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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
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FORM 10-Q
Quarterly Report Under Section 13 or 15(d)
of the Securities Exchange Act of 1934
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934.
For the quarterly period ended June 30, 2002
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OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934.
For the transition period from to
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Commission file number 0-30828
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 (I.R.S. Employer Identification No.)
of Organization)
10 Hata'asiya Street
P.O. Box 1066, Or-Yehuda, 60408 Israel
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(Address of Principal Executive Offices) (Zip Code)
Registrant's Telephone Number, Including Area Code 972-(3)-735-2222
Indicate by check |X| whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days Yes |X| No [_]
At August 12, 2002, 28,832,732 of the registrant's ordinary shares (par
value, 0.03 NIS per share) were outstanding.
-1-
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FORM 10-Q
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2002
TABLE OF CONTENTS
PAGE
PART I: FINANCIAL INFORMATION
ITEM 1. Consolidated Financial Statements:
Condensed Consolidated Balance Sheets as of June 30,
2002 (unaudited) and December 31, 2001..........................4-5
Condensed Consolidated Statements of Operations (unaudited)
for the three and six months ended June 30, 2002 and 2001.........6
Condensed Consolidated Statements of Cash Flows (unaudited)
for the six months ended June 30, 2002 and 2001.................7-8
Notes to Condensed Consolidated Financial Statements
(unaudited)....................................................9-15
ITEM 2 Management's Discussion and Analysis of Financial
Condition and Results of Operations.......................16-20
ITEM 3 Quantitative and Qualitative Disclosures About
Market Risk..................................................20
PART II. OTHER INFORMATION
ITEM 1. Legal Proceedings............................................21
ITEM 2. Changes in Securities and Use of Proceeds.....................*
ITEM 3. Defaults Upon Senior Securities...............................*
ITEM 4. Matters Submitted to a Vote of Security Holders..............21
ITEM 5. Other Information............................................22
ITEM 6. Exhibits and Reports on Form 8-K.............................22
SIGNATURES...................................................................23
*No information provided due to inapplicability of item.
2
PRECISE SOFTWARE SOLUTIONS LTD.
FORM 10-Q
QUARTER ENDED JUNE 30, 2002
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
3
PRECISE SOFTWARE SOLUTIONS LTD. AND ITS SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
- --------------------------------------------------------------------------------
U.S. dollars in thousands
December 31, June 30,
2001 2002
--------- ---------
Audited Unaudited
--------- ---------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 35,144 $ 37,732
Marketable securities 39,752 63,669
Trade receivables, net of allowance for doubtful accounts
(2001 - $179, 2002 - $212) 12,156 13,570
Other accounts receivable and prepaid expenses 3,168 4,076
--------- ---------
Total current assets 90,220 119,047
--------- ---------
MARKETABLE SECURITIES, NON CURRENT 60,935 37,712
--------- ---------
SEVERANCE PAY FUND 750 837
--------- ---------
PROPERTY AND EQUPIMENT, NET 5,047 4,868
--------- ---------
OTHER ASSETS, NET 46,231 49,183
--------- ---------
$ 203,183 $ 211,647
========= =========
The accompanying notes are an integral part of the condensed consolidated financial statements.
4
PRECISE SOFTWARE SOLUTIONS LTD. AND ITS SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
- --------------------------------------------------------------------------------
U.S. dollars in thousands
December 31, June 30,
2001 2002
--------- ---------
Audited Unaudited
--------- ---------
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Trade payables $ 1,394 $ 868
Deferred revenues 6,673 8,927
Employees and payroll accruals 5,161 5,373
Accrued expenses 2,014 1,879
Other current liabilities 973 1,158
--------- ---------
Total current liabilities 16,215 18,205
--------- ---------
LONG-TERM LIABILITIES:
Long-term debt and other liabilities 193 223
Accrued severance pay 1,116 1,174
--------- ---------
Total long-term liabilities 1,309 1,397
--------- ---------
SHAREHOLDERS' EQUITY:
Ordinary shares and additional paid-in capital 210,436 215,053
Deferred stock compensation (544) (216)
Accumulated other comprehensive income 1,191 1,152
Accumulated deficit (25,424) (23,944)
--------- ---------
Total shareholders' equity 185,659 192,045
--------- ---------
$ 203,183 $ 211,647
========= =========
The accompanying notes are an integral part of the condensed consolidated financial statements.
5
PRECISE SOFTWARE SOLUTIONS LTD. AND ITS SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
- --------------------------------------------------------------------------------
U.S. dollars in thousands (except per share data)
Three months ended Six months ended
June 30, June 30,
---------------------- ----------------------
2001 2002 2001 2002
-------- -------- -------- --------
Unaudited
--------------------------------------------------
Revenues:
Software licenses $ 9,995 $ 13,197 $ 19,441 $ 25,599
Services 2,712 5,023 4,776 9,715
-------- -------- -------- --------
Total revenues 12,707 18,220 24,217 35,314
-------- -------- -------- --------
Cost of revenues:
Software licenses 42 121 112 253
Services 702 1,334 1,447 2,399
-------- -------- -------- --------
Total cost of revenues 744 1,455 1,559 2,652
-------- -------- -------- --------
Gross profit 11,963 16,765 22,658 32,662
-------- -------- -------- --------
Operating expenses:
Research and development 2,688 3,189 4,924 6,439
Sales and marketing 8,121 10,532 15,754 20,342
General and administrative 1,586 2,188 3,138 4,353
Amortization of deferred stock compensation 469 75 1,182 263
Amortization of goodwill and intangible assets 654 887 1,292 1,652
-------- -------- -------- --------
Total operating expenses 13,518 16,871 26,290 33,049
-------- -------- -------- --------
Operating loss (1,555) (106) (3,632) (387)
Financial income and other, net 1,765 1,016 3,871 2,019
-------- -------- -------- --------
Income before income tax provision 210 910 239 1,632
Income tax provision -- 80 -- 152
-------- -------- -------- --------
Net income $ 210 $ 830 $ 239 $ 1,480
======== ======== ======== ========
Net earnings per share:
Basic and diluted earnings per share $ 0.01 $ 0.03 $ 0.01 $ 0.05
======== ======== ======== ========
Weighted average number of shares used in
computing basic earnings per share 26,405 28,652 26,114 28,447
======== ======== ======== ========
Weighted average number of shares used in
computing diluted earnings per share 29,959 30,460 29,688 31,027
======== ======== ======== ========
The accompanying notes are an integral part of the condensed consolidated financial statements.
6
PRECISE SOFTWARE SOLUTIONS LTD. AND ITS SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
- --------------------------------------------------------------------------------
U.S. dollars in thousands
Six months ended
June 30,
-------------------------
2001 2002
-------- --------
Unaudited
-------------------------
Cash flows from operating activities:
Net income $ 239 $ 1,480
Adjustments to reconcile net income to net cash provided by operating
activities:
Depreciation 573 1,013
Loss on sale of property and equipment -- 40
Accretion of discount (amortization of debenture premium) on
available-for-sale marketable securities (133) 530
Amortization of deferred stock compensation 1,181 263
Amortization of goodwill and intangible assets 1,292 1,652
Increase in trade receivables, net (1,996) (824)
Decrease (increase) in other accounts receivable and prepaid expenses 428 (885)
Decrease in other assets -- 429
Decrease in trade payables (194) (587)
Increase in deferred revenues 766 1,521
Increase in employees and payroll accruals 307 100
Decrease in other current liabilities and accrued expenses (197) (155)
Increase (decrease) in accrued severance pay, net 90 (29)
Other -- 14
-------- --------
Net cash provided by operating activities 2,356 4,562
-------- --------
Cash flows from investing activities:
Purchase of property and equipment (1,340) (763)
Purchase of available-for-sale marketable securities (33,260) (19,589)
Purchase of other assets (490) (1,387)
Payment for acquisition of consolidated subsidiary (1) -- (3,152)
Proceeds from redemption of available-for-sale marketable securities 24,210 17,350
Proceeds from sale of marketable securities 3,785 747
-------- --------
Net cash used in investing activities $ (7,095) $ (6,794)
-------- --------
The accompanying notes are an integral part of the condensed consolidated financial statements.
7
PRECISE SOFTWARE SOLUTIONS LTD. AND ITS SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
- --------------------------------------------------------------------------------
U.S. dollars in thousands
Six months ended
June 30,
-------------------------
2001 2002
-------- --------
Unaudited
-------------------------
Cash flows from financing activities:
Proceeds from exercise of options, net 1,819 4,682
Repayment of long-term debt (14) (13)
-------- --------
Net cash provided by financing activities 1,805 4,669
-------- --------
Effect of exchange rate change on cash and cash equivalents (62) 151
-------- --------
Increase (decrease) in cash and cash equivalents (2,996) 2,588
Cash and cash equivalents at the beginning of the period 82,218 35,144
-------- --------
Cash and cash equivalents at the end of the period $ 79,222 $ 37,732
======== ========
(1) The net fair value of the assets acquired of the
consolidated subsidiary were as follows:
Working deficiency, except cash and cash equivalents $ (232)
Property and equipment 35
Other assets 3,349
--------
$ 3,152
========
Supplemental disclosure of cash flows activities:
Cash paid during the period for:
Interest $ 9 $ 11
======== ========
Income taxes $ -- $ 9
======== ========
Non cash transactions:
Purchased technology $ -- $ 297
======== ========
Accrued acquisition costs $ -- $ 150
======== ========
Capital lease obligation $ -- $ 41
======== ========
Adjustment to Savant Corporation acquisition, net $ 583 $ --
======== ========
The accompanying notes are an integral part of the condensed consolidated financial statements.
8
PRECISE SOFTWARE SOLUTIONS LTD. AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
NOTE 1: BASIS OF PRESENTATION
a. Company:
Precise Software Solutions Ltd. ("the Company") was established
in Israel on November 15, 1990. The Company is a provider of
software products that assist organizations in performance
management, monitoring and tuning of applications, and related
consulting, training and support services. The Company has
operations in the form of wholly owned subsidiaries in the United
States, the United Kingdom, France, Germany, Holland, Malaysia
and Australia.
b. Accounting:
The accompanying condensed interim consolidated financial
statements have been prepared by Precise Software Solutions Ltd.
in accordance with generally accepted accounting principles in
the United States, pursuant to the rules and regulations of the
Securities and Exchange Commission and include the accounts of
Precise Software Solutions Ltd. and its wholly-owned subsidiaries
collectively. Certain information and footnote disclosures,
normally included in financial statements prepared in accordance
with generally accepted accounting principles in the United
States, have been condensed or omitted pursuant to such rules and
regulations. In the opinion of the Company, the unaudited
financial statements reflect all adjustments (consisting only of
normal recurring adjustments) necessary for a fair presentation
of the financial position at June 30, 2002 and the operating
results for the three and six months ended June 30, 2002 and 2001
and cash flows for the six months ended June 30, 2002 and 2001.
These financial statements and notes should be read in
conjunction with the Company's audited consolidated financial
statements and notes thereto, included in the Company's annual
report on Form 10-K filed with the Securities and Exchange
Commission.
The results of operations for the three and six month periods
ended June 30, 2002 are not necessarily indicative of results
that may be expected for any other interim period or for the full
fiscal year ending December 31, 2002.
NOTE 2: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
a. Cash and cash equivalents:
Cash equivalents are short-term highly liquid investments that
are readily convertible to cash with original maturities of three
months or less.
9
b. Marketable securities:
The Company accounts for investments in debt and equity
securities in accordance with SFAS No. 115, "Accounting for
Certain Investments in Debt and Equity Securities." Management
determines the proper classification of investments with fixed
maturities and marketable equity securities at the time of
purchase and reevaluates such designations as of each balance
sheet date. At June 30, 2002, all securities covered by SFAS No.
115 were designated as available-for-sale. Accordingly, these
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 all sales of
investments, as determined on a specific identification basis,
are included in the consolidated statement of operations.
c. Other assets:
Acquired assembled workforce, acquired technology, acquired
trademark and customer relationships, acquired patents, internet
site capitalization costs and goodwill are stated at amortized
cost. Amortization is calculated using the straight-line method
over the estimated useful lives, which are three to ten years.
d. Revenue recognition:
The Company and its subsidiaries generate revenues mainly from
licensing the rights to use their software products and services.
The Company and its subsidiaries sell its products primarily
through its direct sales force, resellers and Original Equipment
Manufacturers ("OEMs").
The Company has implemented Statement of Position (SOP) 97-2,
"Software Revenue Recognition", as amended. Revenues from
software arrangements are recognized upon delivery of the product
when no future obligation exists, when collection is probable,
the product fee is either fixed or determinable and persuasive
evidence of an arrangement exists. SOP 97-2 requires revenue
earned on software arrangements involving multiple elements to be
allocated to each element based on the relative fair value of the
elements. The Company has also adopted SOP 98-9, "Modification of
SOP 97-2, Software Revenue Recognition with Respect to Certain
Transactions," for all transactions entered into after January 1,
2000. The Company's Vendor Specific Objective Evidence ("VSOE")
used to allocate the sales price to maintenance and support and
professional services are based on renewal ratio or the price
charged when these elements will be sold separately. SOP 98-9
requires that revenue be recognized under the "residual method"
when (1) VSOE of fair value exists for all undelivered elements,
and (2) all revenue recognition criteria of SOP 97-2, as amended,
are satisfied. Under the residual method any discount in the
arrangement is allocated to the delivered elements.
The Company is entitled to fees from its OEMs upon the
sublicensing of the Company's products to end-users. Generally,
the fees due from the OEMs are recognized when such fees are
reported to the Company upon the sublicensing of the products by
the OEMs.
The Company and its subsidiaries generally do not grant a right
of return to their customers, except for time-limited warranty
provisions. Historically, the Company has seen negligible
returns.
10
Service revenues are comprised of revenues from maintenance and
support arrangements, consulting fees, and training, none of
which are considered essential to the functionality of the
software license. Revenues from maintenance and support
arrangements are deferred and recognized on a straight-line basis
as service revenues over the life of the related agreement.
Consulting fees and training revenues are recognized after the
services are rendered.
Deferred revenue includes unearned amounts received under
maintenance and support contracts and professional services
engagements, and amounts received from customers, but not yet
recognized as revenues.
e. Impact of recently issued accounting standards:
In July 2001, the Financial Accounting Standards Board ("FASB"),
issue Statement of Financial Accounting Standard No. 142
"Goodwill and Other Intangible Assets" ("SFAS 142"). SFAS No. 142
prohibits the amortization of goodwill and intangible assets with
indefinite useful lives and instead requires that these assets be
reviewed for impairment on a periodic basis. Intangible assets
with finite lives will continue to be amortized over their
estimated useful lives. Additionally, SFAS No. 142 requires that
goodwill included in the carrying value of equity method
investments no longer be amortized. In addition, within six
months of adopting the accounting standard impairment test must
be completed and any impairments identified must be treated as a
cumulative effect of a change in accounting policies.
The Company adopted SFAS No. 142, and in accordance with its
guidelines the company is currently in the process of performing
the goodwill impairment test. The Company has completed the
transitional impairment test, which did not result in an
impairment charge. The Company completed its reassessment of
previously recognized intangible assets and ceased amortization
of identified intangible assets with indefinite lives.
In accordance with SFAS No. 142, prior period amounts were not
restated. The unaudited pro forma reconciliation of previously
reported net income and earnings per share for the three and six
month periods ended June 30, 2002 and 2001, to the amounts
adjusted for the elimination of goodwill amortization, are as
follows:
Three months ended Six months ended
June 30, June 30,
-------------------- ---------------------
2001 2002 2001 2002
---- ---- ---- ----
Unaudited
---------------------------------------------
Reported net income $ 210 $ 830 $ 239 $ 1,480
Add: Goodwill amortization 324 -- 640 --
------- ------- ------- ---------
Adjusted net income $ 534 $ 830 $ 879 $ 1,480
Reported basic and diluted earnings per share $ 0.01 $ 0.03 $ 0.01 $ 0.05
Add: Goodwill amortization 0.01 -- 0.02 --
------- ------- ------- ---------
Adjusted basic and diluted earnings per share $ 0.02 $ 0.03 $ 0.03 $ 0.05
======= ======= ======= =========
FASB recently issued SFAS No. 144, "Accounting for the Impairment
or Disposal of Long-Lived Assets," that is applicable to
financial statements issued for fiscal years beginning after
December 15, 2001. FASB's new rules on the asset impairment
11
supersede FASB Statement 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to be Disposed Of,"
and portions of APB Opinion 30, "Reporting the Results of
Operations." SFAS No. 144 provides a single accounting model for
long-lived assets to be disposed of and significantly changes the
criteria that must be met to classify an asset as
"held-for-sale." Classification as "held-for-sale" is an
important distinction since such assets are not depreciated and
are stated at the lower of fair value and carrying amount. SFAS
No. 144 also requires expected future operating losses from
discontinued operations to be displayed in the period(s) in which
the losses are incurred, rather than as of the measurement date
as presently required. This pronouncement is not expected to have
a material effect on the Company's financial position or
operating results.
f. Reclassification:
Certain prior period amounts have been reclassified to conform to
current period presentation.
NOTE 3: ACQUISITION
In June 2002, the Company acquired all the outstanding shares of
The Middleware Company, a United States based services company,
in consideration of approximately $6.0 million. The company
provides consulting, training courses and other related services.
The purchase price consisted of less than $4.0 million paid in
cash. In addition, the stockholders are entitled to up to an
additional $2.0 million of the Company's ordinary shares to be
issued in the fourth quarter of 2002. Additional consideration of
$150,000 in estimated transaction costs is included in the total
purchase price. The stockholders also have the right to receive
additional contingent consideration including consideration of
20% of revenue for achieving a set revenue minimum and
consideration equal to the amount by which revenues exceed
another set minimum revenue target up to a set maximum relating
to the one year period subsequent to the closing.
The acquisition was accounted for under the purchase method,
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. The excess of the purchase
price over the estimated fair value of the net assets acquired
has been recorded as goodwill.
According to Statement of Financial Standards Board ("SFAS") No.
142, "Goodwill and Other Intangible Assets", this goodwill will
not be amortized, but will be subject to annual impairment tests
in accordance with the statement. The allocation of the purchase
price for this acquisition is preliminary and the information was
arranged before the allocation was finalized.
The second quarter of 2002 includes actual results of this
acquisition after the closing date, which was June 18, 2002. The
acquisition, if it had been consummated as of January 1, 2001 and
2002, would not have a significant impact on revenues, net
income, and basic and diluted earnings per share.
12
NOTE 4: SHAREHOLDERS' EQUITY
Stock options plans:
The following table summarizes information about stock options
outstanding as of June 30, 2002:
Weighted
Number of average
options exercise price
---------- ---------
Outstanding at December 31, 2001 7,038,372 $ 11.18
Granted 354,850 13.15
Exercised (746,194) 4.79
Forfeited (206,950) 15.03
---------- ---------
Outstanding at June 30, 2002 (unaudited) 6,446,328 $ 11.91
========== =========
NOTE 5: EARNINGS PER SHARE
Basic earnings per share is computed based on the weighted
average number of ordinary shares outstanding during each period.
Diluted earnings per share is computed based on the weighted
average number of ordinary shares outstanding during each period,
plus dilutive potential ordinary shares considered outstanding
during the period, in accordance with FASB Statement No. 128,
"Earnings per Share".
The following table presents the calculation of unaudited basic
and diluted earnings per share (in thousands, except per share
amounts):
Three months ended Six months ended
June 30, June 30,
------------------- -------------------
2001 2002 2001 2002
------- ------- ------- -------
Unaudited
-------------------------------------------
Net Income $ 210 $ 830 $ 239 $ 1,480
------- ------- ------- -------
Shares used in computing basic earnings
per share 26,405 28,652 26,114 28,447
Effect of dilutive stock options 3,554 1,808 3,574 2,580
------- ------- ------- -------
Shares used in computing diluted
earnings per share 29,959 30,460 29,688 31,027
Basic and diluted earnings per share $ 0.01 $ 0.03 $ 0.01 $ 0.05
======= ======= ======= =======
13
NOTE 6: COMPREHENSIVE INCOME
The components of comprehensive income are as follows (in thousands):
Three months ended Six months ended
June 30, June 30,
-------------------- --------------------
2001 2002 2001 2002
------- ------- ------- -------
Unaudited
---------------------------------------------
Net income $ 210 $ 830 $ 239 $ 1,480
------- ------- ------- -------
Other comprehensive income:
Change in net unrealized gains on investments (122) 573 307 (268)
Change in exchange rate differences (11) 224 (42) 229
------- ------- ------- -------
$ 77 $ 1,627 $ 504 $ 1,441
======= ======= ======= =======
NOTE 7: GEOGRAPHIC INFORMATION
a. Summary information about geographical areas (in thousands):
The Company and its subsidiaries operate in one industry segment,
the development and marketing of performance management software
products. See Note 1 for a brief description of the Company's
business. The following data is presented in accordance with SFAS
No. 131, "Disclosure About Segments of an Enterprise and Related
Information". The following is a summary of operations within
geographic areas based on customer's location.
Three months ended Six months ended
June 30, June 30,
------------------- -------------------
2001 2002 2001 2002
------- ------- ------- -------
Unaudited
-------------------------------------------
Revenues from sales to unaffiliated customers:
U.S.A $ 8,692 $11,941 $14,622 $21,991
North and South America (except U.S.A.) 824 774 1,413 1,648
Asia 856 1,449 2,395 2,924
United Kingdom 1,157 924 3,473 3,189
Europe and others 1,178 3,132 2,314 5,562
------- ------- ------- -------
$12,707 $18,220 $24,217 $35,314
======= ======= ======= =======
14
b. Summary information about geographical areas (in thousands):
December 31, June 30,
2001 2002
------- -------
Unaudited
-------
Long-lived assets, by geographic region:
Israel $ 3,956 $ 3,614
United States 45,635 48,561
Europe and others 1,687 1,876
------- -------
$51,278 $54,051
======= =======
15
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
This Form 10-Q contains certain statements of a forward-looking nature
relating to future events or the future financial performance of Precise
Software Solutions Ltd. ("Precise"). Precise's actual future results may differ
significantly from these statements. In evaluating these statements, the various
factors identified in the caption "Factors Affecting Future Operating Results"
should be considered.
OVERVIEW
Precise is a provider of software that assists organizations in monitoring
and optimizing the performance of their complex Information Technology
infrastructure. We were incorporated in November 1990. Initially, we focused on
developing and marketing performance management software for mainframe computer
systems. In 1995, we shifted our focus to Application Performance Management
software for Oracle database environments. In 1996, we released the initial
version of our Precise/SQL software, now called Precise/Indepth for Oracle, for
database monitoring. Since 1998, we have released or acquired new products and
continually updated our product suite making the following products generally
available:
Release Product
------- -------
1998 Precise/Pulse!, Precise/Presto for EMC, Precise/Interpoint
2000 Precise/Insight, Precise/Savant
2001 Precise/Foresight, Precise/Indepth for J2EE, Precise/Savvy for
Oracle, Web, J2EE, SAP R/3, BEA Tuxedo, and Siebel,
Precise/Indepth for DB2 UDB, Precise/Crosspoint, Precise/Storage
Central SRM, Precise i3 Suite
2002 Precise/SiteStor SRM, Precise/Luminate, Precise/Indepth for
Transactions, Precise/Lightpoint, Precise/Indepth for SQL Server
We derive our revenues from the sale of software licenses and from services.
Our products are sold worldwide through a combination of our direct sales force
and indirect sales channels, including original equipment manufacturers, or
OEMs, and resellers. Our services revenues consist primarily of fees derived
from annual maintenance and support agreements and consulting and training, none
of which are considered essential to the functionality of the software license.
Precise recognizes revenue in accordance with Staff Accounting Bulletin No.
101 (SAB 101), which summarizes the views of the staff of the U.S. Securities
and Exchange Commission in applying generally accepted accounting principles to
revenue recognition. Generally revenues from our OEMs are recognized when we
receive reports of fees due upon the sublicensing of our products by the OEMs.
Software license revenues on sales to resellers and end users are recognized
when:
persuasive evidence of an agreement exists;
the product has been delivered;
all license payments are due within one year;
vendor-specific objective evidence exists;
the license fee is fixed or determinable; and
collection of the fee is probable.
16
Maintenance-related service revenues are recognized ratably over the term of
the maintenance agreement, which is typically one year. Consulting and training
revenues are recognized after the services are rendered.
RESULTS OF OPERATIONS
The following table presents certain condensed consolidated statement of
operations data as a percentage of total revenues for the periods indicated:
Three months ended Six months ended
June 30, June 30,
----------------- ----------------
Percent of Total Revenues: 2001 2002 2001 2002
---- ---- ---- ----
Revenues:
Software licenses...................................... 79% 72% 80% 72%
Services............................................... 21 28 20 28
---- ---- ---- ----
Total revenues...................................... 100 100 100 100
Cost of revenues:
Software licenses...................................... - 1 - 1
Services............................................... 6 7 6 7
---- ---- ---- ----
Total cost of revenues.............................. 6 8 6 8
---- ---- ---- ----
Gross profit.............................................. 94 92 94 92
Operating expenses:
Research and development................................ 21 18 20 18
Sales and marketing..................................... 64 58 65 58
General and administrative 12 12 13 12
Amortization of deferred stock compensation.............. 4 0 6 1
Amortization of goodwill and intangible assets........... 5 5 5 5
---- ---- ---- ----
Total operating expenses............................ 106 93 109 94
---- ---- ---- ----
Operating loss............................................ (12) (1) (15) (2)
Financial income and other, net........................... 14 6 16 6
---- ---- ---- ----
Income before income tax provision........................ 2 5 1 4
Income tax provision...................................... - - - -
---- ---- ---- ----
Net income ............................................... 2% 5% 1% 4%
==== ==== ==== ====
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 $18.2 million for the three months ended June 30,
2002 and $12.7 million for the comparable quarter of 2001, representing an
increase of $5.5 million, or 43%, and were $35.3 million for the six months
ended June 30, 2002 and $24.2 million for the comparable period of 2001,
representing an increase of $11.1 million, or 46%.
Revenues from sales of software licenses were $13.2 million for the three
months ended June 30, 2002 and $10.0 million for the comparable quarter of 2001,
representing an increase of $3.2 million, or 32%, and were $25.6 million for the
six months ended June 30, 2002 and $19.4 million for the comparable period in
2001, representing an increase of $6.2 million, or 32%. The increase in software
license revenues during the three and six month periods is attributable to the
expansion of our direct sales force, increased recurring sales to our installed
customer base, the addition of new products, and an increased average deal size,
partially offset by a decrease from our strategic partner channel.
Revenues from services were $5.0 million for the three months ended June 30,
2002 and $2.7 million for the comparable quarter of 2001, representing an
increase of $2.3 million, or 85%, and were $9.7 million for the six months ended
June 30, 2002 and $4.8 million for the comparable period of 2001, representing
an increase of $4.9 million, or 103%. The increase in services revenue during
the three and six month periods ended June 30, 2002 over the comparable periods
in 2001 is attributable to additional maintenance
17
agreements resulting from new sales of software licenses, renewals of annual
maintenance agreements with existing customers, and additional professional
services revenue.
COST OF REVENUES
Cost of revenues consists of costs associated with generating software
license and service revenues. Cost of revenues was $1.5 million for the three
months ended June 30, 2002 and $744,000 for the comparable quarter of 2001,
representing an increase of $711,000, or 96%, and were $2.7 million for the six
months ended June 30, 2002 and $1.6 million for the comparable period of 2001,
representing an increase of $1.1 million, or 70%.
Cost of software license revenues in 2002 consists primarily of production
costs and in the comparable periods of 2001, cost of software license revenues
consists primarily of royalties to the government of Israel as consideration for
research and development grants received in previous years and, to a lesser
extent, production costs. Cost of software license revenues was $121,000 for the
three months ended June 30, 2002 and $42,000 for the comparable quarter of 2001,
representing an increase of $79,000, or 188%, and were $253,000 for the six
months ended June 30, 2002 and $112,000 for the comparable period in 2001,
representing an increase of $141,000, or 126%.
Cost of service revenues consists primarily of costs related to personnel
providing customer support and professional services. Cost of service revenues
was $1.3 million for the three months ended June 30, 2002 and $702,000 for the
comparable quarter of 2001, representing an increase of $632,000, or 90%, and
were $2.4 million for the six months ended June 30, 2002 and $1.4 million for
the comparable period of 2001, representing an increase of $1.0 million, or 66%.
The increase is due to the continued increase in the number of customer support
and professional services personnel.
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 $3.2 million for the three months ended June 30, 2002
and $2.7 million for the comparable period of 2001, representing an increase of
$0.5 million, or 19%, and were $6.4 million for the six months ended June 30,
2002 and $4.9 million for the comparable period of 2001, representing an
increase of $1.5 million, or 31%. The increases for these periods were primarily
related to the increase in the number of software developers and quality
assurance personnel engaged in the continuing enhancement of our software suite,
which included the release of five new products in the six month period ended
June 30, 2002.
SALES AND MARKETING
Sales and marketing expenses consist primarily of salaries and other
personnel-related expenses, commissions and other costs associated with our
sales and marketing efforts. Sales and marketing expenses were $10.5 million for
the three months ended June 30, 2002 and $8.1 million for the comparable quarter
of 2001, representing an increase of $2.4 million, or 30%, and were $20.3
million for the six months ended June 30, 2002 and $15.8 million for the
comparable period in 2001, representing an increase of $4.6 million, or 29%. The
increase is due to an increase in payroll and related expenses attributable to
the increase in the number of people comprising our direct sales force and
increased commission expenses associated with the increase in revenue.
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 $2.2 million for the three months ended June 30,
2002 and $1.6 million for the comparable quarter of 2001, representing an
increase of $0.6 million, or 38%, and were
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$4.4 million for the six months ended June 30, 2002 and $3.1 million for the
comparable period in 2001, representing an increase of $1.2 million, or 39%. The
increase is attributable to increased number of employees in our administrative
and finance departments to support our growing organization.
AMORTIZATION OF STOCK-BASED COMPENSATION
Deferred stock-based compensation represents compensation costs related to
the grant of options to purchase ordinary shares at less than fair market value.
Our stock-based compensation expenses decreased to $75,000 for the three months
ended June 30, 2002 from $469,000 for the comparable period in 2001,
representing a decrease of $394,000, or 84%, and decreased to $263,000 for the
six months ended June 30, 2002 from $1.2 million for the comparable period of
2001, representing a decrease of $0.9 million, or 78%. The deferred compensation
is amortized over the vesting schedule of the underlying options, generally
three to four years. The decrease for these periods is due to a portion of the
deferred compensation balance being fully amortized at June 30, 2002. We had a
$216,000 deferred compensation balance at June 30, 2002.
AMORTIZATION OF GOODWILL AND INTANGIBLE ASSETS
The goodwill and intangible asset amortization consists primarily of charges
to expense reducing the goodwill and intangible assets associated with
acquisitions and purchased technology. Amortization expense was $0.9 million for
the three months ended June 30, 2002 and $0.7 million for the comparable quarter
of 2001, representing an increase of $0.2 million, or 36%, and were $1.7 million
for the six months ended June 30, 2002 and $1.3 million for the comparable
period in 2001, representing an increase of $0.4 million, or 28%. The increase
is primarily related to acquisitions and purchased technology, partially offset
by the elimination of goodwill amortization as a result of our adoption of SFAS
No. 142.
FINANCIAL INCOME AND OTHER, NET
Financial income and other, net was $1.0 million for the three months ended
June 30, 2002 and $1.8 million for the comparable quarter of 2001, representing
a decrease of $0.7 million, or 42%, and was $2.0 million for the six months
ended June 30, 2002 and $3.9 million for the comparable period in 2001,
representing a decrease of $1.9 million, or 48%. The decrease is attributable to
less interest earned on our investments due to the decline in interest rates and
a slightly lower total cash and marketable securities balance.
LIQUIDITY AND CAPITAL RESOURCES
At June 30, 2002, our principal source of liquidity was $139 million of cash
and cash equivalents and marketable securities compared to $136 million at
December 31, 2001. As of June 30, 2002, we had $223,000 of long-term debt
outstanding relating to obligations under capital leases and deferred rent
expense and an obligation for severance pay to Israeli employees of $1.2 million
that is fully provided for by monthly deposits with severance pay funds,
insurance policies and by an accrual. As of June 30, 2002, our accumulated
deficit was $23.9 million.
Net cash provided by operating activities was $4.6 million and $2.4 million
for the six-month periods ended June 30, 2002 and 2001, respectively. Net cash
provided by operating activities for the six months ended June 30, 2002 was
primarily the result of net income for the period, the amortization of deferred
stock compensation, amortization of intangible assets, depreciation and an
increase in deferred revenue for the period. These additive cash items were
offset primarily by an increases in other accounts receivable and prepaid
expenses and trade receivables as well as a decrease in trade payables, which
reduced the cash provided by operations for the period. Net cash provided by
operating activities for the six months ended June 30, 2001 was primarily the
result of decreases in other accounts receivable and prepaid expenses, an
increase in deferred revenues, amortization of deferred stock-based
compensation, amortization of goodwill and intangible assets, and depreciation,
offset by an increase in trade receivables for the period.
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Net cash used in investing activities was $6.8 million and $7.1 million for
the six-month periods ended June 30, 2002 and 2001, respectively. Investing
activities for both the six months ended June 30, 2002 and 2001 consisted of
purchases of available-for-sale marketable securities, purchases of other
assets, acquisitions and capital expenditures, offset by proceeds from the sale
and redemption of marketable securities. The majority of our capital investments
were for computers, peripheral equipment and software.
Net cash provided by financing activities was $4.7 million and $1.8 million
for the six-month periods ended June 30, 2002 and 2001, respectively. Net cash
provided by financing activities for both the six months ended June 30, 2002 and
2001 were from the proceeds from the exercise of options.
We believe that our existing cash equivalents and marketable securities will
be sufficient to meet our anticipated cash needs for working capital and capital
expenditures for at least the next 12 months. Thereafter, if we do not have
available sufficient cash to finance our operations, we may be required to
obtain additional debt or equity financing. We cannot be certain that we will be
able to obtain, if required, additional financing on acceptable terms, or at
all.
FACTORS AFFECTING FUTURE OPERATING RESULTS
This Form 10-Q contains forward-looking statements that involve risks
and uncertainties. These forward-looking statements include the ability to
attract customers for Precise's products, ability to execute as designed,
acceptance of Precise's products in the market place, ability to manage existing
and future strategic relationships, ability to successfully integrate the
operations of acquired companies, as well as statements regarding the financial
performance, strategy and plans of Precise. Precise's actual experience may
differ materially from those discussed in the forward-looking statements.
Factors that might cause such a difference include the size of the market;
timing and acceptance of Precise's products in the market place; the future
growth and acceptance of Precise's products in the market place; Precise's
ability to predict and respond to market developments; the development,
expansion and training of Precise's sales force; risks associated with
management of growth; risks associated with existing and future strategic
relationships and acquisitions; Precise being held liable for defects or errors
in its products; political, economic and business fluctuations in the United
States, Israel and Precise's international markets; as well as risks of
downturns in economic conditions generally or as a result of recent events, and
in the information technology and software industries specifically; and risks
associated with competition, and competitive pricing pressures. For a more
detailed description of the risk factors associated with Precise, please refer
to Precise's Annual Report on Form 10-K filed with the Securities and Exchange
Commission.
ITEM 3. QUALITATIVE AND QUANTITATIVE DISCLOSURE ABOUT MARKET RISK
We own financial instruments that are sensitive to market risks as part of
our investment portfolio. The investment portfolio is used to preserve our
capital until it is required to fund operations, including research and
development activities. None of these market-risk sensitive instruments are held
for trading purposes. We do not own derivative financial instruments in our
investment portfolio. The investment portfolio contains instruments that are
subject to the risk of a decline in interest rates. Our investment portfolio
includes debt instruments that are United States government obligations. These
investments are subject to interest rate risk, and could decline in value if
interest rates fluctuate.
We do not engage in currency hedging activities and hold no foreign currency
related derivative instruments that would subject our financial condition or
results of operations to risks associated with foreign currency exchange rate
fluctuations. We do, however, incur a portion of our expenditures in foreign
currencies, such as NIS, Euro and British pound sterling, that could cause our
results of operations to fluctuate.
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PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Precise is not a party to any material pending legal proceedings, other than
ordinary routine litigation incidental to its business.
ITEM 4. MATTERS SUBMITTED TO A VOTE OF SECURITY HOLDERS
At our Annual Meeting of Shareholders, held on May 30, 2002, the following
member was elected to the Board of Directors for:
Affirmative Negative
Votes Votes
---------------------- --------------------
Term expiring in 2005
Michael J. Miracle 25,392,824 2,787
The following proposals were approved at our Annual Meeting of Shareholders:
Affirmative Negative
Votes Votes Abstentions Broker
Non-Votes
----------------- ---------------- -------------- -------------
1. Amendment to the Company's 1998
Share Option and Incentive Plan
(the "Plan") increasing the number
of Ordinary Shares, par value NIS
0.03 per share, of the Company
available for issuance under the 13,341,928 9,389,299 14,945 2,649,439
Plan from 8,993,168 to 10,993,168
shares, and to ratify the 1998
Plan, as amended.
2. The compensation of the Chief
Executive Officer of the Company, 21,813,910 915,340 16,922 2,649,349
as required by Israeli law, for
2002.
3 Grant of options to Michael J.
Miracle, as required by Israeli law. 21,770,481 943,773 31,918 2,649,349
4. Ratify the selection of the firm of
Kost, Forer & Gabbay, a member of
Ernst & Young International, as the
Company's independent auditors for 24,992,397 399,949 3,265
the fiscal year ending December 31,
2002 and authorize the Board of
Directors to set their compensation
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ITEM 5. OTHER INFORMATION
The Registrant has filed with the Securities and Exchange Commission the
certifications of its Chief Executive Officer and Chief Financial Officer
required by Section 906 of the Sarbanes-Oxley Act of 2002.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
Precise did not file any current reports on Form 8-K during the six-month
period ended June 30, 2002.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
PRECISE SOFTWARE SOLUTIONS LTD.
Date 8/14/02 By /S/ Shimon Alon
-------------------------- -------------------------------------
Shimon Alon, Chief Executive Officer
Date 8/14/02 By /S/ J. Benjamin Nye
-------------------------- -------------------------------------
J. Benjamin H. Nye, Chief Financial
Officer and Chief Operating Officer
Date 8/14/02 By /S/ Richard Forcier
-------------------------- -------------------------------------
Richard L. Forcier, Chief Accounting
Officer
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