<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 1998
(mark one)
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
- --- SECURITIES EXCHANGE ACT OF 1934
- --- TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES AND EXCHANGE ACT OF 1934
For the transition period from _______________ to __________________
Commission File Number 0-23852
PROJECT SOFTWARE & DEVELOPMENT, INC.
(Exact name of registrant as specified in its charter)
MASSACHUSETTS 04-2448516
(State or other jurisdiction (I.R.S employer
incorporation or organization) identification number)
100 CROSBY DRIVE, BEDFORD MASSACHUSETTS 01730
(Address of principal executive offices, including zip code)
(formerly at 20 University Road
Cambridge, MA 02138)
(781) 280-2000
(Registrant's telephone number, including area code)
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
--- ---
Number of shares outstanding of the Registrant's common stock as of the latest
practicable date: 9,995,951 shares of common stock, $.01 par value per share, as
of July 31, 1998.
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PROJECT SOFTWARE & DEVELOPMENT, INC.
10-Q INDEX
PAGE
- ----
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS PAGE
Consolidated Balance Sheets (unaudited) as of
June 30, 1998 and September 30, 1997. 3
Consolidated Statements of Operations (unaudited) for
the three and nine months ended June 30, 1998 and 1997. 4
Consolidated Statements of Cash Flows (unaudited) for
the nine months ended June 30, 1998 and 1997. 5
Notes to Consolidated Financial Statements (unaudited). 6
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS 11
PART II. OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY 31
HOLDERS
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K 31
SIGNATURE 33
2
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PROJECT SOFTWARE & DEVELOPMENT, INC.
CONSOLIDATED BALANCE SHEETS
(unaudited)
<TABLE>
<CAPTION>
JUNE 30, SEPTEMBER 30,
1998 1997
-------- -------------
<S> <C> <C>
ASSETS
(IN THOUSANDS,EXCEPT SHARE DATA)
Current assets:
Cash and cash equivalents $ 20,802 $ 25,964
Marketable securities 38,414 38,299
Accounts receivable, trade, less allowance
for doubtful accounts of $2,328 at June 30,
1998 and $2,286 at September 30, 1997, respectively 29,325 24,021
Prepaid expenses 3,252 1,877
Other assets 1,045 1,244
Deferred income taxes 1,596 1,806
-------- --------
Total current assets 94,434 93,211
-------- --------
Property and equipment, net 9,373 7,322
Computer software costs, net 383 --
Goodwill, net 1,175 1,447
Deferred income taxes 333 214
Other assets 56 45
-------- --------
Total assets $105,754 $102,239
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 9,718 $ 9,809
Accrued compensation 3,725 4,494
Income taxes payable 3,228 3,678
Deferred revenue 12,315 9,750
Deferred income taxes 155 394
-------- --------
Total current liabilities 29,141 28,125
-------- --------
Deferred income taxes 451 12
Deferred rent 103 12
Deferred revenue 84 120
Commitments and contingencies
STOCKHOLDERS' EQUITY
Preferred stock, $.01 par value;1,000,000 authorized,
none issued and outstanding -- --
Common stock, $.01 par value;15,350,000 authorized;
issued and outstanding 9,995,621 and 9,856,474 for
June 30, 1998 and September 30, 1997, respectively 100 99
Additional paid-in capital 49,603 48,163
Retained earnings 27,313 26,108
Cumulative translation adjustment (649) (629)
Net unrealized (loss)/gain on marketable securities (392) 229
-------- --------
Total stockholders' equity 75,975 73,970
-------- --------
Total liabilities and stockholders' equity $105,754 $102,239
======== ========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
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<TABLE>
<CAPTION>
PROJECT SOFTWARE & DEVELOPMENT, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
THREE MONTHS ENDED NINE MONTHS ENDED
JUNE 30, JUNE 30,
----------------------------- ------------------------------
1998 1997 1998 1997
<S> <C> <C> <C> <C>
(IN THOUSANDS, EXCEPT SHARE AND
PER SHARE DATA)
Revenues:
Software $ 13,754 $ 11,277 $ 38,150 $ 36,165
Support and services 17,496 12,375 46,450 33,052
------------ ----------- ------------ ------------
Total revenues 31,250 23,652 84,600 69,217
------------ ----------- ------------ ------------
Cost of revenues:
Software 1,147 747 2,976 1,998
Support and services 9,038 6,293 23,658 17,475
------------ ----------- ------------ ------------
Total cost of revenues 10,185 7,040 26,634 19,473
------------ ----------- ------------ ------------
Gross margin 21,065 16,612 57,966 49,744
Operating expenses:
Sales and marketing 9,856 8,337 27,027 23,908
Product development 3,622 2,873 9,391 8,247
General and administrative 2,411 2,129 7,106 7,088
Charge for purchased in-process
product development --- --- 9,172 ---
------------ ----------- ------------ ------------
Total operating expenses 15,889 13,339 52,696 39,243
------------ ----------- ------------ ------------
Income from operations 5,176 3,273 5,270 10,501
Interest income (expense), net 659 752 2,055 1,698
Other income (expense), net (100) (122) (331) (263)
------------ ----------- ------------ ------------
Income before income taxes 5,735 3,903 6,994 11,936
Provision for income taxes 2,052 1,413 5,789 4,381
------------ ----------- ------------ ------------
Net income $ 3,683 $ 2,490 $ 1,205 $ 7,555
============ =========== ============ ============
Net income per share, basic $ 0.37 $ 0.2 $ 0.12 $ 0.77
------------ ----------- ------------ ------------
Net income per share, diluted $ 0.36 $ 0.2 $ 0.12 $ 0.75
------------ ----------- ------------ ------------
Shares used to calculate net
income per share
Basic 9,971,370 9,826,396 9,915,800 9,767,357
Diluted 10,121,729 9,971,731 10,077,254 10,077,804
Supplemental Data: (1)
Adjusted operating income $ 5,176 $ 3,273 $ 14,442 $ 10,501
Adjusted net income applicable to $ 3,683 $ 2,490 $ 10,377 $ 7,555
shareholders
Shares used to calculate net income 10,121,729 9,971,731 10,077,254 10,077,804
per share, diluted
Adjusted net income per share, diluted $ 0.36 $ 0.25 $ 1.03 $ 0.75
(1) Excludes charge for purchased in-process product development.
The accompanying notes are an integral part of the consolidated financial statements.
</TABLE>
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PROJECT SOFTWARE & DEVELOPMENT, INC
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
NINE MONTHS ENDED NINE MONTHS ENDED
JUNE 30, JUNE 30,
1998 1997
(IN THOUSANDS)
<S> <C> <C>
Cash flows from operating activities:
Net income $ 1,205 $ 7,555
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 3,087 2,521
Loss on sale and disposal of property
and equipment --- 37
Amortization of discount on marketable securities 84 315
Deferred rent 91 (51)
Deferred taxes 287 54
Charge for purchased in-process product development 9,184 ---
Changes in operating assets and liabilities, net
of effect of acquisitions:
Accounts receivable (5,230) 4,306
Prepaid expenses (1,360) (55)
Other assets 183 (548)
Accounts payable (1,515) (716)
Accrued compensation (723) (1,901)
Income taxes payable (437) 813
Deferred revenue 2,626 1,018
-------- ---------
Net cash provided by operating activities 7,482 13,348
-------- ---------
Cash flows from investing activities:
Acquisitions of business, net of cash (7,466) ---
Acquisitions of property and equipment (3,571) (3,049)
Additions to computer software costs (1,081) (88)
Purchase of marketable securities (66,605) (102,525)
Sale of marketable securities 65,785 101,874
-------- ---------
Net cash used in investing activities (12,938) (3,788)
-------- ---------
Cash flows from financing activities:
Payments on bank loans (467) ---
Payments of debenture (1,050) ---
Proceeds from exercise of stock options
including related tax benefit 1,442 2,580
-------- ---------
Net cash (used in)/provided by financing activities (75) 2,580
-------- ---------
Effect of exchange rate changes on cash 369 (451)
-------- ---------
Net (decrease) increase in cash and cash equivalents (5,162) 11,689
Cash and cash equivalents, beginning of period 25,964 9,097
-------- ---------
Cash and cash equivalents, end of period $ 20,802 $ 20,786
======== =========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
5
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PROJECT SOFTWARE & DEVELOPMENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
A. BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements include the
accounts of Project Software & Development, Inc. (PSDI) and its majority-owned
subsidiaries (collectively, the "Company"), as of June 30, 1998 and have been
prepared by the Company in accordance with generally accepted accounting
principles for interim reporting and with the instructions to Form 10-Q and
Article 10 of Regulation S-X. All intercompany accounts and transactions have
been eliminated. In the opinion of management, the accompanying unaudited
consolidated financial statements contain all adjustments, consisting only of
those of a normal recurring nature, necessary for a fair presentation of the
Company's financial position, results of operations and cash flows at the dates
and for the periods indicated. The results of operations for the periods
presented herein are not necessarily indicative of the results of operations to
be expected for the entire fiscal year, which ends on September 30, 1998, or for
any other future period.
These consolidated financial statements should be read in conjunction with the
consolidated financial statements and notes thereto for the year ended
September 30, 1997 included in the Company's Annual Report on Form 10-K filed
with the Securities and Exchange Commission on December 29, 1997.
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
B. INCOME PER SHARE
Basic earnings per share is computed by dividing income available to common
shareholders by the weighted average number of common shares outstanding.
Diluted earnings per share is computed by dividing income available to common
shareholders by the weighted average common shares outstanding plus additional
common shares that would have been outstanding if dilutive potential common
shares had been issued. For purposes of this calculation, stock options are
considered common stock equivalents in periods in which they have a dilutive
effect.
Statement of Financial Accounting Standards No. 128, "Earnings Per Share
(SFAS 128) replaces APB Opinion No. 15, Earnings Per
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Share. SFAS 128 simplifies the computation of EPS by replacing the presentation
of primary EPS with a presentation of basic EPS. It requires dual presentation
of basic and diluted EPS by entities with complex capital structures. The
Company adopted SFAS 128 per the effective date for the periods ended after
December 15, 1997.
Basic and diluted earnings per share are calculated as follows:
<TABLE>
<CAPTION>
THREE MONTHS ENDED
BASIC EPS 06/30/98 06/30/97
- ---------------------------------------------------------------------------
<S> <C> <C>
Net income $ 3,682,532 $ 2,490,478
Weighted average common shares outstanding 9,971,370 9,826,396
Basic income per share $ 0.37 $ 0.25
DILUTED EPS
- ---------------------------------------------------------------------------
Net income $ 3,682,532 $ 2,490,478
Weighted average common shares outstanding 9,971,370 9,826,396
Common stock equivalents 150,359 145,335
-----------------------------
Total diluted shares 10,121,729 9,971,731
Diluted income per share $ 0.36 $ 0.25
</TABLE>
<TABLE>
<CAPTION>
NINE MONTHS ENDED
BASIC EPS 06/30/98 06/30/97
- ---------------------------------------------------------------------------
<S> <C> <C>
Net income $ 1,204,524 $ 7,555,034
Weighted average common shares outstanding 9,915,800 9,767,357
Basic income per share $ 0.12 $ 0.77
DILUTED EPS
- ---------------------------------------------------------------------------
Net income $ 1,204,524 $ 7,555,034
Weighted average common shares outstanding 9,915,800 9,767,357
Common stock equivalents 161,454 310,447
-----------------------------
Total diluted shares 10,077,254 10,077,804
Diluted income per share $ 0.12 $ 0.75
</TABLE>
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C. ACCOUNTING STANDARDS
Statement of Financial Accounting Standards No. 130, "Reporting Comprehensive
Income" (SFAS 130) is effective for fiscal years beginning after December 15,
1997. SFAS 130 requires that changes in comprehensive income be shown in a
financial statement that is displayed with the same prominence as other
financial statements. The Company will adopt SFAS 130 in fiscal year ended
September 30, 1999.
Statement of Financial Accounting Standards No. 131, "Disclosures about Segments
of an Enterprise and Related Information" (SFAS 131) is effective for financial
statements for periods beginning after December 15, 1997. This statement will
change the way companies report annual financial statements and requires them to
report selected segment information in their quarterly reports issued to
shareholders. It also requires entity-wide disclosures about the products and
services an entity provides, the material countries in which it holds assets and
reports revenues, and its major customers. The Company will adopt SFAS 131 for
the current fiscal year ended September 30, 1998.
Statement of Financial Accounting Standards No. 132, "Employers' Disclosure
about Pensions and Other Postretirement Benefits" (SFAS 132) is effective for
financial statements for fiscal years beginning after December 15, 1997. SFAS
132 revises employers' disclosures about pension and other postretirement
benefit plans. It does not change the measurement or recognition of those plans.
The Company will adopt SFAS 132 in the fiscal year ended September 30, 1999.
Statement of Financial Accounting Standards No. 133 on accounting for derivative
instruments and hedging activities was adopted in June 1998. It becomes
effective for fiscal years beginning after June 15, 1999, with earlier adoption
encouraged. The new standard requires companies to record derivatives on the
balance sheet as assets or liabilities, measured at fair value. Gains or losses
resulting from changes in the values of those derivatives would be accounted for
depending on the use of the derivatives and whether they qualify for hedge
accounting. The key criterion for hedge accounting is that the hedging
relationship must be highly effective in achieving offsetting changes in fair
value or cash flows. The Company will adopt SFAS 133 in the fiscal year ended
September 30, 2000.
Statement of Position ("SOP") 97-2, "Software Revenue Recognition" was issued in
October 1997 and addresses software revenue recognition matters. The SOP
supersedes SOP 91-1 and is effective for transactions entered into for fiscal
years beginning after December 15, 1997. In March 1998, the adoption date of
certain provisions of SOP No. 97-2 were postponed. Based
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upon its reading and interpretation of SOP 97-2 the Company believes its current
revenue recognition policies and practices are materially consistent with the
SOP.
D. COMPUTER SOFTWARE COSTS
Internally developed software costs capitalized were $0 and $675,000 for the
three and nine months ended June 30, 1998. There were no software costs
capitalized in the three and nine months ended June 30, 1997. Amortization
expense was $135,000 and $106,000 for the three months ended June 30, 1998 and
1997, respectively, and $293,000 and $360,000 for the nine months ended June 30,
1998 and 1997, respectively. Software costs are amortized on a straight-line
basis over the estimated useful or market life of the software (generally,
fifteen months).
E. ACQUISITIONS
On February 6, 1998, the Company acquired the stock of A.R.M. Group Inc.,
Ontario, Canada for the sum of $10.3 million in cash, stock and assumed
liabilities. A.R.M. Group Inc. was a privately-held organization that helped
businesses solve maintenance and materials management problems. A.R.M launched
the M|Net solution and emerged as a leader in shared inventory networks over
which distributors, manufacturers and purchasers of Maintenance Repair
Operations (MRO) supplies conduct their business. The Company recorded the
acquisition using the purchase method of accounting with $9.2 million of the
purchase price allocated to in-process product development and charged to the
consolidated statement of operations on March 31, 1998, $452 thousand allocated
to purchased technology, and $657 thousand allocated to tangible assets. The
Company determined that certain aspects of the acquired technology had not
reached technological feasibility and had no alternative future use. The Company
expensed the portion of the purchase price allocable to such in-process product
development at the date of acquisition. The operating results of this acquired
business has been included in the consolidated statement of operations from the
date of acquisition.
F. SUPPLEMENTAL CASH FLOW DISCLOSURES
Cash paid for interest and taxes were as follows:
Nine Months Ended
------------------
(in thousands) 1998 1997
------- ------
Interest......................................... $ 11 $ 4
Income taxes..................................... 4,753 2,423
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Acquisitions of businesses were as follows:
Nine Months Ended
------------------
(in thousands) 1998 1997
------- ------
Fair value of assets acquired.................... $10,280 $ ---
Fair value of liabilities assumed................ 2,751 ---
Net cash payments................................ 6,400 ---
10
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
FORWARD-LOOKING STATEMENTS
In addition to historical information this Quarterly Report contains
forward-looking statements. The forward-looking statements are subject to
certain risks and uncertainties that could cause actual results to differ
materially from those reflected in such forward-looking statements. Factors that
might cause such a difference include, but are not limited to, those discussed
in the section entitled "Management's Discussion and Analysis of Financial
Condition and Results of Operations--Factors Affecting Future Performance."
Readers are cautioned not to place undue reliance on these forward-looking
statements, which reflect management's opinions only as of the date hereof. The
Company undertakes no obligation to revise or publicly release the results of
any revision to these forward-looking statements. Readers should carefully
review the risk factors described in other documents of the Company files from
time to time with the Securities and Exchange Commission, including the Annual
Report on Form 10-K for the fiscal year ended September 30, 1997 and the
Quarterly Reports on Form 10-Q filed by the Company in fiscal 1998.
OVERVIEW
The Company develops, markets and supports enterprise asset maintenance software
used by businesses, government and other organizations to improve the
productivity of facilities, plants and production equipment. The Company's
revenues are derived primarily from two sources: software licenses and fees for
services, including support contracts, training and consulting services and
connect fees for on-line charges to engage in electronic commerce for
Maintenance Repair Operations ("MRO") supplies.
The Company's principal products are its client/server versions of MAXIMO.
Client/server MAXIMO runs on Oracle 7 and 8, SQLServer, SQLBase and SYBASE
platforms. The product acquired as a result of the acquisition of Maintenance
Automation Corporation ("MAC") on March 1, 1996, MAXIMO ADvantage, is intended
for the lower-end maintenance market. MAXIMO ADvantage supports Microsoft Access
for the single user, PC LAN segment.
The Company made the English language version of MAXIMO 4.0 generally available
in March 1998 for new clients. The release of MAXIMO 4.0 combines an open
architecture with self-service Java components and enhanced safety work
management and materials management features, which helps organizations better
manage maintenance operations and prevent equipment disruptions and down time.
MAXIMO 4.0 includes safety and compliance features so that
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companies can implement in-depth tracking and reporting processes that adhere to
mandated regulatory guidelines.
Over the next two quarters of calendar year ended 1998, the Company will be
offering pre-configured applications with industry specific MAXIMO modules
packaged into the base product. The new offerings will be priced competitively
and will be supported by standard implementation packages tailored specifically
for facilities, mid-tier manufacturing and companies with sophisticated fleet
management needs. MAXIMO for Facilities, MAXIMO for Industry, and MAXIMO
Enterprise for Transportation was made generally available in July 1998 and
MAXIMO Enterprise for Utilities, MAXIMO Enterprise for Energy, MAXIMO Enterprise
for Process, and MAXIMO Enterprise for Telecommunications will be available in
the fall of 1998. (1)
The Company's other client/server product, P/X, is no longer actively sold or
marketed. The Company also no longer actively markets its mainframe and other
project management software products. However, the Company does provide
technical support and other services to the P/X and mainframe installed customer
base.
ACQUISITIONS
On February 6, 1998, the Company acquired the stock of A.R.M. Group Inc.,
Ontario, Canada for the sum of $10.3 million in cash, stock and assumed
liabilities. A.R.M. Group Inc. was a privately-held organization that helped
businesses solve maintenance and materials management problems. A.R.M launched
the M|Net solution and emerged as a leader in shared inventory networks over
which distributors, manufacturers and purchasers of MRO supplies conduct their
business. The Company recorded the acquisition using the purchase method of
accounting with $9.2 million of the purchase price allocated to in-process
product development and charged to the consolidated statement of operations on
March 31, 1998, $452 thousand allocated to purchased technology, and $657
thousand allocated to tangible assets.
- -----------------------------
(1) Forward looking statement
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RESULTS OF OPERATIONS
THREE MONTHS ENDED JUNE 30, 1998 COMPARED TO THREE MONTHS ENDED JUNE 30, 1997
<TABLE>
<CAPTION>
REVENUES
Three CHANGE % Three
Months Months
Ended Ended
(in thousands) 06/30/98 06/30/97
- ----------------------------------------------------------------------------
<S> <C> <C> <C>
Software licenses $13,754 22.0% $11,277
Percentage of total revenues 44.0% 47.7%
Support and services $17,496 41.4% $12,375
Percentage of total revenues 56.0% 52.3%
Total revenues $31,250 32.1% $23,652
</TABLE>
The growth in total revenues is generated from the Company's MAXIMO software and
related support and services. A significant portion of the Company's total
revenues are derived from operations outside the United States. Revenues from
sales outside the United States increased 38.7% to $13.9 million or 44.5% of
total revenues for the three months ended June 30, 1998, compared to
$10.0 million or 42.4% of total revenues for the three months ended June 30,
1997.
Revenues from the client/server versions of MAXIMO increased 36.4% to $29.2
million or 93.3% of total revenues for the three months ended June 30, 1998
compared to $21.4 million or 90.5% of total revenues for the three months ended
June 30, 1997. The increase in MAXIMO client/server revenues for the quarter is
attributable to an increase in support and services and the average selling
price due to an increase in the average number of users licensed and the general
availability of MAXIMO Release 4.0 in English. Also, during the current quarter,
the Company concluded a multimillion dollar agreement which contributed $2.8
million in license revenues for this quarter. This agreement will provide
additional software, services and support revenues to the Company over a three
year period.(1)
Revenues from MAXIMO ADvantage decreased 19.9% to 3.8% of total revenues for the
three months ended June 30, 1998 compared to 6.2% of total revenues for the
three months ended June 30, 1997. The Company has reduced the sales force size
to improve the profitability of this business unit.
- -----------------------------
(1) Forward looking statement
13
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Revenues from licenses of P/X and from related support and services decreased
32.2% to 1.2% of total revenues for the three months ended June 30, 1998
compared to 2.3% of total revenues for the three months ended June 30, 1997. The
Company no longer focuses on selling and marketing this product.
The Company recognized revenues of $438 thousand for the quarter for its new
electronic commerce product, M|Net, acquired as a result of the A.R.M. Group
Inc. acquisition on February 6, 1998.
The increase in support and services revenues is attributable to increases in
both MAXIMO support contracts and consulting services. Consulting services
continue to be a larger percentage of total revenues due to additional service
demands in connection with large scale implementations of the Company's MAXIMO
client/server product. Currently, approximately 90% of all MAXIMO client/server
customers renew their maintenance contracts.
<TABLE>
<CAPTION>
COST OF REVENUES
Three CHANGE % Three
Months Months
Ended Ended
(in thousands) 06/30/98 06/30/97
- ----------------------------------------------------------------------------
<S> <C> <C> <C>
Software licenses $1,147 53.5% $747
Percentage of software licenses 8.3% 6.6%
Support and services $9,038 43.6% $6,293
Percentage of support and services 51.7% 50.9%
Total cost of revenues $10,185 44.7% $7,040
Percentage of total revenues 32.6% 29.8%
</TABLE>
Cost of software revenues consists of royalties paid to vendors of third party
software, the amortization of capitalized software, the cost of software product
packaging and media, and certain employee costs related to software duplication,
packaging and shipping. The increase in the cost of software revenues is due
primarily to royalties paid to third party vendors for software and costs for
third party software products. Also contributing to the increase is a one time
write off of $140 thousand for a prepaid software royalty. The Company
determined that the third party licensed software would not operate in an
integrated enterprise environment.
Cost of support and services consists primarily of personnel costs for employees
and the related costs of benefits and facilities. The increase in the cost of
support and services is attributable to the hiring of employees and the
extensive use of third-party consultants contracted to perform services for the
Company. The Company utilizes the services of these higher cost third party
consultants in order to meet the services backlog.
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The cost of the services component as a percentage of services revenues
increased to 68.4% from 68.1% for the three months ended June 30, 1998 and 1997,
respectively.
<TABLE>
<CAPTION>
OPERATING EXPENSES
Three CHANGE % Three
Months Months
Ended Ended
(in thousands) 06/30/98 06/30/97
- ----------------------------------------------------------------------------
<S> <C> <C> <C>
Sales and marketing $9,856 18.2% $8,337
Percentage of total revenues 31.5% 35.2%
Product development $3,622 26.1% $2,873
Percentage of total revenues 11.6% 12.1%
General and administrative $2,411 13.2% $2,129
Percentage of total revenues 7.7% 9.0%
</TABLE>
The increase in sales and marketing expenses in the three months ended June 30,
1998 is primarily due to increases in sales support and marketing personnel,
sales commissions and travel and lodging expenses due partially to price
increases imposed by the airline and travel industries. The comparative
quarter's expense levels were a larger percentage of revenues as they were
established for budgeted revenue levels that were not achieved.
The increase in product development expenses in the three months ended June 30,
1998 is primarily due to the engagement of additional employees, third party
consultants and product translation services costs. There were no internal
software costs capitalized in the three months ended June 30, 1998 and 1997. The
comparative quarter's expense levels were a larger percentage of revenues as
they were established for budgeted revenue levels that were not achieved. The
Company will continue to make investments in a new MAXIMO Java-based component
architecture including a mobile application suite of products.(1) The Company
will also expend development dollars on its M|Net electronic commerce product
for MRO supply chain management.(1) The Company will continue to invest in
client/server MAXIMO including application programming interfaces to enterprise
resource planning application software products developed by Oracle, Peoplesoft
and SAP.(1) Additionally, a new version of client/server MAXIMO will be made
available later in the year that will support the European Monetary Policy.(1)
The increase in general and administrative expenses for the three months ended
June 30, 1998 is primarily due to an increase in growth in operations and legal
fees for proxy statement review
- -----------------------------
(1) Forward looking statement
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and preparation, partially offset by a smaller bad debt reserve over the prior
quarter as adequate reserves have been established. The comparative quarter's
expense levels were a larger percentage of revenues as they were established for
budgeted revenue levels that were not achieved.
<TABLE>
<CAPTION>
NON-OPERATING EXPENSES
Three CHANGE % Three
Months Months
Ended Ended
(in thousands) 06/30/98 06/30/97
- ----------------------------------------------------------------------------
<S> <C> <C> <C>
Interest income(expense),net $ 659 (12.4%) $ 752
Other income (expense),net $(100) (18.0%) $(122)
</TABLE>
Interest income for the three months ended June 30, 1998 is attributable to
interest earned on cash equivalents from cash flow generated from operations
including accounts receivable collections. The days sales outstanding improved
to 84 days at June 30, 1998 compared to 87 days at June 30, 1997. The Company
has established a target of 90 to 95 days for its days sales outstanding.(1)
Other expense is primarily attributable to accrued translation losses on certain
Asian receivables. Given the nature of the Asian economies, further losses may
be realized in the future if the currencies do not stabilize in relation to the
dollar. (1)
PROVISION FOR INCOME TAXES
The Company's effective tax rates were 35.8% and 36.2% for the three months
ended June 30, 1998 and 1997, respectively. The Company anticipates that its
1998 effective quarterly tax rates will not exceed 36%. (1)
NINE MONTHS ENDED JUNE 30, 1998 COMPARED TO NINE MONTHS ENDED JUNE, 30, 1997
<TABLE>
<CAPTION>
REVENUES
Nine CHANGE % Nine
Months Months
Ended Ended
(in thousands) 06/30/98 06/30/97
- ----------------------------------------------------------------------------
<S> <C> <C> <C>
Software licenses $38,150 5.5% $36,165
Percentage of total revenues 45.1% 52.2%
Support and services $46,450 40.5% $33,052
Percentage of total revenues 54.9% 47.8%
Total revenues $84,600 22.2% $69,217
</TABLE>
- -----------------------------
(1) Forward looking statement
16
<PAGE> 17
The growth in total revenues is generated from the Company's MAXIMO software and
related support and services. A significant portion of the Company's total
revenues are derived from operations outside the United States. Revenues from
sales outside the United States increased 31.5% to $38.8 million or 45.8% of
total revenues for the nine months ended June 30, 1998, compared to $29.5
million or 42.6% of total revenues for the nine months ended June 30, 1997.
Revenues from the client/server versions of MAXIMO increased 25.5% to $78.7
million or 93.0% of total revenues for the nine months ended June 30, 1998
compared to $62.7 million or 90.6% of total revenues for the nine months ended
June 30, 1997. The increase in MAXIMO client/server revenues for the nine months
ended June 30, 1998 is attributable to an increase in support and services and
the average selling price due to an increase in the average number of users
licensed and the general availability of MAXIMO Release 4.0 in English.
Revenues from MAXIMO Advantage decreased 8.3% to 4.3% of total revenues for the
nine months ended June 30, 1998 compared to 5.7% of total revenues for the nine
months ended June 30, 1997. The Company has reduced the sales force size to
improve the profitability of this business unit.
Revenues from licenses of P/X and from related support and services decreased
32.5% to 1.5% of total revenues for the nine months ended June 30, 1998 compared
to 2.7% of total revenues for the nine months ended June 30, 1997. The Company
no longer focuses on selling and marketing this product.
The increase in support and services revenues is attributable to increases in
both MAXIMO support contracts and consulting services. Consulting services
continue to be a larger percentage of total revenues due to additional service
demands in connection with large scale implementations of the Company's MAXIMO
client/server product.
<TABLE>
<CAPTION>
COST OF REVENUES
Nine CHANGE % Nine
Months Months
Ended Ended
(in thousands) 06/30/98 06/30/97
- ----------------------------------------------------------------------------
<S> <C> <C> <C>
Software licenses $2,976 48.9% $1,998
Percentage of software licenses 7.8% 5.5%
Support and services $23,658 35.4% $17,475
Percentage of support and services 50.9% 52.9%
Total cost of revenues $26,634 36.8% $19,473
Percentage of total revenues 31.5% 28.1%
</TABLE>
17
<PAGE> 18
Cost of software revenues consists of royalties paid to vendors of third party
software, the amortization of capitalized software, the cost of software product
packaging and media, and certain employee costs related to software duplication,
packaging and shipping. The increase in the cost of software revenues is due
primarily to royalties paid to third party vendors for software and costs for
third party software products.
Cost of support and services consists primarily of personnel costs for employees
and the related costs of benefits and facilities. The increase in the cost of
support and services is attributable to the hiring of employees and the
extensive use of third-party consultants contracted to perform services for the
Company. The Company utilizes the services of these higher cost third party
consultants in order to meet the services backlog.
<TABLE>
<CAPTION>
OPERATING EXPENSES
Nine CHANGE % Nine
Months Months
Ended Ended
(in thousands) 06/30/98 06/30/97
- ----------------------------------------------------------------------------
<S> <C> <C> <C>
Sales and marketing $27,027 13.0% $23,908
Percentage of total revenues 31.9% 34.5%
Product development $9,391 13.9% $8,247
Percentage of total revenues 11.1% 11.9%
General and administrative $7,106 .25% $7,088
Percentage of total revenues 8.4% 10.2%
In-Process Product Development $9,172 N/A N/A
Percentage of total revenues 10.8% N/A N/A
</TABLE>
The increase in sales and marketing expenses in the nine months ended June 30,
1998 is primarily due to increases in the number of sales support and marketing
personnel, sales commissions and price increases imposed by the airline and
travel industries. The comparative quarter's expense levels were a larger
percentage of revenues as they were established for budgeted revenue levels that
were not achieved.
The increase in product development expenses in the nine months ended June 30,
1998 is primarily due to the engagement of additional employees, third party
consultants and product translation services. Software costs capitalized in the
nine months ended June 30, 1998 and 1997 were $675,000 and $0, respectively. The
comparative quarter's expense levels were a larger percentage of revenues as
they were established for budgeted revenue levels that were not achieved. The
Company will continue to make investments in a new MAXIMO Java-based component
architecture including a mobile application suite of products.(1)
- -----------------------------
(1) Forward looking statement
18
<PAGE> 19
The Company will also expend development dollars on its M|Net electronic
commerce product for MRO supply chain management.(1) The Company will continue
to invest in client/server MAXIMO including application programming interfaces
to enterprise resource planning application software products developed by
Oracle, Peoplesoft and SAP.(1) Additionally, a new version of client/server
MAXIMO will be made available later in the year that will support the European
Monetary Policy.(1)
In connection with the A.R.M. Group Inc. acquisition, the Company acquired
in-process product development of $9.2 million. The Company determined that
certain aspects of the acquired technology had not reached technological
feasibility and had no alternative future use. The Company reached this
conclusion based on information prepared by a third party. The Company expensed
the portion of the purchase price allocable to in-process product development at
the date of acquisition.
<TABLE>
<CAPTION>
NON-OPERATING EXPENSES
Nine CHANGE % Nine
Months Months
Ended Ended
(in thousands) 06/30/98 06/30/97
- ----------------------------------------------------------------------------
<S> <C> <C> <C>
Interest income (expense),net $2,055 21.0% $1,698
Other income (expense),net $ (331) 25.9% $ (263)
</TABLE>
The increase in interest income for the nine months ended June 30, 1998 is
attributable to interest earned on increased cash equivalents from cash flow
generated from operations including accounts receivable collections. Other
expense is primarily attributable to accrued translation losses on certain Asian
receivables. Given the nature of the Asian economies, further losses may be
realized in the future if the currencies do not stabilize in relation to the
dollar. (1)
PROVISION FOR INCOME TAXES
The Company's effective tax rate before a one time non-deductible charge for
purchased in-process product development was 35.8% for the nine months ended
June 30, 1998. The Company's effective tax rate for the nine months ended June
30, 1997 was 36.7%. The income tax expense provided during 1998 reflects the
nondeductible nature of certain charges related to the acquisition of the A.R.M.
Group Inc. The Company anticipates that its 1998 effective annual tax rates will
not exceed 36%. (1)
- -----------------------------
(1) Forward looking statement
19
<PAGE> 20
LIQUIDITY AND CAPITAL RESOURCES
As of June 30, 1998, the Company had cash and cash equivalents and marketable
securities of approximately $59.2 million and working capital of $65.3 million.
Cash generated by operations for the nine months ended June 30, 1998 was $7.5
million, primarily attributable to the purchase of in-process product
development in connection with the A.R.M. Group acquisition and depreciation.
Contributing to the use of cash by operations was an increase in receivables as
a result of the increase in revenues, bonuses paid to employees, income taxes
paid, payments made to trade vendors, and prepaid royalties paid to third party
software vendors. Cash used in investing activities totaled $12.9 million,
primarily for improvements related to the relocation of the Company's corporate
headquarters in December 1997 and the purchase of marketable securities and the
purchase of property and equipment. Cash used in financing activities was $75
thousand, primarily for payment of debentures and bank loans assumed from the
acquisition of the A.R.M. Group Inc., offset by proceeds received from exercises
of employee stock options.
As of June 30, 1998, the Company's principal commitments consisted primarily of
an office lease for its headquarters. The Company leases its facilities and
certain equipment under non-cancelable operating lease agreements that expire at
various dates through November 2003. The Company relocated its corporate
headquarters in December 1997. Under the terms of the lease agreement, upon
termination of the lease the Company has the right to extend the lease for an
additional six year term for an agreed upon fixed cost. The Company's
expenditures for construction and leasehold improvements in connection with the
relocation were $2.2 million.
The Company believes that its current cash balances combined with cash flow from
operations will be sufficient to meet its working capital and capital
expenditure requirements through at least September 30, 1999. (1)
YEAR 2000
The Year 2000 issue is the result of computer programs being written using two
digits rather than four to define the applicable year. Certain computer programs
that have date sensitive software and use two digits only may recognize a date
using "00" as the year 1900 rather than the year 2000.
- -----------------------------
(1) Forward looking statement
20
<PAGE> 21
Management has initiated a program to prepare the Company's financial,
manufacturing and other critical systems and applications for the year 2000. The
focus of the program is to identify affected software and hardware, develop a
plan to correct that software or hardware in the most effective manner and
implement and monitor that plan. The Company will also assess the readiness of
its significant suppliers to determine the extent to which the Company is
vulnerable to those third parties' failure to remediate their own Year 2000
issues. The Company utilizes other third party software products, network
equipment and telecommunications products. Failure of any critical technology
components to operate properly in the Year 2000 may have an adverse impact on
business operations or require the Company to incur unanticipated expenses to
remedy any problems. There can be no guarantee that the systems of other
companies will be timely converted, or that a failure to convert by another
company would not have a material adverse effect on the Company. The Company
currently estimates that the costs associated with preparing internal systems
for the Year 2000 should not exceed $100,000.(1) There can be no assurances that
as the Company continues its program of reviewing internal systems that the
costs will not exceed $100,000. The Company will develop a contingency plan
based on the final results gathered from its suppliers and third parties.(1)
The Company warrants to its customers that its current versions of MAXIMO and
P/X client/server products and MAXIMO ADvantage are year 2000 enabled. The
Company's other product Project 2 is no longer sold but the Company does offer
support for this product. The Company will release an upgrade of this product
that is year 2000 enabled. The Company estimates that the cost to upgrade this
product and any other older versions of its products will not have a material
adverse effect on its results of operations or financial condition.(1)
EURO COMPLIANCE
On January 1, 1999, eleven European Union member states will adopt the euro as
their common national currency. Thereafter, until January 1, 2002, (the
transition period), either the euro or a participating country's present
currency will be accepted as legal tender. Beginning on January 1, 2002,
euro-denominated bills and coins will be issued, and by July 1, 2002, only the
euro will be used. A significant number of the Company's customers are located
in participating European Union countries. As a result, the computer systems or
software used by many companies may need to be upgraded to comply with euro
requirements. The Company is currently expending development dollars on a new
client/server version of MAXIMO that will support the European Monetary Policy.
The amount of development
- -----------------------------
(1) Forward looking statement
21
<PAGE> 22
dollars spent on the euro release will not have a material adverse effect on the
Company's results of operations or financial condition. The Company has
initiated a program to determine what, if any, internal systems need to be
replaced to comply with the European Monetary Policy.(1)
FACTORS AFFECTING FUTURE PERFORMANCE
The nature of forward-looking information is that such information involves
assumptions, risks and uncertainties. Certain public documents of the Company
and oral statements made by authorized officers, directors, employees, agents
and representatives of the Company, acting on its behalf, may include
forward-looking information which will be influenced by the following and other
assumptions, risks and uncertainties. Forward-looking information requires
management of the Company to make assumptions, estimates, forecasts and
projections regarding the Company's future results as well as the future
effectiveness of the Company's strategic plans and future operational decisions.
Forward-looking statements made by or on behalf of the Company are subject to
the risk that the forecasts, projections, and expectations of management, or
assumptions underlying such forecasts, projections and expectations, may become
inaccurate. Accordingly, actual results and the Company's implementation of its
plans and operations may differ materially from forward-looking statements made
by or on behalf of the Company. The following discussion identifies certain
important factors that could affect the Company's actual results and actions and
could cause such results and actions to differ materially from any
forward-looking statements made by or on behalf of the Company that related to
such results and actions. Other factors, which are not identified herein, could
also have such an effect.
RAPID TECHNOLOGICAL CHANGE
The computer software industry is characterized by rapid technological advances,
changes in customer requirements and frequent product introductions and
enhancements. The Company's success depends upon its ability to continue to
enhance its current products and to develop and introduce new products that keep
pace with technological developments, respond to evolving customer requirements
and achieve market acceptance. In particular, the Company believes that it must
continue to respond quickly to users' needs for broad functionality and to
advances in hardware and operating systems. Any failure by the Company to
anticipate or respond adequately to technological developments and customer
requirements, or any significant delays in product development or introduction,
could result in a loss of competitiveness and revenues. There can be no
assurance that the
- -----------------------------
(1) Forward looking statement
22
<PAGE> 23
Company will be successful in developing and marketing new products or product
enhancements, or that the Company will not experience significant delays in
developing such new products or product enhancements. Such delays could have a
material adverse effect on the Company's results of operations. In addition,
there can be no assurance that new products and product enhancements developed
by the Company will achieve market acceptance.
DEPENDENCE ON MAXIMO
The Company's revenues are primarily attributable to the licensing of its MAXIMO
client/server product, introduced in 1991, and to related services and support.
Revenues from licenses of MAXIMO and related services and support accounted for
approximately 96.3% of the Company's total revenues in fiscal 1997. The
Company's financial performance in fiscal 1998 will depend on continued market
acceptance of MAXIMO. The Company believes that continued market acceptance of
MAXIMO will largely depend on its ability to enhance and broaden the
capabilities of MAXIMO, by, among other things, developing additional
application modules for MAXIMO, versions of MAXIMO and by developing and
incorporating into the MAXIMO product technologies that are emerging in
connection with the Internet. Any factor adversely affecting sales of MAXIMO,
such as delays in development, significant software flaws, incompatibility with
significant hardware platforms, operating systems or databases, increased
competition or negative evaluations of the products, would have a material
adverse effect on the Company's business and financial results.
The Company made the English language version of MAXIMO Release 4.0 generally
available in March 1998 for new clients. The failure of MAXIMO 4.0 to achieve
market acceptance would have a material adverse effect on the Company's business
and financial results.
FLUCTUATIONS IN QUARTERLY OPERATING RESULTS; SEASONALITY
The Company has experienced, and may in the future experience, significant
period-to-period fluctuations in revenues and operating results. The Company's
revenues and income from operations typically grow at a lower rate or decline in
the first quarter of each fiscal year, compared to the fourth quarter of the
preceding fiscal year. In addition, revenues are typically higher in the fourth
quarter than in other quarters of the year. The Company believes that these
quarterly patterns are partly attributable to the Company's sales commission
policies, which compensate members of the Company's direct sales force for
meeting or exceeding annual quotas. In addition, the Company's quarterly
revenues and operating results have fluctuated historically, due to the number
and timing of product introductions and enhancements, the budgeting and
purchasing
23
<PAGE> 24
cycles of customers, the timing of product shipments and the timing of marketing
and product development expenditures. The Company typically realizes more than
60% of its revenue from sales of software licenses in the last two weeks of a
quarter, frequently even in the last days of a quarter. Large software license
contracts may have a significant impact on revenues for any quarter and could
therefore result in significant fluctuations in quarterly revenues and operating
results. Accordingly, the Company believes that period-to-period comparisons of
its results of operations are not necessarily meaningful and should not be
relied upon as an indication of future performance.
The Company generally ships its products upon receipt of orders and maintains no
significant product backlog. As a result, revenues from license fees in any
quarter are substantially dependent on orders booked and shipped in that
quarter. A delay in or loss of orders can cause significant variations in
operating results. A significant portion of the Company's operating expenses are
fixed in the short term, and planned expenditures are based primarily on sales
forecasts. Accordingly, if revenues do not meet the Company's expectations in
any given quarter, operating results may be materially adversely affected.
COMPETITION
The market for applications software is intensely competitive and rapidly
changing. While the Company believes that it has competed effectively to date,
competition in its industry is likely to intensify as current competitors expand
their product lines and new companies enter the market. To remain successful in
the future, the Company must respond promptly and effectively to the challenges
of technological change, evolving standards and its competitors' innovations by
continually enhancing its own product, services and support offerings, as well
as its marketing programs. There can be no assurance that the Company will
continue to be able to compete successfully in the future.
The market for asset maintenance software is fragmented by geography, by
hardware platform and by industry orientation, and is characterized by a large
number of competitors. Currently, the Company's client/server versions of
MAXIMO, MAXIMO Enterprise and MAXIMO Workgroup, compete with products of a
number of large vendors some of which have traditionally provided maintenance
software running on mainframes and minicomputers and are now offering systems
for use in the client/server environment. MAXIMO Enterprise also competes with
integrated enterprise resource planning systems which are provided by several
large vendors and which include maintenance modules. MAXIMO Workgroup encounters
competition from vendors of low cost maintenance management systems designed
initially for use by a single user or limited number of users as vendors of
these products upgrade their functionality to enter the client/server market.
24
<PAGE> 25
MAXIMO ADvantage competes with a number of competitors, including a national
vendor and other various small regional companies.
The MRO supply chain management business using electronic commerce has many
diverse competitors offering a wide range of differing products, services and
technologies. While the Company believes that electronic commerce products and
technologies compliment the Company's existing products, there can be no
assurance that the Company will be able to compete successfully in this market.
Certain of the Company's competitors have greater financial, marketing, service
and support and technological resources than the Company. To the extent that
such competitors increase their focus on the asset maintenance or planning and
cost systems markets, the Company could be at a competitive disadvantage.
INTERNATIONAL OPERATIONS
A significant portion of the Company's total revenues are derived from
operations outside the United States. The Company derived 43.8%, 40.5%, and
38.4% of its total revenue from sales outside the United States in fiscal years
1997, 1996, and 1995, respectively. The Company expects that international
revenues will continue to be a significant percentage of total revenues. The
Company expects international revenues to continue to grow in absolute dollars
during 1998, and accordingly, continues to invest heavily in international
infrastructure, global product functionality and translated versions of
financial and other software products. In the event international expansion
and/or product globalization efforts are not successful, the Company's business
operating results and financial condition may be adversely affected. This
international business is subject to various risks common to international
activities, including exposure to currency fluctuations, greater difficulty in
collecting accounts receivable, political and economic instability, the greater
difficulty of administering business abroad and the need to comply with a wide
variety of foreign import and United States export laws and regulatory
requirements.
A significant portion of the Company's total revenue is derived from
international operations which are conducted in foreign currencies. Changes in
the values of these foreign currencies relative to the United States dollar have
in the past adversely affected, and may in the future affect, the Company's
results of operations and financial position. Gains and losses on translation to
United States dollars and settlement of receivables from international
subsidiaries may contribute to fluctuations in the Company's results of
operations. To date, the Company has not engaged in currency hedging
transactions. The Company may in the future undertake currency hedging, although
there can be no assurance that hedging transactions, if entered into, would
materially reduce the effects of fluctuations in foreign currency exchange rates
on the Company's results of
25
<PAGE> 26
operations. The Company experienced lower than anticipated revenue growth rates
in the Asia Pacific region during the first three quarters of fiscal 1998 in
part due to the economic difficulties that have occurred throughout this region.
There can be no assurances that the economy of this region will recover in the
near future or that the Company's growth rates in this geographic region will
return to the previous levels if the recovery occurs.
DEPENDENCE ON THIRD PARTIES
The client/server versions of MAXIMO operate with the Oracle 7, SQLServer,
SYBASE and SQLBase, SQLServer database management systems. MAXIMO ADvantage runs
on the Microsoft Access database. Introduction and increased market acceptance
of database management systems with which the Company's products do not operate,
or failure of Oracle, SYBASE, SQLBase, SQLServer or Access to achieve continued
market acceptance, could adversely affect the market for the Company's products.
The Company has entered into nonexclusive license agreements with Centura
Software Corporation, Scribe Technologies, Incorporated, Cognos Corporation,
Netronic Software GmbH, HSB Reliability Technologies Corporation, Intelligent
Labeling Technologies, Incorporated, WebLogic, Incorporated, Connect
Software, Inc., Marimba, Inc., and Intermat, Inc. pursuant to which the Company
incorporates into its products software providing certain application
development, user interface, business intelligence, content and graphics
capabilities developed by these companies. If the Company were unable to renew
these licenses, or if any of such vendors were to become unable to support and
enhance its products, the Company could be required to devote additional
resources to the enhancement and support of these products or to acquire or
develop software providing equivalent capabilities, which could cause delays in
the development and introduction of products incorporating such capabilities.
PRODUCT DEVELOPMENT: INTERNET
The Company is currently developing a Java-based component architect software
application to incorporate into the MAXIMO product technologies emerging in
conjunction with the Internet. Internet technologies and applications generally
are developing and gaining acceptance rapidly in the market. MRO supply chain
management using electronic commerce is a nascent market with many standards and
technologies remaining to be developed. Accordingly, developing technologies
pose risks to the Company. The Company believes that electronic commerce
products and technologies compliment the Company's existing products. There can
be no assurance that the Company will successfully anticipate trends in this
market, that the Company will be successful in Internet technology development
or acquisition efforts or that
26
<PAGE> 27
the Company's Internet applications, if developed, will achieve market
acceptance.
LIMITED INTELLECTUAL PROPERTY PROTECTION
The Company's success is dependent upon proprietary technology. The Company
currently has no patents and protects its technology primarily through
copyrights, trademarks, trade secrets and employee and third party nondisclosure
agreements. The Company's software products are sometimes licensed to customers
under"shrink wrap" licenses included as part of the product packaging. Although,
in larger sales, the Company's shrink wrap licenses may be accompanied by
specifically negotiated agreements signed by the licensee, in many cases its
shrink wrap licenses are not negotiated with or signed by individual licensees.
Certain provisions of the Company's shrink wrap licenses, including provisions
protecting against unauthorized use, copying, transfer and disclosure of the
licensed program, may be unenforceable under the laws of certain jurisdictions.
In addition, the laws of some foreign countries do not protect the Company's
proprietary rights to the same extent as do the laws of the United States. There
can be no assurance that the steps taken by the Company to protect its
proprietary rights will be adequate to prevent misappropriation of its
technology or development by others of similar technology. Although the Company
believes that its products and technology do not infringe on any existing
proprietary rights of others, there can be no assurance that third parties will
not assert infringement claims in the future.
GENERAL ECONOMIC RISK FACTORS
To date, inflation has not had a material impact on the Company's financial
results. There can be no assurance, however, that inflation will not adversely
affect the Company's financial results in the future.
DEPENDENCE ON KEY PERSONNEL
The Company is highly dependent on certain key executive officers and technical
employees, the loss of one or more of whom could have an adverse impact on the
future operations of the Company. The Company continues to hire a significant
number of additional sales, services and technical personnel. Competition for
hiring of such personnel in the software industry is intense, and the Company
from time to time experiences difficulty in locating candidates with the
appropriate qualifications within the desired geographic locations, or with
certain industry specific domain expertise. It is widely believed that the
technology industry is at or beyond a condition of full employment. The Company
does not have employment contracts with, and does not maintain key person life
insurance policies on, any personnel. In addition, the Company may need to hire
27
<PAGE> 28
additional skilled personnel to support the continued growth of its business.
There can be no assurance that the Company will be able to retain its existing
personnel or attract additional qualified employees.
MAXIMO ADVANTAGE; MAINTENANCE AUTOMATION CORPORATION
The core of the software constituting MAXIMO ADvantage was acquired by the
Company through its acquisition of Maintenance Automation Corporation ("MAC").
MAC's product, Chief ADvantage, has been renamed MAXIMO ADvantage and enhanced
since the acquisition. The software architecture for PC-based MAXIMO ADvantage
is significantly different from the client/server architecture of MAXIMO
Enterprise and Workgroup. Since its acquisition of MAC, the Company has incurred
significant additional and unexpected costs in developing a new release of
MAXIMO ADvantage that meets the quality and functionality standards demanded by
the Company. In addition to these unexpected costs, there was a delay in excess
of six months in completing a new release of this product. The Company has
restructured MAC's telesales distribution operation for MAXIMO ADvantage. No
assurance can be given that MAC will in the future be profitable or that its
telesales distribution operation for MAXIMO ADvantage will achieve the Company's
goals.
CERTAIN RISKS ASSOCIATED WITH ACQUISITIONS
As part of its overall strategy, the Company plans to continue to acquire or
invest in complementary companies, products, or technologies and to enter into
joint ventures and strategic alliances with other companies. There can be no
assurance that the Company would be successful in overcoming the risks
associated or problems encountered in connection with such business
combinations, investments, or joint ventures, or that such transactions will not
materially adversely affect the Company's business, financial condition, or
operating results.
POSSIBLE CONTINUED VOLATILITY OF STOCK PRICE
Fiscal 1997 was marked by significant fluctuations in the market price of the
common stock, par value $.01 per share, of the Company (the "Common Stock").
Factors such as announcements of technological innovations or new products by
the Company, its competitors and other third parties, as well as quarterly
variations in the Company's results of operations and market conditions in the
industry, may cause the market price of the Common Stock to continue to
fluctuate significantly. In addition, the stock market in general has recently
experienced substantial price and volume fluctuations, which have particularly
affected the market prices of many software companies and which have often been
unrelated to the operating performance of such companies. These broad market
fluctuations also may adversely affect the market price of the Common Stock.
28
<PAGE> 29
LITIGATION RISKS
The Company is subject to the normal risks of litigation with respect to its
business operation.
YEAR 2000
The Year 2000 issue is the result of computer programs being written using two
digits rather than four to define the applicable year. Certain computer programs
that have date sensitive software and use two digits only may recognize a date
using "00" as the year 1900 rather than the year 2000.
Management has initiated a program to prepare the Company's financial,
manufacturing and other critical systems and applications for the year 2000. The
focus of the program is to identify affected software and hardware, develop a
plan to correct that software or hardware in the most effective manner and
implement and monitor that plan. The Company will also assess the readiness of
its significant suppliers to determine the extent to which the Company is
vulnerable to those third parties' failure to remediate their own Year 2000
issues. The Company utilizes other third party software products, network
equipment and telecommunications products. Failure of any critical technology
components to operate properly in the Year 2000 may have an adverse impact on
business operations or require the Company to incur unanticipated expenses to
remedy any problems. There can be no guarantee that the systems of other
companies will be timely converted, or that a failure to convert by another
company would not have a material adverse effect on the Company. The Company
currently estimates that the costs associated with preparing internal systems
for the Year 2000 should not exceed $100,000. There can be no assurances that as
the Company continues its program of reviewing internal systems that the costs
will not exceed $100,000. The Company will develop a contingency plan based on
the final results gathered from its supplier and third parties.
The Company warrants to its customers that its current versions of MAXIMO and
P/X client/server products and MAXIMO ADvantage are year 2000 enabled. The
Company's other product Project 2 is no longer sold but the Company does offer
support for this product. The Company will release an upgrade of this product
that is year 2000 enabled. The Company estimates that the cost to upgrade this
product and any other older versions of its products will not have a material
adverse effect on its results of operations or financial condition.
EURO COMPLIANCE
On January 1, 1999, eleven European Union member states will adopt the euro as
their national currency. Thereafter, until January 1, 2002, (the transition
period), either the euro
29
<PAGE> 30
or a participating country's present currency will be accepted as legal tender.
Beginning on January 1, 2002, euro-denominated bills and coins will be issued,
and by July 1, 2002, only the euro will be used. A significant number of the
Company's customers are located in participating European Union countries. As a
result, the computer systems or software used by many companies may need to be
upgraded to comply with euro requirements. The Company is currently expending
development dollars on a new client/server version of MAXIMO that will support
the European Monetary Policy. The amount of development dollars spent on the
euro release will not have a material adverse effect on the Company's results of
operations of financial condition. The Company has initiated a program to
determine what, if any, internal systems need to be replaced to comply with the
European Monetary Policy.
EFFECT OF ACCOUNTING PRONOUNCEMENTS
Statement of Position ("SOP") 97-2, "Software Revenue Recognition" was issued in
October 1997 and addresses software revenue recognition matters. The SOP
supersedes SOP 91-1 and is effective for transactions entered into for fiscal
years beginning after December 15, 1997. In March 1998, the adoption date of
certain provisions of SOP No. 97-2 were postponed. Based upon its reading and
interpretation of SOP 97-2 the Company believes its current revenue recognition
policies and practices are materially consistent with the SOP.
Statement of Financial Accounting Standards No. 133 on accounting for derivative
instruments and hedging activities was adopted in June 1998. It becomes
effective for fiscal years beginning after June 15, 1999, with earlier adoption
encouraged. The new standard requires companies to record derivatives on the
balance sheet as assets or liabilities, measured at fair value. Gains or losses
resulting from changes in the values of those derivatives would be accounted for
depending on the use of the derivatives and whether they qualify for hedge
accounting. The key criterion for hedge accounting is that the hedging
relationship must be highly effective in achieving offsetting changes in fair
value or cash flows. The Company will adopt SFAS 133 in the fiscal year ended
September 30, 2000.
NO REVISIONS OR UPDATES TO FORWARD-LOOKING STATEMENTS
The Company will have no obligation to release publicly any revision or update
to any forward-looking statements to reflect events or circumstances after the
date of such statements or to reflect the occurrence of anticipated or
unanticipated events.
30
<PAGE> 31
Part II. OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
The Company's Annual Meeting of Stockholders was held on May 28, 1998. At
the Annual Meeting the stockholders of the Company voted to approve the
following actions by the following votes:
1. To elect Alan L. Stanzler as a Class II Director of the Company for a
term of three years.
No. of Shares
-------------
For 8,961,831
Against 273,552
Abstain 0
No Vote 719,594
2. To approve the proposal to ratify the selection by the Board of
Directors of Coopers & Lybrand L.L.P. as the Company's independent
public accountants for the current fiscal year.
No. of Shares
-------------
For 9,230,118
Against 3,908
Abstain 1,357
No Vote 719,594
ITEM 5. OTHER INFORMATION
On May 18, 1998, David M. Sample resigned as Chairman of the Board of
Directors, President and Chief Executive Officer. In addition, Robert
L.Daniels was elected executive Chairman of the Board, Norman E.
Drapeau, Jr. was elected President and Chief Executive Officer and
Paul D. Birch was elected to the Board of Directors.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
3.1 Amended and Restated Articles of Organization of the Company
(included as Exhibit 3.3 to the Company's Registration Statement on
Form S-1, Registration No. 33-76420, and incorporated herein by
reference)
31
<PAGE> 32
3.2 Restated By-Laws of the Company, as amended (included as Exhibit 3.2
to the Company's Annual Report on Form 10-K for the fiscal year ended
September 30, 1996, File No. 0-23852, and incorporated herein by
reference)
3.4 Form of Certificate of Designation of Series A Junior Participating
Preferred Stock of Project Software & Development, Inc. (which is
attached as Exhibit A to the Rights Agreement and included as Exhibit
4 (b) to the Company's Current Report on Form 8-K dated February 2,
1998, File No. 0-23852, and incorporated herein by reference)
4. Instruments Defining the Rights of Security-Holders
4.1 Specimen certificate for the Common Stock of the Company
(included as Exhibit 4.1 to the Company's Registration
Statement on Form S-1, Registration No. 33-76420, and
incorporated herein by reference)
4.2 Article 4B of the Amended and Restated Articles of
Organization of the Company (included as Exhibit 4.1 to the
Company's Registration Statement on Form S-1, Registration
No. 33-76420, and incorporated herein by reference)
4.3 Rights Agreement dated as of January 27, 1998, between Project
Software & Development, Inc. and BankBoston, N.A. as Rights
Agent (included as Exhibit 4(a) to the Company's Current
Report on Form 8-K dated February 2, 1998, File No. 0-23852,
and incorporated herein by reference)
4.4 Form of Certificate of Designation of Series A Junior
Participating Preferred Stock of Project Software &
Development, Inc. (included as Exhibit 4(b) to the Company's
Current Report on Form 8-K dated February 2, 1998,
File No. 0-23852, and incorporated herein by reference)
4.5 Form of Rights Certificate (included as Exhibit 4(c) to the
Company's Current Report on Form 8-K dated February 2, 1998,
File No. 0-23852, and incorporated herein by reference)
27. Financial Data Schedule
(b) Reports filed on Form 8-K
The Company filed a current report on Form 8-K on June 16, 1998 with
respect to a reorganization of the board of directors.
32
<PAGE> 33
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.
PROJECT SOFTWARE & DEVELOPMENT, INC.
Date: August 14, 1998 By: /s/ Paul D. Birch
----------------------------------
Paul D. Birch
Authorized Officer
Executive Vice President Finance &
Administration, Chief Financial
Officer and Treasurer
(Principal Financial Officer)
33
<PAGE> 34
EXHIBIT INDEX
EXHIBIT
NO. DESCRIPTION PAGE
- ------- -------------------------------------------------------------- ----
3.1 Amended and Restated Articles of Organization of the
Company (included as Exhibit 3.3 to the Company's
Registration Statement on Form S-1, Registration
No. 33-76420, and incorporated herein by reference)
3.2 Restated By-Laws of the Company, as amended(included as
Exhibit 3.2 to the Company's Annual Report on Form 10-K for
the fiscal year ended September 30, 1996, commission File
No. 0-23852) and incorporated herein by reference)
3.4 Form of Certificate of Designation of Series A Junior
Participating Preferred Stock of Project Software &
Development, Inc. (included as Exhibit 4(b)to the Company's
Current Report on Form 8-K dated February 2, 1998, File
No. 0-23852,and incorporated herein by reference)
4.1 Specimen certificate for the Common Stock of the Company
(included as exhibit4.1 to the Company's Registration
Statement on Form S-1, Registration No. 33-76420, and
incorporated herein by reference)
4.2 Article 4B of the Amended and Restated Articles of
Organization of the Company (included as Exhibit 4.1 to the
Company's Registration Statement on Form S-1, Registration
No. 33-76420, and incorporated herein by reference)
4.3 Rights Agreement dated as of January 27, 1998, between
Project Software & Development, Inc. and BankBoston, N.A.
as Rights Agent (included as Exhibit 4(a) to the Company's
Current Report on Form 8-K dated February 2, 1998, File
No. 0-23852,and incorporated herein by reference)
4.4 Form of Certificate of Designation of Series A Junior
Participating Preferred Stock of Project Software &
Development, Inc. (included as Exhibit 4(b)to the Company's
Current Report on Form 8-K dated February 2, 1998, File
No. 0-23852,and incorporated herein by reference)
4.5 Form of Rights Certificate (included as Exhibit 4(c)to the
Company's Current Report on Form 8-K dated February 2,
1998, File No. 0-23852, and incorporated herein by
reference)
27. Financial Data Schedule
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<PERIOD-TYPE> OTHER
<FISCAL-YEAR-END> SEP-30-1998
<PERIOD-START> OCT-01-1997
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0
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