-----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, FV3nju1XZy0xPinQIzzW4sEPRIKmGc+vAJVniCBgNHxYwOv4J0n33FReqEaO7Zki o4zMLC0L71uqPaAGtE/gjQ== 0000950135-98-004760.txt : 19980817 0000950135-98-004760.hdr.sgml : 19980817 ACCESSION NUMBER: 0000950135-98-004760 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19980630 FILED AS OF DATE: 19980814 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-Q SEC ACT: SEC FILE NUMBER: 000-23852 FILM NUMBER: 98688022 BUSINESS ADDRESS: STREET 1: 100 CROSBY DR D CITY: BEDFORD STATE: MA ZIP: 01730 BUSINESS PHONE: 6176611444 MAIL ADDRESS: STREET 1: 100 CROSBY DRIVE CITY: CAMBRBEDFORD STATE: MA ZIP: 01730 10-Q 1 PROJECT SOFTWARE & DEVELOPMENT, INC. 1 UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q FOR THE QUARTERLY PERIOD ENDED JUNE 30, 1998 (mark one) X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE - --- SECURITIES EXCHANGE ACT OF 1934 - --- TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES AND EXCHANGE ACT OF 1934 For the transition period from _______________ to __________________ Commission File Number 0-23852 PROJECT SOFTWARE & DEVELOPMENT, INC. (Exact name of registrant as specified in its charter) MASSACHUSETTS 04-2448516 (State or other jurisdiction (I.R.S employer incorporation or organization) identification number) 100 CROSBY DRIVE, BEDFORD MASSACHUSETTS 01730 (Address of principal executive offices, including zip code) (formerly at 20 University Road Cambridge, MA 02138) (781) 280-2000 (Registrant's telephone number, including area code) Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No --- --- Number of shares outstanding of the Registrant's common stock as of the latest practicable date: 9,995,951 shares of common stock, $.01 par value per share, as of July 31, 1998. 1 2 PROJECT SOFTWARE & DEVELOPMENT, INC. 10-Q INDEX PAGE - ---- PART I. FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS PAGE Consolidated Balance Sheets (unaudited) as of June 30, 1998 and September 30, 1997. 3 Consolidated Statements of Operations (unaudited) for the three and nine months ended June 30, 1998 and 1997. 4 Consolidated Statements of Cash Flows (unaudited) for the nine months ended June 30, 1998 and 1997. 5 Notes to Consolidated Financial Statements (unaudited). 6 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS 11 PART II. OTHER INFORMATION ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY 31 HOLDERS ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K 31 SIGNATURE 33 2 3 PROJECT SOFTWARE & DEVELOPMENT, INC. CONSOLIDATED BALANCE SHEETS (unaudited)
JUNE 30, SEPTEMBER 30, 1998 1997 -------- ------------- ASSETS (IN THOUSANDS,EXCEPT SHARE DATA) Current assets: Cash and cash equivalents $ 20,802 $ 25,964 Marketable securities 38,414 38,299 Accounts receivable, trade, less allowance for doubtful accounts of $2,328 at June 30, 1998 and $2,286 at September 30, 1997, respectively 29,325 24,021 Prepaid expenses 3,252 1,877 Other assets 1,045 1,244 Deferred income taxes 1,596 1,806 -------- -------- Total current assets 94,434 93,211 -------- -------- Property and equipment, net 9,373 7,322 Computer software costs, net 383 -- Goodwill, net 1,175 1,447 Deferred income taxes 333 214 Other assets 56 45 -------- -------- Total assets $105,754 $102,239 ======== ======== LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable $ 9,718 $ 9,809 Accrued compensation 3,725 4,494 Income taxes payable 3,228 3,678 Deferred revenue 12,315 9,750 Deferred income taxes 155 394 -------- -------- Total current liabilities 29,141 28,125 -------- -------- Deferred income taxes 451 12 Deferred rent 103 12 Deferred revenue 84 120 Commitments and contingencies STOCKHOLDERS' EQUITY Preferred stock, $.01 par value;1,000,000 authorized, none issued and outstanding -- -- Common stock, $.01 par value;15,350,000 authorized; issued and outstanding 9,995,621 and 9,856,474 for June 30, 1998 and September 30, 1997, respectively 100 99 Additional paid-in capital 49,603 48,163 Retained earnings 27,313 26,108 Cumulative translation adjustment (649) (629) Net unrealized (loss)/gain on marketable securities (392) 229 -------- -------- Total stockholders' equity 75,975 73,970 -------- -------- Total liabilities and stockholders' equity $105,754 $102,239 ======== ========
The accompanying notes are an integral part of the consolidated financial statements. 3 4
PROJECT SOFTWARE & DEVELOPMENT, INC. CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED) THREE MONTHS ENDED NINE MONTHS ENDED JUNE 30, JUNE 30, ----------------------------- ------------------------------ 1998 1997 1998 1997 (IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA) Revenues: Software $ 13,754 $ 11,277 $ 38,150 $ 36,165 Support and services 17,496 12,375 46,450 33,052 ------------ ----------- ------------ ------------ Total revenues 31,250 23,652 84,600 69,217 ------------ ----------- ------------ ------------ Cost of revenues: Software 1,147 747 2,976 1,998 Support and services 9,038 6,293 23,658 17,475 ------------ ----------- ------------ ------------ Total cost of revenues 10,185 7,040 26,634 19,473 ------------ ----------- ------------ ------------ Gross margin 21,065 16,612 57,966 49,744 Operating expenses: Sales and marketing 9,856 8,337 27,027 23,908 Product development 3,622 2,873 9,391 8,247 General and administrative 2,411 2,129 7,106 7,088 Charge for purchased in-process product development --- --- 9,172 --- ------------ ----------- ------------ ------------ Total operating expenses 15,889 13,339 52,696 39,243 ------------ ----------- ------------ ------------ Income from operations 5,176 3,273 5,270 10,501 Interest income (expense), net 659 752 2,055 1,698 Other income (expense), net (100) (122) (331) (263) ------------ ----------- ------------ ------------ Income before income taxes 5,735 3,903 6,994 11,936 Provision for income taxes 2,052 1,413 5,789 4,381 ------------ ----------- ------------ ------------ Net income $ 3,683 $ 2,490 $ 1,205 $ 7,555 ============ =========== ============ ============ Net income per share, basic $ 0.37 $ 0.2 $ 0.12 $ 0.77 ------------ ----------- ------------ ------------ Net income per share, diluted $ 0.36 $ 0.2 $ 0.12 $ 0.75 ------------ ----------- ------------ ------------ Shares used to calculate net income per share Basic 9,971,370 9,826,396 9,915,800 9,767,357 Diluted 10,121,729 9,971,731 10,077,254 10,077,804 Supplemental Data: (1) Adjusted operating income $ 5,176 $ 3,273 $ 14,442 $ 10,501 Adjusted net income applicable to $ 3,683 $ 2,490 $ 10,377 $ 7,555 shareholders Shares used to calculate net income 10,121,729 9,971,731 10,077,254 10,077,804 per share, diluted Adjusted net income per share, diluted $ 0.36 $ 0.25 $ 1.03 $ 0.75 (1) Excludes charge for purchased in-process product development. The accompanying notes are an integral part of the consolidated financial statements.
4 5 PROJECT SOFTWARE & DEVELOPMENT, INC CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
NINE MONTHS ENDED NINE MONTHS ENDED JUNE 30, JUNE 30, 1998 1997 (IN THOUSANDS) Cash flows from operating activities: Net income $ 1,205 $ 7,555 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 3,087 2,521 Loss on sale and disposal of property and equipment --- 37 Amortization of discount on marketable securities 84 315 Deferred rent 91 (51) Deferred taxes 287 54 Charge for purchased in-process product development 9,184 --- Changes in operating assets and liabilities, net of effect of acquisitions: Accounts receivable (5,230) 4,306 Prepaid expenses (1,360) (55) Other assets 183 (548) Accounts payable (1,515) (716) Accrued compensation (723) (1,901) Income taxes payable (437) 813 Deferred revenue 2,626 1,018 -------- --------- Net cash provided by operating activities 7,482 13,348 -------- --------- Cash flows from investing activities: Acquisitions of business, net of cash (7,466) --- Acquisitions of property and equipment (3,571) (3,049) Additions to computer software costs (1,081) (88) Purchase of marketable securities (66,605) (102,525) Sale of marketable securities 65,785 101,874 -------- --------- Net cash used in investing activities (12,938) (3,788) -------- --------- Cash flows from financing activities: Payments on bank loans (467) --- Payments of debenture (1,050) --- Proceeds from exercise of stock options including related tax benefit 1,442 2,580 -------- --------- Net cash (used in)/provided by financing activities (75) 2,580 -------- --------- Effect of exchange rate changes on cash 369 (451) -------- --------- Net (decrease) increase in cash and cash equivalents (5,162) 11,689 Cash and cash equivalents, beginning of period 25,964 9,097 -------- --------- Cash and cash equivalents, end of period $ 20,802 $ 20,786 ======== =========
The accompanying notes are an integral part of the consolidated financial statements. 5 6 PROJECT SOFTWARE & DEVELOPMENT, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) A. BASIS OF PRESENTATION The accompanying unaudited consolidated financial statements include the accounts of Project Software & Development, Inc. (PSDI) and its majority-owned subsidiaries (collectively, the "Company"), as of June 30, 1998 and have been prepared by the Company in accordance with generally accepted accounting principles for interim reporting and with the instructions to Form 10-Q and Article 10 of Regulation S-X. All intercompany accounts and transactions have been eliminated. In the opinion of management, the accompanying unaudited consolidated financial statements contain all adjustments, consisting only of those of a normal recurring nature, necessary for a fair presentation of the Company's financial position, results of operations and cash flows at the dates and for the periods indicated. The results of operations for the periods presented herein are not necessarily indicative of the results of operations to be expected for the entire fiscal year, which ends on September 30, 1998, or for any other future period. These consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto for the year ended September 30, 1997 included in the Company's Annual Report on Form 10-K filed with the Securities and Exchange Commission on December 29, 1997. The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. B. INCOME PER SHARE Basic earnings per share is computed by dividing income available to common shareholders by the weighted average number of common shares outstanding. Diluted earnings per share is computed by dividing income available to common shareholders by the weighted average common shares outstanding plus additional common shares that would have been outstanding if dilutive potential common shares had been issued. For purposes of this calculation, stock options are considered common stock equivalents in periods in which they have a dilutive effect. Statement of Financial Accounting Standards No. 128, "Earnings Per Share (SFAS 128) replaces APB Opinion No. 15, Earnings Per 6 7 Share. SFAS 128 simplifies the computation of EPS by replacing the presentation of primary EPS with a presentation of basic EPS. It requires dual presentation of basic and diluted EPS by entities with complex capital structures. The Company adopted SFAS 128 per the effective date for the periods ended after December 15, 1997. Basic and diluted earnings per share are calculated as follows:
THREE MONTHS ENDED BASIC EPS 06/30/98 06/30/97 - --------------------------------------------------------------------------- Net income $ 3,682,532 $ 2,490,478 Weighted average common shares outstanding 9,971,370 9,826,396 Basic income per share $ 0.37 $ 0.25 DILUTED EPS - --------------------------------------------------------------------------- Net income $ 3,682,532 $ 2,490,478 Weighted average common shares outstanding 9,971,370 9,826,396 Common stock equivalents 150,359 145,335 ----------------------------- Total diluted shares 10,121,729 9,971,731 Diluted income per share $ 0.36 $ 0.25
NINE MONTHS ENDED BASIC EPS 06/30/98 06/30/97 - --------------------------------------------------------------------------- Net income $ 1,204,524 $ 7,555,034 Weighted average common shares outstanding 9,915,800 9,767,357 Basic income per share $ 0.12 $ 0.77 DILUTED EPS - --------------------------------------------------------------------------- Net income $ 1,204,524 $ 7,555,034 Weighted average common shares outstanding 9,915,800 9,767,357 Common stock equivalents 161,454 310,447 ----------------------------- Total diluted shares 10,077,254 10,077,804 Diluted income per share $ 0.12 $ 0.75
7 8 C. ACCOUNTING STANDARDS Statement of Financial Accounting Standards No. 130, "Reporting Comprehensive Income" (SFAS 130) is effective for fiscal years beginning after December 15, 1997. SFAS 130 requires that changes in comprehensive income be shown in a financial statement that is displayed with the same prominence as other financial statements. The Company will adopt SFAS 130 in fiscal year ended September 30, 1999. Statement of Financial Accounting Standards No. 131, "Disclosures about Segments of an Enterprise and Related Information" (SFAS 131) is effective for financial statements for periods beginning after December 15, 1997. This statement will change the way companies report annual financial statements and requires them to report selected segment information in their quarterly reports issued to shareholders. It also requires entity-wide disclosures about the products and services an entity provides, the material countries in which it holds assets and reports revenues, and its major customers. The Company will adopt SFAS 131 for the current fiscal year ended September 30, 1998. Statement of Financial Accounting Standards No. 132, "Employers' Disclosure about Pensions and Other Postretirement Benefits" (SFAS 132) is effective for financial statements for fiscal years beginning after December 15, 1997. SFAS 132 revises employers' disclosures about pension and other postretirement benefit plans. It does not change the measurement or recognition of those plans. The Company will adopt SFAS 132 in the fiscal year ended September 30, 1999. Statement of Financial Accounting Standards No. 133 on accounting for derivative instruments and hedging activities was adopted in June 1998. It becomes effective for fiscal years beginning after June 15, 1999, with earlier adoption encouraged. The new standard requires companies to record derivatives on the balance sheet as assets or liabilities, measured at fair value. Gains or losses resulting from changes in the values of those derivatives would be accounted for depending on the use of the derivatives and whether they qualify for hedge accounting. The key criterion for hedge accounting is that the hedging relationship must be highly effective in achieving offsetting changes in fair value or cash flows. The Company will adopt SFAS 133 in the fiscal year ended September 30, 2000. Statement of Position ("SOP") 97-2, "Software Revenue Recognition" was issued in October 1997 and addresses software revenue recognition matters. The SOP supersedes SOP 91-1 and is effective for transactions entered into for fiscal years beginning after December 15, 1997. In March 1998, the adoption date of certain provisions of SOP No. 97-2 were postponed. Based 8 9 upon its reading and interpretation of SOP 97-2 the Company believes its current revenue recognition policies and practices are materially consistent with the SOP. D. COMPUTER SOFTWARE COSTS Internally developed software costs capitalized were $0 and $675,000 for the three and nine months ended June 30, 1998. There were no software costs capitalized in the three and nine months ended June 30, 1997. Amortization expense was $135,000 and $106,000 for the three months ended June 30, 1998 and 1997, respectively, and $293,000 and $360,000 for the nine months ended June 30, 1998 and 1997, respectively. Software costs are amortized on a straight-line basis over the estimated useful or market life of the software (generally, fifteen months). E. ACQUISITIONS On February 6, 1998, the Company acquired the stock of A.R.M. Group Inc., Ontario, Canada for the sum of $10.3 million in cash, stock and assumed liabilities. A.R.M. Group Inc. was a privately-held organization that helped businesses solve maintenance and materials management problems. A.R.M launched the M|Net solution and emerged as a leader in shared inventory networks over which distributors, manufacturers and purchasers of Maintenance Repair Operations (MRO) supplies conduct their business. The Company recorded the acquisition using the purchase method of accounting with $9.2 million of the purchase price allocated to in-process product development and charged to the consolidated statement of operations on March 31, 1998, $452 thousand allocated to purchased technology, and $657 thousand allocated to tangible assets. The Company determined that certain aspects of the acquired technology had not reached technological feasibility and had no alternative future use. The Company expensed the portion of the purchase price allocable to such in-process product development at the date of acquisition. The operating results of this acquired business has been included in the consolidated statement of operations from the date of acquisition. F. SUPPLEMENTAL CASH FLOW DISCLOSURES Cash paid for interest and taxes were as follows: Nine Months Ended ------------------ (in thousands) 1998 1997 ------- ------ Interest......................................... $ 11 $ 4 Income taxes..................................... 4,753 2,423 9 10 Acquisitions of businesses were as follows: Nine Months Ended ------------------ (in thousands) 1998 1997 ------- ------ Fair value of assets acquired.................... $10,280 $ --- Fair value of liabilities assumed................ 2,751 --- Net cash payments................................ 6,400 --- 10 11 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS FORWARD-LOOKING STATEMENTS In addition to historical information this Quarterly Report contains forward-looking statements. The forward-looking statements are subject to certain risks and uncertainties that could cause actual results to differ materially from those reflected in such forward-looking statements. Factors that might cause such a difference include, but are not limited to, those discussed in the section entitled "Management's Discussion and Analysis of Financial Condition and Results of Operations--Factors Affecting Future Performance." Readers are cautioned not to place undue reliance on these forward-looking statements, which reflect management's opinions only as of the date hereof. The Company undertakes no obligation to revise or publicly release the results of any revision to these forward-looking statements. Readers should carefully review the risk factors described in other documents of the Company files from time to time with the Securities and Exchange Commission, including the Annual Report on Form 10-K for the fiscal year ended September 30, 1997 and the Quarterly Reports on Form 10-Q filed by the Company in fiscal 1998. OVERVIEW The Company develops, markets and supports enterprise asset maintenance software used by businesses, government and other organizations to improve the productivity of facilities, plants and production equipment. The Company's revenues are derived primarily from two sources: software licenses and fees for services, including support contracts, training and consulting services and connect fees for on-line charges to engage in electronic commerce for Maintenance Repair Operations ("MRO") supplies. The Company's principal products are its client/server versions of MAXIMO. Client/server MAXIMO runs on Oracle 7 and 8, SQLServer, SQLBase and SYBASE platforms. The product acquired as a result of the acquisition of Maintenance Automation Corporation ("MAC") on March 1, 1996, MAXIMO ADvantage, is intended for the lower-end maintenance market. MAXIMO ADvantage supports Microsoft Access for the single user, PC LAN segment. The Company made the English language version of MAXIMO 4.0 generally available in March 1998 for new clients. The release of MAXIMO 4.0 combines an open architecture with self-service Java components and enhanced safety work management and materials management features, which helps organizations better manage maintenance operations and prevent equipment disruptions and down time. MAXIMO 4.0 includes safety and compliance features so that 11 12 companies can implement in-depth tracking and reporting processes that adhere to mandated regulatory guidelines. Over the next two quarters of calendar year ended 1998, the Company will be offering pre-configured applications with industry specific MAXIMO modules packaged into the base product. The new offerings will be priced competitively and will be supported by standard implementation packages tailored specifically for facilities, mid-tier manufacturing and companies with sophisticated fleet management needs. MAXIMO for Facilities, MAXIMO for Industry, and MAXIMO Enterprise for Transportation was made generally available in July 1998 and MAXIMO Enterprise for Utilities, MAXIMO Enterprise for Energy, MAXIMO Enterprise for Process, and MAXIMO Enterprise for Telecommunications will be available in the fall of 1998. (1) The Company's other client/server product, P/X, is no longer actively sold or marketed. The Company also no longer actively markets its mainframe and other project management software products. However, the Company does provide technical support and other services to the P/X and mainframe installed customer base. ACQUISITIONS On February 6, 1998, the Company acquired the stock of A.R.M. Group Inc., Ontario, Canada for the sum of $10.3 million in cash, stock and assumed liabilities. A.R.M. Group Inc. was a privately-held organization that helped businesses solve maintenance and materials management problems. A.R.M launched the M|Net solution and emerged as a leader in shared inventory networks over which distributors, manufacturers and purchasers of MRO supplies conduct their business. The Company recorded the acquisition using the purchase method of accounting with $9.2 million of the purchase price allocated to in-process product development and charged to the consolidated statement of operations on March 31, 1998, $452 thousand allocated to purchased technology, and $657 thousand allocated to tangible assets. - ----------------------------- (1) Forward looking statement 12 13 RESULTS OF OPERATIONS THREE MONTHS ENDED JUNE 30, 1998 COMPARED TO THREE MONTHS ENDED JUNE 30, 1997
REVENUES Three CHANGE % Three Months Months Ended Ended (in thousands) 06/30/98 06/30/97 - ---------------------------------------------------------------------------- Software licenses $13,754 22.0% $11,277 Percentage of total revenues 44.0% 47.7% Support and services $17,496 41.4% $12,375 Percentage of total revenues 56.0% 52.3% Total revenues $31,250 32.1% $23,652
The growth in total revenues is generated from the Company's MAXIMO software and related support and services. A significant portion of the Company's total revenues are derived from operations outside the United States. Revenues from sales outside the United States increased 38.7% to $13.9 million or 44.5% of total revenues for the three months ended June 30, 1998, compared to $10.0 million or 42.4% of total revenues for the three months ended June 30, 1997. Revenues from the client/server versions of MAXIMO increased 36.4% to $29.2 million or 93.3% of total revenues for the three months ended June 30, 1998 compared to $21.4 million or 90.5% of total revenues for the three months ended June 30, 1997. The increase in MAXIMO client/server revenues for the quarter is attributable to an increase in support and services and the average selling price due to an increase in the average number of users licensed and the general availability of MAXIMO Release 4.0 in English. Also, during the current quarter, the Company concluded a multimillion dollar agreement which contributed $2.8 million in license revenues for this quarter. This agreement will provide additional software, services and support revenues to the Company over a three year period.(1) Revenues from MAXIMO ADvantage decreased 19.9% to 3.8% of total revenues for the three months ended June 30, 1998 compared to 6.2% of total revenues for the three months ended June 30, 1997. The Company has reduced the sales force size to improve the profitability of this business unit. - ----------------------------- (1) Forward looking statement 13 14 Revenues from licenses of P/X and from related support and services decreased 32.2% to 1.2% of total revenues for the three months ended June 30, 1998 compared to 2.3% of total revenues for the three months ended June 30, 1997. The Company no longer focuses on selling and marketing this product. The Company recognized revenues of $438 thousand for the quarter for its new electronic commerce product, M|Net, acquired as a result of the A.R.M. Group Inc. acquisition on February 6, 1998. The increase in support and services revenues is attributable to increases in both MAXIMO support contracts and consulting services. Consulting services continue to be a larger percentage of total revenues due to additional service demands in connection with large scale implementations of the Company's MAXIMO client/server product. Currently, approximately 90% of all MAXIMO client/server customers renew their maintenance contracts.
COST OF REVENUES Three CHANGE % Three Months Months Ended Ended (in thousands) 06/30/98 06/30/97 - ---------------------------------------------------------------------------- Software licenses $1,147 53.5% $747 Percentage of software licenses 8.3% 6.6% Support and services $9,038 43.6% $6,293 Percentage of support and services 51.7% 50.9% Total cost of revenues $10,185 44.7% $7,040 Percentage of total revenues 32.6% 29.8%
Cost of software revenues consists of royalties paid to vendors of third party software, the amortization of capitalized software, the cost of software product packaging and media, and certain employee costs related to software duplication, packaging and shipping. The increase in the cost of software revenues is due primarily to royalties paid to third party vendors for software and costs for third party software products. Also contributing to the increase is a one time write off of $140 thousand for a prepaid software royalty. The Company determined that the third party licensed software would not operate in an integrated enterprise environment. Cost of support and services consists primarily of personnel costs for employees and the related costs of benefits and facilities. The increase in the cost of support and services is attributable to the hiring of employees and the extensive use of third-party consultants contracted to perform services for the Company. The Company utilizes the services of these higher cost third party consultants in order to meet the services backlog. 14 15 The cost of the services component as a percentage of services revenues increased to 68.4% from 68.1% for the three months ended June 30, 1998 and 1997, respectively.
OPERATING EXPENSES Three CHANGE % Three Months Months Ended Ended (in thousands) 06/30/98 06/30/97 - ---------------------------------------------------------------------------- Sales and marketing $9,856 18.2% $8,337 Percentage of total revenues 31.5% 35.2% Product development $3,622 26.1% $2,873 Percentage of total revenues 11.6% 12.1% General and administrative $2,411 13.2% $2,129 Percentage of total revenues 7.7% 9.0%
The increase in sales and marketing expenses in the three months ended June 30, 1998 is primarily due to increases in sales support and marketing personnel, sales commissions and travel and lodging expenses due partially to price increases imposed by the airline and travel industries. The comparative quarter's expense levels were a larger percentage of revenues as they were established for budgeted revenue levels that were not achieved. The increase in product development expenses in the three months ended June 30, 1998 is primarily due to the engagement of additional employees, third party consultants and product translation services costs. There were no internal software costs capitalized in the three months ended June 30, 1998 and 1997. The comparative quarter's expense levels were a larger percentage of revenues as they were established for budgeted revenue levels that were not achieved. The Company will continue to make investments in a new MAXIMO Java-based component architecture including a mobile application suite of products.(1) The Company will also expend development dollars on its M|Net electronic commerce product for MRO supply chain management.(1) The Company will continue to invest in client/server MAXIMO including application programming interfaces to enterprise resource planning application software products developed by Oracle, Peoplesoft and SAP.(1) Additionally, a new version of client/server MAXIMO will be made available later in the year that will support the European Monetary Policy.(1) The increase in general and administrative expenses for the three months ended June 30, 1998 is primarily due to an increase in growth in operations and legal fees for proxy statement review - ----------------------------- (1) Forward looking statement 15 16 and preparation, partially offset by a smaller bad debt reserve over the prior quarter as adequate reserves have been established. The comparative quarter's expense levels were a larger percentage of revenues as they were established for budgeted revenue levels that were not achieved.
NON-OPERATING EXPENSES Three CHANGE % Three Months Months Ended Ended (in thousands) 06/30/98 06/30/97 - ---------------------------------------------------------------------------- Interest income(expense),net $ 659 (12.4%) $ 752 Other income (expense),net $(100) (18.0%) $(122)
Interest income for the three months ended June 30, 1998 is attributable to interest earned on cash equivalents from cash flow generated from operations including accounts receivable collections. The days sales outstanding improved to 84 days at June 30, 1998 compared to 87 days at June 30, 1997. The Company has established a target of 90 to 95 days for its days sales outstanding.(1) Other expense is primarily attributable to accrued translation losses on certain Asian receivables. Given the nature of the Asian economies, further losses may be realized in the future if the currencies do not stabilize in relation to the dollar. (1) PROVISION FOR INCOME TAXES The Company's effective tax rates were 35.8% and 36.2% for the three months ended June 30, 1998 and 1997, respectively. The Company anticipates that its 1998 effective quarterly tax rates will not exceed 36%. (1) NINE MONTHS ENDED JUNE 30, 1998 COMPARED TO NINE MONTHS ENDED JUNE, 30, 1997
REVENUES Nine CHANGE % Nine Months Months Ended Ended (in thousands) 06/30/98 06/30/97 - ---------------------------------------------------------------------------- Software licenses $38,150 5.5% $36,165 Percentage of total revenues 45.1% 52.2% Support and services $46,450 40.5% $33,052 Percentage of total revenues 54.9% 47.8% Total revenues $84,600 22.2% $69,217
- ----------------------------- (1) Forward looking statement 16 17 The growth in total revenues is generated from the Company's MAXIMO software and related support and services. A significant portion of the Company's total revenues are derived from operations outside the United States. Revenues from sales outside the United States increased 31.5% to $38.8 million or 45.8% of total revenues for the nine months ended June 30, 1998, compared to $29.5 million or 42.6% of total revenues for the nine months ended June 30, 1997. Revenues from the client/server versions of MAXIMO increased 25.5% to $78.7 million or 93.0% of total revenues for the nine months ended June 30, 1998 compared to $62.7 million or 90.6% of total revenues for the nine months ended June 30, 1997. The increase in MAXIMO client/server revenues for the nine months ended June 30, 1998 is attributable to an increase in support and services and the average selling price due to an increase in the average number of users licensed and the general availability of MAXIMO Release 4.0 in English. Revenues from MAXIMO Advantage decreased 8.3% to 4.3% of total revenues for the nine months ended June 30, 1998 compared to 5.7% of total revenues for the nine months ended June 30, 1997. The Company has reduced the sales force size to improve the profitability of this business unit. Revenues from licenses of P/X and from related support and services decreased 32.5% to 1.5% of total revenues for the nine months ended June 30, 1998 compared to 2.7% of total revenues for the nine months ended June 30, 1997. The Company no longer focuses on selling and marketing this product. The increase in support and services revenues is attributable to increases in both MAXIMO support contracts and consulting services. Consulting services continue to be a larger percentage of total revenues due to additional service demands in connection with large scale implementations of the Company's MAXIMO client/server product.
COST OF REVENUES Nine CHANGE % Nine Months Months Ended Ended (in thousands) 06/30/98 06/30/97 - ---------------------------------------------------------------------------- Software licenses $2,976 48.9% $1,998 Percentage of software licenses 7.8% 5.5% Support and services $23,658 35.4% $17,475 Percentage of support and services 50.9% 52.9% Total cost of revenues $26,634 36.8% $19,473 Percentage of total revenues 31.5% 28.1%
17 18 Cost of software revenues consists of royalties paid to vendors of third party software, the amortization of capitalized software, the cost of software product packaging and media, and certain employee costs related to software duplication, packaging and shipping. The increase in the cost of software revenues is due primarily to royalties paid to third party vendors for software and costs for third party software products. Cost of support and services consists primarily of personnel costs for employees and the related costs of benefits and facilities. The increase in the cost of support and services is attributable to the hiring of employees and the extensive use of third-party consultants contracted to perform services for the Company. The Company utilizes the services of these higher cost third party consultants in order to meet the services backlog.
OPERATING EXPENSES Nine CHANGE % Nine Months Months Ended Ended (in thousands) 06/30/98 06/30/97 - ---------------------------------------------------------------------------- Sales and marketing $27,027 13.0% $23,908 Percentage of total revenues 31.9% 34.5% Product development $9,391 13.9% $8,247 Percentage of total revenues 11.1% 11.9% General and administrative $7,106 .25% $7,088 Percentage of total revenues 8.4% 10.2% In-Process Product Development $9,172 N/A N/A Percentage of total revenues 10.8% N/A N/A
The increase in sales and marketing expenses in the nine months ended June 30, 1998 is primarily due to increases in the number of sales support and marketing personnel, sales commissions and price increases imposed by the airline and travel industries. The comparative quarter's expense levels were a larger percentage of revenues as they were established for budgeted revenue levels that were not achieved. The increase in product development expenses in the nine months ended June 30, 1998 is primarily due to the engagement of additional employees, third party consultants and product translation services. Software costs capitalized in the nine months ended June 30, 1998 and 1997 were $675,000 and $0, respectively. The comparative quarter's expense levels were a larger percentage of revenues as they were established for budgeted revenue levels that were not achieved. The Company will continue to make investments in a new MAXIMO Java-based component architecture including a mobile application suite of products.(1) - ----------------------------- (1) Forward looking statement 18 19 The Company will also expend development dollars on its M|Net electronic commerce product for MRO supply chain management.(1) The Company will continue to invest in client/server MAXIMO including application programming interfaces to enterprise resource planning application software products developed by Oracle, Peoplesoft and SAP.(1) Additionally, a new version of client/server MAXIMO will be made available later in the year that will support the European Monetary Policy.(1) In connection with the A.R.M. Group Inc. acquisition, the Company acquired in-process product development of $9.2 million. The Company determined that certain aspects of the acquired technology had not reached technological feasibility and had no alternative future use. The Company reached this conclusion based on information prepared by a third party. The Company expensed the portion of the purchase price allocable to in-process product development at the date of acquisition.
NON-OPERATING EXPENSES Nine CHANGE % Nine Months Months Ended Ended (in thousands) 06/30/98 06/30/97 - ---------------------------------------------------------------------------- Interest income (expense),net $2,055 21.0% $1,698 Other income (expense),net $ (331) 25.9% $ (263)
The increase in interest income for the nine months ended June 30, 1998 is attributable to interest earned on increased cash equivalents from cash flow generated from operations including accounts receivable collections. Other expense is primarily attributable to accrued translation losses on certain Asian receivables. Given the nature of the Asian economies, further losses may be realized in the future if the currencies do not stabilize in relation to the dollar. (1) PROVISION FOR INCOME TAXES The Company's effective tax rate before a one time non-deductible charge for purchased in-process product development was 35.8% for the nine months ended June 30, 1998. The Company's effective tax rate for the nine months ended June 30, 1997 was 36.7%. The income tax expense provided during 1998 reflects the nondeductible nature of certain charges related to the acquisition of the A.R.M. Group Inc. The Company anticipates that its 1998 effective annual tax rates will not exceed 36%. (1) - ----------------------------- (1) Forward looking statement 19 20 LIQUIDITY AND CAPITAL RESOURCES As of June 30, 1998, the Company had cash and cash equivalents and marketable securities of approximately $59.2 million and working capital of $65.3 million. Cash generated by operations for the nine months ended June 30, 1998 was $7.5 million, primarily attributable to the purchase of in-process product development in connection with the A.R.M. Group acquisition and depreciation. Contributing to the use of cash by operations was an increase in receivables as a result of the increase in revenues, bonuses paid to employees, income taxes paid, payments made to trade vendors, and prepaid royalties paid to third party software vendors. Cash used in investing activities totaled $12.9 million, primarily for improvements related to the relocation of the Company's corporate headquarters in December 1997 and the purchase of marketable securities and the purchase of property and equipment. Cash used in financing activities was $75 thousand, primarily for payment of debentures and bank loans assumed from the acquisition of the A.R.M. Group Inc., offset by proceeds received from exercises of employee stock options. As of June 30, 1998, the Company's principal commitments consisted primarily of an office lease for its headquarters. The Company leases its facilities and certain equipment under non-cancelable operating lease agreements that expire at various dates through November 2003. The Company relocated its corporate headquarters in December 1997. Under the terms of the lease agreement, upon termination of the lease the Company has the right to extend the lease for an additional six year term for an agreed upon fixed cost. The Company's expenditures for construction and leasehold improvements in connection with the relocation were $2.2 million. The Company believes that its current cash balances combined with cash flow from operations will be sufficient to meet its working capital and capital expenditure requirements through at least September 30, 1999. (1) YEAR 2000 The Year 2000 issue is the result of computer programs being written using two digits rather than four to define the applicable year. Certain computer programs that have date sensitive software and use two digits only may recognize a date using "00" as the year 1900 rather than the year 2000. - ----------------------------- (1) Forward looking statement 20 21 Management has initiated a program to prepare the Company's financial, manufacturing and other critical systems and applications for the year 2000. The focus of the program is to identify affected software and hardware, develop a plan to correct that software or hardware in the most effective manner and implement and monitor that plan. The Company will also assess the readiness of its significant suppliers to determine the extent to which the Company is vulnerable to those third parties' failure to remediate their own Year 2000 issues. The Company utilizes other third party software products, network equipment and telecommunications products. Failure of any critical technology components to operate properly in the Year 2000 may have an adverse impact on business operations or require the Company to incur unanticipated expenses to remedy any problems. There can be no guarantee that the systems of other companies will be timely converted, or that a failure to convert by another company would not have a material adverse effect on the Company. The Company currently estimates that the costs associated with preparing internal systems for the Year 2000 should not exceed $100,000.(1) There can be no assurances that as the Company continues its program of reviewing internal systems that the costs will not exceed $100,000. The Company will develop a contingency plan based on the final results gathered from its suppliers and third parties.(1) The Company warrants to its customers that its current versions of MAXIMO and P/X client/server products and MAXIMO ADvantage are year 2000 enabled. The Company's other product Project 2 is no longer sold but the Company does offer support for this product. The Company will release an upgrade of this product that is year 2000 enabled. The Company estimates that the cost to upgrade this product and any other older versions of its products will not have a material adverse effect on its results of operations or financial condition.(1) EURO COMPLIANCE On January 1, 1999, eleven European Union member states will adopt the euro as their common national currency. Thereafter, until January 1, 2002, (the transition period), either the euro or a participating country's present currency will be accepted as legal tender. Beginning on January 1, 2002, euro-denominated bills and coins will be issued, and by July 1, 2002, only the euro will be used. A significant number of the Company's customers are located in participating European Union countries. As a result, the computer systems or software used by many companies may need to be upgraded to comply with euro requirements. The Company is currently expending development dollars on a new client/server version of MAXIMO that will support the European Monetary Policy. The amount of development - ----------------------------- (1) Forward looking statement 21 22 dollars spent on the euro release will not have a material adverse effect on the Company's results of operations or financial condition. The Company has initiated a program to determine what, if any, internal systems need to be replaced to comply with the European Monetary Policy.(1) FACTORS AFFECTING FUTURE PERFORMANCE The nature of forward-looking information is that such information involves assumptions, risks and uncertainties. Certain public documents of the Company and oral statements made by authorized officers, directors, employees, agents and representatives of the Company, acting on its behalf, may include forward-looking information which will be influenced by the following and other assumptions, risks and uncertainties. Forward-looking information requires management of the Company to make assumptions, estimates, forecasts and projections regarding the Company's future results as well as the future effectiveness of the Company's strategic plans and future operational decisions. Forward-looking statements made by or on behalf of the Company are subject to the risk that the forecasts, projections, and expectations of management, or assumptions underlying such forecasts, projections and expectations, may become inaccurate. Accordingly, actual results and the Company's implementation of its plans and operations may differ materially from forward-looking statements made by or on behalf of the Company. The following discussion identifies certain important factors that could affect the Company's actual results and actions and could cause such results and actions to differ materially from any forward-looking statements made by or on behalf of the Company that related to such results and actions. Other factors, which are not identified herein, could also have such an effect. RAPID TECHNOLOGICAL CHANGE The computer software industry is characterized by rapid technological advances, changes in customer requirements and frequent product introductions and enhancements. The Company's success depends upon its ability to continue to enhance its current products and to develop and introduce new products that keep pace with technological developments, respond to evolving customer requirements and achieve market acceptance. In particular, the Company believes that it must continue to respond quickly to users' needs for broad functionality and to advances in hardware and operating systems. Any failure by the Company to anticipate or respond adequately to technological developments and customer requirements, or any significant delays in product development or introduction, could result in a loss of competitiveness and revenues. There can be no assurance that the - ----------------------------- (1) Forward looking statement 22 23 Company will be successful in developing and marketing new products or product enhancements, or that the Company will not experience significant delays in developing such new products or product enhancements. Such delays could have a material adverse effect on the Company's results of operations. In addition, there can be no assurance that new products and product enhancements developed by the Company will achieve market acceptance. DEPENDENCE ON MAXIMO The Company's revenues are primarily attributable to the licensing of its MAXIMO client/server product, introduced in 1991, and to related services and support. Revenues from licenses of MAXIMO and related services and support accounted for approximately 96.3% of the Company's total revenues in fiscal 1997. The Company's financial performance in fiscal 1998 will depend on continued market acceptance of MAXIMO. The Company believes that continued market acceptance of MAXIMO will largely depend on its ability to enhance and broaden the capabilities of MAXIMO, by, among other things, developing additional application modules for MAXIMO, versions of MAXIMO and by developing and incorporating into the MAXIMO product technologies that are emerging in connection with the Internet. Any factor adversely affecting sales of MAXIMO, such as delays in development, significant software flaws, incompatibility with significant hardware platforms, operating systems or databases, increased competition or negative evaluations of the products, would have a material adverse effect on the Company's business and financial results. The Company made the English language version of MAXIMO Release 4.0 generally available in March 1998 for new clients. The failure of MAXIMO 4.0 to achieve market acceptance would have a material adverse effect on the Company's business and financial results. FLUCTUATIONS IN QUARTERLY OPERATING RESULTS; SEASONALITY The Company has experienced, and may in the future experience, significant period-to-period fluctuations in revenues and operating results. The Company's revenues and income from operations typically grow at a lower rate or decline in the first quarter of each fiscal year, compared to the fourth quarter of the preceding fiscal year. In addition, revenues are typically higher in the fourth quarter than in other quarters of the year. The Company believes that these quarterly patterns are partly attributable to the Company's sales commission policies, which compensate members of the Company's direct sales force for meeting or exceeding annual quotas. In addition, the Company's quarterly revenues and operating results have fluctuated historically, due to the number and timing of product introductions and enhancements, the budgeting and purchasing 23 24 cycles of customers, the timing of product shipments and the timing of marketing and product development expenditures. The Company typically realizes more than 60% of its revenue from sales of software licenses in the last two weeks of a quarter, frequently even in the last days of a quarter. Large software license contracts may have a significant impact on revenues for any quarter and could therefore result in significant fluctuations in quarterly revenues and operating results. Accordingly, the Company believes that period-to-period comparisons of its results of operations are not necessarily meaningful and should not be relied upon as an indication of future performance. The Company generally ships its products upon receipt of orders and maintains no significant product backlog. As a result, revenues from license fees in any quarter are substantially dependent on orders booked and shipped in that quarter. A delay in or loss of orders can cause significant variations in operating results. A significant portion of the Company's operating expenses are fixed in the short term, and planned expenditures are based primarily on sales forecasts. Accordingly, if revenues do not meet the Company's expectations in any given quarter, operating results may be materially adversely affected. COMPETITION The market for applications software is intensely competitive and rapidly changing. While the Company believes that it has competed effectively to date, competition in its industry is likely to intensify as current competitors expand their product lines and new companies enter the market. To remain successful in the future, the Company must respond promptly and effectively to the challenges of technological change, evolving standards and its competitors' innovations by continually enhancing its own product, services and support offerings, as well as its marketing programs. There can be no assurance that the Company will continue to be able to compete successfully in the future. The market for asset maintenance software is fragmented by geography, by hardware platform and by industry orientation, and is characterized by a large number of competitors. Currently, the Company's client/server versions of MAXIMO, MAXIMO Enterprise and MAXIMO Workgroup, compete with products of a number of large vendors some of which have traditionally provided maintenance software running on mainframes and minicomputers and are now offering systems for use in the client/server environment. MAXIMO Enterprise also competes with integrated enterprise resource planning systems which are provided by several large vendors and which include maintenance modules. MAXIMO Workgroup encounters competition from vendors of low cost maintenance management systems designed initially for use by a single user or limited number of users as vendors of these products upgrade their functionality to enter the client/server market. 24 25 MAXIMO ADvantage competes with a number of competitors, including a national vendor and other various small regional companies. The MRO supply chain management business using electronic commerce has many diverse competitors offering a wide range of differing products, services and technologies. While the Company believes that electronic commerce products and technologies compliment the Company's existing products, there can be no assurance that the Company will be able to compete successfully in this market. Certain of the Company's competitors have greater financial, marketing, service and support and technological resources than the Company. To the extent that such competitors increase their focus on the asset maintenance or planning and cost systems markets, the Company could be at a competitive disadvantage. INTERNATIONAL OPERATIONS A significant portion of the Company's total revenues are derived from operations outside the United States. The Company derived 43.8%, 40.5%, and 38.4% of its total revenue from sales outside the United States in fiscal years 1997, 1996, and 1995, respectively. The Company expects that international revenues will continue to be a significant percentage of total revenues. The Company expects international revenues to continue to grow in absolute dollars during 1998, and accordingly, continues to invest heavily in international infrastructure, global product functionality and translated versions of financial and other software products. In the event international expansion and/or product globalization efforts are not successful, the Company's business operating results and financial condition may be adversely affected. This international business is subject to various risks common to international activities, including exposure to currency fluctuations, greater difficulty in collecting accounts receivable, political and economic instability, the greater difficulty of administering business abroad and the need to comply with a wide variety of foreign import and United States export laws and regulatory requirements. A significant portion of the Company's total revenue is derived from international operations which are conducted in foreign currencies. Changes in the values of these foreign currencies relative to the United States dollar have in the past adversely affected, and may in the future affect, the Company's results of operations and financial position. Gains and losses on translation to United States dollars and settlement of receivables from international subsidiaries may contribute to fluctuations in the Company's results of operations. To date, the Company has not engaged in currency hedging transactions. The Company may in the future undertake currency hedging, although there can be no assurance that hedging transactions, if entered into, would materially reduce the effects of fluctuations in foreign currency exchange rates on the Company's results of 25 26 operations. The Company experienced lower than anticipated revenue growth rates in the Asia Pacific region during the first three quarters of fiscal 1998 in part due to the economic difficulties that have occurred throughout this region. There can be no assurances that the economy of this region will recover in the near future or that the Company's growth rates in this geographic region will return to the previous levels if the recovery occurs. DEPENDENCE ON THIRD PARTIES The client/server versions of MAXIMO operate with the Oracle 7, SQLServer, SYBASE and SQLBase, SQLServer database management systems. MAXIMO ADvantage runs on the Microsoft Access database. Introduction and increased market acceptance of database management systems with which the Company's products do not operate, or failure of Oracle, SYBASE, SQLBase, SQLServer or Access to achieve continued market acceptance, could adversely affect the market for the Company's products. The Company has entered into nonexclusive license agreements with Centura Software Corporation, Scribe Technologies, Incorporated, Cognos Corporation, Netronic Software GmbH, HSB Reliability Technologies Corporation, Intelligent Labeling Technologies, Incorporated, WebLogic, Incorporated, Connect Software, Inc., Marimba, Inc., and Intermat, Inc. pursuant to which the Company incorporates into its products software providing certain application development, user interface, business intelligence, content and graphics capabilities developed by these companies. If the Company were unable to renew these licenses, or if any of such vendors were to become unable to support and enhance its products, the Company could be required to devote additional resources to the enhancement and support of these products or to acquire or develop software providing equivalent capabilities, which could cause delays in the development and introduction of products incorporating such capabilities. PRODUCT DEVELOPMENT: INTERNET The Company is currently developing a Java-based component architect software application to incorporate into the MAXIMO product technologies emerging in conjunction with the Internet. Internet technologies and applications generally are developing and gaining acceptance rapidly in the market. MRO supply chain management using electronic commerce is a nascent market with many standards and technologies remaining to be developed. Accordingly, developing technologies pose risks to the Company. The Company believes that electronic commerce products and technologies compliment the Company's existing products. There can be no assurance that the Company will successfully anticipate trends in this market, that the Company will be successful in Internet technology development or acquisition efforts or that 26 27 the Company's Internet applications, if developed, will achieve market acceptance. LIMITED INTELLECTUAL PROPERTY PROTECTION The Company's success is dependent upon proprietary technology. The Company currently has no patents and protects its technology primarily through copyrights, trademarks, trade secrets and employee and third party nondisclosure agreements. The Company's software products are sometimes licensed to customers under"shrink wrap" licenses included as part of the product packaging. Although, in larger sales, the Company's shrink wrap licenses may be accompanied by specifically negotiated agreements signed by the licensee, in many cases its shrink wrap licenses are not negotiated with or signed by individual licensees. Certain provisions of the Company's shrink wrap licenses, including provisions protecting against unauthorized use, copying, transfer and disclosure of the licensed program, may be unenforceable under the laws of certain jurisdictions. In addition, the laws of some foreign countries do not protect the Company's proprietary rights to the same extent as do the laws of the United States. There can be no assurance that the steps taken by the Company to protect its proprietary rights will be adequate to prevent misappropriation of its technology or development by others of similar technology. Although the Company believes that its products and technology do not infringe on any existing proprietary rights of others, there can be no assurance that third parties will not assert infringement claims in the future. GENERAL ECONOMIC RISK FACTORS To date, inflation has not had a material impact on the Company's financial results. There can be no assurance, however, that inflation will not adversely affect the Company's financial results in the future. DEPENDENCE ON KEY PERSONNEL The Company is highly dependent on certain key executive officers and technical employees, the loss of one or more of whom could have an adverse impact on the future operations of the Company. The Company continues to hire a significant number of additional sales, services and technical personnel. Competition for hiring of such personnel in the software industry is intense, and the Company from time to time experiences difficulty in locating candidates with the appropriate qualifications within the desired geographic locations, or with certain industry specific domain expertise. It is widely believed that the technology industry is at or beyond a condition of full employment. The Company does not have employment contracts with, and does not maintain key person life insurance policies on, any personnel. In addition, the Company may need to hire 27 28 additional skilled personnel to support the continued growth of its business. There can be no assurance that the Company will be able to retain its existing personnel or attract additional qualified employees. MAXIMO ADVANTAGE; MAINTENANCE AUTOMATION CORPORATION The core of the software constituting MAXIMO ADvantage was acquired by the Company through its acquisition of Maintenance Automation Corporation ("MAC"). MAC's product, Chief ADvantage, has been renamed MAXIMO ADvantage and enhanced since the acquisition. The software architecture for PC-based MAXIMO ADvantage is significantly different from the client/server architecture of MAXIMO Enterprise and Workgroup. Since its acquisition of MAC, the Company has incurred significant additional and unexpected costs in developing a new release of MAXIMO ADvantage that meets the quality and functionality standards demanded by the Company. In addition to these unexpected costs, there was a delay in excess of six months in completing a new release of this product. The Company has restructured MAC's telesales distribution operation for MAXIMO ADvantage. No assurance can be given that MAC will in the future be profitable or that its telesales distribution operation for MAXIMO ADvantage will achieve the Company's goals. CERTAIN RISKS ASSOCIATED WITH ACQUISITIONS As part of its overall strategy, the Company plans to continue to acquire or invest in complementary companies, products, or technologies and to enter into joint ventures and strategic alliances with other companies. There can be no assurance that the Company would be successful in overcoming the risks associated or problems encountered in connection with such business combinations, investments, or joint ventures, or that such transactions will not materially adversely affect the Company's business, financial condition, or operating results. POSSIBLE CONTINUED VOLATILITY OF STOCK PRICE Fiscal 1997 was marked by significant fluctuations in the market price of the common stock, par value $.01 per share, of the Company (the "Common Stock"). Factors such as announcements of technological innovations or new products by the Company, its competitors and other third parties, as well as quarterly variations in the Company's results of operations and market conditions in the industry, may cause the market price of the Common Stock to continue to fluctuate significantly. In addition, the stock market in general has recently experienced substantial price and volume fluctuations, which have particularly affected the market prices of many software companies and which have often been unrelated to the operating performance of such companies. These broad market fluctuations also may adversely affect the market price of the Common Stock. 28 29 LITIGATION RISKS The Company is subject to the normal risks of litigation with respect to its business operation. YEAR 2000 The Year 2000 issue is the result of computer programs being written using two digits rather than four to define the applicable year. Certain computer programs that have date sensitive software and use two digits only may recognize a date using "00" as the year 1900 rather than the year 2000. Management has initiated a program to prepare the Company's financial, manufacturing and other critical systems and applications for the year 2000. The focus of the program is to identify affected software and hardware, develop a plan to correct that software or hardware in the most effective manner and implement and monitor that plan. The Company will also assess the readiness of its significant suppliers to determine the extent to which the Company is vulnerable to those third parties' failure to remediate their own Year 2000 issues. The Company utilizes other third party software products, network equipment and telecommunications products. Failure of any critical technology components to operate properly in the Year 2000 may have an adverse impact on business operations or require the Company to incur unanticipated expenses to remedy any problems. There can be no guarantee that the systems of other companies will be timely converted, or that a failure to convert by another company would not have a material adverse effect on the Company. The Company currently estimates that the costs associated with preparing internal systems for the Year 2000 should not exceed $100,000. There can be no assurances that as the Company continues its program of reviewing internal systems that the costs will not exceed $100,000. The Company will develop a contingency plan based on the final results gathered from its supplier and third parties. The Company warrants to its customers that its current versions of MAXIMO and P/X client/server products and MAXIMO ADvantage are year 2000 enabled. The Company's other product Project 2 is no longer sold but the Company does offer support for this product. The Company will release an upgrade of this product that is year 2000 enabled. The Company estimates that the cost to upgrade this product and any other older versions of its products will not have a material adverse effect on its results of operations or financial condition. EURO COMPLIANCE On January 1, 1999, eleven European Union member states will adopt the euro as their national currency. Thereafter, until January 1, 2002, (the transition period), either the euro 29 30 or a participating country's present currency will be accepted as legal tender. Beginning on January 1, 2002, euro-denominated bills and coins will be issued, and by July 1, 2002, only the euro will be used. A significant number of the Company's customers are located in participating European Union countries. As a result, the computer systems or software used by many companies may need to be upgraded to comply with euro requirements. The Company is currently expending development dollars on a new client/server version of MAXIMO that will support the European Monetary Policy. The amount of development dollars spent on the euro release will not have a material adverse effect on the Company's results of operations of financial condition. The Company has initiated a program to determine what, if any, internal systems need to be replaced to comply with the European Monetary Policy. EFFECT OF ACCOUNTING PRONOUNCEMENTS Statement of Position ("SOP") 97-2, "Software Revenue Recognition" was issued in October 1997 and addresses software revenue recognition matters. The SOP supersedes SOP 91-1 and is effective for transactions entered into for fiscal years beginning after December 15, 1997. In March 1998, the adoption date of certain provisions of SOP No. 97-2 were postponed. Based upon its reading and interpretation of SOP 97-2 the Company believes its current revenue recognition policies and practices are materially consistent with the SOP. Statement of Financial Accounting Standards No. 133 on accounting for derivative instruments and hedging activities was adopted in June 1998. It becomes effective for fiscal years beginning after June 15, 1999, with earlier adoption encouraged. The new standard requires companies to record derivatives on the balance sheet as assets or liabilities, measured at fair value. Gains or losses resulting from changes in the values of those derivatives would be accounted for depending on the use of the derivatives and whether they qualify for hedge accounting. The key criterion for hedge accounting is that the hedging relationship must be highly effective in achieving offsetting changes in fair value or cash flows. The Company will adopt SFAS 133 in the fiscal year ended September 30, 2000. NO REVISIONS OR UPDATES TO FORWARD-LOOKING STATEMENTS The Company will have no obligation to release publicly any revision or update to any forward-looking statements to reflect events or circumstances after the date of such statements or to reflect the occurrence of anticipated or unanticipated events. 30 31 Part II. OTHER INFORMATION ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. The Company's Annual Meeting of Stockholders was held on May 28, 1998. At the Annual Meeting the stockholders of the Company voted to approve the following actions by the following votes: 1. To elect Alan L. Stanzler as a Class II Director of the Company for a term of three years. No. of Shares ------------- For 8,961,831 Against 273,552 Abstain 0 No Vote 719,594 2. To approve the proposal to ratify the selection by the Board of Directors of Coopers & Lybrand L.L.P. as the Company's independent public accountants for the current fiscal year. No. of Shares ------------- For 9,230,118 Against 3,908 Abstain 1,357 No Vote 719,594 ITEM 5. OTHER INFORMATION On May 18, 1998, David M. Sample resigned as Chairman of the Board of Directors, President and Chief Executive Officer. In addition, Robert L.Daniels was elected executive Chairman of the Board, Norman E. Drapeau, Jr. was elected President and Chief Executive Officer and Paul D. Birch was elected to the Board of Directors. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits 3.1 Amended and Restated Articles of Organization of the Company (included as Exhibit 3.3 to the Company's Registration Statement on Form S-1, Registration No. 33-76420, and incorporated herein by reference) 31 32 3.2 Restated By-Laws of the Company, as amended (included as Exhibit 3.2 to the Company's Annual Report on Form 10-K for the fiscal year ended September 30, 1996, File No. 0-23852, and incorporated herein by reference) 3.4 Form of Certificate of Designation of Series A Junior Participating Preferred Stock of Project Software & Development, Inc. (which is attached as Exhibit A to the Rights Agreement and included as Exhibit 4 (b) to the Company's Current Report on Form 8-K dated February 2, 1998, File No. 0-23852, and incorporated herein by reference) 4. Instruments Defining the Rights of Security-Holders 4.1 Specimen certificate for the Common Stock of the Company (included as Exhibit 4.1 to the Company's Registration Statement on Form S-1, Registration No. 33-76420, and incorporated herein by reference) 4.2 Article 4B of the Amended and Restated Articles of Organization of the Company (included as Exhibit 4.1 to the Company's Registration Statement on Form S-1, Registration No. 33-76420, and incorporated herein by reference) 4.3 Rights Agreement dated as of January 27, 1998, between Project Software & Development, Inc. and BankBoston, N.A. as Rights Agent (included as Exhibit 4(a) to the Company's Current Report on Form 8-K dated February 2, 1998, File No. 0-23852, and incorporated herein by reference) 4.4 Form of Certificate of Designation of Series A Junior Participating Preferred Stock of Project Software & Development, Inc. (included as Exhibit 4(b) to the Company's Current Report on Form 8-K dated February 2, 1998, File No. 0-23852, and incorporated herein by reference) 4.5 Form of Rights Certificate (included as Exhibit 4(c) to the Company's Current Report on Form 8-K dated February 2, 1998, File No. 0-23852, and incorporated herein by reference) 27. Financial Data Schedule (b) Reports filed on Form 8-K The Company filed a current report on Form 8-K on June 16, 1998 with respect to a reorganization of the board of directors. 32 33 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. PROJECT SOFTWARE & DEVELOPMENT, INC. Date: August 14, 1998 By: /s/ Paul D. Birch ---------------------------------- Paul D. Birch Authorized Officer Executive Vice President Finance & Administration, Chief Financial Officer and Treasurer (Principal Financial Officer) 33 34 EXHIBIT INDEX EXHIBIT NO. DESCRIPTION PAGE - ------- -------------------------------------------------------------- ---- 3.1 Amended and Restated Articles of Organization of the Company (included as Exhibit 3.3 to the Company's Registration Statement on Form S-1, Registration No. 33-76420, and incorporated herein by reference) 3.2 Restated By-Laws of the Company, as amended(included as Exhibit 3.2 to the Company's Annual Report on Form 10-K for the fiscal year ended September 30, 1996, commission File No. 0-23852) and incorporated herein by reference) 3.4 Form of Certificate of Designation of Series A Junior Participating Preferred Stock of Project Software & Development, Inc. (included as Exhibit 4(b)to the Company's Current Report on Form 8-K dated February 2, 1998, File No. 0-23852,and incorporated herein by reference) 4.1 Specimen certificate for the Common Stock of the Company (included as exhibit4.1 to the Company's Registration Statement on Form S-1, Registration No. 33-76420, and incorporated herein by reference) 4.2 Article 4B of the Amended and Restated Articles of Organization of the Company (included as Exhibit 4.1 to the Company's Registration Statement on Form S-1, Registration No. 33-76420, and incorporated herein by reference) 4.3 Rights Agreement dated as of January 27, 1998, between Project Software & Development, Inc. and BankBoston, N.A. as Rights Agent (included as Exhibit 4(a) to the Company's Current Report on Form 8-K dated February 2, 1998, File No. 0-23852,and incorporated herein by reference) 4.4 Form of Certificate of Designation of Series A Junior Participating Preferred Stock of Project Software & Development, Inc. (included as Exhibit 4(b)to the Company's Current Report on Form 8-K dated February 2, 1998, File No. 0-23852,and incorporated herein by reference) 4.5 Form of Rights Certificate (included as Exhibit 4(c)to the Company's Current Report on Form 8-K dated February 2, 1998, File No. 0-23852, and incorporated herein by reference) 27. Financial Data Schedule EX-27 2 FINANCIAL DATA SCHEDULE
5 1,000 U.S. DOLLARS OTHER SEP-30-1998 OCT-01-1997 JUN-30-1998 1 20,802 38,414 31,652 2,327 0 94,434 18,488 9,115 105,754 29,141 0 0 0 100 75,875 105,754 38,150 84,600 2,976 26,634 52,696 267 11 6,994 5,789 5,270 0 0 0 1,205 .12 .12
-----END PRIVACY-ENHANCED MESSAGE-----