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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
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FORM 10-Q
QUARTERLY REPORT UNDER SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE
ACT OF 1934.
For the quarterly period ended September 30, 2000
------------------
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934.
For the transition period from to
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Commission file number 0-30828
PRECISE SOFTWARE SOLUTIONS LTD.
-------------------------------
(Exact Name of Registrant as Specified in Its Charter)
Israel Not Applicable
------ --------------
(State or Other Jurisdiction (I.R.S. Employer Identification No.)
of Organization)
1 Hashikma Street
P.O. Box 88 Savyon, 56518 Israel
--------------------------------
(Address of Principal Executive Offices) (Zip Code)
Registrant's Telephone Number, Including Area Code 972-(3)-635-2566
Indicate by check |X| whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days Yes X No
--- ---
At November 12, 2000, 21,959,967 of the registrant's ordinary shares
(par value, 0.03 NIS per share) were outstanding.
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<PAGE>
FORM 10-Q
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2000
TABLE OF CONTENTS
PAGE
PART I: FINANCIAL INFORMATION
ITEM 1. Consolidated Financial Statements:
Condensed Consolidated Balance Sheets as of September 30, 2000
(unaudited) and December 31, 1999.................................. 5
Condensed Consolidated Statements of Operations (unaudited) for
the three months and nine months ended September 30, 2000 and 1999. 7
Consolidated Statements of Cash Flows (unaudited) for the nine
months ended September 30, 2000 and 1999........................... 8
Notes to Consolidated Financial Statements (unaudited)............. 10
ITEM 2 Management's Discussion and Analysis of Financial Condition
and Results of Operations.................................... 17
ITEM 3 Quantitative and Qualitative Disclosures About Market Risk... 20
PART II. OTHER INFORMATION
ITEM 1. Legal Proceedings............................................ 21
ITEM 2. Changes in Securities and Use of Proceeds.................... 21
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............................. 21
SIGNATURES................................................................... 22
*No information provided due to inapplicability of item.
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<PAGE>
PRECISE SOFTWARE SOLUTIONS LTD.
FORM 10-Q
QUARTER ENDED September 30, 2000
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
-3-
<PAGE>
PRECISE SOFTWARE SOLUTIONS LTD. AND SUBSIDIARIES
INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
AS OF SEPTEMBER 30, 2000
IN U.S. DOLLARS
UNAUDITED
-4-
<PAGE>
<TABLE><CAPTION>
PRECISE SOFTWARE SOLUTIONS LTD. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
----------------------------------------------------------------------------------------------
U.S. DOLLARS IN THOUSANDS
DECEMBER 31, SEPTEMBER 30,
1999 2000
------- -------
UNAUDITED
---------
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 6,693 $25,447
Short-term deposits 888 --
Marketable securities -- 29,149
Trade receivables, net of allowance for doubtful accounts
(1999 - $ 55, 2000 - $ 0) 3,767 3,507
Other accounts receivable 358 3,253
------- -------
Total current assets 11,706 61,356
------- -------
LONG-TERM INVESTMENT -- 25,981
------- -------
SEVERANCE PAY FUND 308 445
------- -------
PROPERTY AND EQUPIMENT, NET 972 1,994
------- -------
OTHER ASSETS, NET OF ACCUMULATED AMORTIZATION
(2000 - $ 55) -- 778
------- -------
$12,986 $90,554
======= =======
The accompanying notes are an integral part of the condensed consolidated financial statements.
</TABLE>
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<PAGE>
<TABLE><CAPTION>
PRECISE SOFTWARE SOLUTIONS LTD. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
----------------------------------------------------------------------------------------------
U.S. DOLLARS IN THOUSANDS
DECEMBER 31, SEPTEMBER 30,
1999 2000
--------- ---------
UNAUDITED
---------
<S> <C> <C>
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Trade payables $ 628 $ 1,894
Deferred revenues 1,535 2,154
Employees and payroll accruals 921 1,128
Accrued expenses 835 1,807
Other accounts payable 78 339
--------- ---------
Total current liabilities 3,997 7,322
--------- ---------
LONG-TERM LIABILITIES:
Long-term debt 199 --
Accrued severance pay 497 753
--------- ---------
Total long-term liabilities 696 753
--------- ---------
SHAREHOLDERS' EQUITY:
Preferred shares, Ordinary shares and additional paid-in capital 25,400 110,054
Deferred compensation (665) (3,915)
Accumulated other comprehensive loss -- (41)
Accumulated deficit (16,442) (23,619)
--------- ---------
Total shareholders' equity 8,293 82,479
--------- ---------
$ 12,986 $ 90,554
========= =========
The accompanying notes are an integral part of the condensed consolidated financial statements.
</TABLE>
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<PAGE>
<TABLE><CAPTION>
PRECISE SOFTWARE SOLUTIONS LTD. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
----------------------------------------------------------------------------------------------
U.S. DOLLARS IN THOUSANDS (EXCEPT PER SHARE DATA)
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
---------------------------- ----------------------------
1999 2000 1999 2000
------------ ------------ ------------ ------------
UNAUDITED
------------------------------------------------------------
<S> <C> <C> <C> <C>
Revenues:
Software licenses $ 2,585 $ 6,412 $ 6,598 $ 14,875
Services 484 1,227 1,170 3,051
------------ ------------ ------------ ------------
3,069 7,639 7,768 17,926
------------ ------------ ------------ ------------
Cost of revenues:
Software licenses 202 187 525 484
Services 196 407 422 1,174
------------ ------------ ------------ ------------
398 594 947 1,658
------------ ------------ ------------ ------------
Gross profit 2,671 7,045 6,821 16,268
------------ ------------ ------------ ------------
Operating expenses:
Research and development, net 691 1,386 2,113 3,437
Selling and marketing, net 1,969 5,478 5,117 13,787
General and administrative 389 1,273 1,129 2,640
Amortization of deferred
stock compensation 23 1,235 95 4,953
------------ ------------ ------------ ------------
Total operating expenses 3,072 9,372 8,454 24,817
------------ ------------ ------------ ------------
Operating loss (401) (2,327) (1,633) (8,549)
Financial income (expenses), net (4) 1,236 (21) 1,372
------------ ------------ ------------ ------------
Net loss $ (405) $ (1,091) $ (1,654) $ (7,177)
============ ============ ============ ============
Net loss per share:
Basic and diluted net loss per
share $ (0.12) $ (0.05) $ (0.5) $ (0.76)
============ ============ ============ ============
Weighted average number of shares used in
computing basic and diluted net loss per share 3,298,766 21,571,225 3,298,766 9,450,703
============ ============ ============ ============
The accompanying notes are an integral part of the condensed consolidated financial statements.
</TABLE>
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<PAGE>
<TABLE><CAPTION>
PRECISE SOFTWARE SOLUTIONS LTD. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
---------------------------------------------------------------------------------------------
U.S. DOLLARS IN THOUSANDS
NINE MONTHS ENDED
SEPTEMBER 30,
---------------------------
1999 2000
-------- --------
UNAUDITED
---------------------------
<S> <C> <C>
Cash flows from operating activities:
Net loss $ (1,654) $ (7,177)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization 135 404
Amortization of deferred stock compensation 95 4,953
Decrease (increase) in trade receivables, net (610) 703
Increase in other accounts receivable (258) (2,831)
Increase in trade payables 61 1,104
Increase in other accounts payable 471 1,734
Increase in accrued severance pay, net 46 119
Other 50 9
-------- --------
Net cash used in operating activities (1,664) (982)
-------- --------
Cash flows used in investing activities:
Purchase of property and equipment (213) (1,337)
Purchase of long-term investments -- (25,985)
Purchase of other assets -- (112)
Purchase of marketable securities -- (29,188)
Proceeds from sale of short-term deposits -- 888
Payment for acquisition of consolidated subsidiary (1) -- (507)
-------- --------
Net cash used in investing activities $ (213) $(56,241)
-------- --------
The accompanying notes are an integral part of the condensed consolidated financial statements.
</TABLE>
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<PAGE>
<TABLE><CAPTION>
PRECISE SOFTWARE SOLUTIONS LTD. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
----------------------------------------------------------------------------------------------
U.S. DOLLARS IN THOUSANDS
NINE MONTHS ENDED
SEPTEMBER 30,
-------------------------------------
1999 2000
---------------- ----------------
UNAUDITED
-------------------------------------
<S> <C> <C>
Cash flows from financing activities:
Short-term bank credit, net $ - $ (24)
Proceeds from issuance of shares, net 3,676 75,948
Proceeds from convertible shareholders' loan and exercise
of stock options - 304
Repayment of long-term debt (12) (251)
---------------- ----------------
Net cash provided by financing activities 3,664 75,977
---------------- ----------------
Increase in cash and cash equivalents 1,787 18,754
Cash and cash equivalents at the beginning of the period 844 6,693
---------------- ----------------
Cash and cash equivalents at the end of the period $ 2,631 $ 25,447
================ ================
(1) Payment for acquisition of subsidiary:
In February 2000, the Company acquired all of the outstanding shares of
Knight Fisk Software Ltd. The net fair value of the assets acquired and
liabilities assumed, at the date of acquisition as follows:
Working capital $ (8)
Fixed assets 41
Long-term loans and other (45)
Goodwill 718
----------------
706
Options granted (199)
----------------
$ 507
================
(2) Supplemental disclosure of cash flows information:
Cash paid during the period for:
Interest $ 16 $ 1
================ ================
Unrealized holding losses on available-for-sale securities $ - $ 43
================ ================
The accompanying notes are an integral part of the condensed consolidated financial statements.
</TABLE>
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<PAGE>
NOTE 1: BASIS OF PRESENTATION
The condensed consolidated financial statements have been prepared
by Precise Software Solutions Ltd., pursuant to the rules and
regulations of the Securities and Exchange Commission and include
the accounts of Precise Software Solutions Ltd. and its
wholly-owned subsidiaries (collectively, the "Company"). Certain
information and footnote disclosures, normally included in
financial statements prepared in accordance with generally
accepted accounting principles, have been condensed or omitted
pursuant to such rules and regulations. While 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
September 30, 2000 and the operating results and cash flows for
the three and nine months ended September 30, 2000 and 1999, 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 Registration Statement on Form
F-1 filed with the Securities and Exchange Commission.
The results of operations for the three months and nine months
ended September 30, 2000 are not necessarily indicative of results
that may be expected for any other interim period or for the full
fiscal year ending December 31, 2000.
NOTE 2: ACQUISITION OF KNIGHT FISK SOFTWARE LTD.
In February 2000, in consideration of $706 thousand, 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 subsequently
changed its name to Precise Software Solutions UK Ltd. ("Precise
UK"). The purchase price has been allocated to the fair value of
the tangible assets acquired and the liabilities assumed. The
acquisition was accounted under the purchase method. The excess of
the purchase price was allocated to goodwill.
PRO FORMA FINANCIAL INFORMATION:
The operations of Precise UK are included in the Company's
consolidated operating results from February 1, 2000. The
following unaudited pro forma information presents the results of
operations for the Company and Precise UK for the nine months
ended September 30, 2000 and 1999 and for the year ended December
31, 1999, as if the acquisition had been consummated as of January
1, 2000 and January 1, 1999, respectively. This pro forma
information does not purport to be indicative of what may occur in
the future:
<TABLE><CAPTION>
YEAR ENDED NINE MONTHS ENDED
DECEMBER 31, SEPTEMBER 30,
-------------------------------------
1999 1999 2000
----------------- ---------------- -----------------
UNAUDITED
-------------------------------------
<S> <C> <C> <C>
Total revenues $ 12,100 $ 8,201 $ 18,108
================= ================ =================
Net loss $ (3,027) $ (1,788) $ (7,099)
================= ================ =================
Basic and diluted net loss per share $ (0.92) $ (0.54) $ (0.75)
================= ================ =================
</TABLE>
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<PAGE>
NOTE 3: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
A. CASH, CASH EQUIVALENTS AND SHORT-TERM DEPOSITS:
The Company considers all highly liquid investment
securities with maturities from date of purchase of three
months or less to be cash equivalents, as well as
short-term deposits with maturities of more than three
months but less than one year.
B. LONG-TERM INVESTMENTS AND MARKETABLE SECURITIES:
Management determines the proper classification of
investments in obligations with fixed maturities and
marketable equity securities at the time of purchase and
reevaluates such designations as of each balance sheet
date. At September 30, 2000, all securities covered by SFAS
No. 115 "Accounting for Certain Investments in Debt and
Equity Securities" were designated as available for sale.
Accordingly, these securities are stated at fair value,
with unrealized gains and losses reported in a separate
component of shareholders' equity, accumulated other
comprehensive income (loss). Realized gains and losses on
sales of investments, as determined on a specific
identification basis, are included in the consolidated
statement of income.
C. OTHER ASSETS:
Licensing rights and goodwill are stated at amortized cost.
Amortization is calculated using the straight-line method
over their estimated useful life, which is four to ten
years.
D. REVENUE RECOGNITION:
Revenues from software sales are recognized in accordance
with SOP 97-2, as amended. License revenues are comprised
of perpetual license fees which are derived from contracts
with end-customers, and an original equipment manufacturer
("OEM"). The Company and its subsidiaries generally do not
grant rights of return. When right of return exists, the
Company and its subsidiaries defer the revenues until such
right expires. The Company is entitled to royalties from
the OEM upon the sublicensing of the Company's products to
end users. Royalties due from this OEM are recognized when
such royalties are reported to the Company upon the
sublicensing of the products by the OEM. License revenues
from sales to distributors, and end-customers are
recognized upon delivery of the software when collection is
probable; all license payments are due within one year; the
license fee is otherwise fixed or determinable;
vendor-specific objective evidence exists and persuasive
evidence of an arrangement exists.
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 support arrangements
are deferred and recognized on a straight-line basis as
service revenues over the life of the related agreement.
Consulting and training revenues are recognized at the time
the services are rendered. Customer advances and billed
amounts due from customers in excess of revenue recognized
are recorded as deferred revenues.
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<PAGE>
Where software arrangements involve multiple elements,
revenue is allocated to each element based on vendor
specific objective evidence ("VSOE") of the relative fair
values of each element in the arrangement in accordance
with the "Residual Method" prescribed by SOP 98-9. The
Company's 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 vendor-specific objective evidence of the fair
values of all the undelivered elements other than those
accounted for using long-term contract accounting, and (2)
all revenue recognition criteria of SOP 97-2, as amended,
are satisfied.
E. BASIC AND DILUTED NET LOSS PER SHARE:
Basic net loss per share is computed based on the weighted
average number of ordinary shares outstanding during each
period. Diluted net loss 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".
All convertible Preferred shares, outstanding stock
options, and warrants have been excluded from the
calculation of the diluted net loss per ordinary share
because all of these securities are anti-dilutive for all
periods presented.
Basic and diluted pro forma net loss per shares, as
presented in the statements of operations, has been
calculated as described above and also gives effect to the
automatic conversion of the convertible preferred shares
into ordinary shares using the as if-converted method.
The following table presents the calculation of unaudited
pro forma basic and diluted net loss per share (in
thousands, except share and per share data):
<TABLE><CAPTION>
THREE MONTHS NINE MONTHS
-------------------------------- -------------------------------
ENDED SEPTEMBER 30,
-----------------------------------------------------------------
1999 2000 1999 2000
--------------- -------------- -------------- --------------
UNAUDITED
-----------------------------------------------------------------
<S> <C> <C> <C> <C>
Net loss $ (405) $ (1,091) $ (1,654) $ (7,177)
=============== ============== ============== ==============
Pro forma:
Shares used in computing basic
and diluted net loss per share 3,298,766 21,571,225 3,298,766 9,450,703
Effect of assumed conversion of
convertible preferred shares 7,118,922 - 7,118,922 7,952,544
--------------- -------------- -------------- --------------
Shares used in computing pro
forma basic and diluted net loss
per share 10,417,688 21,571,225 10,417,688 17,403,247
=============== ============== ============== ==============
Pro forma basic and diluted net
loss per share $ (0.04) $ (0.05) $ (0.16) $ (0.41)
=============== ============== ============== ==============
</TABLE>
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<PAGE>
F. SHAREHOLDERS' EQUITY:
1. Automatic Conversion Upon IPO:
All preferred shares were automatically converted
into ordinary shares at the time of the Company's
Initial Public Offering ("IPO), which took place in
July 2000. Since then, the ordinary shares have been
traded on NASDAQ National Market in the United
States.
2. Reverse Split:
All share and per share data included in these
financial statements have been retroactively
adjusted to reflect a two-for-three reverse split as
approved by the Company's shareholders on April 12,
2000.
3. Stock options plans:
The following table summarized information about
stock options outstanding as of September 30, 2000:
<TABLE><CAPTION>
WEIGHTED AVERAGE
NUMBER OF OPTIONS EXERCISE PRICE
------------------ ------------------
<S> <C> <C>
Outstanding at December 31, 1999 3,681,044 $ 1.04
Granted 1,997,216 $ 12.64
Exercised (123,828) $ 0.81
Forfeited (107,172) $ 1.61
------------------ ------------------
Outstanding at September 30, 2000 5,447,260 $ 5.29
================== ==================
</TABLE>
G. SEGMENT, CUSTOMERS AND GEOGRAPHIC INFORMATION:
1. Summary information about geographical areas
(in thousands):
The Company operates in one industry segment, the
development and marketing of performance software
products. Operations in Israel include research and
development, selling and marketing. Operations in
the United States and in the United Kingdom include
selling and marketing. The following is a summary of
operations within geographic areas based on
customer's location.
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<PAGE>
<TABLE><CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
----------------------------- -------------------------------
1999 2000 1999 2000
------------- ------------- -------------- ---------------
UNAUDITED
--------------------------------------------------------------
<S> <C> <C> <C> <C>
Revenues from sales to unaffiliated
customers:
U.S.A. $ 1,977 $ 4,863 $ 4,786 $ 12,216
North and South America
(except U.S.A) 200 630 490 879
Japan 46 188 183 621
Far East (except Japan) 236 316 409 585
Europe and others 610 1,642 1,900 3,625
------------- ------------- -------------- ---------------
$ 3,069 $ 7,639 $ 7,768 $ 17,926
============= ============= ============== ===============
SEPTEMBER 30,
DECEMBER 31, -------------------------------
1999 1999 2000
------------- ------------- ---------------
UNAUDITED
-------------------------------
Long-lived assets, by geographic region:
Israel $ 477 $ 451 $ 825
United States 495 460 1,080
United Kingdom - - 89
------------- ------------- ---------------
$ 972 $ 911 $ 1,994
============= ============= ===============
2. Major customer data as a percentage of total revenues:
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
----------------------------- ------------------------------
1999 2000 1999 2000
-------------- ------------- ------------- -------------
UNAUDITED
---------------------------------------------------------------
Customer A 5.6% 3.7% 15.2% 5.2%
Customer B 1.5% 1.8% 2.4% 3.1%
Customer C - 27.6% 0.7% 26.2%
</TABLE>
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<PAGE>
H. IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS:
In June 1998, the Financial Accounting Standards Board
issued SFAS No. 133, "Accounting for Derivative Instruments
and Hedging Activities" ("SFAS No. 133") in June 1999 and
its amendments, statements 137 and 138, in June 1999 and
June 2000, respectively. These statements establish
accounting and reporting standards requiring that every
derivative instrument (including certain derivative
instruments embedded in other contracts) be recorded on the
balance sheet as either an asset or liability measured at
its fair value. These statements also require that changes
in the derivative's fair value be recognized currently in
earnings unless specific hedge accounting criteria are met.
Special accounting for qualifying hedges allows a
derivative's gains and losses to offset related results on
the hedged item in the income statement, and requires that
a company must formally document, designate, and assess the
effectiveness of transactions that receive hedge
accounting. The FASB has issued SFAS No. 137, "Accounting
for Derivative Instruments and Hedging Activities-Deferral
of the Effective Date of FASB Statement No. 133". The
Statement defers for one year the effective date of SFAS
No. 133. The rule applies to all fiscal quarters of all
fiscal years beginning after June 15, 2000. The Company
does not expect the impact of this new statement on the
Company's consolidated balance sheets or results of
operations to be material.
In March 2000, the Financial Accounting Statement Board
issued FASB Interpretation No. 44, "Accounting for Certain
Transactions Involving Stock Compensation", an
interpretation of APB Opinion No. 25 ("FIN 44"). The
Interpretation clarifies guidance for certain issues that
arose in application APB Opinion No. 25, "Accounting to
Stock Issued to Employees". The Interpretation applies to
all fiscal quarters of all fiscal years beginning after
July 1, 2000. The Company does not expect a material impact
of FIN 44 on the Company's consolidated balance sheets or
results of operations.
In December 1999, the Securities and Exchange Commission
("SEC") issued Staff Accounting Bulletin No. 101, "Revenue
Recognition in Financial Statements" ("SAB 101"), which
summarizes some of the staff's interpretations of the
application of generally accepted accounting principles to
revenue recognition. The Company does not expect a material
impact of SAB 101 on the Company's consolidated balance
sheets or result of operations.
I. SUBSEQUENT EVENTS (UNAUDITED):
1. In October 2000, the Company entered into an
agreement to acquire Savant Corporation (Savant).
The acquisition will expand the breadth and depth of
Precise's performance solutions allowing its
customers to improve business performance. The
consummation of the acquisition is subject to
regulatory approval and customary closing
conditions. The total purchase price payable
consists of $2.5 million in cash and 512,455
ordinary shares. In addition, Savant's shareholders
will have the right to receive additional ordinary
shares based on the achievement of certain post
acquisition revenue performance targets. The Company
has incurred approximately $300 thousand in expenses
related to the acquisition.
-15-
<PAGE>
The acquisition of Savant will be accounted for as a
purchase, with the result of Savant's operations
included in the Company's results of operations from
the date of acquisition. The following unaudited pro
forma information presents the results of operations
for the Company and Savant for the nine months ended
September 30, 1999 and 2000 as if the acquisition
had been consummated as of January 1, 1999 and
January 1, 2000, respectively (in thousands, except
per share amounts, unaudited):
NINE MONTHS ENDED
SEPTEMBER 30
------------------------------
1999 2000
------------- -------------
Revenue $ 10,460 $ 20,504
Net loss $ 3,921 $ 9,151
Basic and diluted
net loss per share $ 1.03 $ 0.92
The undaudited pro forma information is presented
for illustrative purposes only and is not
necessarily indicative of the operating results that
would have occurred had the transaction been
completed at the beginning of the earliest period
presented, nor is it necessarily indicative of
future operating results.
2. On October 30, 2000, the Company filed a
registration statement with the Securities and
Exchange Commission for a follow-on offering in
which 2,594,085 ordinary shares are being offered
for sale by the Company and 1,755,915 ordinary
shares are being offered by selling shareholders.
These securities may not be sold nor may offers to
buy be accepted prior to the time the registration
statement becomes effective.
-16-
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
This Form 10-Q contains certain statements of a forward-looking nature
relating to future events or the future financial performance of Precise
Software Solutions Ltd. ("Precise"). Precise's actual future results may differ
significantly from these statements. In evaluating these statements, the various
factors identified in the caption "Factors Affecting Future Operating Results"
should be considered.
OVERVIEW
Precise is a provider of software that assists organizations in
monitoring and optimizing the performance of their complex Information
Technology infrastructure. We were incorporated in Israel in November 1990.
Initially, we focused on developing and marketing performance management
software for mainframe computer systems. In 1995, we shifted our focus from
performance management software for mainframe systems to Information Technology
infrastructure performance management software for Oracle database environments.
In 1996, we released the initial version of our Precise/SQL software for
database monitoring. In 1998, we released several new products, including our
Precise/Pulse! software for proactive monitoring, Precise/Presto for EMC
software for monitoring database along with EMC storage systems and
Precise/Interpoint software for monitoring ERP applications. In 1999, we
introduced our Precise/SWIFT-E software for IT infrastructure performance
management in e-business environments and in April 2000, we introduced
Precise/Insight.
In October 2000, Precise entered into an agreement to acquire Savant
Corporation. The acquisition will expand the breadth and depth of Precise's
performance solutions allowing its customers to improve business performance.
The consummation of the acquisition is subject to regulatory approval and
customary closing conditions. The total purchase price payable consists of $ 2.5
million in cash and 512,455 ordinary shares. In addition, Savant Corporation's
shareholders will have the right to receive additional ordinary shares based on
the achievement of certain post-acquisition revenue performance targets.
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 $7.6 million for the three months
ended September 30, 2000 and $3.1 million for the comparable quarter of 1999,
representing an increase of $4.5 million, or 145%, and were $17.9 million for
the nine months ended September 30, 2000 and $7.8 million for the comparable
period of 1999, representing an increase of $10.1 million, or 130%.
Revenues from sales of software licenses were $6.4 million for the
three months ended September 30, 2000 and $2.6 million for comparable quarter of
1999, representing an increase of $3.8 million, or 146%, and were $14.9 million
for the nine months ended September 30, 2000 and $6.6 million for the comparable
period of 1999, representing an increase of $8.3 million, or 125%. The increase
in software license revenues during these periods are attributable to the
expansion of our direct sales force and indirect sales channels, and recurring
sales to our installed customer base.
Revenues from services were $1.2 million for the three months ended
September 30, 2000 and $0.5 million for the comparable quarter of 1999,
representing an increase of $0.7 million, or 140% and were $3 million for the
nine months ended September 30, 2000 and $1.2 million for the comparable period
of 1999, representing an increase of $1.8 million, or 150%. The increase in
service revenues during these periods are attributable to sales from our
recently established professional service department, additional maintenance
agreements resulting from new sales of software licenses and renewals of annual
maintenance agreements with existing customers.
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COST OF REVENUES
Cost of revenues consists of costs associated with generating software
license and service revenues. Cost of revenues was $0.6 million for the three
months ended September 30, 2000 and $0.4 million for the comparable quarter of
1999, representing an increase of $0.2 million, or 50%, and were $1.7 million
for the nine months ended September 30, 2000 and $0.9 million for the comparable
period of 1999, representing an increase of $0.8 million, or 89%. Cost of
revenues as a percentage of total revenues was 8% for the three months ended
September 30, 2000 and 13% for the comparable quarter of 1999 and was 10% for
the nine months ended September 30, 2000 and 12% for the comparable period of
1999.
Cost of software license revenues consists primarily of royalties to
the government of Israel as consideration for royalty-bearing marketing and
research and development grants received in previous years and, to a lesser
extent, production costs. Cost of software license revenues was $187,000 for the
three months ended September 30, 2000 and $202,000 for the comparable quarter of
1999, representing a decrease of $15,000, or 7%. The decrease is due to a
decrease in royalties accrued in connection with royalty-bearing marketing
grants, as these grants were fully expensed. We anticipate that royalty expenses
relating to research and development royalty bearing grants received will
decline commencing the first quarter of 2001. Cost of software license revenue
was $0.5 million for both the nine months ended September 30, 2000 and for the
comparable period of 1999. Cost of software license revenues as a percentage of
total software license revenues was 3% for the three months ended September 30,
2000 and 8% for the comparable quarter in 1999, and was 3% for the nine months
ended September 30, 2000 and 8% for the comparable period of 1999.
Cost of service revenues consists primarily of costs related to
personnel providing customer support and professional services. Cost of service
revenues was $0.4 million for the three months ended September 30, 2000 and $0.2
million for the comparable quarter of 1999, representing an increase of $0.2
million, or 100%, and was $1.2 million for the nine months ended September 30,
2000 and $0.4 million for the comparable period of 1999 representing an increase
of $0.8 million or 200%. Cost of service revenues as a percentage of service
revenues was 33% in the three months ended September 30, 2000 and 40% in the
comparable quarter of 1999, and was 40% in the nine months ended September 30,
2000 and 33% in the comparable period of 1999. The increases are due to costs
related to our professional services personnel who were hired during the later
half of 1999
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 $1.4 million for the three months ended September 30,
2000 and $0.7 million for the comparable period of 1999, representing an
increase of $0.7 million, or 100%, and were $3.4 million for the nine months
ended September 30, 2000 and $2.1 million for the comparable period of 1999
representing an increase of $1.3 million, or 62%. The increases were primarily
related to the increase in the number of software developers and quality
assurance personnel engaged in the continuing enhancement of our software suite.
Research and development expenses as a percentage of total revenues were 18% in
the three months ended September 30, 2000 and 23% in the comparable quarter of
1999, and were 19% for the nine months ended September 30, 2000 and 27% for the
comparable period of 1999. We expect the amount of research and development
expenses to increase as we extend the functionality and development of our
software and as we hire additional personnel.
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 $5.5 million for
the three months ended September 30, 2000 and $2.0 million for the comparable
quarter of 1999, representing an increase of $3.5 million, or 175%, and were
$13.8 million in the nine months ended September 30, 2000 and $5.1 million in
the comparable period of 1999, representing
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an increase of $8.7 million, or 171%. These increases are attributable to the
additional commission expenses from the increase in software license revenues,
increased travel expenditures, and an increase in payroll and related expenses
attributable to the increase in the number of people comprising our direct sales
force. Sales and marketing expenses as a percentage of total revenues were 72%
for the three months ended September 30, 2000 and 65% for the comparable period
of 1999, and were 77% for the nine months ended September 30, 2000 and 65% for
the comparable period of 1999. We expect the amount of sales and marketing
expenses to increase as we expand our geographic reach and hire additional
personnel.
GENERAL AND ADMINISTRATIVE
General and administrative expenses consist primarily of salaries and
other personnel-related expenses from our administrative and finance personnel,
facilities, computer equipment and professional services fees. General and
administrative expenses were $1.3 million for the three months ended September
30, 2000 and $0.4 million for the comparable quarter of 1999, representing an
increase of $0.9 million, or 225%, and were $2.6 million for the nine months
ended September 30, 2000 and $1.1 million for the comparable period of 1999,
representing an increase of $1.5 million, or 136%. These increases are
attributable to the increased personnel in our finance department and the
increase in professional fees. General and administrative expenses as a
percentage of total revenues were 17% for the three months ended September 30,
2000 and 13% for the comparable quarter in 1999, and were 15% for the nine
months ended September 30, 2000 and 14% for the comparable period of 1999. We
expect the amount of general and administrative expenses to increase for the
foreseeable future as we expand our administrative staff and continue to incur
expenses associated with being a public company, including the costs of annual
and periodic reporting and investor relations programs.
AMORTIZATION OF STOCK-BASED COMPENSATION
Our stock-based compensation expenses increased from $23,000 for the
three months ended September 30, 1999 to $1.2 million for the three months ended
September 30, 2000, and from $95,000 for the nine months ended September 30,
1999 to $5.0 million in the comparable period in 2000 due to additional
amortization of deferred compensation recorded on stock options granted prior to
our initial public offering during the three months and the nine months ended
September 30, 2000. The deferred compensation is amortized over the vesting
schedule of the underlying options, generally three to four years. We had $3.9
million of deferred compensation at September 30, 2000.
LIQUIDITY AND CAPITAL RESOURCES
Since our inception, we have funded our operations primarily through
the sale of our equity securities, the issuance of convertible notes to
shareholders and, to a lesser extent, borrowings from financial institutions.
Through September 30, 2000, our sales of securities resulted in net proceeds of
approximately $110 million. As of September 30, 2000, our principal source of
liquidity was $54.6 million of cash and cash equivalents and short-term
investments. As of September 30, 2000, our accumulated net deficit was $23.6
million.
Net cash used in operating activities for the nine months ended
September 30, 2000 and 1999 was $1 million and $ 1.7 million, respectively. Net
cash used in operating activities in the nine months ended September 30, 2000
was primarily the result of net losses and increase in trade receivables that
were offset in part by the increase in accounts payable and amortization of
deferred stock compensation. Net cash used in operating activities in the nine
months ended September 30, 1999 was primarily the result of net losses and the
increase in trade receivables that was in part offset by the increase of trade
payables.
Net cash used in investing activities was $56.2 million and $0.2
million in the nine months ended September 30, 2000 and 1999, respectively.
Investing activities in the nine months ended September 30, 2000 consisted of
capital expenditures, purchases of short-term and long-term investments and the
payment
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for the acquisition of Knight Fisk. Investing activities in the nine months
ended September 30, 1999 consisted of capital expenditures.
Net cash provided by financing activities was $76 million, and $3.7
million in the nine months ended September 2000 and 1999, respectively. Net cash
provided by financing activities in the nine months ended September 30, 2000
resulted primarily from the net proceeds of our initial public offering in July
2000. Cash provided by financing activities in the nine months ended September
30, 1999 resulted primarily from proceeds from private placements of our
securities.
We believe that the net proceeds to Precise from the offering, together
with our existing cash equivalents, and short-term investments, 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 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 management's plans
and objectives for future operations, as well as statements regarding the
strategy and plans of Precise and Precise's acquisition of Savant. 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, timing and recognition of revenue from major customers; the status of
Precise's continuing relationship with Oracle; the continued development of the
market for Oracle databases and related applications software; market acceptance
of new product offerings and Precise's ability to predict and respond to market
developments; the completion of Precise's acquisition of Savant and the
integration and further development of Savant's products; the failure to keep
pace with the rapidly changing requirements of its customers; Precise's ability
to attract and retain key personnel; the development and expansion of Precise's
direct sales force; risks associated with management of growth, including
integration of Savant; Precise being held liable for defects or errors in its
products; political, economic and business fluctuations in Israel and Precise's
international markets; as well as risks of downturns in economic conditions
generally, 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 Registration Statement on Form F-1 on file
with the Securities and Exchange Commission.
ITEM 3. QUALITATIVE AND QUANTITATIVE DISCLOSURE ABOUT MARKET RISK
We own financial instruments that are sensitive to market risks as part
of our investment portfolio. The investment portfolio is used to preserve our
capital until it is required to fund operations, including research and
development activities. None of these market-risk sensitive instruments are held
for trading purposes. We do not own derivative financial instruments in our
investment portfolio. The investment portfolio contains instruments that are
subject to the risk of a decline in interest rates.
Our investment portfolio includes debt instruments that are United
States government obligations. These investments are subject to interest rate
risk, and could decline in value if interest rates fluctuate. We do not engage
in currency hedging activities and hold no foreign currency related derivative
instruments that would subject our financial condition or results of operations
to risks associated with foreign currency exchange rate fluctuations. We do,
however, incur a portion of our expenditures in foreign currencies, such as NIS
and British pound sterling, that could cause our results of operations to
fluctuate.
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PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Precise is not a party to any material pending legal proceedings, other
than ordinary routine litigation incidental to its business.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
The following options, granted pursuant to the Company's option plans,
were exercised during the period covered by this report: on July 5, 2000,
options to purchase 8,333 ordinary shares were exercised; on July 13, 2000,
options to purchase 751 ordinary shares were exercised; on July 26, 2000,
options to purchase 25,000 ordinary shares were exercised; on August 17, 2000,
options to purchase 23,243 ordinary shares were exercised; and on September 11,
2000, options to purchase 1,333 ordinary shares were exercised.
On June 29, 2000, we commenced an initial public offering of 4,250,000
ordinary shares, 0.03 NIS par value per share, pursuant to a final prospectus
dated June 29, 2000. The prospectus was contained in the Company's registration
statement on Form F-1, (SEC File No. 333-11992), covering 4,250,000 ordinary
shares plus an additional 637,500 ordinary shares to cover over-allotments by
the underwriters. The registration statement was declared effective by the
Securities and Exchange Commission on June 29, 2000. The offering closed on July
6, 2000 and the aggregate offering price to the public was $68.0 million. The
over-allotment closed on July 13, 2000 and the aggregate over-allotment price to
the public was $10.2 million. The aggregate amount of expenses incurred by the
Company in connection with the issuance and distribution of the ordinary shares
of sold in the offering were approximately $7.1 million, including approximately
$5.5 million in underwriting discounts and $1.6 million in other expenses.
Proceeds to Precise, after deduction of expenses, was $71.1 million. None of the
expenses incurred by Precise in connection with the offering represented
payments, direct or indirect, to directors, officers, persons owning 10% or more
of the equity securities of Precise, or affiliates of Precise. Merrill Lynch &
Co., CIBC World Markets and Wit SoundView acted as underwriters for the initial
public offering. The primary purposes of the initial public offering were to
obtain additional capital, create a public market for Precise's common stock,
provide liquidity to existing stockholders and optionholders, create a currency
for future acquisitions and facilitate future access to public markets. A total
of $208,000 of the proceeds were used to retire indebtedness of Precise, and the
remainder of proceeds are intended to be used for working capital and general
corporate purposes.
Other than our initial public offering, all such issuances of
securities of Precise during the quarter ending September 30, 2000 were made in
reliance on Section 4(2), Rule 701 and/or Regulation D under the Securities Act
of 1933, as amended.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
Exhibit 27.1 Financial Data Schedule (EDGAR filing only)
Precise did not file any current reports on Form 8-K during the quarter
ended September 30, 2000.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
PRECISE SOFTWARE SOLUTIONS LTD.
Date 11/14/00 By /s/ Shimon Alon
-------------------- --------------------------------------------------
Shimon Alon, Chief Executive Officer and President
Date 11/14/00 By /s/ J. Benjamin H. Nye
-------------------- ---------------------------------------------------
J. Benjamin H. Nye, Chief Financial Officer
Date 11/14/00 By /s/ Dror Elkayam
-------------------- ---------------------------------------------------
Dror Elkayam, Chief Accounting Officer
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