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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
__________
FORM 10-Q
Quarterly Report Under Section 13 or 15(d)
of the Securities Exchange Act of 1934
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934.
For the quarterly period ended ______MARCH 31, 2003
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 0-30828
PRECISE SOFTWARE SOLUTIONS LTD.
(Exact Name of Registrant as Specified in Its Charter)
Israel Not Applicable
(State or Other Jurisdiction (I.R.S. Employer
of Organization) Identification No.)
10 Hata'asiya Street
P.O. Box 1066, Or-Yehuda, 60408 Israel
(Address of Principal Executive Offices) (Zip Code)
Registrant's Telephone Number, Including Area Code 972-(3)-735-2222
Indicate by check |X| whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days
Yes [X] No [_]
Indicate by check |X| whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act).
Yes [X] No [_]
At May 9, 2003, 30,301,970 of the registrant's ordinary shares (par value,
0.03 NIS per share) were outstanding.
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FORM 10-Q
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2003
TABLE OF CONTENTS
PAGE
PART I: FINANCIAL INFORMATION
ITEM 1. Consolidated Financial Statements:
Condensed Consolidated Balance Sheets as of
March 31, 2003 (unaudited) and December 31, 2002..............4-5
Condensed Consolidated Statements of Operations
(unaudited) for the three months ended March 31,
2003 and 2002..................................................6
Condensed Consolidated Statements of Cash Flows
(unaudited) for the three months ended
March 31, 2003 and 2002.......................................7-8
Notes to Condensed Consolidated Financial
Statements (unaudited)........................................9-14
ITEM 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations...........................15-21
ITEM 3. Quantitative and Qualitative Disclosures About Market Risk.....21
ITEM 4. Controls and Procedures........................................21
PART II. OTHER INFORMATION
ITEM 1. Legal Proceedings..............................................22
ITEM 2. Changes in Securities and Use of Proceeds.......................*
ITEM 3. Defaults Upon Senior Securities.................................*
ITEM 4. Matters Submitted to a Vote of Security Holders.................*
ITEM 5. Other Information...............................................*
ITEM 6. Exhibits and Reports on Form 8-K...............................22
SIGNATURES..................................................................23
CERTIFICATIONS.............................................................24-25
*No information provided due to inapplicability of item.
2
PRECISE SOFTWARE SOLUTIONS LTD.
FORM 10-Q
QUARTER ENDED MARCH 31, 2003
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
PRECISE SOFTWARE SOLUTIONS LTD. AND ITS SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
- ---------------------------------------------------------------------------------------------
U.S. DOLLARS IN THOUSANDS
DECEMBER 31, MARCH 31,
2002 2003
------------ ------------
AUDITED UNAUDITED
------------ ------------
ASSETS
Current assets:
Cash and cash equivalents $ 13,870 $ 17,445
Marketable securities 71,754 69,974
Trade receivables, net of allowance for doubtful accounts
(2002 - $278, 2003 - $378) 18,065 21,218
Other accounts receivable and prepaid expenses 3,114 3,576
------------ ------------
Total current assets 106,803 112,213
Marketable securities, non-current 54,571 51,912
Severance pay fund 951 1,005
Property and equipment, net 4,604 4,384
Other receivables, non-current 2,700 3,555
Other intangible assets, net 12,778 11,785
Goodwill 44,611 44,656
------------ ------------
Total assets $ 227,018 $ 229,510
============ ============
The accompanying notes are an integral part of the condensed consolidated
financial statements.
3
PRECISE SOFTWARE SOLUTIONS LTD. AND ITS SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
- ---------------------------------------------------------------------------------------------
U.S. DOLLARS IN THOUSANDS
DECEMBER 31, MARCH 31,
2002 2003
------------ ------------
AUDITED UNAUDITED
------------ ------------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Trade payables $ 1,297 $ 1,045
Deferred revenues 9,400 10,382
Employees and payroll accruals 5,624 5,534
Accrued expenses 2,161 1,896
Other current liabilities 1,800 1,969
------------ ------------
Total current liabilities 20,282 20,826
------------ ------------
Long-term liabilities:
Capital lease obligation 85 73
Accrued severance pay 1,207 1,254
------------ ------------
Total long-term liabilities 1,292 1,327
------------ ------------
SHAREHOLDERS' EQUITY:
Ordinary shares and additional paid-in capital 225,998 227,618
Deferred stock compensation (77) (55)
Accumulated other comprehensive income 1,356 1,080
Accumulated deficit (21,833) (21,286)
------------ ------------
Total shareholders' equity 205,444 207,357
------------ ------------
Total liabilities and shareholders' equity $ 227,018 $ 229,510
============ ============
The accompanying notes are an integral part of the condensed consolidated
financial statements.
4
PRECISE SOFTWARE SOLUTIONS LTD. AND ITS SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
- ---------------------------------------------------------------------------------------------
U.S. DOLLARS IN THOUSANDS (EXCEPT PER SHARE DATA)
THREE MONTHS ENDED
MARCH 31,
-----------------------------
2002 2003
------------ ------------
Revenues:
Software licenses $ 12,402 $ 15,294
Services 4,692 6,861
------------ ------------
Total revenues 17,094 22,155
------------ ------------
Cost of revenues:
Software licenses 132 259
Services 1,065 2,101
Amortization of acquired technology 463 553
------------ ------------
Total cost of revenues 1,660 2,913
------------ ------------
Gross profit 15,434 19,242
------------ ------------
Operating expenses:
Research and development 3,250 3,381
Sales and marketing 9,810 12,200
General and administrative 2,165 2,362
Amortization of deferred stock compensation 188 18
Amortization of intangible assets 302 466
VERITAS acquisition related expenses - 739
------------ ------------
Total operating expenses 15,715 19,166
------------ ------------
Operating income (loss) (281) 76
Financial income and other, net 1,003 779
------------ ------------
Income before income taxes 722 855
Income taxes 72 308
------------ ------------
Net income $ 650 $ 547
============ ============
Net earnings per share:
Basic and diluted net earnings per share $ 0.02 $ 0.02
============ ============
The accompanying notes are an integral part of the condensed consolidated
financial statements.
5
PRECISE SOFTWARE SOLUTIONS LTD. AND ITS SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
- ---------------------------------------------------------------------------------------------
U.S. DOLLARS IN THOUSANDS
THREE MONTHS ENDED
MARCH 31,
-----------------------------
2002 2003
------------ ------------
UNAUDITED
-----------------------------
Cash flows from operating activities:
Net income $ 650 $ 547
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Depreciation 488 506
Loss on sale of property and equipment 40 --
Amortization of debenture premium on available-for-sale
marketable securities 262 424
Amortization of deferred stock compensation 188 18
Amortization of acquired technology 463 553
Amortization of intangible assets 302 466
Decrease (increase) in trade receivables, net 618 (3,110)
Increase in other accounts receivable and prepaid expenses (932) (459)
Decrease in other receivables, non-current 410 --
Decrease in trade payables (469) (254)
Increase in deferred revenues 889 969
Increase (decrease) in employees and payroll accruals 1,458 (102)
Decrease in other current liabilities and accrued expenses (85) (102)
Decrease in accrued severance pay, net (2) (7)
------------ ------------
Net cash provided by (used in) operating activities 4,280 (551)
------------ ------------
Cash flows from investing activities:
Purchase of property and equipment (347) (286)
Purchase of available-for-sale marketable securities (14,732) (18,701)
Purchase of goodwill and intangible assets (984) (71)
Increase in other receivables, non-current -- (855)
Proceeds from redemption of available-for-sale
marketable securities 11,500 19,915
Proceeds from sale of marketable securities 747 2,500
------------ ------------
Net cash provided by (used in) investing activities $ (3,816) $ 2,502
------------ ------------
The accompanying notes are an integral part of the condensed consolidated
financial statements.
6
PRECISE SOFTWARE SOLUTIONS LTD. AND ITS SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
- ---------------------------------------------------------------------------------------------
U.S. DOLLARS IN THOUSANDS
THREE MONTHS ENDED
MARCH 31,
-----------------------------
2002 2003
------------ ------------
UNAUDITED
-----------------------------
Cash flows from financing activities:
Proceeds from issuance of shares, net -- 502
Proceeds from exercise of options, net 3,960 1,122
Repayment of long-term debt (7) (15)
------------ ------------
Net cash provided by financing activities 3,953 1,609
------------ ------------
Effect of exchange rate change on cash and cash equivalents 13 15
------------ ------------
Increase in cash and cash equivalents 4,430 3,575
Cash and cash equivalents at the beginning of the period 35,144 13,870
------------ ------------
Cash and cash equivalents at the end of the period $ 39,574 $ 17,445
============ ============
Supplemental disclosure of cash flows activities:
-------------------------------------------------
Non cash transactions:
Purchased technology $ 597 $ --
============ ============
Capital lease obligation $ 41 $ --
============ ============
The accompanying notes are an integral part of the condensed consolidated
financial statements.
7
PRECISE SOFTWARE SOLUTIONS LTD. AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
NOTE 1: BASIS OF PRESENTATION
a. Company:
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. 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.
c. Accounting:
The accompanying condensed interim consolidated financial statements
have been prepared by Precise in accordance with generally accepted
accounting principles in the United States, pursuant to the rules and
regulations of the Securities and Exchange Commission and include the
accounts of Precise and its wholly-owned subsidiaries collectively.
Certain information and footnote disclosures, normally included in
financial statements prepared in accordance with generally accepted
accounting principles in the United States, have been condensed or
omitted pursuant to such rules and regulations. In the opinion of the
Company, the unaudited financial statements reflect all adjustments
(consisting only of normal recurring adjustments) necessary for a
fair presentation of the financial position at March 31, 2003 and the
operating results for the three months ended March 31, 2003 and 2002
and cash flows for the three months ended March 31, 2003 and 2002.
These financial statements and notes should be read in conjunction
with the Company's audited consolidated financial statements and
notes thereto, included in the Company's annual report on Form 10-K,
filed with the Securities and Exchange Commission.
The results of operations for the three month periods ended March 31,
2003 are not necessarily indicative of results that may be expected
for any other interim period or for the full fiscal year ending
December 31, 2003.
8
NOTE 2: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
a. Cash and cash equivalents:
Cash equivalents are short-term highly liquid investments that are
readily convertible to cash with original maturities of three months
or less.
b. Marketable securities:
The Company accounts for investments in debt and equity securities in
accordance with Statement of Financial Accounting Standards ("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 March 31, 2003, 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.
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.
c. Other intangible assets, net:
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 Principles 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.
d. 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
9
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. As of March 31, 2003, no impairment losses were identified.
e. 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
resellers and OEMs upon the sublicensing of the Company's products to
end-users. Generally, fees due from the resellers and OEMs are
recognized when such fees are reported to the Company upon the
sublicensing of the products by the OEMs.
The Company and its subsidiaries generally do not grant a right of
return to their customers except for time-limited warranty
provisions. Historically, the Company has seen negligible returns.
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.
10
f. Reclassification:
The amortization of acquired technology has been reclassified from
amortization of goodwill and intangible assets to cost of revenues to
conform to current period presentation.
NOTE 3: SHAREHOLDERS' EQUITY
a. Stock options plans:
The following table summarizes information about stock options
outstanding as of March 31, 2003:
NUMBER OF WEIGHTED AVERAGE
OPTIONS EXERCISE PRICE
------------ ------------
Outstanding at December 31, 2002 7,887,267 $ 11.62
Granted -- --
Exercised (226,337) 5.55
Forfeited (172,517) 13.40
------------ ------------
Outstanding at March 31, 2003 (unaudited) 7,488,413 $ 11.76
============ ============
b. Pro forma information under SFAS No. 123:
Under SFAS No. 123 "Accounting for Stock-Based Compensation", Pro
forma information regarding net loss and net loss per share is
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 that statement. The fair
value for these options was estimated at the date of grant, using
the Black-Scholes Option Valuation Model, with the following
assumptions for 2002 and 2003, respectively: weighted-average
risk-free interest rates of 4% and 3%; a dividend yield of 0% for
each year; expected volatility of 0.86 and 0.65 for each year;
and a weighted-average expected life of the option of, 2.97 and 3
years.
Pro forma information under SFAS 123 (in thousands, except per share
data):
THREE MONTHS ENDED MARCH 31,
-----------------------------
2002 2003
------------ ------------
UNAUDITED
-----------------------------
Net income, as reported $ 650 $ 547
============ ============
Add: stock-based employee compensation expense
included in reported net income 188 18
Deduct: total stock-based employee compensation
expense determined under fair value based method 2,849 2,177
------------ ------------
Pro forma net loss $ (2,011) $ (1,612)
============ ============
Pro forma basic and diluted net loss per share $ (0.07) $ (0.05)
============ ============
11
NOTE 4: INCOME TAXES
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.
The increase in the Company's income taxes in the first quarter of
2003 was mainly a result of the tax reform in Israel.
NOTE 5: EARNINGS PER SHARE
Basic net earnings per share is computed based on the weighted
average number of ordinary shares outstanding during each period.
Diluted net earnings per share is computed based on the weighted
average number of ordinary shares outstanding during each period,
plus dilutive potential ordinary shares considered outstanding during
the period, in accordance with FASB Statement No. 128, "Earnings per
Share."
The following table presents the calculation of unaudited basic and
diluted net earnings per share (in thousands, except per share data):
THREE MONTHS ENDED
MARCH 31,
-----------------------------
2002 2003
------------ ------------
UNAUDITED
-----------------------------
Net income $ 650 $ 547
============ ============
Weighted average number of shares used in
computing basic net earnings per share
28,240 30,128
Effect of dilutive stock options 3,428 2,429
------------ ------------
Weighted average number of shares used in
computing diluted net earnings per share 31,668 32,557
============ ============
Basic and diluted net earnings per share $ 0.02 $ 0.02
============ ============
12
NOTE 6: COMPREHENSIVE INCOME
The components of comprehensive income (loss) are as follows (in
thousands):
THREE MONTHS ENDED
MARCH 31,
-----------------------------
2002 2003
------------ ------------
UNAUDITED
-----------------------------
Net income $ 650 $ 547
Other comprehensive income:
Change in net unrealized gains on investments (841) (301)
Change in exchange rate differences 5 25
------------ ------------
Total $ (186) $ 271
============ ============
NOTE 7: GEOGRAPHIC INFORMATION
The Company and its subsidiaries operate in one industry segment, the
development and marketing of performance management software
products. See Note 1 for a brief description of the Company's
business. The following data is presented in accordance with SFAS No.
131, "Disclosure About Segments of an Enterprise and Related
Information."
The following presents total revenues by customer location for the
periods ended March 31, 2002 and 2003 and long-lived assets as of
December 31, 2002 and March 31, 2003.
THREE MONTHS ENDED
MARCH 31,
-----------------------------
2002 2003
------------ ------------
UNAUDITED
-----------------------------
Revenues from sales to unaffiliated customers:
U.S.A. $ 10,049 $ 13,381
North and South America (excluding U.S.A) 875 666
Asia 1,475 1,092
United Kingdom 2,265 3,457
Europe and others (excluding United Kingdom) 2,430 3,559
------------ ------------
$ 17,094 $ 22,155
============ ============
DECEMBER 31, MARCH 31,
2002 2003
------------ ------------
AUDITED UNAUDITED
------------ ------------
Long-lived assets, by geographic region:
Israel $ 3,134 $ 2,369
United States 59,399 59,851
Europe and others 2,160 2,160
------------ ------------
$ 64,693 $ 64,380
============ ============
13
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Except for the historical information contained herein, the matters
discussed in this Quarterly Report on Form 10-Q 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. Actual results may vary materially
from those projected, anticipated or indicated in any forward-looking
statements. In this Item 2, 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 the accompanying consolidated financial
statements and related notes included elsewhere in this Quarterly Report on Form
10-Q.
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 OUR ANNUAL REPORT ON FORM 10-K, WE BELIEVE THE
FOLLOWING ACCOUNTING POLICIES TO BE CRITICAL:
14
REVENUE RECOGNITION. We derive our revenues from the sale of software
licenses and from services. Our products are sold worldwide through a
combination of our direct sales force and indirect sales channels, including
original equipment manufacturers, or OEMs, and resellers. Our services revenues
consist primarily of fees derived from annual maintenance and support agreements
and consulting and training, none of which are considered essential to the
functionality of the software license.
The Company recognizes revenue in accordance with 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 and resellers are recognized when we
receive reports of fees due upon the sublicensing of our products by the OEMs
and resellers.
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 2002
annual consolidated financial statements on the Form 10-K, 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 July 1, 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 March 31, 2003, we had $44.7
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
15
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.
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 March 31, 2003, 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 condensed consolidated statement of
operations data as a percentage of total revenues for the periods indicated:
Three months ended March 31,
Percent of Total Revenues: 2002 2003
Revenues:
Software licenses............................. 73% 69%
Services...................................... 27 31
--- ---
Total revenues........................... 100 100
Cost of revenues:
Software licenses............................. 1 1
Services...................................... 6 10
Amortization of acquired technology........... 3 3
--- ---
Total cost of revenues................... 10 14
--- ---
Gross profit..................................... 90 86
Operating expenses:
Research and development....................... 19 15
Sales and marketing............................ 57 55
General and administrative 13 11
Amortization of deferred stock compensation.... 1 -
Amortization of intangible assets 2 2
VERITAS acquisition related expenses - 3
--- ---
Total operating expenses................. 92 86
--- ---
Operating income (loss).......................... (2) -
Financial income and other, net.................. 6 4
--- ---
Income before income taxes....................... 4 4
Income taxes..................................... - 1
--- ---
Net income ...................................... 4% 3%
=== ===
16
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 $22.2 million for the three months
ended March 31, 2003 and $17.1 million for the comparable quarter of 2002,
representing an increase of $5.1 million, or 30%.
Revenues from sales of software licenses were $15.3 million for the three
months ended March 31, 2003 and $12.4 million for the comparable quarter of
2002, representing an increase of $2.9 million, or 23%. The increase in software
license revenue is due to a $2.4 million increase from the expansion of our
direct and indirect sales channels and an increase of $473,000 in software
license revenue attributable to our strategic relationships.
Revenues from services were $6.9 million for the three months ended March
31, 2003 and $4.7 million for the comparable quarter of 2002, representing an
increase of $2.2 million, or 46%. Of the increase in service revenue, $1.4
million is attributable to additional professional services and $784,000 is
attributable to additional maintenance agreements from new software license
sales and renewals of annual maintenance agreements with existing customers.
COST OF REVENUES
Cost of revenues consists of costs associated with generating software
license and service revenues together with the amortization of acquired
technology. Cost of revenues was $2.9 million for the three months ended March
31, 2003 and $1.7 million for the comparable quarter of 2002, representing an
increase of $1.2 million, or 75%. The increase in cost of revenues is due to a
change in revenue mix, as our professional services business, which delivers
lower gross margins than software licenses and maintenance, grew significantly.
Cost of software license revenues consists primarily of third party
royalties, production costs and referral fees. Cost of software license revenues
was $259,000 for the three months ended March 31, 2003 and $132,000 for the
comparable quarter of 2002, representing an increase of $127,000, or 96%. Cost
of software license revenues, as a percentage of total software license
revenues, was 2% for the three months ended March 31, 2003 and 1% in the
comparable quarter of 2002. The increase is primarily attributable to higher
referral fees.
Cost of service revenues consists primarily of costs related to personnel
providing customer support and professional services. Cost of service revenues
was $2.1 million for the three months ended March 31, 2003 and $1.1 million for
the comparable quarter of 2002, representing an increase of $1.0 million, or
97%. The increase 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 was 31% for the three months ended
March 31, 2003 and 23% in the comparable quarter of 2002. The increase in cost
of services revenues is due to a change in the revenue mix, as our professional
service business, which delivers lower gross margins than our software
maintenance business, grew at a faster rate than software maintenance revenues.
Amortization of acquired technology was $553,000 and $463,000 for the
three months ended March 31, 2003 and 2002, respectively, representing an
increase of $90,000. The increase is attributable to a full quarter of
amortization relating to a technology purchase made in February 2002.
17
RESEARCH AND DEVELOPMENT
Research and development expenses consist primarily of costs related to
research and development personnel, including salaries and other
personnel-related expenses, sub-contracting fees, facilities and computer
equipment used in our product and technology development. Research and
development expenses were $3.4 million for the three months ended March 31, 2003
and $3.2 million for the comparable period of 2002, representing an increase of
$131,000, or 4%. The increase is primarily attributable to an increase in
payroll and headcount related expenses.
SALES AND MARKETING
Sales and marketing expenses consist primarily of salaries and other
personnel-related expenses, commissions and other costs associated with our
sales and marketing efforts. Sales and marketing expenses were $12.2 million for
the three months ended March 31, 2003 and $9.8 million for the comparable
quarter of 2002, representing an increase of $2.4 million, or 24%. The increase
is primarily due to an increase in payroll and headcount related expenses to
support the growth of our sales force, which accounted for $1.6 million of the
increase, a $600,000 increase in commission expenses attributable to the
increase in software license revenues and a $165,000 increase in marketing
expenses.
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 consulting fees. General and
administrative expenses were $2.4 million for the three months ended March 31,
2003 and $2.2 million for the comparable quarter of 2002, representing an
increase of $197,000, or 9%. The increase is primarily attributable to an
increase in payroll and headcount related expenses.
AMORTIZATION OF DEFERRED STOCK COMPENSATION
Amortization of deferred stock compensation was $18,000 and $188,000 for
the three months ended March 31, 2003 and 2002, respectively, representing a
decrease of $170,000. The decrease 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 March 31, 2003, the
unamortized deferred stock compensation balance is $55,000, most of which will
be amortized during 2003.
AMORTIZATION OF INTANGIBLE ASSETS
Amortization of intangible assets was $466,000 and $302,000 for the three
months ended March 31, 2003 and 2002, respectively, representing an increase of
$164,000. The increase is primarily attributable to amortization of intangible
assets relating to the acquisition of The Middleware Company in June 2002.
VERITAS ACQUISITION RELATED EXPENSES
VERITAS acquisition related expenses consist of costs incurred in
connection with the proposed merger between Precise and VERITAS Software
Corporation, which was announced on December 19, 2002. For the quarter ended
March 31, 2003, these costs amounted to $739,000 and consist primarily of
professional consulting fees.
FINANCIAL INCOME AND OTHER, NET
Financial income and other, net, was $779,000 for the three months ended
March 31, 2003 and $1.0 million for the comparable quarter of 2002, representing
a decrease of $224,000, or 22%. The decrease is due to lower market interest
rates earned on our investments.
18
INCOME TAXES
Income tax expenses were $308,000 and $72,000 for the three months ended March
31, 2003 and 2002. The provision for income taxes as a percentage of income
before taxes was 36% and 10% for the three months ended March 31, 2003 and 2002,
respectively. The percentage increase was mainly a result of tax reform in
Israel which became effective on January 1, 2003.
LIQUIDITY AND CAPITAL RESOURCES
At March 31, 2003, our principal source of liquidity was $139 million of
cash and cash equivalents and marketable securities compared to $142 million at
March 31, 2002. As of March 31, 2003, we had $73,000 of long-term debt
outstanding relating to obligations under capital leases and an obligation for
severance pay to Israeli employees of $1.3 million that is fully provided for by
monthly deposits with severance pay funds, insurance policies and by an accrual.
As of March 31, 2003, our accumulated deficit was $21.3 million.
Net cash used in operating activities for the three months ended March 31,
2003 was $551,000 compared to $4.3 million in cash provided by operating
activities for the three months ended March 31, 2002. Net cash used in operating
activities for the three months ended March 31, 2003 was primarily the result of
an increase in trade and other receivables of $3.6 million. These items were
offset primarily by the net income for the period of $547,000, various non-cash
items of $2.0 million, and a $1.0 million increase in deferred revenue. Net cash
provided by operating activities for the three months ended March 31, 2002 was
primarily the result of net income for the period of $650,000, a $1.5 million
increase in employee and payroll accruals, various non-cash charges of $1.7
million, and an $889,000 increase in deferred revenue.
Net cash provided by investing activities was $2.5 million for the three
months ended March 31, 2003 compared to $3.8 million in cash used in investing
activities for the three months ended March 31, 2002. Investing activities for
the three months ended March 31, 2003 consisted of proceeds from the redemption
and sale of marketable securities of $22.4 million offset by purchases of
available-for-sale marketable securities of $18.7 million and an increase in
other receivables, non-current of $855,000. Investing activities for the three
months ended March 31, 2002 consisted of purchases of available-for-sale
marketable securities of $14.7 million and $1.0 million in goodwill and
intangible asset purchases, offset by proceeds from the sale and redemption of
marketable securities of $12.2 million. The majority of our capital investments
were for computers, peripheral equipment and software.
Net cash provided by financing activities was $1.6 million and $4.0
million for the three-month periods ended March 31, 2003 and 2002, respectively.
Net cash provided by financing activities for both the three months ended March
31, 2003 and 2002 were primarily from the proceeds from the exercise of options.
We believe that our existing cash equivalents and marketable securities
will be sufficient to meet our anticipated cash needs for working capital and
capital expenditures for at least the next 12 months. Thereafter, if we do not
have available sufficient cash to finance our operations, we may be required to
obtain additional debt or equity financing. We cannot be certain that we will be
able to obtain, if required, additional financing on acceptable terms, or at
all.
FACTORS AFFECTING FUTURE OPERATING RESULTS
This Form 10-Q contains forward-looking statements that involve risks and
uncertainties. These forward-looking statements include the ability to attract
customers for Precise's products, ability to execute as designed, acceptance of
Precise's products in the market place, ability to manage existing and future
strategic relationships, ability to successfully integrate the operations of
acquired companies, as well as statements regarding the financial performance,
strategy and plans of Precise. Precise's actual experience may differ materially
from those discussed in the forward-looking statements. Factors that might cause
such a difference include the size of the market; timing and acceptance of
Precise's products in the market
19
place; the future growth and acceptance of Precise's products in the market
place; Precise's ability to predict and respond to market developments; the
development, expansion and training of Precise's sales force; risks associated
with management of growth; risks associated with existing and future strategic
relationships and acquisitions; Precise being held liable for defects or errors
in its products; political, economic and business fluctuations in the United
States, Israel and Precise's international markets; as well as risks of
downturns in economic conditions generally or as a result of recent events, and
in the information technology and software industries specifically; and risks
associated with competition, and competitive pricing pressures. For a more
detailed description of the risk factors associated with Precise, please refer
to Precise's Annual Report on Form 10-K filed with the Securities and Exchange
Commission.
ITEM 3. QUALITATIVE AND QUANTITATIVE DISCLOSURE ABOUT MARKET RISK
We own financial instruments that are sensitive to market risks as part of
our investment portfolio. The investment portfolio is used to preserve our
capital until it is required to fund operations, including research and
development activities. None of these market-risk sensitive instruments are held
for trading purposes. We do not own derivative financial instruments in our
investment portfolio. 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 4. 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 the significant deficiencies and material weaknesses.
20
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Precise is not a party to any material pending legal proceedings, other
than ordinary routine litigation incidental to its business.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
99.1 Certification of Principal Executive Officer
99.2 Certification of Principal Financial Officer
(b) Precise filed a Current Report on Form 8-K on May 1, 2003 furnishing a press
release containing its financial results for the three months ended March
31, 2003.
21
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
PRECISE SOFTWARE SOLUTIONS LTD.
Date 5/14/03 By /s/ Shimon Alon
------------------- --------------------------------------------
Shimon Alon, Chief Executive Officer
Date 5/14/03 By /s/ Marc J. Venator
------------------- --------------------------------------------
Marc J. Venator, Chief Financial Officer
(Principal Financial and Accounting Officer)
22
CERTIFICATIONS
I, Shimon Alon, certify that:
1. I have reviewed this quarterly report on Form 10-Q of March 31, 2003;
2. Based on my knowledge, this quarterly 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 quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly 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
quarterly report;
4. The registrant's other certifying officers 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 quarterly
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 quarterly report (the "Evaluation Date"); and
(c) presented in this quarterly 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 officers 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 officers and I have indicated in this
quarterly 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.
/s/ Shimon Alon Date: May 14, 2003
- ---------------------------
Shimon Alon,
Chief Executive Officer
23
I, Marc Venator, certify that:
1. I have reviewed this quarterly report on Form 10-Q of March 31, 2003;
2. Based on my knowledge, this quarterly 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 quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly 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
quarterly report;
4. The registrant's other certifying officers 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 quarterly
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 quarterly report (the "Evaluation Date"); and
(c) presented in this quarterly 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 officers 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 officers and I have indicated in this
quarterly 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.
/s/ Marc J. Venator Date: May 14, 2003
- ---------------------------
Marc J. Venator,
Chief Financial Officer
24