McCurdy served as Vice President at Boole & Babbage (acquired by
BMC Software) where he was responsible for sales and field support in the
northeast, southeast and the federal government. Concurrently, Mr. McCurdy
served as the Site Manager for the Storage Division with responsibility for
development, marketing, administration and sales. Mr. McCurdy has also held
senior sales positions at XA Systems Corp, Shared Medical Systems, and IBM.
OTHER KEY EMPLOYEES
DANIEL GERMAIN has been Vice President and Director of Customer Service of
our U.S. subsidiary since November 1995. From September 1994 to November 1995,
Mr. Germain served Open Data Inc., a data access software company, as Product
Manager and Senior Systems Engineer. From August 1991 to September 1994, Mr.
Germain served as Senior Systems Engineer for Information Builders, Inc., an
information systems software developer.
MICHAEL KILLORAN has served as Vice President of North American Sales of our
U.S. subsidiary since October 1999. From June 1996 to October 1999, Mr. Killoran
served our U.S. subsidiary in various regional sales capacities. From October
1992 to June 1996, Mr. Killoran was a Regional Sales Manager with BMC Software
(formerly Boole & Babbage Company), a developer of systems management software.
ANDREW B. KNIGHT has served as the Director for Knight Fisk Software, Ltd.,
or Knight Fisk, the U.K.-based distributor of our software that we acquired in
February 2000, since July 1998. From April 1995 to June 1998, Mr. Knight was the
Director for Knight Fisk. From October 1983 to March 1995, Mr. Knight was
self-employed as a professional consultant.
HAIM KOPANS has served as our Vice President of Product Management since
March 1997 and is one of our founders. From August 1990 to March 1997, Mr.
Kopans served as our Development Manager. Mr. Kopans was a database consultant
and Product Division Manager with SCP Systems, a software distributor and
provider of consulting services, from February 1989 to August 1990 and a DB2
systems analyst for the Israeli Defense Forces prior to that. Mr. Kopans is a
Certified Systems Analyst.
RUSSELL LUKE has served as Director of Sales for Knight Fisk since February
1998. From March 1997 to January 1998, Mr. Luke was the Business Development
Manager with Remedy Corporation, a software developer. From March 1996 to March
1997, Mr. Luke served as Business Development Manager with BRIO. From January
1994 to February 1996, Mr. Luke served as a sales manager with Business Objects.
8
JOHN MCHUGH has served as Vice President of Marketing of our U.S. subsidiary
since October 1998. Prior to October 1998, Mr. McHugh served Sterling/Cayenne
Software, Inc., a development and data modeling software vendor, as Director of
Product Marketing for Information Technology Solutions and as Director of
Commercial Markets from June 1996 to October 1998. Cayenne was formed from the
merger of Bachman and Cadre. From January 1994 to June 1996, Mr. McHugh served
as Senior Marketing Manager for Object Design, Inc., an object database vendor.
RAMI SCHWARTZ has served as our Vice President of Research and Development
since September 2000. From October 1999 to September 2000, Mr. Schwartz was the
Vice President of Development of Amdocs. From June 1985 to June 1999, Mr.
Schwartz served with the Israeli Air Force Software Development Division most
recently as its Division Commander.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Precise commenced its initial public offering of ordinary shares on June 29,
2000 at a price to the public of $16.00 per share. As of March 14, 2001, there
were approximately 155 holders of record of Precise's ordinary shares. Precise's
ordinary shares are listed and traded on the Nasdaq National Market under the
symbol "PRSE."
The following table sets forth, for the periods indicated, the range of high
and low sales prices for Precise's ordinary shares since its initial public
offering, all as reported by the Nasdaq National Market.
High Low
---- ---
June 30, 2000........................................ $ 28.11/16 $ 18.3/4
July 1, 2000 - September 30, 2000.................... $ 44.3/8 $ 18.7/16
October 1, 2000 - December 31, 2000.................. $ 42.3/8 $ 19.13/16
Precise has not paid any cash dividends on its ordinary shares and currently
intends to retain any future earnings for use in its business. Precise does not
anticipate that any cash dividends will be declared or paid on the ordinary
shares in the foreseeable future.
RECENT SALES OF UNREGISTERED SECURITIES
During the fiscal year ended December 31, 2000, Precise issued the following
securities that were not registered under the Securities Act of 1933, as
amended:
(a) ISSUANCES OF ORDINARY SHARES
In June 2000, Precise issued 11,994,722 ordinary shares in connection
with the conversion of 7,118,922 outstanding preferred A shares and
4,875,800 outstanding preferred B shares.
In June 2000, Precise issued 1,309,062 ordinary shares in connection
with the exercise of warrants held by existing investors in Precise and
management. Each of these warrants had a stated exercise price ranging
from $.02 to $1.41 per share. Precise received an aggregate of $192,694
from the exercise of the warrants. Certain of the warrants were
exercised through a cashless exercise feature.
In July 2000, Precise issued 312,500 ordinary shares to EMC Investment
Corporation for $5,000,000 and issued 113,806 ordinary shares upon
exercise of warrants held by an existing investor at an aggregate
exercise price of $46,503.
In December 2000, Precise acquired Savant Corporation. In connection
with this acquisition, and pursuant to the terms of the Agreement and
Plan of Merger dated October 27, 2000, Precise issued an aggregate of
9
403,189 ordinary shares to the shareholders of Savant as partial
consideration for all of the outstanding capital stock of Savant.
(b) EXERCISES OF OPTIONS
On September 12, 2000, Precise filed a registration statement on Form
S-8 for the purpose of registering the sale of its ordinary shares
pursuant to the grant of options granted to Precise's employees,
directors and consultants pursuant to Precise's option plans and
employee share purchase plan. From January 1, 2000 through September
11, 2000, Precise issued 122,496 ordinary shares in connection with the
exercise of options at exercise prices ranging from $0.375 to $1.50,
for an aggregate purchase price of $99,442 pursuant to the exercise of
options.
No underwriters were involved in the foregoing sales of securities. Such
sales were made in reliance upon an exemption from the registration provisions
of the Securities Act set forth in Section 4(2) thereof relative to sales by an
issuer not involving any public offering or the rules and regulations thereunder
or, in the case of the exercise of options, Rule 701 under the Securities Act or
were issued outside of the United States in transactions not subject to the
United States federal securities laws. All of the foregoing securities are
deemed restricted securities for purposes of the Securities Act.
10
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
You should read the following selected consolidated financial data together
with "Management's Discussion and Analysis of Financial Condition and Results of
Operations" and the consolidated financial statements and the related notes
included elsewhere in this Annual Report on Form 10-K.
The selected consolidated statement of operations data set forth below for
the years ended December 31, 1998, 1999 and 2000, and the selected consolidated
balance sheet data as of December 31, 1999 and 2000 are derived from our audited
consolidated financial statements that are included elsewhere in this Report.
The selected consolidated statement of operations data for the years ended
December 31, 1996 and 1997 and the selected consolidated balance sheet data as
of December 31, 1996, 1997 and 1998 are derived from audited consolidated
financial statements that are not included in this Report. These financial
statements have been prepared in accordance with U.S. generally accepted
accounting principles.
Year Ended December 31,
---------------------------------------------------------------------
1996 1997 1998 1999 2000
--------- --------- --------- --------- ---------
(in thousands, except per share data)
Consolidated Statement of Operations Data:
Revenues:
Software licenses ..................................... $ 954 $ 2,382 $ 5,331 $ 9,770 $ 22,968
Services .............................................. 272 406 858 1,844 4,580
--------- --------- --------- --------- ---------
Total revenues .................................. 1,226 2,788 6,189 11,614 27,548
Cost of revenues:
Software licenses ..................................... 130 349 522 741 742
Services, net ......................................... 54 86 198 906 1,693
--------- --------- --------- --------- ---------
Total cost of revenues .......................... 184 435 720 1,647 2,435
--------- --------- --------- --------- ---------
Gross profit ............................................ 1,042 2,353 5,469 9,967 25,113
--------- --------- --------- --------- ---------
Operating expenses:
Research and development, net ......................... 602 1,737 2,214 2,891 4,987
Sales and marketing, net .............................. 2,498 3,278 5,739 7,913 20,749
General and administrative, net ....................... 1,264 1,341 1,272 1,598 3,923
Amortization of deferred stock compensation, goodwill
and intangible assets ............................... -- -- 300 234 6,250
In-process research and development write-off ......... -- -- -- -- 2,200
--------- --------- --------- --------- ---------
Total operating expenses ........................ 4,364 6,356 9,525 12,636 38,109
--------- --------- --------- --------- ---------
Operating loss .......................................... (3,322) (4,003) (4,056) (2,669) (12,996)
Financial income (expenses), net ........................ 60 (202) 34 71 3,091
--------- --------- --------- --------- ---------
Loss from continuing operations ......................... (3,262) (4,205) (4,022) (2,598) (9,905)
Income (loss) from discontinued operations .............. 1,669 (192) -- -- --
Gain from disposal of business segment .................. -- 182 -- -- --
--------- --------- --------- --------- ---------
Net loss ................................................ $ (1,593) $ (4,215) $ (4,022) $ (2,598) $ (9,905)
========= ========= ========= ========= =========
Net earnings (loss) per share:
Continuing operations ................................. $ (1.83) $ (2.35) $ (1.31) $ (0.79) $ (0.77)
Discontinued operations ............................... 0.94 (0.01) -- -- --
--------- --------- --------- --------- ---------
Basic and diluted net loss per share .................... $ (0.89) $ (2.36) $ (1.31) $ (0.79) $ (0.77)
========= ========= ========= ========= =========
Weighted average number of shares used in computing basic
and diluted net loss per share ........................ 1,783 1,785 3,077 3,299 12,901
========= ========= ========= ========= =========
December 31,
---------------------------------------------------------------------
1996 1997 1998 1999 2000
--------- --------- --------- --------- ---------
(in thousands)
Consolidated Balance Sheet Data:
Cash and cash equivalents ............................... $ 1,561 $ 301 $ 844 $ 6,693 $ 82,218
Working capital (deficit) ............................... 587 (3,656) 242 7,709 120,147
Total assets ............................................ 4,301 2,673 4,333 12,986 178,681
Shareholders' equity (deficiency) ....................... (1,124) (3,079) 742 8,293 166,876
11
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion contains forward-looking statements which involve
risks and uncertainties. Precise makes such forward-looking statements under the
provision of the "Safe Harbor" section of the Private Securities Litigation
Reform Act of 1995. Any forward-looking statements should be considered in light
of the factors described below in this Item 7 under "Factors That May Affect
Future Results." Actual results may vary materially from those projected,
anticipated or indicated in any forward-looking statements. In this Item 7, the
words "anticipates," "believes," "expects," "intends," "future," "could," and
similar words or expressions (as well as other words or expressions referencing
future events, conditions, or circumstances) identify forward-looking
statements. The following discussion and analysis should be read in conjunction
with "Selected Consolidated Financial Data" and the accompanying consolidated
financial statements and related notes included elsewhere in this Form 10-K.
OVERVIEW
Precise is a provider of software that assists organizations in monitoring
and optimizing the performance of their complex Information Technology
infrastructure. We were incorporated in November 1990. Initially, we focused on
developing and marketing performance management software for mainframe computer
systems. In 1995, we shifted our focus from performance management software for
mainframe systems to Information Technology infrastructure performance
management software for Oracle database environments. In 1996, we released the
initial version of our Precise/SQL software for database monitoring. In 1998, we
released several new products, including our Precise/Pulse! software for
proactive monitoring, Precise/Presto for EMC software for monitoring databases
along with EMC storage systems and Precise/Interpoint software for monitoring
ERP applications. In 1999, we introduced our Precise/Swift-e software for IT
infrastructure performance management in e-business environments and in April
2000, we introduced Precise/Insight.
In February 2000, we completed the acquisition of all of the capital stock
of Knight Fisk Software Ltd., or Knight Fisk, our U.K.-based distributor, for
cash and options to purchase our ordinary shares. The business combination has
been accounted for using the purchase method and, accordingly, the purchase
price has been allocated to the fair value of the tangible assets acquired and
the liabilities assumed. Of the total purchase price, approximately $0.7 million
was allocated to goodwill, representing the excess of the aggregate purchase
price over the fair value of the net liabilities assumed. Prior to the Knight
Fisk acquisition, we sold our products to Knight Fisk at discounts of up to 45%
off our list price and we recognized revenues based on our sales to Knight Fisk
at these discounted prices. Knight Fisk, in turn, would resell these products to
third party end users and recognize revenues based on these sales. Since Knight
Fisk is now our U.K. subsidiary, we recognize revenues on Knight Fisk sales to
third party end users based on the actual price of the products sold by Knight
Fisk, as required by principles of consolidation, rather than based on our sales
to Knight Fisk at a discounted price. As a result, our total revenues from the
U.K. have increased. Our operating expenses in the U.K. have increased due to
the Knight Fisk acquisition.
In December 2000, we completed the acquisition of all of the capital stock
of Savant Corporation for $16.7 million in a combination of cash and ordinary
shares. We issued 403,189 ordinary shares, assumed vested options and warrants
to purchase an additional 109,256 ordinary shares and paid $2.8 million in cash
for the acquisition. In addition, if revenue from Savant's products and services
exceed certain thresholds in 2001, we will pay up to an additional $27 million
in our ordinary shares. The business combination has been accounted for using
the purchase method and, accordingly, the purchase price has been allocated to
the fair value of the tangible assets acquired and the liabilities assumed. The
Company acquired negative tangible assets of $0.6 million. Of the total purchase
price which included direct acquisition costs, $11.9 million was allocated to
goodwill-type assets, representing the excess of the aggregate purchase price
over the fair value of net liabilities assumed, $3.2 million was allocated to
purchased technology, and a one-time charge of approximately $2.2 million on our
statement of operations for acquired in-process research and development was
taken in December 2000.
We derive our revenues from the sale of software licenses and from services,
consisting primarily of annual maintenance fees, and, to a lesser extent,
professional services. Our products are sold worldwide through a combination of
our direct sales force and indirect sales channels, including original equipment
manufacturers, or OEMs, and resellers. Our services revenues consist primarily
of fees derived from annual maintenance agreements.
12
On January 1, 1998, we adopted American Institute of Certified Public
Accountants Statement of Position 97-2, or SOP 97-2, related to revenue
recognition for software products, and on March 15, 1999, we adopted SOP 98-9,
related to software arrangements involving multiple elements. During the fourth
quarter of 2000, we adopted Staff Accounting Bulletin No. 101 (SAB 101), which
summarizes the views of the staff of the U.S. Securities and Exchange Commission
in applying generally accepted accounting principles to revenue recognition.
Revenues from our OEM, EMC Corporation, are recognized when we receive reports
of fees due upon the sublicensing of our products by EMC. Software license
revenues on sales to resellers and end users are recognized when:
persuasive evidence of an agreement exists;
the product has been delivered;
all license payments are due within one year;
vendor-specific objective evidence exists;
the license fee is fixed or determinable; and
collection of the fee is probable.
Maintenance-related service revenues are recognized ratably over the term of
the maintenance agreement, which is typically one year. Consulting and training
revenues are recognized at the time the services are rendered.
Where software arrangements involve multiple elements, revenue is allocated
to each element based on vendor specific objective evidence, or VSOE, of the
relative fair values of each element in the arrangement in accordance with the
"residual method" prescribed by SOP 98-9. Our VSOE used to allocate the sales
price to training and maintenance is based on the price charged when these
elements are sold separately. License revenues are recorded based on the
residual method. Under the residual method, revenue is recognized for the
delivered elements when (1) there is VSOE of the fair values of all the
undelivered elements other than those accounted for using long term contract
accounting and (2) all revenue recognition criteria of SOP 97-2, as amended, are
satisfied.
Our consolidated financial statements, which are included elsewhere in this
report, are prepared in accordance with U.S. generally accepted accounting
principles. The functional currency of our operations is the U.S. dollar, which
is the primary currency in the economic environment in which we conduct the
majority of our business. We have operations in the U.S., the U.K., Israel,
Benelux, Australia, Germany and France where business is usually conducted using
the local currencies. We do not engage in any currency or exchange rate hedging
activities to mitigate our exposure to these fluctuations. We may, however,
engage in these types of transactions in the future.
13
RESULTS OF OPERATIONS
The following table presents certain consolidated statement of operations
data as a percentage of total revenues for the periods indicated:
Years Ended December 31,
Percent of Total Revenues: 1998 1999 2000
----- ----- -----
Revenues:
Software licenses ................................. 86.1% 84.1% 83.4%
Services .......................................... 13.9 15.9 16.6
----- ----- -----
Total revenues ................................. 100.0 100.0 100.0
Cost of revenues:
Software licenses ................................. 8.4 6.4 2.7
Services, net ..................................... 3.2 7.8 6.1
----- ----- -----
Total cost of revenues ......................... 11.6 14.2 8.8
----- ----- -----
Gross profit ......................................... 88.4 85.8 91.2
Operating expenses:
Research and development, net ...................... 35.8 24.9 18.1
Sales and marketing, net ........................... 92.7 68.1 75.3
General and administrative, net ..................... 20.6 13.8 14.2
Amortization of deferred stock compensation, goodwill
and intangible assets ........................... 4.8 2.0 22.7
In-process research and development write-off ....... 0.0 0.0 8.0
----- ----- -----
Total operating expenses ....................... 153.9 108.8 138.3
----- ----- -----
Operating loss ....................................... (65.5) (23.0) (47.1)
Financial income, net ................................ 0.5 0.6 11.2
----- ----- -----
Net loss ............................................. (65.0)% (22.4)% (35.9)%
===== ===== =====
YEARS ENDED DECEMBER 31, 1998, 1999, AND 2000
REVENUES
We derive our revenues from the sale of software licenses and from services
consisting primarily of maintenance fees, and, to a lesser extent, professional
services. Total revenues were $6.2 million, $11.6 million, and $27.5 million in
1998, 1999, and 2000, respectively, representing an increase of $5.4 million, or
87%, from 1998 to 1999, and an increase of $15.9 million, or 137%, from 1999 to
2000. No end user customer accounted for more than 10% of total revenues in
1998. One customer accounted for 15.3% of total revenues in 1999. Our OEM
channel, which bundled our products for sale to end user customers through EMC
Corporation, accounted for 23.1% of total revenues in 2000.
Revenues from sales of software licenses were $5.3 million, $9.8 million,
and $23.0 million in 1998, 1999, and 2000, respectively, representing an
increase of $4.5 million, or 85%, from 1998 to 1999, and an increase of $13.2
million, or 135%, from 1999 to 2000. The increase in software license revenues
from 1998 to 1999 is due to the increased volume of license sales, which is
attributable to the expansion of our direct sales force and indirect sales
channels, and recurring sales to our installed base. The increase in software
licenses from 1999 to 2000 is due to the increased volume of license sales,
which is attributable to continued expansion of the direct sales force and
indirect sales channels, and the strength of our OEM relationship.
Revenues from services were $0.9 million, $1.8 million, and $4.6 million in
1998, 1999, and 2000 respectively, representing an increase of $0.9 million, or
100%, from 1998 to 1999, and an increase of $2.8 million, or 156%, from 1999 to
2000. The increase in service revenues from 1998 to 1999 is principally
attributable to additional maintenance agreements in the amount of approximately
$0.8 million resulting from new sales of software licenses and renewals of
annual maintenance agreements with existing customers. The increase in service
revenue from 1999 to 2000 is attributable to additional maintenance agreements
in the amount of approximately $1.8 million resulting from new sales of software
licenses and renewals of annual maintenance agreements with existing customers.
The professional consulting business was expanded in 2000 and resulted in an
increase of approximately $1.0 million in consulting revenue over 1999.
14
COST OF REVENUES
Cost of revenues consists of costs associated with generating software
license and service revenues. Cost of revenues were $0.7 million, $1.6 million,
and $2.4 million in 1998, 1999, and 2000, respectively, representing an increase
of $0.9 million, or 129%, from 1998 to 1999, and an increase of $0.8 million, or
50%, from 1999 to 2000. Cost of revenues as a percentage of total revenues were
12%, 14%, and 9% in 1998, 1999, and 2000, respectively.
Cost of software license revenues consists primarily of royalties to the
government of Israel as consideration for royalty-bearing marketing and research
and development grants received in previous years and, to a lesser extent,
production costs. Cost of software license revenues were $0.5 million, $0.7
million, and $0.7 million in 1998, 1999, and 2000, respectively, representing an
increase of $0.2 million, or 40%, from 1998 to 1999, and cost of software
licenses remained constant from 1999 to 2000. The increase from 1998 to 1999 is
due to the increase in royalties owed to the Government of Israel as a result of
the increase in sales of software licenses. Cost of software licenses remained
constant from 1999 to 2000 even though license sales increased due to the
accrual in the first quarter of 2000 of the full amount of the royalty owed to
the Government of Israel Fund for the Encouragement of Marketing Activities
which represented a cost of 4% of the increase in export sales out of Israel in
a given period. Cost of software license revenues as a percentage of total
software license revenues were 10%, 8%, and 3% in 1998, 1999, and 2000,
respectively.
Cost of service revenues consists primarily of costs related to personnel
providing customer support and professional services. Cost of service revenues
were $0.2 million, $0.9 million, and $1.7 million in 1998, 1999, and 2000,
respectively, representing an increase of $0.7 million, or 350%, from 1998 to
1999, and an increase of $0.8 million, or 89%, from 1999 to 2000. Cost of
service revenues as a percentage of service revenues were 23%, 49%, and 37% in
1998, 1999, and 2000, respectively. The increase from 1998 to 1999 is due to the
increase in the number of customer support personnel hired to service our
growing customer base and to the hiring during the latter half of 1999 of
personnel to provide professional services. The increase from 1999 to 2000 is
due to the continued increase in the number of customer support personnel hired
to service our growing customer base and to the hiring of additional personnel
to provide professional services in 2000.
RESEARCH AND DEVELOPMENT
Research and development expenses consist primarily of costs related to
research and development personnel, including salaries and other
personnel-related expenses, sub-contracting fees, facilities and computer
equipment used in our product and technology development. Research and
development expenses were $2.2 million, $2.9 million, and $5.0 million in 1998,
1999, and 2000, respectively, representing an increase of $0.7 million, or 32%,
from 1998 to 1999, and an increase of $2.1 million, or 72%, from 1999 to 2000.
The increase from 1998 to 1999 was primarily related to expenses of
approximately $0.5 million in headcount related costs due to the increase in the
number of software developers and quality assurance personnel engaged in the
continuing enhancement of our software suite. The increase from 1999 to 2000 was
attributable to the cost associated with the development of new products to
enhance our software suite, including Insight and Foresight, which were
introduced to the market in 2000 and early 2001, respectively. The increase was
primarily related to expenses of approximately $1.6 million in headcount related
costs due to the increase in the number of software developers and quality
assurance personnel. Research and development expenses as a percentage of total
revenues were 36%, 25%, and 18% in 1998, 1999, and 2000, respectively.
SALES AND MARKETING
Sales and marketing expenses consist primarily of salaries and other
personnel-related expenses, commission and other costs associated with our sales
and marketing efforts. Sales and marketing expenses were $5.7 million, $7.9
million, and $20.7 million in 1998, 1999, and 2000, respectively, representing
an increase of $2.2 million, or 39%, from 1998 to 1999, and an increase of $12.8
million, or 162%, from 1999 to 2000. The increase from 1998 to 1999 is primarily
due to an increase in payroll and headcount related expenses of $1.4 million
related to the increase in the number of people comprising our direct sales
force and an increase in commission expenses of approximately $0.7 million
attributable to the increase in software license revenues. The increase from
1999 to 2000 is primarily due to an increase in payroll and headcount related
expenses of $5.9 million related to the increase in the number of people
comprising our direct sales force, an increase in commission expenses of
approximately $1.4 million
15
attributable to the increase in software license revenues, and an increase of
approximately $1.4 million in marketing communications such as trade shows,
seminars, and advertising. Sales and marketing expenses as a percentage of total
revenues were 93%, 68%, and 75% in 1998, 1999, and 2000, respectively. The
percentage decreased from 1998 to 1999 as sales personnel hired in 1998 became
more productive. The percentage increase from 1999 to 2000 was due to increased
marketing activity, increased personnel hired to expand the direct sales force,
and the opening of new international sales channels.
GENERAL AND ADMINISTRATIVE
General and administrative expenses consist primarily of salaries and other
personnel-related expenses from our administrative and finance personnel,
facilities, computer equipment and professional services fees. General and
administrative expenses were $1.3 million, $1.6 million, and $3.9 million in
1998, 1999, and 2000, respectively, representing an increase of $0.3 million, or
23%, from 1998 to 1999, and an increase of $2.3 million, or 144%, from 1999 to
2000. The increase from 1998 to 1999 is attributable to the increase in payroll
and related expenses from additional personnel hired during 1999. The increase
from 1999 to 2000 is attributable to an increase of $1.8 million in payroll and
headcount related expenses. General and administrative expenses as a percentage
of total revenues were 21%, 14%, and 14% in 1998, 1999, and 2000, respectively.
The percent decrease from 1998 to 1999 was a result of the company beginning to
realize operating leverage from our established infrastructure. This percentage
remained constant from 1999 to 2000 as the established infrastructure continued
to grow at the same rate to support the company's revenue growth and obligations
as a public company.
AMORTIZATION OF DEFERRED STOCK COMPENSATION, GOODWILL AND INTANGIBLE
ASSETS
Amortization of deferred stock compensation, goodwill and intangible assets
were $0.3 million, $0.2 million, and $ 6.3 million in 1998, 1999, and 2000,
respectively, representing a decrease of $0.1 million, or 33%, from 1998 to
1999, and an increase of $6.1 million from 1999 to 2000. The 1998 and 1999
expense remained relatively constant and represented compensation costs related
to the grant of options to purchase ordinary shares at less than fair market
value. The increase from 1999 to 2000 is attributable to an increase of $6.0
million in compensation costs.
FINANCIAL INCOME, NET
Financial income, net was $30,000, $70,000, and $3.1 million in 1998, 1999,
and 2000, respectively, representing an increase of $40,000, from 1998 to 1999,
and an increase of $3.0 million from 1999 to 2000. The increase from 1999 to
2000 is attributable to interest earned on the investment of the initial public
offering and secondary offering proceeds in marketable securities.
16
QUARTERLY RESULTS OF OPERATIONS
The following table presents certain consolidated statement of operations
data for each quarter of 1999 and 2000. We believe this information has been
prepared on the same basis as our annual consolidated financial statements and
includes all adjustments, consisting only of normal recurring adjustments,
necessary for a fair presentation of the information for the quarters presented.
This information should be read together with the consolidated financial
statements and the related notes included elsewhere in this Annual Report on
Form 10-K. The operating results for any quarter are not necessarily indicative
of the results for any future period.
Three Months Ended
Mar 31, June 30, Sept 30, Dec 31, Mar 31, June 30, Sept 30, Dec 31,
1999 1999 1999 1999 2000 2000 2000 2000
-------- -------- ------- ------- -------- -------- -------- ---------
Revenues:
Software licenses ............... $ 1,941 $ 2,072 $ 2,585 $ 3,172 $ 3,588 $ 4,875 $ 6,412 $ 8,093
Services ........................ 290 396 484 674 954 870 1,227 1,529
-------- -------- ------- ------- -------- -------- -------- ---------
Total revenues ........... 2,231 2,468 3,069 3,846 4,542 5,745 7,639 9,622
Cost of revenues:
Software licenses ............... 156 167 202 216 116 181 187 258
Services, net ................... 87 139 196 484 356 411 407 519
-------- -------- ------- ------- -------- -------- -------- ---------
Total cost of revenues ... 243 306 398 700 472 592 594 777
-------- -------- ------- ------- -------- -------- -------- ---------
Gross profit ...................... 1,988 2,162 2,671 3,146 4,070 5,153 7,045 8,845
Operating expenses:
Research and development, net ... 732 690 691 778 1,019 1,032 1,386 1,550
Sales and marketing, net ........ 1,520 1,628 1,969 2,746 3,754 4,555 5,478 6,962
General and administrative, net . 397 343 389 469 609 758 1,273 1,283
Amortization of deferred stock
compensation, goodwill and
intangible assets .............. 30 42 23 189 780 2,938 1,235 1,297
In-process research and
development write-off ......... -- -- -- -- -- -- -- 2,200
-------- -------- ------- ------- -------- -------- -------- ---------
Total operating expenses 2,679 2,703 3,072 4,182 6,162 9,283 9,372 13,292
-------- -------- ------- ------- -------- -------- -------- ---------
Operating loss .................... (691) (541) (401) (1,036) (2,092) (4,130) (2,327) (4,447)
Financial income (expenses), net .. (3) (14) (4) 92 37 99 1,236 1,719
-------- -------- ------- ------- -------- -------- -------- ---------
Net loss .......................... $ (694) $ (555) $ (405) $ (944) $ (2,055) $ (4,031) $ (1,091) $ (2,728)
======== ======== ======= ======= ======== ======== ======== =========
Percent of Total Revenues:
Revenues:
Software licenses .............. 87.0% 84.0% 84.2% 82.5% 79.0% 84.9% 83.9% 84.1%
Services ....................... 13.0 16.0 15.8 17.5 21.0 15.1 16.1 15.9
-------- -------- ------- ------- -------- -------- -------- ---------
Total revenues .......... 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0
Cost of revenues:
Software licenses .............. 7.0 6.8 6.6 5.6 2.6 3.2 2.5 2.7
Services, net .................. 3.9 5.6 6.4 12.6 7.8 7.1 5.3 5.4
-------- -------- ------- ------- -------- -------- -------- ---------
Total cost of revenues .. 10.9 12.4 13.0 18.2 10.4 10.3 7.8 8.1
-------- -------- ------- ------- -------- -------- -------- ---------
Gross margin ...................... 89.1 87.6 87.0 81.8 89.6 89.7 92.2 91.9
Operating expenses:
Research and development, net .. 32.8 28.0 22.5 20.2 22.4 18.0 18.1 16.1
Sales and marketing, net ....... 68.1 66.0 64.2 72.7 82.7 79.3 71.7 72.4
General and administrative, net 17.8 13.9 12.7 12.2 13.4 13.2 16.7 13.3
Amortization of deferred stock
compensation, goodwill and
intangible assets .............. 1.4 1.7 -- -- 17.2 51.1 16.2 13.5
In-process research and
development write-off .......... -- -- -- -- -- -- -- 22.8
-------- -------- ------- ------- -------- -------- -------- ---------
Total operating expenses 120.1 109.6 100.1 108.7 135.7 161.6 122.7 138.1
-------- -------- ------- ------- -------- -------- -------- ---------
Operating loss .................... (31.0) (22.0) (13.1) (26.9) (46.1) (71.9) (30.5) (46.2)
Financial income (expenses), net .. (0.1) (0.6) (0.7) 3.6 0.8 0.2 16.2 17.9
-------- -------- ------- ------- -------- -------- -------- ---------
Net loss .......................... (31.1)% (22.6)% (13.2)% (24.5)% (45.3)% (71.7)% (14.3)% (28.3)%
======== ======== ======= ======= ======== ======== ======== =========
17
LIQUIDITY AND CAPITAL RESOURCES
Since our inception, we have funded operations primarily through the sales
of our equity securities, including cash generated from our initial public
offering, in June 2000, and our secondary public offering, in November 2000,
which resulted in total net proceeds of approximately $147 million, the issuance
of convertible notes to shareholders and, to a lesser extent, borrowings from
financial institutions. As of December 31, 2000, our principal source of
liquidity was $149 million of cash and cash equivalents and marketable
securities. As of December 31, 2000, we had $120,000 of debt outstanding
relating to obligations under capital leases and an obligation for severance pay
to Israeli employees of $831,000 that is fully provided by monthly deposits with
severance pay funds, insurance policies and by an accrual. As of December 31,
2000, our accumulated net deficit was $26.3 million.
Net cash used in operating activities was $3.2 million, $2.6 million and
$0.7 million in 1998, 1999 and 2000, respectively. Net cash used in operating
activities in each of these periods was primarily the result of net losses and
increases in trade receivables, year-to-year. Additional use of cash during 2000
resulted from increases in prepaid expenses. During 1998, 1999 and 2000 the
decrease in net cash used in operating activities was offset in part by
increases in accounts payable and amortization of deferred stock compensation.
Net cash used in investing activities was $0.3 million, $1.4 million and $72
million in 1998, 1999 and 2000, respectively. Investing activities for the year
ended December 31, 2000 consisted of $70.8 million in purchases of short-term
and long-term marketable securities, $2.1 million related to capital
expenditures, and $3.3 million in payments relating to the acquisitions of
Knight Fisk and Savant Corporation. The use of cash relating to capital
expenditures and acquisition activity was offset by $4.9 million in proceeds
received from the sale and redemption of short-term deposits and marketable
securities. In 1999 and 1998, use of cash consisted of capital expenditures and
purchases of short-term deposits. In 1998 and 2000, the cash usages were
partially offset by the sale and redemption of short-term deposits. The majority
of our capital investments were for computers, peripheral equipment and
software.
Net cash provided by financing activities was $4.0 million, $9.8 million and
$148.3 million in 1998, 1999 and 2000, respectively. The cash in 1998 and 1999
was primarily from net proceeds from the sale of our preferred shares. Net cash
provided by financing activities for the year ended December 31, 2000 was
primarily from the proceeds of our initial public offering in June 2000 and our
secondary public offering in November 2000, offset slightly by the repayment of
long-term debt.
We believe that our existing cash equivalents and short-term investments
will be sufficient to meet our anticipated cash needs for working capital and
capital expenditures for at least the next 12 months. Thereafter, if we do not
have available sufficient cash to finance our operations, we may be required to
obtain additional debt or equity financing. We cannot be certain that we will be
able to obtain, if required, additional financing on acceptable terms, or at
all.
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
The Financial Accounting Standards Board issued SFAS No. 133, "Accounting
for Derivative Instruments and Hedging Activities" ("SFAS No. 133") in June 1999
and its amendments, statements 137 and 138, in June 1999 and June 2000,
respectively. These statements establish accounting and reporting standards
requiring that every derivative instrument (including certain derivative
instruments embedded in other contracts) be recorded on the balance sheet as
either an asset or liability measured at its fair value. These statements also
require that changes in the derivative's fair value be recognized currently in
earnings unless specific hedge accounting criteria are met. Special accounting
for qualifying hedges allows a derivative's gains and losses to offset related
results on the hedged item in the income statement, and requires that a company
must formally document, designate, and assess the effectiveness of transactions
that receive hedge accounting. The FASB has issued SFAS No. 137, "Accounting for
Derivative Instruments and Hedging Activities-Deferral of the Effective Date of
FASB Statement No. 133". The Statement defers for one year the effective date of
SFAS No. 133. The rule will apply to all fiscal quarters of all fiscal years
beginning after June 15, 2000. The Company does not expect the impact of this
new statement on the Company's consolidated balance sheets or results of
operations to be material.
18
FACTORS THAT MAY AFFECT FUTURE RESULTS
This Annual Report on Form 10-K contains forward-looking statements that
involve risks and uncertainties. Precise's actual results could differ
materially from those anticipated in these forward-looking statements as a
result of certain factors, including, without limitation, those set forth in the
following risk factors and elsewhere in this Annual Report on Form 10-K. In
addition to the other information included or incorporated by reference in this
Annual Report on Form 10-K, the following risk factors should be considered
carefully in evaluating Precise and its business.
RISKS RELATED TO OUR BUSINESS
BECAUSE OF THE SIGNIFICANT PURCHASE PRICE OF OUR SOFTWARE PRODUCTS AND THE
CORRESPONDING CARE THAT OUR POTENTIAL CUSTOMERS EXERCISE IN MAKING A PURCHASE
DECISION, WE EXPECT THAT OUR QUARTERLY OPERATING RESULTS WILL CONTINUE TO
FLUCTUATE AND THIS COULD CAUSE THE TRADING PRICE OF OUR SHARES TO FLUCTUATE OR
DECLINE
Like many software and technology related companies, our quarterly operating
results have varied significantly in the past. Because of the significant
purchase price of our software products, our customers exercise care in making a
purchase decision. We believe that this caution, in combination with the other
factors listed below, exposes us to larger variability in quarterly operating
results relative to other software or technology companies. Since our operating
results are likely to vary significantly in the future, we believe that
period-to-period comparisons of our operating results are not meaningful and you
should not rely upon our results in any one quarter as an indicator of our
future performance. If our quarterly revenues and operating results fail to meet
or exceed the expectations of securities analysts or investors, the market price
of our ordinary shares could fall substantially. Our operating results vary
depending on a number of factors, many of which are outside our control,
including:
o varying budgeting cycles and available funds of our customers and
potential customers;
o the length and variability of our sales cycle;
o varying size, timing and contractual terms of enterprise-wide orders for
our software;
o changes in demand for Oracle databases, with which our software
operates, and related enterprise application software;
o seasonality in our revenues, which have been lower historically in the
first and third quarters;
o changes in gross margins resulting from the mix of U.S. vs.
international sales or license sales vs. services;
o software defects and other product quality problems that may not become
known until customer trials or after installation;
o changes in gross margins depending on whether our software is sold
directly or through indirect sales channels; and
o the revenue performance of third party sales channels.
In addition, a significant portion of our software license revenues in any
quarter is often derived from orders booked and shipped in the last weeks or
days of that quarter. A delay in an order, even from just one customer, could
negatively impact our quarterly revenues and operating results.
A substantial portion of our expenses, including most software development
and sales and marketing expenses, must be incurred in advance of generating
revenues. In addition, our operating expenses are largely based on anticipated
organizational growth and revenue trends and a high percentage of our expenses
are, and will continue to be, fixed. As a result, if our projected revenues do
not meet our expectations, for the reasons above or for any other
19
reasons, then we will still incur these fixed expenses and are likely to
experience an even larger shortfall in our quarterly operating results relative
to expectations.
WE HAVE A HISTORY OF LOSSES, AND WE ANTICIPATE OUR EXPENSES WILL INCREASE IN THE
FORESEEABLE FUTURE AS A RESULT OF PLANNED EXPANSION OF OUR SALES AND MARKETING
CHANNELS AND RESEARCH AND DEVELOPMENT ACTIVITIES, WHICH COULD DELAY OR PREVENT
US FROM ATTAINING PROFITABILITY
We incurred net losses of approximately $4.0 million for the year ended
December 31, 1998, $2.6 million for the year ended December 31, 1999 and $9.9
million for the year ended December 31, 2000. As of December 31, 2000, we had an
accumulated deficit of approximately $26.3 million. We cannot predict the extent
of our future losses and when, or if, we may become profitable. We anticipate
that our expenses will increase substantially in the foreseeable future as we
seek to expand our distribution channels, to increase our sales and marketing
activities, and to continue to develop our technology and introduce new
software. These efforts may prove more costly than we currently anticipate and
we may not succeed in increasing our revenues sufficiently to offset these
higher expenses. If we fail to increase our revenues at a greater rate than our
expenses, we will not be able to achieve and maintain profitability.
OUR INABILITY TO DEDICATE APPROPRIATE FINANCIAL AND MANAGERIAL RESOURCES COULD
IMPAIR OUR ABILITY TO GROW OUR REVENUES AT THE SAME RATE IN THE FUTURE AS THEY
HAVE IN THE PAST AND, FOR THE SAME REASON, THEY COULD DECLINE
Although our revenues have grown at substantial rates in recent years, we do
not expect our revenues to grow as rapidly in the future, and our revenues could
decline. Our total revenues have grown from $6.2 million for the year ended
December 31, 1998 to $11.6 million for the year ended December 31, 1999 and
$27.5 million for the year ended December 31, 2000. As our business develops and
the market for our software products matures, it is unlikely that our revenues
will continue to grow at the same rapid pace. We may not be able to dedicate the
significant managerial time and effort required to develop additional strategic
relationships, and we may not be able to hire sufficient numbers of sales
personnel to expand our sales channels and increase penetration of our existing
markets. In addition, we may not have the financial liquidity required to
develop and introduce, on a timely basis, new products that achieve broad market
acceptance.
OUR FAILURE TO DEDICATE APPROPRIATE RESOURCES TO OUR BUSINESS COULD STRAIN OUR
EXISTING SYSTEMS OR MANAGEMENT CAPABILITIES, LIMIT OUR GROWTH AND HARM OUR
BUSINESS AND FINANCIAL PERFORMANCE
We currently have employees based in Israel, the United Kingdom, France,
Benelux, Germany, Australia, and throughout the United States. We increased our
employee base significantly during 2000. In particular, we have recently
increased, and expect to continue to increase, the size of our sales force and
have recently integrated the operations of our U.K. distributor, Knight Fisk
Software Ltd., which we acquired in February 2000 and Savant Corporation, which
we acquired in December 2000. Furthermore, we have recently established
subsidiaries and joint ventures in Europe and Australia and expect to continue
to establish additional distribution channels through third-party relationships.
Our growth, coupled with rapid changes in our market, has placed, and is likely
to continue to place, significant strains on our administrative, operational and
financial resources and places significant demands on our internal systems,
procedures and controls. In order to manage growth effectively, we must
implement and improve our operational systems and controls. The failure to
invest in and establish systems with sufficient capacity to handle expanded
operations or failure to dedicate appropriate managerial resources could
restrain our potential future growth and may harm the efficiency of our
operations. Furthermore, if we fail to manage our growth effectively, the
quality of our products and services and our operating results could be
seriously harmed.
WE WILL NEED TO RECRUIT AND RETAIN ADDITIONAL QUALIFIED PERSONNEL TO
SUCCESSFULLY GROW OUR BUSINESS
Our future success will depend in large part on our ability to attract and
retain experienced sales, marketing, research and development, customer support
and management personnel. If we do not attract and retain such personnel, we may
not be able to expand our sales coverage or develop and introduce new or
enhanced products on the scale and schedule that we intend. Competition for
qualified personnel in the computer software industry is intense, especially for
technical personnel. We have experienced difficulty in the past recruiting
qualified personnel, especially technical and sales personnel. Moreover, we
intend to expand the scope of our international operations and these plans will
require us to hire experienced management, service, marketing, sales and
customer support
20
personnel abroad. We expect competition for qualified personnel to remain
intense and we may not succeed in attracting or retaining these personnel.
In addition, new employees generally require substantial training in the use
of our products, which in turn requires significant resources and management
attention. There is a risk that even if we invest significant resources in
attempting to attract, train and retain qualified personnel, we will not be
successful in our efforts. Our costs of doing business would increase without
the expected increase in revenues. Our inability to recruit, hire, train and
retain qualified employees could cause our business to suffer.
ANY ACQUISITIONS OR ATTEMPTED ACQUISITIONS WILL DIVERT MANAGEMENT ATTENTION AND
FINANCIAL RESOURCES AND MAY HARM OUR RESULTS OF OPERATIONS AND FINANCIAL
CONDITION
As part of our growth strategy, we intend to consider acquiring
complementary technologies, products and businesses. Attempted acquisitions may
divert management, operational and financial resources from the conduct of our
core business. For example, we do not have specific personnel dedicated to the
identification and integration of potential acquisitions. As a result, if we
pursue this growth strategy, the efforts of management will be diverted from
their other operational responsibilities, and we may not complete any attempted
acquisition. If we use capital stock, our existing shareholders may experience
dilution. If we use cash or debt financing, our financial liquidity will be
reduced, the holders of our debt would have claims on our assets ahead of
holders of our ordinary shares and our business operations may be restricted by
the terms of any debt, including restrictions on our ability to pay dividends on
our ordinary shares. In addition, an acquisition may involve nonrecurring
charges or amortization of significant amounts of goodwill and other intangible
assets, which would adversely affect our ability to achieve and maintain
profitability. In February 2000, we acquired all of the capital stock of Knight
Fisk Software Ltd., our U.K. distributor. As part of this transaction, which was
accounted under the purchase method, approximately $0.7 million of goodwill was
recorded as an asset on our balance sheet and will be amortized over the next
ten years. In December 2000, we acquired Savant Corporation in a transaction
accounted under the purchase method. We paid the stockholders of Savant $2.8
million in cash, 403,189 of our ordinary shares and reserved 109,256 shares for
vested options and warrants. If certain performance targets are met, we would be
obligated to issue additional ordinary shares. As part of this transaction, we
recorded goodwill and other intangibles of approximately $15.1 million on our
balance sheet and a one-time charge to our statement of operations of
approximately $2.2 million for acquired research and development. The goodwill
and other intangibles will be amortized over a five to seven year period.
FUTURE ACQUISITIONS MAY NOT PRODUCE THE REVENUES, EARNINGS OR BUSINESS SYNERGIES
THAT WE ANTICIPATED AND MAY CAUSE OUR REVENUES TO DECLINE
The acquisition of Savant and any other future acquisitions may not produce
the revenues, earnings or business synergies that we anticipated, and acquired
businesses or technologies may not perform as expected for a variety of reasons,
including:
o difficulties in the integration of the operations, technologies,
products and personnel of the acquired company;
o risks of entering markets in which we have no or limited prior
experience;
o potential loss of key employees of the acquired entity; and
o expenses of any undisclosed or potential legal liabilities of the
acquired company.
In addition, management's attention and resources may be diverted during any
attempted integration. Any one or a combination of these factors may cause our
revenues or earnings to decline.
21
WE DEPEND UPON KEY PERSONNEL, THE LOSS OF WHOM WOULD HARM OUR OPERATIONS
Our success depends, to a significant extent, upon the continued performance
and services of our executive officers and other key sales, marketing,
engineering and support personnel. The loss of the services of any of our
executive officers or key personnel, including Shimon Alon, our Chief Executive
Officer, would be disruptive to our operations. It would be difficult and time
consuming to replace them. We do not maintain key person life insurance policies
on any of our officers. Any of these individuals may voluntarily terminate his
employment with Precise. Our inability to retain these employees could harm the
growth and success of our business.
WE COMPETE WITH ORACLE, A COMPANY WITH LONG-STANDING RELATIONSHIPS WITH OUR
CUSTOMERS; EFFORTS BY ORACLE TO IMPROVE THEIR COMPETITIVE POSITION COULD REDUCE
OUR REVENUES OR GROSS MARGINS
We face both current and potential competition from Oracle. Our Precise/SQL
software presently competes with a product sold by Oracle in the market for
Information Technology infrastructure performance management software. As part
of its competitive strategy, Oracle could attempt to increase its presence in
this market by focusing its efforts on selling its own performance management
software to our present and potential customers. In addition, Oracle could
bundle its own performance management software, or performance management
software offered by a third party, with its database software, which could
discourage potential customers from purchasing our software. Even if the
performance management software sold by Oracle or bundled with Oracle's database
software was more limited in functionality than our software, a significant
number of customers or potential customers might elect to accept more limited
functionality instead of purchasing additional software from us. Although to
date we have not experienced pressure to reduce prices or margins as a result of
Oracle bundling performance management software with their database software,
this bundling practice could lead to future price reductions for our software,
reducing our gross margins. Oracle has a longer operating history, a larger
installed base of customers and substantially greater financial, distribution,
marketing and technical resources than we do. If any of those events occurred,
our ability to compete effectively could be impaired, and we would lose market
share.
OUR RELATIONSHIP WITH ORACLE IS IMPORTANT TO OUR SOFTWARE DEVELOPMENT EFFORTS
AND ANY DETERIORATION IN THIS RELATIONSHIP COULD IMPAIR OUR ABILITY TO DEVELOP
OUR SOFTWARE RELATED TO ORACLE PRODUCTS
We rely on our participation in Oracle's testing and feedback programs to
develop our technology and enhance the features and functionality of our
software on a timely basis to coincide with the release of new software or
software enhancements from Oracle. Any deterioration of our relationship with
Oracle could delay development or introduction of our new or enhanced software.
This would adversely affect our competitive position. We do not have any
agreements to ensure that our existing relationship with Oracle will continue.
Traditionally, Oracle has not prohibited companies who develop software that
supports Oracle products from participating in these programs. However, if
Oracle were to prohibit us from participating in these programs in the future
for competitive or other reasons, our inability to respond to any changes in
Oracle products could result in shipment delays or lost revenues.
IF THE MARKETS FOR ORACLE DATABASES AND RELATED APPLICATIONS SOFTWARE DO NOT
CONTINUE TO EXPAND, OUR ABILITY TO GROW OUR BUSINESS MAY BE ADVERSELY AFFECTED
To date, most of the Precise software has been designed to support
Oracle-based Information Technology infrastructures, although we have introduced
new products and expect to continue to develop new products which are designed
for databases marketed by other software providers, or are not dependent on
databases. If the market for Oracle databases and related applications software
declines or expands more slowly than we currently anticipate, our ability to
grow our business, sell our software and achieve and maintain profitability may
be impaired. Although the market for Oracle databases and related applications
has grown rapidly, this growth may not continue at the same rate, or at all.
THE PERFORMANCE MANAGEMENT SOFTWARE MARKET IS EXPECTED TO RAPIDLY EVOLVE, AND IF
WE ARE NOT ABLE TO ACCURATELY PREDICT AND RESPOND TO MARKET DEVELOPMENTS OR
CUSTOMER NEEDS, OUR COMPETITIVE POSITION WILL BE IMPAIRED
The market for Information Technology infrastructure performance management
software is relatively new and is expected to evolve rapidly. However, estimates
of our market's expected growth are inherently uncertain and are
22
subject to many risks and assumptions. Moreover, many of our customers operate
in markets characterized by rapidly changing technologies and business plans.
These customers look to our software products to monitor performance in this
environment. Rapid changes in the needs of these customers and changing
technologies make it difficult for us to predict their demands. We are
particularly susceptible to those changes since our software is used in a wide
array of operating environments, which are constantly evolving. As a result, we
may not be able to develop, on a timely basis or at all, software that meets our
customers' needs or desires. In addition, various sectors of our market are
served by competitors who may respond more effectively to market developments
and customer needs. We cannot assure you that the market for our software will
grow or that we will be able to respond to changes in the market, evolving
customer needs or our competition. If the market for our software does not
develop as we expect or if we fail to respond to market and competitive
developments, our business prospects and competitive position will be impaired.
THE FAILURE OF OUR NEW SOFTWARE TO ACHIEVE MARKET ACCEPTANCE OR DELAYS IN OUR
CURRENT OR FUTURE SOFTWARE DEVELOPMENT EFFORTS COULD ERODE OUR COMPETITIVE
POSITION
The failure to successfully develop, enhance or modify our software, or the
failure to do so on a timely basis, could limit our revenue growth and
competitive position. We recently expanded our product line to allow the
monitoring of an organization's Information Technology infrastructure
performance and continuing to develop new releases of our core products that
incorporate additional features. We may need to rapidly develop and introduce
additional software and enhancements to our existing software to satisfy our
current customers and maintain our competitive position in the marketplace. We
may also need to modify our software so that it can operate with new or enhanced
software introduced by other software vendors. The failure to introduce new,
enhanced or modified software on a timely basis could prevent our software from
achieving market acceptance. We have in the past, and may in the future,
experience delays in the timing of new software introductions. To support our
software development, enhancement or modification, we may find it necessary to
license or acquire new technologies, which may not be available to us on
acceptable terms, if at all.
OUR FAILURE TO ESTABLISH AND EFFECTIVELY MANAGE INDIRECT DISTRIBUTION CHANNELS
COULD CAUSE OUR REVENUES TO DECLINE
Our ability to sell our software in new markets and to increase our share of
existing markets will be impaired if we fail to expand significantly our
indirect distribution channels. Our sales strategy involves the establishment of
multiple distribution channels domestically and internationally through
value-added resellers, systems integrators and original equipment manufacturers.
We have entered into agreements with EMC to bundle a version of our software
with their products, and with Amdocs to sell our software along with their
product. Although these relationships have been successful to date, we cannot
predict the extent to which these companies will continue to be successful in
marketing or selling our software. These agreements could be terminated on short
notice and they do not prevent either EMC or Amdocs from selling the software of
other companies, including our competitors. EMC, Amdocs or any new OEM or
reseller could give higher priority to other companies' software or to their own
software than they give to ours.
OUR INABILITY TO DEVELOP AND EXPAND OUR DIRECT SALES FORCE WOULD LIMIT OUR
REVENUE GROWTH
If we do not expand and retain our direct sales force, revenue growth could
be seriously harmed. Competition for qualified sales personnel is intense and we
may not be able to hire and retain as many qualified individuals as we may
require in the future. To the extent we hire personnel from competitors, we may
be subject to allegations that they have been improperly solicited or divulged
proprietary or other confidential information. In addition, sale of our software
requires sales personnel, experienced in our market, who target and gain access
to the senior management of our prospective customers. Newly hired sales
personnel require extensive training and may take six months or longer to
achieve full productivity. This training period, along with the difficulty in
attracting and retaining qualified individuals, makes it difficult to grow the
size of our sales force rapidly and utilize them effectively.
23
A DECLINE IN THE PRICE OF OR DEMAND FOR OUR PRECISE/SQL SOFTWARE, WHICH ACCOUNTS
FOR A SUBSTANTIAL PORTION OF OUR SOFTWARE LICENSE REVENUES, WOULD CAUSE A
SIGNIFICANT DECLINE IN OUR REVENUES
Our success depends on continued market acceptance of our Precise/SQL
software. Revenues from licensing Precise/SQL accounted for approximately 86% of
our total revenues for the year ended December 31, 1999 and 72.5% of our total
revenues for the year ended December 31, 2000. We expect software license
revenues from Precise/SQL to continue to account for a substantial portion of
our future revenues. If Precise/SQL does not continue to achieve market
acceptance, or if our competitors release new products that have more advanced
features, offer better performance or are more price competitive than
Precise/SQL, our revenues may not grow and may even decline.
IF EXISTING CUSTOMERS DO NOT MAKE SUBSEQUENT PURCHASES FROM US OR IF OUR
RELATIONSHIPS WITH OUR LARGEST CUSTOMERS ARE IMPAIRED, OUR REVENUE GROWTH COULD
DECLINE
Our revenue growth could decline if our current customers do not purchase
additional licenses from us. Most of our current customers initially license
only a single software product from us or license a software product for a
limited use. In addition, as we deploy new versions of our existing software or
introduce new software, our current customers may not require the functionality
of this new software and may not license it.
We also depend on our installed customer base for future service revenue
from maintenance renewal fees. The terms of our standard license arrangements
provide for a one-time license fee and a prepayment of one year of software
maintenance. Our maintenance agreements are renewable annually at the option of
our customers but there are no obligations to renew. If customers choose not to
continue their maintenance service, our revenues may decline.
In addition, a substantial percentage of our revenues is derived from two of
our current customers, Amdocs and EMC. If our sales from either of these
customers were impaired, our revenue growth could decline.
DEFECTS IN OUR SOFTWARE WOULD HARM OUR BUSINESS AND DIVERT RESOURCES
Because our software is complex, it may contain errors that can be detected
at any point in its life cycle. Any errors or defects in our software could
result in:
o delayed or lost revenue;
o failure to attract new customers or achieve market acceptance;
o claims against us;
o diversion of development resources;
o increased service, warranty and insurance costs; and
o negative publicity resulting in damage to our reputation.
While we continually test our software for errors and work with customers to
identify and correct them, errors in our software may be found in the future.
Testing for errors is complicated because it is difficult to simulate the
breadth of operating systems, user applications and computing environments that
our customers use and because our software is becoming increasingly complex
itself. The costs we may incur in addressing software errors could be
substantial.
24
WE MAY BE SUBJECT TO PRODUCT LIABILITY CLAIMS THAT COULD RESULT IN SIGNIFICANT
COSTS TO US
Because our customers rely on our software to monitor and improve the
performance of their critical software applications, they are sensitive to
potential disruptions that may be caused by the use of, or any defects in, our
software. As a result, we may be subject to claims for damages related to
software errors in the future. Liability claims could require us to spend
significant time and money in litigation or to pay significant damages.
Regardless of whether we prevail, diversion of key employees' time and attention
from the business, incurrence of substantial expenses and potential damage to
our reputation might result. Our license agreements with our customers typically
contain provisions designed to limit our exposure to potential product liability
claims. Limitation of liability provisions like those in our license agreements,
however, may not be effective under the laws of some jurisdictions. In addition,
although we maintain general liability insurance, we cannot assure you that this
coverage will be available in amounts sufficient to cover one or more large
claims, or that the insurer will not disclaim coverage as to any future claim.
OUR FAILURE TO ADEQUATELY PROTECT OUR INTELLECTUAL PROPERTY COULD HARM OUR
COMPETITIVE MARKET POSITION
Our success and ability to compete are substantially d