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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 synergies that we anticipate, and acquired businesses or technologies
may not perform as expected for a variety of reasons, including:
o difficulties in the integration of the operations, technologies,
products and personnel of the acquired company;
o risks of entering markets in which we have no or limited prior
experience;
o potential loss of key employees of the acquired entity; and
o expenses of any undisclosed or potential legal liabilities of the
acquired company.
In addition, management's attention and resources may be diverted during
any attempted integration. Any one or a combination of these factors may cause
our revenues or earnings to decline.
WE DEPEND UPON KEY PERSONNEL, THE LOSS OF WHOM WOULD HARM OUR OPERATIONS.
Our success depends, to a significant extent, upon the continued
performance and services of our executive officers and other key sales,
marketing, engineering and support personnel. The loss of the services of any of
our executive officers or key personnel, including Shimon Alon, our Chief
Executive Officer, and Itzhak "Aki" Ratner, our President, would be disruptive
to our operations. It would be difficult and time consuming to replace them. We
do not maintain key person life insurance policies on any of our officers. Any
of these individuals may voluntarily terminate his employment with Precise. Our
inability to retain these employees could harm the growth and success of our
business.
IF THE MARKETS FOR THE DATABASES AND RELATED APPLICATIONS SOFTWARE WE SUPPORT DO
NOT CONTINUE TO EXPAND, OUR ABILITY TO GROW OUR BUSINESS MAY BE ADVERSELY
AFFECTED.
If the market for the databases and related applications software we
support declines or expands more slowly than we currently anticipate, our
ability to grow our business, sell our software and achieve and maintain
profitability may be impaired. Although the market for these databases and
related applications has grown rapidly, this growth may not continue at the same
rate, or at all.
THE SOFTWARE MARKET WE ADDRESS IS EXPECTED TO RAPIDLY EVOLVE, AND IF WE ARE NOT
ABLE TO ACCURATELY PREDICT AND RESPOND TO MARKET DEVELOPMENTS OR CUSTOMER NEEDS,
OUR COMPETITIVE POSITION WILL BE IMPAIRED.
The market for the software we provide is relatively new and is expected to
evolve rapidly. However, estimates of our market's expected growth are
inherently uncertain and are subject to many risks and assumptions. Moreover,
many of our customers operate in markets characterized by rapidly changing
technologies and business plans. These customers look to our software products
to monitor application performance in this environment. Rapid changes in the
needs of these customers and changing technologies make it difficult for us to
predict their demands. We are particularly susceptible to those changes since
our software is used in a wide array of operating environments, which are
constantly evolving. As a result, we may not be able to develop, on a timely
basis or at all, software that meets our customers' needs or desires. In
addition, various sectors of our market are served by competitors who may
respond more effectively to market developments and customer needs. We cannot
assure you that the market for our software will grow or that we will be able to
respond to changes in the market, evolving customer needs or our competition. If
the market for our software does not develop as we expect or if we fail to
respond to market and competitive developments, our business prospects and
competitive position will be impaired.
25
THE FAILURE OF OUR NEW SOFTWARE TO ACHIEVE MARKET ACCEPTANCE OR DELAYS IN OUR
CURRENT OR FUTURE SOFTWARE DEVELOPMENT EFFORTS COULD ERODE OUR COMPETITIVE
POSITION.
The failure to successfully develop, enhance or modify our software, or the
failure to do so on a timely basis, could limit our revenue growth and
competitive position. We have expanded our product line to allow the monitoring
of an organization's application performance across the IT infrastructure and
continue to develop new releases of our core products that incorporate
additional features. We may need to rapidly develop and introduce additional
software and enhancements to our existing software to satisfy our current
customers and maintain our competitive position in the marketplace. We may also
need to modify our software so that it can operate with new or enhanced software
introduced by other software vendors. The failure to introduce new, enhanced or
modified software on a timely basis could prevent our software from achieving
market acceptance. We have in the past, and may in the future, experience delays
in the timing of new software introductions. To support our software
development, enhancement or modification, we may find it necessary to license or
acquire new technologies, which may not be available to us on acceptable terms,
if at all.
OUR FAILURE TO ESTABLISH AND EFFECTIVELY MANAGE INDIRECT DISTRIBUTION CHANNELS
COULD CAUSE OUR REVENUES TO DECLINE.
Our ability to sell our software in new markets and to increase our share
of existing markets will be impaired if we fail to expand significantly our
indirect distribution channels. Our sales strategy involves the establishment of
multiple distribution channels domestically and internationally through
value-added resellers, systems integrators and original equipment manufacturers.
We have entered into agreements with EMC, Amdocs and several other companies to
bundle a version of our software with their products or to sell our software
along with their product. Although these relationships have been successful to
date, we cannot predict the extent to which these companies will continue to be
successful in marketing or selling our software or the effect of our proposed
merger on these relationships. These agreements could be terminated on short
notice and they do not prevent any of these parties from selling the software of
other companies, including our competitors. Our OEMs or resellers could give
higher priority to other companies' software or to their own software than they
give to ours.
OUR INABILITY TO DEVELOP AND EXPAND OUR DIRECT SALES FORCE WOULD LIMIT OUR
REVENUE GROWTH.
If we do not expand and retain our direct sales force, revenue growth could
be seriously harmed. Competition for qualified sales personnel is intense and we
may not be able to hire and retain as many qualified individuals as we may
require in the future. To the extent we hire personnel from competitors, we may
be subject to allegations that they have been improperly solicited or divulged
proprietary or other confidential information. In addition, sale of our software
requires sales personnel, experienced in our market, who target and gain access
to the senior management of our prospective customers. Newly hired sales
personnel require extensive training and may take six months or longer to
achieve full productivity. This training period, along with the difficulty in
attracting and retaining qualified individuals, makes it difficult to grow the
size of our sales force rapidly and utilize them effectively.
IF EXISTING CUSTOMERS DO NOT MAKE SUBSEQUENT PURCHASES FROM US OR IF OUR
RELATIONSHIPS WITH OUR LARGEST CUSTOMERS ARE IMPAIRED, OUR REVENUE GROWTH COULD
DECLINE.
Our revenue growth could decline if our current customers do not purchase
additional licenses from us. As we deploy new versions of our existing software
or introduce new software, our current customers may not require the
functionality of this new software and may not license it.
We also depend on our installed customer base for future service revenue
from maintenance renewal fees. The terms of our standard license arrangements
provide for a one-time license fee and a prepayment of one year of software
maintenance. Our maintenance agreements are renewable annually at the option of
our customers but there are no obligations to renew. If customers choose not to
continue their maintenance service, our revenues may decline.
In addition, our strategic channel represents a large portion of our total
revenues. These revenues are derived from EMC, Amdocs and, to a lesser extent,
other strategic partners. If our sales from these customers were impaired, our
revenue growth could decline.
26
DEFECTS IN OUR SOFTWARE WOULD HARM OUR BUSINESS AND DIVERT RESOURCES.
Because our software is complex, it may contain errors that can be detected
at any point in its life cycle. Any errors or defects in our software could
result in:
o delayed or lost revenue;
o failure to attract new customers or achieve market acceptance;
o claims against us;
o diversion of development resources;
o increased service, warranty and insurance costs; and
o negative publicity resulting in damage to our reputation.
While we continually test our software for errors and work with customers
to identify and correct them, errors in our software may be found in the future.
Testing for errors is complicated because it is difficult to simulate the
breadth of operating systems, user applications and computing environments that
our customers use and because our software is becoming increasingly complex
itself. The costs we may incur in addressing software errors could be
substantial.
WE MAY BE SUBJECT TO PRODUCT LIABILITY CLAIMS THAT COULD RESULT IN SIGNIFICANT
COSTS TO US.
Because our customers rely on our software to monitor and improve the
performance of their critical software applications, they are sensitive to
potential disruptions that may be caused by the use of, or any defects in, our
software. As a result, we may be subject to claims for damages related to
software errors in the future. Liability claims could require us to spend
significant time and money in litigation or to pay significant damages.
Regardless of whether we prevail, diversion of key employees' time and attention
from the business, incurrence of substantial expenses and potential damage to
our reputation might result. Our license agreements with our customers typically
contain provisions designed to limit our exposure to potential product liability
claims. Limitation of liability provisions like those in our license agreements,
however, may not be effective under the laws of some jurisdictions. In addition,
although we maintain general liability insurance, we cannot assure you that this
coverage will be available in amounts sufficient to cover one or more large
claims, or that the insurer will not disclaim coverage as to any future claim
OUR FAILURE TO ADEQUATELY PROTECT OUR INTELLECTUAL PROPERTY COULD HARM OUR
COMPETITIVE MARKET POSITION.
Our success and ability to compete are substantially dependent upon our
internally developed technology, consisting primarily of computer programs and
instructions stored on digital media that can be easily reproduced. If we are
unable to protect that technology, our market position will be harmed. Other
than our trademarks, most of our intellectual property consists of proprietary
or confidential information that is not subject to patent or similar protection.
Unauthorized third parties may attempt to copy or otherwise obtain and use the
technology protected by those rights. Furthermore, policing unauthorized use of
our software is difficult and costly, particularly in countries where the laws
may not protect our proprietary rights as fully as in the U.S. If competitors or
potential customers are able to use our technology, our ability to compete
effectively would be harmed.
We have placed, and in the future may place, source code for our software
in escrow. The source code may, under certain circumstances, be made available
to certain of our customers. This may increase the likelihood of
misappropriation or other misuse of our software.
CLAIMS THAT OUR SOFTWARE INFRINGES THE PROPRIETARY RIGHTS OF OTHERS COULD HARM
OUR BUSINESS AND CAUSE US TO INCUR SIGNIFICANT COSTS.
Software products are increasingly subject to third-party infringement
claims as the functionality of products in different industry segments overlaps.
As a result, third parties may claim that our software infringes on their
proprietary rights. The application of patent law to the software industry is
particularly uncertain as the U.S. Patent and Trademark Office has only recently
begun to issue software patents in large numbers. Any potential intellectual
property claims against us, with or without merit, could:
27
o be expensive and time consuming to defend;
o cause us to cease making, licensing or using software that
incorporates the challenged intellectual property;
o cause software shipment and installation delays;
o require us to redesign our software, if feasible;
o divert management's attention and resources; or
o require us to enter into royalty or licensing agreements in order to
obtain the right to use a necessary product or component.
Royalty or licensing agreements, if required, may not be available on
acceptable terms, if at all. A successful claim of software infringement against
us and our failure or inability to license the infringed or similar technology
could prevent us from distributing our software or cause us to incur great
expense and delay in developing non-infringing software.
WE RELY ON SOFTWARE LICENSES FROM THIRD PARTIES, THE LOSS OF WHICH COULD
INCREASE OUR COSTS AND DELAY SOFTWARE SHIPMENTS.
We integrate various third-party software products as components of our
software. Our business would be disrupted if this software, or functional
equivalents of this software, were either no longer available to us or no longer
offered to us on commercially reasonable terms. In either case, we would be
required to either redesign our software to function with alternate third-party
software or develop these components ourselves, which would result in increased
costs and could result in delays in our software shipments. Furthermore, we
might be forced to limit the features available in our current or future
software offerings.
WE ARE SUBJECT TO RISKS OF OPERATING WORLDWIDE THAT COULD IMPAIR OUR ABILITY TO
GROW OUR REVENUES ABROAD.
We market and sell our software in North America, South America, Europe,
Asia, South Africa and Australia and we plan to establish additional facilities
in these and other parts of the world. Therefore, we are subject to risks
associated with having worldwide operations. Sales to customers located outside
of North America accounted for approximately 29% of our total revenues in the
year ended December 31, 2000, approximately 36% of our total revenues in the
year ended December 31, 2001 and approximately 34% of our total revenues in the
year ended December 31, 2002. In addition, our principal research and
development facility is located in Israel. The expansion of our existing
operations and entry into additional worldwide markets will require significant
management attention and financial resources. We are also subject to a number of
risks customary for worldwide operations, including:
o economic or political instability in worldwide markets;
o greater difficulty in accounts receivable collection and longer
collection periods;
o unexpected changes in regulatory requirements;
o difficulties and costs of staffing and managing foreign operations;
o import and export controls;
o the uncertainty of protection for intellectual property rights in some
countries;
o multiple and possibly overlapping tax structures; and
o foreign currency exchange rate fluctuations.
To date, a substantial portion of our sales have been denominated in U.S.
dollars, and we have not used risk management techniques or "hedged" the risks
associated with fluctuations in foreign currency exchange rates. In the future,
if we do not engage in hedging transactions, our results of operations will be
subject to losses from fluctuations in foreign currency exchange rates.
28
OUR SHARE PRICE HAS BEEN VOLATILE AND COULD DROP UNEXPECTEDLY.
The price at which our ordinary shares trade has been and is likely to
continue to be volatile. The stock market from time to time experiences
significant price and volume fluctuations that affect the market prices of
securities, particularly securities of technology and computer software
companies. As a result, investors may experience a significant decline in the
market price of our ordinary shares, regardless of our operating performance.
Price declines in our stock could result from many factors outside of our
control, including:
o announcements by our competitors of financial results, acquisitions,
new products or technological innovations;
o disputes concerning patents or other proprietary rights;
o conditions in Israel; and
o general market conditions.
In the past, following periods of volatility in the market price of a
particular company's securities, securities class action litigation has often
been brought against that company. We may become involved in this type of
litigation in the future. Litigation of this type, regardless of its merit, is
often extremely expensive and diverts management's attention and resources.
RISKS RELATED TO OUR OPERATIONS IN ISRAEL
POTENTIAL POLITICAL, ECONOMIC AND MILITARY INSTABILITY IN ISRAEL MAY ADVERSELY
AFFECT OUR RESULTS OF OPERATIONS.
Our largest research and development facility and the third party
manufacturer of many of our products are located in Israel and a small portion
of our sales is currently being made to customers in Israel. Accordingly,
political, economic and military conditions in Israel directly affect our
operations. Since the establishment of the State of Israel in 1948, a number of
armed conflicts have taken place between Israel and its Arab neighbors. A state
of hostility, varying in degree and intensity, has led to security and economic
problems for Israel. Since September 2000, there has been a high level of
violence between Israel and the Palestinians. Any armed conflicts or political
instability in the region and, specifically, the impending war in Iraq, could
negatively affect business conditions and harm our results of operations. We
cannot predict the effect on the region of the increase in the degree of
violence between Israel and the Palestinians. Parties with whom we have done
business have declined to travel to Israel during periods of heightened unrest
and tension, forcing us to make alternative arrangements when necessary.
Furthermore, several countries restrict business with Israel and Israeli
companies, and additional countries may restrict doing business with Israel and
Israeli companies as a result of the recent increase in hostilities. These
restrictive laws and policies may seriously harm our operating results,
financial condition and the expansion of our business.
OUR OPERATIONS MAY BE NEGATIVELY AFFECTED BY THE OBLIGATIONS OF OUR PERSONNEL TO
PERFORM MILITARY SERVICE.
Many of our employees in Israel are obligated to perform military reserve
duty. In addition, in the event of a war, military or other conflict, including
the ongoing conflict with the Palestinians and the impending war with Iraq,
individuals could be required to serve in the military for extended periods of
time. Our operations could be disrupted by the absence for a significant period
of time of one or more of our key employees or a significant number of our other
employees due to military service. Any such disruption in our operations could
harm our business.
BECAUSE MOST OF OUR REVENUES ARE GENERATED IN NON-ISRAELI CURRENCIES, BUT A
PORTION OF OUR EXPENSES ARE INCURRED IN NEW ISRAELI SHEKELS, INFLATION AND
CURRENCY FLUCTUATIONS COULD SERIOUSLY HARM OUR RESULTS OF OPERATIONS.
We generate most of our revenues in U.S. dollars but a portion of the costs
associated with our Israeli operations is in New Israeli Shekels, or NIS. We
also pay some of our international-based sales and support staff in local
currencies, such as the British pound sterling and the Euro. As a result, we are
exposed to risks to the extent that the rate of inflation in Israel, in the U.K.
or in Europe exceeds the rate of devaluation of the NIS, the British pound
sterling or the Euro in relation to the U.S. dollar or if the timing of such
devaluations lags behind inflation in Israel, in the U.K. or in Europe. In that
event, the cost of our operations in Israel, the U.K. and Europe measured in
terms of U.S. dollars will increase and our U.S. dollar-measured results of
operations will suffer. Historically, Israel has
29
experienced periods of high inflation. Our results of operations also could be
harmed if we are unable to guard against currency fluctuations in Israel, the
U.K. or other countries in which we may employ sales or support staff in the
future.
YOU MAY HAVE DIFFICULTIES IN ENFORCING A U.S. JUDGMENT AGAINST US, OUR EXECUTIVE
OFFICERS AND DIRECTORS OR IN ASSERTING U.S. SECURITIES LAWS CLAIMS IN ISRAEL.
Because a significant portion of our assets and the assets of our directors
and executive officers are located outside the United States, a judgment
obtained in the United States against us or any of them may not be collectible
in the United States and may not be enforced by an Israeli court. Further, if a
foreign judgment is enforced by an Israeli court, it will be payable in Israeli
currency.
U.S. INVESTORS IN OUR COMPANY COULD SUFFER ADVERSE TAX CONSEQUENCES IF WE ARE
CHARACTERIZED AS A PASSIVE FOREIGN INVESTMENT COMPANY.
If, for any taxable year, our passive income or our assets that produce
passive income exceed levels provided by law, we may be characterized as a
passive foreign investment company, or PFIC, for U.S. federal income tax
purposes. This characterization could result in adverse U.S. tax consequences to
our shareholders. U.S. shareholders should consult with their own U.S. tax
advisors with respect to the U.S. tax consequences of investing in our ordinary
shares.
WE INTEND TO RELY UPON TAX BENEFITS FROM THE STATE OF ISRAEL, BUT THOSE TAX
BENEFITS MAY NOT BE AVAILABLE TO US AT THAT TIME.
We are eligible for certain tax benefits for the first several years in
which we generate taxable income pursuant to Israel's Law for the Encouragement
of Capital Investments, 1959. Although we have not historically generated
taxable income for purposes of this law, we expect to begin to use these tax
benefits in either 2003 or 2004, depending on when we become profitable in
Israel. Our financial condition could suffer if these tax benefits were
subsequently reduced or not available to us.
In order to receive tax benefits, we must comply with the conditions of the
certificates of approval that were granted to its approved enterprise programs.
If we fail to comply in whole or in part with these conditions, the tax benefits
that we expect to receive could be partially or fully canceled. In that event,
we could be forced to refund the amount of the benefits we have received,
adjusted for inflation and interest. From time to time, the government of Israel
has discussed reducing or eliminating the benefits available under the approved
enterprise regime. Thus, these tax benefits may not be continued with respect to
future programs at their current levels or at all.
Additionally, in the event that we increase our activities outside of
Israel due to, for example, future acquisitions or internal restructuring, those
increased activities generally will not be eligible for inclusion in Israeli tax
benefit programs. Accordingly, our effective corporate tax rate could increase
significantly in the future as the revenues generated by the new activities will
not qualify for approved enterprise treatment.
THE TRANSFER AND USE OF PORTIONS OF OUR TECHNOLOGY ARE LIMITED BECAUSE OF
RESEARCH AND DEVELOPMENT GRANTS WE RECEIVED FROM THE ISRAELI GOVERNMENT.
Our research and development efforts associated with the development of the
technology embedded in Precise/Indepth for Oracle software have been partially
financed through grants from the Office of the Chief Scientist of the Israeli
Ministry of Industry and Trade. We have developed software funded partially by
Chief Scientist grants that subject us to royalty payments and restrictions,
which could limit or prevent our growth and profitability. The know-how
developed with this funding may not be transferred outside of Israel. The
products incorporating the software developed with this know-how, or any part
thereof, may not be manufactured outside of Israel, without appropriate
governmental approvals. These restrictions do not apply to the sale or export
from Israel of our products incorporating software developed with this know-how.
These restrictions extend to any derivative or related products or software
containing the technologies developed with the financial assistance of the
Office of the Chief Scientist. Since our Indepth for SQL Server and Indepth for
DB2 UDB products may contain technologies present in Precise/Indepth for Oracle,
the Office of the Chief Scientist may maintain that these products are also
subject to the restrictions discussed above. If the Chief Scientist consents to
the manufacture of our software outside Israel, the
30
regulations prescribe the payment of an increased royalty rate and amount, which
may range from 120% to 300% of the amount of the Chief Scientist grant,
depending on the percentage of foreign manufacture.
BECAUSE THIS ANNUAL REPORT CONTAINS FORWARD-LOOKING STATEMENTS, IT MAY NOT PROVE
TO BE ACCURATE.
This Annual Report includes forward-looking statements. We use words like
"anticipate," "believe," "plan," "expect," "future," "intend" and similar
expressions to identify these forward-looking statements. We have based these
forward-looking statements on our current expectations and projections about
future events. These forward-looking statements are subject to risks,
uncertainties and assumptions about Precise, the market for our products and the
competition, including, among other things:
o our ability to complete our proposed merger with VERITAS;
o our inability to achieve or maintain profitability since we expect to
incur significant expenses in the near future to grow our business,
particularly our direct sales force and indirect sales channels;
o the size, timing and recognition of revenue from major customers;
o market acceptance of new product offerings and our ability to predict
and respond to market developments;
o our ability to attract and retain key personnel;
o the development and expansion of our direct sales force;
o our ability to consummate acquisitions and to successfully integrate
and operate the acquired businesses;
o risks associated with management of growth;
o political, economic and business fluctuations in Israel and our
international markets; and
o risks of downturns in economic conditions generally, and in the
information technology and software industries specifically.
We undertake no obligation to publicly update or revise any forward-looking
statements, whether as a result of new information, future events or otherwise.
In light of these risks, uncertainties, and assumptions, the forward-looking
events discussed in this Annual Report might not occur.
31
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES 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. 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.
Because we do not hold the securities in our investment portfolio for trading
purposes, we believe we have minimal exposure to market risks associated with
changes in interest rates related to our investment securities. We believe that
any market change related to our investment securities is not material to our
consolidated financial statements. However, given the short-term nature of these
securities, a general decline in interest rates would adversely affect the
interest income from our portfolio as securities mature and are replaced with
securities having a lower interest rate.
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, the Euro and British pound sterling that
could cause our results of operations to fluctuate.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The Company's consolidated financial statements, together with the related
notes and independent auditors' report thereon, appear beginning on page F-1 of
this Annual Report on Form 10-K.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
32
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
DIRECTORS OF THE REGISTRANT
The following table sets forth for each director of the Company that
person's age, the positions currently held by such person, the year each
director's term will expire and the class of directorship:
TERM
NAME AGE POSITION EXPIRES CLASS
- ---- --- -------- ------- -----
EXTERNAL DIRECTORS:
Robert J. Dolan (2).........54 Director 2003 N/A
Mary A. Palermo (1)(2)......45 Director 2003 N/A
CLASS DIRECTORS:
Shimon Alon (1).............53 Chief Executive Officer 2004 I
and Director
Gary L. Fuhrman (2).........41 Director 2004 I
Michael J. Miracle...,......45 Director 2005 II
Anton Simunovic (1).........37 Director 2003 III
Ron Zuckerman (1)...........45 Director and Chairman of the 2003 III
Board of Directors
- ----------
(1) Member of the compensation committee
(2) Member of the audit committee
ROBERT J. DOLAN has been one of the Company's two external directors since
July 2000. Mr. Dolan has been Dean of the University of Michigan Business School
since July 2001. From 1980 to 2001, Mr. Dolan was a Professor of Business
Administration at Harvard University Graduate School of Business Administration.
From 1976 to 1980, Mr. Dolan was a professor at University of Chicago Graduate
School of Business.
MARY A. PALERMO has been one of the Company's two external directors since
July 2000. Ms. Palermo has served as an Executive Vice President of Aspen
Technology, Inc. since September 1998. From December 1995 to August 1998, she
served as their Executive Vice President, Finance and Chief Financial Officer
and from May 1989 to December 1995, she served as their Vice President and Chief
Financial Officer. Ms. Palermo is a C.P.A.
SHIMON ALON has served as the Company's Chief Executive Officer since
September 1997 and as one of the Company's directors since December 1998. From
September 1997 until December 2000, he also served as President. Mr. Alon served
at Scitex Corporation, a supplier of digital imaging solutions for graphic
communication image processing equipment, and its affiliates in varying
executive management, sales, marketing, and customer support capacities from
October 1982 to September 1996. From November 1995 to September 1996, Mr. Alon
was Scitex Corporation's Senior Executive Vice President of the Graphic Art
Division. From May 1995 to September 1996, Mr. Alon was Scitex America
Corporation's President and Chief Executive Officer. From January 1993 to May
1995, Mr. Alon served Scitex Europe Ltd. as Managing Director.
GARY L. FUHRMAN has been one of the Company's directors since March 2001.
Mr. Fuhrman has been Chairman and CEO of GF Capital Management & Advisors, LLC,
a financial advisory firm, and Chairman of GF Capital's subsidiary, TAG
Associates, a wealth management firm, since January 2002. From 1984 to 2002, Mr.
Fuhrman served as a Co-Director of Investment Banking and director of Arnhold
and S. Bleichroeder, Inc., an international banking firm that offers asset
management services, securities brokerage and advice on mergers and acquisitions
and other corporate finance matters.
33
MICHAEL J. MIRACLE has been one of the Company's directors since April
2002. Mr. Miracle has been a General Partner in Ridge Partners, LLC since
February 2002. From February 1998 to October 2001, Mr. Miracle served as Vice
President of Corporate Business Development of VERITAS Software Corporation.
From February 1996 to January 1998, Mr. Miracle served as Section Manager of
Hewlett-Packard, Inc., where he was responsible for HP-UX and web infrastructure
development. From June 1993 to January 1996, Mr. Miracle was Director of
Operating Systems Development at Novell, Inc. Mr. Miracle serves as a director
of Mediconnect.net and is a member of the Board of Directors of Connected
Corporation.
ANTON SIMUNOVIC has served as one of the Company's directors since October
1999. In January 2000, Mr. Simunovic joined Divine, Inc and became Chief
Investment Officer in July 2000. In April 2002, Mr. Simunovic left Divine, Inc
to pursue private investment opportunities. From August 1996 to January 2000,
Mr. Simunovic was Senior Vice President and Group Head of internet
infrastructure and enterprise software investing for GE Equity. From June 1993
to August 1996, Mr. Simunovic was a Manager of Strategy Consulting for the
Barents Group LLC. Mr. Simunovic was elected by the holders of the Company's
series B preferred shares, which are no longer outstanding, under similar
provisions that are no longer in effect.
RON ZUCKERMAN is one of the Company's founders and has served as the
Company's Chairman of the Board of Directors since June 1991, which was shortly
after the Company's inception. Mr. Zuckerman has been a consultant at MCF
Advisory Services, Ltd. since January 2003. Mr. Zuckerman is a co-founder of
Sapiens International Corporation N.V. (Nasdaq:SPNS), a large-scale,
business-critical information technology solutions company, and has served as
its Chairman of the Board of Directors since January 1998. Mr. Zuckerman was
elected as a director by the holders of the Company's series A preferred shares,
which are no longer outstanding, under provisions in the Company's Articles of
Association that are no longer in effect.
EXECUTIVE OFFICERS
NAME AGE POSITION
- ---- --- --------
Shimon Alon.............. 53 Chief Executive Officer and Director
Itzhak "Aki" Ratner...... 46 President
Benjamin H. Nye.......... 37 Chief Operating Officer
Marc J. Venator.......... 46 Chief Financial Officer
Rami Schwartz............ 45 Executive Vice President of Research and
Development, General Manager
Joseph R. McCurdy........ 54 Executive Vice President of Business Operations
Andrew D. Bird........... 48 Executive Vice President of Marketing
ITZHAK "AKI" RATNER has served as our President since December 2000. Prior
to that, he served as General Manager of our Israeli office from May 1997 to
December 2000 and served as our Vice President of Research and Development from
May 1997 to September 2000. Before joining Precise, Mr. Ratner served in the
Israeli Air Force from August 1981 to June 1996 in various software development
management positions. From February 1993 to June 1996, Mr. Ratner served in the
Israeli Air Force as a lieutenant colonel in charge of client/server project
development.
BENJAMIN H. NYE has served as our Chief Operating Officer since February
2002 and from February 2000 to August 2002 served as our Vice President of
Finance and Chief Financial Officer. Prior to joining Precise, Mr. Nye was a
principal of Allied Capital Corporation, a publicly-traded investment fund,
where he structured and oversaw private debt and equity investments in a
portfolio of operating companies. From February 1993 to June 1997, Mr. Nye was a
senior advisor to U.S. Treasury Secretaries Lloyd Bentsen and Robert Rubin in
the U.S. Department of the Treasury.
MARC J. VENATOR has served as our Chief Financial Officer since September
2002. Prior to joining Precise, Marc served as Chief Operating Officer and Chief
Financial Officer of Saville Systems. Prior to Saville, he was Corporate
Controller of System Software Associates. He previously held finance positions
at Quaker Oats, Gould, Inc. and Coopers & Lybrand.
34
RAMI SCHWARTZ has served as our Executive Vice President of Research and
Development and General Manager of our Israeli office since July of 2001 and
from September 2000 to July 2001 served as our Vice President of Research and
Development. From October 1999 to September 2000, Mr. Schwartz was the Vice
President of Development of Amdocs. From June 1985 to June 1999, Mr. Schwartz
served with the Israeli Air Force Software Development Division, most recently
as its Division Commander.
JOSEPH R. MCCURDY has served as our Executive Vice President of Business
Operations since January 2001. He is responsible for managing our distribution
channels - both direct sales and alliance partnerships. Prior to joining
Precise, from October 1999 to April 2000, Mr. McCurdy served as the President
and Chief Executive Officer of Tempest Software, Inc. From September 1991 to
June 1999, Mr. McCurdy served as Vice President at Boole & Babbage (acquired by
BMC Software) where he was responsible for sales and field support in the
northeast, southeast and the federal government. Concurrently, Mr. McCurdy
served as the Site Manager for the Storage Division with responsibility for
development, marketing, administration and sales. Mr. McCurdy has also held
senior sales positions at XA Systems Corp, Shared Medical Systems, and IBM.
ANDREW D. BIRD has served as our Executive Vice President of Marketing
since April 2001. He is responsible for the strategic direction and positioning
of Precise, including corporate strategy and global marketing. Prior to joining
Precise, Mr. Bird served as European Business Unit Director for BMC Software
where he was responsible for the market development of BMC's Systems Management
products across Europe, the Middle East and Africa. From 1996 to 1998 Mr. Bird
served as Vice President of Marketing for BGS Systems, which was acquired by BMC
Software, where he was responsible for global marketing and market development.
From 1990 to 1996, Mr. Bird served as Managing Director of BGS System's United
Kingdom operation where he was responsible for marketing, administration and
sales for the United Kingdom and major European countries. Mr. Bird has also
held senior sales positions at Cullinet, CCS and Cincom Systems.
SECTION 16(A) BENEFICIAL OWNERSHIP COMPLIANCE
Section 16(a) of the Securities Exchange Act of 1934, as amended, requires
the Company's directors, executive officers and holders of more than 10% of the
Company's ordinary shares (collectively, "Reporting Persons") to file with the
SEC initial reports of ownership and reports of changes in ownership of the
Company's ordinary shares. Such persons are required by regulations of the SEC
to furnish the Company with copies of all such filings. Based on its review of
the copies of such filings received by it with respect to the fiscal year ended
December 31, 2002 and written representations from certain Reporting Persons,
the Company believes that all Reporting Persons complied with all Section 16(a)
filing requirements in the fiscal year ended December 31, 2002, with the
following exceptions: Messrs. Alon, Ratner, Nye, Venator, Schwartz, McCurdy and
Bird failed to timely file a Form 4 reporting their receipt of options granted
on October 14, 2002. These Form 4's were filed on October 18, 2002.
35
ITEM 11. EXECUTIVE COMPENSATION
EXECUTIVE COMPENSATION SUMMARY
The following table sets forth certain information concerning the annual
and long-term compensation for services in all capacities to the Company and its
subsidiaries for the fiscal year ended December 31, 2002 of (1) the Company's
Chief Executive Officer and (2) the four other highest paid executive officers
of the Company during 2002 (collectively, with the Chief Executive Officer, the
"Named Officers"):
SUMMARY COMPENSATION TABLE
ANNUAL COMPENSATION (1) LONG-TERM COMPENSATION (2)
----------------------- --------------------------
SECURITIES
FISCAL UNDERLYING ALL OTHER
NAME AND PRINCIPAL POSITION YEAR SALARY ($) BONUS ($)(3) OPTIONS COMPENSATION ($)(4)
---- ---------- ------------ ------- -------------------
Shimon Alon (5)............. 2002 270,000 208,870 350,000(5) 4,000
Chief Executive Officer 2001 270,000 191,897 565,000 8,500
Director 2000 272,500 196,520 --- 8,500
Itzhak "Aki" Ratner (6)..... 2002 200,965 102,062 200,000 15,687
President 2001 182,793 100,000 290,000 29,409
2000 132,865 74,140 --- 24,907
Benjamin H. Nye (7)......... 2002 241,678 144,263 200,000 4,000
Chief Operating Officer 2001 200,746 99,699 200,000 8,500
2000 173,163 140,600 333,334 8,500
Joseph R. McCurdy (8)....... 2002 200,701 68,850 50,000 4,000
Executive Vice President, 2001 192,381 78,849 200,000 8,500
Business Operations
Andrew Bird (9)............. 2002 175,614 68,269 25,000 4,000
Executive Vice President 2001 124,415 66,946 115,000 ---
of Marketing
- -----------------
(1) Excludes perquisites and other personal benefits, the aggregate annual
amount of which for each officer was less than the lesser of $50,000 or 10%
of the total salary and bonus reported.
(2) The Company did not grant any restricted awards of its ordinary shares or
stock appreciation rights ("SARs") or make any long-term incentive plan
payouts during fiscal year 2002.
(3) Bonuses are reported in the year earned, even if actually paid in a
subsequent year.
(4) Consists of contributions made by the Company on behalf of the Named
Officers to the Company's 401(k) Plan or other tax deferred savings plan.
(5) Represents options subject to shareholder approval.
(6) All Other Compensation consists of contributions made by the Company on
behalf of Mr. Ratner to a tax deferred savings plan ($4,840, $8,045 and
$5,978 in 2002, 2001 and 2000, respectively), contributions to an insurance
policy to provide for the Company's statutory obligation under Israeli Law
to provide severance pay in the event Mr. Ratner is terminated ($8,064,
$13,709 and $9,961 in 2002, 2001 and 2000, respectively) and contributions
to a tax deferred education fund ($2,783, $7,655 and $8,968 in 2002, 2001
and 2000, respectively).
(7) In February 2002, Mr. Nye's title was changed from Vice President and Chief
Financial Officer to Chief Financial Officer and Chief Operating Officer.
In September 2002, Mr. Nye's title was changed to Chief Operating Officer.
(8) Mr. McCurdy's employment with the Company commenced in January 2001.
(9) Mr. Bird's employment with the Company commenced in April 2001.
36
OPTION GRANTS IN LAST FISCAL YEAR
The following table sets forth grants of options to purchase ordinary
shares of the Company pursuant to the Company's Amended and Restated 1998 Share
Option and Incentive Plan granted during the fiscal year ended December 31, 2002
to the Named Officers who are listed in the Summary Compensation Table above:
OPTION GRANTS IN LAST FISCAL YEAR (1)
INDIVIDUAL GRANTS (2)
---------------------
POTENTIAL REALIZABLE
PERCENT OF VALUE AT ASSUMED ANNUAL
NUMBER OF TOTAL OPTIONS RATES OF STOCK PRICE
SECURITIES GRANTED TO APPRECIATION
UNDERLYING EMPLOYEES IN EXERCISE OR FOR OPTION TERM (4)
OPTIONS FISCAL YEAR BASE PRICE EXPIRATION --------------------
NAME GRANTED(#) (%)(3) ($/SH) DATE 5%($) 10%($)
---- ---------- ------ ------ ---- ----- ------
Shimon Alon........... 350,000(5) 14.2 9.68 10/2012 2,131,500 5,400,500
Itzhak "Aki" Ratner... 200,000 8.1 9.68 10/2012 1,218,000 3,086,000
Benjamin H. Nye....... 200,000 8.1 9.68 10/2012 1,218,000 3,086,000
Joseph R. McCurdy..... 50,000 2.0 9.68 10/2012 304,500 771,500
Andrew Bird........... 25,000 1.0 9.68 10/2012 152,250 385,750
- -------------
(1) No stock appreciation rights ("SARs") were granted by the Company in the
fiscal year ended December 31, 2002.
(2) Share options were granted under the Company's Amended and Restated 1998
Share Option and Incentive Plan. All grants were made with an exercise
price equal to the market price on the date of grant. All of these grants
are subject to vesting over a term of four years and are subject to
acceleration in certain situations.
(3) Options to purchase a total of 2,458,545 ordinary shares were granted to
employees, including the Named Officers, during fiscal year 2002.
(4) Amounts reported in these columns represent amounts that may be realized
upon exercise of the options immediately prior to the expiration of their
term assuming the specified compounded rates of appreciation (5% and 10%)
on the market value of the Company's ordinary shares on the date of option
grant over the term of the options. These numbers are calculated based on
rules promulgated by the Securities and Exchange Commission and do not
reflect the Company's estimate of future ordinary share price growth.
Actual gains, if any, on ordinary share option exercises and ordinary share
holdings are dependent on the timing of such exercise and the future
performance of the Company's ordinary shares. The rates of appreciation
assumed in this table may not be achieved and the amounts reflected may not
be received by the individuals.
(5) Subject to shareholder approval.
37
OPTION EXERCISES AND FISCAL YEAR-END VALUES
The following table sets forth information with respect to options to
purchase the Company's ordinary shares granted to the Named Officers who are
listed in the Summary Compensation Table above, including (1) the number of
ordinary shares purchased upon exercise of options in the fiscal year ended
December 31, 2002; (2) the net value realized upon such exercise; (3) the number
of unexercised options outstanding at December 31, 2002; and (4) the value of
such unexercised options at December 31, 2002:
AGGREGATED OPTION EXERCISES IN LAST FISCAL
YEAR AND FISCAL YEAR-END OPTION VALUES
NUMBER OF UNEXERCISED VALUE OF UNEXERCISED
OPTIONS AT IN-THE-MONEY OPTIONS
SHARES DECEMBER 31, 2002 AT DECEMBER 31, 2002 ($)(2)
ACQUIRED ON VALUE -------------------------- -----------------------------
NAME EXERCISE(#) REALIZED($)(1) EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- ---- ----------- -------------- ----------- ------------- ----------- -------------
Shimon Alon............... 178,236 3,113,530 781,186 899,063(3) 10,383,903 4,125,902
Itzhak "Aki" Ratner....... 292,319 3,861,009 39,375 495,625 61,917 2,121,058
Benjamin H. Nye........... 110,333 1,463,864 63,001 400,000 945,645 1,366,000
Joseph R. McCurdy......... -- -- 37,500 212,500 84,750 595,750
Andrew Bird............... -- -- 25,000 115,000 -- 170,750
- ----------------
(1) Amounts disclosed in this column do not reflect amounts actually received
by the Named Officers but are calculated based on the difference between
the fair market value of the Company's ordinary shares on the date of
exercise and the exercise price of its options. The Named Officers will
receive cash only if and when they sell the ordinary shares issued upon
exercise of the options, and the amount of cash received by such
individuals is dependent on the price of the Company's ordinary shares at
the time of such sale.
(2) Value is based on the difference between the option exercise price and the
fair market value at December 31, 2002 (based upon a last reported sale
price of $16.51 per share as quoted on the Nasdaq National Market on
December 31, 2002) multiplied by the number of shares underlying the
option.
(3) Includes 350,000 options subject to shareholder approval.
EXECUTIVE EMPLOYMENT AGREEMENTS
The Company has entered into the following employment agreements with the
Named Officers:
Mr. Alon entered into an employment agreement dated November 23, 1998. The
initial term of the employment agreement was through September 8, 2000. Mr. Alon
agreed to extend the term for an additional 24 months and may, upon mutual
agreement, extend the term of the Agreement for subsequent 24-month periods.
Under the terms of the employment agreement, Mr. Alon is compensated for serving
as an employee of the Company's U.S. subsidiary and also serves as an officer
and director of the Company for no additional consideration. Mr. Alon, the
Company, and the U.S. subsidiary entered into a separate employment agreement
concerning the performance by Mr. Alon of duties for the Company, and the
Company has agreed to reimburse the U.S. subsidiary for the performance by Mr.
Alon of services for the Company. Mr. Alon's compensation is set by the Board of
Directors, but may not be less than $250,000 per year. His salary was set at
$270,000 per year for 2001, $270,000 for 2002 and $320,000 for 2003. The
employment agreement also provides that Mr. Alon will be eligible to receive an
annual bonus of $120,000 per year or more, based upon target revenues or
earnings established by the Board of Directors. He received a bonus of $191,897
for 2001 and has a target bonus of 200,000 for 2002. Under the terms of the
employment agreement, if Mr. Alon's employment is terminated without cause, he
is entitled to twelve months' advance notice or a severance payment equal to
twelve months' salary and medical and health insurance benefits for
38
the same period. Mr. Alon is also entitled to the use of a car. Mr. Alon has
agreed that, if he voluntarily terminates his employment, he will not engage in
any business or employment that competes with the Company. In the event that Mr.
Alon's employment is terminated within the first twelve months after the
acquisition of the Company, he will be entitled to a payment equal to twelve
months' salary and benefits for the same period.
Mr. Ratner entered into employment agreements dated August 1, 2002 with us
and our U.S. subsidiary which superseded his prior employment agreement dated
May 1, 1997. The employment agreements provide that Mr. Ratner will perform such
functions as are requested by the Chairman of the Board of Directors or CEO of
the Company. Mr. Ratner's aggregate salary under the employment agreements is
$20,750 per month. Mr. Ratner is also entitled to the use of a car provided by
the Company. Mr. Ratner has agreed with the Company not to engage in any
business or employment competitive with the Company during the term of his
employment and for one year thereafter. In the event of the termination of Mr.
Ratner's employment by the Company other than for cause, Mr. Ratner will be
entitled to receive the continuation of his salary, bonus and health insurance
benefit for nine months. In the event of an acquisition of the Company, 50% of
any option shares which remain unvested will become vested immediately prior to
such acquisition. In addition, if Mr. Ratner is terminated without cause or
constructively terminated within one year of such an acquisition, the remainder
of the unvested portion of the option would become vested. As one of the
Company's Israel based employees, the Company makes contributions to an
insurance policy which would provide Mr. Ratner severance in the event his
employment with the Company ends. If Mr. Ratner's terminates his employment
voluntarily, Mr. Ratner is entitled to the proceeds of the insurance policy. If
Mr. Ratner's employment is terminated by the Company, the Company is obligated
by law to provide severance in the amount of one month's salary for each year he
has been employed by the Company, regardless of whether the proceeds from the
insurance policy are sufficient to cover this amount.
Mr. Nye entered into an employment agreement dated February 28, 2002 which
superseded his prior employment agreement dated February 9, 2000. Under the
terms of the employment agreement, Mr. Nye serves as the Chief Operating Officer
of the Company, reporting to the Company's CEO. Mr. Nye's compensation was set
initially at $20,750 per month. In addition, the employment agreement provides
that Mr. Nye will be eligible for a bonus of $148,000 per year based upon the
achievement of goals established by the Company's Board of Directors. In the
event of the termination of Mr. Nye's employment by the Company other than for
cause, Mr. Nye will be entitled to receive the continuation of his salary, bonus
and health insurance benefit for twelve months, and his options will continue to
vest during that period. In the event of an acquisition of the Company, 50% of
any option shares which remain unvested will become vested immediately prior to
such acquisition. In addition, if Mr. Nye is terminated without cause or
constructively terminated within one year of such an acquisition, the remainder
of the unvested portion of the option would become vested.
In addition, each of Messrs. Alon, Ratner and Nye and certain of our other
executive officers have entered into employment agreements that will only be
effective upon the closing of our proposed merger with VERITAS. The terms of
these agreements will be described in the proxy statement/prospectus relating to
the merger when it becomes available.
COMPENSATION AND AUDIT COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
Currently, Messrs. Alon, Simunovic and Zuckerman and Ms. Palermo serve as
members of the Compensation Committee of the Board of Directors. Under the
Israeli Companies Law - 1999, the compensation of all executive officers of
public companies must be approved by the Audit Committee. Currently, Messrs.
Dolan and Fuhrman and Ms. Palermo serve as members of the Audit Committee. The
Compensation Committee recommends to the full Board of Directors the salary and
other compensation for the Company's executive officers, including Mr. Alon. Mr.
Alon did not participate in the Compensation Committee's deliberations
concerning his compensation. The suggested compensation is then subject to the
approval of the Board and the Audit Committee. No executive officer of the
Company serves as a member of the board of directors or compensation committee
of any entity which has one or more executive officers serving as a member of
the Company's Board of Directors, Audit Committee or Compensation Committee.
COMPENSATION OF DIRECTORS
Under the Companies Law, all compensation to the Company's directors must
be approved by the Company's shareholders. During the year ended December 31,
2002, directors who were not employees of the
39
Company received no cash compensation for their services as directors, except
for reimbursement of expenses incurred in connection with attending meetings.
All of these directors are eligible to receive options under the Company's
Amended and Restated 1998 Share Option and Incentive Plan. In April 2002, Mr.
Miracle was granted an option to purchase 40,000 ordinary shares at an exercise
price of $13.24 per share. In December 2002, the Company's Board of Directors
approved the acceleration of the vesting of stock options held by non-employee
members of the Board of Directors upon the closing of our proposed merger with
VERITAS, subject to approval by our shareholders.
The Company has purchased directors' and officers' liability insurance
covering all of the Company's directors and officers. The aggregate premium for
this insurance policy in 2002 was approximately $288,000.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCKHOLDER MATTERS
EQUITY COMPENSATION PLAN INFORMATION
The following table sets forth information regarding the Company's equity
compensation plans as of December 31, 2002.
NUMBER OF SECURITIES
NUMBER OF SECURITIES REMAINING AVAILABLE FOR
TO BE ISSUED WEIGHTED-AVERAGE FUTURE ISSUANCE UNDER
UPON EXERCISE OF EXERCISE PRICE OF EQUITY COMPENSATION PLANS
OUTSTANDING OPTIONS, OUTSTANDING OPTIONS, (EXCLUDING SECURITIES
PLAN CATEGORY WARRANTS AND RIGHTS (1) WARRANTS AND RIGHTS REFLECTED IN FIRST COLUMN)(1)
- ------------------------------- ----------------------- -------------------- -----------------------------
Equity compensation plans
approved by security holders... 7,887,267 $ 11.62 637,855
Equity compensation plans not
approved by security holders... 16,882(2) $ 21.85 --
Total.......................... 7,904,149 637,855
========= =======
- --------
(1) Represents ordinary shares issuable in connection with such equity
compensation plans.
(2) Represents ordinary shares issuable upon exercise of options granted under
the Savant Corporation Stock Option Plan that was assumed by the Company in
connection with the acquisition of Savant Corporation in December 2000. No
further awards may be made under the Savant Corporation Stock Option Plan.
40
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth as of February 28, 2003 certain information
regarding beneficial ownership of the Company's ordinary shares (1) by each
person who is known by the Company to be the beneficial owner of more than 5% of
its ordinary shares, (2) by each director, or nominee for director, of the
Company, (3) by each executive officer named in the Summary Compensation Table
included under Item 11 above, and (4) by all directors and executive officers of
the Company as a group. Except as otherwise indicated in the footnotes to the
table, the beneficial owners listed have sole voting and investment power
(subject to community property laws where applicable) as to all of the shares
beneficially owned by them. As of February 28, there were 30,208,113 ordinary
shares outstanding.
NAME AND ADDRESS OF BENEFICIAL OWNER AMOUNT AND NATURE PERCENT OF
------------------------------------ OF BENEFICIAL ORDINARY
OWNERSHIP (2) SHARES OUTSTANDING
------------- ------------------
FIVE PERCENT HOLDERS
N/A -- --
DIRECTORS AND EXECUTIVE OFFICERS (1)
Shimon Alon (2) ........................ 1,176,218 3.9%
Itzhak "Aki" Ratner (3) ................ 226,445 *
Benjamin H. Nye (4) .................... 182,886 *
Marc J. Venator ........................ - *
Rami Schwartz (5)....................... 110,625 *
Joseph R. McCurdy (6) .................. 90,625 *
Andrew D. Bird (7) ..................... 54,687 *
Ron Zuckerman (8) ...................... 24,500 *
Robert J. Dolan (9)..................... 52,000 *
Gary L. Fuhrman (10).................... 20,000 *
Michael Miracle (11).................... 13,000 *
Mary A. Palermo (9)..................... 55,000 *
Anton Simunovic (9)..................... 55,000 *
All directors and executive officers
as a group (13 persons) (12).......... 2,060,986 6.8%
- ---------------
*Less than 1% of the outstanding ordinary shares.
(1) Unless otherwise indicated below, each person listed above maintains a
mailing address at: 690 Canton Street, Westwood, Massachusetts 02090.
(2) Includes 175,921 ordinary shares held in trust for the benefit of various
family members and 907,061 ordinary shares issuable upon exercise of
options exercisable within 60 days of February 28, 2003. Mr. Alon disclaims
beneficial ownership of the shares held in trust, except to the extent of
his pecuniary interest therein.
(3) Includes 113,125 ordinary shares issuable upon exercise of options
exercisable within 60 days of February 28, 2003. Mr. Ratner's address is
c/o Precise Software Solutions, 10 Hata'asiya Street, Or-Yehuda, Israel
60408.
(4) Includes 125,501 ordinary shares issuable upon exercise of options
exercisable within 60 days of February 28, 2003.
(5) Includes 110,625 ordinary shares issuable upon exercise of options
exercisable within 60 days of February 28, 2003. Mr. Schwartz's address is
c/o Precise Software Solutions, 10 Hata'asiya Street, Or-Yehuda, Israel
60408.
(6) Includes 90,625 ordinary shares issuable upon exercise of options
exercisable within 60 days of February 28, 2003.
(7) Includes 54,687 ordinary shares issuable upon exercise of options
exercisable within 60 days of February 28, 2003.
41
(8) Includes 12,500 ordinary shares issuable upon exercise of options
exercisable within 60 days of February 28, 2003.
(9) Includes 50,000 ordinary shares issuable upon exercise of options
exercisable within 60 days of February 28, 2003.
(10) Includes 20,000 ordinary shares issuable upon exercise of options
exercisable within 60 days of February 28, 2003.
(11) Includes 10,000 ordinary shares issuable upon exercise of options
exercisable within 60 days of February 28, 2003.
(12) Includes 1,594,124 ordinary shares issuable pursuant to outstanding options
that may be exercised within 60 days of February 28, 2003 and 175,921
ordinary shares held in trust for the benefit of various family members.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
None
ITEM 14. CONTROLS AND PROCEDURES
Within the 90 days prior to the date of this report, the Company carried
out an evaluation, under the supervision and with the participation of the
Company's management, including the Company's Chief Executive Officer and Chief
Financial Officer, of the effectiveness of the design and operation of the
Company's disclosure controls and procedures pursuant to Rule 13a-14 under the
Securities Exchange Act of 1934, as amended. Based upon that evaluation, the
Chief Executive Officer and Chief Financial Officer concluded that the Company's
disclosure controls and procedures are effective in timely alerting them to
material information relating to the Company required to be included in the
Company's periodic SEC filings. There have been no significant changes in the
Company's internal controls or in other factors that could significantly affect
these controls subsequent to the date of that evaluation and no corrective
actions with regard to significant deficiencies and material weaknesses that
would warrant corrective action.
42
PART IV
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K.
(a) The following documents are filed as part of this Annual Report on Form
10-K:
(1) Financial Statements: The financial statements included in Item 8 of
Part II which appear beginning on page F-1 of this Annual Report on
Form 10-K
(2) Financial Statement Schedules: Financial statement schedules have been
omitted because the required information is not present or not present
in amounts sufficient to require submission of the schedule, or
because the information required is included in the financial
statements or the notes thereto.
(3) Exhibits: The exhibits listed in the Exhibit Index immediately
preceding the Exhibits.
(b) Reports on Form 8-K: Precise filed the following reports on Form 8-K during
the fiscal year ended December 31, 2002: Report on Form 8-K on December 24,
2002 reporting the execution of an Agreement and Plan of Merger dated as of
December 19, 2002 by and among VERITAS Software Corporation, Argon Merger
Sub Ltd. and Precise Software Solutions Ltd.
43
PRECISE SOFTWARE SOLUTIONS LTD. AND ITS SUBSIDIARIES
CONSOLIDATED FINANCIAL STATEMENTS
AS OF DECEMBER 31, 2002
IN U.S. DOLLARS
INDEX
PAGE
----
REPORT OF INDEPENDENT AUDITORS F-2
CONSOLIDATED BALANCE SHEETS F-3
CONSOLIDATED STATEMENTS OF OPERATIONS F-5
STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY F-6
CONSOLIDATED STATEMENTS OF CASH FLOWS F-8
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS F-11
- - - - - - - -
REPORT OF INDEPENDENT AUDITORS
ERNST & YOUNG [LOGO]
To the Shareholders of
PRECISE SOFTWARE SOLUTIONS LTD.
We have audited the accompanying consolidated balance sheets of Precise
Software Solutions Ltd. ("the Company") and its subsidiaries as of December 31,
2001 and 2002, and the related consolidated statements of operations, changes in
shareholders' equity and cash flows for each of the three years in the period
ended December 31, 2002. These financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position of
the Company and its subsidiaries as of December 31, 2001 and 2002, and the
consolidated results of their operations and cash flows for each of the three
years in the period ended December 31, 2002, in conformity with generally
accepted accounting principles in the United States.
/s/ Kost Forer & Gabbay
Tel-Aviv, Israel KOST FORER & GABBAY
January 21, 2003 A Member of Ernst & Young Global
F-2
PRECISE SOFTWARE SOLUTIONS LTD. AND ITS SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
================================================================================
U.S. DOLLARS IN THOUSANDS
DECEMBER 31,
-------------------------
2001 2002
---------- ----------
ASSETS
- ------
Current assets:
Cash and cash equivalents $ 35,144 $ 13,870
Marketable securities 39,752 71,754
Trade receivables, net of allowance for
doubtful accounts (2001 - $179, 2002 - $278) 12,156 18,065
Other accounts receivable and prepaid expenses 3,168 3,114
---------- ----------
Total current assets 90,220 106,803
Marketable securities, non-current 60,935 54,571
Severance pay fund 750 951
Property and equipment, net 5,047 4,604
Other receivables, non-current 500 2,700
Other intangible assets, net 12,869 12,778
Goodwill 32,862 44,611
---------- ----------
Total assets $ 203,183 $ 227,018
========== ==========
The accompanying notes are an integral part
of the consolidated financial statements.
F-3
PRECISE SOFTWARE SOLUTIONS LTD. AND ITS SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
================================================================================
U.S. DOLLARS IN THOUSANDS (EXCEPT SHARE DATA)
DECEMBER 31,
-------------------------
2001 2002
---------- ----------
LIABILITIES AND SHAREHOLDERS' EQUITY
- ------------------------------------
Current liabilities:
Trade payables $ 1,394 $ 1,297
Deferred revenues 6,673 9,400
Employees and payroll accruals 5,161 5,624
Accrued expenses 2,014 2,161
Other current liabilities 1,074 1,800
---------- ----------
Total current liabilities 16,316 20,282
---------- ----------
Long-term liabilities:
Capital lease obligation 92 85
Accrued severance pay 1,116 1,207
---------- ----------
Total long-term liabilities 1,208 1,292
---------- ----------
SHAREHOLDERS' EQUITY
Ordinary shares:
NIS 0.03 par value: Authorized: 70,000,000
shares at December 31, 2001 and 2002;
Issued and outstanding: 27,937,776 and
29,969,664 shares at December 31, 2001
and 2002, respectively 221 234
Additional paid-in capital 210,215 225,764
Deferred stock compensation (544) (77)
Accumulated other comprehensive income 1,191 1,356
Accumulated deficit (25,424) (21,833)
---------- ----------
Total shareholders' equity 185,659 205,444
---------- ----------
Total liabilities and shareholders' equity $ 203,183 $ 227,018
========== ==========
The accompanying notes are an integral part
of the consolidated financial statements.
F-4
PRECISE SOFTWARE SOLUTIONS LTD. AND ITS SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
================================================================================
U.S. DOLLARS IN THOUSANDS (EXCEPT PER SHARE DATA)
YEAR ENDED DECEMBER 31,
------------------------------------------
2000 2001 2002
---------- ---------- ----------
Revenues:
Software licenses $ 22,968 $ 43,903 $ 52,672
Services 4,580 11,694 23,328
---------- ---------- ----------
Total revenues 27,548 55,597 76,000
---------- ---------- ----------
Cost of revenues:
Software licenses 742 362 628
Services (1) 1,693 3,143 6,395
---------- ---------- ----------
Total cost of revenues 2,435 3,505 7,023
---------- ---------- ----------
Gross profit 25,113 52,092 68,977
---------- ---------- ----------
Operating expenses:
Research and development (2) 4,987 10,924 12,793
Sales and marketing (3) 20,749 34,675 43,611
General and administrative (4) 3,923 7,046 8,668
Amortization of deferred stock compensation 6,151 1,930 354
Amortization of goodwill and intangible assets 99 3,040 3,640
In-process research and development write-off 2,200 86 --
Veritas acquisition related expenses -- -- 131
---------- ---------- ----------
Total operating expenses 38,109 57,701 69,197
---------- ---------- ----------
Operating loss (12,996) (5,609) (220)
Financial income and other, net 3,091 6,565 4,021
---------- ---------- ----------
Income (loss) before income taxes (9,905) 956 3,801
Income taxes -- 33 210
---------- ---------- ----------
Net income (loss) $ (9,905) $ 923 $ 3,591
========== ========== ==========
Net earnings (loss) per share:
Basic and diluted net earnings (loss) per share $ (0.77) $ 0.03 $ 0.12
========== ========== ==========
- ----------------
(1) Excludes $283, $12 and $2 in amortization of deferred stock compensation in
2000, 2001 and 2002, respectively.
(2) Excludes $144, $59 and $34 in amortization of deferred stock compensation
in 2000, 2001 and 2002, respectively.
(3) Excludes $2,382, $419 and $170 in amortization of deferred stock
compensation in 2000, 2001 and 2002, respectively.
(4) Excludes $3,342, $1,440 and $148 in amortization of deferred stock
compensation in 2000, 2001 and 2002, respectively.
The accompanying notes are an integral part
of the consolidated financial statements.
F-5
PRECISE SOFTWARE SOLUTIONS LTD. AND ITS SUBSIDIARIES
STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
================================================================================
U.S. DOLLARS IN THOUSANDS
ACCUMULATED
ADDITIONAL DEFERRED OTHER TOTAL TOTAL
PREFERRED ORDINARY PAID-IN STOCK COMPREHENSIVE ACCUMULATED COMPREHENSIVE SHAREHOLDERS'
SHARES SHARES CAPITAL COMPENSATION INCOME DEFICIT INCOME(LOSS) EQUITY
--------- --------- --------- --------- --------- --------- --------- ---------
Balance as of January 1, 2000 $ 97 $ 31 $ 25,272 $ (665) $ -- $ (16,442) $ -- $ 8,293
Options issued pursuant to
the acquisition of Knight
Fisk Software Ltd. -- -- 199 -- -- -- -- 199
Issuance of shares in IPO,
net of $1,628 offering costs -- 39 75,909 -- -- -- -- 75,948
Conversion of Preferred
shares upon IPO (97) 97 -- -- -- -- -- --
Issuance of shares in second
public offering, net of
$2,257 offering costs -- 21 71,423 -- -- -- -- 71,444
Exercise of options, net -- 12 468 -- -- -- -- 480
Issuance of shares pursuant
to the acquisition of
Savant Corporation -- 4 13,932 -- -- -- -- 13,936
Deferred stock compensation
related to options granted
to employees -- -- 8,203 (8,203) -- -- -- --
Amortization of deferred
stock compensation -- -- -- 6,151 -- -- -- 6,151
Comprehensive loss:
Unrealized holding gains on
available-for-sale
marketable securities -- -- -- -- 322 -- $ 322 322
Foreign currency translation
adjustments -- -- -- -- 8 -- 8 8
Total other comprehensive ---------
income 330
Net loss -- -- -- -- -- (9,905) (9,905) (9,905)
--------- --------- --------- --------- --------- --------- --------- ---------
Total comprehensive loss $ (9,575)
=========
Balance as of December 31, 2000 $ -- $ 204 $ 195,406 $ (2,717) $ 330 $ (26,347) $ 166,876
========= ========= ========= ========= ========= ========= =========
The accompanying notes are an integral part
of the consolidated financial statements.
F-6
PRECISE SOFTWARE SOLUTIONS LTD. AND ITS SUBSIDIARIES
STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
================================================================================
U.S. DOLLARS IN THOUSANDS
ACCUMULATED
ADDITIONAL DEFERRED OTHER TOTAL TOTAL
PREFERRED ORDINARY PAID-IN STOCK COMPREHENSIVE ACCUMULATED COMPREHENSIVE SHAREHOLDERS'
SHARES SHARES CAPITAL COMPENSATION INCOME DEFICIT INCOME(LOSS) EQUITY
--------- --------- --------- --------- --------- --------- --------- ---------
Balance as of January 1, 2001 $ -- $ 204 $ 195,406 $ (2,717) $ 330 $ (26,347) $ -- $ 166,876
Issuance of shares under ESPP -- 1 726 -- -- -- -- 727
Exercise of options, net -- 11 3,272 -- -- -- -- 3,283
Issuance of shares pursuant
to the acquisition of
W. Quinn -- 5 12,480 -- -- -- -- 12,485
Adjustments to Savant
acquisition -- -- (1,426) -- -- -- -- (1,426)
Amortization of deferred
stock compensation, net -- -- (243) 2,173 -- -- -- 1,930
Comprehensive income:
Unrealized holding gains on
available-for-sale
marketable securities -- -- -- -- 903 -- $ 903 903
Foreign currency translation
adjustments -- -- -- -- (42) -- (42) (42)
Total other comprehensive ---------
income 861
Net income -- -- -- -- -- 923 923 923
--------- --------- --------- --------- --------- --------- --------- ---------
Total comprehensive income $ 1,784
=========
Balance as of December 31, 2001 -- 221 210,215 (544) 1,191 (25,424) 185,659
Issuance of shares under ESPP -- -- 725 -- -- -- -- 725
Exercise of options, net -- 8 5,358 -- -- -- -- 5,366
Issuance of shares pursuant
to the earn-out of
W. Quinn -- 4 7,494 -- -- -- -- 7,498
Issuance of shares pursuant
to the acquisition of
Middleware -- 1 2,085 -- -- -- -- 2,086
Amortization of deferred
stock compensation, net -- -- (113) 467 -- -- -- 354
Comprehensive income:
Unrealized holding losses on
available-for-sale
marketable securities -- -- -- -- (298) -- $ (298) (298)
Foreign currency translation
adjustments -- -- -- -- 463 -- 463 463
Total other comprehensive ---------
income 165
Net income -- -- -- -- -- 3,591 $ 3,591 3,591
--------- --------- --------- --------- --------- --------- --------- ---------
Total comprehensive income $ 3,756
=========
Balance as of December 31, 2002 $ -- $ 234 $ 225,764 $ (77) $ 1,356 $ (21,833) $ 205,444
========= ========= ========= ========= ========= ========= =========
Accumulated unrealized holding
gains on available-for-sale
marketable securities $ 927
Accumulated foreign currency
translation adjustments 429
Total accumulated other ---------
comprehensive income $ 1,356
=========
The accompanying notes are an integral part
of the consolidated financial statements.
F-7
PRECISE SOFTWARE SOLUTIONS LTD. AND ITS SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
================================================================================
U.S. DOLLARS IN THOUSANDS
YEAR ENDED DECEMBER 31,
------------------------------------------
2000 2001 2002
---------- ---------- ----------
Cash flows from operating activities:
Net income (loss) $ (9,905) $ 923 $ 3,591
Adjustments required to reconcile net income (loss) to net cash
provided by (used in) operating activities:
Depreciation 603 1,329 2,060
Loss on sale of equipment -- 61 37
Amortization of debenture premium/(accretion of discount) on
available-for-sale marketable securities (18) 109 1,231
Amortization of deferred stock compensation 6,151 1,930 354
Amortization of goodwill and intangible assets 99 3,040 3,640
In-process research and development write-off 2,200 86 --
Increase in trade receivables (1,386) (5,680) (5,041)
Decrease (increase) in other accounts receivable and prepaid
expenses (3,248) 1,315 (61)
Decrease in other receivables -- -- 447
Increase (decrease) in trade payables 588 (518) (188)
Increase in deferred revenues 958 2,111 1,896
Increase in employees and payroll accruals 2,946 1,044 299
Increase in other current liabilities and accrued expenses 174 393 396
Increase (decrease) in accrued severance pay, net 102 75 (110)
Other 9 (40) --
---------- ---------- ----------
Net cash provided by (used in) operating activities (727) 6,178 8,551
---------- ---------- ----------
Cash flows from investing activities:
Purchase of property and equipment (2,089) (3,274) (1,495)
Purchase of available-for-sale marketable securities (70,852) (89,440) (66,214)
Purchase of other intangible assets (765) (1,328) (1,617)
Increase in other receivables, non-current -- -- (2,647)
Payment for acquisition of consolidated subsidiary (1) (507) -- --
Payment for acquisition of consolidated subsidiary (2) (2,787) -- --
Payment for acquisition of consolidated subsidiary (3) -- (20,641) --
Payment for acquisition of consolidated subsidiary (4) -- -- (3,257)
Proceeds from sale of short-term deposits 888 -- --
Proceeds from redemption of available-for-sale marketable securities 4,000 53,710 38,300
Proceeds from sale of available-for-sale marketable securities -- 3,785 747
---------- ---------- ----------
Net cash used in investing activities (72,112) (57,188) (36,183)
---------- ---------- ----------
Cash flows from financing activities:
Short-term bank credit, net (24) -- --
Proceeds from issuance of shares, net 148,141 727 725
Proceeds from exercise of options, net 480 3,283 5,366
Repayment of capital lease obligation (251) (27) (65)
---------- ---------- ----------
Net cash provided by financing activities 148,346 3,983 6,026
---------- ---------- ----------
Effect of exchange rate change on cash and cash equivalents 18 (47) 332
---------- ---------- ----------
Increase (decrease) in cash and cash equivalents 75,525 (47,074) (21,274)
Cash and cash equivalents at the beginning of the year 6,693 82,218 35,144
---------- ---------- ----------
Cash and cash equivalents at the end of the year $ 82,218 $ 35,144 $ 13,870
========== ========== ==========
The accompanying notes are an integral part
of the consolidated financial statements.
F-8
PRECISE SOFTWARE SOLUTIONS LTD. AND ITS SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
================================================================================
U.S. DOLLARS IN THOUSANDS
YEAR ENDED DECEMBER 31,
------------------------------------------
2000 2001 2002
------------ ------------ ------------
1. In February 2000, the Company acquired all of the outstanding
shares of Knight Fisk Software Ltd. The net estimated fair
value of the assets acquired and liabilities assumed at the
date of acquisition was as follows:
Working deficiency, except cash and cash equivalents $ (8)
Property and equipment 41
Long-term loans and other (45)
Goodwill 718
------------
706
Options granted (199)
------------
$ 507
============
2. In December 2000, the Company acquired all of the outstanding
shares of Savant Corporation. The net estimated fair value of
the assets acquired and liabilities assumed at the date of
acquisition was as follows:
Working deficiency, except cash and cash equivalents $ (687)
Property and equipment 111
Long-term loans (23)
Goodwill and other intangible assets 15,122
In-process research and development 2,200
------------
16,723
Issuance of shares, net (13,936)
------------
$ 2,787
============
3. In September 2001, the Company acquired all of the outstanding
shares of W. Quinn Associates, Inc. The net estimated fair
value of the assets acquired and liabilities assumed at the
date of acquisition was as follows:
Working deficiency, except cash and cash equivalents $ (136) $ --
Property and equipment 475 --
Other receivables 481 --
Goodwill and other intangible assets 32,134 7,498
In-process research and development 86 --
------------ ------------
33,126 7,498
Issuance of shares, net (12,485) (7,498)
------------ ------------
$ 20,641 $ --
============ ============
4. In June 2002, the Company acquired all of the outstanding
shares of The Middleware Company. The net estimated fair value
of the assets acquired and liabilities assumed at the date of
the acquisition was as follows:
Working deficiency, except cash and cash equivalents $ (428)
Property and equipment 35
Other intangible assets 1,964
Goodwill 3,772
------------
5,343
Issuance of shares, net (2,086)
------------
$ 3,257
============
F-9
PRECISE SOFTWARE SOLUTIONS LTD. AND ITS SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
================================================================================
U.S. DOLLARS IN THOUSANDS
Supplemental disclosure of cash flows activities:
-------------------------------------------------
(a) Cash paid during the years for:
-------------------------------
Interest $ 13 $ 21 $ 30
============ ============ ============
Income taxes $ -- $ -- $ 43
============ ============ ============
(b) Non cash transactions:
----------------------
Capital lease obligation $ 97 $ -- $ 67
============ ============ ============
Adjustment to Savant Corporation acquisition $ -- $ 1,426 $ --
============ ============ ============
Accrued issuance and acquisition cost $ 749 $ 241 $ 45
============ ============ ============
Purchased Technology $ -- $ -- $ 297
============ ============ ============
The accompanying notes are an integral part
of the consolidated financial statements.
F-10
PRECISE SOFTWARE SOLUTIONS LTD. AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1: GENERAL
a. Organization:
Precise Software Solutions Ltd. ("Precise" or "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 applications and of
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,
Japan and Australia.
b. Public offering:
The Company completed an initial public offering in June 2000,
and since then, the Company's ordinary shares have been traded on
The Nasdaq National Market in the United States.
c. Acquisition of the Company by VERITAS Software Corporation
("VERITAS"):
On December 19, 2002, the Company entered into an Agreement and
Plan of Merger with VERITAS and Argon Merger Sub Ltd., an
indirect wholly-owned subsidiary of VERITAS ("the Merger
Subsidiary"), 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 the Company 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. Shareholders of the Company 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 the shareholders of Precise. The merger is
expected to close in the second quarter of 2003.
NOTE 2: ACQUISITIONS
a. Acquisition of The Middleware Company ("Middleware"):
In June 2002, the Company acquired all the outstanding shares of
Middleware, a United States based services company, for
consideration of approximately $6.1 million. Middleware provides
consulting, training courses and other related services. The
total purchase price consisted of $4.0 million paid in cash and
$2.1 million paid by the issuance of 126,353 ordinary shares,
including $150,000 in transaction costs.
The Middleware stockholders also have the right to receive
additional contingent consideration 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.
F-11
PRECISE SOFTWARE SOLUTIONS LTD. AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 2: ACQUISITIONS (CONT.)
The acquisition of Middleware 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 Accounting Standards ("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.
In connection with the Middleware acquisition intangible assets
acquired had an estimated fair value of $5.7 million shown in the
following table:
IN THOUSANDS
------------
Trademarks and customer relationships $ 1,209
Other intangible assets 755
Goodwill 3,772
------------
$ 5,736
============
The operations of Middleware are included in the Company's
consolidated results of operations from June 18, 2002.
Pro forma information was not provided as it is considered
immaterial to the Company's consolidated operating results.
b. Acquisition of W. Quinn Associates, Inc. ("W. Quinn"):
In September 2001, the Company acquired all the outstanding
shares of W. Quinn, a United States based company, in
consideration of approximately $34.1 million. W. Quinn develops
and markets storage resource management software and solutions.
The total purchase price consisted of $21.6 million paid in cash
and $12.5 million paid by the issuance of 774,413 ordinary
shares. The consideration included $1.5 million of transaction
cost.
The acquisition of W. Quinn 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.
F-12
PRECISE SOFTWARE SOLUTIONS LTD. AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 2: ACQUISITIONS (CONT.)
The W. Quinn 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 the third quarter of 2001 and ending in the third
quarter of 2002. On October 16, 2002, the contingency was
resolved and the consideration was paid by the issuance of an
additional 675,614 ordinary shares and, as a result, the Company
recorded approximately $7.5 million in associated goodwill.
According to SFAS No. 142 this goodwill is not amortized, but
will be subject to annual impairment tests in accordance with the
statement.
In connection with the W. Quinn acquisition, the Company recorded
a one-time expense of $86,000 to write-off software acquired from
W. Quinn for which technological feasibility has not yet been
established and for which no alternative future use exists. Other
intangible assets acquired in the acquisition had an estimated
fair value of $32.1 million shown in the following table:
IN THOUSANDS
------------
Goodwill $ 25,553
Acquired technology 2,147
Patents 2,165
Trademarks and customer relationship 2,269
------------
$ 32,134
============
The operations of W. Quinn are included in the Company's
consolidated results of operations from September 5, 2001.
Pro forma information:
The following unaudited pro forma information presents the
results of operations for the Company and W. Quinn for the years
ended December 31, 2000 and December 31, 2001, as if the
acquisition had been consummated as of January 1, 2000 and
January 1, 2001, respectively. The pro forma total revenues would
have been $36.4 million and $62.0 million for the years ended
December 31, 2000 and 2001, respectively. The pro forma net loss
would have been $10.2 million and $1.8 million for the years
ended December 31, 2000 and 2001, respectively. The pro forma
basic and diluted net loss per share would have been $0.74 per
share and $0.07 per share for the years ended December 31, 2000
and 2001, respectively. The pro forma financial information is
not necessarily indicative of the consolidated results that would
have been attained had the acquisition taken place at the
beginning of 2000 or 2001, nor is it necessarily indicative of
future results.
F-13
PRECISE SOFTWARE SOLUTIONS LTD. AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 2: ACQUISITIONS (CONT.)
c. Acquisition of Savant Corporation ("Savant"):
In December 2000, in consideration of approximately $16.7
million, the Company acquired all the outstanding shares of
Savant, a United States based company. Savant develops and
markets diagnostic and proactive performance management
solutions. The total purchase price consisted of $2.8 million in
cash and $13.9 million paid by the issuance of 512,445 ordinary
shares, including $0.3 million of transaction cost.
The acquisition of Savant 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.
In connection with the Savant acquisition, the Company recorded a
one-time expense of $2.2 million to write-off software acquired
from Savant for which technological feasibility has not yet been
established and for which no alternative future use exists. Other
intangible assets acquired had an estimated fair value of $15.1
million shown in the following table:
IN THOUSANDS
------------
Goodwill $ 9,022
Acquired technology 4,300
Customer relationships 1,800
------------
$ 15,122
============
In 2001, upon the completion of the allocation of the purchase
price and the resolution of certain contingencies, the company
reduced goodwill by $1,426,000.
Savant's results of operations are included in the Company's
consolidated results of operations from December 5, 2000.
Pro forma financial information:
The following unaudited pro forma information represents the
results of operations for the Company and Savant for the year
ended December 31, 2000, as if the acquisition had been
consummated as of January 1, 2000. The pro forma total revenues
would have been $30.9 million for the year ended December 31,
2000. The pro forma net loss would have been $10.9 million for
the year ended December 31, 2000. The pro forma basic and diluted
net loss per share would have been $0.81 per share for the year
ended December 31, 2000. The pro forma financial information is
not necessarily indicative of the consolidated results that would
have been attained had the acquisition taken place at the
beginning of 2000, nor is it necessarily indicative of future
results.
F-14
PRECISE SOFTWARE SOLUTIONS LTD. AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 2: ACQUISITIONS (CONT.)
d. Acquisition of Knight Fisk Software Ltd. ("Precise UK"):
In February 2000, in consideration of $706,000, the Company
acquired all the outstanding shares of Knight Fisk Software Ltd.
("Knight Fisk"), a U.K.-based company and the distributor of the
Company's products in the United Kingdom. Knight Fisk changed its
name to Precise Software Solutions UK Ltd. The acquisition was
accounted for under the purchase method.
The operations of Precise UK are included in the Company's
consolidated results of operations from February 1, 2000.
Pro forma financial information:
The following unaudited pro forma information presents the
results of operations for the Company and Precise UK for the year
ended December 31, 2000, as if the acquisition had been
consummated as of January 1, 2000. The pro forma total revenues
would have been $27.7 million for the year ended December 31,
2000. The pro forma net loss would have been $9.8 million for the
year ended December 31, 2000. The pro forma basic and diluted net
loss per share would have been $0.76 for the year ended December
31, 2000. The pro forma financial information is not necessarily
indicative of the consolidated results that would have been
attained had the acquisition taken place at the beginning of
2000, nor is it necessarily indicative of future results.
NOTE 3: SIGNIFICANT ACCOUNTING POLICIES
The consolidated financial statements have been prepared in accordance
with generally accepted accounting principles in the United States
("U.S. GAAP").
a. 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.
b. Financial statements in U.S. dollars:
A majority of the revenues of the Company and most of its
subsidiaries are generated in U.S. dollars ("dollar"). In
addition, a substantial portion of the Company's and most of its
subsidiaries costs are incurred in U.S. dollars. The Company's
management believes that the U.S. dollar is the primary currency
of the economic environment in which the Company and most of its
subsidiaries operate. Thus, the functional and reporting currency
of the Company and most of its subsidiaries is the U.S. dollar.
Accordingly, monetary accounts maintained in currencies other
than the U.S. dollar are remeasured into U.S. dollars in
accordance with SFAS No. 52, "Foreign Currency Translations." All
transaction gains and losses from remeasurement of monetary
balance sheet items are reflected in the consolidated statement
of operations as financial income or expenses as appropriate.
F-15
PRECISE SOFTWARE SOLUTIONS LTD. AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 3: SIGNIFICANT ACCOUNTING POLICIES (CONT.)
The financial statements of subsidiaries whose functional
currency is not the U.S. dollar, have been translated into U.S.
dollars. All balance sheet accounts have been translated using
the exchange rates in effect at the balance sheet date. The
statements of operations amounts have been translated using the
average exchange rate for the period. The resulting translation
adjustments are reported as a component of accumulated other
comprehensive income in shareholders' equity.
c. Principles of consolidation:
The consolidated financial statements include the accounts of the
Company and its subsidiaries. Intercompany balances and
transactions have been eliminated upon consolidation.
d. Cash equivalents:
Cash equivalents include short-term highly liquid investments
that are readily convertible into cash with original maturities
of three months or less.
e. Marketable securities:
The Company accounts for investments in debt and equity
securities accordance with SFAS No. 115, "Accounting for Certain
Investments in Debt and Equity Securities."
Management determines the proper classification of investments in
obligations with fixed maturities in marketable equity securities
at the time of purchase and reevaluates such designations as of
each balance sheet date. At December 31, 2002, all securities
covered by SFAS No. 115 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 (loss). 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 statement of operations in financial income and
other, net.
f. Property and equipment:
Property and equipment are stated at cost, less accumulated
depreciation. Depreciation is calculated by the straight-line
method over the estimated useful lives of the assets as follows:
Computers and peripheral equipment 3-5 years
Office furniture and equipment 6-14 years
Leasehold improvements Over the term of the lease
g. Other receivables, non-current:
A loan to a privately held U.S.-based company represented by
secured demand notes is stated at cost, since Precise does not
have the ability to exercise significant influence over operating
and financial policies of the company.
F-16
PRECISE SOFTWARE SOLUTIONS LTD. AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 3: SIGNIFICANT ACCOUNTING POLICIES (CONT.)
h. Other intangible assets:
Acquired technology, trademarks and customer relationships,
patents and other intangible assets are stated at amortized cost.
Intangible assets subject to amortization that arose from
acquisitions prior to July 1, 2001, are being amortized on a
straight-line basis over their useful life in accordance with
Accounting Principal Board ("APB") Opinion No. 17, "Intangible
Assets." Acquired technology, trademarks and customer
relationships, patents and other intangible assets are amortized
using the straight-line method over their estimated useful life,
which is three to seven years.
Intangible assets acquired in a business combination on or after
July 1, 2001 should be amortized over their useful life using a
method of amortization that reflects the pattern in which the
economic benefits of the intangible assets are consumed or
otherwise used up, in accordance with SFAS No.142. Acquired
technology, trademarks and customer relationships, patents and
other intangible assets are amortized over a weighted average of
three to five years.
i. Impairment of long-lived assets to be disposed:
The Company's long-lived assets and certain identifiable
intangibles are reviewed for impairment, in accordance with SFAS
No. 144 "Accounting for the Impairment and the Disposal of
Long-Lived Assets," whenever events or changes in circumstances
indicate that the carrying amount of an asset may not be
recoverable. Recoverability of assets to be held and used is
measured by a comparison of the carrying amount compared to the
future undiscounted cash flows expected to be generated by the
assets. If such assets are considered to be impaired, the
impairment to be recognized is measured by the amount by which
the carrying amount exceeds the fair value of the assets. Assets
to be disposed of are reported at the lower of the carrying
amount or fair value less costs to sell. As of December 31, 2002,
no impairment losses have been identified.
j. Goodwill:
Goodwill represents the excess of the costs over the net assets
of businesses acquired. Goodwill that arose from acquisitions
prior to July 1, 2001, was amortized until December 31, 2001, on
a straight-line basis over four to ten years. Under SFAS No. 142,
goodwill acquired in a business combination on or after July 1,
2001 is not amortized.
SFAS No. 142 requires goodwill to be tested for impairment on
adoption and at least annually thereafter or between annual tests
in certain circumstances, and written down when impaired, rather
than being amortized as previous accounting standards required.
Goodwill attributable to each of the reporting units is tested
for impairment by comparing the fair value of each reporting unit
with its carrying value. Fair values are determined using
discounted cash flows, market multiples and market
capitalization. Significant estimates used in the methodologies
include estimates of future cash flows, future short-term and
long-term growth rates, weighted average cost of capital and
estimates of market multiples for each of the reportable units.
The Company's goodwill is reviewed for impairment in accordance
SFAS No. 142. The Company performed impairment tests during the
fourth quarter of 2002. As of December 31, 2002, no impairment
losses have been identified.
F-17
PRECISE SOFTWARE SOLUTIONS LTD. AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 3: SIGNIFICANT ACCOUNTING POLICIES (CONT.)
k. Research and development costs:
SFAS No. 86 "Accounting for the Costs of Computer Software to be
Sold, Leased or Otherwise Marketed," requires capitalization of
certain software development costs subsequent to the
establishment of technological feasibility.
Based on the Company's product development process, technological
feasibility is established upon completion of a working model.
The Company does not incur material costs between the completion
of the working model and the point at which the products are
ready for general release. Therefore, research and development
costs are charged to the statement of operations as incurred.
l. Income taxes:
The Company and its subsidiaries account for income taxes in
accordance with SFAS No. 109, "Accounting for Income Taxes." SFAS
No. 109 prescribes the use of the liability method whereby
deferred tax asset and liability account balances are determined
based on differences between financial reporting and tax bases of
assets and liabilities and are measured using the enacted tax
rates and laws that will be in effect when the differences are
expected to reverse. The Company and its subsidiaries provide a
valuation allowance, if necessary, to reduce deferred tax assets
to their estimated realizable value.
m. 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 products primarily through
a 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 collection is probable, the product fee is
otherwise fixed or determinable, persuasive evidence of an
arrangement exists and no significant obligation 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, support and training is based on renewal ratio and
the prices charged when these elements are 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 no VSOE exists for the delivered 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 and its subsidiaries are entitled to fees from its
OEMs upon the sublicensing of the Company's products to
end-users. Generally, fees due from the OEMs are recognized when
such fees are reported to the Company upon the sublicensing of
the products by the OEMs.
F-18
PRECISE SOFTWARE SOLUTIONS LTD. AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 3: SIGNIFICANT ACCOUNTING POLICIES (CONT.)
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.
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
agreements included in multiple element 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 as the services are rendered.
Deferred revenue includes unearned amounts received under
maintenance and support contracts, and amounts received from
customers but not recognized as revenues.
n. Concentrations of credit risks:
Financial instruments, which potentially subject the Company and
its subsidiaries to concentrations of credit risk, consist
principally of cash and cash equivalents, marketable securities,
trade receivables and other non-current receivables.
Cash and cash equivalents are almost entirely invested in major
banks in the United States in U.S. dollars. Such cash and cash
equivalents in the United States may be in excess of insured
limits and are not insured in other jurisdictions. A small
portion of cash and cash equivalents is invested in major banks
in Europe and Israel. Management believes that the financial
institutions holding the Company's investments are financially
sound and, accordingly, minimal credit risk exists with respect
to these investments.
Almost all marketable securities represent investments in U.S.
treasury notes. Management believes that those investments are
financially secure and accordingly, minimal credit risk exists
with respect to the investments.
The trade receivables of the Company and its subsidiaries are
mainly derived from sales to customers located primarily in the
U.S., Europe and Asia. The Company and its subsidiaries perform
periodic credit evaluations of their customers' financial
condition and generally do not require collateral. An allowance
for doubtful accounts is determined with respect to those
accounts that the Company has determined to be doubtful of
collection.
The Company evaluated the carrying value of the loan to a
privately held U.S.-based company in accordance with the
provisions of SFAS No. 114, "Accounting by Creditors for
Impairment of a Loan, an Amendment to Statements No. 5 and No.
15," and determined that the carrying value approximates the fair
value of the loan.
The Company has no significant off-balance-sheet concentration of
credit risk such as foreign exchange contracts, option contracts
or other foreign hedging arrangements.
See Note 14 for concentrations of credit risk as to major
customers.
F-19
PRECISE SOFTWARE SOLUTIONS LTD. AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 3: SIGNIFICANT ACCOUNTING POLICIES (CONT.)
o. Accounting for stock-based compensation:
The Company has elected to follow APB Opinion No. 25 "Accounting
for Stock Issued to Employees," and the Financial Accounting
Standards Board ("FASB") Interpretation No. 44 "Accounting for
Certain Transactions Involving Stock Compensation," in accounting
for its employee stock option plans. Under APB No. 25, when the
exercise price of the Company's share options is less than the
market price of the underlying shares on the date of grant,
compensation expense is recognized. The pro forma disclosures
required by SFAS No. 123 "Accounting for Stock-Based
Compensation," are provided in Note 10.
See Note 3t for adoption of SFAS No. 148, "Accounting for
Stock-Based Compensation - Transition and Disclosure."
p. Severance pay:
The Company's liability for severance pay is calculated pursuant
to the Israeli Severance Pay Law based on the most recent salary
of the employees multiplied by the number of years of employment
as of the balance sheet date. Employees are entitled to one
month's salary for each year of employment or a portion thereof.
The Company's liability for all of its employees, is fully
provided by monthly deposits with severance pay funds, insurance
policies and by an accrual. The value of these policies is
recorded as an asset in the Company's balance sheets.
The deposited funds include profits accumulated up to the balance
sheet date. The deposited funds may be withdrawn only in
accordance with the Israeli Severance Pay Law or labor
agreements. The value of the deposited funds are based on the
cash surrendered value of these policies, and include immaterial
profits.
Severance expenses for the years ended December 31, 2000, 2001
and 2002 amounted to $323,000, $308,000 and $388,000,
respectively.
q. Advertising:
Advertising costs are expensed as incurred.
r. Fair value of financial instruments:
The following methods and assumptions were used by the Company
and its subsidiaries in estimating their fair value disclosures
for financial instruments:
1. The carrying amounts of cash and cash equivalents, accounts
receivable and accounts payable approximate their fair value
due to the short-term maturity of such instruments.
2. The fair value for available-for-sale and trading securities
are based on the quoted market prices (see Note 4).
3. The carrying amount of the loan to the privately held
U.S.-based company ("company") approximates its fair value,
based on Precise's assessment of such company to repay the
loan as well as the value of the assets pledged to secure
such loan.
F-20
PRECISE SOFTWARE SOLUTIONS LTD. AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 3: SIGNIFICANT ACCOUNTING POLICIES (CONT.)
s. Basic and diluted net earning (loss) per share:
Basic net earnings (loss) per share is computed based on the
weighted average number of ordinary shares outstanding during
each year. Diluted net earnings (loss) per share is computed
based on the weighted average number of ordinary shares
outstanding during each year, plus dilutive potential ordinary
shares considered outstanding during the year, in accordance with
SFAS No. 128, "Earnings per Share."
All convertible preferred shares, and outstanding stock options
have been excluded from the calculation of the diluted net
earnings (loss) per ordinary share for 2000 because such
securities are anti-dilutive. The total weighted average number
of shares related to outstanding convertible preferred shares and
options excluded from the calculations of diluted net earnings
(loss) per share were 4,147,968, 0 and 2,052,506 for the years
ended December 31, 2000, 2001 and 2002, respectively.
t. Impact of recently issued accounting standards:
In April 2002, the FASB issued SFAS No. 145, "Rescission of SFAS
No. 4, 44 and 64, Amendment of SFAS No. 13, and Technical
Corrections," which rescinds SFAS No. 4, "Reporting Gains and
Losses from Extinguishment of Debt," and an amendment of that
Statement, and SFAS No. 64, "Extinguishments of Debt Made to
Satisfy Sinking-Fund Requirements." SFAS No. 145 amends SFAS No.
44, "Accounting for Intangible Assets for Motor Carriers." SFAS
No. 145 amends SFAS No. 13, "Accounting for Leases," to
eliminated an inconsistency between the required accounting for
sale-leaseback transactions and the required accounting for
certain lease modifications that have economic effects that are
similar to sale-leaseback transactions. SFAS No. 145 also amends
other existing authoritative pronouncements to make various
technical corrections, clarify meanings, or describe their
applicability under changed conditions. SFAS No. 145 is effective
for fiscal years beginning May 15, 2002. The Company does not
expect the adoption of SFAS No. 145 will have a material impact
on the its results of operations or financial position.
In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs
Associated with Exit of Disposal Activities," which addresses
significant issues regarding the recognition, measurement and
reporting of costs associated with exit and disposal activities,
including restructuring activities. SFAS No. 146 requires that
costs associated with exit or disposal activities be recognized
when they are incurred rather than at the date of a commitment to
an exit or disposal plan. SFAS No. 146 is effective for all exit
or disposal activities initiated after December 31, 2002. The
Company does not expect the adoption of SFAS No. 146 to have a
material impact on our results of operations or financial
position.
F-21
PRECISE SOFTWARE SOLUTIONS LTD. AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 3: SIGNIFICANT ACCOUNTING POLICIES (CONT.)
On December 31, 2002, FASB issued SFAS No. 148, "Accounting for
Stock-Based Compensation - Transition and Disclosure." SFAS No.
148 amends SFAS No. 123, "Accounting for Stock-Based
Compensation," to provide alternative methods of transition to
SFAS No. 123's fair value method of accounting for stock-based
employee compensation. SFAS No. 148 also amends the disclosure
provisions of SFAS No. 123 and APB Opinion No. 28, "Interim
Financial Reporting," to require disclosure in the summary of
significant accounting policies of the effects of an entity's
accounting policy with respect to stock-based employee
compensation on reported net income and earnings per share in
annual and interim financial statements. While SFAS No. 148 does
not amend SFAS No. 123 to require companies to account for
employee stock options using the fair value method, the
disclosure provisions of SFAS No. 148 are applicable to all
companies with stock-based compensation, regardless of whether
they account for compensation using the fair value method of SFAS
No. 123 or the intrinsic value method of APB Opinion No. 25. SFAS
No. 148 is effective for companies after December 15, 2002.
In November 2002, the FASB issued Interpretation No. 45 ("FIN No.
45"), "Guarantor's Accounting and Disclosure Requirements for
Guarantees, Including Indirect Guarantees of Indebtedness of
Others, an interpretation of SFAS No. 5, 57 and 107 and
Rescission of FASB Interpretation No. 34 ("FIN No. 34")." FIN No.
45 elaborates on the disclosures to be made by a guarantor in its
interim and annual financial statements about its obligations
under certain guarantees that it has issued. It also clarifies
that a guarantor is required to recognize, at the inception of a
guarantee, a liability for the fair value of the obligation
undertaken in issuing the guarantee. FIN No. 45 does not
prescribe a specific approach for subsequently measuring the
guarantor's recognized liability over the term of the related
guarantee. It also incorporates, without change, the guidance in
FIN No. 34, "Disclosure of Indirect Guarantees of Indebtedness to
Others," which is being superseded. The disclosure provisions of
FIN No. 45 are effective for financial statements of interim or
annual periods that end after December 15, 2002 and the
provisions for initial recognition and measurement are effective
on a prospective basis for guarantees that are issued or modified
after December 31, 2002, irrespective of a guarantor's year-end.
The Company does not expect the adoption of FIN No. 45 to have a
material impact on its results of operations or financial
position.
u. Reclassification:
Certain prior period amounts have been reclassified to conform to
current period presentation.
NOTE 4: MARKETABLE SECURITIES
The following is a summary of available-for-sale securities:
DECEMBER 31, 2001
------------------------------------------------
ESTIMATED
GROSS GROSS FAIR
AMORTIZED UNREALIZED UNREALIZED MARKET
COST GAINS LOSSES VALUE
--------- --------- --------- ---------
IN THOUSANDS
------------------------------------------------
Available-for-sale:
-------------------
U.S. Treasury notes $ 98,716 $ 1,293 $ 68 $ 99,941
========= ========= ========= =========
F-22
PRECISE SOFTWARE SOLUTIONS LTD. AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 4: MARKETABLE SECURITIES (CONT.)
DECEMBER 31, 2002
------------------------------------------------
ESTIMATED
GROSS GROSS FAIR
AMORTIZED UNREALIZED UNREALIZED MARKET
COST GAINS LOSSES VALUE
--------- --------- --------- ---------
IN THOUSANDS
------------------------------------------------
Available-for-sale:
-------------------
U.S. Treasury notes $ 124,886 $ 924 $ -- $ 125,810
Corporate bonds 512 3 -- 515
--------- --------- --------- ---------
$ 125,398 $ 927 $ -- $ 126,325
========= ========= ========= =========
There were no realized gains from sales of available-for-sale
securities in 2001 or 2002.
The unrealized holding gains (losses) on available-for-sale securities
included as a separate component of shareholders' equity, other
comprehensive income, totaled $322,000, $903,000 and $(298,000) in,
2000, 2001 and 2002, respectively. The unrealized holding gain on
available-for-sale securities balance was $1,225,000 and $927,000 as
of December 31, 2001 and 2002, respectively. The amortized cost and
estimated fair value of debt and marketable equity securities as of
December 31, 2002, by contractual maturity, are shown below.
DECEMBER 31, 2002
------------------------------
AMORTIZED MARKET
COST VALUE
------------ ------------
IN THOUSANDS
------------------------------
Available-for-sale:
-------------------
Matures in one year $ 71,720 $ 71,754
Matures in second year 53,633 54,017
Matures in third year 545 554
------------ ------------
Total $ 125,398 $ 126,325
============ ============
The Company had invested $746,000 in trading securities as of December
31, 2001, and recorded net gain of $29,000 from these investments in
2001.
The Company had no trading securities as of December 31, 2002.
F-23
PRECISE SOFTWARE SOLUTIONS LTD. AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 5: PROPERTY AND EQUIPMENT, NET
DECEMBER 31,
---------------------------
2001 2002
------------ ------------
IN THOUSANDS
---------------------------
Cost:
Computers and peripheral equipment $ 6,035 7,189
Office furniture and equipment 896 1,187
Leasehold improvements 1,079 1,148
------------ ------------
8,010 9,524
------------ ------------
Accumulated depreciation 2,963 4,920
------------ ------------
Depreciated cost $ 5,047 4,604
============ ============
Depreciation expenses for the years ended December 31, 2000, 2001 and
2002, were $603,000, $1,329,000 and $2,060,000, respectively.
NOTE 6: OTHER RECEIVABLES, NON-CURRENT
a. Composed as follows:
DECEMBER 31,
---------------------------
2001 2002
------------ ------------
IN THOUSANDS
---------------------------
Other receivables, non-current:
Tax receivables $ 447 $ --
Other long-term deposits 53 141
Loan -- 2,559
------------ ------------
Other receivables, non-current $ 500 $ 2,700
============ ============
In October 2002, Precise 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 Precise's
technology. The loan terms provide that Precise 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 company.
Concurrently with entering into the loan agreement, Precise loaned
$0.6 million to the borrower, and 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, Precise executed an agreement entitling
Precise, in its 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 revenues of the borrower (up to a maximum of $44.4
million), after applying the aggregate amount loaned toward the
purchase price. Precise has not performed the requisite business
review of the borrower to determine whether it would be interested in
acquiring the borrower and it is uncertain whether it will become
interested in pursuing such an acquisition. Precise presently has no
influence on the borrower's conduct of its business. Precise valued
the warrants based on the total value of the borrower, which was
considered to be immaterial.
F-24
PRECISE SOFTWARE SOLUTIONS LTD. AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 7: OTHER INTANGIBLE ASSETS, NET
a. Composed as follows:
DECEMBER 31,
---------------------------
2001 2002
------------ ------------
IN THOUSANDS
---------------------------
Cost:
Acquired technology $ 7,655 $ 9,245
Trademarks and customer relationships 4,754 5,959
Patents 2,165 2,165
Other intangible assets 130 885
------------ ------------
Total intangible assets 14,704 18,254
------------ ------------
Accumulated amortization:
Acquired technology 1,117 3,224
Trademarks and customer relationships 550 1,605
Patents 103 412
Other intangible assets 65 235
------------ ------------
Total accumulated amortization 1,835 5,476
------------ ------------
Amortized cost $ 12,869 $ 12,778
============ ============
b. Amortization expenses amounted to $29,000, $1,806,000 and
$3,640,000 for the years ended December 31, 2000, 2001 and 2002,
respectively.
c. In February 2002, the Company purchased intellectual property
from a third party for $1.6 million, which consisted of $1.3
million in cash and $0.3 million in assigned liabilities. The
purchase has been recorded as acquired technology and will be
amortized over a three year period.
d. On October 1, 2001, the Company purchased intellectual property
from a third party for $ 1.1 million. The purchase has been
recorded as acquired technology and will be amortized over three
years. In addition, the third party has the right to receive 10%
of revenues generated up to a set maximum from the sale of
products containing this intellectual property until October 1,
2004 ("earn-out"). Payments made or accrued during 2002 amounted
to $21,000 in accordance with the earn-out provisions of the
agreement.
e. Estimated amortization expenses for the years ended:
DECEMBER 31, IN THOUSANDS
------------ ------------
2003 $ 4,046
2004 3,930
2005 2,850
2006 1,171
2007 574
F-25
PRECISE SOFTWARE SOLUTIONS LTD. AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 8: GOODWILL
a. The changes in the carrying amount of goodwill for the year ended
December 31, 2002, are as follows:
GOODWILL
------------
In thousands
Balance as of January 1, 2002: $ 32,862
Goodwill acquisitions and additions
during the year 11,749
------------
Balance as of December 31, 2002: $ 44,611
============
b. Amortization expenses amounted to $70,000, $1,234,000 and $0 for
the years ended December 31, 2000, 2001 and 2002, respectively.
As of December 31, 2002 the accumulated amortization expense
amounted to $1,304,000.
c. The unaudited results of operations presented below for the three
years ended December 31, 2000, 2001 and 2002, respectively,
reflect the operations had the Company adopted the
non-amortization provisions of SFAS No. 142 effective as of
January 1, 2000:
YEAR ENDED DECEMBER 31,
-----------------------------------------
2000 2001 2002
---------- ---------- ----------
(IN THOUSANDS EXCEPT PER SHARE DATA)
Reported net income (loss) $ (9,905) $ 923 $ 3,591
Goodwill amortization 70 1,234 --
---------- ---------- ----------
Adjusted net income (loss) $ (9,835) $ 2,157 $ 3,591
Basic net earning (loss) per share
Reported net earning (loss) per share $ (0.77) $ 0.03 $ 0.12
Goodwill amortization 0.01 0.05 --
---------- ---------- ----------
Adjusted net earning (loss) per share $ (0.76) $ 0.08 $ 0.12
Diluted net earning (loss) per share
Reported net earning (loss) per share $ (0.77) $ 0.03 $ 0.12
Goodwill amortization 0.01 0.04 --
---------- ---------- ----------
Adjusted net earning (loss) per share $ (0.76) $ 0.07 $ 0.12
F-26
PRECISE SOFTWARE SOLUTIONS LTD. AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 9: CAPITAL LEASE OBLIGATION
Composed as follows:
DECEMBER 31,
INTEREST -------------------
CURRENCY RATE 2001 2002
-------- -------- -------- --------
IN THOUSANDS
-------------------
Capital lease obligations U.S $ 11 - 17% $ 134 $ 136
Less - current maturities 42 51
-------- --------
$ 92 $ 85
======== ========
The lease obligations are calculated based on the present value of
future lease payments.
NOTE 10: SHAREHOLDERS' EQUITY
a. Reverse split:
All share and per share data, included in these financial
statements, has been retroactively adjusted to reflect a
two-for-three reverse stock split as approved by the Company's
shareholders on April 12, 2000.
b. Automatic conversion upon IPO:
All preferred shares were automatically converted into ordinary
shares at the closing of the Company's initial public offering
("IPO") in July 2000.
c. Ordinary shares:
Ordinary shares confer upon their holders voting rights, the
right to receive cash dividends and the right to share in excess
assets upon liquidation of the Company.
d. Share Option Plans:
The Company has two share option plans, the 1995 Share Option and
Incentive Plan ("the 1995 Plan") and the Amended and Restated
1998 Share Option and Incentive Plan ("the 1998 Plan") (together,
"the Plans"). In addition, as part of the acquisition of Savant
Corporation, the Company assumed the existing stock option plan
of Savant Corporation (the "Savant Plan"). No additional options
may be granted under the 1995 Plan or the Savant Plan. Under the
1998 Plan, options may be granted to employees, officers,
directors and consultants of the Company and its subsidiaries.
Pursuant to the Plans, the Company reserved for issuance a total
of 9,549,000 ordinary shares. As of December 31, 2002, an
aggregate of 637,855 ordinary shares of the Company are still
available for future grant.
Options granted under the Plans generally vest annually over 3-4
years. Those options will expire ten years from the date of
grant. Any options, which are forfeited or not exercised before
expiration, become available for future grants. Where the Company
has recorded deferred stock compensation for options issued with
an exercise price below the fair value of the ordinary shares,
the deferred stock compensation is amortized and recorded as
compensation expense ratably over the vesting period of the
options.
F-27
PRECISE SOFTWARE SOLUTIONS LTD. AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 10: SHAREHOLDERS' EQUITY (CONT.)
YEAR ENDED DECEMBER 31,
---------------------------------------------------------------------
2000 2001 2002
--------------------- --------------------- ---------------------
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
NUMBER OF EXERCISE NUMBER OF EXERCISE NUMBER OF EXERCISE
OPTIONS PRICE OPTIONS PRICE OPTIONS PRICE
--------- --------- --------- --------- --------- ---------
Outstanding at the
beginning of the
period 3,681,044 $ 1.04 5,384,175 $ 6.10 7,038,372 $ 11.18
Granted 2,215,916 $ 13.37 3,717,448 $ 15.22 2,458,545 $ 10.19
Exercised (393,278) $ 0.71 (1,521,203) $ 2.17 (1,113,731) $ 4.18
Forfeited (119,507) $ 2.49 (542,048) $ 12.54 (495,919) $ 14.97
--------- --------- --------- --------- --------- ---------
Outstanding at the
end of the period 5,384,175 $ 6.10 7,038,372 $ 11.18 7,887,267 $ 11.62
========= ========= ========= ========= ========= =========
Exercisable options 2,043,033 $ 1.10 1,772,878 $ 4.51 2,247,679 $ 8.61
========= ========= ========= ========= ========= =========
The options outstanding as of December 31, 2002, have been separated
into ranges of exercise price as follows:
WEIGHTED WEIGHTED
OPTIONS AVERAGE OPTIONS AVERAGE
OUTSTANDING REMAINING WEIGHTED EXERCISABLE EXERCISE
RANGE OF AS OF CONTRACTUAL AVERAGE AS OF PRICE OF
EXERCISE DECEMBER 31, LIFE EXERCISE DECEMBER 31, OPTIONS
PRICE 2002 (YEARS) PRICE 2002 EXERCISABLE
-------------- ----------- ----------- ----------- ----------- -----------
$ 0.38 119,963 5.2 $ 0.38 119,963 $ 0.38
$ 1.04 495,058 5.9 $ 1.04 465,722 $ 1.04
$ 1.50 715,156 6.9 $ 1.50 488,618 $ 1.50
$ 8.50 243,000 9.6 $ 8.50 -- --
$ 9.68 1,660,879 9.8 $ 9.68 -- --
$10.30 - 11.21 723,314 8.9 $10.59 142,277 $10.39
$12.20 - 13.25 329,725 9.3 $13.15 26,062 $13.18
$14.20 - 15.00 1,547,666 7.8 $14.83 730,514 $14.89
$17.11 1,398,416 8.8 $17.11 18,416 $17.11
$19.63 - 20.20 654,090 7.5 $19.87 256,107 $19.83
----------- ----------- ----------- -----------
7,887,267 $11.62 2,247,679 $ 8.61
=========== =========== =========== ===========
F-28
PRECISE SOFTWARE SOLUTIONS LTD. AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 10: SHAREHOLDERS' EQUITY (CONT.)
e. Pro forma information under SFAS No. 123:
Under SFAS No. 123, pro forma information regarding net loss and
net loss per share required for grants issued after December 1994
and has been determined as if the Company had accounted for its
employee stock options under the fair value method of SFAS No.
123. The fair value for these options was estimated at the date
of grant, using the Black-Scholes Option Valuation Model, with
the following weighted-average assumptions for 2000, 2001 and
2002, respectively: expected volatility of 1.1, 0.86 and 0.65;
risk-free interest rates of 6.5%, 4% and 3%; dividend yields of
0% for each year and a weighted-average expected life of the
option of 2.57, 2.97 and 3.00 years.
The weighted average fair value of options granted for the years
ended December 31, 2000, 2001 and 2002, were:
FOR EXERCISE PRICE ON THE GRANT DATE THAT:
----------------------------------------------------------------------
EQUALS MARKET PRICE IS LESS THAN MARKET PRICE
---------------------------------- ----------------------------------
YEAR ENDED DECEMBER 31, YEAR ENDED DECEMBER 31,
---------------------------------- ----------------------------------
2000 2001 2002 2000 2001 2002
---------- ---------- ---------- ---------- ---------- ----------
Weighted average exercise price $ 17.73 $ 15.22 $ 10.19 $ 4.41 $ -- $ --
========== ========== ========== ========== ========== ==========
Weighted average fair values on
grant date $ 11.74 $ 4.91 $ 2.97 $ 12.98 $ -- $ --
========== ========== ========== ========== ========== ==========
Pro forma information under SFAS 123:
YEAR ENDED DECEMBER 31,
------------------------------------------
2000 2001 2002
---------- ---------- ----------
IN THOUSANDS (EXCEPT PER SHARE DATA)
------------------------------------------
Net income (loss), as reported $ (9,905) $ 923 $ 3,591
========== ========== ==========
Add: stock-based employee compensation expense
included in reported net income (loss) 6,151 1,930 354
Deduct: total stock-based employee compensation
expense determined under fair value based method (10,408) (13,163) (11,009)
---------- ---------- ----------
Pro forma net loss $ (14,162) $ (10,310) $ (7,064)
========== ========== ==========
Pro forma basic and diluted net loss per share $ (1.10) $ (0.39) $ (0.24)
========== ========== ==========
f. Employee Share Purchase Plan:
During 2000, the Company adopted its 2000 Employee Share Purchase
Plan ("ESPP"). The Company reserved 667,000 ordinary shares for
issuance under the ESPP. As of December 31, 2002, an aggregate of
520,787 ordinary shares of the Company are available for future
issuance. The ESPP provides eligible employees with the
opportunity to acquire the Company's ordinary shares through
periodic payroll deductions. According to the ESPP, the Company's
employees are entitled to purchase the Company's ordinary shares
at an amount equal to the lower of 85% of the Company's share
price at the beginning or at the end of the period. During 2001
and 2002, approximately 68,000 and 78,000 ordinary shares were
issued pursuant to the ESPP, respectively.
F-29
PRECISE SOFTWARE SOLUTIONS LTD. AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 10: SHAREHOLDERS' EQUITY (CONT.)
g. Dividends:
The Company does not intend to pay cash dividends in the
foreseeable future. Dividends declared on the ordinary shares
will be paid in NIS. Dividends paid to shareholders outside
Israel will be converted into U.S. dollars on the basis of the
exchange rate prevailing at the date of payment.
NOTE 11: INCOME TAXES
a. Israeli income tax:
1. Measurement of taxable income under the Income Tax
(Inflationary Adjustments) Law, 1985:
Results for tax purposes are measured in terms of earnings
in NIS after certain adjustments for increases in the
Israeli Consumer Price Index. As explained in Note 3b, the
financial statements are measured in U.S. dollars. The
difference between the annual change in the Israeli CPI and
in the NIS/dollar exchange rate causes a further difference
between taxable income and the income before taxes shown in
the financial statements. In accordance with paragraph 9(f)
of SFAS No. 109, the Company has not provided deferred
income taxes on the difference between the functional
currency balances and the tax bases of assets and
liabilities.
Starting in 2003 the Company has elected to measure its
taxable income and file its tax return under Israeli income
tax regulations (Principles Regarding the Management of
Books of Account of Foreign Invested Companies and Certain
Partnerships and the Determination of Their Taxable Income),
1986.
2. Tax benefits under the Law for Encouragement of Capital
Investments, 1959 ("the Law").
The Company has been granted an "Approved Enterprise" status
for four investment programs approved in 1992, 1994, 1998
and 2002, by the Israeli government under the Law.
Undistributed Israeli income derived from the first, the
third and the fourth "Approved Enterprise" programs entitle
the Company to a tax exemption for a period of two years and
to a reduced tax rate of 10% - 25% for an additional period
of five to eight years (depending on the level of foreign
investment in the Company). Undistributed Israeli income
derived from the second "Approved Enterprise" program
entitles the Company to a tax exemption of four years and to
a reduced tax rate of 10%-25% for an additional period of
three to six years (depending on the level of foreign
investment in the Company). These tax benefits must be used
during the earlier of twelve years from commencement of
operations, or fourteen years from receipt of approval.
Thereafter, the Company's income will be subject to the
regular income tax rate of 36%. Because the Company has had
no taxable income in Israel, the Company has not yet
realized any benefits under these programs.
The Company completed the implementation of its first,
second and third investment programs in 1994, 1998 and 2002,
respectively. The fourth investment program has not yet been
completed.
F-30
PRECISE SOFTWARE SOLUTIONS LTD. AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 11: INCOME TAXES (CONT.)
The entitlement to the above benefits is conditional upon the
Company's fulfilling the conditions stipulated by the above law,
regulations published thereunder and the instruments of approval
for the specific investments in "approved enterprises." In the
event of failure to comply with these conditions, the benefits
may be canceled and the Company may be required to refund the
amount of the benefits, in whole or in part, including interest.
As of December 31, 2002, management believes that the Company is
meeting all of the aforementioned conditions.
The tax-exempt profits that will be earned by the Company's
"Approved Enterprises" can be distributed to shareholders,
without imposing tax liability to the Company only upon the
complete liquidation of the Company. If these retained tax exempt
profits are distributed in a manner other than in the complete
liquidation of the Company, the profits would be taxed at the
corporate tax rate applicable to such profits as if the Company
had not elected the alternative system of benefits currently
between 10% to 25% for an "Approved Enterprise." The Company's
Board of Directors has determined that such tax exempt income
will not be distributed as dividends.
Income from sources other than an "Approved Enterprise" during
the benefit period will be subject to tax at the regular
corporate tax rate of 36%.
The Company is entitled to claim accelerated depreciation with
respect to equipment in use by "Approved Enterprises" during the
first five years of operations of these assets. The entitlement
to the above benefits is conditional upon the Company fulfilling
the conditions stipulated by the above law and regulations
published thereunder and the instruments of approval for the
specific investments in "approved enterprises." In the event of a
failure to comply with these conditions, the benefits may be
canceled and the Company may be required to refund the amount of
the benefits, in whole or in part, including interest.
3. Tax benefits under the Law for Encouragement of Industry
(Taxation), 1969:
The Company is an "industrial company" under the Law for the
Encouragement of Industry (Taxation), 1969, and as such is
entitled to certain tax benefits.
4. Israeli tax reform:
On January 1, 2003, the Law for Amendment of the Income Tax
Ordinance (Amendment No. 132) 5762-2002, known as the tax reform,
became effective. The tax reform changed the Israeli tax system
from a territorial tax method into a personal tax method on a
global basis.
F-31
PRECISE SOFTWARE SOLUTIONS LTD. AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 11: INCOME TAXES (CONT.)
b. Deferred income taxes:
Deferred income taxes reflect the net tax effects of temporary
differences between the carrying amounts of assets and
liabilities for financial reporting purposes and the amounts used
for income tax purposes. Significant components of the Company's
and its subsidiary's deferred tax liabilities and assets are as
follows:
DECEMBER 31,
---------------------------
2001 2002
------------ ------------
IN THOUSANDS
---------------------------
Operating loss carryforward $ 15,614 $ 13,382
Reserves. allowances and other 880 3,030
------------ ------------
Deferred tax asset before
valuation allowance 16,494 16,412
Valuation allowance (16,494) (16,412)
------------ ------------
Net deferred tax asset $ -- $ --
============ ============
The Company and its subsidiaries have provided valuation
allowances in respect of deferred tax assets resulting from tax
loss carryforwards. Management currently believes that, because
the Company and its subsidiaries have a history of losses and
various tax benefits, it is more likely than not that the
deferred tax regarding the loss carryforwards and other temporary
differences will not be realized in the foreseeable future.
During 2002, the Company realized certain deferred tax assets and
reduced the valuation allowance by $82 to $16,412.
c. Reconciliation of the theoretical tax expense (benefit) to the
actual tax expense (benefit):
Theoretical tax reconciliation was not calculated due to the
amount of carryforward tax losses of the Company and its
subsidiaries.
d. Net operating loss carryforwards:
The Company has accumulated losses for Israeli tax purposes as of
December 31, 2002, in the amount of approximately $30 million,
which may be carried forward and offset against taxable income in
the future for an indefinite period.
Through December 31, 2002, Precise Software Solutions Inc., the
Company's U.S. subsidiary, had a U.S. federal net operating loss
carryforward of approximately $26 million that can be carried
forward and offset against taxable income for 15 to 20 years and
will expire from 2009 to 2014. Utilization of U.S. net operating
losses may be subject to substantial annual limitations due to
the "change in ownership" provisions of the Internal Revenue Code
of 1986 and similar state provisions. The annual limitation may
result in the expiration of net operating losses before
utilization.
The Company's subsidiary in the United Kingdom has estimated
available carryforward tax losses of $4 million.
F-32
PRECISE SOFTWARE SOLUTIONS LTD. AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 11: INCOME TAXES (CONT.)
e. Income (loss) before income taxes consists of the following:
YEAR ENDED DECEMBER 31,
------------------------------------------
2000 2001 2002
------------ ------------ ------------
IN THOUSANDS
------------------------------------------
Domestic $ 878 $ 4,746 $ 7,034
Foreign (10,783) (3,799) (3,233)
------------ ------------ ------------
$ (9,905) $ 956 $ 3,801
============ ============ ============
NOTE 12: COMMITMENTS AND CONTINGENT LIABILITIES
a. Lease commitments:
The Company and its subsidiaries lease their facilities and
vehicles under non-cancelable operating lease agreements for
periods through 2009.
Future minimum commitments under non-cancelable operating leases
as of December 31, 2002, are as follows (in thousands):
YEAR ENDED DECEMBER 31, OPERATING LEASES
----------------------- ----------------
2003 $ 3,106
2004 2,287
2005 763
2006 495
2007 and thereafter 1,241
----------------
$ 7,892
================
Lease and related expenses under operating leases for the years
ended December 31, 2000, 2001 and 2002, aggregate to
approximately $848,000, $2,450,000 and $3,335,000, respectively.
b. Royalties:
1. The Company is committed to pay royalties to the Chief
Scientist of the Israeli Ministry of Industry and Trade at a
rate of 3.5% on the sale of products developed with funds
provided by the Chief Scientist, up to an amount equal to
100%-150% of dollar-linked research and development grants
related to such projects.
Royalties paid or accrued amounted to $586,000, $151,000 and
$0 in 2000, 2001 and 2002, respectively, and recorded in
cost of revenues in the Company's statement of operations.
As of December 31, 2002, the Company has no outstanding
contingent liability to the Chief Scientist.
F-33
PRECISE SOFTWARE SOLUTIONS LTD. AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 12: COMMITMENTS AND CONTINGENT LIABILITIES (CONT.)
2. The Government of Israel, through the Fund for the
Encouragement of Marketing Activities ("the Fund"), awarded
the Company grants for participation in its foreign
marketing expenses. The Company is committed to pay
royalties at the rate of 4% of the increase in export sales,
up to the amount of the grants, and linked to the U.S.
dollar.
Royalties paid or accrued amounted to $28,000, $0 and $0 in
2000, 2001 and 2002, respectively.
As of December 31, 2002, the Company has no outstanding
contingent liability under these grants.
c. Guarantees:
The Company has provided guarantees in the amount of $628,000 as
of December 31, 2002 relating to leases for its Israeli
facilities, its U.S. subsidiaries' facilities, and automobiles in
Europe.
NOTE 13: FINANCIAL INCOME AND OTHER, NET
YEAR ENDED DECEMBER 31,
------------------------------------------
2000 2001 2002
---------- ---------- ----------
IN THOUSANDS
------------------------------------------
Financial income:
Interest and others $ 3,163 $ 6,845 $ 5,640
Accretion of discount on available-for-sale
marketable securities 54 262 38
Foreign currency translation differences 364 201 400
---------- ---------- ----------
Financial income 3,581 7,308 6,078
---------- ---------- ----------
Financial expenses:
Interest and others (38) (113) (281)
Amortization of premium on available-for-sale
marketable securities (36) (371) (1,269)
Foreign currency translation differences (416) (198) (470)
---------- ---------- ----------
Financial expenses (490) (682) (2,020)
---------- ---------- ----------
Capital loss on property and equipment -- (61) (37)
---------- ---------- ----------
Financial income and other, net $ 3,091 $ 6,565 $ 4,021
========== ========== ==========
F-34
PRECISE SOFTWARE SOLUTIONS LTD. AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 14: SEGMENT, CUSTOMERS AND GEOGRAPHIC INFORMATION
The Company and its subsidiaries operate in one industry segment, the
development and marketing of performance 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, "Disclosures about
Segments of an Enterprise and Related Information."
a. Summary information about geographical areas:
The following presents total revenues by customer location for
the years ended December 31, 2000, 2001 and 2002 and long-lived
assets as of December 31, 2001 and 2002.
YEAR ENDED DECEMBER 31,
------------------------------------------
2000 2001 2002
---------- ---------- ----------
IN THOUSANDS
------------------------------------------
Revenues from sales to unaffiliated customers:
U.S.A. $ 17,737 $ 33,142 $ 47,646
North and South America (excluding U.S.A.) 1,469 3,209 3,104
Asia 3,181 4,738 5,424
United Kingdom 2,074 5,747 6,085
Europe and others (excluding the United Kingdom) 3,087 8,761 13,741
---------- ---------- ----------
$ 27,548 $ 55,597 $ 76,000
========== ========== ==========
DECEMBER 31,
--------------------------
2001 2002
---------- ----------
IN THOUSANDS
--------------------------
Long-lived assets, by geographic region:
Israel $ 3,956 $ 3,134
United States 45,635 59,399
Europe and others 1,687 2,160
---------- ----------
$ 51,278 $ 64,693
========== ==========
b. Major customer data as a percentage of total revenues:
DECEMBER 31,
------------------------------------------
2000 2001 2002
---------- ---------- ----------
Customer A 7% 13% 2%
Customer B 23% 18% 10%
F-35
PRECISE SOFTWARE SOLUTIONS LTD. AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 15: EARNING (LOSS) PER SHARE
The following table sets forth the computation of the basic and
diluted net earnings (loss) per share:
1) Numerator
YEAR ENDED DECEMBER 31,
------------------------------------------
2000 2001 2002
---------- ---------- ----------
NUMBER OF SHARES IN THOUSANDS
------------------------------------------
Net income (loss) to ordinary shareholders (9,905) 923 3,591
========== ========== ==========
2) Denominator
YEAR ENDED DECEMBER 31,
------------------------------------------
2000 2001 2002
---------- ---------- ----------
NUMBER OF SHARES IN THOUSANDS
------------------------------------------
Weighted average number of shares used
for basic net earnings (loss) per share 12,901 26,745 28,843
Effect of dilutive securities:
Employee stock options -- 3,226 2,108
Contingent consideration -- -- 259
---------- ---------- ----------
Dilutive potential ordinary shares -- 3,226 2,367
Weighted average number of shares used
for diluted net earnings (loss) per share -
adjusted weighted average shares, assumed
exercise of options and contingent
consideration 12,901 29,971 31,210
========== ========== ==========
F-36
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, as amended, the Registrant has duly caused this report to
be signed on its behalf by the undersigned thereunto duly authorized.
PRECISE SOFTWARE SOLUTIONS LTD.
Date: March 13, 2003
By: /s/ Shimon Alon
------------------------------------
Shimon Alon, Chief Executive Officer
POWER OF ATTORNEY AND SIGNATURES
We, the undersigned officers and directors of Precise Software Solutions
Ltd., hereby severally constitute and appoint Shimon Alon, our true and lawful
attorney, with full power to him singly, to sign for us and in our names in the
capacities indicated below, any amendments to this Annual Report on Form 10-K,
and generally to do all things in our names and on our behalf in such capacities
to enable Precise Software Solutions Ltd. to comply with the provisions of the
Securities Exchange Act of 1934, as amended, and all the requirements of the
Securities Exchange Commission.
Pursuant to the requirements of the Securities Exchange Act of 1934, as
amended, this report has been signed below by the following persons on behalf of
the registrant and in the capacities and on the dates indicated.
SIGNATURE TITLE(S) DATE
--------- -------- ----
/s/ Shimon Alon Chief Executive Officer March 13, 2003
- ---------------------- and Director
Shimon Alon (Principal Executive Officer)
/s/ Marc J. Venator Chief Financial Officer March 13, 2003
- ---------------------- (Principal Financial and
Marc J. Venator Accounting Officer)
/s/ Ron Zuckerman Director and Chairman March 13, 2003
- ---------------------- of the Board of Directors
Ron Zuckerman
/s/ Robert J. Dolan Director March 13, 2003
- ----------------------
Robert J. Dolan
/s/ Gary L. Fuhrman Director March 13, 2003
- ----------------------
Gary L. Fuhrman
/s/ Michael J. Miracle Director March 13, 2003
- ----------------------
Michael J. Miracle
/s/ Mary A. Palermo Director March 13, 2003
- ----------------------
Mary A. Palermo
/s/ Anton Simunovic Director March 13, 2003
- ----------------------
Anton Simunovic
II-1
CERTIFICATIONS
--------------
I, Shimon Alon, certify that:
1. I have reviewed this annual report on Form 10-K of Precise Software
Solutions Ltd.;
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this annual
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this annual report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
(a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this annual report
is being prepared;
(b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this annual report (the "Evaluation Date"); and
(c) presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officer and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit committee
of registrant's board of directors (or persons performing the equivalent
function):
(a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
(b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officer and I have indicated in this
annual report whether or not there were significant changes in internal controls
or in other factors that could significantly affect internal controls subsequent
to the date of our most recent evaluation, including any corrective actions with
regard to significant deficiencies and material weaknesses.
Date: March 13, 2003 /s/ Shimon Alon
-----------------------
Shimon Alon
Chief Executive Officer
I, Marc J. Venator, certify that:
1. I have reviewed this annual report on Form 10-K of Precise Software
Solutions Ltd.;
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this annual
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this annual report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
(a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this annual report
is being prepared;
(b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this annual report (the "Evaluation Date"); and
(c) presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officer and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit committee
of registrant's board of directors (or persons performing the equivalent
function):
(a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
(b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officer and I have indicated in this
annual report whether or not there were significant changes in internal controls
or in other factors that could significantly affect internal controls subsequent
to the date of our most recent evaluation, including any corrective actions with
regard to significant deficiencies and material weaknesses.
Date: March 13, 2003 /s/ Marc J. Venator
-----------------------
Marc J. Venator
Chief Financial Officer
EXHIBIT INDEX TO ANNUAL REPORT ON FORM 10-K
FOR FISCAL YEAR ENDED DECEMBER 31, 2002
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
------ -----------------------
2.1(1) Agreement and Plan of Merger dated as of October 27 2000 by and
among Precise Software Solutions Ltd., Precise Acquisition
Corporation, Savant Corporation and certain stockholders of
Savant Corporation
2.2(1) Amendment to Agreement and Plan of Merger dated as of November
13, 2000 by and among Precise Software Solutions Ltd., Precise
Acquisition Corporation, Savant Corporation and Certain
Stockholders of Savant Corporation
2.3(2) Agreement and Plan of Merger dated as of September 4, 2001 by
and among Precise Software Solutions Ltd., WQ Acquisition
Corporation, W. Quinn Associates, Inc. and certain stockholders
of W. Quinn Associates, Inc.
2.3(3) Agreement and Plan of Merger dated as of December 19, 2002 by
and among VERITAS Software Corporation, Argon Merger Sub Ltd.
and Precise Software Solutions Ltd.
3.1(4) Memorandum of Association of Registrant (English translation)
3.2(4) Amendment to Memorandum of Association of Registrant, dated
April 12, 2000 (English translation)
3.3(5) Amended and Restated Articles of Association of Registrant
4.1(4) Specimen of Ordinary Share Certificate
10.1(6) Lease Agreement by and between Precise Software Solutions Ltd.,
Ness B.S.G. Ltd. and Ilan Gat Engineers Ltd. dated November 2001
(English translation)
10.2(4) Sublease Agreement, by and between the Travelers Indemnity
Company and Precise Software Solutions, Inc. dated June 3, 1999
10.3(4)+ Application Software Vendor Agreement by and between Precise and
Amdocs UK Limited dated January 12, 1998
10.4(4)+ Software License Agreement by and between Precise and EMC
Corporation dated March 19, 1999 and the amendments thereto
dated October 5, 1999 and December 13, 1999
10.5(4) Letter Agreement between Precise and EMC Investment Corporation
dated April 18, 2000, as amended May 19, 2000 and June 26, 2000
10.6(7) Registration Rights Agreement, dated as of December 5, 2000,
between Precise Software Solutions Ltd. and Richard North as
agent for the stockholders of Savant Corporation
10.7(3) Registration Rights Agreement, dated as of September, 2001,
between Precise Software Solutions Ltd. and the parties named
therein as agent for the stockholders of W. Quinn Associates,
Inc.
10.8(8) Employment Agreement dated as of November 23, 1998, as amended,
between Precise and Shimon Alon
10.9(9) Employment Agreement dated as of February 8, 2002, between
Precise and Benjamin H. Nye
10.10(10) Employment Agreement dated as of August 1, 2002, between Precise
Software Solutions Ltd. and Itzhak ("Aki") Ratner
10.11(10) Employment Agreement dated as of August 1, 2002, between Precise
Software Solutions, Inc. and Itzhak ("Aki") Ratner
10.12(10) Employment Agreement dated as of September 3, 2002, between
Precise Software Solutions, Inc. and Marc J. Venator
10.13(4) 1995 Share Option and Incentive Plan
10.14(11) Amended and Restated 1998 Share Option and Incentive Plan
10.15(9) Amended 2000 Employee Share Purchase Plan
10.16(8) Form of indemnification agreement between Precise Software
Solutions Ltd. and its executive officers
10.17(8) Form of indemnification agreement between Precise Software
Solutions, Inc. and its executive officers
10.18(6) Lease Agreement by and between Campus Commons, LLC and W. Quinn
Associates, Inc. dated May 4, 1999
21.1 Subsidiaries of the Registrant
23.1 Consent of Kost, Forer & Gabbay, a member of Ernst and Young
Global
24.1 Powers of Attorney (included on page II-1)
99.1 Certification of Principal Executive Officer
99.2 Certification of Principal Financial Officer
- ------------
+ The Securities and Exchange Commission granted confidential treatment as to
certain portions, which portions were separately filed with the Securities
and Exchange Commission pursuant to a confidential treatment request.
(1) Incorporated by reference to the exhibits to the registrant's registration
statement on Form F-1 (File No. 333-48878).
(2) Incorporated by reference to the exhibits to the registrant's current
report on Form 8-K filed September 19, 2001.
(3) Incorporated by reference to the exhibits of the registrant's current
report on Form 8-K filed December 24, 2002.
(4) Incorporated by reference to the exhibits to the registrant's registration
statement on Form F-1 (File No. 333-11992).
(5) Incorporated by reference to the exhibits to the registrant's registration
statement on Form F-1 (File No. 333-11992) and the registrant's definitive
proxy statement filed on April 11, 2001.
(6) Incorporated by reference to the exhibits to the registrant's annual report
on Form 10-K for the year ended December 31, 2001.
(7) Incorporated by reference to the exhibits of the registrant's current
report on Form 8-K filed December 20, 2000.
(8) Incorporated by reference to the exhibits to the registrant's annual report
on Form 10-K for the year ended December 31, 2000.
(9) Incorporated by reference to the exhibits of the registrant's quarterly
report on Form 10-Q for the period ended March 31, 2002.
(10) Incorporated by reference to the exhibits of the registrant's quarterly
report on Form 10-Q for the period ended June 30, 2002.
(11) Incorporated by reference to the exhibits to the registrant's definitive
proxy statement filed April 30, 2002.