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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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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, 2002
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
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(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
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(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: 972 (3) 735-2222
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. [_]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Exchange Act Rule 12b-2). Yes [X] No [_]
The aggregate market value of the voting stock held by non-affiliates of
the registrant, as of February 28, 2003, was approximately $490,730,642 million
(based on the closing price of the registrant's ordinary shares on February 28,
2003, of $16.50 per share). This excludes 466,862 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 February 28, 2003 was 30,208,113.
DOCUMENTS INCORPORATED BY REFERENCE
None
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PRECISE SOFTWARE SOLUTIONS LTD.
ANNUAL REPORT ON FORM 10-K
YEAR ENDED DECEMBER 31, 2002
TABLE OF CONTENTS
PAGE NO.
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PART I
Item 1. Business.........................................................1
Item 2. Properties.......................................................9
Item 3. Legal Proceedings................................................9
Item 4. Submission of Matters to a Vote of Security Holders..............9
PART II
Item 5. Market for Registrant's Common Equity and Related
Stockholder Matters.............................................10
Item 6. Selected Consolidated Financial Data............................11
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations..... .......................12
Item 7A. Quantitative and Qualitative Disclosures About Market Risk......32
Item 8. Financial Statements and Supplementary Data.....................32
Item 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure........................................32
PART III
Item 10. Directors and Executive Officers of the Registrant..............33
Item 11. Executive Compensation..........................................36
Item 12. Security Ownership of Certain Beneficial Owners and
Management of Precise and Related Matters.......................40
Item 13. Certain Relationships and Related Transactions..................42
Item 14. Controls and Procedures.........................................42
PART IV
Item 15. Exhibits, Financial Statement Schedules and Reports
on Form 8-K.....................................................43
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 PROVISIONS 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 "ANTICIPATE," "BELIEVE," "EXPECT,"
"INTEND," "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
OVERVIEW
Precise Software Solutions Ltd. is a provider of software that assists
organizations in monitoring and optimizing the performance of their Information
Technology infrastructure. This IT infrastructure consists of networks,
operating systems, servers, applications, databases and storage devices that
help manage traditional and electronic business activities. Our software allows
an organization to continuously monitor its infrastructure performance and be
alerted when performance parameters exceed user-established thresholds. When our
software detects a performance problem, it also provides technology support
personnel with a thorough set of diagnostic data that pinpoints the specific
cause of performance degradation and offers suggested alternatives to alleviate
the problem. Our software serves businesses that rely on enterprise applications
or have implemented e-business applications to cut costs and improve
efficiencies. Businesses have become increasingly reliant on the proper
functioning of their Information Technology infrastructure and our software
assists them in achieving this goal.
Precise was incorporated in 1990. Our U.S. office is 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. Our web site is located at www.precise.com, but
information contained on our web site does not constitute part of this Annual
Report on Form 10-K. We make available on our web site information filed by us
with the SEC as soon as reasonably practicable after filing. 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.
RECENT DEVELOPMENT
On December 19, 2002, we entered into an Agreement and Plan of Merger with
VERITAS Software Corporation and Argon Merger Sub Ltd., an indirect wholly-owned
subsidiary of VERITAS, providing for the acquisition of Precise by VERITAS
pursuant to a merger of the Merger Subsidiary with and into Precise, with
Precise surviving the merger as an indirect wholly-owned subsidiary of VERITAS.
Upon completion of the merger, each ordinary share of Precise will be exchanged,
at the election of the holder, for either $16.50 in cash or a combination of
$12.375 in cash and 0.2365 of a share of VERITAS common stock. Precise
shareholders who are Israeli holders, as defined in the merger agreement, and
who properly and timely elect to receive the mixed consideration will receive
(1) $12.375 in cash, plus (2) an amount of cash equal to 0.2365 multiplied by
the closing price of one share of VERITAS common stock, as reported on The
Nasdaq National Market, on the trading day immediately prior to the date the
merger takes effect. The consummation of the merger is subject to various
conditions, including approval by our shareholders. The merger is expected to
close in the second quarter of 2003.
In connection with the proposed merger, VERITAS intends to file a
registration statement on Form S-4, including a proxy statement/prospectus, with
the Securities and Exchange Commission. Investors and security holders are urged
to read the proxy statement/prospectus regarding the proposed merger when it
becomes available because it will contain important information about the
transaction. Investors and security holders may obtain a free copy of the proxy
statement/prospectus when it is available and other documents filed by VERITAS
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and Precise with the Securities and Exchange Commission at the Securities and
Exchange Commission's web site at www.sec.gov. The proxy statement/prospectus
and these other documents also may be obtained for free from VERITAS and
Precise.
Precise, its directors and executive officers may be deemed to be
participants in the solicitation of proxies from Precise shareholders in favor
of the proposed merger. A description of any interests that the directors and
executive officers of Precise may have in the transaction will be available in
the proxy statement/prospectus.
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 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. 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.
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 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. Precise i3 is designed to optimize the performance of
applications deployed on any technology combinations running in today's
multi-tier, business-critical applications: PeopleSoft, Siebel, SAP, Oracle
Applications, BEA WebLogic, IBM WebSphere, Oracle, IBM DB2 UDB, Microsoft SQL
Server, and storage arrays from EMC, IBM, HP and HDS.
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PRODUCTS
Product Functions
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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,
Precise/Savvy for Siebel,
Precise/Savvy for Oracle Applications
and Precise/Savvy for Operating
Systems.
INDEPTH:
Precise/Indepth FOR ORACLE Precise/Indepth for Oracle monitors,
analyzes and helps tune Oracle-based
applications and databases to ensure
that those applications perform at
peak efficiency. After being alerted
to a performance issue, the software
assists the user in identifying the
specific causes of slow performance.
The product permits users to view the
access path that the database has
chosen for a query from an
application, automatically generates
structured query language ("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/Indepth FOR SQL SERVER Precise/Indepth for SQL Server
monitors, analyzes and helps tune MS
SQL Server 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
SQL statements that will access the
database in a different manner, and
projects the performance improvement
if the change is made. Through the
Precise Performance Warehouse,
Precise/Indepth for SQL Server
supports long-term analysis and
proactive management by providing
historical performance information.
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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. 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. The SmarTune
tuning capability 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, Oracle 9iAS and
Macromedia's JRun J2EE application
servers.
Precise/Indepth FOR TRANSACTIONS Precise/Indepth for Transactions
allows IT organizations to continually
measure the business performance of a
website by measuring key performance
indicators and comparing those
measurements against service level
objectives to ensure the quality of
experience for website visitors.
Precise/Indepth for Transactions helps
to ensure the service provided to
website visitors is high-quality and
the critical business opportunities
supported via the website do not get
disrupted. It measures the real
end-user web experience from a
performance perspective, providing
detailed visibility into the
performance of the web site and the
pages representing business
transactions. With Precise/Indepth for
Transactions IT organizations can:
measure the performance of specific
pages; understand which pages users
abandon; track web performance by
unique IP address; compare response
time to service level expectations;
and aggregate visitors by geographical
region.
Precise/Interpoint Precise/Interpoint works as an add-on
product to Precise/Indepth for Oracle,
Precise/Indepth for DB2 UDB and
Precise/Indepth for SQL Server to
optimize ERP application performance.
By tracing a query from the ERP
application back to the initiating
user, form and t-codes,
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, Precise/Indepth for DB2 UDB
and Precise/Indepth for SQL Server or
other changes to the ERP application
to improve performance. This product
supports Oracle Applications,
Peoplesoft 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.
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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/Lightpoint Precise/Lightpoint correlates
application, operating system,
database and HDS Lightning 99xx and
Thunder 92xx storage array performance
metrics for monitoring and tuning.
Works as an add-on product to
Precise/Indepth for Oracle.
Precise/Sharkpoint Precise/Sharkpoint correlates
application, operating system,
database and IBM Enterprise Storage
Server performance metrics for
monitoring and tuning. Works as an
add-on product to Precise/Indepth for
Oracle.
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.
Precise/SiteStor SRM Precise/SiteStor SRM discovers and
analyzes storage resources on an
interval basis to monitor adherence to
corporate storage usage policy. It
provides a consolidated view of
enterprise storage for use in the
following functions: Server/Storage
Consolidation, SAN/NAS/DAS Planning,
Storage Consumption Analysis,
Chargeback, and Data Migration and
Availability.
Precise/QuotaAdvisor Precise/QuotaAdvisor gives the ability
to set and enforce disk quotas by
users, groups, disk, shares,
directories and files for Windows
NT/2000 servers, according to
corporate storage policy.
INFORM:
Precise/Inform FOR FORESIGHT Precise/Inform for 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/Inform FOR ALERTS Precise/Inform for Alerts 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.
Precise/Luminate Precise/Luminate delivers service
level reporting and analysis of SAP
performance and availability in a way
that is easy to navigate and
understand. Precise/Luminate utilizes
service level information to provide
moving averages, comparisons to
targets, and analysis by user
organization, location, and
application module on a continuous
basis. The combination of product and
services converts raw data to
meaningful information through
sophisticated collection and analysis.
That empowers everyone-from CIOs to
technical staff-to identify the
actions and resources necessary to
manage and improve SAP service-levels.
We plan to continue to introduce performance management solutions targeted
at specific market and business segments to answer the call for business-focused
solutions.
5
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 6,000
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 Japan.
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 products for multiple departments or servers, the sales cycle may
range from one to six 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, Canada,
Chile, Colombia, Costa Rica, Mexico, Peru, Puerto Rico, the United States and
Venezuela. 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
Australia, Austria, China, Czech Republic, Denmark, France, Greece, Holland,
Hungary, India, Ireland, Israel, Italy, Japan, Korea, Malaysia, New Zealand,
Norway, Poland, Portugal, Singapore, South Africa, Spain, Sweden, Switzerland,
Taiwan, Thailand, Turkey and the United Kingdom.
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 e-blasts, 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 a non-exclusive stand alone version of Precise/Indepth for
Oracle and Precise/Indepth for DB2 UDB called Open Database (DB) Tuner. We also
provide 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. Due to the growth in our direct sales channel, the relative
contribution from EMC has declined significantly over time. License revenue from
EMC was $6.4 million, $10.1 million and $7.6 million for the years end December
31, 2000, 2001 and 2002, respectively. Over this period, EMC license revenue as
a percentage of our total revenue declined from 22% in 2000, to 16% in 2001 to
8% in 2002. Total revenue from EMC in 2002 represented 10% of our total
revenues.
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
6
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.
OTHER. We also have strategic original equipment manufacturer or "OEM"
relationships with Microsoft Corporation and Intel 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, training courses and consulting.
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 and
solutions. 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 performance management software is rapidly evolving and
intensely competitive. The 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.
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
7
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 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 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 market for our products 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 patent, trademark, trade secret and copyright laws and
contractual restrictions to protect the proprietary aspects of our technology.
We have two issued patents and have filed seven patent applications covering
portions of our products. 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.
Our success and ability to compete are also dependent on our ability to
operate without infringing upon the proprietary rights of others. In the event
of a successful claim of infringement against us and our failure or inability to
license the infringed technology on acceptable terms, our business and operating
results would be significantly harmed.
We integrate various third party software products as components of our
software under the terms of licensing agreements 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/InsightR, Precise/SavvyR, Precise/IndepthR, Precise/CrosspointTM,
Precise/LightpointTM, Precise/SharkpointTM, Precise/InterpointR,
Precise/SavantTM, Precise/InformTM, Precise/ForesightR, SmarTuneR, Precise i3R ,
Precise/Storage CentralTM, Precise/SitestorTM, Precise/QuotaAdvisorTM 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.
8
EMPLOYEES
At December 31, 2002, we had a total of 462 employees. Our employees in
France are subject to a statutory collective bargaining agreement. None of our
other employees is subject to a collective bargaining agreement. 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. See Note 3 to the consolidated financial statements for a
discussion of the liability related to severance for our Israeli employees.
FINANCIAL INFORMATION ABOUT GEOGRAPHIC AREAS
For further information concerning the geographic distribution of our
revenues and assets, please refer to Note 14 to the consolidated financial
statements included in Part II of this Annual Report on Form 10-K.
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, Canada, Japan, China 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, other than
ordinary routine litigation incidental to our business.
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, 2002.
9
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Precise's ordinary shares are listed and traded on The Nasdaq National
Market under the symbol "PRSE." As of February 28, 2003, there were
approximately 96 holders of record of Precise's ordinary shares. 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.
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
2002 HIGH LOW
First Quarter.............. $ 27.98 $ 16.55
Second Quarter............. $ 24.55 $ 6.45
Third Quarter.............. $ 15.20 $ 7.70
Fourth Quarter............. $ 16.84 $ 8.45
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.
During the fiscal year ended December 31, 2002, Precise issued the
following securities that were not registered under the Securities Act of 1933,
as amended:
o In September 2001, Precise acquired W. Quinn Associates, Inc. In
connection with this acquisition, Precise issued in October 2002 an
aggregate of 675,614 ordinary shares to the former shareholders of W.
Quinn as additional consideration for all of the outstanding capital
stock of W. Quinn. This consideration was based on the performance of
W. Quinn from the acquisition to the first anniversary of the date of
acquisition.
o In June 2002, Precise acquired The Middleware Company. In connection
with this acquisition, Precise issued in December 2002 an aggregate of
126,353 ordinary shares to the former shareholders of Middleware as
partial consideration for all of the outstanding capital stock of
Middleware. These shares were registered for resale in February 2003.
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.
10
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
You should read the following selected consolidated financial data together
with "Management's Discussion and Analysis of Financial Condition and Results of
Operations" and the consolidated financial statements and the related notes
included elsewhere in this Annual Report on Form 10-K.
The selected consolidated statement of operations data set forth below for
the years ended December 31, 2000, 2001 and 2002, and the selected consolidated
balance sheet data as of December 31, 2001 and 2002 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, 1998 and 1999 and the selected consolidated balance sheet data as
of December 31, 1998, 1999 and 2000 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,
--------------------------------------------------------
1998 1999 2000 2001 2002
-------- -------- -------- -------- --------
(in thousands, except per share data)
CONSOLIDATED STATEMENT OF OPERATIONS DATA:
Revenues:
Software licenses ..................................... $ 5,331 $ 9,770 $ 22,968 $ 43,903 $ 52,672
Services .............................................. 858 1,844 4,580 11,694 23,328
-------- -------- -------- -------- --------
Total revenues .................................. 6,189 11,614 27,548 55,597 76,000
Cost of revenues:
Software licenses ..................................... 522 741 742 362 628
Services, net ......................................... 198 906 1,693 3,143 6,395
-------- -------- -------- -------- --------
Total cost of revenues .......................... 720 1,647 2,435 3,505 7,023
-------- -------- -------- -------- --------
Gross profit ............................................ 5,469 9,967 25,113 52,092 68,977
-------- -------- -------- -------- --------
Operating expenses:
Research and development, net ......................... 2,214 2,891 4,987 10,924 12,793
Sales and marketing, net .............................. 5,739 7,913 20,749 34,675 43,611
General and administrative, net ....................... 1,272 1,598 3,923 7,046 8,668
Amortization of deferred stock compensation, goodwill
and intangible assets ................................. 300 234 6,250 4,970 3,994
In-process research and development write-off ......... -- -- 2,200 86 --
Veritas acquisition related expenses .................. -- -- -- -- 131
-------- -------- -------- -------- --------
Total operating expenses ........................ 9,525 12,636 38,109 57,701 69,197
-------- -------- -------- -------- --------
Operating loss .......................................... (4,056) (2,669) (12,996) (5,609) (220)
Financial income and other, net ......................... 34 71 3,091 6,565 4,021
-------- -------- -------- -------- --------
Income (loss) before income taxes ....................... (4,022) (2,598) (9,905) 956 3,801
Income taxes ............................................ -- -- -- 33 210
-------- -------- -------- -------- --------
Net income (loss) ....................................... $ (4,022) $ (2,598) $ (9,905) $ 923 $ 3,591
======== ======== ======== ======== ========
Net earnings (loss) per share:
Basic and diluted net earnings (loss) per share ......... $ (1.31) $ (0.79) $ (0.77) $ 0.03 $ 0.12
======== ======== ======== ======== ========
Weighted average number of shares used in computing basic
net earnings (loss) per share ......................... 3,077 3,299 12,901 26,745 28,843
======== ======== ======== ======== ========
Weighted average number of shares used in computing
diluted net earnings (loss) per share ................. 3,077 3,299 12,901 29,971 31,210
======== ======== ======== ======== ========
DECEMBER 31,
--------------------------------------------------------
1998 1999 2000 2001 2002
-------- -------- -------- -------- --------
CONSOLIDATED BALANCE SHEET DATA: (in thousands)
Cash, cash equivalents and marketable securities.......... $ 844 $ 6,693 $149,410 $135,831 $140,195
Working capital .......................................... 242 7,709 120,147 74,904 86,521
Total assets.............................................. 4,333 12,986 178,681 203,183 227,018
Shareholders' equity ..................................... 742 8,293 166,876 185,659 205,444
11
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
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 PROVISIONS 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 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 "ANTICIPATE," "BELIEVE," "EXPECT," "INTEND," "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 ANNUAL REPORT
ON 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 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 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/Inform for Alerts, Precise/Presto for EMC,
Precise/Interpoint
2000 Precise/Insight, Precise/Savant
2001 Precise/Inform for Foresight, Precise/Indepth for J2EE,
Precise/Savvy, Precise/Indepth for DB2 UDB, Precise/Crosspoint,
Precise/StorageCentral SRM, Precise/QuotaAdvisor, Precise i3 Suite
2002 Precise/SiteStor SRM, Precise/Luminate, Precise/Indepth for
Transactions, Precise/Lightpoint, Precise/Indepth for SQL Server,
Precise/Sharkpoint
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 Japan 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.
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 INHERENTLY UNCERTAIN. WHILE OUR
SIGNIFICANT ACCOUNTING POLICIES ARE DISCUSSED IN NOTE 3 TO OUR CONSOLIDATED
FINANCIAL STATEMENTS INCLUDED IN THIS ANNUAL REPORT ON 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
12
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 Statement of Position
("SOP") 97-2, "Software Revenue Recognition," as amended. Revenues from software
arrangements are recognized when:
o persuasive evidence of an agreement exists;
o the product has been delivered;
o all license payments are due within one year;
o the license fee is fixed or determinable; and
o collection of the fee is probable
o no significant obligations exist.
Where software arrangements involve multiple elements, revenue is allocated
to each element based on vendor specific objective evidence, or VSOE, in
accordance with the "residual method" prescribed by SOP 98-9, "Modification of
SOP 97-2, Software Revenue Recognition with Respect to Certain Transactions."
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.
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 as the services are rendered.
Generally, revenues from our OEMs are recognized when we receive reports of
fees due upon the sublicensing of our products by the OEMs.
ALLOWANCES FOR DOUBTFUL ACCOUNTS. We make judgments as to our ability to
collect outstanding receivables and provide allowances for a portion of
receivables when collection becomes doubtful. Provisions are made based upon a
review of significant outstanding balances, as well as our historical collection
experience and current economic trends. If our historical experience does not
reflect our future ability to collect outstanding receivables, additional
provisions for doubtful accounts may be needed and the future results of
operations could be adversely affected.
GOODWILL AND OTHER INTANGIBLE ASSETS. As discussed in Note 3 to our
consolidated financial statements, we adopted Statement of Financial Accounting
Standards ("SFAS") No.142, "Goodwill and Other Intangible Assets," for
acquisitions on or after July 1, 2001, and have not amortized the associated
goodwill for 2001 or 2002. We adopted the pronouncement related to acquisitions
that occurred prior to June 2001 at January 1, 2002. This standard requires that
goodwill no longer be amortized, and instead, be tested for impairment on a
periodic basis. At December 31, 2002, we had $44.6 million in goodwill.
In testing for a potential impairment of goodwill, SFAS 142 requires us to:
(1) allocate goodwill to the various businesses to which the acquired goodwill
relates; and (2) estimate the fair value of those businesses to which goodwill
relates. The process of evaluating the potential impairment of goodwill is
highly subjective and requires significant judgment. In estimating the fair
value of the businesses with recognized goodwill for the purposes of our 2002
financial statements, we made estimates and judgments about the future cash
flows of these businesses. Our cash flow forecasts were based on assumptions
that are consistent with the plans and estimates we are using to manage the
underlying businesses. We also considered our market capitalization.
13
Based on our best estimates, we have concluded that there is no impairment
of our goodwill. However, changes in these estimates, including our market
capitalization, could cause one or more of the businesses to be valued
differently and may result in an impairment.
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, 2002, all securities were designated as
available-for-sale. 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 investments, as determined on a
specific identification basis, are included in the consolidated statements of
operations.
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: 2000 2001 2002
---- ---- ----
Revenues:
Software licenses........................................ 83% 79% 69%
Services ................................................ 17 21 31
-------------------------
Total revenues ....................................... 100 100 100
Cost of revenues:
Software licenses ....................................... 3 1 1
Services, net ........................................... 6 5 8
-------------------------
Total cost of revenues ............................... 9 6 9
-------------------------
Gross profit ............................................... 91 94 91
Operating expenses:
Research and development, net ........................... 18 20 17
Sales and marketing, net ................................ 75 62 57
General and administrative, net ......................... 14 13 11
Amortization of deferred stock compensation.............. 22 3 1
Amortization of goodwill, intangible assets and IPR&D.... 9 6 5
Veritas acquisition related expenses..................... -- -- --
-------------------------
Total operating expenses ............................. 138 104 91
-------------------------
Operating loss ............................................. (47) (10) --
Financial income and other, net ............................ 11 12 5
-------------------------
Income (loss) before income taxes .......................... (36) 2 5
Income taxes ............................................... -- -- --
-------------------------
Net income (loss) .......................................... (36)% 2% 5%
=========================
YEARS ENDED DECEMBER 31, 2000, 2001, AND 2002
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 $27.5 million, $55.6 million, and $76.0
14
million in 2000, 2001, and 2002, respectively, representing an increase of $28.1
million, or 102%, from 2000 to 2001, and an increase of $20.4 million, or 37%,
from 2001 to 2002. One customer accounted for 23%, 18% and 10% of total revenues
for the years ended December 31, 2000, 2001 and 2002, respectively. In addition,
one other customer accounted for 13% of total revenues for the year ended
December 31, 2001 and less than 10% for the years ended December 31, 2000 and
2002.
Revenues from sales of software licenses were $23.0 million, $43.9 million,
and $52.7 million in 2000, 2001, and 2002, respectively, representing an
increase of $20.9 million, or 91%, from 2000 to 2001, and an increase of $8.8
million, or 20%, from 2001 to 2002. The increase in software license revenue
from 2000 to 2001 is due to increased volume of license sales due to the
expansion of our direct and indirect sales channels, the continued strength of
our OEM relationships, and the acquisition and introduction of new products to
the market. The increase in software license revenue from 2001 to 2002 is due to
the expansion of our direct sales channel, including the addition of storage
resource management products in September 2001, partially offset by a decline in
our OEM revenue.
Revenues from services were $4.6 million, $11.7 million, and $23.3 million
in 2000, 2001, and 2002 respectively, representing an increase of $7.1 million,
or 155%, from 2000 to 2001, and an increase of $11.6 million, or 99%, from 2001
to 2002. The increase in service revenue from 2000 to 2001 and from 2001 to 2002
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, including, revenue resulting from the
operations of The Middleware Company, which was acquired in June 2002.
COST OF REVENUES
Cost of revenues consists of costs associated with generating software
license and service revenues. Cost of revenues were $2.4 million, $3.5 million,
and $7.0 million in 2000, 2001, and 2002, respectively, representing an increase
of $1.1 million, or 44%, from 2000 to 2001, and an increase of $3.5 million, or
100%, from 2001 to 2002. Cost of revenues as a percentage of total revenues were
9%, 6%, and 9% in 2000, 2001, and 2002, respectively. The decline in cost of
revenues from 2000 to 2001 is explained in the following two paragraphs. The
increase in cost of revenues from 2001 to 2002 is due to a change in revenue
mix, as our services business, which delivers lower gross margins than software
licenses, grew at a faster rate than license revenues.
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 and third party royalties. Cost of software license revenues
was $0.7 million, $0.4 million, and $0.6 million in 2000, 2001, and 2002,
respectively. 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 Israeli
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 3%, 1%, and 1% in 2000, 2001, and 2002, respectively.
Cost of service revenues consists primarily of costs related to personnel
providing customer support and professional services. Cost of service revenues
were $1.7 million, $3.1 million, and $6.4 million in 2000, 2001, and 2002,
respectively, representing an increase of $1.4 million, or 86%, from 2000 to
2001, and an increase of $3.3 million, or 103%, from 2001 to 2002. The increase
from 2000 to 2001 and from 2001 to 2002 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 37%, 27%, and 27%
in 2000, 2001, and 2002, respectively. The decline in the cost of service
revenue from 2000 to 2001 relates primarily to improving gross margins from our
professional services business due to scale and productivity initiatives.
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 $5.0 million, $10.9 million, and $12.8 million in
2000, 2001, and 2002, respectively, representing an increase of $5.9 million, or
119%, from
15
2000 to 2001, and an increase of $1.9 million, or 17%, from 2001 to 2002. The
increase from 2000 to 2001 and from 2001 to 2002 was attributable to the cost
associated with the development of new products to enhance our software suite,
which resulted in an increase in headcount related expenses.
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 $20.7 million, $34.7
million, and $43.6 million in 2000, 2001, and 2002, respectively, representing
an increase of $14.0 million, or 67%, from 2000 to 2001, and an increase of $8.9
million, or 26%, from 2001 to 2002. The increase from 2000 to 2001 and from 2001
to 2002 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. As a percentage of total
revenue, sales and marketing expenses have declined from 75% in 2000, to 62% in
2001 and to 57% in 2002, representing the most significant factor in our
improving overall operating margins over that period. This trend reflects
improving productivity within our direct sales force as well as leveraging
marketing spending as we have grown.
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 $3.9 million, $7.0 million, and $8.7 million in
2000, 2001, and 2002, respectively, representing an increase of $3.1 million, or
80%, from 2000 to 2001, and an increase of $1.7 million, or 23%, from 2001 to
2002. The increase from 2000 to 2001 and from 2001 to 2002 is primarily
attributable to an increase in payroll and headcount related expenses.
AMORTIZATION OF DEFERRED STOCK COMPENSATION
Amortization of deferred stock compensation was $6.2 million, $1.9 million,
and $0.4 million in 2000, 2001, and 2002, respectively, representing a decrease
of $4.3 million from 2000 to 2001, and a decrease of $1.5 million from 2001 to
2002. The decrease from 2000 to 2001 and from 2001 to 2002 is attributable to
deferred stock compensation being fully amortized and options reaching the end
of the vesting period for various individuals during this period. As of December
31, 2002, the unamortized deferred stock compensation balance is $77,000, most
of which will be amortized during 2003.
AMORTIZATION OF GOODWILL AND INTANGIBLE ASSETS
Amortization of goodwill and intangible assets was $99,000, $3.0 million
and $3.6 million in 2000, 2001, and 2002, respectively, representing an increase
of $2.9 million from 2000 to 2001, and an increase of $0.6 million from 2001 to
2002. The increase from 2000 to 2001 is attributable to amortization of goodwill
and intangible assets relating to the purchase of Savant Corporation ("Savant")
and W. Quinn Associates, Inc. ("W. Quinn") in December of 2000 and September of
2001, respectively. The increase from 2001 to 2002 is attributable to a full
year of amortization of intangible assets for W. Quinn and other technology
purchases, partially offset by the discontinuance of goodwill amortization in
accordance with the adoption of SFAS No.142 for acquisitions on or after July 1,
2001. For further discussion see Note 3 to our consolidated financial
statements.
IN-PROCESS RESEARCH AND DEVELOPMENT WRITE-OFF
In-process research and development write-offs were $2.2 million, $86,000,
and $0 in 2000, 2001, and 2002, respectively. 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.
16
FINANCIAL INCOME AND OTHER, NET
Financial income and other, net, was $3.1 million, $6.6 million, and $4.0
million in 2000, 2001, and 2002, respectively, representing an increase of $3.5
million from 2000 to 2001, and a decrease of $2.6 million from 2001 to 2002. The
increase from 2000 to 2001 is attributable to additional interest earned on a
full year of investment of proceeds from both our initial public offering and
secondary public offering, which occurred in June 2000 and November 2000,
respectively. The decrease from 2001 to 2002 is due to lower market interest
rates earned on our investments.
17
QUARTERLY RESULTS OF OPERATIONS
The following table presents certain unaudited consolidated statement of
operations data for each quarter of 2001 and 2002. 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,
2001 2001 2001 2001 2002 2002 2002 2002
-----------------------------------------------------------------------------------------
Revenues:
Software licenses........ $9,446 $9,995 $11,300 $13,161 $12,402 $13,197 $12,562 $14,511
Services................. 2,064 2,712 3,028 3,891 4,692 5,023 6,788 6,825
-----------------------------------------------------------------------------------------
Total revenues........ 11,510 12,707 14,328 17,052 17,094 18,220 19,350 21,336
Cost of revenues:
Software licenses........ 70 42 69 181 132 121 237 138
Services, net............ 745 702 766 931 1,065 1,334 1,963 2,033
-----------------------------------------------------------------------------------------
Total cost of revenues 815 744 835 1,112 1,197 1,455 2,200 2,171
-----------------------------------------------------------------------------------------
Gross profit............... 10,695 11,963 13,493 15,940 15,897 16,765 17,150 19,165
Operating expenses:
Research and development,
net..................... 2,236 2,688 2,850 3,149 3,250 3,189 3,199 3,155
Sales and marketing, net 7,633 8,121 8,688 10,233 9,810 10,532 10,738 12,531
General and
administrative, net..... 1,552 1,586 1,887 2,020 2,165 2,188 2,152 2,163
Amortization of deferred
stock compensation...... 713 469 404 345 188 75 72 19
Amortization of goodwill,
intangible assets and
IPR&D................... 638 654 833 1,001 765 887 979 1,009
Veritas acquisition
related expenses........ -- -- -- -- -- -- -- 131
-----------------------------------------------------------------------------------------
Total operating
expenses............. 12,772 13,518 14,662 16,748 16,178 16,871 17,140 19,008
-----------------------------------------------------------------------------------------
Operating income (loss).... (2,077) (1,555) (1,169) (808) (281) (106) 10 157
Financial income and
other, net............... 2,106 1,765 1,621 1,073 1,003 1,016 1,094 908
-----------------------------------------------------------------------------------------
Income before income taxes 29 210 452 265 722 910 1,104 1,065
Income taxes............... -- -- -- 33 72 80 8 50
-----------------------------------------------------------------------------------------
Net income................. $29 $210 $452 $232 $650 $830 $1,096 $1,015
=========================================================================================
18
Three Months Ended
-----------------------------------------------------------------------------------------
Mar 31, June 30, Sept 30, Dec 31, Mar 31, June 30, Sept 30, Dec 31,
2001 2001 2001 2001 2002 2002 2002 2002
-----------------------------------------------------------------------------------------
Percent of Total Revenues:
Revenues:
Software licenses....... 82% 79% 79% 77% 73% 72% 65% 68%
Services................ 18 21 21 23 27 28 35 32
-----------------------------------------------------------------------------------------
Total revenues........ 100 100 100 100 100 100 100 100
Cost of revenues:
Software licenses....... 1 -- 1 1 1 1 1 1
Services, net........... 6 6 5 6 6 7 10 9
-----------------------------------------------------------------------------------------
Total cost of revenues 7 6 6 7 7 8 11 10
-----------------------------------------------------------------------------------------
Gross margin............... 93 94 94 93 93 92 89 90
Operating expenses:
Research and development, net 19 21 20 18 19 18 17 15
Sales and marketing, net 66 64 61 60 57 58 56 58
General and
administrative, net.... 14 12 13 12 13 12 11 10
Amortization of deferred
stock Compensation..... 6 4 3 2 1 -- -- --
Amortization of goodwill,
intangible assets and
IPR&D.................. 6 5 5 6 5 5 5 5
Veritas acquisition
related expenses....... -- -- -- -- -- -- -- 1
-----------------------------------------------------------------------------------------
Total operating expenses 111 106 102 98 95 93 89 89
-----------------------------------------------------------------------------------------
Operating income (loss).... (18) (12) (8) (5) (2) (1) -- 1
Financial income and
other, net .......... 18 14 11 6 6 6 6 4
-----------------------------------------------------------------------------------------
Income before income taxes - 2 3 1 4 5 6 5
Income taxes............... - - - - - - - -
-----------------------------------------------------------------------------------------
Net income ................ 0% 2% 3% 1% 4% 5% 6% 5%
=========================================================================================
LIQUIDITY AND CAPITAL RESOURCES
Since January 1, 2000, we have funded operations primarily through 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, and, to a lesser extent, borrowings from financial institutions.
As of December 31, 2002, our principal source of liquidity was $140 million of
cash, cash equivalents and marketable securities. As of December 31, 2002, we
had $136,000 of debt outstanding relating to obligations under capital leases
and an obligation for severance pay to Israeli employees of $1.2 million that is
fully provided by monthly deposits with severance pay funds, insurance policies
and by an accrual. As of December 31, 2002, our accumulated net deficit was
$21.8 million.
Net cash provided by (used in) operating activities was $(0.7) million,
$6.2 million and $8.6 million in 2000, 2001, and 2002, respectively. Net cash
used in operating activities in 2000 was primarily the result of net losses as
well as increases in trade and other receivables, which more than offset various
non-cash charges. Net cash provided by operating activities for both 2001 and
2002 was primarily the result of net income and various non-cash charges, which
more than offset higher receivables.
Net cash used in investing activities was $72.1 million, $57.2 million, and
$36.2 million in 2000, 2001, and 2002, respectively. Net cash used in investing
activities in 2000 consisted of $70.9 million in purchases of available-for-sale
marketable securities, $2.1 million related to capital expenditures, and $3.3
million in payments relating to the acquisitions of Savant 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
available-for-sale marketable securities. Investing activities in 2001 consisted
of $89.4 million in purchases of available-for-sale marketable securities, $3.3
19
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 available-for-sale marketable
securities. The majority of our capital investments were for computers,
peripheral equipment and software. Investing activities in 2002 primarily
consisted of $66.2 million in purchases of available-for-sale marketable
securities, $3.3 million in payments relating to the acquisition of The
Middleware Company, a $2.6 million loan to a privately held technology company,
a $1.6 million purchase of other intangible assets and $1.5 million for capital
expenditures. The use of cash relating to capital expenditures and acquisition
activity was offset by $38.3 million in proceeds received from the redemption of
available-for-sale marketable securities and the sale of trading securities.
Net cash provided by financing activities was $148.3 million, $4.0 million,
and $6.0 million in 2000, 2001, and 2002, respectively. 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 capital lease obligations. Net cash provided in 2001 and 2002 was
primarily from the issuance of shares in connection with our employee stock
purchase plan and the exercise of options.
We believe that our existing cash equivalents and available-for-sale
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.
On December 19, 2002, we entered into an Agreement and Plan of Merger with
VERITAS Software Corporation and Argon Merger Sub Ltd., an indirect wholly-owned
subsidiary of VERITAS, providing for the acquisition of Precise by VERITAS
pursuant to a merger of Argon with and into Precise, with Precise surviving the
merger as an indirect wholly-owned subsidiary of VERITAS. The consummation of
the merger is subject to various conditions, including approval by the
shareholders of Precise. The merger is expected to close in the second quarter
of 2003.
ACQUISITIONS AND INVESTMENTS
In October 2002, we entered into a loan agreement relating to a loan of up
to $3.4 million to a privately held U.S.-based company ("borrower"), which owns
technology complementary to our technology. The loan terms provide that we will
receive warrants of up to 7% of the capital stock of the borrower for nominal
consideration, depending on the total amount loaned to the borrower.
Concurrently with entering into the loan agreement, we loaned $0.6 million to
the borrower, and we loaned an additional $1.9 million in November 2002. The
loan is secured by a first lien on the assets of the borrower, bears interest at
10% and is due and payable within 30 days of a demand for payment by Precise.
Concurrently with funding the loan in November 2002, we executed an agreement
entitling us, in our discretion and upon satisfaction with a review of the
business and assets of the borrower, to acquire all of the equity interests of
the borrower through a merger for a contingent payment based on the 2003 results
of the borrower (up to a maximum of $44.4 million), after applying the aggregate
amount loaned toward the purchase price. We have not performed the requisite
business review of the borrower to determine whether we would be interested in
acquiring the borrower and we are uncertain whether we will become interested in
pursuing such an acquisition. We presently have no influence on the borrower's
conduct of its business. We valued the warrants based on the total value of the
borrower, which was considered to be immaterial.
In June 2002, we acquired all the outstanding shares of The Middleware
Company, a U.S.-based services company, for consideration of approximately $6.1
million. Middleware provides consulting, training courses and other related
services. The purchase price consisted of approximately $4.0 million paid in
cash. In addition, The Middleware stockholders were entitled to an additional
$2.1 million payable in our ordinary shares, which equated to 126,353 shares
issued in the fourth quarter of 2002. The consideration includes $150,000 in
estimated transaction costs. The stockholders also have the right to receive
additional contingent consideration of up to an amount of $3.5 million based on
achieving earnings levels and performance targets related to the one year period
subsequent to the closing.
The acquisition was accounted for under the purchase method, and
accordingly the purchase price has been allocated to the assets acquired and
liabilities assumed based on their estimated fair value at the date of
acquisition.
20
The excess of the purchase price over the estimated fair value of the net assets
acquired has been recorded as goodwill.
In September 2001, we completed the acquisition of all of the capital stock
of W. Quinn for approximately $34.1 million in a combination of cash and
ordinary shares. We issued 774,413 ordinary shares and paid $21.6 million in
cash for the acquisition, which included $1.5 million in transaction costs. In
addition, the acquisition provided the W. Quinn shareholders with a right to
receive additional ordinary shares based on achievement of certain
post-acquisition revenue and performance targets during a twelve month period
spanning five quarters, beginning in the third quarter of 2001 and ending in the
third quarter of 2002 ("earn out"). The additional consideration was paid in the
form of 675,614 ordinary shares issued in the fourth quarter of 2002 and, as a
result, we recorded approximately $7.5 million in goodwill.
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, and an additional $6.6 million has been allocated
to other intangible assets. An additional $7.5 million of goodwill was recorded
in 2002 related to the payment of the earn out, resulting in $33.2 million of
total goodwill relating to the W. Quinn acquisition. See note 2 of our
consolidated financial statements for further details.
In December 2000, we completed the acquisition of all of the capital stock
of Savant 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, an additional
$6.1 million has been allocated to other intangible assets 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.
21
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. YOU
SHOULD CONSIDER CAREFULLY EACH OF THE FOLLOWING RISKS AND ALL OF THE OTHER
INFORMATION IN THIS ANNUAL REPORT ON FORM 10-K AND THE DOCUMENTS WE INCORPORATE
BY REFERENCE BEFORE INVESTING IN OUR ORDINARY SHARES. YOU SHOULD ALSO CONSIDER
CAREFULLY THE PROXY STATEMENT/PROSPECTUS REGARDING OUR PROPOSED MERGER WITH
VERITAS WHEN IT BECOMES AVAILABLE BECAUSE IT WILL CONTAIN IMPORTANT INFORMATION
ABOUT THE MERGER. IF ANY OF THE FOLLOWING RISKS AND UNCERTAINTIES DEVELOP INTO
ACTUAL EVENTS, OUR BUSINESS, FINANCIAL CONDITION OR RESULTS OF OPERATIONS COULD
BE ADVERSELY AFFECTED.
RISKS RELATED TO OUR PROPOSED MERGER WITH VERITAS
FAILURE TO COMPLETE THE PROPOSED MERGER WITH VERITAS COULD HARM OUR ORDINARY
SHARE PRICE AND FUTURE BUSINESS AND OPERATIONS.
If our proposed merger with VERITAS is not completed, we may be subject to
the following risks:
o if the merger agreement is terminated under specified circumstances,
we will be required to pay VERITAS a termination fee of $16.2 million;
o the price of our ordinary shares may decline to the extent that the
current market price of our ordinary shares reflects a market
assumption that the proposed merger with VERITAS will be completed;
o costs related to the proposed merger with VERITAS, such as some legal,
accounting and certain financial advisory fees, must be paid even if
the merger is not completed; and
o if the proposed merger with VERITAS is terminated and our board of
directors determines to seek another merger or business combination,
we may not be able to find a partner willing to pay an equivalent or
more attractive price than that which would be paid by VERITAS in the
merger.
GENERAL UNCERTAINTY RELATED TO THE PROPOSED MERGER WITH VERITAS COULD HARM OUR
BUSINESS.
Our customers may, in response to the announcement of the proposed merger
with VERITAS, delay or defer purchasing decisions. If our customers delay or
defer purchasing decisions, our revenue could materially decline or any
increases in revenue could be lower than expected. Similarly, our employees may
experience uncertainty about their future roles with the combined company. This
may harm our ability to attract and retain key management, marketing, sales and
technical personnel. Also, speculation regarding the likelihood of the closing
of the merger with VERITAS could increase the volatility of the price of our
ordinary shares.
THIRD PARTIES MAY TERMINATE OR ALTER EXISTING CONTRACTS OR RELATIONSHIPS WITH
US.
We have contracts with some of our suppliers, distributors, customers,
licensors and other business partners. Some of these contracts require us to
obtain consent from these other parties in connection with the proposed merger
with VERITAS. If these consents cannot be obtained, we may suffer a loss of
potential future revenue and may lose rights that are material to our business
and the business of the combined company. In addition, third parties with whom
we currently have relationships may terminate or otherwise reduce the scope of
their relationship with us in anticipation or as a result of the merger.
REGULATORY AGENCIES MUST APPROVE THE PROPOSED MERGER AND COULD IMPOSE CONDITIONS
ON, DELAY OR REFUSE TO APPROVE THE MERGER.
We intend to comply with the securities and antitrust laws of the United
States, and any other jurisdiction in which the proposed merger is subject to
review, as well as with Israeli regulatory requirements. The reviewing
authorities may seek to impose conditions before giving their approval or
consent to the merger, and those conditions could harm the combined company's
business. In addition, a delay in obtaining the necessary regulatory approvals
will delay the completion of the merger. We have not yet obtained other
governmental or regulatory approvals
22
required to complete the merger. We may be unable to obtain these approvals, or
obtain them within the timeframe contemplated by the merger agreement.
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 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. and
international sales or license sales and 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.
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.
We incurred net losses of approximately $4.0 million for the year ended
December 31, 1998, $2.6 million for the year ended December 31, 1999, $9.9
million for the year ended December 31, 2000 and had net income of $923,000 for
the year ended December 31, 2001 and $3.6 million for the year ended December
31, 2002. As of December 31, 2002, we had an accumulated deficit of
approximately $21.8 million. We cannot predict the extent of our future losses
and profitability. We anticipate that our expenses may increase substantially in
the foreseeable future as we seek to expand
23
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 $27.5 million for the year
ended December 31, 2000 to $55.6 million for the year ended December 31, 2001
and to $76.0 million for the year ended December 31, 2002. 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, Japan and throughout the United
States. We increased our employee base significantly during 2001 and 2002.
Furthermore, we have recently established subsidiaries and joint ventures in
Europe and Japan 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. 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
24
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.
Past or future acquisitions may not produce the revenues, earnings or
business s