-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, G4hpRZ1qzevHzrdLxjofmF3QtAvWevQg5GVi8XrJjX0x/RX19HVbWSkskGGVD4s8 6MBwUmMTCrVkZ/u5DhtEMA== 0000950135-97-005223.txt : 19971230 0000950135-97-005223.hdr.sgml : 19971230 ACCESSION NUMBER: 0000950135-97-005223 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 8 CONFORMED PERIOD OF REPORT: 19970930 FILED AS OF DATE: 19971229 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: PROJECT SOFTWARE & DEVELOPMENT INC CENTRAL INDEX KEY: 0000920354 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-PREPACKAGED SOFTWARE [7372] IRS NUMBER: 042448516 STATE OF INCORPORATION: MA FISCAL YEAR END: 0930 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 000-23852 FILM NUMBER: 97745568 BUSINESS ADDRESS: STREET 1: 20 UNIVERSITY RD CITY: CAMBRIDGE STATE: MA ZIP: 02138 BUSINESS PHONE: 6176611444 MAIL ADDRESS: STREET 1: 20 UNIVERSITY RD CITY: CAMBRIDGE STATE: MA ZIP: 02138 10-K 1 PROJECT SOFTWARE & DEVELOPMENT, INC. 1 SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-K FOR THE FISCAL YEAR ENDED SEPTEMBER 30, 1997 (mark one) /X/ ANNUAL 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 of (I.R.S. employer incorporation or organization) identification number) 100 CROSBY DRIVE, BEDFORD, MASSACHUSETTS 01730 (Address of principal executive offices, including zip code) (781) 280-2000 (Registrant's telephone number, including area code) Securities registered pursuant to Section 12(b) of the Act: None Securities registered pursuant to Section 12(g) of the Act: Common Stock, $.01 par value (Title of class) 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 / / Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of the registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to the Form 10-K. As of December 15, 1997, the aggregate market value of the voting stock held by non-affiliates of the Registrant was approximately $116,995,865 based on the last sale price of such stock on such date. Number of shares outstanding of the Registrant's common stock as of the latest practicable date: 9,882,071 shares of common stock, $.01 par value per share, as of December 15, 1997. DOCUMENT INCORPORATED BY REFERENCE Certain portions of the Company's Definitive Proxy Statement for its 1998 Annual Meeting of Stockholders are incorporated by reference into Part III of this Annual Report on Form 10-K. Total number of pages: Exhibit index is located on page: 2 PART I ITEM 1. BUSINESS GENERAL Project Software & Development, Inc. ("PSDI" or the "Company") develops, markets and supports applications software used by businesses, government agencies and other organizations to assist them in maintaining high-value capital assets such as facilities, plants and production equipment. The Company's products are designed to enable customers to reduce down-time, control maintenance expenses, cut spare parts inventories and costs, improve purchasing efficiency and more effectively deploy productive assets, personnel and other resources. PRODUCTS The Company's enterprise-wide client/server application products are MAXIMO(R) and P/X(R). MAXIMO, an asset maintenance management system, is the Company's principal product and its first client/server product. The client/server version of MAXIMO was first released in February 1991 and has been employed in production environments for more than six years. Revenues from licenses of client/server MAXIMO have grown from $1,406,000 in fiscal year 1991 to $47,504,000 in fiscal year 1997. In fiscal 1996, the Company introduced a new suite of MAXIMO products: MAXIMO Enterprise, MAXIMO Workgroup and MAXIMO ADvantage. MAXIMO Enterprise is a client/server product which runs on Oracle7 and SYBASE platforms and is intended for the high function, high usage segment of the maintenance management market. MAXIMO Workgroup is also a client/server product and runs on SQLBase, SQL Server and Oracle7 Workgroup Server. MAXIMO Workgroup is intended for the mid-range segment of the maintenance management market. On March 1, 1996 the Company acquired Maintenance Automation Corporation ("MAC"). The product acquired as a result of the acquisition of MAC, Chief Advantage, was renamed MAXIMO ADvantage. MAXIMO ADvantage is intended as a point solution for the lowerend of the maintenance management market. MAXIMO ADvantage supports Microsoft Access for the single user, PC LAN segment. Revenues from licenses of MAXIMO ADvantage declined from $3,631,000 in fiscal 1996 to $2,253,000 in fiscal 1997. Maintenance Automation Corporation has incurred operating losses of $1,203,000 and $1,420,000, in fiscal 1996 and 1997, respectively. MAXIMO permits work orders to be generated and tracked electronically, and also to be linked to related information, such as labor and equipment records, job procedures, parts inventories and purchasing systems. Failure analysis using MAXIMO can assist in identifying root causes of equipment problems and aids in designing preventive maintenance procedures to reduce future equipment failure rates and downtime. 1 3 The Company's MAXIMO client/server products are designed to enable customers to take full advantage of the computing environment, and offer robust functionality, drawing upon the Company's established track record as a provider of large-scale applications critical to the operations of major industrial companies. MAXIMO Enterprise and Workgroup provide access to standard commercial SQL databases and incorporate a modular design and an open architecture which permits end users to customize their applications. P/X, the Company's client/server planning and cost system, was released in June 1992. Revenues from licenses of P/X grew from $1,148,000 in fiscal year 1992 to $3,604,000 in fiscal 1994. However, revenues from P/X licenses have declined since then to $551,000 in fiscal 1997. The decline in P/X revenues can be attributed to product performance issues, delays in releasing a new version of the product, diminished demand for high-end planning and cost solutions, increased competition, and the Company's declining focus on selling and marketing this product. MAXIMO ENTERPRISE AND WORKGROUP MAXIMO Enterprise and Workgroup are comprised of a series of integrated modules, each of which is linked to the others and to a relational database management system. Each module includes one or more applications functions, including the following: Work Order Management organizes maintenance work, including labor, parts and tools and tracks actual usage and associated costs. Asset Management tracks corporate assets, including facilities and equipment and their associated warranty, downtime, maintenance costs, failure history and performance data. Spare Parts Inventory Control maintains spare parts inventory balances, tracks parts issued from stock and automatically reorders parts when minimum balances have been reached, including multiple storerooms for Enterprise. Purchasing generates request for proposal, blanket purchase orders and purchase agreements, purchase requisitions and purchase orders, records receipt of parts, analyzes vendor performance and integrates with accounting applications, including invoice matching and multiple currency functionality for Enterprise. Labor Management manages employee records and tracks employee attendance and employee time reporting, including productive and non-productive time such as travel and waiting for parts. Planning and Scheduling schedules work orders based on availability of labor, materials and equipment and automatically 2 4 generates routine preventive maintenance work orders based on time, meter frequencies or other criteria. Work Manager creates and closes work orders, assigns labor to outstanding work, manages backlogs and tracks ongoing jobs in real time. MAXIMO ADVANTAGE The following is a list of some of the functionality aspects of the MAXIMO ADvantage maintenance management system: Work and Labor Management creates, edits and closes new and existing work orders. Time Cards charges time to work orders, service requests/QUIK calls or time and materials accounts. Inventory adds items, edits stock levels and sets reorder points to create purchase requisitions automatically. It also issues items to work orders, service requests, maintenance records or inventory accounts. Preventive Maintenance allows the set up of PM schedules for equipment items or facilities. Work orders will be created automatically at the appointed time, complete with tools, supplies and procedures. PM schedules can also be based on meters, run time or usage. Purchase Order allows the creation of purchase orders, including setting dollar-value approval levels. MAXIMO Enterprise and Workgroup's database server functions are provided by a direct link to ORACLE, SQL Server, SYBASE and Centura Corporation's (Centura) SQLBase, widely-used commercial relational database management systems, employing industry-standard SQL commands. MAXIMO accommodates database servers operating under Novell NLM, Windows NT and UNIX operating systems, and supports a variety of network operating systems, including Novell NetWare, Banyan VINES and IBM LAN Server for OS/2, and standard network communications protocols including TCP/IP and IPX/SPX. MAXIMO's use of a standard SQL database and support for a broad range of server platforms, network operating systems and communications protocols provides customers with the flexibility to match their computing resources to their needs, and facilitates the integration of data from other applications such as accounting and human resources. MAXIMO Enterprise and Workgroup were built using a commercially available application development tool set, SQLWindows from Centura Corporation. As a result, MAXIMO's "front-end" user interface, including screens, menus and help messages, can readily be modified by the customer, using standard tools. In 3 5 addition, tables, data structures and other elements of the "back-end" database can be modified by the customer using utilities provided by the Company. Therefore, the customer is neither constrained by a proprietary system design, nor does the customer need to rely on outside consultants with special expertise or knowledge of programming languages in order to customize the system to fit their needs. MAXIMO ADvantage runs on the Microsoft Access database and runs on stand-alone PC's, LANs and WANs. MAXIMO ADvantage's open architecture supports connectivity to numerous applications, including predictive, energy or reliability centered management, vibrations analysis, accounting, estimating and purchasing systems. MAXIMO ADvantage was built using a commercially available application development tool set, Visual Basic from Microsoft Corporation. The core of the software constituting MAXIMO ADvantage was acquired by the Company through its acquisition of 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 considerably different from the client/server architecture of MAXIMO Enterprise and Workgroup. Since its acquisition of MAC, the Company incurred significant additional and unexpected costs to complete the development of MAXIMO ADvantage in order to meet the quality and functionality standards demanded by the Company. MAXIMO runs on personal computers and provides the maintenance worker with an intuitive, easily mastered graphical user interface employing mouse-driven "point and click" commands, pull-down menus, icon bars and other standard features of Windows. MAXIMO permits the use of touch screens, bar code readers and other specialized input devices, providing for flexible and efficient data collection and input. An application launching feature provides access from within any MAXIMO module to other MAXIMO modules, as well as to word processing, spreadsheet, graphics, computer-aided-design ("CAD") and other personal productivity tools provided by third parties. P/X P/X is a multi-user, multi-project planning and cost system. The key functions of P/X include planning and prioritizing tasks, multi-project scheduling and project management, cost/schedule integration, and graphical reporting. Development efforts of the P/X product are focused on integrating the P/X scheduling functionality tightly with the MAXIMO product and on providing the scheduling features required for the markets supported by the MAXIMO product. 4 6 PRODUCT PRICING The current U.S. list price for the minimum five-user configuration of MAXIMO Workgroup for use with Centura's SQLBase databases is approximately $20,000, with an added fee of $3,000 for each additional user. The current U.S. list price for the minimum ten-user configuration of MAXIMO Enterprise for use with ORACLE and SYBASE databases is approximately $65,000, with an added fee of $5,000 for each additional user. MAXIMO Enterprise application modules generally are bundled for an additional fee and not licensed separately. The current U.S. list price for a single configuration of MAXIMO ADvantage is $2,995 for use with Microsoft Corporation's Access database. The current U.S. list price for a five-user LAN version is $3,995. A number of optional modules are available. Discounts from the Company's list prices may be made available for volume purchasers or for competitive or strategic reasons. OEM customers who purchase the Company's products in significant quantities receive discounts of 35% to 60%, depending upon the level of initial purchases and commitments. The Company also offers site-license arrangements to major accounts. International pricing for the Company's products varies by territory, depending on the cost of localizing, marketing, selling and supporting the product. Generally, list prices outside North America exceed the comparable U.S. list prices by 15% or more. The Company's international distributors and agents receive discounts ranging from 35% to 50%. The license fee for MAXIMO generally includes 90 days of technical support. At the time of initial licensing, customers typically purchase a support contract providing for an additional year of technical support, at a current U.S. list price generally equal to 20% of the applicable license fee. In most circumstances, customers also purchase installation, customization, integration and training services, and in many instances customers subsequently license additional seats, platform upgrades or modules. The total first-year revenues to the Company from a typical MAXIMO Enterprise and Workgroup implementation, including paid-up license fees and revenues from support contracts and installation, customization and training services, average from $200,000 to $500,000 and from $50,000 to $75,000, respectively. A large multi-site implementation can result in significantly larger first-year revenues. CUSTOMER SUPPORT AND SERVICES A high level of customer service and technical support is critical to customer satisfaction because many of the Company's customers implement their client/server maintenance management products in complex, large-scale applications on which the success of their organizations depend. In addition, 5 7 implementation of enterprise-wide applications in a heterogeneous client/server computing environment incorporating multiple operating systems, network operating systems and communications protocols can present customers with substantial technical challenges. The Company offers support and consulting services designed to assist customers in meeting these challenges and in successfully implementing business solutions which realize the benefits promised by client/server computing. The Company believes that its approach to service and support has been and will continue to be a significant factor in the market acceptance of its products. Revenues from support and services accounted for 48% of the Company's total revenues in fiscal year 1997, and the Company expects that recurring revenues from support and services will continue to account for a substantial portion of its total revenues. Customer Support Programs. As of September 30, 1997, the Company employed a technical hot-line support staff of 49 employees, of whom 31 are based at the Company's headquarters in Massachusetts, 4 are located in Florida, and 14 operate out of two international technical response centers located in the United Kingdom and Australia. Telephone support calls are handled by applications software specialists, supported by a computerized call tracking and problem reporting system. The Company's field based account managers also provide additional technical support, as needed, within their territories. The Company's network of international distributors also provide first-level technical support within their geographical territories. Subscribers to the Company's annual support contracts are entitled to receive (i) customer service and technical support by telephone (including dial-in diagnostics), fax, support on line via the Internet and electronic bulletin board, (ii) a newsletter and periodic technical bulletins, (iii) a discounted admission to attend the Company's annual user group meeting and (iv) any periodic software updates. The Company believes that support contracts are a stable source of recurring revenue. The Company maintains a network operations group within the support organization which provides technical support to assist customers in implementing MAXIMO in distributed computing environments involving one or more complex networks. These specialists in server and client hardware platforms, network operating systems and communications protocols supplement the applications and systems expertise of the Company's technical support staff. The network operations group helps customers plan complex network installations, troubleshoot and resolve conflicts arising from heterogeneous hardware configurations, communications protocols and network operating systems, and optimize network performance. Implementation, Consulting and Training. As of September 30, 1997, the Company employed a consulting and training staff of 117 6 8 employees of whom 70 are located in the U.S., 42 in Europe, and 5 in Asia/Pacific and Latin America. The Company's network of international distributors also provides services within their geographic territories. The Company provides consulting services, on a fee basis, to assist customers in planning and carrying out the implementation of the Company's solutions. In some cases, customers install and implement MAXIMO systems and perform any necessary customization themselves with only limited assistance from the Company. In other cases, particularly where a complex, integrated solution or extensive customization is required, the Company provides comprehensive implementation planning, project management, network communications, system integration and custom modification services. The Company's professional services group has expert knowledge of the Company's products and tools and the concepts and theories of maintenance and planning. They can also draw upon experience in implementing systems addressing diverse applications on a number of different platforms in a wide range of industries worldwide. The Company conducts comprehensive training programs covering Company applications and concepts for its end users. Training is offered at the Company's headquarters in Massachusetts and at regional centers located in California, Colorado, Florida, Michigan, Texas, Virginia, Australia, France, Germany, Sweden, the United Kingdom and the Netherlands. The Company also offers on-site training classes at customer sites upon request. The Company has found that most clients desire initial user training classes in connection with the license of a system and often attend subsequent advanced schools or send additional users to schools. CUSTOMERS The Company's customers include electric, water and other utilities, educational, research and health care institutions, government agencies, hotels, casinos, airlines and railroads, as well as large, well-known corporations in the manufacturing, oil and gas, construction, mining, aerospace, defense, ship building, telecommunications, ground fleet transportation, data processing, semiconductor, financial, computer, entertainment, banking, insurance, pharmaceutical and other industries. The Company's products have been installed and are supported in major markets worldwide. Local language support is provided in many of these markets. MAXIMO has been installed at more than 5,000 sites by more than 3,000 companies, government agencies and other organizations. No customer has accounted for more than 10% of the Company's total revenue in any of its three most recent fiscal years. 7 9 SALES AND MARKETING The Company markets its products in North America through a direct sales force of 87 persons including pre-sales engineers, account managers and engagement managers operating out of its Massachusetts headquarters, and sales offices located in California, Colorado, Florida, Illinois, Michigan, New Hampshire, New Jersey, New York, Oregon, Texas, Virginia, and Washington, and a tele-sales and tele-marketing force of 15 persons operating out of its Florida and Georgia offices. The Company markets its products outside North America through a sales force of 65 persons and a network of sales offices in Argentina, Australia, Canada, France, Germany, Hong Kong, India, the Netherlands, Sweden, Thailand and the United Kingdom and through distributors in parts of Africa, Asia, Europe, the Middle East and South America. Approximately 44% of the Company's total revenues in fiscal 1997 were derived from sales outside the United States. The Company markets its products through advertising campaigns in national trade periodicals, direct mail and seminar series. These efforts are supplemented by listings in relevant trade directories, exhibitions at trade shows and conference appearances. Initial leads are qualified by the tele-marketing operation before being turned over to either the direct sales force or tele-sales. MAXIMO Enterprise and Workgroup sales representatives work closely with sales engineers in each of the Company's sales offices throughout the sales process, although to a lesser degree for Workgroup. The Company's direct and tele-sales personnel are compensated through salaries plus commissions based on annual quotas and may also receive quarterly bonuses. Sales management personnel receive salaries plus bonuses based on monthly, quarterly and annual revenue and contribution targets. The sales cycle for MAXIMO products, from the initial sales presentation to the issuance of a purchase order, typically ranges from thirty to ninety days for ADvantage, six to nine months for Workgroup and nine to fifteen months for Enterprise. The Company believes that customers generally choose MAXIMO based on the features it provides and upon a preference for the product architecture, rapid time to benefit, domain expertise and ease of use. The Company has experienced a longer sales cycle for MAXIMO Enterprise in the last year as its procurement is increasingly tightly linked to the selection of a backbone enterprise resource planning system. Delivery lead times for the Company's products are very short and, consequently, substantially all of the Company's software revenues in each quarter result from the orders received in the quarter. Accordingly, the Company only maintains a backlog for its consulting and training services and believes that its backlog at any point in time is not a reliable indicator of 8 10 future sales and earnings. The absence of significant backlog may contribute to unpredictability in the Company's results of operations. An important part of the Company's sales and marketing strategy is to build and maintain marketing relationships with companies that PSDI believes can assist it to penetrate new markets. The Company has agreements with IBM Global Services (an affiliate of IBM), ABB Service Worldwide (an affiliate of Asea Brown Boveri) and Cordant Inc. (an affiliate of Tracor, Inc.). The Company plans to work more closely with major systems integrators and to expand and leverage its relationships with engineering and construction firms and original equipment manufacturers ("OEMs") which incorporate the Company's products into facilities or systems developed by them through its MAXIMO Alliance Program. The Company has OEM arrangements with companies such as Honeywell Incorporated and Johnson Controls, Inc., under which these companies may integrate MAXIMO with their building controls systems and with The Foxboro Company (an affiliate of Siebe Plc) under which Foxboro uses Java-based applets to integrate MAXIMO with its shop floor controls system. PRODUCT DEVELOPMENT As of September 30, 1997, the Company employed 96 persons and a number of consultants in product management, application development, technology research and quality assurance. The Company's product management group (consisting of 9 persons) is responsible for identifying application trends in the market and works closely with key customers to define and specify product requirements. The applications development group (consisting of 37 persons) is organized in groups focused on application functionality, user interface and output, and database and systems development. This group also works closely with the product management group to develop new products and functional modules, and maintains and enhances the functionality and usability of the Company's existing products. The Company's technology research group (consisting of 13 persons) investigates and researches new technologies that provide functionality that is targeted for commercial release in time frames ranging from several months to several years into the future. The Company's quality assurance group (consisting of 37 persons) tests the Company's software for compliance with the functional and technical specifications established by the product design group and confirms that it operates as expected with third-party databases, operating systems, network operating systems and applications software, tests manufactured products, manages non-English language releases and prepares and updates user documentation and training manuals. The Company's total product development expenses in 1997, 1996 and 1995 were $11,387,000, $7,653,000, and $6,639,000, respectively. The Company capitalizes certain software development costs in accordance with Statement of Financial 9 11 Accounting Standards No. 86, "Accounting for Costs of Computer Software to be Sold, Leased or Otherwise Marketed." Capitalized software costs are amortized over the estimated market life of the product (generally one to three years) and amounts amortized are included in the cost of software revenues. The Company capitalized $0, $634,000 and $0 of software development costs in 1997, 1996 and 1995, respectively. In fiscal years 1997, 1996 and 1995, the Company amortized $360,000, $948,000, and $1,120,000, of software development costs, respectively. The Company's products consist primarily of internally developed software and the product acquired from MAC. In addition, the Company has incorporated in its products graphical user interfaces, report writers, applications development tools and database management systems developed by other vendors. In March 1997, the Company released a version of client/server MAXIMO for use with the Microsoft SQL Server database and Microsoft NT(R) Workstation 4.0. In August 1997, the Company released MAXIMO Analyzer, a new business intelligence tool. MAXIMO Analyzer provides detailed information allowing users to rapidly pose multiple questions and assess responding data to make critical business decisions. The product converts significant transaction data into a functional analysis instrument utilizing PowerPlay(R) from Cognos, a leading supplier of business intelligence tools. MAXIMO Analyzer delivers true distributed Online Analytical Processing (OLAP) capabilities for MAXIMO users. In September 1997, the Company released the MAXIMO Mobile Application Suite, a mobile and paperless work management system. MAXIMO Mobile Application Suite is a set of new integrated MAXIMO modules which install directly onto hand-held computers and utilize bar coding technology to ensure compliance with procedures and automation of routine and preventive practices for maintenance engineers. The MAXIMO Mobile Application Suite consists of three applications, MAXIMO(R) Procedure Builder, MAXIMO(R) Rounds and MAXIMO(R) Lockout/Tagout/Lineup. Together, these applications provide: - - Point-of-Performance Data Access: Engineers can now have access to critical maintenance data, such as job plans and safety information, while greatly improving the speed and accuracy of field data collection. - - Enhanced Procedural Compliance: Automation procedures, coupled with the use of hand-held computers and barcode labels, ensures that procedures are performed the same way, every time throughout the operation. In the event the user's input into the application is outside of specification, an alert for corrective action is automatically initiated. Every procedural step is also time and date stamped. 10 12 - - Increased Data Integrity: Data automatically populates the maintenance database from the paperless solution, eliminating repetitive and error-prone data entry. The quality and accessibility of data also simplifies regulatory reporting. In 1996, the Company released an application programming interface ("API") to ORACLE's accounting software. The Company is also a third-party reseller of Centura Corporation's SQLBase, and developed its MAXIMO product using applications tools developed by Centura Corporation which have subsequently been made commercially available by Centura Corporation. In May 1996, the Company released a version of MAXIMO Enterprise for use with the SYBASE database. The Company's relationships with these leading database management system vendors enable the Company's customers to take advantage of the latest developments in database technology. The Company also maintains ongoing relationships with other third-party software developers, such as Netronic Software GmbH (graphics and interface technology), Cognos Corporation (OLAP Technology), Scribe Technologies (report generation) and Intersolv Inc. (ODBC drivers). See "Licensed Technology." The Company's product development efforts are currently focused on providing application enhancements for the MAXIMO product line (Enterprise, Workgroup and ADvantage). The Company also is in the process of developing a version of MAXIMO to enable other third-party applications software to be more easily integrated with the Company's products. The initial product offering utilizing this technology is MAXIMO Work Order component that has been used by The Foxboro Company as an imbedded component in their shop floor distributed control system. In addition, the technology research group is currently researching, developing and incorporating into the MAXIMO product technologies that are emerging in conjunction with the Internet. The computer industry is characterized by rapid technological advances, changes in customer requirements and frequent product introductions and enhancements. The Company's future success will depend upon its ability 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 multi-platform support and to advances in hardware and operating systems. Any failure by the Company to anticipate or respond adequately to technological development and customer requirements, or any significant delays in product development or introduction could result in a loss of competitiveness and revenues. The Company has experienced delays in the introduction of new products and product enhancements. These delays have varied in 11 13 duration depending on the scope of the project and the nature of the problems encountered. There can be no assurance, however, that the Company will be successful in developing and marketing new products or product enhancements on a timely basis or that the Company will not experience significant delays in the future, which 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. COMPETITION The market for applications software is intensely competitive and rapidly changing. In general, the Company competes on the basis of (1) product architecture, which includes distributed computing capability, access to commercial SQL databases, and ease of customization and integration with other applications; (2) functionality, which includes the breadth and depth of features and functions, and ease of use; (3) support and service, which includes the range and quality of technical support, training and consulting services, as well as the capability to provide these on a global basis; (4) product pricing in relation to performance; (5) rapid implementation to achieve benefits and (6) domain expertise. The market for asset maintenance software is fragmented by geography, hardware platform and industry orientation, and is characterized by a large number of competitors, including both independent software vendors and certain enterprise resource planning vendors including SAP AG, JD Edwards and The Baan Company who offer a module incorporating limited asset maintenance functionality. During the year there has been consolidation within the asset maintenance software market with the acquisition of SQL Group BV by Datastream Systems, Inc., TSW International Inc. by Indus Group and Revere, Inc. by Walker Interactive Systems. Currently, MAXIMO Enterprise and Workgroup compete with products of a number of large vendors which have traditionally provided maintenance software running on mainframes and minicomputers, and are now offering systems for use in the client/server environment. The Company expects that in the future MAXIMO Enterprise and Workgroup may encounter competition from vendors of low cost maintenance systems designed initially for use by a single user or limited number of users, as vendors of these products upgrade their functionality in an attempt to enter the client/server market. MAXIMO ADvantage competes with a number of competitors, one of which is a public company, but most of which are small regional companies. The Company believes that the functionality of MAXIMO, its open product architecture and the Company's ability to provide global distribution and support have been significant factors in the competitive success of MAXIMO. While the Company believes that MAXIMO 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 12 14 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, support and services 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. PRODUCTION The principal materials and components used in the Company's software products include computer media, user materials and training guides. The Company currently uses third-party vendors to print its user manuals, packaging and related materials, but duplicates program diskettes and CD-Roms in its manufacturing and distribution facility located at its corporate headquarters. The Company then assembles the third party produced documentation with diskettes and CD-Roms and ships these directly from its manufacturing and distribution facility. To date, the Company has been able to obtain adequate supplies of all components and materials and has not experienced any material difficulties or delays in manufacture and assembly of its products or materials due to product defects. PROPRIETARY RIGHTS AND LICENSES The Company has registered its MAXIMO and P/X trademarks with the United States Patent and Trademark Office. Registrations with equivalent offices in many foreign countries in which the Company or its distributors do business have been obtained or are in process. The Company regards its software as proprietary and attempts to protect its rights with a combination of trademark, copyright and employee and third party non-disclosure agreements. Despite these precautions, it may be possible for unauthorized parties to copy or reverse-engineer portions of the Company's products. While the Company's competitive position could conceivably be threatened by its inability to protect its proprietary information, the Company believes that copyright and trademark protection are less important to the Company's success than other factors such as knowledge, ability and experience of the Company's personnel, its name recognition and ongoing product development and support. The Company's software products are usually licensed to customers under a perpetual, non-transferable, non-exclusive license that stipulates how many concurrent users may access the system. The Company relies on both "shrink wrap" licenses and negotiated agreements depending on various factors including the size and level of integration. A shrink wrap license agreement is a printed license agreement included with packaged software that sets forth the terms and conditions under which the purchaser can use the product, and purports to bind the purchaser 13 15 to such terms and conditions by its acceptance and purchase of the software. 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. MAXIMO(R) and P/X(R) are registered trademarks of the Company. Microsoft(R) is a registered trademark and Windows(TM) is a trademark of Microsoft Corporation. This Annual Report on Form 10-K also includes other trademarks of the Company and trademarks of companies other than the Company. LICENSED TECHNOLOGY The Company licenses certain software programs from third-party developers and incorporates them into the Company's products. These licenses are non-exclusive worldwide licenses which terminate on varying dates. The Company believes that it will be able to renew these licenses or that it will be able to obtain substitute products if needed. The Company has entered into a non-exclusive license agreement with Centura Corporation that permits the Company to include certain Centura proprietary software products collectively called the "SQL System" in the Company's products. Under the terms of the agreement, the Company is required to pay fixed royalty fees to Centura. Centura may terminate the agreement on the occurrence of a material, uncured breach of the agreement by the Company. The Company has entered into a non-exclusive license agreement with Scribe Technologies ("Scribe") that grants the Company's end-users to the rights to a single-user, application specific SQR3 license to modify the standard reports delivered with MAXIMO, as well as, run-time licenses. Under the terms of the agreement, the Company is currently required to pay fixed royalties to Scribe. The Company may terminate the agreement at any time. Scribe may terminate the agreement on the occurrence of a material, uncured breach of the agreement by the Company. Currently, these products are included in MAXIMO Enterprise and Workgroup. The Company has entered into a non-exclusive license agreement with Cognos Corporation ("Cognos") that permits the Company to incorporate Cognos' Powerplay product in MAXIMO Analyzer. Under the term of the Agreement, the Company is required to pay royalties to Cognos based on every MAXIMO Analyzer module licensed. The Company has entered into a non-exclusive license agreement with Netronic Software GmbH ("Netronic") that permits the Company to incorporate certain graphic software programs into the Company's products. Under the terms of the agreement, the Company is currently required to pay fixed royalties to Netronic. The Company may terminate the agreement at any time. Netronic may terminate the agreement on 14 16 the occurrence of a material, uncured breach of the agreement by the Company. EMPLOYEES As of September 30, 1997, the Company had 489 full-time employees including 167 in sales, marketing and related services, 96 in product research, applications development, technology research, and quality assurance, 166 in customer support, training and consulting services, and 59 in finance and administration, human resources, manufacturing and office services. The Company's employees are not represented by any collective bargaining organization, and the Company has never experienced a work stoppage. The Company believes that its relations with employees are good. ITEM 2. PROPERTY Until December 8, 1997, the Company's headquarters were located in Cambridge, Massachusetts in a leased facility consisting of approximately 45,000 square feet, at an average annual cost including parking, of approximately $2,000,000, under a 13 year lease that expires on December 31, 1997. The Company was also leasing a 13,000 square foot manufacturing and distribution facility in Watertown, Massachusetts at an average annual cost of approximately $100,000 under a lease originally expiring on May 31, 1998. The Company negotiated a no penalty termination to this lease effective December 31, 1997. The Company has relocated both its corporate headquarters and its manufacturing and distribution facilities in December 1997 to a leased facility consisting of approximately 110,000 square feet, at an average annual base cost of $1,300,000, under a 6 year net lease with a renewal option through December 31, 2009. Additionally, the Company estimates that its annual operating expenses under the new lease will be approximately $900,000, based on information currently available. The actual costs will depend on such factors as actual electricity usage, real estate taxes and operating costs. Under the terms of its lease, the Company has the ability to sublease the space and may elect to do so in the future should business conditions dictate. The operating expenses for both the Cambridge and Bedford facilities described above exclude depreciation and amortization. The Company expects to spend $2.5 million for construction and leasehold improvements in connection with the relocation. It also plans to spend approximately $1 million on furniture, fixtures and equipment. The Company leases additional sales offices in California, Colorado, Connecticut, Florida, Georgia, Illinois, Michigan, Missouri, New Hampshire, New Jersey, New York, Texas, Virginia, Washington, and Oregon. The Company also leases offices for its international operations in Argentina, Australia, Belgium, Canada, France, Germany, Hong Kong, India, the Netherlands, Sweden, Thailand and the United Kingdom. 15 17 ITEM 3. LEGAL PROCEEDINGS As of the date of this Annual Report on Form 10-K, the Company is not a party to any legal proceedings the outcome of which, in the opinion of management, would have a material adverse effect on the Company's results of operations or financial condition. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS None. PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND STOCKHOLDER MATTERS STOCK INFORMATION Price Range of Common Stock The Company's Common Stock is traded in the over-the-counter market and prices are quoted on the National Association of Securities Dealers Automated Quotation National Market System ("NASDAQ National Market") under the symbol PSDI. As of December 15, 1997, there were approximately 60 holders of record of the Company's Common Stock. This reflects the fact that most of the Company's stock is held in street names through one or more nominees. The following table sets forth the high and low per share sales prices of the Company's Common Stock, as reported on the NASDAQ National Market consolidated reporting system for each quarterly period within the two year period ended September 30, 1997.
FISCAL 1997 HIGH LOW First Quarter $44.25 $30.50 Second Quarter $47.00 $27.75 Third Quarter $31.87 $11.12 Fourth Quarter $29.50 $14.25
FISCAL 1996 HIGH LOW First Quarter $37.75 $21.75 Second Quarter $40.75 $22.25 Third Quarter $48.50 $29.50 Fourth Quarter $49.75 $28.00
Since 1983, the Company has not declared or paid cash dividends on its Common Stock, other than distributions to stockholders made with respect to fiscal years 1992 and 1993 to satisfy certain federal and state tax obligations of the stockholders attributable to the Company's S Corporation status prior to October 1, 1993. The Company currently intends to retain any future earnings to finance growth and therefore does not anticipate paying cash dividends in the foreseeable future. 16 18 ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA The selected consolidated financial data of the Company set forth below has been derived from the consolidated financial statements for the Company for the periods indicated. This selected consolidated financial data should be read in conjunction with "Management's Discussion and Analysis of Consolidated Financial Condition and Results of Operations" and the Company's consolidated financial statements and the notes thereto included elsewhere herein.
YEAR ENDED SEPTEMBER 30, ---------------------------------------------------------------- (in thousands, except 1997 1996 1995 1994 1993 share and per share data) -------- ------- ------- ------- ------- Revenues $ 96,700 $73,329 $50,372 $36,753 $29,978 Income from operations 16,271 14,606 8,438 4,702 1,857 Historical net income $ 11,570 $10,046 $ 5,629 $ 2,315 $ 1,265 Historical income per share $ 1.15 $ 1.00 $ 0.64 $ 0.33 $ 0.22 Pro forma data (unaudited): Pro forma net income (1) -- -- -- $ 2,601 $ 1,277 Pro forma income per -- -- -- $ 0.37 $ 0.22 share (1) Weighted number of 10,064 10,052 8,846 6,942 5,811 common and common equivalent shares ---------------------------------------------------------------- Total Assets 102,239 83,476 64,960 28,713 13,899 Long-Term Obligations 144 628 962 1,333 2,718 Dividends Per Share -- -- -- -- $ 0.11
(1) From October 1, 1981 through September 30, 1993, the Company operated as an S corporation under Subchapter S of the Internal Revenue Code of 1986, as amended and comparable provisions of certain state tax laws. The pro forma adjustment for the fiscal year ended 1993 reflect provision for federal and state income taxes as if the Company has been subject to federal and state income taxation as a corporation during such period. For the three-month period ended December 31, 1993, the provision for income tax is adjusted to exclude the expense of the cumulative deferred tax provision required on termination of S corporation status. (2) The consolidated financial statements of the Company for all periods presented include the results and balances of an acquisition accounted for as a pooling-of-interests. 17 19 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS OVERVIEW The Company develops, markets and supports applications 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 and training and consulting services. The Company has experienced a significant shift in the sources of its revenues as a result of its decision to concentrate its resources on the development and marketing of enterprise-wide asset maintenance management systems operating in a client/server environment. The Company released MAXIMO, its first client/server product, in 1991, and released P/X, its second client/server product, in 1992. In the fiscal year ended September 30, 1997, revenues from client/server software accounted for 95% of software revenues, of which 99% was attributable to the client/server versions of MAXIMO. The Company acquired Maintenance Automation Corporation ("MAC") on March 1, 1996. MAC is a developer of maintenance management software for the single-user, PC LAN segment. In March 1997, the Company released a new SQL Server version of MAXIMO Enterprise and MAXIMO Workgroup for the Microsoft SQL Server database. The new SQL Server version is available for Windows NT servers, including NT 3.5.1 and NT 4.0, supporting Windows 95, Windows 95B, all Windows 3.x systems, and NT 3.5.1 and NT 4.0 clients. In August 1997, the Company released MAXIMO Analyzer, a new business intelligence tool. MAXIMO Analyzer provides detailed information allowing users to rapidly pose multiple questions and assess responding data to make critical business decisions. In September 1997, the Company released the MAXIMO Mobile Application Suite, a mobile and paperless work management system. MAXIMO Mobile Application Suite is a set of new integrated MAXIMO modules which install directly onto hand-held computers and utilize bar coding technology to ensure compliance with procedures and automation of routine and preventive practices for maintenance engineers. In fiscal 1996, the Company introduced a new suite of MAXIMO products: MAXIMO Enterprise, MAXIMO Workgroup and MAXIMO ADvantage. MAXIMO Enterprise, a new version of which was released in March 1996, is a client/server product, which runs on Oracle7 and SYBASE platforms and is intended for the high function, high usage segment of the maintenance management market. MAXIMO Workgroup, released in July 1996, is also a 18 20 client/server product and runs on SQLBase and Oracle Workgroup and is intended for the mid-range segment of the maintenance management market. The product acquired as a result of the acquisition of MAC on March 1, 1996, MAXIMO ADvantage, is intended for the lowerend maintenance market. MAXIMO ADvantage supports Microsoft Access for the single user, PC LAN segment. The Company incurred significant additional and unexpected costs in developing a new release of MAXIMO ADvantage due to a delay in excess of six months in completing the new release of this product. The delay was necessary to meet both the quality expectations and functionality demanded by the Company. Further affecting MAXIMO ADvantage sales was the delay in availability of a CD-Rom based multi-media evaluation kit. This evaluation kit generally became available in December 1996. In March 1997, the Company released the first significant version of MAXIMO ADvantage since the acquisition of Maintenance Automation Corporation. The Company has not realized any significant revenues from this new release despite opening a new tele-sales operation in Atlanta in March 1997. Accordingly, expenses related to this product have been reduced to a level commensurate with the lower revenue expectations. The unexpected costs and shortfalls in expected revenues resulted in net operating losses of $1,420,000, and $1,203,000 for MAC for fiscal 1997 and 1996, respectively. The sources of the Company's revenues from support and services have also shifted since the introduction of the Company's new generation of client/server products. Revenues from support and services relating to the Company's MAXIMO products have increased, while those relating to the Company's P/X and mainframe and other project management software have declined. The Company experienced an increase in the average selling price of its MAXIMO client/server software licenses during fiscal 1997. The Company attributes this increase in part to licenses of a version of MAXIMO for use with the ORACLE and SYBASE database management systems. These client/server versions of MAXIMO have a higher entry price and are typically implemented in configurations involving a larger number of users, for whom additional license fees are paid. Larger software license contracts, if any, may have a significant impact on revenues for any quarter and could therefore result in significant fluctuations in quarterly revenues and operating results. Revenues from licenses of P/X have declined sharply, dropping to $551,000 of total license revenues in the fiscal year ended 1997. The Company no longer actively markets the P/X product as a stand alone solution. Revenues from licenses of mainframe and other project management software have also declined sharply, dropping to less than 1% of total license revenues in the fiscal year ended 1997. The Company no longer actively markets its mainframe and other project management software products, although it 19 21 provides technical support and other services to their installed customer base. The Company's revenues attributable to its operations outside the United States are a significant portion of total revenues. The Company expects that international revenues will continue to be a significant percentage of total revenues. As the percentage of the Company's total revenues which are derived from international operations and are conducted in foreign currencies grows, changes in the values of these foreign currencies relative to the United States dollar will affect the Company's results of operations, and may contribute to fluctuations in the Company's results of operations. The functional currencies of the Company's international subsidiaries include the pound sterling, the French franc, the German deutschemark, the Thai baht, the Dutch guilder, the Indian rupee, the Japanese yen, the Swedish krona, and the Australian and Canadian dollars, each of which has fluctuated significantly in relation to the United States dollar. In addition, the Company is exposed to potential losses as a result of transactions giving rise to accounts receivable in currencies other than the United States dollar or the functional currencies of its international subsidiaries. When the value of a foreign currency in which the accounts receivable of the Company are denominated changes between the date the account receivable is recorded and the date on which it is settled, the resulting gain or loss is recorded as a foreign currency transaction adjustment. The Company recorded foreign currency transaction losses of $476,000, $142,000, and $117,000 for the fiscal years 1997, 1996 and 1995, respectively. 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 operations. 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. 20 22 Results of Operations The following table sets forth, for the periods indicated, certain financial data as a percentage of total revenues:
Year Ended September 30, ------------------------ Revenues: 1997 1996 1995 ------ ------ ------ Software 52.1 % 59.2 % 59.7 % Support and services 47.9 40.8 40.3 ------ ------ ------ Total revenues: 100.0 100.0 100.0 Total cost of revenues 27.5 24.9 25.3 ------ ------ ------ Gross margin 72.5 75.1 74.7 ------ ------ ------ Operating expenses: Sales and marketing 34.1 33.3 32.8 Product development 11.8 10.4 13.2 General and 9.8 10.2 12.0 administrative Merger expenses -- 1.3 -- ------ ------ ------ Total operating expenses: 55.7 55.2 58.0 ------ ------ ------ Income from operations 16.8 19.9 16.7 Other income(expense), net 1.9 2.6 1.8 ------ ------ ------ Income before income taxes 18.7 22.5 18.5 Income taxes 6.8 8.8 7.4 ------ ------ ------ Net income 11.9 % 13.7 % 11.1 % ------ ------ ------
(1) Fiscal years ended September 30, 1996 and 1995 have been restated to include the results and balances of an acquisition accounted for as a pooling-of-interests. FISCAL 1997 COMPARED TO FISCAL 1996 REVENUES
(in thousands) 1997 CHANGE % 1996 - ------------------------------------------------------------------------------------- Software licenses $50,393 16.2% $43,382 Percentage of total revenues 52.1% 59.2% Support and services $46,307 54.6% $29,947 Percentage of total revenues 47.9% 40.8% Total revenues $96,700 31.9% $73,329
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 for 1997 increased 42.8% to $42.4 million or 43.8% of total revenues, compared to $29.7 million or 40.5% of total revenues in 1996. The increases in the percentage of total revenues generated outside the U.S. in 1997 can be attributed to the expansion of the Company's international sales organization and the signing of a significant license in Canada. The progressive growth in software revenues is attributable to increases in the number of MAXIMO licenses, the number of users per license of MAXIMO and a few large MAXIMO Enterprise software licenses, combined with the release of the client/server versions 21 23 of MAXIMO supporting the SQL Server platform. Revenues from licenses of MAXIMO and from related support and services increased 39.5% to $93.1 million or 96.3% of total revenues in 1997 compared to $66.7 million or 91.0% of total revenues in 1996. Revenues from licenses of P/X and from related support and services decreased 44.9% to $2.7 million or 2.8% of total revenues in 1997 compared to $4.9 million or 6.7% of total revenues in 1996. The decline in P/X revenues occurred most significantly in P/X software license revenues and can be attributed to product performance issues, diminished demand for high-end planning and cost solutions, increased competition, and the Company's declining focus on selling and marketing this product. The increase in support and services revenues is attributable to increased sales of MAXIMO support contracts and consulting and training services as a direct result of the increase in MAXIMO software licenses sold and services sold in connection with large scale software implementations. COST OF REVENUES
(in thousands) 1997 CHANGE % 1996 - --------------------------------------------------------------------------------------------- Software licenses $ 2,547 -18.0% $ 3,106 Percentage of software licenses 5.1% 7.2% Support and services $ 24,025 58.8% $15,132 Percentage of support and services 51.9% 50.5% Total cost of revenues $ 26,572 45.7% $18,238 Percentage of total revenues 27.5% 24.9%
Cost of software revenues consists of the amortization of capitalized software, royalties paid to vendors of third party software, the cost of software product packaging and media, and certain employee costs related to software duplication, packaging and shipping. The decrease in the cost of software revenues is due primarily to lower amortization expense for capitalized development costs and economies resulting from increased sales volume. In fiscal 1996, the Company changed the estimated useful life of its MAXIMO Enterprise product from three years to fifteen months to accurately reflect the lifecycles for new releases of this product. This change resulted in additional amortization expense of $565,000. 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 22 24 attributable to extensive use of third-party consultants contracted to perform services for the Company as a result of the increases in the number of licenses sold and the timing of hiring permanent employees. The increase is also attributable to the costs of personnel to support international distributors in certain territories where the distributors performed a larger proportion of services without corresponding increases in service revenues to the Company. OPERATING EXPENSES
(in thousands) 1997 CHANGE % 1996 - -------------------------------------------------------------------------------------- Sales and marketing $ 32,985 35.1% $24,422 Percentage of total revenues 34.1% 33.3% Product development $ 11,387 48.8% $ 7,653 Percentage of total revenues 11.8% 10.4% General and administrative $ 9,485 27.4% $ 7,445 Percentage of total revenues 9.8% 10.2%
The increase in sales and marketing expenses in 1997 is primarily due to increases in the number of sales personnel, sales commissions, travel and lodging expenses, an increase in advertising costs and expense levels established to achieve a high level of revenues. The increase as a percentage of revenues for 1997 is due primarily to increases in sales commissions paid to both the geographic sales representatives and in some cases the industry oriented vertical sales representative, which decreases the margin on the sale combined with the costs of expanding into new territories and the training of new sales personnel to sell the Company's product. The increase in product development expenses in 1997 is primarily due to the engagement of additional employees and third party consultants who worked on the new client/server releases of MAXIMO. Capitalization of software costs were $0 and $634,000 in 1997 and 1996, respectively. During fiscal 1997 and 1996, the Company spent its development expenditures on MAXIMO. The increase as a percentage of revenues in 1997 is attributable to the investment in both new releases of the current version of MAXIMO and the research for a new MAXIMO-architected application, as well as the absence of any capitalization of expenses in 1997. The increase in general and administrative expenses in 1997 is primarily due to goodwill amortization for the purchase of two of its Swedish and German distributors and expenses related to professional fees in connection with growth of the Company. Also contributing to the increase is an increase in personnel to support the increase in the revenue base. The decrease as a percentage of revenues in 1997 is primarily attributable to the Company's ability to manage a larger revenue base without a commensurate increase in general and administrative expenses. 23 25 NON-OPERATING EXPENSES
(in thousands) 1997 CHANGE % 1996 - ---------------------------------------------------------------------------------- Interest income $ 2,409 22.2% $ 1,971 Interest (expense) $ (24) -36.8% $ (38) Other income (expense) $ (529) 1,159.5% $ (42)
The increase in interest income in 1997 is attributable to interest earned on increased cash equivalents from cash flow generated from operations. The increase in other income (expense), net, is attributable to an increase foreign currency translation losses. PROVISION FOR INCOME TAXES The Company's effective tax rates were 36.2% and 39.1% in 1997 and 1996, respectively. The decrease in the effective tax rate for fiscal 1997 can be attributed to research and development tax credits, use of a foreign sales corporation and tax exempt interest income. FISCAL 1996 COMPARED TO FISCAL 1995 REVENUES
(in thousands) 1996 CHANGE % 1995 - -------------------------------------------------------------------------------------- Software licenses $ 43,382 44.3% $30,054 Percentage of total revenues 59.2% 59.7% Support and services $ 29,947 47.4% $20,318 Percentage of total revenues 40.8% 40.3% Total revenues $ 73,329 45.6% $50,372
(1) Comparative revenues for 1995 include only nine months of MAC expenses in fiscal 1995, as MAC's fiscal year was changed to coincide with the Company's. 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 for 1996 increased 53.9% to $29.7 million or 40.5% of total revenues, compared to $19.3 million or 38.3% of total revenues in 1995. The increase in the percentage of total revenues generated outside the U.S. in 1996 can be attributed to the expansion of the Company's international sales organization. The growth in software revenues is attributable to increases in the number of MAXIMO licenses, the number of users per license of MAXIMO and a few large MAXIMO Enterprise software licenses, combined with the release of the client/server versions of MAXIMO supporting the SYBASE and Oracle platforms. Revenues from licenses of MAXIMO and from related support and services increased 60.7% to $66.7 million or 91.0% of total revenues in 24 26 1996 compared to $41.5 million or 82.3% of total revenues in 1995. Revenues from licenses of P/X and from related support and services decreased 12.5% to $4.9 million or 6.7% of total revenues in 1996 compared to $5.6 million or 11.1% of total revenues in 1995. The decline in P/X revenues occurred most significantly in P/X software license revenues and can be attributed to product performance issues, diminished demand for high-end planning and cost solutions, increased competition, and the Company's declining focus on selling and marketing this product. The increase in support and services revenues are attributable to increased sales of MAXIMO support contracts and consulting and training services, partially offset by declines in sales of support contracts and services relating to the Company's project management software. COST OF REVENUES
(in thousands) 1996 CHANGE % 1995 - -------------------------------------------------------------------------------------------- Software licenses $ 3,106 14.5% $ 2,713 Percentage of software licenses 7.2% 9.0% Support and services $ 15,132 51.2% $10,006 Percentage of support and services 50.5% 49.2% Total cost of revenues $ 18,238 43.4% $12,719 Percentage of total revenues 24.9% 25.3%
(1) Comparative expenses for 1995 include only nine months of MAC expenses in fiscal 1995, as MAC's fiscal year was changed to coincide with the Company's. Cost of software revenues consists of the amortization of capitalized software, royalties paid to vendors of third party software, the cost of software product packaging and media, and certain employee costs related to software duplication, packaging and shipping. In 1996, the Company changed the estimated useful life of its MAXIMO Enterprise product from three years to fifteen months to accurately reflect the lifecycles for new releases of this product. This change resulted in additional amortization expense of $565,000. In 1995, the Company accelerated the amortization expense of its internally developed software related to its P/X product, which resulted in $514,000 of additional expense. The increase in 1996 is also attributable to production costs associated with increased licenses of software. 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 in 1996 is attributable to extensive use of third-party consultants contracted to perform services for the Company as a result of the increases in the number of licenses sold and the timing of hiring 25 27 permanent employees. Also in fiscal 1996, the Company created a Business Solutions group whose goal is to manage large industry implementations in certain vertical markets. The increase is also attributable to the costs of personnel to support international distributors in certain territories where the distributors performed a larger proportion of services without corresponding increases in service revenues to the Company. OPERATING EXPENSES
(in thousands) 1996 CHANGE % 1995 - -------------------------------------------------------------------------------------- Sales and marketing $ 24,422 47.5% $16,555 Percentage of total revenues 33.3% 32.8% Product development $ 7,653 15.3% $ 6,639 Percentage of total revenues 10.4% 13.2% General and administrative $ 7,445 23.7% $ 6,021 Percentage of total revenues 10.2% 12.0%
(1) Comparative expenses for 1995 include only nine months of MAC expenses in fiscal 1995, as MAC's fiscal year was changed to coincide with the Company's. The increase in sales and marketing expenses in 1996 is primarily due to increases in the number of sales personnel, sales commissions, travel and lodging expenses, and an increase in advertising costs and the restructuring of the MAC tele-sales operation. The increase as a percentage of revenues for 1996 is due primarily to increases in sales commissions paid to both the geographic sales representatives and in some cases the industry oriented vertical sales representatives, which decrease the margins on the sales. The increase in product development expenses in 1996 is primarily due to the engagement of additional employees and third party consultants who worked on the new client/server release of MAXIMO during the first six months of the year, offset by the capitalization of the software costs related to the product, as no software costs were capitalized for 1995. Capitalization of software costs were $634,000 and $0 in 1996 and 1995, respectively. During 1996, the Company spent progressively more of its development expenditures on MAXIMO such that virtually all of its development dollars were incurred on the MAXIMO product line by the end of the year. The decrease as a percentage of revenues in 1996 is attributable to the delays in planned hires of new development staff until the later half of 1996 and capitalization of internal software developments costs in 1996 versus no capitalization of expenses in 1995. The increase in general and administrative expenses in 1996 is attributable to goodwill amortization for the purchase of its Swedish and German distributors, expenses related to professional fees in connection with growth of the company, as well as, increases in insurance premiums resulting for the second public 26 28 offering in July 1995. The decrease as a percentage of revenues in 1996 is attributable to salary costs due to the departure of several MAC executives and administrative employees, and the ability of the Company to manage a larger revenue base without commensurate increases in general and administrative expenses. NON OPERATING EXPENSES
(in thousands) 1996 CHANGE % 1995 - ---------------------------------------------------------------------------------- Interest income $ 1,971 78.5% $ 1,104 Interest (expense) $ (38) -22.4% $ (49) Other income (expense),net $ (42) 69.1% $ (136)
The increase in interest income in 1996 is attributable to interest earned on cash equivalents and marketable securities purchased with the net proceeds of the Company's public offering in 1995. The decrease in interest expense in 1996 is attributable to an increase in income derived from the MAXIMO Users Group Conference, offset by foreign currency translation losses. PROVISION FOR INCOME TAXES The Company's effective tax rates were 39.1% and 39.8% in 1996 and 1995, respectively. The decrease in the effective tax rate for fiscal 1996 can be attributed to the use of a foreign sales corporation and tax exempt interest income partially offset by non-deductible merger expenses. At September 30, 1996, the Company had net operating loss carryforwards of approximately $1.3 million and $94 thousand of credit carryforwards in certain foreign jurisdictions. LIQUIDITY AND CAPITAL RESOURCES As of September 30, 1997, the Company had cash and cash equivalents and marketable securities of approximately $64.3 million and working capital of $65.1 million. Cash provided by operations for fiscal year 1997 was $21.7 million, generated primarily by income earned for the period and depreciation, and cash generated by accounts receivable collections. Cash used in investing activities totaled $7.2 million, primarily for the purchase of computer equipment and purchases of marketable securities. The Company also funded the purchases of office equipment, office furniture and leasehold improvements related to the relocation of its corporate headquarters in December 1997. Cash provided by financing activities was $2.8 million, generated by proceeds from exercises of employee stock options. As of September 30, 1997, 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 27 29 dates through November 2003. The Company has relocated its corporate headquarters in December 1997. The Company expects to spend $2.5 million for construction and leasehold improvements in connection with the relocation. It also plans to spend approximately $1 million on furniture, fixtures and equipment, most of which was capitalized in fiscal 1997. The Company may use a portion of its cash to acquire businesses, products and technologies complementary to its business. 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, 1998. FLUCTUATIONS IN QUARTERLY OPERATING RESULTS; SEASONALITY The Company generally ships its product upon receipt of orders and maintains no significant 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 quarterly operating results. In addition, the Company's revenues and operating results have fluctuated historically, due to the number and timing of product introductions and enhancements, the budgeting and purchasing cycles of customers and the timing of large orders, the timing of product shipments and the timing of marketing and product development expenditures. 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. The Company's revenues and income from operations typically grow at a lower rate or decline in the first quarter of each fiscal year. In addition, revenues are typically higher in the fourth quarter than in other quarters of the year, reflecting the Company's fiscal year end and a sales commission policy that bases rewards on achievement of annual quotas. As a result of these factors, the Company has experienced, and may in the future experience, significant period-to-period fluctuations in revenues and operating results. Forward-looking statements of the Company are subject to the risk that assumptions made by management of the Company concerning future general economic conditions such as recession, inflation, interest rates, tax rates, consumer spending and credit and other future condition having an impact on software markets and the Company's business may prove to be incorrect. Adverse changes in such future economic conditions could have an adverse effect on the Company's business. FACTORS AFFECTING FUTURE PERFORMANCE Further information on factors that could affect the Company's business and financial results are included in the exhibits to this Annual Report on Form 10-K. 28 30 ITEM 7 A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK NOT APPLICABLE ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA Information with respect to exhibits and financial statement schedules are included in Part IV item 14(a)(1) and (2). Quarterly Financial Data (Unaudited) 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. (in thousands, except per share amounts)
1997 Quarter Dec.31, Mar. 31, June 30, Sep. 30, Year Ended Ended: 1996 1997 1997 1997 1997 ---- ---- ---- ---- ---- Total revenues $23,379 $22,186 $23,652 $27,483 $96,700 Income from operations 5,106 2,122 3,273 5,770 16,271 Income before income taxes 5,623 2,410 3,903 6,191 18,127 Provision for income taxes 2,094 874 1,413 2,176 6,557 Net income 3,528 1,535 2,490 4,015 11,570 Net income per share $ 0.35 $ 0.15 $ 0.25 $ 0.40 $ 1.15
1996 Quarter Dec.31, Mar. 31, June 30, Sep. 30, Year Ended Ended: 1995 1996 1996 1996 1996 ---- ---- ---- ---- ---- Total revenues $16,187 $16,376 $18,151 $22,615 $73,329 Income from operations 3,213 2,676 3,720 4,997 14,606 Income before income taxes 3,634 2,993 4,207 5,663 16,497 Provision for income taxes 1,507 1,546 1,457 1,941 6,451 Net income 2,127 1,447 2,750 3,722 10,046 Net income per share $ 0.21 $ 0.14 $ 0.27 $ 0.37 $ 1.00
The consolidated financial statements of the Company for all periods presented include the results and balances of an acquisition accounted for as a pooling-of interests. The acquisition occurred in March 1996. 29 31 ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE. None. PART III (ITEMS 10, 11, 12, 13) In accordance with general instruction G(3) to Form 10-K, information required by Part III is incorporated by reference from the Company's definitive Proxy Statement for its 1998 Annual Meeting of Stockholders to be filed, pursuant to Regulation 14A, within 120 days after the end of the Company's fiscal year ended September 30, 1997. 30 32 PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K The financial statements and schedules filed as part of this Report are listed in the following Index to Financial Statements and Schedules. The exhibits filed as part of this Report are listed in the accompanying Index to Exhibits. (a) The following documents are filed as a part of this Report: 1. Consolidated Financial Statements. The following Consolidated Financial Statements of the Company are filed as part of this report:
PAGE ---- Report of Independent Accountants............................. 36 Consolidated Balance Sheets - September 30, 1997 and 1996.................................. 37 Consolidated Statements of Operations - Years Ended September 30, 1997, 1996 and 1995................ 38 Consolidated Statements of Cash Flows - Years Ended September 30, 1997, 1996 and 1995................ 39 Consolidated Statements of Stockholders' Equity - Years Ended September 30, 1997, 1996 and 1995................ 40 Notes to Consolidated Financial Statements.................... 41
2. Financial Statement Schedules. The following financial statement schedules of Project Software & Development, Inc. for the Years Ended September 30, 1997, 1996 and 1995 are filed as part of this Report and should be read in conjunction with the Consolidated Financial Statements of the Company.
SCHEDULE PAGE -------- ---- II Valuation and Qualifying Accounts....................... 57
Schedules not listed above have been omitted because they are not applicable or are not required, or the information required to be set forth therein is included in the Consolidated Financial Statements or Notes thereto. 3. Exhibits. Exhibits 10.1 through 10.4 include the Company's management contracts, compensatory plans or compensatory arrangements required to be identified pursuant to Item 14(2) of Form 10-K. 3. Instruments Defining the Rights of Security-Holders 3.1 Amended and Restated Articles of Organization of the Company (included as Exhibit 3.3 to the Company's 31 33 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) 4. Instruments defining the Rights of Security Holders, Including Indentures 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) 9. Voting Trust Agreements 9.1 1996 Daniels Voting Trust Agreement dated August 19, 1996 among Susan H. Daniels, Robert L. Daniels and Robert L. Daniels, as Trustee (included as Exhibit 9.1 to the Company's Annual Report on Form 10-K for the fiscal year ended September 30, 1996, and incorporated herein by reference) 10. Material Contracts 10.1 1997 Executive Bonus Plan (included as Exhibit 10.1 to the Company's Quarterly Report on Form 10-Q for the quarter ended December 31, 1996, Commission File No. 0-23852 and incorporated herein by reference) 10.2 Amended and Restated 1994 Incentive and Nonqualified Stock Option Plan 10.3 Offer letter by and between the Company and David M. Sample dated January 30, 1997 (included as Exhibit 10.1 to the Company's Current Report on Form 8-K dated February 26, 1997, File No. 0-23852, and incorporated herein by reference) 10.4 1994 Employee Stock Purchase Plan 32 34 10.5 Agreement and Plan of Merger, dated as of March 1, 1996, by and among the Company, Toolbox Acquisition Corp., Maintenance Automation Corporation, Johnson Controls, Inc., Eli G. Katz, Phyllis S. Katz, Mitchell B. Knecht, Heidi D. Knecht, Nicholas E. Meola, Naomi R. Meola, Johnson Controls, Inc. and Eli G. Katz, as agent (included as Exhibit 10.4 to the Company's Quarterly Report on Form 10-Q for the quarter ended March 31, 1996, File No. 0-23852, and incorporated herein by reference) 10.6 Escrow Agreement, dated as of March 1, 1996, by and among the Company, Toolbox Acquisition Corp., Maintenance Automation Corporation, Johnson Controls, Inc., Eli G. Katz, Phyllis S. Katz, Mitchell B. Knecht, Heidi D. Knecht, Nicholas E. Meola, Naomi R. Meola, Johnson Controls, Inc. and Eli G. Katz, as agent (included as Exhibit 10.5 to the Company's Quarterly Report on Form 10-Q for the quarter ended March 31, 1996, File No. 0-23852, and incorporated herein by reference) 10.7 Registration Rights Agreement, dated as of March 1, 1996, by and among the Company, Toolbox Acquisition Corp., Maintenance Automation Corporation, Johnson Controls, Inc., Eli G. Katz, Phyllis S. Katz, Mitchell B. Knecht, Heidi D. Knecht, Nicholas E. Meola, Naomi R. Meola, Johnson Controls, Inc. and Eli G. Katz, as agent (included as Exhibit 10.6 to the Company's Quarterly Report on Form 10-Q for the quarter ended March 31, 1996, File No. 0-23852, and incorporated herein by reference) 10.8 Form of PSDI 1994 Authorized Value Added Reseller Agreement (included as Exhibit 10.22 to the Company's Registration Statement on Form S-1, Registration No. 33-76420, and incorporated herein by reference) 11. Statements re computation of per share earnings 11.1 Statement re computation of per share earnings 21. Subsidiaries of the registrant 21.1 Subsidiaries of the Company 33 35 23. Consents of experts and counsel 23.1 Consent of Coopers & Lybrand L.L.P. 27. Financial Data Schedule 27.1 Financial Data Schedule 99. Certain Factors 99.1 Certain Factors - Certain factors concerning the Company dated December 23, 1997 concerning certain cautionary statements of the Company to be taken into account in conjunction with the consideration and review of the Company's publicly-disseminated documents and oral statements (including oral statements made by others on behalf of the Company) that include forward-looking information. (b) Reports on Form 8-K During the three months ended September 30, 1997, the Company did not file a current Report on Form 8-K. The Company will furnish a copy of any exhibit listed to requesting stockholders upon payment of the Company's reasonable expense in furnishing those materials. 34 36 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) 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. Dated: December 22, 1997 PROJECT SOFTWARE & DEVELOPMENT, INC. By: /s/ David M. Sample -------------------------- David M. Sample Chairman of the Board, President and Chief Executive Officer Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated. /s/ David M. Sample Chairman of the Board, December 22, 1997 - ---------------------- President, and Chief David M. Sample Executive Officer (Principal Executive Officer) /s/ Paul D. Birch - ---------------------- Paul D. Birch Executive Vice December 22, 1997 President, Chief Financial Officer and Treasurer (Principal Financial and Accounting Officer) Director December 22, 1997 - ---------------------- Robert L. Daniels /s/ Charles S. Jones Director December 22, 1997 - ---------------------- Charles S. Jones Director December 22, 1997 - ---------------------- Michael D. Marvin /s/ William G. Nelson Director December 22, 1997 - ---------------------- William G. Nelson 35 37 REPORT OF INDEPENDENT ACCOUNTANTS We have audited the consolidated financial statements and the financial statement schedule of Project Software & Development, Inc. and its subsidiaries listed in the index on page 31 of this Form 10-K. These financial statements and financial statement schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements and the financial statement schedule based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatements. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Project Software & Development, Inc. and its subsidiaries as of September 30, 1997 and 1996, and the consolidated results of their operations and their cash flows for each of the three years in the period ended September 30, 1997 in conformity with generally accepted accounting principles. In addition, in our opinion, the financial statement schedule referred to above, when considered in relation to the basic financial statements taken as a whole, present fairly, in all material respects, the information required to be included therein. Coopers & Lybrand L.L.P. Boston, Massachusetts November 7, 1997 36 38 PROJECT SOFTWARE & DEVELOPMENT, INC. CONSOLIDATED BALANCE SHEETS
ASSETS SEPTEMBER 30, SEPTEMBER 30, 1997 1996 ---- ---- (IN THOUSANDS,EXCEPT SHARE DATA) Current assets: Cash and cash equivalents $ 25,964 $ 9,097 Marketable securities 38,299 36,798 Accounts receivable, trade, less allowance for doubtful accounts of $2,286 in 1997 and $1,954 in 1996 24,021 27,030 Prepaid expenses 1,877 1,410 Other assets 1,244 748 Deferred income taxes 1,806 892 --------- ------- Total current assets 93,211 75,975 --------- ------- Property and equipment, net 7,322 4,602 Computer software costs, net -- 359 Goodwill, net 1,447 1,832 Deferred income taxes 214 675 Other assets 45 33 --------- ------- Total assets $ 102,239 $83,476 ========= ======= LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable $ 9,809 $ 8,384 Accrued compensation 4,494 5,007 Income taxes payable 3,678 248 Deferred revenue 9,750 9,042 Deferred income taxes 394 5 --------- ------- Total current liabilities 28,125 22,686 --------- ------- Deferred income taxes 12 168 Deferred rent 12 85 Deferred revenue 120 375 Commitments and contingencies 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 9,856,474 and 9,702,579 for 1997 and 1996, respectively 99 97 Additional paid-in capital 48,163 45,324 Retained earnings 26,108 14,538 Cumulative translation adjustment (629) 49 Net unrealized gain on marketable securities 229 154 --------- ------- Total stockholders' equity 73,970 60,162 --------- ------- Total liabilities and stockholders' equity $ 102,239 $83,476 ========= =======
The accompanying notes are an integral part of the consolidated financial statements. 37 39 PROJECT SOFTWARE & DEVELOPMENT, INC. CONSOLIDATED STATEMENTS OF OPERATIONS
YEAR ENDED SEPTEMBER 30, --------------------------------------------------- 1997 1996 1995 ---- ---- ---- (IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA) Revenues: Software $ 50,393 $ 43,382 $ 30,054 Support and services 46,307 29,947 20,318 ------------ ------------ ----------- Total revenues 96,700 73,329 50,372 ------------ ------------ ----------- Cost of revenues: Software 2,547 3,106 2,713 Support and services 24,025 15,132 10,006 ------------ ------------ ----------- Total cost of revenues 26,572 18,238 12,719 ------------ ------------ ----------- Gross margin 70,128 55,091 37,653 Operating expenses: Sales and marketing 32,985 24,422 16,555 Product development 11,387 7,653 6,639 General and administrative 9,485 7,445 6,021 Merger expenses -- 965 -- ------------ ------------ ----------- Total operating expenses 53,857 40,485 29,215 ------------ ------------ ----------- Income from operations 16,271 14,606 8,438 Interest income 2,409 1,971 1,104 Interest (expense) (24) (38) (49) Other income (expense), net (529) (42) (136) ------------ ------------ ----------- Income before income taxes 18,127 16,497 9,357 Provision for income taxes 6,557 6,451 3,728 ------------ ------------ ----------- Net income $ 11,570 $ 10,046 $ 5,629 ============ ============ =========== Net income per share $ 1.15 $ 1.00 $ 0.64 ------------ ------------ ----------- Weighted number of common and common equivalent shares 10,064,268 10,051,908 8,845,746 ------------ ------------ -----------
The accompanying notes are an integral part of the consolidated financial statements. 38 40
PROJECT SOFTWARE & DEVELOPMENT, INC CONSOLIDATED STATEMENTS OF CASH FLOWS YEAR ENDED SEPTEMBER 30, 1997 1996 1995 ---- ---- ---- (IN THOUSANDS) Cash flows from operating activities: Net income $ 11,570 $ 10,046 $ 5,629 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 3,358 2,662 2,391 Loss on sale and disposal of property and equipment 131 17 42 Amortization of discount on marketable securities 409 331 172 Deferred rent (73) (73) (34) Deferred taxes (238) (908) (735) Changes in operating assets and liabilities, net of effect of acquisitions: Accounts receivable 2,824 (12,935) (4,871) Prepaid expenses (480) (90) (519) Other assets (1,164) 144 54 Accounts payable 1,805 2,209 1,577 Accrued compensation (532) 1,361 2,522 Income taxes payable 3,477 (347) (227) Deferred revenue 627 2,374 2,613 --------- --------- --------- Net cash provided by operating activities 21,714 4,791 8,614 --------- --------- --------- Cash flows from investing activities: Acquisitions of businesses, net of cash -- (1,837) -- Acquisitions of property and equipment (5,390) (3,204) (2,007) Proceeds from sale of property and equipment -- 6 5 Additions to computer software costs -- (1,084) (83) Purchases of marketable securities (151,375) (191,574) (148,609) Sales of marketable securities 149,540 190,552 112,484 --------- --------- --------- Net cash used in investing activities (7,225) (7,141) (38,210) --------- --------- --------- Cash flows from financing activities: Payments on leased equipment -- (29) (413) (Payments)/Borrowings on line of credit, net -- (325) 244 (Payments)/ Borrowings on long-term notes, net -- (124) 35 Proceeds from issuance of common stock, net of issuance costs -- -- 23,552 Proceeds from exercise of stock options including related tax benefit 2,841 2,600 915 --------- --------- --------- Net cash provided by financing activities 2,841 2,122 24,333 --------- --------- --------- Effect of exchange rate changes on cash (463) (21) 2 --------- --------- --------- Net increase/(decrease) in cash and cash equivalents 16,867 (249) (5,261) Cash and cash equivalents, beginning of year 9,097 9,346 14,607 --------- --------- --------- Cash and cash equivalents, end of year $ 25,964 $ 9,097 $ 9,346 ========= ========= ========= The accompanying notes are an integral part of the consolidated financial statements. 39
41
PROJECT SOFTWARE & DEVELOPMENT, INC. CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY FOR THE YEARS ENDED SEPTEMBER 30, 1997, 1996 AND 1995 Net Unrealized Common Stock Additional Accumulated Cumulative Gains on Total Shares Paid-in Earnings Translation Marketable Stockholders' (in thousands, except share data) Issued Amount Capital (Deficit) Adjustment Securities Equity - ------------------------------------------------------------------------------------------------------------------------------------ Balance at September 30, 1994 ..... 8,273,207 $83 $18,271 ($1,137) $109 $17,326 Issuance of common stock, net of issuance cost of $470 .............. 1,207,500 12 23,540 23,552 Stock options exercised and related tax benefit, employee stock purchases 86,005 1 914 915 Net income ............... 5,629 5,629 Translation adjustment ... 50 50 Net unrealized gain on marketable securities. $72 72 - ------------------------------------------------------------------------------------------------------------------------------------ Balance at September 30, 1995 ..... 9,566,712 96 42,725 4,492 159 72 47,544 Stock options exercised and related tax benefit, employee stock purchases 135,837 1 2,599 2,600 Net income .............. 10,046 10,046 Translation adjustment ... (110) (110) Net unrealized gain on marketable securities. 82 82 - ------------------------------------------------------------------------------------------------------------------------------------ Balance at September 30, 1996 ..... 9,702,549 97 45,324 14,538 49 154 60,162 Stock options exercised and related tax benefit, employee stock purchases 153,925 2 2,839 2,841 Net income .............. 11,570 11,570 Translation adjustment ... (678) (678) Net unrealized gain on marketable securities. 75 75 - ------------------------------------------------------------------------------------------------------------------------------------ Balance at September 30, 1997 ..... 9,856,474 $99 $48,163 $26,108 $(629) $229 $73,970 - ------------------------------------------------------------------------------------------------------------------------------------ The accompanying notes are an integral part of the consolidated financial statements. 40
42 PROJECT SOFTWARE & DEVELOPMENT, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED A. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: Nature of Business The Company's primary business is the development, marketing, sales and support of applications software used by business, government and other organizations to improve the productivity of facilities, plants and production equipment. Basis of Presentation The consolidated financial statements include the accounts of Project Software & Development, Inc. ("PSDI") and its majority-owned subsidiaries (collectively, the "Company"). All intercompany accounts and transactions have been eliminated. Certain prior year financial statement items have been reclassified to the current year's format. Income per Share Income per share is computed for each period based upon the weighted average number of common shares outstanding and dilutive common stock equivalents (using the treasury stock method). For purposes of this calculation, stock options are considered common stock equivalents in periods in which they have a dilutive effect. All share and per share data has been restated to account for businesses acquired as pooling of interests. Fully diluted and primary income per share data are the same for each period presented. Depreciation and Amortization Property and equipment are stated at cost. Depreciation is computed over the estimated useful lives of the assets as follows:
Description Estimated Useful Life ----------- --------------------- Computer equipment & software......... 3 years Vehicles.............................. 3 years Furniture and fixtures................ 5 years
Leasehold improvements are amortized on the straight-line method over the shorter of their estimated useful life or term of the lease. Maintenance and repairs are charged to expense as incurred and betterments are capitalized. Upon retirement or sale, the cost of the assets disposed of and the related accumulated depreciation are removed from the accounts and any resulting gain or loss is included in the determination of net income. Goodwill The excess cost over net assets of acquired companies is being amortized over five years using the straight-line method of amortization. 41 43 PROJECT SOFTWARE & DEVELOPMENT, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED Computer Software Costs Computer software costs consist of internally developed and purchased or licensed software. Development costs incurred in the research and development of new software products and enhancements to existing products are expensed in the period incurred unless they qualify for capitalization under Statement of Financial Accounting Standards No. 86, "Accounting for the Cost of Computer Software to Be Sold, Leased or Otherwise Marketed." These costs are amortized on a straight-line basis over the estimated useful or market life of the software (generally, one to two years). Amortization expense for 1997, 1996 and 1995 was $359,000, $948,000 and $1,120,000, respectively. In fiscal 1996, the Company changed the estimated useful life of its MAXIMO Enterprise product from three years to 15 months to accurately reflect the lifecycles for new releases of this product. Income Taxes In 1993, the Company adopted Statement of Financial Accounting Standards No. 109, "Accounting for Income Taxes" (SFAS 109), which requires an asset and liability approach for accounting and reporting for income taxes. SFAS 109 also requires a valuation allowance against net deferred tax assets if, based upon the available evidence, is more likely than not that some or all of the deferred tax assets will not be realized. As permitted under SFAS 109, prior years' financial statements were not restated. The adoption of SFAS 109 did not have a material impact on the Company's financial position or results of operations. The Company has not provided for the U.S. income tax on earnings of its foreign subsidiaries as it considers these earnings to be permanently reinvested. At September 30, 1997, the undistributed earnings of foreign subsidiaries were $2,112,000. Revenue Recognition The Company licenses its software products upon contract execution and shipment, provided that no significant vendor obligations remain outstanding and collection of the resulting receivable is deemed probable. Insignificant vendor obligations, if any, remaining after contract execution and shipment are accounted for either by deferring a pro rata portion of revenue for the remaining tasks or by accruing the costs related to the remaining obligations. The revenue from maintenance contracts is recognized ratably over the term of the agreement, generally one year. Revenues from services and system implementations are recognized as the services are performed. Revenue from hardware sales is recognized upon shipment. To date, the Company's warranty and product return expenses have been immaterial. Deferred Revenue Deferred revenue includes revenues from fixed fee license agreements with payment terms greater than one year and maintenance contracts billed in advance. 42 44 PROJECT SOFTWARE & DEVELOPMENT, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED Foreign Currency Assets and liabilities are translated at current exchange rates at the balance sheet dates. The translation adjustments made on translation of the balance sheet are recorded as a separate component of stockholders' equity. Revenues and expenses are translated into U.S. dollars at average exchange rates. Foreign currency transaction gains and losses are included in determining net income. The Company recorded losses of $476,000, $142,000 and $117,000 for 1997, 1996, and 1995, respectively. Cash and Cash Equivalents The Company considers all highly liquid instruments purchased with maturities of three months or less to be cash equivalents. Cash equivalents consist primarily of money market funds, which are stated at cost, which approximates market. Concentration of Credit Risk Financial instruments which potentially subject the Company to concentration of credit risk consist primarily of temporary cash investments and accounts receivables. The Company restricts investment of temporary cash investments to financial institutions with high credit standing. The Company has not experienced any losses on these investments to date. Credit risk on trade receivables is minimized as a result of the diverse nature of the Company's customer base. The Company has not experienced significant losses related to accounts receivable from individual customers or groups of customers in a particular industry or geographic area. Due to these factors, no additional credit risk beyond amounts provided for collection losses is believed inherent in the Company's accounts receivable. Marketable Securities In 1994, the Company adopted Statement of Financial Accounting Standards No. 115, "Accounting for Certain Investments in Debt and Equity Securities" (SFAS 115). The Company's marketable securities are classified as available-for-sale and are stated at their fair market value. The fair market value of marketable securities was determined based on quoted market prices. Unrealized gains and losses on securities classified as available-for-sale are reported as a separate component of stockholders' equity. Accounting Standards Statement of Financial Accounting Standards No. 128, "Earnings Per Share" (SFAS 128) is effective for financial statements issued for periods ending after December 15, 1997. SFAS 128 replaces APB Opinion No. 15, Earnings Per 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 will adopt SFAS 128 per the effective date for the periods ended after December 15, 1997. The adoption of SFAS 128 will not have a material impact on the Company's financial position or results of operations. 43 45 PROJECT SOFTWARE & DEVELOPMENT, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED Statement of Financial Accounting Standards No. 130, "Reporting Comprehensive Income" (SFAS 130) is effective for financial statements 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 beginning in the first quarter of the fiscal year ended September 30, 1998. Statement of Financial Accounting Standards No. 131, "Disclosures about Segments of an Enterprise and Related Information" (SFAS 131) is effective for fiscal years 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 in the fiscal year ended September 30, 1998. Use of estimates The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures 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 TAXES: The components of income before income taxes consist of the following:
Year Ended September 30, ------------------------------------- (in thousands) 1997 1996 1995 ------- ------- ------- Income before income taxes: United States .................................... $16,098 $15,484 $ 8,240 Foreign .......................................... 2,029 1,013 1,117 ------- ------- ------- $18,127 $16,497 $ 9,357 ======= ======= =======
(Liability Method) ------------------------------------- Current taxes: Federal .......................................... 4,970 5,291 3,146 State ............................................ 843 1,075 765 Foreign .......................................... 887 757 347 Foreign withholding taxes ........................ 77 233 206 ------- ------- ------- $ 6,777 $ 7,356 $ 4,464 ======= ======= =======
44 46 PROJECT SOFTWARE & DEVELOPMENT, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED Deferred taxes: Federal...................................................... (235) (382) (561) State........................................................ (26) (63) (134) Foreign...................................................... 41 (460) (41) ----------- ---------- ---------- (220) (905) (736) --------- ---------- ---------- Total.................................................. $ 6,557 $ 6,451 $ 3,728 ======== ========== ========
The reconciliation of the Company's income tax provision to the statutory federal tax rate is as follows:
Year Ended September 30, ------------------------------------------- 1997 1996 1995 ---- ---- ---- Statutory federal tax rate................................... 35.0% 35.0% 34.0% FSC benefit.................................................. (1.3) (1.5) -- State taxes, net of federal tax benefit...................... 3.0 4.3 5.0 Foreign withholding taxes.................................... 0.4 1.4 0.4 Incremental tax of foreign withholding....................... -- -- 0.5 Non-deductible acquisition costs............................. -- 2.1 -- Unbenefited net operating losses............................. -- (0.3) 2.4 Utilization of net operating loss carryforwards.............. -- (0.3) (1.3) R&D credit................................................... (0.7) -- (1.1) Exempt interest.............................................. (1.4) (1.0) (0.4) Other........................................................ 1.2 (0.6) 0.3 -------- -------- ----- 36.2% 39.1% 39.8% ===== ===== =====
45 47 PROJECT SOFTWARE & DEVELOPMENT, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED The components of the deferred tax provision are:
Year Ended September 30, ------------------------------------------- (in thousands) 1997 1996 ---- ---- Depreciation................................................. $(340) $ 47 Allowance for Doubtful Accounts.............................. (45) (283) Software Capitalization...................................... (141) (121) Deferred Revenue............................................. (135) 45 Deferred Rent................................................ 29 23 Deferred Merchandise......................................... 36 (49) Package Design............................................... (4) 3 Accrued Vacation............................................. 35 (40) Net Operating Losses......................................... 585 (564) Translation Loss............................................. (191) -- Other........................................................ (49) 34 ==== ====== $(220) $(905) ====== ======
The components of the deferred tax assets and liabilities are as follows:
Year Ended September 30, --------------------------- (in thousands) 1997 1996 ------- ------- Deferred Tax Assets: Deferred Revenue............................................. $ 296 $ 161 Deferred Rent................................................ 4 33 Allowance for Doubtful Accounts.............................. 678 633 Accrued Vacation............................................. 66 101 Depreciation................................................. 340 -- Package Design............................................... 59 55 Other Reserves............................................... 80 20 Goodwill..................................................... 118 -- Section 481 Cash to Accrual Adjustment....................... 188 -- Translation Loss............................................. 191 -- Net Operating Loss Carryforwards............................. -- 585 Valuation Allowance.......................................... -- (21) ------ ------- $2,020 $1,567 ====== ======
46 48 PROJECT SOFTWARE & DEVELOPMENT, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED Deferred Tax Liabilities: Software Capitalization...................................... -- $ 141 Section 475 Account Receivable Adjustment.................... $ 359 -- Other Liabilities............................................ 47 32 ------- --------- $ 406 $ 173 ------- ------- Net Deferred Tax Asset $ 1,614 $ 1,394 ======= =======
The French tax authorities are examining the French income tax returns for the fiscal years ended 1989 through 1991. The French tax authorities have proposed an adjustment with which the Company is in disagreement and which it has protested. Management does not believe that any additional tax liability for such periods which might arise out of such examination would have a material adverse effect on the results of operations or financial position of the Company. C. ACQUISITIONS: On March 1, 1996, the Company acquired all of the outstanding common stock of Maintenance Automation Corporation ("MAC"), a developer of PC-based maintenance management software, in exchange for the issuance of 368,946 shares of common stock. The transaction was accounted for as a pooling-of-interests. Costs of the merger were $965,000. The Company's consolidated financial statements for all periods presented were restated to include MAC. MAC's fiscal year for financial reporting purposes was changed from December 31 to September 30 for the period ended September 30, 1995. MAC's results of operations for the nine-month period ended September 30, 1995 has been included in the Company's 1995 results. The following is certain financial information for PSDI and MAC which is included in the current combined financial statements:
Year Ended September 30, ------------------------ 1996 1995 --------- --------- Revenue: PSDI $ 66,789 $ 46,293 MAC 6,540 4,079 --------- --------- Combined $ 73,329 $ 50,372 --------- --------- Net income (loss): PSDI $ 10,882 $ 6,322 MAC (836) (693) --------- --------- Combined $ 10,046 $ 5,629 --------- ---------
47 49 PROJECT SOFTWARE & DEVELOPMENT, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED D. LEASED EQUIPMENT OBLIGATION The Company acquired computer equipment and vehicles under capital lease agreements which expired at various dates through December 31, 1996. The capitalized cost of the leased equipment and vehicles was $0 and $199,000 with related accumulated amortization of $0 and $183,000 at September 30, 1997 and 1996, respectively. E. MARKETABLE SECURITIES: Marketable equity and debt securities available for current operations are classified in the balance sheet as current assets. It is the Company's intention that all securities held at the balance sheet date will be sold within one year based upon historical experience to date. Dividend and interest income, including amortization of premium and discount arising at acquisition, are included in other income. The unrealized holding gains and (losses) for the year ended September 30, 1997 were $575,000 and $(500,000), respectively. The unrealized holding gains and (losses) for the year ended September 30, 1996 were $359,000 and $(275,000), respectively.
Amortized Fair Market 1997 Cost Value - ---- --------------- --------------- (in thousands) U.S. Government securities $ 17,017 $ 17,591 Tax exempt municipal securities 20,794 20,708 --------------- --------------- $ 37,811 $ 38,299 =============== ===============
Amortized Fair Market 1996 Cost Value --------------- --------------- (in thousands) U.S. Government securities $ 17,000 $ 17,412 Tax exempt municipal securities 19,267 19,186 Corporate debt securities 200 200 --------------- --------------- $ 36,467 $ 36,798 =============== ===============
48 50 PROJECT SOFTWARE & DEVELOPMENT, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED F. PROPERTY AND EQUIPMENT: Property and equipment are stated at cost and consist of the following:
Year Ended September 30, ---------------------------- (in thousands) 1997 1996 -------- -------- Computer equipment and software................................... $10,972 $ 9,660 Vehicles.......................................................... 367 397 Furniture and fixtures............................................ 4,899 3,372 Leasehold improvements............................................ 3,415 1,980 -------- -------- 19,653 15,409 Less accumulated depreciation and amortization.................... (12,331) (10,807) -------- -------- $ 7,322 $ 4,602 ======== ========
Depreciation and amortization expense was $2,577,000, $1,588,000, and $1,004,000 for 1997, 1996 and 1995, respectively. G. GOODWILL Goodwill represents the excess of the cost of acquired businesses over the fair market value of their net tangible and identified intangible assets. Goodwill is evaluated at each balance sheet date to determine whether any potential impairment exists. The Company believes that no material impairment exists at September 30, 1997. Goodwill is being amortized on the straight-line method over a period of five years. Amortization expense was $421,000 and $268,000 for 1997 and 1996, respectively. H. ACCRUED COMPENSATION: A summary of accrued compensation consists of the following:
Year Ended September 30, --------------------------- (in thousands) 1997 1996 ------- ------ Accrued bonus..................................................... $ 683 $1,778 Accrued 401(k) Company contribution............................... 224 133 Accrued payroll................................................... 396 140 Accrued sales commissions......................................... 2,687 2,547 Accrued vacation pay.............................................. 504 409 ------- ------- $4,494 $5,007 ======= =======
49 51 PROJECT SOFTWARE & DEVELOPMENT, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED I. COMMITMENTS AND CONTINGENCIES: The Company leases its office facilities under operating lease agreements which expire at various dates through September 30, 2006. The Company pays all insurance, utilities, and pro rated portions of any increase in certain operating expenses and real estate taxes. Rent expense under these leases aggregated $3,780,000, $3,033,000, and $2,649,000 for 1997, 1996 and 1995, respectively. The Company will be relocating its corporate headquarters in December 1997. The operating leases provide for minimum aggregate future rentals as of September 30, 1997 as follows:
(in thousands) 1998............................................................ $ 2,910 1999............................................................ 2,359 2000............................................................ 2,068 2001............................................................ 1,936 2002 and thereafter............................................. 4,422 ------- $13,695 =======
At September 30, 1997, the Company is also obligated to pay $300,000 in 1998 under guaranteed royalty arrangements. The Company is not a party to any legal proceedings the outcome of which, in the opinion of management, would have a material adverse effect on the Company's results of operations or financial condition. J. EMPLOYEE BENEFITS: Cash or Deferred Plan The PSDI Cash or Deferred Plan (the "Plan") is a defined contribution plan available to substantially all of PSDI's domestic employees. The Plan was established in 1988 under Section 401(a) of the Internal Revenue Code. Under the Plan, employees may make voluntary contributions based on a percentage of their pretax earnings. Effective January 1, 1993, the Plan was amended to provide for both a guaranteed and a discretionary contribution made by PSDI. Amounts charged to expense for this Plan in 1997, 1996, and 1995 were $268,000, $40,000, and $237,000, respectively. Incentive and Nonqualified Stock Option Plan On March 10, 1994, the Board of Directors of the Company adopted the 1994 Incentive and Nonqualified Stock Option Plan (the "Option Plan") that provided for the grant of 900,000 nonqualified and incentive stock options to directors and employees. On January 25, 1996, the 50 52 PROJECT SOFTWARE & DEVELOPMENT, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED Board of Directors of the Company voted to increase the number of shares of Common Stock that may be issued from 900,000 to 1,800,000. The exercise price of Incentive Options must be at least equal to the fair market value on the date of grant. The exercise price of Nonqualified Options must not be less than 85% of the fair market value on the date of grant. These options vest in equal annual installments over periods of two to four years, commencing on December 31, 1994. During the last quarter of 1997, the Company's Board of Directors approved a stock repricing program for all stock options granted during the grant period from August 1, 1996 through March 31, 1997 ("Grant Period"). Each group of stock options covering two shares of the Company's Common Stock granted during this period was replaced with one share of the Company's Common Stock. Each employee had to elect to cancel all or none of the shares granted to each during the Grant Period. The price of these stock options was determined as of the closing of the stock market on July 31, 1997. Stock option activity is summarized as follows:
1995 - ---- Granted 303,750 $ 15.50 - $18.00 Canceled (17,820) $ 5.67 - $18.00 Exercised (75,200) $ 5.67 - $ 6.33 Outstanding at September 30, 1995 744,130 $ 5.67 - $18.00 Exercisable at September 30, 1995 70,450 $ 5.67 - $ 6.33 Available for grant at September 30, 1995 80,670 1996 - ---- Granted 310,850 $ 23.75 - $31.00 Canceled (10,868) $ 5.67 - $31.00 Exercised (126,708) $ 5.67 - $18.00 Outstanding at September 30, 1996 917,404 $ 5.67 - $31.00 Exercisable at September 30, 1996 167,812 $ 5.67 - $18.00 Available for grant at September 30, 1996 680,688 1997 - ---- Granted 548,098 $ 21.125 - $ 41.13 Canceled (565,998) $ 5.667 - $ 42.63 Exercised (145,535) $ 5.667 - $ 23.75 Outstanding at September 30, 1997 753,969 $ 5.667 - $ 41.13 Exercisable at September 30, 1997 259,788 $ 5.667 - $ 31.00 Available for grant at September 30, 1997 698,588
51 53 PROJECT SOFTWARE & DEVELOPMENT, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED The following table summarizes information about stock options outstanding at September 30, 1997:
Options Outstanding Options Exercisable - --------------------------------------------------------------------- ------------------------------- Weighted-Avg Number Remaining Number Range of Outstanding Contractual Weighted-Avg Exercisable Weighted-Avg Exercise Prices As of 9/30/97 Life (years) Exercise Price As of 9/30/97 Exercise Price - --------------- ------------- ------------ -------------- ------------- -------------- $ 5.67 - 6.33 220,050 5.0 $ 5.67 145,575 $ 5.78 15.50 - 23.75 445,069 8.5 20.47 86,134 18.87 31.00 - 33.50 76,350 5.4 31.39 28,079 32.07 41.13 - 42.63 12,500 4.6 41.19 0 -- $ 5.67 - 42.63 753,969 7.1 $17.63 259,788 $ 12.96
Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based Compensation" (SFAS 123) encourages, but does not require, recognition of compensation expense based on the fair value of employee stock-based compensation instruments. The Company will not adopt the fair value method of accounting for employee stock-based compensation but will instead comply with the pro forma disclosure requirements. The fair value method of the Company's stock options was estimated using the Black-Scholes option pricing model. This model was developed for use in estimated fair value of traded options that have no vesting restrictions and are fully transferable. This model requires the input of highly subjective assumptions including the expected stock price volatility. Because the Company's stock options have characteristics significantly different from those of traded options, and because changes in the subjective input assumptions can materially affect the fair value estimates, in management's opinion, the existing model does not necessarily provide a reliable single measure of the fair value of its stock options. The fair value of the Company's stock options was estimated using the following weighted-average assumptions:
Year Ended September 30, ---------------------------- 1997 1996 ------- ------- Expected life (in years)........................... 3.78 3.00 Volatility......................................... 75% 75% Risk-free interest rate............................ 6.10% 6.24% Dividend yield..................................... 0% 0%
52 54 PROJECT SOFTWARE & DEVELOPMENT, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED The weighted average estimated fair value of stock options granted during fiscal 1997 and 1996 was $13.18 and $16.41 per share, respectively. For pro forma purposes, the estimated fair value of the Company's stock options is amortized over the options' vesting period. The Company's pro forma information is as follows:
Year Ended September 30, -------------------------------- 1997 1996 ---------- ---------- Net income As reported ................... $ 11,570 $ 10,046 Pro forma ..................... 10,443 9,706 Net income per share As reported ................... $ 1.15 $ 1.00 Pro forma ..................... 1.04 0.97
Because SFAS 123 is applicable only to options granted subsequent to September 30, 1995, its pro forma effect will not be fully reflected until approximately the year 2000. Under SFAS 123, the weighted-average estimated fair value of purchase rights granted during fiscal 1997 and 1996 were $7.76 and $13.23 per share, respectively. Employee Stock Purchase Plan On March 10, 1994, the Board of Directors of the Company adopted the 1994 Employee Stock Purchase Plan that provides for a maximum issuance of 225,000 shares of Common Stock for purchase by eligible employees at 85% of the lower of the fair market value of the Company's Common Stock on either the first or last day of the semi-annual offering period. No compensation expense is recorded in connection with the plan. During fiscal year ended 1997, employees purchased 8,390 shares at a price of $32.73 and $16.47 for the offering periods ended November 30, 1996 and May 31, 1997, respectively. Approximately 110 employees participated in the plan during the fiscal year ended 1997. K. STOCKHOLDERS' EQUITY: Preferred Stock On March 11,1994, the issuance of up to 1,000,000 shares of preferred stock, $0.01 par value was authorized. The Board of Directors has the authority to issue the preferred stock in one or more series and to fix rights, preferences, privileges and restrictions, including dividends, and the number of shares constituting any series and the designation of such series. 53 55 PROJECT SOFTWARE & DEVELOPMENT, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED L. DEBT AND CREDIT AGREEMENTS: Bank Demand Loan The Company did not extend its $5,000,000 unsecured line of credit agreement with Chase Manhattan Bank, N.A., which expired in March 1997. PSDI UK Limited has a line of credit agreement authorized to a limit of pounds sterling 200,000, payable upon demand with interest at the bank's base rate plus 2-1/4%. The line of credit is collateralized by all business assets of PSDI UK Limited. There was no outstanding balance on the PSDI UK Limited line of credit at September 30, 1997 and 1996. M. SUPPLEMENTAL CASH FLOW DISCLOSURES: Cash paid for interest and taxes were as follows:
Year Ended September 30, --------------------------------- (in thousands) 1997 1996 1995 ------ ------ ------ Interest.............................................. $ 24 $ 38 $ 49 Income taxes.......................................... 2,856 6,175 3,393
Acquisitions of businesses were as follows:
Year Ended September 30, --------------------------------- (in thousands) 1997 1996 1995 ------ ------ ------ Fair value of assets acquired......................... -- $ 2,729 $ -- Fair value of liabilities assumed..................... -- 892 -- ------ -------- ----- Net cash payments..................................... -- $ 1,837 -- ------ -------- -----
54 56 PROJECT SOFTWARE & DEVELOPMENT, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED N. GEOGRAPHIC DATA AND MAJOR CUSTOMERS: A summary of the Company's operations by geographical area was as follows:
Year Ended September 30, ------------------------------------------------- (in thousands) 1997 1996 1995 -------- -------- -------- Revenues: The Americas US ....................... $ 54,348 $ 43,595 $ 31,032 Canada ................... 5,121 2,089 1,615 Export sales ............. 3,906 3,091 2,307 Intercompany revenues .... 8,291 8,676 5,878 -------- -------- -------- $ 63,375 $ 57,451 $ 40,832 Europe ................... 28,063 20,224 13,138 Asia/Pacific ............. 5,262 4,330 2,280 Consolidating eliminations (8,291) (8,676) (5,878) -------- -------- -------- $ 96,700 $ 73,329 $ 50,372 -------- -------- -------- Income from operations: US ........................... 15,030 13,671 7,338 Canada ....................... 65 56 361 Europe ....................... 998 756 659 Asia/Pacific ................. 178 147 19 Consolidating eliminations ... -- (24) 61 -------- -------- -------- $ 16,271 $ 14,606 $ 8,438 -------- -------- -------- Cash and cash equivalents: US ........................... 17,579 3,657 6,764 Canada ....................... 641 151 483 Europe ....................... 6,929 4,846 1,747 Asia/Pacific ................. 815 443 352 -------- -------- -------- $ 25,964 $ 9,097 $ 9,346 -------- -------- -------- Accounts receivable, net: US ........................... 14,755 13,940 8,939 Canada ....................... 111 498 414 Europe ....................... 6,945 10,207 4,002 Asia/Pacific ................. 2,210 2,385 567 -------- -------- -------- $ 24,021 $ 27,030 $ 13,922 -------- -------- --------
55 57 PROJECT SOFTWARE & DEVELOPMENT, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED Identifiable assets: US ........................... 79,733 60,979 56,593 Canada ....................... 782 662 922 Europe ....................... 17,606 18,828 6,398 Asia/Pacific ................. 4,118 3,005 1,045 Consolidated eliminations .... -- 2 2 -------- -------- -------- $102,239 $ 83,476 $ 64,960 -------- -------- --------
The Company operates in one business segment: software business applications. The Company has subsidiaries in foreign countries which sell the Company's products and services in their respective geographic areas from which the sales are made. Intercompany revenues primarily represent shipments of software to international subsidiaries and are eliminated from consolidated revenues. Income (loss) from operations excludes interest income, interest expense, provision for income taxes and transaction gains and losses. No single customer accounted for 10% or more of total revenues in the years ended September 30, 1997, 1996, and 1995. O. RELATED PARTY TRANSACTIONS: The Company leases its corporate headquarters pursuant to a 13 year lease which expires on December 31, 1997, from a partnership in which the Founder and Director of the Company has a 1.69% limited partnership interest. Rent payments to the partnership for 1997, 1996, and 1995 totaled $1,510,000, $1,650,000 and $1,480,000, respectively. 56 58 PROJECT SOFTWARE & DEVELOPMENT, INC. SCHEDULE VIII - VALUATION AND QUALIFYING ACCOUNTS
COL. A COL. B COL. C COL. D COL. E ------ ------ ----------------------------- ------ ------ ADDITIONS ----------------------------- BALANCE AT CHARGED TO BALANCE BEGINNING COSTS AND CHARGED TO END OF OF PERIOD EXPENSES OTHER ACCOUNTS DEDUCTIONS PERIOD ---------- ---------- -------------- ---------- -------- YEAR ENDED SEPTEMBER 30, 1997 $1,954,000 $4,383,185 $4,050,719 $2,286,574 Allowance for doubtful accounts YEAR ENDED SEPTEMBER 30, 1996 $1,346,000 $1,040,000 $ 432,000 $1,954,000 Allowance for doubtful accounts YEAR ENDED SEPTEMBER 30, 1995 Allowance for doubtful accounts $ 854,000 $1,409,000 $ 917,000 $1,346,000
59 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) 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) 9.1 1996 Daniels Voting Trust Agreement dated August 19, 1996 among Susan H. Daniels, Robert L. Daniels and Robert L. Daniels, as Trustee (included as Exhibit 9.1 to the Company's Annual Report on Form 10-K for the fiscal year ended September 30, 1996, and incorporated herein by reference) 10.1 1997 Executive Bonus Plan (included as Exhibit 10.1 to the Company's Quarterly Report on Form 10-Q for the quarter ended December 31, 1996, Commission File No. 0-23852 and incorporated herein by reference) 10.2 Amended and Restated 1994 Incentive and Nonqualified Stock Option Plan 10.3 Offer letter by and between the Company and David M. Sample dated January 30, 1997 (included as Exhibit 10.1 to the Company's Current Report on Form 8-K dated February 26, 1997, File No. 0-23852, and incorporated herein by reference) 10.4 1994 Employee Stock Purchase Plan 10.5 Agreement and Plan of Merger, dated as of March 1, 1996, by and among the Company, Toolbox Acquisition Corp., Maintenance Automation Corporation, Johnson Controls, Inc., Eli G. Katz, Phyllis S. Katz, Mitchell B. Knecht, Heidi D. Knecht, Nicholas E. Meola, Naomi R. Meola, Johnson Controls, Inc. and Eli G. Katz, as agent (included
60 as Exhibit 10.4 to the Company's Quarterly Report on Form 10-Q for the quarter ended March 31, 1996, File No. 0-23852, and incorporated herein by reference) 10.6 Escrow Agreement, dated as of March 1, 1996, by and among the Company, Toolbox Acquisition Corp., Maintenance Automation Corporation, Johnson Controls, Inc., Eli G. Katz, Phyllis S. Katz, Mitchell B. Knecht, Heidi D. Knecht, Nicholas E. Meola, Naomi R. Meola, Johnson Controls, Inc. and Eli G. Katz, as agent (included as Exhibit 10.5 to the Company's Quarterly Report on Form 10-Q for the quarter ended March 31, 1996, File No. 0-23852, and incorporated herein by reference) 10.7 Registration Rights Agreement, dated as of March 1, 1996, by and among the Company, Toolbox Acquisition Corp., Maintenance Automation Corporation, Johnson Controls, Inc., Eli G. Katz, Phyllis S. Katz, Mitchell B. Knecht, Heidi D. Knecht, Nicholas E. Meola, Naomi R. Meola, Johnson Controls, Inc. and Eli G. Katz, as agent (included as Exhibit 10.6 to the Company's Quarterly Report on Form 10-Q for the quarter ended March 31, 1996, File No. 0-23852, and incorporated herein by reference) 10.8 Form of PSDI 1994 Authorized Value Added Reseller Agreement (included as Exhibit 10.22 to the Company's Registration Statement on Form S-1, Registration No. 33-76420, and incorporated herein by reference) 11.1 Statement re computation of per share earnings 21.1 Subsidiaries of the Company 23.1 Consent of Coopers & Lybrand L.L.P. 27.1 Financial Data Schedule 99. Certain Factors - Certain factors concerning the Company dated December 15, 1997 concerning certain cautionary statements of the Company to be taken into account in conjunction with the consideration and review of the Company's publicly-disseminated documents and oral statements (including oral statements made by others on behalf of the Company) that include forward-looking information.
EX-10.2 2 1994 INCENTIVE AND NON QUALIFIED SOP 1 EXHIBIT 10.2 PROJECT SOFTWARE & DEVELOPMENT, INC. 1994 INCENTIVE AND NONQUALIFIED STOCK OPTION PLAN ------------------------------------------------- SECTION 1. PURPOSE This Amended and Restated 1994 Incentive and Nonqualified Stock Option Plan (the "Plan") of Project Software & Development, Inc. (the "Company"), is designed to provide additional incentive to executives and other key employees of the Company, and any parent or subsidiary of the Company, and to certain other individuals providing services to or acting as directors of the Company or any such parent or subsidiary. The Company intends that this purpose will be effected by the granting of incentive stock options ("Incentive Stock Options") as defined in Section 422 of the Internal Revenue Code of 1986, as amended (the "Code"), and nonqualified stock options ("Nonqualified Options") under the Plan which afford such executives, key employees or other individuals an opportunity to acquire or increase their proprietary interest in the Company through the acquisition of shares of its Common Stock. The Company intends that Incentive Stock Options issued under the Plan will qualify as "incentive stock options" as defined in Section 422 of the Code and the terms of the Plan shall be interpreted in accordance with this intention. As used in the Plan the terms "parent" and "subsidiary" shall have the respective meanings set forth in Section 424 of the Code. 2 SECTION 2. ADMINISTRATION 2.1 THE COMMITTEE. The Plan shall be administered by a Committee (the "Committee") consisting of at least two "Outside Directors." As used herein, the term "Outside Director" means any director of the Company who (i) is not an employee of the Company or of an "affiliated group," as such term is defined in Section 1504(a) of the Code, which includes the Company (an "Affiliate"), (ii) is not a former employee of the Company or any Affiliate who is receiving compensation for prior services (other than benefits under a tax-qualified retirement plan) during the Company's or any Affiliate's taxable year, (iii) has not been an officer of the Company or any Affiliate and (iv) does not receive remuneration from the Company or any Affiliate, either directly or indirectly, in any capacity other than as a director. None of the members of the Committee shall be an officer or other employee of the Company. It is the intention of the Company that the Plan shall be administered by "Non-Employee Directors" within the meaning of Rule 16b-3 under the Securities Exchange Act of 1934 as amended (the "1934 Act"), but the authority and validity of any act taken or not taken by the Committee shall not be affected if any person administering the Plan is not a disinterested person. Except as specifically reserved to the Board of Directors of the Company (the "Board") under the terms of the Plan, the Committee shall have full and final authority to operate, manage and administer the Plan on behalf of the Company. Action by the Committee shall require the affirmative vote of a majority of all members thereof. -2- 3 2.2 POWERS OF THE COMMITTEE. Subject to the terms and conditions of the Plan, the Committee shall have the power: (a) To determine from time to time the persons eligible to receive options and the options to be granted to such persons under the Plan and to prescribe the terms, conditions, restrictions, if any, and provisions (which need not be identical) of each option granted under the Plan to such persons; (b) To construe and interpret the Plan and options granted thereunder and to establish, amend, and revoke rules and regulations for administration of the Plan. In this connection, the Committee may correct any defect or supply any omission, or reconcile any inconsistency in the Plan, or in any option agreement, in the manner and to the extent it shall deem necessary or expedient to make the Plan fully effective. All decisions and determinations by the Committee in the exercise of this power shall be final and binding upon the Company and optionees; (c) To make, in its sole discretion, changes to any outstanding option granted under the Plan, including: (i) to reduce the exercise price, (ii) to accelerate the vesting schedule or (iii) to extend the expiration date; and (d) Generally, to exercise such powers and to perform such acts as are deemed necessary or expedient to promote the best interests of the Company with respect to the Plan. -3- 4 SECTION 3. STOCK 3.1 STOCK TO BE ISSUED. The stock subject to the options granted under the Plan shall be shares of the Company's authorized but unissued common stock, $.01 par value (the "Common Stock"), or shares of the Company's Common Stock held in treasury. The total number of shares that may be issued pursuant to options granted under the Plan shall not exceed an aggregate of 1,800,000 shares of Common Stock; provided, however, that the class and aggregate number of shares which may be subject to options granted under the Plan shall be subject to adjustment as provided in Section 8 hereof. 3.2 EXPIRATION, CANCELLATION OR TERMINATION OF OPTION. Whenever any outstanding option under the Plan expires, is cancelled or is otherwise terminated (other than by exercise), the shares of Common Stock allocable to the unexercised portion of such option may again be the subject of options under the Plan, and shares of Common Stock issuable under options that expire, are cancelled or are otherwise terminated shall not count against the limitation on grants set forth in Section 3.3 hereof. 3.3 LIMITATION ON GRANTS. In no event may any Plan participant be granted options with respect to more than 150,000 shares of Common Stock in any calendar year. SECTION 4. ELIGIBILITY 4.1 PERSONS ELIGIBLE. Incentive Stock Options under the Plan may be granted only to officers and other employees of the Company or any parent or subsidiary of the Company. Nonqualified -4- 5 Options may be granted to officers or other employees of the Company or any parent or subsidiary of the Company, and to members of the Board and consultants or other persons who render services to the Company or any such parent or subsidiary (regardless of whether they are also employees), provided, however, that options may be granted to members of the Board who are not employees of the Company or any such parent or subsidiary ("Outside Directors") only as provided in Section 4.4. 4.2 GREATER-THAN-TEN-PERCENT STOCKHOLDERS. Except as may otherwise be permitted by the Code or other applicable law or regulation, no Incentive Stock Option shall be granted to an individual who, at the time the option is granted, owns (including ownership attributed pursuant to Section 425 of the Code) more than ten percent of the total combined voting power of all classes of stock of the Company or any parent or subsidiary (a "greater-than-ten-percent stockholder"), unless such Incentive Stock Option provides that (i) the purchase price per share shall not be less than one hundred ten percent of the fair market value of the Common Stock at the time such option is granted, and (ii) that such option shall not be exercisable to any extent after the expiration of five years from the date it is granted. 4.3 MAXIMUM AGGREGATE FAIR MARKET VALUE. The aggregate fair market value (determined at the time the option is granted) of the Common Stock with respect to which Incentive Stock Options are exercisable for the first time by any optionee during any calendar year (under the Plan and any other plans of the Company or any parent or subsidiary for the issuance of incentive stock -5- 6 options) shall not exceed $100,000 (or such greater amount as may from time to time be permitted with respect to incentive stock options by the Code or any other applicable law or regulation). 4.4 OPTION GRANTS TO OUTSIDE DIRECTORS. (a) GRANT OF OPTIONS UPON ELECTION TO BOARD. Each Outside Director joining the Board at or subsequent to the meeting of the Company's stockholders at which this Section 4.4(a) in this form is approved (the "Approval Meeting") shall automatically be granted, upon such Outside Director so joining the Board, an initial Nonqualified Option to purchase 12,000 shares of Common Stock. Such Nonqualified Option shall vest and become exercisable in three equal annual installments cumulatively beginning on the first anniversary of the date the option was granted. (b) GRANT OF OPTIONS UPON RE-ELECTION TO BOARD OR CONTINUATION ON THE BOARD. Each Outside Director who is re-elected by the stockholders of the Company to the Board at or subsequent to the Approval Meeting shall automatically be granted, immediately following the meeting of stockholders at which such Outside Director is re-elected, a Nonqualified Option to purchase 4,000 shares of Common Stock. In addition, each Outside Director whose term of office does not expire at any annual meeting of stockholders or special meeting in lieu thereof subsequent to the Approval Meeting and who shall remain an Outside Director after such meeting shall automatically be granted, immediately following such meeting, a Nonqualified Option to purchase 4,000 shares of -6- 7 Common Stock. Each Nonqualified Option described in this Section 4.4(b) shall vest and become exercisable in full on the last day of December in the year in which the Nonqualified Option was granted. (c) PURCHASE PRICE. The purchase price per share of Common Stock under each Nonqualified Option granted pursuant to this Section 4.4 shall be equal to the fair market value of the Common Stock on the date the Nonqualified Option is granted, such fair market value to be determined in accordance with the provisions of Section 6.3(b). (d) EXPIRATION. Each Nonqualified Option granted to an Outside Director under this Section 4.4 shall expire on the fifth anniversary of the date of grant. SECTION 5. TERMINATION OF EMPLOYMENT OR DEATH OF OPTIONEE 5.1 TERMINATION OF EMPLOYMENT. Except as may be otherwise expressly provided herein, options shall terminate on the earlier of: (a) the date of expiration thereof; (b) immediately upon the termination of the optionee's employment with or performance of services for the Company (or any parent or subsidiary of the Company) by the Company (or any such parent or subsidiary) for cause (as determined by the Company or such parent or subsidiary); or (c) thirty days after the date of termination of the optionee's employment with or performance of services for the Company (or any parent or subsidiary of the Company) -7- 8 by the Company (or any such parent or subsidiary) without cause or voluntarily by the optionee; PROVIDED, HOWEVER, that Nonqualified Options granted to persons who are not employees of the Company (or any parent or subsidiary of the Company) need not, unless the Committee determines otherwise, be subject to the provisions set forth in clauses (b) and (c) above. An employment relationship between the Company (or any parent or subsidiary of the Company) and the optionee shall be deemed to exist during any period in which the optionee is employed by the Company (or any such parent or subsidiary). Whether authorized leave of absence, or absence on military or government service, shall constitute termination of the employment relationship between the Company (or any parent or subsidiary of the Company) and the optionee shall be determined by the Committee at the time thereof. As used herein, "cause" shall mean (x) any material breach by the optionee of any agreement to which the optionee and the Company (or any parent or subsidiary of the Company) are both parties, (y) any act or omission to act by the optionee which may have a material and adverse effect on the business of the Company (or any such parent or subsidiary) or on the optionee's ability to perform services for the Company (or any such parent or subsidiary), including, without limitation, the commission of any crime (other than ordinary traffic violations), or (z) any material misconduct or material neglect of duties by the optionee in connection with the business or affairs of the Company (or any -8- 9 such parent or subsidiary) or any affiliate of the Company (or any such parent or subsidiary). 5.2 DEATH OR RETIREMENT OF OPTIONEE. In the event of the death of the holder of an option that is subject to clause (b) or (c) of Section 5.1 above prior to termination of the optionee's employment with or performance of services for the Company (or any parent or subsidiary of the Company) and before the date of expiration of such option, such option shall terminate on the earlier of such date of expiration or one year following the date of such death. After the death of the optionee, his executors, administrators or any person or persons to whom his option may be transferred by will or by the laws of descent and distribution, shall have the right, at any time prior to such termination, to exercise the option to the extent the optionee was entitled to exercise such option at the time of his death. If, before the date of the expiration of an option that is subject to clause (b) or (c) of Section 5.1 above, the optionee shall be retired in good standing from the Company for reasons of age or disability under the then established rules of the Company, the option shall terminate on the earlier of such date of expiration or ninety (90) days after the date of such retirement. In the event of such retirement, the optionee shall have the right prior to the termination of such option to exercise the option to the extent to which he was entitled to exercise such option immediately prior to such retirement. SECTION 6. TERMS OF THE OPTION AGREEMENTS -9- 10 Each option agreement shall be in writing and shall contain such terms, conditions, restrictions, if any, and provisions as the Committee shall from time to time deem appropriate. Such provisions or conditions may include, without limitation, restrictions on transfer, repurchase rights, or such other provisions as shall be determined by the Committee; PROVIDED, HOWEVER, THAT such additional provisions shall not be inconsistent with any other term or condition of the Plan and such additional provisions shall not cause any Incentive Stock Option granted under the Plan to fail to qualify as an incentive option within the meaning of Section 422 of the Code. The shares of stock issuable upon exercise of an option by any executive officer, director or beneficial owner of more than ten percent of the Common Stock of the Company may not be sold or transferred (except that such shares may be issued upon exercise of such option) by such officer, director or beneficial owner for a period of six months following the grant of such option. Option agreements need not be identical, but each option agreement by appropriate language shall include the substance of all of the following provisions: 6.1 EXPIRATION OF OPTION. Notwithstanding any other provision of the Plan or of any option agreement, each option shall expire on the date specified in the option agreement, which date shall not, in the case of an Incentive Stock Option, be later than the tenth anniversary (fifth anniversary in the case of a greater-than-ten-percent stockholder) of the date on which the option was granted or as specified in Section 5 of this Plan. -10- 11 6.2 EXERCISE. Each option may be exercised, so long as it is valid and outstanding, from time to time in part or as a whole, subject to any limitations with respect to the number of shares for which the option may be exercised at a particular time and to such other conditions as the Committee in its discretion may specify upon granting the option. 6.3 PURCHASE PRICE. The purchase price per share under each option shall be determined by the Committee at the time the option is granted; provided, however, that the option price of any Incentive Stock Option shall not, unless otherwise permitted by the Code or other applicable law or regulation, be less than the fair market value of the Common Stock on the date the option is granted (110% of the fair market value in the case of a greater-than-ten-percent stockholder) and the option price of any Nonqualified Option shall not be less than 85% of the fair market value of the Common Stock on the date the option is granted. For the purpose of the Plan the fair market value of the Common Stock shall be (i) in the case of the Nonqualified Options granted to Outside Directors in connection with the Company's initial public offering, the initial public offering price and (ii) in all other cases, the closing price per share on the date of grant of the option as reported by a nationally recognized stock exchange, or, if the Common Stock is not listed on such an exchange, as reported by the National Association of Securities Dealers Automated Quotation System ("Nasdaq") National Market System or, if the Common Stock is not listed on the Nasdaq National Market System, the mean of the bid and asked prices per share on the -11- 12 date of grant of the option or, if the Common Stock is not traded over-the-counter, the fair market value as determined by the Committee. 6.4 TRANSFERABILITY OF OPTIONS. Options shall not be transferable by the optionee otherwise than by will or under the laws of descent and distribution, and shall be exercisable, during his lifetime, only by the optionee. 6.5 RIGHTS OF OPTIONEES. No optionee shall be deemed for any purpose to be the owner of any shares of Common Stock subject to any option unless and until the option shall have been exercised pursuant to the terms thereof, and the Company shall have issued and delivered certificates representing such shares to the optionee. 6.6 CERTAIN RIGHTS OF THE COMPANY. The Committee may in its discretion provide upon the grant of any option hereunder that the Company shall have an option to repurchase upon such terms and conditions as determined by the Committee all or any number of shares purchased upon exercise of such option or a right of first refusal in connection with subsequent transfer of any or all of such shares. The repurchase price per share payable by the Company shall be such amount or be determined by such formula as is fixed by the Committee at the time the option for the shares subject to repurchase is granted. In the event the Committee shall grant options subject to the Company's repurchase option or right of first refusal, the certificates representing the shares purchased pursuant to such option shall -12- 13 carry a legend satisfactory to counsel for the Company referring to the Company's repurchase option or right of first refusal. 6.7 "LOCKUP" AGREEMENT. The Committee may in its discretion specify upon granting an option that upon request of the Company or the underwriters managing any underwritten offering of the Company's securities, the optionee shall agree in writing that for a period of time (not to exceed 180 days) from the effective date of any registration of securities of the Company, the optionee will not sell, make any short sale of, loan, grant any option for the purchase of, or otherwise dispose of any shares issued pursuant to the exercise of such option, without the prior written consent of the Company or such underwriters, as the case may be. SECTION 7. METHOD OF EXERCISE; PAYMENT OF PURCHASE PRICE 7.1 METHOD OF EXERCISE. Any option granted under the Plan may be exercised by the optionee by delivering to the Company on any business day a written notice specifying the number of shares of Common Stock the optionee then desires to purchase and specifying the address to which the certificates for such shares are to be mailed (the "Notice"), accompanied by payment for such shares. 7.2 PAYMENT OF PURCHASE PRICE. Payment for the shares of Common Stock purchased pursuant to the exercise of an option shall be made either by (i) cash or check equal to the option price for the number of shares specified in the Notice, or (ii) with the consent of the Committee, other shares of Common -13- 14 Stock which (a) either have been owned by the optionee for more than six (6) months on the date of surrender or were not acquired, directly or indirectly, from the Company, and (b) have a fair market value on the date of surrender not greater than the aggregate option price of the shares as to which such option shall be exercised, (iii) with the consent of the Committee, delivery of such documentation as the Committee and the broker, if applicable, shall require to effect an exercise of the option and delivery to the Company of the sale or loan proceeds required to pay the option price, (iv) with the consent of the Committee, such other consideration which is acceptable to the Committee and which has a fair market value equal to the option price of such shares, or (v) with the consent of the Committee, a combination of (i), (ii), (iii), (iv) and/or (v). For the purpose of the preceding sentence, the fair market value per share of Common Stock so delivered to the Company shall be determined in the manner specified in Section 6.3. As promptly as practicable after receipt of the Notice and accompanying payment, the Company shall deliver to the optionee certificates for the number of shares with respect to which such option has been so exercised, issued in the optionee's name; provided, however, that such delivery shall be deemed effected for all purposes when the Company or a stock transfer agent of the Company shall have deposited such certificates in the United States mail, addressed to the optionee, at the address specified in the Notice. -14- 15 SECTION 8. CHANGES IN COMPANY'S CAPITAL STRUCTURE 8.1 RIGHTS OF COMPANY. The existence of outstanding options shall not affect in any way the right or power of the Company or its stockholders to make or authorize, without limitation, any or all adjustments, recapitalizations, reorganizations or other changes in the Company's capital structure or its business, or any merger or consolidation of the Company, or any issue of Common Stock, or any issue of bonds, debentures, preferred or prior preference stock or other capital stock ahead of or affecting the Common Stock or the rights thereof, or the dissolution or liquidation of the Company, or any sale or transfer of all or any part of its assets or business, or any other corporate act or proceeding, whether of a similar character or otherwise. 8.2 RECAPITALIZATIONS, STOCK SPLITS AND DIVIDENDS. If the Company shall effect a subdivision or consolidation of shares or other capital readjustment, the payment of a stock dividend, or other increase or reduction of the number of shares of the Common Stock outstanding, in any such case without receiving compensation therefor in money, services or property, then (i) the number, class, and price per share of shares of stock subject to outstanding options hereunder shall be appropriately adjusted in such a manner as to entitle an optionee to receive upon exercise of an option, for the same aggregate cash consideration, the same total number and class of shares as he would have received as a result of the event requiring the adjustment had he exercised his option in full immediately prior -15- 16 to such event; (ii) the number and class of shares with respect to which options may be granted under the Plan; and (iii) the number and class of shares set forth in Sections 3.3 and 4.4 shall be adjusted by substituting for the total number of shares of Common Stock then reserved for issuance under the Plan that number and class of shares of stock that the owner of an equal number of outstanding shares of Common Stock immediately prior to the event requiring adjustment would own as the result of such event. 8.3 MERGER WITHOUT CHANGE OF CONTROL. After a merger of one or more corporations with or into the Company or after a consolidation of the Company and one or more corporations in which the stockholders of the Company immediately prior to such merger or consolidation own after such merger or consolidation shares representing at least fifty percent (50%) of the voting power of the Company or the surviving or resulting corporation, as the case may be, each holder of an outstanding option shall, at no additional cost, be entitled upon exercise of such option to receive in lieu of the shares of Common Stock as to which such option was exercisable immediately prior to such event, the number and class of shares of stock or other securities, cash or property (including, without limitation, shares of stock or other securities of another corporation or Common Stock) to which such holder would have been entitled pursuant to the terms of the agreement of merger or consolidation if, immediately prior to such merger or consolidation, such holder had been the holder of -16- 17 record of a number of shares of Common Stock equal to the number of shares for which such option shall be so exercised. 8.4 CHANGE OF CONTROL. (a) Upon the occurrence of a Change of Control (as defined below) the time for exercise of each unvested installment of any then outstanding option shall be accelerated, such that: (i) immediately upon such Change of Control, twenty-five percent (25%) of any such unvested installment shall be exercisable; (ii) on the date that is nine months after such Change in Control, one third (33 1/3%) of any installment of such option that has not yet vested in accordance with its original terms or by virtue of this Section 8.4 shall become exercisable; (iii) on the date that is eighteen months after such Change in Control, fifty percent (50%) of any installment of such option that has not yet vested in accordance with its original terms or by virtue of this Section 8.4 shall become exercisable; and (iv) on the second anniversary of such Change in Control, any remaining installment of such option that has not yet vested in accordance with its original terms or by virtue of this Section 8.4 shall become exercisable. The foregoing clauses (i) through (iv) are intended to provide for vesting that is additive to, and not in lieu of, the vesting schedule originally provided in any option outstanding at the time of a Change in Control, and, except to -17- 18 the extent accelerated by such clauses, each such option shall continue to vest in accordance with its original terms. (b) If the Company is merged with or into or consolidated with another corporation, other than a merger or consolidation which would result in the voting securities of the Company outstanding immediately prior thereto continuing to represent (either by remaining outstanding or by being converted into voting securities of the surviving entity) more than fifty percent (50%) of the combined voting power of the voting securities of the Company or such surviving entity outstanding immediately after such merger or consolidation; or if the Company is liquidated, or sells or otherwise disposes of substantially all of its assets to another corporation while unexercised options remain outstanding under the Plan, then either in such event: (i) subject to the provisions of clause (iii) below, after the effective date of such merger, consolidation, liquidation, sale or disposition, as the case may be, each holder of an outstanding option shall be entitled, upon exercise of such option, to receive, in lieu of the shares of Common Stock as to which such option was exercisable immediately prior to such event, the number and class of shares of stock or other securities, cash or property (including, without limitation, shares of stock or other securities of another corporation or common stock) to which such holder would have been entitled pursuant to the terms of the merger, consolidation, liquidation, sale or disposition if, immediately prior to such event, such -18- 19 holder had been the holder of a number of shares of Common Stock equal to the number of shares as to which such option shall be so exercised; (ii) the Committee may accelerate the time for exercise of some or all unexercised and unexpired options so that from and after a date prior to the effective date of such merger, consolidation, liquidation, sale or disposition, as the case may be, specified by the Committee such accelerated options shall be exercisable in full; or (iii) all outstanding options may be cancelled by the Committee as of the effective date of any such merger, consolidation, liquidation, sale or disposition provided that (x) notice of such cancellation shall be given to each holder of an option and (y) each holder of an option shall have the right to exercise such option to the extent that the same is then exercisable or, if the Committee shall have accelerated the time for exercise of all unexercised and unexpired options, in full during the 10-day period preceding the effective date of such merger, consolidation, liquidation, sale or disposition. (c) If, within two years following a Change in Control, the employment of any optionee who immediately prior to such Change in Control was employed by the Company in a capacity designated by the Board of Directors of the Company as that of an "executive officer" within the meaning of Rule 16a-1(f) promulgated under the 1934 Act (each such optionee being hereafter referred to as a "Designated Executive") shall be terminated by the Company other than for cause, or shall be -19- 20 terminated by the Designated Executive for good reason, then in such event all unvested, unexercised and unexpired options held by such Designated Executive at the date of such termination shall thereupon immediately become exercisable in full. For purposes of this paragraph, "good reason" for termination by a Designated Executive of his employment shall be deemed to have existed only if (i) within two years after a Change in Control, the Company, or any successor entity then employing the Designated Executive, shall materially diminish the responsibilities and authority of the Designated Executive or, shall materially reduce the rate of compensation of the Designated Executive (including by way of a change in the method of determining the eligibility of such Designated Executive to earn bonus or incentive compensation), in either case as compared with his responsibilities and authority or rate of compensation, as the case may be, in effect immediately prior to such Change in Control, and (ii) within thirty (30) days following such diminution or reduction the Designated Executive shall resign from his employment by the Company or such successor entity. (d) "Change of Control" shall mean the occurrence of any one of the following events: (i) any "person" (as such term is used in Sections 13(d) and 14(d)(2) of the 1934 Act) becomes a "beneficial owner" (as such term is defined in Rule 13d-3 promulgated under the 1934 Act) (other than the Company, any trustee or other fiduciary holding securities under an employee benefit plan of the Company, or any corporation owned, directly -20- 21 or indirectly, by the stockholders of the Company in substantially the same proportions as their ownership of stock of the Company), directly or indirectly, of securities of the Company representing fifty percent (50%) or more of the combined voting power of the Company's then outstanding securities; or (ii) persons who, as of March 1, 1997, constituted the Company's Board (the "Incumbent Board") cease for any reason, including, without limitation, as a result of a tender offer, proxy contest, merger or similar transaction, to constitute at least a majority of the Board, provided that any person becoming a director of the Company subsequent to March 1, 1997 whose election was approved by, or who was nominated with the approval of, at least a majority of the directors then comprising the Incumbent Board shall, for purposes of this Plan, be considered a member of the Incumbent Board; or (iii) the stockholders of the Company approve a merger or consolidation of the Company with any other corporation or other entity, other than a merger or consolidation which would result in the voting securities of the Company outstanding immediately prior thereto continuing to represent (either by remaining outstanding or by being converted into voting securities of the surviving entity) more than fifty percent (50%) of the combined voting power of the voting securities of the Company or such surviving entity outstanding immediately after such merger or consolidation; or (iv) the stockholders of the Company approve a plan of complete liquidation of the Company or an agreement for -21- 22 the sale or disposition by the Company of all or substantially all of the Company's assets. 8.5 ADJUSTMENTS TO COMMON STOCK SUBJECT TO OPTIONS. Except as hereinbefore expressly provided, the issue by the Company of shares of stock of any class, or securities convertible into shares of stock of any class, for cash or property, or for labor or services, either upon direct sale or upon the exercise of rights or warrants to subscribe therefor, or upon conversion of shares or obligations of the Company convertible into such shares or other securities, shall not affect, and no adjustment by reason thereof shall be made with respect to, the number or price of shares of Common Stock then subject to outstanding options. 8.6 MISCELLANEOUS. Adjustments under this Section 8 shall be determined by the Committee, and such determinations shall be conclusive. No fractional shares of Common Stock shall be issued under the Plan on account of any adjustment specified above. SECTION 9. GENERAL RESTRICTIONS 9.1 INVESTMENT REPRESENTATIONS. The Company may require any person to whom an option is granted, as a condition of exercising such option, to give written assurances in substance and form satisfactory to the Company to the effect that such person is acquiring the Common Stock subject to the option for his own account for investment and not with any present intention of selling or otherwise distributing the same, and to such other effects as the Company deems necessary or appropriate in order to comply with federal and applicable state securities laws. -22- 23 9.2 COMPLIANCE WITH SECURITIES LAWS. The Company shall not be required to sell or issue any shares under any option if the issuance of such shares shall constitute a violation by the optionee or by the Company of any provision of any law or regulation of any governmental authority. In addition, in connection with the Securities Act of 1933, as now in effect or hereafter amended (the "Act"), upon exercise of any option, the Company shall not be required to issue such shares unless the Committee has received evidence satisfactory to it to the effect that the holder of such option will not transfer such shares except pursuant to a registration statement in effect under such Act or unless an opinion of counsel satisfactory to the Company has been received by the Company to the effect that such registration is not required. Any determination in this connection by the Committee shall be final, binding and conclusive. In the event the shares issuable on exercise of an option are not registered under the Act, the Company may imprint upon any certificate representing shares so issued the following legend or any other legend which counsel for the Company considers necessary or advisable to comply with the Act and with applicable state securities laws: The shares of stock represented by this certificate have not been registered under the Securities Act of 1933 or under the securities laws of any State and may not be pledged, hypothecated, sold or otherwise transferred except upon such registration or upon receipt by the Corporation of an opinion of counsel satisfactory to the Corporation, in form and substance satisfactory to the Corporation, that registration is not required for such sale or transfer. -23- 24 The Company may, but shall in no event be obligated to, register any securities covered hereby pursuant to the Act; and in the event any shares are so registered the Company may remove any legend on certificates representing such shares. The Company shall not be obligated to take any other affirmative action in order to cause the exercise of an option or the issuance of shares pursuant thereto to comply with any law or regulation of any governmental authority. 9.3 EMPLOYMENT OBLIGATION. The granting of any option shall not impose upon the Company (or any parent or subsidiary of the Company) any obligation to employ or continue to employ any optionee; and the right of the Company (or any such parent or subsidiary) to terminate the employment of any officer or other employee shall not be diminished or affected by reason of the fact that an option has been granted to him/her. 9.4 WITHHOLDING TAX. Whenever under the Plan shares of Common Stock are to be delivered upon exercise of an option, the Company shall be entitled to require as a condition of delivery that the optionee remit an amount sufficient to satisfy all federal, state and other governmental withholding tax requirements related thereto. SECTION 10. AMENDMENT OR TERMINATION OF THE PLAN The Board of Directors may modify, revise or terminate this Plan at any time and from time to time, except that (i) the class of persons eligible to receive options and the aggregate number -24- 25 of shares issuable pursuant to this Plan shall not be changed or increased, other than by operation of Section 8 hereof, without the consent of the stockholders of the Company and (ii) the provisions of Section 4.4 shall not be amended more than once every six (6) months, other than to comport with changes in the Code, the Employee Retirement Income Security Act of 1974, or the rules thereunder. SECTION 11. NONEXCLUSIVITY OF THE PLAN Neither the adoption of the Plan by the Board of Directors nor the submission of the Plan to the stockholders of the Company for approval shall be construed as creating any limitations on the power of the Board of Directors to adopt such other incentive arrangements as it may deem desirable, including, without limitation, the granting of stock options otherwise than under the Plan, and such arrangements may be either applicable generally or only in specific cases. SECTION 12. EFFECTIVE DATE AND DURATION OF PLAN The Plan shall become effective upon its adoption by the Board of Directors. No option may be granted under the Plan after the tenth anniversary of the effective date. The Plan shall terminate (i) when the total amount of Common Stock with respect to which options may be granted shall have been issued upon the exercise of options or (ii) by action of the Board of Directors pursuant to Section 10 hereof, whichever shall first occur. * * * * * * * * -25- EX-10.4 3 1994 EMPLOYEE STOCK PURCHASE PLAN 1 EXHIBIT 10.4 PROJECT SOFTWARE & DEVELOPMENT, INC. 1994 EMPLOYEE STOCK PURCHASE PLAN 1. PURPOSE. The Project Software & Development, Inc. 1994 Employee Stock Purchase Plan (the "Plan") is intended to provide a method whereby employees of Project Software and Development, Inc. (the "Company") will have an opportunity to acquire an ownership interest (or increase an existing ownership interest) in the Company through the purchase of shares of the Common Stock of the Company. It is the intention of the Company that the Plan qualify as an "employee stock purchase plan" under Section 423 of the Internal Revenue Code of 1986, as amended (the "Code"). The provisions of the Plan shall, accordingly, be construed so as to extend and limit participation in a manner consistent with the requirements of that section of the Code. 2. DEFINITIONS. (a) "Compensation" means, for the purpose of any Offering pursuant to this Plan, base pay in effect as of the Offering Commencement Date (as hereinafter defined). Compensation shall not include any deferred compensation other than contributions by an individual through a salary reduction agreement to a cash or deferred plan pursuant to Section 401(k) of the Code or to a cafeteria plan pursuant to Section 125 of the Code. (b) "Board" means the Board of Directors of the Company. (c) "Committee" means the Compensation Committee of the Board. (d) "Common Stock" means the common stock, $.01 par value per share, of the Company. (e) "Company" shall also include any Parent or Subsidiary of Project Software & Development, Inc. designated by the Board, unless the context otherwise requires. (f) "Employee" means any person who is customarily employed at least 20 hours per week and more than five months in a calendar year by the Company. (g) "Parent" shall mean any present or future corporation which is or would constitute a "parent corporation" as that term is defined in Section 424 of the Code. 2 (h) "Subsidiary" shall mean any present or future corporation which is or would constitute a "subsidiary corporation" as that term is defined in Section 424 of the Code. 3. ELIGIBILITY. (a) Participation in the Plan is completely voluntary. Participation in any one or more of the offerings under the Plan shall neither limit, nor require, participation in any other offering. (b) Each employee shall be eligible to participate in the Plan on the first Offering Commencement Date, as hereafter defined, following the completion of three (3) full calendar months of continuous service with the Company. Notwithstanding the foregoing, no employee shall be granted an option under the Plan: (i) if, immediately after the grant, such employee would own stock, and/or hold outstanding options to purchase stock, possessing 5% or more of the total combined voting power or value of all classes of stock of the Company or any Parent or Subsidiary; for purposes of this Paragraph the rules of Section 424(d) of the Code shall apply in determining stock ownership of any employee; or (ii) which permits his rights to purchase stock under all Section 423 employee stock purchase plans of the Company and any Parent or Subsidiary to exceed $25,000 of the fair market value of the stock (determined at the time such option is granted) for each calendar year in which such option is outstanding; for purposes of this Paragraph, the rules of Section 423(b)(8) of the Code shall apply. 4. OFFERING DATES. The right to purchase stock hereunder shall be made available by a series of six-month offerings (the "Offering" or "Offerings") to employees eligible in accordance with Paragraph 3 hereof. The Committee will, in its discretion, determine the applicable date of commencement ("Offering Commencement Date") and termination date ("Offering Termination Date") for each Offering. Participation in any one or more of the Offerings under the Plan shall neither limit, nor require, participation in any other Offering. 5. PARTICIPATION. Any eligible employee may become a participant by completing a payroll deduction authorization form provided by the Company and filing it with the office of the Company's Treasurer 20 days prior to an applicable Offering Commencement Date, as -2- 3 determined by the Committee pursuant to Paragraph 4. A participant who obtains shares of Common Stock in one Offering will be deemed to have elected to participate in each subsequent Offering, provided such participant is eligible to participate during each such subsequent Offering and provided that such participant has not specifically elected not to participate in such subsequent Offering. Such participant will also be deemed to have authorized the same payroll deductions under Paragraph 6 hereof for each such subsequent Offering as in the immediately preceding Offering; provided however, that, during the enrollment period prior to each new Offering, the participant may elect to change such participant's payroll deductions by submitting a new payroll deduction authorization form. 6. PAYROLL DEDUCTIONS. (a) At the time a participant files his authorization for a payroll deduction, he shall elect to have deductions made from his pay on each payday during any Offering in which he is a participant at a specified percentage of his Compensation as determined on the applicable Offering Commencement Date; said percentage shall be in increments of one percent up to a maximum percentage of ten percent. (b) Payroll deductions for a participant shall commence on the applicable Offering Commencement Date when his authorization for a payroll deduction becomes effective and subject to the last sentence of Paragraph 5 shall end on the Offering Termination Date of the Offering to which such authorization is applicable unless sooner terminated by the participant as provided in Paragraph 10. (c) All payroll deductions made for a participant shall be credited to his account under the Plan. A participant may not make any separate cash payment into such account. (d) A participant may withdraw from the Plan at any time during the applicable Offering period. 7. GRANTING OF OPTION. (a) Except as set forth in Paragraph 7(c) hereof, on the Offering Commencement Date of each Offering, a participating employee shall be deemed to have been granted an option to purchase a maximum number of shares of the Common Stock equal to an amount determined as follows: 85% of the market value per share of the Common Stock on the applicable Offering Commencement Date shall be divided into an amount equal to the percentage of the employee's Compensation which he has elected to have withheld (but no more than 10%) multiplied by the employee's Compensation over the Offering period. Such market value per share of the -3- 4 Common Stock shall be determined as provided in clause (i) of Paragraph 7(b). (b) The option price of the Common Stock purchased with payroll deductions made during each such Offering for a participant therein shall be the lower of: (i) 85% of the closing price per share on the Offering Commencement Date as reported by a nationally recognized stock exchange, or, if the Common Stock is not listed on such an exchange, as reported by the National Association of Securities Dealers Automated Quotation System ("Nasdaq") National Market System or, if the Common Stock is not listed on the Nasdaq National Market System, 85% of the mean of the bid and asked prices per share on the Offering Commencement Date or, if the Common Stock is not traded over-the-counter, 85% of the fair market value on the Offering Commencement Date as determined by the Committee; and (ii) 85% of the closing price per share on the Offering Termination Date as reported by a nationally recognized stock exchange, or, if the Common Stock is not listed on such an exchange, as reported by the Nasdaq National Market System or, if the Common Stock is not listed on the Nasdaq National Market System, 85% of the mean of the bid and asked prices per share on the Offering Termination Date or, if the Common Stock is not traded over-the-counter, 85% of the fair market value on the Offering Termination Date as determined by the Committee. 8. EXERCISE OF OPTION. (a) Unless a participant gives written notice to the Treasurer of the Company as hereinafter provided, his option for the purchase of Common Stock with payroll deductions made during any Offering will be deemed to have been exercised automatically on the Offering Termination Date applicable to such Offering for the purchase of the number of full shares of Common Stock which the accumulated payroll deductions in his account at that time will purchase at the applicable option price (but not in excess of the number of shares for which options have been granted the employee pursuant to Paragraph 7(a)), and any excess in his account at that time, other than amounts representing fractional shares, will be returned to him. (b) Fractional shares will not be issued under the Plan and any accumulated payroll deductions which would have been used to purchase fractional shares shall be automatically carried forward to the next Offering unless the participant elects, by written notice to the Treasurer of the Company, to have the excess cash returned to him. -4- 5 9. DELIVERY. The Company will deliver to each participant (as promptly as possible after the appropriate Offering Termination Date), a certificate representing the Common Stock purchased upon exercise of his option. 10. WITHDRAWAL AND TERMINATION. (a) Prior to the Offering Termination Date for an Offering, any participant may withdraw the payroll deductions credited to his account under the Plan for such Offering by giving written notice to the Treasurer of the Company. All of the participant's payroll deductions credited to such account will be paid to him promptly after receipt of notice of withdrawal, without interest, and no future payroll deductions will be made from his pay during such Offering. The Company will treat any attempt to borrow by a participant on the security of accumulated payroll deductions as an election to withdraw such deductions. (b) Except as set forth in Paragraphs 6(d) and 7(c), a participant's election not to participate in, or withdrawal from, any Offering will not have any effect upon his eligibility to participate in any succeeding Offering or in any similar plan which may hereafter be adopted by the Company. (c) Upon termination of the participant's employment for any reason, including retirement but excluding death, the payroll deductions credited to his account will be returned to him, or, in the case of his death, to the person or persons entitled thereto under Paragraph 14. (d) Upon termination of the participant's employment because of death, his beneficiary (as defined in Paragraph 14) shall have the right to elect, by written notice given to the Company's Treasurer prior to the expiration of a period of 90 days commencing with the date of the death of the participant, either: (i) to withdraw all of the payroll deductions credited to the participant's account under the Plan; or (ii) to exercise the participant's option for the purchase of stock on the Offering Termination Date next following the date of the participant's death for the purchase of the number of full shares which the accumulated payroll deductions in the participant's account at the date of the participant's death will purchase at the applicable option price (subject to the limitation contained in Paragraph 7(a)), and any excess in such account will be returned to said beneficiary. In the event that no such written notice of election shall be duly received by the -5- 6 office of the Company's Treasurer, the beneficiary shall automatically be deemed to have elected to withdraw the payroll deductions credited to the participant's account at the date of the participant's death and the same will be paid promptly to said beneficiary. 11. INTEREST. No interest will be paid or allowed on any money paid into the Plan or credited to the account of any participating employee. 12. STOCK. (a) The maximum number of shares of Common Stock available for issuance and purchase by employees under the Plan, subject to adjustment upon changes in capitalization of the Company as provided in Paragraph 17, shall be 150,000 shares of Common Stock, par value $.01 per share, of the Company. If the total number of shares for which options are exercised on any Offering Termination Date in accordance with Paragraph 8 exceeds the maximum number of shares for the applicable Offering, the Company shall make a pro rata allocation of the shares available for delivery and distribution in an equitable manner, and the balances of payroll deductions credited to the account of each participant under the Plan shall be returned to the participant. (b) The participant will have no interest in stock covered by his option until such option has been exercised. 13. ADMINISTRATION. The Plan shall be administered by the Committee. The interpretation and construction of any provision of the Plan and adoption of rules and regulations for administering the Plan shall be made by the Committee. Determinations made by the Committee with respect to any matter or provision contained in the Plan shall be final, conclusive and binding upon the Company and upon all participants, their heirs or legal representatives. Any rule or regulation adopted by the Committee shall remain in full force and effect unless and until altered, amended, or repealed by the Committee. 14. DESIGNATION OF BENEFICIARY. A participant shall file with the Treasurer of the Company a written designation of a beneficiary who is to receive any Common Stock and/or cash under the Plan. Such designation of beneficiary may be changed by the participant at any time by written notice. Upon the death of a participant and upon receipt by the Company of proof of the identity and existence at the participant's death of a beneficiary validly designated by him -6- 7 under the Plan, the Company shall deliver such Common Stock and/or cash to such beneficiary. In the event of the death of a participant and in the absence of a beneficiary validly designated under the Plan who is living at the time of such participant's death, the Company shall deliver such Common Stock and/or cash to the executor or administrator of the estate of the participant. No beneficiary shall prior to the death of the participant by whom he has been designated, acquire any interest in the Common Stock and/or cash credited to the participant under the Plan. 15. TRANSFERABILITY. Neither payroll deductions credited to a participant's account nor any rights with regard to the exercise of an option or to receive Common Stock under the Plan may be assigned, transferred, pledged, or otherwise disposed of in any way by the participant other than by will or the laws of descent and distribution. Any such attempted assignment, transfer, pledge, or other disposition shall be without effect, except that the Company may treat such act as an election to withdraw funds in accordance with Paragraph 10. 16. USE OF FUNDS. All payroll deductions received or held by the Company under this Plan may be used by the Company for any corporate purpose, and the Company shall not be obligated to segregate such payroll deductions. 17. EFFECT OF CHANGES OF COMMON STOCK. If the Company shall subdivide or reclassify the Common Stock which has been or may be subject to options under this Plan, or shall declare thereon any dividend payable in shares of such Common Stock, or shall take any other action of a similar nature affecting such Common Stock, then the number and class of shares of Common Stock which may thereafter be subject to options under the Plan (in the aggregate and to any participant) shall be adjusted accordingly and in the case of each option outstanding at the time of any such action, the number and class of shares which may thereafter be purchased pursuant to such option and the option price per share shall be adjusted to such extent as may be determined by the Committee, with the approval of independent public accountants and counsel, to be necessary to preserve the rights of the holder of such option. 18. AMENDMENT OR TERMINATION. The Board may at any time terminate or amend the Plan. No such termination shall affect options previously granted, nor may an amendment make any change in any option theretofore -7- 8 granted which would adversely affect the rights of any participant holding options under the Plan without the consent of such participant. 19. NOTICES. All notices or other communications by a participant to the Company under or in connection with the Plan shall be deemed to have been duly given when received by the Treasurer of the Company. 20. MERGER OR CONSOLIDATION. If the Company shall at any time merge into or consolidate with another corporation, the holder of each option then outstanding will thereafter be entitled to receive at the next Offering Termination Date upon the exercise of such option, in lieu of the number of shares of Common Stock as to which such option shall be exercisable, the number and class of shares of stock or other securities or property to which such holder would have been entitled pursuant to the terms of the agreement of merger or consolidation if, immediately prior to such merger or consolidation, such holder had been the holder of record of a number of shares of Common Stock equal to the number of shares for which such option was exercisable. In accordance with this Paragraph and Paragraph 17, the Committee shall determine the kind and amount of such securities or property which such holder of an option shall be entitled to receive. A sale of all or substantially all of the assets of the Company shall be deemed a merger or consolidation for the foregoing purposes. 21. APPROVAL OF STOCKHOLDERS. The Plan is subject to the approval of the stockholders of the Company at their next annual meeting or at any special meeting of the stockholders for which one of the purposes shall be to act upon the Plan. 22. GOVERNMENTAL AND OTHER REGULATIONS. The Plan, and the grant and exercise of the rights to purchase shares hereunder, and the Company's obligation to sell and deliver shares upon the exercise of rights to purchase shares, shall be subject to all applicable federal, state and foreign laws, rules and regulations, and to such approvals by any regulatory or governmental agency as may, in the opinion of counsel for the Company, be required. The Plan shall be governed by, and construed and enforced in accordance with, the provisions of Sections 421, 423 and 424 of the Code and the substantive laws of The Commonwealth of Massachusetts. In the event of any inconsistency between such provisions of the Code and any such laws, such provisions of the Code shall govern to the extent -8- 9 necessary to preserve favorable federal income tax treatment afforded employee stock purchase plans under Section 423 of the Code. * * * -9- EX-11.1 4 STATEMENT RE: COMPUTATION OF PER SHARE 1 EXHIBIT 11.1 PROJECT SOFTWARE & DEVELOPMENT, INC. STATEMENT RE COMPUTATION OF EARNINGS (LOSS) PER SHARE Type of Security
COMPANY, FOR THE YEAR ENDED SEPTEMBER 30, 1995:(in thousands, except share and per share data) Primary Fully Diluted ----------- ----------- Weighted average common shares outstanding .......... 8,530,882 8,530,882 Common stock equivalents ............................ 314,864 329,420 ----------- ----------- 8,845,746 8,860,302 ----------- ----------- Net income .......................................... $ 5,629 $ 5,629 Net income per share ................................ $ 0.64 $ 0.64 COMPANY, FOR THE YEAR ENDED SEPTEMBER 30, 1996:(in thousands, except share and per share data) Weighted average common shares outstanding .......... 9,602,710 9,602,710 Common stock equivalents ............................ 449,198 481,571 ----------- ----------- 10,051,908 10,084,281 ----------- ----------- Net income .......................................... $ 10,046 $ 10,046 Net income per share ................................ $ 1.00 $ 1.00 COMPANY, FOR THE YEAR ENDED SEPTEMBER 30, 1997:(in thousands, except share and per share data) Weighted average common shares outstanding .......... 9,787,144 9,787,144 Common stock equivalents ............................ 277,124 290,434 ----------- ----------- 10,064,268 10,077,578 ----------- ----------- Net income .......................................... $ 11,570 $ 11,570 Net income per share ................................ $ 1.15 $ 1.15
EX-21.1 5 SUBSIDIARIES OF THE COMPANY 1 EXHIBIT 21.1 PROJECT SOFTWARE & DEVELOPMENT, INC. List of Subsidiaries
Name of Subsidiary Jurisdiction of Ownership - ------------------ --------------- --------- Incorporation ------------- PSDI International Software, Inc. Delaware (1) PSDI Security Corporation Massachusetts (1) Maintenance Automation Corporation Florida (1) PSDI International Holdings Inc. Delaware (2) PSDI Export, Inc. Barbados (2) PSDI (UK) Ltd. United Kingdom (2) PSDI Canada Limited Canada (2) PSDI France SARL France (2) PSDI Australia PTY. Ltd. Australia (2) PSDI Deutschland GmbH Germany (2) PSDI Europe, Ltd United Kingdom (2) PSDI Espana S.A. Spain (2) PSDI Benelux N.V. Netherlands (2) PSDI Norden AB Sweden (2) PSDI Japan K.K. Japan (2) PSDI (Thailand) Limited Thailand (2) PSDI India India (2) PSDI Brasil Ltda. Brazil (3)
(1) All of the outstanding capital stock is owned by Project Software & Development, Inc. (2) All of the outstanding capital stock (other than certain qualifying shares required in the jurisdiction of organization and representing from 0% to 2% of the outstanding capital stock), is owned by PSDI International Software, Inc. (3) 4,950 shares are owned by PSDI International Software, Inc. and 50 shares are owned by PSDI International Holdings, Inc. EX-23.1 6 CONSENT OF COOPERS & LYBRAND 1 EXHIBIT 23.1 CONSENT OF INDEPENDENT ACCOUNTANTS We consent to the incorporation by reference in the registration statements of Project Software & Development, Inc. on Form S-8 (File Nos. 33-79074, 33-79142, 33-95774, 33-95780, 333-3402) of our report dated November 7, 1997, on our audits of the consolidated financial statements and financial statements schedule of Project Software & Development, Inc. as of September 30, 1997, 1996 and 1995 and for the years ended September 30, 1997 and 1996, which report is included in this Annual Report on Form 10-K. Coopers & Lybrand L.L.P. Boston, Massachusetts December 22, 1997 EX-27.1 7 FINANCIAL DATA SCHEDULE
5 1,000 US DOLLARS YEAR SEP-30-1997 OCT-01-1996 SEP-30-1997 1 25,964 38,299 26,307 2,286 0 93,211 19,653 12,331 102,239 28,125 0 99 0 0 73,871 102,239 50,393 96,700 2,547 26,572 53,857 761 24 18,127 6,557 11,570 0 0 0 11,570 1.15 1.15
EX-99.1 8 CERTAIN FACTORS 1 Exhibit 99.1 CERTAIN FACTORS Project Software & Development, Inc. (the "Company") is filing this Exhibit with the Securities and Exchange Commission in order to set forth in a readily available document certain significant risks and uncertainties that are important considerations to be taken into account in conjunction with consideration and review of the Company's reports, registration statements, information statements, press releases, and other publicly-disseminated documents (including oral statements concerning Company business information made by others on behalf of the Company) that include forward-looking information. 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. GENERAL ECONOMIC RISK FACTORS Forward-looking statements of the Company are subject to the risk that assumptions made by management of the Company concerning future general economic conditions such as recession, inflation, interest rates, tax rates, corporate spending and credit and other future conditions having an impact on software markets and the Company's business may prove to be incorrect. Adverse changes in such future economic conditions could have an adverse effect on the Company's business. 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 2 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 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, which 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. The Company will be releasing MAXIMO 4.0 in the near future. The failure of MAXIMO 4.0 to achieve market acceptance would have a material adverse effect on the Company's business and financial results. DEPENDENCE ON MAXIMO The Company's revenues are primarily attributable to the licensing of its MAXIMO product, introduced in 1991, and to related services and support. Revenues from licenses of MAXIMO and related services and support accounted for approximately 93.0% 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. 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, -2- 3 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 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 licenses of software in the last two weeks of a quarter, frequently in the last weeks or even 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 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 Workgroup, compete with products of a number of large vendors 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 ADvantage competes with a number of competitors, including a national vendor and other various small regional companies. The Company expects that in the future MAXIMO Enterprise and Workgroup may encounter -3- 4 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 in an attempt to enter the client/server 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. 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 operations. DEPENDENCE ON THIRD PARTIES MAXIMO Enterprise operates with the Oracle 7 and SYBASE database management systems. MAXIMO Workgroup operates with SQLBase, SQLServer and Oracle 7 Workgroup Server 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 non-exclusive license agreements with Centura Corporation, Scribe Technologies, Incorporated, Cognos -4- 5 Corporation and Netronic Software GmbH, pursuant to which the Company incorporates into its products software providing certain application development, user interface, business intelligence, workflow 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 software 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. 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 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 non-disclosure agreements. The Company's software products are often 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. 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 -5- 6 operations of the Company. The Company does not have employment contracts with, and does not maintain key person life insurance policies on, any personnel although it does have an arrangement relating to severance payments with David M. Sample, the Company's President, Chief Executive Officer and Chairman of the Board. In addition, the Company may need to hire 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. 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. LITIGATION RISKS The Company is subject to the normal risks of litigation with respect to its business operation. FACTORS AFFECTING THE COMPANY'S BUSINESS ARE SUBJECT TO CHANGE -6- 7 This Exhibit contains cautionary statements concerning certain factors that may influence the business of the Company and are made as of the date of this Exhibit. Such factors are subject to change. The cautionary statements set forth in this Exhibit are not intended to cover all of the factors that may affect the Company's business in the future. Forward-looking information disseminated publicly by the Company following the date of this Exhibit may be subject to additional factors hereinafter published by the Company. 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. December 23, 1997 -7- -----END PRIVACY-ENHANCED MESSAGE-----