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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, 2001
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM ______ TO ______
COMMISSION FILE NUMBER 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)
10 HATA'ASIYA STREET
P.O. Box 1066
Or-Yehuda, Israel 60408
- ---------------------------------------- ----------
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: 972 (3) 634-5111
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 22, 2002, was approximately $699 million (based on the
closing price of the registrant's Ordinary Shares on March 22, 2002, of $24.85
per share). This excludes 331,306 ordinary shares deemed to be held by
affiliates. Exclusion of shares should not be construed to indicate that such
person possesses the power, direct or indirect, to direct or cause the direction
of the management or policies of the registrant, or that such person is
controlled by or under common control with the registrant.
The number of the registrant's Ordinary Shares outstanding as of March 22,
2002 was 28,475,772.
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, 2001. 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, 2001
TABLE OF CONTENTS
PAGE NO.
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PART I
Item 1. Business............................................................................. 1
Item 2. Properties........................................................................... 10
Item 3. Legal Proceedings.................................................................... 10
Item 4. Submission of Matters to a Vote of Security Holders.................................. 10
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters................ 10
Item 6. Selected Consolidated Financial Data................................................. 12
Item 7. Management's Discussion and Analysis of Financial Condition and Results of
Operations........................................................................... 13
Item 7A. Quantitative and Qualitative Disclosures About Market Risk........................... 31
Item 8. Financial Statements and Supplementary Data.......................................... 31
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial
Disclosure........................................................................... 31
PART III
Item 10. Directors and Executive Officers of the Registrant................................... 31
Item 11. Executive Compensation............................................................... 31
Item 12. Security Ownership of Certain Beneficial Owners and Management of Precise............ 31
Item 13. Certain Relationships and Related Transactions....................................... 32
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K...................... 32
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 enterprise
software applications across the Information Technology ("IT") infrastructure.
Businesses rely on the proper functioning of their IT application
infrastructure, which consists of networks, operating systems, servers,
applications, databases and storage devices to help manage traditional and
electronic business activities. Precise's software allows an organization to
continuously monitor its application infrastructure performance and be alerted
when application performance parameters exceed user-established thresholds. When
the software detects a performance problem, it also provides technology support
personnel with a thorough set of diagnostic data that pinpoints the specific
root cause of application performance degradation and offers suggested
alternatives to alleviate the problem. Precise's software serves those
businesses that rely on enterprise applications to cut costs, improve
efficiencies and generate revenues.
Precise was incorporated in 1990. Our U.S. headquarters are located at 690
Canton Street, Westwood, Massachusetts 02090, and our telephone number is (781)
461-0700. Our international office is located at 10 Hata'asiya Street,
Or-Yehuda, Israel 60408. Precise's Web site is located at www.precise.com, but
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 and serve business objectives, organizations are using IT. In
particular, an organization's IT infrastructure, which consists of networks,
operating systems, servers, applications, databases and storage devices, must
proactively support 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 a means by which an organization can increase
operational and cost efficiencies and drive revenue generation. To enable and
support e-business activities, a complex and multi-tiered IT infrastructure of
technologies and services has evolved. As technical and operational complexities
have increased, so have user demands for efficiency and performance.
Today's businesses depend on custom-developed as well as packaged Enterprise
Resource Planning (ERP) and Customer Relationship Management (CRM) applications
to gain a competitive advantage and improve the efficiency of critical
e-business processes. These applications are the means through which an
organization controls, manages and expands its business operations and achieves
commonality of data and process.
The management of this heterogeneous, distributed and rapidly changing IT
environment, which is supporting continuously growing transaction and data
volumes, has become increasingly challenging. Efficient management of the IT
infrastructure involves addressing the needs and problems of all constituencies
across the extended enterprise.
1
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 application infrastructure. Equally challenging is the need to manage
this application infrastructure without employing techniques or technologies
that consume substantial additional resources and create further burdens on the
system. In addition, application 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 application 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.
Our software solutions provide an integrated end-to-end, correlated view of
application 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 application infrastructure - from URL to SQL -
they pinpoint the root causes of performance degradation quickly and proactively
and determine their impacts on the entire IT application infrastructure - before
they affect end-users. By identifying trends and deviations, and translating
diverse performance data into a common language, our Application Performance
Management solutions bridge the gap between technology and business to
facilitate performance optimization and strategic planning. We call these
solutions Precise i3: Insight, Indepth and Inform. The Insight products contain
our end-to-end technology; the Indepth products include our drill-down
technology; and the Inform products contain our communications technology.
2
PRODUCTS
PRODUCT FAMILY PRODUCT FUNCTIONS
INSIGHT
Precise/Insight Precise/Insight measures the overall
response time of a multi-tier IT
application infrastructure and the
time spent in each technology tier,
helping to isolate the source of
performance degradation. It isolates
the response time delivered to a
geographical location or a business
unit and provides a consistent view
across the diverse technologies that
contribute to a business transaction.
Precise/Savvy Precise/Savvy overlays an application
view on top of Precise/Insight's
infrastructure perspective.
Precise/Savvy measures the response
time of an application transaction and
reports the results in units specific
to the application. Precise/Savvy
application coverage: Precise/Savvy
for Oracle, Precise/Savvy for Web,
Precise/Savvy for J2EE Platform,
Precise/Savvy for SAP R/3,
Precise/Savvy for BEA Tuxedo and
Precise/Savvy for Siebel.
INDEPTH
Precise/Crosspoint Precise/Crosspoint correlates
application, operating system,
database, and HP Surestore XP's disk
array storage performance metrics for
monitoring and tuning. Works as an
add-on product to Precise/Indepth for
Oracle.
Precise/Indepth for DB2 UDB Precise/Indepth for DB2 UDB monitors,
analyzes and helps tune DB2 UDB-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 (" SQL")
statements that will access the
database in a different manner, and
projects the performance improvement
if the change is made. Through an
internal data warehouse called the
Precise Performance Warehouse,
Precise/Indepth for DB2 UDB supports
long-term analysis and proactive
management by providing historical
performance information.
Precise/Indepth for J2EE Precise/Indepth for J2EE provides
performance management for server side
Java applications. It measures the
response time of HTTP requests
(servlets and JSPs) and EJB
invocations. It segments response time
by J2EE application server and
database server, and correlates
problematic SQL statements with EJBs,
JSPs, and servlets. SmarTune, added in
a recent release, automatically
identifies the root cause of J2EE
application performance problems and
recommends the most appropriate
corrective actions. This product
currently supports BEA's WebLogic,
IBM's WebSphere and Macromedia's JRun
J2EE application servers.
Precise/Indepth for Oracle Precise/Indepth for Oracle monitors,
(formerly Precise/SQL) 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
3
permits users to view the access path
that the database has chosen for a
query from an application,
automatically generates 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 the Precise
Performance Warehouse, Precise/Indepth
for Oracle supports long-term analysis
and proactive management by providing
historical performance information.
Precise/Interpoint Precise/Interpoint works as an add-on
product to Precise/Indepth for Oracle
and Precise/Indepth for DB2 UDB to
optimize ERP application performance.
By tracing a query from the ERP
application back to the initiating
person and form, Precise/Interpoint
provides information to the ERP
manager concerned with detecting and
correcting performance issues. The ERP
manager can then implement changes
suggested by Precise/Indepth for
Oracle and Precise/Indepth for DB2 UDB
or other changes to the ERP
application to improve performance.
This product supports Oracle
Applications and SAP R/3 ERP
environments.
Precise/Savant Precise/Savant provides visual
indicators to quickly diagnose the
performance of an Oracle 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.
Precise/StorageCentral SRM Precise/StorageCentral SRM is a
Storage Resource Management software
that monitors and controls disk
utilization in real time. The software
provides web-based reports on storage
content, usage and trending to ensure
appropriate disk allocation thus
eliminating server downtime from
exceeded capacity.
INFORM
Precise/Foresight Precise/Foresight is a web-based
performance portal that brings
Precise's performance data to the IT
and business staff that can leverage
it. Built-in expert analysis and
display techniques provide the IT team
with a common language across diverse
technology domains and the visibility
needed to clearly communicate the top
issues that need to be addressed.
Precise/Pulse! 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 many leading
monitoring products provided by other
software vendors.
4
We plan to continue to introduce Application Performance Management
solutions targeted at specific market and business segments to answer the call
for business-focused solutions.
SALES AND MARKETING
We sell our software through direct sales, indirect channels, resellers and
strategic relationships. To date, we have licensed our software to over 4,500
customers worldwide. Our North American sales organization is headquartered in
Westwood, Massachusetts, with additional sales offices in the U.S. metropolitan
areas of Atlanta, Chicago, Dallas, Denver, Detroit, New York, and Reston,
Virginia, and in Toronto, Canada. Our international sales organization is based
in metropolitan Tel Aviv, Israel, and we have additional sales offices in
France, Germany, Holland, the United Kingdom, Australia, China, and Malaysia.
DIRECT SALES. A sales team 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 license terms, sell products and professional
services engagements, 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 or more of our application
performance products for multiple departments or servers, the sales cycle may
range from one to four months.
INDIRECT SALES. Our 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, Costa
Rica, Mexico, Peru, the United States, Venezuela, and the West Indies. The
valued-added products and services of these vendors combine with our products
serve to deliver a more complete solution to our customers. Outside of North and
South America, we sell our products through vendors that report to our
metropolitan Tel Aviv office. These vendors market our products in the Czech
Republic, Denmark, Finland, Hungary, Iceland, India, Israel, Italy, Japan,
Korea, Norway, Poland, Singapore, South Africa, Sweden, Switzerland, and Taiwan.
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, user groups, and the
trade press to communicate our successful product implementations. We also
engage in targeted marketing through direct-mail and eblasts, 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.
STRATEGIC RELATIONSHIPS
EMC CORPORATION. EMC Corporation began selling our products in the fourth
quarter of 1999. EMC markets an exclusive bundled version of Precise/Indepth for
Oracle, Precise/Indepth for DB2 UDB and Precise/Presto for EMC software, called
Database (DB) Tuner, to its customers for use solely with EMC's storage
products, as well as providing EMC and EMC end customers with professional
services. Under the terms of our agreement with EMC, they pay us a fee on the
sales of these products to end users subject to the protection of a minimum
price per product. 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 2001
represented more than 10% of our total revenues.
5
AMDOCS. We currently have a strategic relationship with Amdocs, a provider
of information systems solutions to telecommunications companies, to sell
Precise i3 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 expired in June 2001, but was
automatically renewed for an additional one-year term and will be renewed for
successive one-year terms unless either Precise or Amdocs notifies the other 30
days in advance of its desire to terminate the agreement. Revenue from Amdocs in
2001 represented more than 10% of our total revenues.
OTHER. We also have strategic original equipment manufacturer or "OEM"
relationships with Microsoft Corporation and Powerquest to sell bundled versions
of our products and have strategic reselling relationships with Hewlett-Packard
Company and SAP America.
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 offices
in Westwood, Massachusetts and Reston, Virginia. We also provide local support
in the United Kingdom, Holland, Germany, and France. 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.
RESEARCH AND DEVELOPMENT
Our research and development organization, based in metropolitan Tel Aviv,
Israel, Reston, Virginia, and Denver, Colorado, 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.
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, Mercury Interactive, Oracle, and
Wily Technology.
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.
6
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 application performance management software or
purchase it from outside suppliers. As a result, we must, on an on-going basis,
educate existing and potential customers on the advantages of our software over
internally developed application 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 effectiveness;
scalability; ease of installation and use; and price.
We believe that we currently compete favorably with respect to each of these
factors. However, the Application 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 Precise/Indepth for Oracle 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/Indepth for Oracle in Israel. These restrictions do not apply to the
sale or export from Israel of Precise/Indepth for Oracle. Under the terms of the
grants, we owe royalties to the Israeli government on sales of Precise/Indepth
for Oracle 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 manufacturing of Precise/Indepth for Oracle 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. As of December 31, 2001 we had no outstanding contingent liability
with respect to these royalties.
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.
7
We integrate various third party software products as components of our
software under the terms of licensing agreements that 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/Insight TM, Precise/Savvy TM, Precise/Indepth TM,
Precise/Crosspoint TM, Precise/Interpoint R, Precise/Savant TM, Precise/Inform
TM, Precise/Foresight! TM , Precise/Pulse! TM, SmarTune TM, Precise/i3 TM ,
Precise/Storage Central TM, Precise/Sitestor TM and the Precise Software
Solutions logo are trademarks or service marks of Precise Software Solutions
Ltd. or our subsidiaries. This Annual Report 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, 2001, we had a total of 389 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 termination without due cause or death of an employee. 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.
EXECUTIVE OFFICERS OF THE REGISTRANT
SHIMON ALON has served as our Chief Executive Officer since September 1997
and as one of our 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 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
8
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 our 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.
ANDREW D. BIRD has served as our Executive Vice President of Marketing since
April 2001. He is responsible for the strategic direction and positioning of
Precise, including corporate strategy and global marketing. Prior to joining
Precise, Mr. Bird served as European Business Unit Director for BMC Software
where he was responsible for the market development of BMC's Systems Management
products across Europe, the Middle East and Africa. From 1996 to 1998 Mr. Bird
served as Vice President of Marketing for BGS Systems, which was acquired by BMC
Software, where he was responsible for global marketing and market development.
From 1990 to 1996, Mr. Bird served as Managing Director of BGS System's United
Kingdom operation where he was responsible for marketing, administration and
sales for the United Kingdom and major European countries. Mr. Bird has also
held senior sales positions at Cullinet, CCS and Cincom Systems.
OTHER KEY EMPLOYEES
RAMI SCHWARTZ has served as our Vice President of Research and Development
since September 2000 and as General Manager of our Israeli office since July of
2001. 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.
CHUCK DELOUIS has served as our Vice President of Professional Services
since May 2000. Prior to joining Precise, Mr. DeLouis served as the Director of
Technology at Creative Data, a data warehouse consulting company specializing in
large-scale e-commerce and web enabled data warehousing implementations. In
1998, Mr. DeLouis served as Director of MIS at Mango Software, a leading
developer of software-based web caching solutions. From 1992 to 1997, Mr.
DeLouis held a variety of positions at Sybase including Technical Support
Manager and Senior IT Manager responsible for the integration of PowerSoft and
Sybase.
DANIEL GERMAIN has served as the 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 the 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.
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
9
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.
ITEM 2. PROPERTIES
Our U.S. headquarters, located in Westwood, Massachusetts, are under a
lease, which expires in July 2004. Our offices located in Reston, Virginia are
under a lease, which expires in July 2009. Our international offices, located in
metropolitan Tel Aviv, Israel are under a lease, which expires in December 2004.
In addition, we have also entered into leasing arrangements for space in
Australia, France, Germany, Holland, Malaysia, Canada 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, 2001.
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 22, 2002, there
were approximately 97 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.
2000 HIGH LOW
Second Quarter $ 28.69 $ 18.75
Third Quarter $ 44.38 $ 18.44
Fourth Quarter $ 42.38 $ 19.81
2001 HIGH LOW
First Quarter $ 31.63 $ 12.88
Second Quarter $ 30.70 $ 11.13
Third Quarter $ 30.10 $ 9.55
Fourth Quarter $ 23.88 $ 9.92
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, 2001, Precise issued the following
securities that were not registered under the Securities Act of 1933, as
amended:
In September 2001, Precise acquired W. Quinn Associates, Inc. In
connection with this acquisition, and pursuant to the terms of the
Agreement and Plan of Merger dated September 4, 2001, Precise issued an
10
aggregate of 774,413 ordinary shares to the shareholders of W. Quinn as
partial consideration for all of the outstanding capital stock of W.
Quinn. These shares were registered for resale in February 2002.
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 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.
11
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, 1999, 2000 and 2001, and the selected consolidated
balance sheet data as of December 31, 2000 and 2001 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, 1997 and 1998 and the selected consolidated balance sheet data as
of December 31, 1997, 1998 and 1999 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,
--------------------------------------------------------
1997 1998 1999 2000 2001
-------- -------- -------- -------- --------
(in thousands, except per share data)
CONSOLIDATED STATEMENT OF OPERATIONS DATA:
Revenues:
Software licenses ..................................... $ 2,382 $ 5,331 $ 9,770 $ 22,968 $ 43,903
Services .............................................. 406 858 1,844 4,580 11,694
-------- -------- -------- -------- --------
Total revenues .................................. 2,788 6,189 11,614 27,548 55,597
Cost of revenues:
Software licenses ..................................... 349 522 741 742 362
Services, net ......................................... 86 198 906 1,693 3,143
-------- -------- -------- -------- --------
Total cost of revenues .......................... 435 720 1,647 2,435 3,505
-------- -------- -------- -------- --------
Gross profit ............................................ 2,353 5,469 9,967 25,113 52,092
-------- -------- -------- -------- --------
Operating expenses:
Research and development, net ......................... 1,737 2,214 2,891 4,987 10,924
Sales and marketing, net .............................. 3,278 5,739 7,913 20,749 34,675
General and administrative, net ....................... 1,341 1,272 1,598 3,923 7,046
Amortization of deferred stock compensation, goodwill
and intangible assets ................................ -- 300 234 6,250 4,970
In-process research and development write-off ......... -- -- -- 2,200 86
-------- -------- -------- -------- --------
Total operating expenses ........................ 6,356 9,525 12,636 38,109 57,701
-------- -------- -------- -------- --------
Operating loss .......................................... (4,003) (4,056) (2,669) (12,996) (5,609)
Financial income (expense), and other, net .............. (202) 34 71 3,091 6,565
-------- -------- -------- -------- --------
Income (loss) from continuing operations ................ (4,205) (4,022) (2,598) (9,905) 956
Income tax provision .................................... -- -- -- -- 33
Income (loss) from discontinued operations, net of tax .. (192) -- -- -- --
Gain from disposal of business segment .................. 182 -- -- -- --
-------- -------- -------- -------- --------
Net Income (loss) ....................................... $ (4,215) $ (4,022) $ (2,598) $ (9,905) $ 923
======== ======== ======== ======== ========
Net earnings (loss) per share:
Continuing operations ................................. $ (2.35) $ (1.31) $ (0.79) $ (0.77) $ 0.03
Discontinued operations ............................... (0.01) -- -- -- --
-------- -------- -------- -------- --------
Basic and diluted net earnings (loss) per share ......... $ (2.36) $ (1.31) $ (0.79) $ (0.77) $ 0.03
======== ======== ======== ======== ========
Weighted average number of shares used in computing basic
net earnings (loss) per share ......................... 1,785 3,077 3,299 12,901 26,745
======== ======== ======== ======== ========
Weighted average number of shares used in computing
diluted net earnings (loss) per share ................. 1,785 3,077 3,299 12,901 29,971
======== ======== ======== ======== ========
12
DECEMBER 31,
--------------------------------------------------
1997 1998 1999 2000 2001
-------- --------- --------- --------- -------
(in thousands)
CONSOLIDATED BALANCE SHEET DATA:
Cash and cash equivalents................................. $ 301 $ 844 $ 6,693 $82,218 $35,144
Working capital (deficit)................................. (3,656) 242 7,709 120,147 74,005
Total assets.............................................. 2,673 4,333 12,986 178,681 203,183
Shareholders' equity (deficiency)......................... (3,079) 742 8,293 166,876 185,659
13
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 to Application Performance Management
software for Oracle database environments. In 1996, we released the initial
version of our Precise/SQL software, now called Precise Indepth for Oracle, for
database monitoring. Since 1998, we have released or acquired new products and
continually updated our product suite making the following products generally
available:
RELEASE PRODUCT
------- -------
1998 Precise/Pulse!, Precise/Presto for
EMC, Precise/Interpoint
2000 Precise/Insight, Precise/Savant
2001 Precise/Foresight, Precise/Indepth
for J2EE, Precise/Savvy for Oracle,
Web, J2EE, SAP R/3, BEA Tuxedo, and
Siebel, Precise/Indepth for DB2 UDB,
Precise/Crosspoint, Precise/Storage
Central SRM, Precise i3 Suite
In September 2001, we completed the acquisition of all of the capital stock
of W. Quinn Associates, Inc. ("W. Quinn") for approximately $34.1 million in a
combination of cash and ordinary shares. We issued 774,413 ordinary shares and
paid $20.1 million in cash for the acquisition, which included $1.5 million in
transaction costs. In addition, W. Quinn shareholders received the right to
receive additional ordinary shares in an amount up to $17.5 million, based on
achievement of certain post-acquisition revenue and performance targets relating
to the one year period subsequent to closing. 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, which included direct
acquisition costs, $25.5 million was allocated to goodwill, representing the
excess of the aggregate purchase price over the fair value of net assets
assumed, $2.1 million was allocated to acquired technology, $2.2 million was
allocated to acquired patents, $2.3 million was allocated to trademarks and
customer relationships, and a one-time charge of approximately $86,000 was
charged on our statement of operations for acquired in-process research and
development in September 2001.
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. The total purchase price consisted of $13.9 million payable in 512,445
ordinary shares and $2.8 million in cash. 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 which included direct
acquisition costs, $9.0 million was allocated to goodwill, representing the
excess of the aggregate purchase price over the fair value of net liabilities
acquired, $3.2 million was allocated to acquired technology, $1.8 million was
allocated to customer relationships,
14
$1.1 million was allocated to acquired assembled work force, 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. In 2001, upon
the completion of the allocation of the purchase price and the resolution of
certain contingencies, the goodwill and purchase price were reduced by $1.4
million.
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.
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,
HOLLAND, AUSTRALIA, GERMANY, FRANCE, CHINA AND MALAYSIA 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.
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: 1999 2000 2001
---- ---- ----
Revenues:
Software licenses...................................... 84% 83% 79%
Services............................................... 16 17 21
----- ----- -----
Total revenues...................................... 100 100 100
Cost of revenues:
Software licenses...................................... 6 3 1
Services, net.......................................... 8 6 5
----- ----- -----
Total cost of revenues.............................. 14 9 6
----- ----- -----
Gross profit.............................................. 86 91 94
Operating expenses:
Research and development, net........................... 25 18 20
Sales and marketing, net................................ 68 75 62
General and administrative, net.......................... 14 14 13
Amortization of deferred stock compensation 2 22 3
Amortization of goodwill and intangible assets - 1 6
In-process research and development write-off - 8 -
------ ------ ------
Total operating expenses............................ 109 138 104
----- --- ---
Operating loss............................................ (23) (47) (10)
Financial income and other, net........................... 1 11 12
----- ----- -----
Income (loss) before income tax provision................. (22) (36) 2
Income tax provision...................................... - - -
------ ------ ------
Net income (loss)......................................... (22)% (36)% 2%
===== ===== =====
15
YEARS ENDED DECEMBER 31, 1999, 2000, AND 2001
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 $11.6 million, $27.5 million, and $55.6 million in
1999, 2000, and 2001, respectively, representing an increase of $15.9 million,
or 137%, from 1999 to 2000, and an increase of $28.1 million, or 102%, from 2000
to 2001. One customer accounted for 15% and 13% of total revenues for the years
ended December 31, 1999 and 2001, respectively. In addition, one customer
accounted for 23% and 18% of total revenues for the years ended December 31,
2000 and 2001, respectively.
Revenues from sales of software licenses were $9.8 million, $23.0 million,
and $43.9 million in 1999, 2000, and 2001, respectively, representing an
increase of $13.2 million, or 135%, from 1999 to 2000, and an increase of $20.9
million, or 91%, from 2000 to 2001. The increase in software license revenue
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 relationships. The increase in software
license revenue from 2000 to 2001 is due to increased volume of license sales
due to the expansion of the direct and indirect sales channels, the continued
strength of our OEM relationships, and the acquisition and introduction of new
products to the market.
Revenues from services were $1.8 million, $4.6 million, and $11.7 million in
1999, 2000, and 2001 respectively, representing an increase of $2.8 million, or
156%, from 1999 to 2000, and an increase of $7.1 million, or 155%, from 2000 to
2001. The increase in service revenue from 1999 to 2000 and from 2000 to 2001 is
attributable to additional maintenance agreements from new sales of software
licenses, renewals of annual maintenance agreements with existing customers and
additional professional services revenue.
COST OF REVENUES
Cost of revenues consists of costs associated with generating software
license and service revenues. Cost of revenues were $1.6 million, $2.4 million,
and $3.5 million in 1999, 2000, and 2001, respectively, representing an increase
of $0.8 million, or 50%, from 1999 to 2000, and an increase of $1.1 million, or
44%, from 2000 to 2001. Cost of revenues as a percentage of total revenues were
14%, 9%, and 6% in 1999, 2000, and 2001, 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 $0.7 million, $0.7
million, and $362,000 in 1999, 2000, and 2001, respectively, whereby the cost of
software licenses remained constant from 1999 to 2000 and decreased $380,000 or
51% from 2000 to 2001. The decrease in cost of software licenses from 2000 to
2001 is due to a decrease in the royalty expense owed to the Chief Scientist of
the Ministry of Industry and Trade. This royalty has been fully accrued at
December 31, 2001. Cost of software license revenues as a percentage of total
software license revenues were 8%, 3%, and 1% in 1999, 2000, and 2001,
respectively.
Cost of service revenues consists primarily of costs related to personnel
providing customer support and professional services. Cost of service revenues
were $0.9 million, $1.7 million, and $3.1 million in 1999, 2000, and 2001,
respectively, representing an increase of $0.8 million, or 89%, from 1999 to
2000, and an increase of $1.4 million, or 86%, from 2000 to 2001. The increase
from 1999 to 2000 and from 2000 to 2001 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. Cost
of service revenues as a percentage of service revenues were 49%, 37%, and 27%
in 1999, 2000, and 2001, respectively.
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 $2.9 million, $5.0 million, and $10.9 million in 1999,
2000, and 2001, respectively, representing an increase of $2.1 million, or 72%,
from 1999 to 2000, and an increase of $5.9 million, or 119%, from 2000 to 2001.
The increase from 1999 to 2000 was attributable to the cost associated with the
development of new products to enhance our software suite, including
Precise/Insight and Precise/Foresight, which were introduced to the market in
2000 and early 2001, respectively. The increase was primarily related to
headcount related costs due to the increase in the number of software
16
developers and quality assurance personnel. The increase from 2000 to 2001 was
attributable to the cost associated with the development of new products to
enhance our software suite. In addition, we expanded our development team in
2001, which resulted in an increase in headcount costs.
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 $7.9 million, $20.7
million, and $34.7 million in 1999, 2000, and 2001, respectively, representing
an increase of $12.8 million, or 162%, from 1999 to 2000, and an increase of
$14.0 million, or 67%, from 2000 to 2001. The increase from 1999 to 2000 and
from 2000 to 2001 is primarily due to an increase in payroll and headcount
related expenses related to the increase in the number of people comprising our
direct sales force, an increase in commission expenses attributable to the
increase in software license revenues, and an increase in marketing
communications such as trade shows, seminars, and promotional activities.
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 $1.6 million, $3.9 million, and $7.0 million in
1999, 2000, and 2001, respectively, representing an increase of $2.3 million, or
144%, from 1999 to 2000, and an increase of $3.1 million, or 80%, from 2000 to
2001. The increase from 1999 to 2000 and from 2000 to 2001is primarily
attributable to an increase in payroll and headcount related expenses.
AMORTIZATION OF DEFERRED STOCK COMPENSATION
Amortization of deferred stock compensation was $0.2 million, $ 6.2
million, and $1.9 million in 1999, 2000, and 2001, respectively, representing an
increase of $6.0 million from 1999 to 2000, and a decrease of $4.2 million from
2000 to 2001. The increase from 1999 to 2000 is attributable to an increase of
$6.0 million in compensation costs. The decrease from 2000 to 2001 is
attributable to deferred stock compensation being fully amortized and options
reaching the end of the vesting period throughout 2001.
AMORTIZATION OF GOODWILL AND INTANGIBLE ASSETS
Amortization of goodwill and intangible assets was $0, $ 99,000, and $3.0
million in 1999, 2000, and 2001, respectively, representing an increase of
$99,000 from 1999 to 2000, and an increase of $2.9 million from 2000 to 2001.
The increase from 1999 to 2000 is primarily attributable to one month of
amortization of goodwill relating to the acquisition of Savant Corporation. The
increase from 2000 to 2001 is attributable to amortization of goodwill and
intangible assets relating to the purchase of Savant Corporation and W. Quinn
Associates, Inc. in December of 2000 and September of 2001, respectively.
IN-PROCESS RESEARCH AND DEVELOPMENT WRITE-OFF
In-process research and development write-offs were $0, $2.2 million, and
$86,000 in 1999, 2000, and 2001, respectively, representing an increase of $2.2
million from 1999 to 2000, and a decrease of $2.1 million from 2000 to 2001. The
in-process research and development write-off from 2000 was related to the one
time write-off of software from the Savant acquisition for which technological
feasibility had not yet been established and for which no alternative future use
existed for the software. The in-process research and development write-off from
2001 was related to the one time write-off of software from the W. Quinn
acquisition for which technological feasibility had not yet been established and
for which no alternative future use existed for the software.
FINANCIAL INCOME AND OTHER, NET
Financial income and other, net was $71,000, $3.1 million, and $6.6 million
in 1999, 2000, and 2001, respectively, representing an increase of $3.0 million
from 1999 to 2000, and an increase of $3.5 million, or 112%,
17
from 2000 to 2001. 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. The increase from 2000 to 2001 is
attributable to additional interest earned on a full year of investment of both
the initial public offering and the secondary offering, which occurred in June
of 2000 and November of 2000, respectively.
QUARTERLY RESULTS OF OPERATIONS
The following table presents certain consolidated statement of operations
data for each quarter of 2000 and 2001. 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,
2000 2000 2000 2000 2001 2001 2001 2001
-------- -------- -------- ------- -------- -------- -------- --------
Revenues:
Software licenses.................... $ 3,588 $ 4,875 $ 6,412 $ 8,093 $ 9,446 $ 9,995 $ 11,300 $ 13,161
Services............................. 954 870 1,227 1,529 2,064 2,712 3,028 3,891
-------- -------- -------- -------- -------- -------- -------- --------
Total revenues................ 4,542 5,745 7,639 9,622 11,510 12,707 14.328 17,052
Cost of revenues:
Software licenses.................... 116 181 187 258 70 42 69 181
Services, net........................ 356 411 407 519 745 702 766 931
-------- -------- -------- -------- -------- -------- -------- --------
Total cost of revenues........ 472 592 594 777 815 744 835 1,112
-------- -------- -------- -------- -------- -------- -------- --------
Gross profit........................... 4,070 5,153 7,045 8,845 10,695 11,963 13,493 15,940
Operating expenses:
Research and development, net........ 1,019 1,032 1,386 1,550 2,236 2,688 2,850 3,149
Sales and marketing, net............. 3,754 4,555 5,478 6,962 7,633 8,121 8,688 10,233
General and administrative, net...... 609 758 1,273 1,283 1,552 1,586 1,887 2,020
Amortization of deferred stock
compensation........................ 780 2,938 1,235 1,198 713 469 404 345
Amortization of goodwill and
intangible assets................... -- -- -- 99 638 654 747 1,001
In-process research and
development write-off............... -- -- -- 2,200 -- -- 86 --
-------- -------- -------- -------- -------- -------- -------- --------
Total operating expenses.... 6,162 9,283 9,372 13,292 12,772 13,518 14,662 16,748
-------- -------- -------- -------- -------- -------- -------- --------
Operating loss......................... (2,092) (4,130) (2,327) (4,447) (2,077) (1,555) (1,169) (808)
Financial income (expenses) and other,
net................................... 37 99 1,236 1,719 2,106 1,765 1,621 1,073
-------- -------- -------- -------- -------- -------- -------- --------
Income (loss) before income tax
provision (2,055) (4,031) (1,091) (2,728) 29 210 452 265
Income tax provision -- -- -- -- -- -- -- 33
Net income (loss) $(2,055) $ (4,031) $ (1,091) $ (2,728) $ 29 $ 210 $ 452 $ 232
======== ======== ======== ======== ======== ======== ======== ========
Percent of Total Revenues:
Revenues:
Software licenses................... 79% 85% 84% 84% 82% 79% 79% 77%
Services............................ 21 15 16 16 18 21 21 23
-------- -------- -------- -------- -------- -------- -------- --------
Total revenues............... 100 100 100 100 100 100 100 100
Cost of revenues:
Software licenses................... 2 3 3 3 1 0 1 1
Services, net....................... 8 7 5 5 6 6 5 6
-------- -------- -------- -------- -------- -------- -------- --------
Total cost of revenues....... 10 10 8 8 7 6 6 7
-------- -------- -------- -------- -------- -------- -------- --------
Gross margin........................... 90 90 92 92 93 94 94 93
Operating expenses:
Research and development, net....... 23 18 18 16 19 21 20 18
Sales and marketing, net............ 83 80 72 72 66 64 61 60
General and administrative, net..... 13 13 17 13 14 12 13 12
Amortization of deferred stock 17 51 16 13 6 4 3 2
compensation
Amortization of goodwill and
intangible assets................ -- -- -- 1 6 5 5 6
In-process research and development
write-off........................ -- -- -- 23 -- -- 0 --
-------- -------- -------- -------- -------- -------- -------- --------
Total operating expenses.... 136 162 123 138 111 106 102 98
-------- -------- -------- -------- -------- -------- -------- --------
Operating loss......................... (46) (72) (31) (46) (18) (12) (8) (5)
Financial income (expenses) and other,
net................................... 1 0 17 18 18 14 11 6
-------- -------- -------- -------- -------- -------- -------- --------
18
Income (loss) before income tax (45) (72) (14) (28) 0 2 3 1
provision
Income tax provision -- -- -- -- -- -- -- 0
-------- -------- -------- -------- -------- -------- -------- --------
Net income (loss) (45)% (72)% (14)% (28)% 0% 2% 3% 1%
======== ======== ======== ======== ======== ======== ======== ========
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, 2001, our principal source of
liquidity was $136 million of cash and cash equivalents and marketable
securities. As of December 31, 2001, we had $134,000 of debt outstanding
relating to obligations under capital leases and an obligation for severance pay
to Israeli employees of $1.1 million that is fully provided by monthly deposits
with severance pay funds, insurance policies and by an accrual. As of December
31, 2001, our accumulated net deficit was $25.4 million.
Net cash provided by (used in) operating activities was ($2.6) million,
($0.7) million and $6.2 million in 1999, 2000, and 2001, respectively. Net cash
used in operating activities in 1999 and 2000 was primarily the result of net
losses, increases in other accounts receivable and prepaid expenses and
increases in trade receivables, year-to-year. These cash outflows were offset by
increases in accrued employee and payroll expenses, deferred revenue, and
amortization of goodwill, stock compensation, and in-process research and
development write-offs for 1999 and 2000. Net cash provided by operating
activities for 2001 was primarily the result of net income, depreciation,
amortization of goodwill, intangibles and stock compensation, decreases in other
accounts receivable and prepaid expenses, and increases in accrued employee and
payroll expenses and deferred revenues. These items were primarily offset by an
increase in trade receivables for 2001.
Net cash used in investing activities was $1.4 million, $72.1 million, and
$57.2 million in 1999, 2000, and 2001, respectively. Net cash used for investing
activities in 1999 consisted of capital expenditures and purchases of short-term
deposits. Investing activities in 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 Savant Corporation and Knight Fisk Software. In 2000 the net cash used was
offset by $4.9 million in proceeds received from the sale and redemption of
short-term deposits and marketable securities. Investing activities in 2001
consisted of $89.4 million in purchases of short-term and long-term marketable
securities, $3.3 million related to capital expenditures, and $20.6 million in
payments relating to the acquisition of W. Quinn. The use of cash relating to
capital expenditures and acquisition activity was offset by $57.5 million in
proceeds received from the sale and redemption of short-term deposits and
marketable securities. The majority of our capital investments were for
computers, peripheral equipment and software.
Net cash provided by financing activities was $9.8 million, $148.3 million,
and $4.0 million in 1999, 2000, and 2001, respectively. The net cash provided by
financing activities in 1999 was primarily from net proceeds from the sale of
our preferred shares. Net cash provided in 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. Net cash
provided in 2001 was primarily from the issuance of shares from the employee
stock purchase plan and the exercise of options.
We believe that our existing cash equivalents and marketable securities 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.
CRITICAL ACCOUNTING POLICIES
In December 2001, the SEC requested that all registrants discuss their
"critical accounting policies." A critical accounting policy is a policy that is
both important to the portrayal of our financial condition and results and
requires subjective or complex judgments, often as a result of the need to make
estimates about the effect of matters that are
19
inherently uncertain. While our significant accounting policies are discussed in
Note 3 to our consolidated financial statements included in this Form 10-K, we
believe the following accounting policies to be critical:
REVENUE RECOGNITION. We derive our revenues from the sale of software
licenses and from 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 and support agreements
and consulting and training, none of which are considered essential to the
functionality of the software license.
The Company recognizes revenue in accordance with 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. Generally revenues from our OEMs are
recognized when we receive reports of fees due upon the sublicensing of our
products by the OEMs. 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 after 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 and (2) all revenue recognition criteria of SOP 97-2, as
amended, are satisfied. Under the residual method of accounting any discount in
the arrangement is allocated to the delivered elements. Should changes in
conditions cause management to determine these criteria are not met for certain
future transactions, revenue recognized for any subsequent reporting period
could be adversely affected.
GOODWILL AND OTHER IDENTIFIABLE INTANGIBLE ASSETS. Goodwill associated with
the excess of purchase price over the fair value of assets acquired and other
intangible assets, such as trademarks and trade names, favorable leases, and
covenants not to compete are currently amortized using the straight-line method
over their estimated useful lives. These assets will be reviewed for impairment
whenever events or changes in circumstances indicate that the carrying amount of
an asset may not be recoverable.
In June 2001, the FASB issued SFAS No. 141 and SFAS No. 142. SFAS No. 141
requires business combinations initiated after June 30, 2001 to be accounted for
using the purchase method of accounting and broadens the criteria for recording
intangible assets separate from goodwill. SFAS No. 142 requires the use of the
non-amortization approach to account for purchased goodwill and certain
intangible assets. We have adopted SFAS No. 142 for the W. Quinn Associates, Inc
acquisition in September 2001, and have not amortized the associated goodwill
for 2001. We plan to adopt these pronouncements related to acquisitions that
occurred prior to June 2001 at such time as the amortization associated with
purchased goodwill will cease.
20
USE OF ESTIMATES. The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
MARKETABLE SECURITIES. We account for investments in debt and equity
securities in accordance with SFAS No. 115, "Accounting for Certain Investments
in Debt and Equity Securities." We determine the proper classification of
investments in obligations with fixed maturities and marketable equity
securities at the time of purchase and reevaluate such designations as of each
balance sheet date. At December 31, 2001, most securities were designated as
available-for-sale with a small portion classified as trading securities.
Accordingly, the available-for-sale securities are stated at fair value, with
unrealized gains and losses reported in a separate component of shareholders'
equity, accumulated other comprehensive income. Amortization of premium and
accretion of discounts are included in financial income and other, net. Realized
gains and losses on sales of all investments, as determined on a specific
identification basis, are included in the consolidated statements of operations.
Our trading securities are carried at their fair value based upon the quoted
market price of those investments. Net realized and unrealized gains and losses
on these securities are included in financial income and other, net.
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 and other databases, with which our software
operates, and related enterprise application software;
o acceptance of new products in the marketplace;
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 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.
21
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 US FROM
ATTAINING PROFITABILITY.
We incurred net losses of approximately $2.6 million for the year ended
December 31, 1999, $9.9 million for the year ended December 31, 2000 and had net
income of $923,000 for the year ended December 31, 2001. As of December 31,
2001, we had an accumulated deficit of approximately $25.4 million. We cannot
predict the extent of our future losses and when, or if, we may become
profitable on a sustained basis. We anticipate that our expenses may 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
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 $11.6 million for the year
ended December 31, 1999, to $27.5 million for the year ended December 31, 2000
and to $55.6 million for the year ended December 31, 2001. 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,
Holland, Germany, Australia, Canada, China, Malaysia and throughout the United
States. We increased our employee base significantly during 2000 and 2001. In
particular, we have increased, and expect to continue to increase, the size of
our sales force through the integration of the operations of Knight Fisk
Software Ltd., which we acquired in February 2000, Savant Corporation, which we
acquired in December 2000, JC2 Informatique, the workforce and assets of which
we acquired in December 2000 and W. Quinn Associates, Inc., which we acquired in
September 2001. Furthermore, we have recently established subsidiaries and joint
ventures in Europe 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. 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 personnel abroad. We expect competition for qualified personnel
to remain intense and we may not succeed in attracting or retaining these
personnel.
22
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. 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.
ACQUISITIONS MAY NOT PRODUCE THE REVENUES, EARNINGS OR BUSINESS SYNERGIES THAT
WE ANTICIPATED AND MAY CAUSE OUR REVENUES TO DECLINE.
The acquisition of Savant, W. Quinn and any other past or 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.
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, and Itzhak "Aki" Ratner, our President, 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/Indepth for Oracle 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
23
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 IT 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 APPLICATION 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 IT Application 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 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 application 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 expanded our product line to allow the monitoring of an
organization's application performance across the IT infrastructure and continue
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
24
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, Amdocs, and several other companies to
bundle a version of our software or 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 any of these parties from selling the software of
other companies, including our competitors. Our OEMs or resellers 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.
A DECLINE IN THE PRICE OF OR DEMAND FOR OUR PRECISE/INDEPTH FOR ORACLE SOFTWARE,
WHICH ACCOUNTS FOR A SUBSTANTIAL PORTION OF OUR TOTAL REVENUES, WOULD CAUSE A
SIGNIFICANT DECLINE IN OUR REVENU