-----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, EjGI3hr+ow9DcmIknol5f5w5Ks+EGrTkChVOh6Wjy9lC1nzuH5GPsB70PlCLDKwq aKjHzYKR13uQYAktIZlPMw== 0000950135-99-005743.txt : 19991230 0000950135-99-005743.hdr.sgml : 19991230 ACCESSION NUMBER: 0000950135-99-005743 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 19990930 FILED AS OF DATE: 19991229 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: 99782930 BUSINESS ADDRESS: STREET 1: 100 CROSBY DR D CITY: BEDFORD STATE: MA ZIP: 01730 BUSINESS PHONE: 7812802000 MAIL ADDRESS: STREET 1: 100 CROSBY DRIVE CITY: CAMBRBEDFORD STATE: MA ZIP: 01730 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, 1999 (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 16, 1999, the aggregate market value of the voting stock held by non-affiliates of the Registrant was approximately $496,684,432 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: 21,487,326 shares of common stock, $.01 par value per share, as of December 16, 1999. DOCUMENT INCORPORATED BY REFERENCE Certain portions of the Company's Definitive Proxy Statement for its 1999 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 enterprise asset maintenance 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 complements its enterprise asset maintenance software with an Internet-based business-to-business e-Commerce network and set of desktop requisition and online procurement software products that enable businesses to engage in electronic commerce. 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. The Company's principal software product is MAXIMO(R), an enterprise-wide client/server asset maintenance management application. The client/server version of MAXIMO was first released in February 1991 and has been employed in production applications for more than eight years. Revenues from licenses of client/server MAXIMO have grown from $1,406,000 in fiscal year 1991 to $56,389,000 in fiscal year 1999. The Company's MAXIMO client/server products 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. In fiscal 1998, the Company introduced an industry specific focused applications strategy for MAXIMO. MAXIMO for Facilities, MAXIMO for Industry, and MAXIMO Enterprise for Transportation are pre-configured applications with industry specific MAXIMO modules that are packaged into the base MAXIMO product. These offerings are priced competitively and supported by standard implementation packages tailored specifically for facilities, mid-tier manufacturing and companies with sophisticated fleet management needs. MAXIMO Enterprise for Utilities, MAXIMO Enterprise for Energy, and MAXIMO Enterprise for Process became available in fiscal 1999. In fiscal 1999, the Company formed a new wholly-owned subsidiary, MRO.com, Inc. MRO.com, Inc. ("MRO.com") has established subsidiaries in Australia, Canada, Hong Kong, and the United Kingdom. MRO.com, Inc. provides on-line procurement solutions for capital intensive industries and the manufacturing and distribution channels that serve them. These solutions will enable buyers at companies to efficiently manage the complex balance between both planned and spot buy procurement activities. MRO.com, Inc. links an on-line community of MRO ("Maintenance, 1 3 Repair and Operating") suppliers and buyers to a group of Internet-based procurement products that reduce purchasing and inventory costs. The buyers, many of whom are already using the Company's MAXIMO Enterprise Asset Management software, will be offered a new set of Internet-based procurement products as well as a connection to a community of MRO suppliers assembled by MRO.com. It is expected that as a result, users will benefit from reduced purchasing and inventory costs. Revenues from MRO.com products and services were $6,100,000 in fiscal year 1999. In April 1999, the Company signed agreements with W.W. Grainger, Inc., a leading business-to-business provider of MRO supplies and related information in North America. W.W. Grainger, Inc. acquired 1,000,000 shares of the Company's common stock for $14.5 million and acquired a two-year option to purchase 5% of the Company's wholly-owned subsidiary, MRO.com, Inc., for an exercise price of $3.8 million. On February 6, 1998, the Company acquired the stock of A.R.M. Group Inc., Ontario, Canada. A.R.M. Group Inc. was a privately-held organization that helped businesses solve maintenance and indirect materials management problems. A.R.M. launched the M|net solution over which distributors, manufacturers and purchasers of MRO supplies conduct their business through a shared inventory network. PRODUCTS MAXIMO The MAXIMO maintenance management software product is used to plan and manage ongoing maintenance and repair operations and to track related labor, parts and costs. Using MAXIMO, customers can prioritize tasks, assign work based on the availability of necessary parts and labor and analyze equipment failures in order to implement appropriate preventative maintenance measures. 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 can aid in designing preventive maintenance procedures to reduce future equipment failure rates and downtime. In fiscal 1998, the Company released MAXIMO 4.0, which combines an open architecture with Java components and enhanced safety work management and materials management features, that helps organizations better manage maintenance operations and prevent equipment disruptions and down time. MAXIMO 4.0 includes safety and compliance features so that companies can implement in-depth tracking and reporting processes that adhere to mandated regulatory guidelines. MAXIMO 4.0 is available in English, Brazilian Portuguese, Dutch, French, German, Japanese, Latin American Spanish, and Swedish. 2 4 MAXIMO FEATURES MAXIMO is composed 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: The Equipment Module tracks associated costs, histories, and failures of a serialized piece of equipment as it moves throughout a plant or facility. Work Orders Module provides the ability to view detailed planning information, enter day to day maintenance requests, schedule work orders based on real-time criticality and compare budgets or estimates against actuals and historical work orders. Preventative Maintenance Module generates preventative maintenance work orders individually, batched or automatically. Resources Module maintains detailed company, service contract, and tool records for use in other modules to plan and analyze maintenance work. Labor Module stores information by employee, craft or contractor. It maintains personnel files and reports labor on work orders in timecard format. Calendars Module provides the ability to view calendars by month or day and associates calendars with labor and craft records to plan work based on equipment and labor availability. Jobs Plans Module tracks multiple quantities and costs by operation or job plan. Purchasing Module creates requests 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. Inventory Module contains over 2,000 material classification templates, tracks items, costs and balances by bin, lot or storeroom, reorders automatically, forecasts materials, accesses up to date cost information and issues parts directly to work orders. Safety Module offers users safety features such as identification of hazardous materials, lock out, tag out capabilities, identification of affected equipment and locations and tracking of permits. 3 5 MAXIMO OPTIONS MAXIMO offers users a variety of integrated options, including, but not limited to, the following: MAXIMO Integration Gateways - MAXIMO integrates with multiple financial systems including package integration to Oracle(R), PeopleSoft(R), and SAP(R). Internet - MAXIMO allows the "Self Service" creation of new work requests and review of existing requests through any Java-enabled Internet browser, electronic commerce capabilities for the transfer of purchase orders to vendors and MRO-Online ability to download job plans and PM schedules. MAXIMO Analyzer - MAXIMO Analyzer provides detailed information allowing users to rapidly pose multiple questions and assess responding data to make critical business decisions. The product converts 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. MAXIMO ARCHITECTURE MAXIMO's client/server versions are provided by a direct link to many of today's leading commercial SQL databases including the Oracle and Microsoft SQL Server database products. 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. The MAXIMO "Self Service" applications are the initial MAXIMO applications developed in a Java-based, object oriented, component architecture designed to replace, in an evolutionary manner, the existing MAXIMO client/server architecture. This framework is initially being used to develop Java-based self-service applications and wireless applications running on hand held devices. MRO.COM MRO.com products are designed to enable organizations to purchase indirect MRO items over the Internet quickly and easily. MRO buyers are provided with the tools to gain immediate access to 4 6 product catalog content from their selected suppliers. This buy-side software solution also provides integration to the business system of the buying organization and transaction management to connect buyers and suppliers in real time. The MRO.com product offerings include the following: mroBuyer(TM): mroBuyer was generally made available in June 1999. mroBuyer is part of a suite of Internet-based procurement products designed to link buyers and suppliers in streamlining purchasing efficiencies. mroBuyer provides a single interface for electronic procurement of MRO supplies, materials, parts and services from participating suppliers. mroBuyer links front-line employees to mroMarketplace(TM), which is MRO.com's growing online community of supplier catalogs through which a buyer can make MRO related purchases. mroBuyer also includes the following components: o Desktop Requisition: a browser-based interface to supplier catalog content and purchase order transaction management information. The desktop requisition tool provides users with the ability to search for and select parts from online catalogs, create requisitions and purchase orders online and electronically transfer purchase orders through the mroNetwork(TM) to a company's selected suppliers. It also provides the ability to view real-time inventory availability, /order status information, invoice and shipping history and contract pricing. o mroIntegration Gateway(TM): a standards-based, open architecture, application program interface (API) that provides a connection to leading ERP systems such as SAP, Oracle, and PeopleSoft. o Workflow: a Java-based application that provides requisition routing and approval based on a company's pre-defined business rules. Requisitions requiring approval are automatically routed through the approval chain by e-mail. An advanced graphical interface is used to create custom rules and workflow models. o mro Transaction Server(TM): an industry-standard, XML-based connection to the mroMarketplace that provides live, real-time status on orders and transactions between connected buyer and suppliers. mroSupplier(TM): mroSupplier provides MRO supplier organizations with the tools to overcome the management and cost hurdles associated with Internet procurement. mroSupplier's electronic catalog assists suppliers with catalog development and maintenance activities, such as data scrubbing and formatting. Supplier catalogs are aggregated at 5 7 the mroMarketplace, where they can be posted for access by all buyers in the community or customized to reflect the unique price and trading agreements of individual buying organizations. mroSupplier provides additional functionality to enable suppliers to update and change catalogs as needed. mroSupplier also includes mroIntegration Gateway(TM) and mro Transaction Server(TM). mroMarketplace(TM): A Web-based community designed to establish the critical mass of buyers and suppliers required for effective management of the indirect supply chain. The mroMarketplace is a content aggregation hub for more than 40 suppliers. 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, 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. Customer Support Programs. As of September 30, 1999, the Company employed a technical hot-line support staff of 79 employees operating out of the Company's corporate headquarters in Massachusetts and three international technical response centers located in the United Kingdom, Australia, and Canada. Subscribers to the Company's annual support contracts are entitled to receive (i) customer service and technical support by telephone, fax, support on line via the Internet and electronic bulletin board, (ii) a newsletter and periodic technical bulletins, (iii) an invitation 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. Implementation, Consulting and Training. As of September 30, 1999, the Company employed a consulting and training staff of 200 employees. The Company's network of international distributors also provides services within their geographic territories. 6 8 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 also contracts with third party consultants, as needed, in order to meet any services backlog. 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, Georgia, 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. 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 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. SALES AND MARKETING The Company markets its products in the United States through a direct sales force of 117 persons operating out of its Massachusetts headquarters and sales offices located in California, Colorado, Florida, Georgia, Illinois, Maryland, Michigan, New Hampshire, New Jersey, New York, Texas, and Virginia. The Company markets its products outside the United States through a sales force of 127 persons from a network of sales offices in Argentina, Australia, Belgium, Canada, China, France, Germany, Hong Kong, India, Mexico, the Netherlands, Sweden, Thailand and the United Kingdom and through distributors in parts of Africa, Asia, Europe, the Middle East and South America. Approximately 46% of the Company's total revenues in fiscal 1999 were derived from sales outside the United States. The Company markets its products through advertising campaigns in national trade periodicals, direct mail, seminars and its Web site (http://www.MAXIMO.com). These efforts are supplemented by 7 9 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. The sales cycle for MAXIMO products, from the initial sales presentation to the issuance of a purchase order, typically ranges from six to eighteen months for the different MAXIMO vertical modules. The Company believes that customers generally choose MAXIMO based on the features it provides and upon a preference for the product architecture, implementation time, domain expertise and ease of use. The sales cycle for MRO.com products, from the initial sales presentation to the issuance of a purchase order, typically ranges from six to nine months. The Company has focused its sales strategy towards capital intensive industrial companies more than the service type industries, such as banks and financial institutions. 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 future sales and earnings. The absence of significant backlog may contribute to unpredictability in the Company's results of operations. The Company has alliances with Oracle and PeopleSoft. The Company also offers a solution to SAP through an alliance with IBM Global Services (an affiliate of IBM). The Company develops reseller channels that supplement the direct sales force. The Company has agreements with outsourcing vendors such as Johnson Controls, Inc. and ABB Service Worldwide (an affiliate of Asea Brown Boveri). The Company works closely with major systems integrators such as IBM Global Services, Innolog, Inc., and Cordant Inc. (an affiliate of Tracor, Inc.). The Company has OEM arrangements with companies such as Honeywell Incorporated, The Foxboro Company, and Elsag-Bailey. The Company also seeks out alliances with niche solution providers who provide a complementary solution to MAXIMO. The Company has established the MAXIMO Connect Program to develop integrated solutions with niche applications to enhance the overall MAXIMO enterprise asset management solution. COMPETITION The market for applications software is intensely competitive and rapidly changing. In general, the Company competes on the basis of (i) product architecture, which includes distributed computing capability, access to commercial SQL databases, and 8 10 ease of customization and integration with other applications; (ii) functionality, which includes the breadth and depth of features and functions, and ease of use; (iii) 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; (iv) product pricing in relation to performance; (v) rapid implementation to achieve benefits and (vi) 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 and JD Edwards, who offer a module incorporating limited asset maintenance functionality. Over the past few years, there has been a consolidation within the asset maintenance software market. The Company expects that in the future MAXIMO 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 for Industry and MAXIMO for Facilities compete 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 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. The MRO supply chain management business using electronic commerce has many diverse competitors offering a wide range of differing products, services and technologies. The Company expects competition to intensify as current competitors expand their product offerings and new competitors enter the market. In addition, the market for electronic procurement solutions is relatively new and underdeveloped. Many of the Company's enterprise asset management competitors are also entering the MRO e-Commerce market. The current potential competitors include, Ariba, Clarus, Commerce One, Concur, Connect, Harbinger, IBM, Intellisys, Microsoft, Netscape, Oracle, PeopleSoft, SAP and others. This market will be rapidly developing and changing. 9 11 PRODUCT DEVELOPMENT The Company has made substantial investments in research and software product development. The Company's total product development expenses in 1999, 1998 and 1997 were $14,959,000, $13,247,000, and $11,387,000, respectively. The Company's research and development staff consisted of 140 employees and a number of consultants as of September 30, 1999. The Company's development organization is comprised of relatively small teams of senior level developers and engineers, who focus on different areas of development. The Company will continue its MAXIMO client/server product development and work closely with customers to define and develop market driven product enhancements. The Company's product development efforts are also currently focused on a standards based component architecture written in the Java programming language. Moving beyond traditional client/server and three-tier architectures, an open standards based component architecture provides benefits in terms of greater flexibility, improved integration capabilities, lower "cost of ownerships" in maintaining and application infrastructure, as well as improved developer productivity in both development and implementations. The MAXIMO and mroBuyer products are heavily leveraging this technology. The Company continues its efforts to integrate MAXIMO and mroBuyer with the major Enterprise Resource Planning ("ERP") systems, such as PeopleSoft, Oracle, SAP and BaaN to offer its clients a complete and flexible integrated business system solution. Some of the other projects that the development group is focused on include developing business components to support mobile applications, self service applications, enterprise integration and the MRO.com, Inc., electronic commerce applications, as well as, researching and investigating new technologies that should complement the Company's product strategies in the future. The Company's products consist primarily of internally developed software and the products acquired from The A.R.M. Group Inc. In addition, the Company has incorporated in its products graphical user interfaces, report writers, application development tools and database management systems developed by other vendors. 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 10 12 significant delays in product development or introduction, could result in a loss of competitiveness and revenues. The Company has experienced delays in the past in the introduction of new products and product enhancements. These delays have varied in 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. 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 that 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 Brio Technologies (formerly Sqribe) ("Brio") that grants to the Company's end-users 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 Brio. The Company may terminate the agreement at any time. Brio 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 11 13 agreement at any time. Netronic may terminate the agreement on the occurrence of a material, uncured breach of the agreement by the Company. The Company has also entered into non-exclusive license agreements after September 1999 with Broadvision, Citrix, Moai, Verity, and Webmethods, which permit the Company to incorporate certain software programs or data into the Company's products. PROPRIETARY RIGHTS AND LICENSES The Company has registered all of its 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. A patent application has been filed with the United States patent office for inventory sharing as it relates to electronic commerce. There has been no objection to the patent in the United Sates. The Company intends to file for a global patent for the same. 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 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 of Microsoft Corporation. Windows (TM) is a trademark of Microsoft Corporation. This Annual 12 14 Report on Form 10-K also includes other trademarks of the Company and trademarks of companies other than the Company. PRODUCTION The principal materials and components used in the Company's software products include computer media, user manuals and training guides. The Company currently uses third-party vendors to print its user manuals, packaging and related materials, but duplicates program CD-Roms and diskettes 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. EMPLOYEES As of September 30, 1999, the Company had 745 full-time employees including 244 in sales, marketing and related services, 140 in product research and development, 79 in customer support, 200 in training and consulting services, and 82 in finance, administration, information technology, 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 The Company 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 lease will be approximately $1,000,000, 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 Company leases additional sales offices in California, Colorado, Florida, Georgia, Idaho, Illinois, Maryland, Missouri, New Hampshire, New Jersey, New York, Ohio, Tennessee, Texas, and Virginia. The Company also leases offices for its international operations in Argentina, Australia, Canada, China, France, Germany, Hong Kong, India, Mexico, the Netherlands, Sweden, Thailand and the United Kingdom. 13 15 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. 14 16 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 ("The NASDAQ Stock Market") under the symbol PSDI. As of December 16, 1999, there were approximately 53 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 Stock Market consolidated reporting system for each quarterly period within the two year period ended September 30, 1999. FISCAL 1999 HIGH LOW First Quarter $16.00 $6.50 Second Quarter $21.06 $9.69 Third Quarter $17.19 $9.00 Fourth Quarter $27.00 $15.38 FISCAL 1998 HIGH LOW First Quarter $13.94 $8.00 Second Quarter $12.22 $9.38 Third Quarter $14.25 $9.38 Fourth Quarter $11.88 $6.13 On October 15, 1999, the Company's Board of Directors approved a 2-for-1 stock split in the form of a dividend of its common stock to be paid to all shareholders of record on December 15, 1999. The payment distribution date for the stock dividend was December 22, 1999. The stock split was subject to shareholder approval of an increase in the Company's authorized common stock, $0.01 par value per share, from 15,350,000 to 50,000,000 shares. Stockholders approved the transaction on December 15, 1999. All share and per share data has been restated to reflect this stock split in the form of a dividend as though it had occurred at the beginning of the earliest period presented. 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 15 17 future earnings to finance growth and therefore does not anticipate paying cash dividends in the foreseeable future. Certain provisions of the Company's Certificate of Incorporation and Bylaws could delay the removal of incumbent directors and could make a merger, tender offer or proxy contest involving the Company more difficult, even if such events would be beneficial to the interests of the stockholders. In addition, the Company has 1,000,000 shares of authorized Preferred Stock. The Company may issue shares of such Preferred Stock in the future without further stockholder approval and upon such terms and conditions, and having such rights, privileges and preferences, as the Board of Directors may determine. The rights of the holders of common stock will be subject to, and may be adversely affected by, the rights of the holders of any Preferred Stock that may be issued in the future. The issuance of Preferred Stock, while providing flexibility in connection with possible acquisitions and other corporate purposes, could have the effect of making it more difficult for a third party to acquire, or of discouraging a third party from acquiring, a majority or the outstanding voting stock of the Company. In addition, the staggered terms of the Company's Board of Directors could have the effect of delaying or deferring a change in control of the Company. In January 1998, the Board of Directors of the Company adopted a stockholder rights plan by declaring a dividend distribution of one preferred stock purchase right (one "Right") on each share of the Company's Common Stock outstanding on January 27, 1998 or, in certain circumstances, issued thereafter. Initially, the Rights are not exercisable, not represented by separate Right certificates and do not trade separately from the Company's Common Stock. Ten days after a tender offer or acquisition of 15% or more of the Company's common stock, each right may be exercised for $140 ("Exercise Price") to purchase one one-thousand of one share of the Company's Series A Junior Participating Preferred Stock. Each one one-thousandth of each share of Series A Junior Participating Preferred Stock will generally be afforded economic rights similar to one share of the Company's common stock. In addition, after such rights are triggered, each Right entitles the holder to purchase common stock of the Company with a fair value of twice the Exercise Price or, in certain circumstances, securities of the acquiring company for the Exercise Price. Each Right expires in January 2008 and, during specified periods, the Company may redeem or exchange each Right for $.01 or one share of common stock, respectively. The Rights Agreement has been filed by the Company with the Securities and Exchange Commission as an exhibit to a Registration Statement on Form 8-A dated February 2, 1998. Stockholders are urged to review the Rights Agreement for a complete understanding of the Rights Plan. The Rights Plan, while providing the Board of Directors with flexibility in connection with possible acquisitions and deterring unfair or coercive takeover tactics, could have the effect of making it 16 18 more difficult for a third party to acquire, or of discouraging a third party from acquiring, beneficial ownership of 15% or more of the outstanding shares of the Company's Common Stock. 17 19 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 per share data) 1999 1998 1997 1996 1995 ---- ---- ---- ---- ---- Revenues $145,665 $120,016 $ 96,700 $73,329 $50,372 Income from operations 24,333 12,902 16,271 14,606 8,438 Net income 17,880 6,222 11,570 10,046 5,629 Net income per 0.87 0.32 0.59 0.53 0.33 share, basic Net income per 0.85 0.31 0.58 0.50 0.32 share, basic Weighted number of common 21,094 20,156 20,126 20,104 17,692 and dilutive potential common shares -------------------------------------------------- Total Assets 159,033 114,520 102,239 83,476 64,960 Long-Term Obligations 282 906 144 628 962 Dividends Per Share - - - - - - - - - - - - - - - On October 15, 1999, the Company's Board of Director's approved a 2-for-1 stock split in the form of a dividend of its common stock. The stock split was subject to approval of an increase in the Company's authorized common stock. Stockholders approved the transaction on December 15, 1999. All share and per data has been restated to reflect this stock split as though it had occurred at the beginning of the earliest period presented. Included in net income for the year ended 1999 is a one-time charge for purchased in-process product technology of $9,172,000 related to the purchase of the A.R.M. Group Inc. on February 6, 1998. 18 20 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS FORWARD-LOOKING STATEMENTS In addition to historical information this Annual Report contains forward-looking statements identified by footnotes in the text. 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 "Factors Affecting Future Performance". Readers should carefully review the risk factors described in other documents that the Company files from time to time with the Securities and Exchange Commission, including the Quarterly Reports on Form 10-Q filed by the Company in fiscal 1999. OVERVIEW The Company develops, markets and supports enterprise asset maintenance 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 complements its enterprise asset maintenance software with an Internet-based business-to-business e-Commerce network and set of desktop requisition and online procurement software products that enables businesses to engage in electronic commerce. 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. The Company's revenues are derived primarily from two sources: (i) software licenses and (ii) fees for services, including support contracts, training and consulting services and commerce fees for on-line charges to engage in electronic commerce for Maintenance, Repair and Operations ("MRO"). ACQUISITIONS AND OTHER RELATED MATTERS On December 10, 1998, the Company acquired the shares and assumed net liabilities of its Italian distributor, Work Management Consulting, s.r.l, for the sum of $411,000. The transaction was accounted for using the purchase method of accounting. The resulting goodwill is being amortized on a straight-line basis over five years. This acquisition was deemed to be immaterial for presentation of pro forma information purposes. In April 1999, the Company signed agreements with W.W. Grainger, Inc. ("Grainger"), a business-to-business provider of MRO supplies and related information, whereby Grainger acquired 1,000,000 shares of the Company's common stock for $14.5 million, less expenses of $954 thousand, 19 21 and acquired a two-year option to purchase 5% of the Company's wholly-owned subsidiary, MRO.com, Inc. with an exercise price of $3.8 million. 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: 1999 1998 1997 ---- ---- ---- Software 42.7% 45.0% 52.1% Support and services 57.3 55.0 47.9 ----- ----- ----- Total revenues: 100.0 100.0 100.0 Total cost of revenues 32.5 31.2 27.5 ----- ----- ----- Gross margin 67.5 68.8 72.5 ----- ----- ----- Operating expenses: Sales and marketing 32.6 31.2 34.1 Product development 10.3 11.0 11.8 General and administrative 8.0 8.2 9.8 Purchased in-process Product development -- 7.6 -- ----- ----- ----- Total operating expenses: 50.9 58.0 55.7 ----- ----- ----- Income from operations 16.6 10.8 16.8 Other income(expense), net 2.0 1.3 1.9 ----- ----- ----- Income before income taxes 18.6 12.1 18.7 Income taxes 6.3 6.9 6.8 ----- ----- ----- Net income 12.3% 5.2% 11.9% ----- ----- ----- FISCAL 1999 COMPARED TO FISCAL 1998 REVENUES (in thousands) 1999 CHANGE % 1998 - --------------------------------------- -------- -------- -------- Software licenses $ 62,240 15.2% $ 54,007 Percentage of total revenues 42.7% 45.0% Support and services $ 83,425 26.4% $ 66,009 Percentage of total revenues 57.3% 55.0% Total revenues $145,665 21.4% $120,016 Total MAXIMO client/server revenues were $136.8 million in fiscal 1999, an increase of 20% over fiscal 1998. The growth in revenues was generated primarily by increases in support and services revenues from the Company's enterprise asset management product, MAXIMO MRO.com revenues were $6.1 million, an increase of 608.5% over 1998. A significant portion of the Company's revenues was derived from operations outside of the United States. Revenues from sales outside the United States for 1999 increased 23.4% to $67.6 million or 46.4% of revenues, compared to $54.8 million or 45.7% of revenues in 1998. The increase in the percentage of revenues generated outside the U.S. can be attributed to the Company's continued global expansion. 20 22 Software licenses for 1999 increased 15.2% to $62.2 million from $54.0 million. MAXIMO client/server software license revenue for 1999 increased 9.1% to $56.3 million from $51.6 million. MRO.com software license revenue for 1999 increased to $5.1 million from $179 thousand. The increase in MRO.com products was attributable to the release of new products in fiscal 1999, specifically MROBuyer(TM) anD mroSupplier(TM). During fiscal 1999. MRO.com, Inc. concluded software license contracts with two customers that were in excess of 10% of its total software revenues. Total software licenses as a percentage of total revenues decreased to 42.7% in 1999 from 45.0% in 1998, but remained within the Company's targeted range of 40 to 45% for the year. The Company anticipates remaining in this range through early fiscal 2000. (1) Support and services revenues increased 26.4% in 1999 over the prior year. Consulting services grew 29.6% in 1999 compared to 1998 and continues to be a large percentage of total revenues due to additional service demands in connection with large scale implementations of the Company's MAXIMO product. MRO.com services were not a significant portion of revenues and represented only 1% of service revenues for fiscal 1999. Support services grew to 21.7% in 1999 compared to 1998. The increase in the percentage of support revenues was in direct relation to the increase in software license revenues and the high renewal rate for MAXIMO maintenance contracts. COST OF REVENUES (in thousands) 1999 CHANGE % 1998 - --------------------------------------- -------- -------- -------- Software licenses $ 5,018 10.6% $ 4,537 Percentage of software licenses 8.1% 8.4% Support and services $42,310 28.5% $32,936 Percentage of support and services 50.7% 49.9% Total cost of revenues $47,328 26.3% $37,473 Percentage of total revenues 32.5% 31.2% Cost of software revenues consists of software purchased for resale, 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 was due primarily to software purchased for resale, royalties paid to third party vendors, and production materials. This increase was partially offset by a significant decrease in software amortization in 1999. 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 was (1) Forward looking statement. 21 23 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 demand and backlog. The cost of support and services as a percentage of support and services revenues increased slightly to 50.7% from 49.9% in 1999 and 1998, respectively. The increase as a percentage of revenues is attributable to salary and benefit increases for new hires and the costs for third party contractors. OPERATING EXPENSES (in thousands) 1999 CHANGE % 1998 - --------------------------------------- -------- -------- -------- Sales and marketing $47,417 26.7% $37,418 Percentage of total revenues 32.6% 31.2% Product development $14,959 12.9% $13,247 Percentage of total revenues 10.3% 11.0% General and administrative $11,628 18.6% $ 9,804 Percentage of total revenues 8.0% 8.2% In-Process Product Development N/A (100)% $ 9,172 Percentage of total revenues N/A 7.6% The increase in sales and marketing expenses in 1999 was primarily due to increases in sales support and marketing personnel, sales commissions, marketing research and telemarketing expenses and higher travel costs. The increase in product development expenses in 1999 was primarily due to the hiring of additional employees and no capitalization of software costs in fiscal 1999. No software development costs were capitalized in 1999 since costs incurred subsequent to the establishment of technological feasibility were not significant. Capitalization of software costs were $675 thousand in 1998. The decrease as a percentage of revenues was attributable to the efficiencies in managing product development goals without commensurate increases in expenses. The Company intends to make significant investments in electronic commerce products for MRO supply chain management. (1) The Company will also continue to invest in client/server MAXIMO Java applications. The increase in general and administrative expenses in 1999 was primarily due to an increase in bad debt reserves to cover foreign receivables and professional fees and other expenses to support the global expansion of the Company. 22 24 NON-OPERATING EXPENSES (in thousands) 1999 CHANGE % 1998 - --------------------------------------- -------- -------- -------- Interest income $3,052 26.6% $2,411 Interest (expense) $ (50) (87.1)% $ (389) Other income (expense) $ (175) (53.5)% $ (376) Loss on minority interest $ N/A (100)% $ (44) Interest income in 1999 was attributable to interest earned on marketable securities and cash equivalents from cash flow generated from operations including accounts receivable collections offset by premiums amortized for purchased marketable securities. In fiscal 1998, the Company obtained financing from a third party for a receivable due from the United States Government, which is the reason for the higher amount of interest expense in fiscal 1998. The decrease in other income (expense) was attributable to income derived from the MAXIMO Users Group Conference, offset by foreign translation losses. PROVISION FOR INCOME TAXES The Company's effective tax rate was 34.2% in 1999. The decrease in the effective tax rate in 1999 is primarily due to foreign tax credits and benefits from a foreign sales corporation. The Company's effective tax rate before a one time non-deductible charge for purchased in-process product development was 35.0% in 1998. The income tax expense provided during 1998 reflects the non-deductible nature of certain charges related to the acquisition of the A.R.M. Group Inc. The Company anticipates that its fiscal 2000 effective tax rate will not exceed 36%. (1) FISCAL 1998 COMPARED TO FISCAL 1997 REVENUES (in thousands) 1998 CHANGE % 1997 - --------------------------------------- -------- -------- -------- Software licenses $ 54,007 7.2% $50,393 Percentage of total revenues 45.0% 52.1% Support and services $ 66,009 42.5% $46,307 Percentage of total revenues 55.0% 47.9% Total revenues $120,016 24.1% $96,700 The growth in total revenues was generated from the Company's MAXIMO client/server software and related support and services. A significant portion of the Company's total revenues was derived from operations outside of the United States. Revenues from sales outside the United States for 1998 increased 29.2% to $54.8 million or 45.7% of total revenues, compared to $42.4 million or 43.8% of total revenues in 1997. The increases in the percentage of total revenues generated outside the United States in 1998 can be 23 25 attributed to the expansion of the Company's international sales organization. The Company experienced an increase in the average selling price of its MAXIMO client/server software licenses during fiscal 1998. 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. Software sales for 1998 increased 7.2% to $54.0 million from $50.4 million. This growth was attributable to licenses of MAXIMO client/server software, which grew 8.6% primarily attributable to a large multi-million dollar software license and the general availability of MAXIMO Release 4.0 in English. Software licenses as a percentage of revenues decreased to 45.0% in 1998 from 52.1% in 1997 due to the increase in services support to implement the Company's MAXIMO client/server product in connection with customers large-scale enterprise-wide financial installations The increase in support and services revenues was attributable to increases in both MAXIMO support contracts and consulting services. Consulting services grew 49.5% in 1998 and was a large percentage of total revenues due to additional service demands in connection with large-scale implementations of the Company's MAXIMO client/server product. Support services grew 30.2% in 1998. COST OF REVENUES (in thousands) 1998 CHANGE % 1997 - --------------------------------------- -------- -------- -------- Software licenses $ 4,537 78.1% $ 2,547 Percentage of software licenses 8.4% 5.1% Support and services $32,936 37.1% $24,025 Percentage of support and services 49.9% 51.9% Total cost of revenues $37,473 41.0% $26,572 Percentage of total revenues 31.2% 27.5% 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 was 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 was attributable to the hiring of employees and the extensive use of third-party consultants contracted to perform services for the 24 26 Company. The Company utilizes the services of these higher cost third-party consultants in order to meet the services backlog. The cost of support and services as a percentage of support and services revenues decreased to 49.9% from 51.9% in 1998 and 1997, respectively. The decrease as a percentage of revenues is attributable to economies of scale realized in connection with the establishment of four support centers which provide round the clock support rather than providing support in all countries, combined with improved margins on third party consulting expenses. OPERATING EXPENSES (in thousands) 1998 CHANGE % 1997 - --------------------------------------- -------- -------- -------- Sales and marketing $37,418 13.4% $32,985 Percentage of total revenues 31.2% 34.1% Product development $13,247 16.3% $11,387 Percentage of total revenues 11.0% 11.8% General and administrative $ 9,804 3.4% $ 9,485 Percentage of total revenues 8.2% 9.8% In-Process Product Development $ 9,172 100% N/A Percentage of total revenues 7.6% N/A The increase in sales and marketing expenses in 1998 was primarily due to increases in sales support and marketing personnel and sales commissions. Also, contributing to this increase was higher costs for travel and lodging due partially to price increases imposed by the airline and travel industries. The comparative year'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 1998 is primarily due to the engagement of additional employees, third-party consultants and product translation services costs. Capitalization of software costs were $675 thousand and $0 in 1998 and 1997, respectively. The increase in general and administrative expenses in 1998 is primarily due to professional legal, audit and tax services to support the increase in growth in global operations and an increase in bad debt reserves. The comparative year's expense levels were a larger percentage of revenues as they were established for budgeted revenue levels that were not achieved. In February 1998, the Company acquired The A.R.M. Group Inc. The acquisition was accounted for as a purchase. The Company allocated the purchase price to the assets acquired and liabilities assumed based on their estimated fair value. The fair value assigned to intangible assets acquired consisted of 25 27 purchased in-process product development and completed technology. In the opinion of management, the purchased in-process product development had not yet reached technological feasibility and had no alternative future use. Accordingly, the Company recorded a non-recurring charge of $9.2 million during the second quarter of fiscal 1998. The value was determined by estimating the costs to develop the purchased in-process technology into commercially viable products, estimating the net cash flows from such projects, and discounting the net cash flows back to their present values. NON-OPERATING EXPENSES (in thousands) 1998 CHANGE % 1997 - --------------------------------------- -------- -------- -------- Interest income $2,411 .1% $2,409 Interest (expense) $ (389) 1520.8% $ (24) Other income (expense) $ (376) (28.9%) $ (529) Loss on minority interest $ (44) N/A Interest income in 1998 was attributable to interest earned on cash equivalents from cash flow generated from operations including accounts receivable collections offset by premiums amortized for purchased marketable securities. The increase in interest expense was attributable to the discount paid on a U.S. Government receivable financed by a third party. The decrease in other income (expense) is attributable to income derived from the MAXIMO Users Group Conference, offset by foreign translation losses. PROVISION FOR INCOME TAXES The Company's effective tax rate before a one time non-deductible charge for purchased in-process product development was 35.0% in 1998. The Company's effective tax rate in 1997 was 36.2%. The income tax expense provided during 1998 reflects the non-deductible nature of certain charges related to the acquisition of the A.R.M. Group Inc. LIQUIDITY AND CAPITAL RESOURCES As of September 30, 1999, the Company had cash and cash equivalents and marketable securities of approximately $98.2 million and working capital of $95.1 million. Cash generated by operations for fiscal year 1999 was $21.1 million, primarily attributable to net income and an increase in deferred revenue, accounts payable, and accrued compensation offset by an increase in receivables as a result of the increases in revenues for the fourth quarter of 1999. 26 28 Cash used in investing activities totaled $6.1 million, primarily for the purchase of marketable securities. Cash generated by financing activities was $16.9 million, primarily from proceeds from an investment by Grainger. In April 1999, the Company signed agreements with Grainger, whereby Grainger acquired 1,000,000 shares of the Company's common stock for $14.5 million less expenses of $954 thousand, and acquired a two-year option to purchase 5% of the Company's wholly-owned subsidiary, MRO.com, Inc. for an exercise price of $3.8 million. Also contributing to cash generated by financing activities are proceeds received from exercises of employee stock options. As of September 30, 1999, the Company's principal commitment consisted primarily of an office lease for its headquarters. 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 leases its facilities and certain equipment under non-cancelable operating lease agreements that expire at various dates through September 2006. The Company may use a portion of its cash to acquire businesses, products and technologies complementary to its business. (1) The Company also plans on making significant investments over the next year in its new MRO.com web-based products and to develop content and add suppliers to WWW.MRO.COM, MRO.com's e-Commerce hub. The Company believes that its current cash balances and marketable securities combined with cash flow from operations will be sufficient to meet its working capital and capital expenditure requirements through at least September 30, 2000. (1) YEAR 2000 "The information contained under this heading constitutes a 'Year 2000 Readiness Disclosure' under the Year 2000 Information and Readiness Disclosure Act." 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. During 1998, Management 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 was 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 assessed the (1) Forward Looking Statement 27 29 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. To date, the Company has not had to spend any material funds on updating its internal systems. Costs associated with preparing internal systems for the Year 2000 were approximately $100,000. There can be no assurances that as the Company experiences the phenomenon of Year 2000 that more costs will not occur. The Company has made its best efforts to prepare for the Year 2000 based on the final results gathered from its suppliers and third parties. The Company's assessment is that they will be adequately prepared for the Year 2000, but can offer no positive guarantees. The Company has evaluated its software products and determined that the current versions of MAXIMO Release 4.0.0, 4.0.1, 4.0.2, 4.0.3, and 3.0.3 will continue to operate properly into the Year 2000. MAXIMO version 3.0.2 is not fully compliant. Customers must take the steps described in the Company's year 2000 readiness documentation to address the issues or the customers must upgrade to a later MAXIMO release and allow adequate time for conversion of data. MAXIMO releases prior to MAXIMO Release 3.0.2 must be upgraded from the user's existing version to a later MAXIMO release order to be year 2000 compliant. MAXIMO ADvantage 4.0 will continue to operate properly into the Year 2000. Customers using prior versions of ADvantage must be upgraded to ADvantage 4.0 and allow adequate time for conversion of data in order to be year 2000 compliant. The Company's product PROJECT/2 is no longer sold but the Company does offer support for this product. PROJECT/2 is not fully compliant. Customers must take the steps described in the Company's year 2000 readiness documentation to address the issues or the customers must upgrade to the recommended versions and allow adequate time for conversion of data. MAXIMO Scheduler releases prior to MAXIMO Scheduler Release 3.0 and P/X releases prior to P/X Version 2.2.0 are not fully compliant. Customers must take the steps described in the Company's year 2000 readiness documentation to address issues or the customers must upgrade to the recommended versions and allow adequate time for conversion of data. The Company estimates that the cost to upgrade all of its products to be year 2000 enabled were approximately $500,000. 28 30 EURO COMPLIANCE On January 1, 1999, eleven European Union member states adopted 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, or transact business with, or have operations in, participating European Union countries. As a result, the computer systems or software used by these companies may need to be upgraded to comply with data storage and computational euro requirements. In the first fiscal quarter of 1999, the Company released a new English language client/server version of MAXIMO (MAXIMO 4.0.1) that accepts, stores, calculates, converts and reports euro currency. In the second quarter of fiscal 1999, the Company released primary language versions of MAXIMO 4.0.1 in Brazilian Portuguese, Dutch, French, German, Latin American Spanish, and Swedish. The Company also released a new English language client/server version of MAXIMO (MAXIMO 4.0.2) for Workflow in the second quarter of fiscal 1999 that is euro compliant as defined above. In the third quarter of fiscal 1999, the Company released an English language version of mroBuyer's(TM) Desktop Requisition that is also euro compliant as defined above. The amount of development dollars spent on the euro releases did not and is not expected to have a material adverse effect on the Company's results of operations or financial condition. (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 29 31 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 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 94% of the Company's total revenues in 1999. The Company's financial performance in 2000 depends largely 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. 30 32 NEW PRODUCTS; NEW MARKETS In the second quarter of fiscal 1999, the Company formed a new wholly-owned subsidiary, MRO.com, Inc. MRO.com, Inc. links an on-line community of MRO suppliers and buyers to a group of Internet-based procurement products. There can be no assurance that the Company's MRO products will be sold successfully in the business-to-business electronic commerce market or that the Company's MRO products will achieve market acceptance. There is also no assurance that the Company can create a large enough community of sellers and buyers. The Company's future success in the electronic commerce market may depend on its ability to accurately determine the functionality and features required by its customers, as well as the ability to enhance its MRO products and deliver them in a timely manner. The Internet procurement market is a nascent market that may undergo rapid technological change. The Company cannot predict the present and future size of the potential market for its MRO products and services. The Company may incur substantial costs to enhance and modify its MRO products and services in order to meet the demands of this growing and changing market. The Company's MRO product segment is not yet profitable and may not be profitable for sometime, if ever. 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 cycles of customers, the timing of product shipments and the timing of marketing and product development expenditures. The Company typically realizes a significant portion 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 31 33 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 products, 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 including both independent software vendors and certain enterprise resource planning vendors. Independent software vendors include Datastream, Inc. and Indus Group. MAXIMO also competes with integrated enterprise resource planning systems which are provided by several large vendors, such as SAP and JD Edwards and others, and which include maintenance modules. Currently, the Company's client/server versions of MAXIMO 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 also 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. The MRO supply chain management business using the Internet has many diverse competitors offering a wide range of differing products, services and technologies. The Company expects competition to intensify as current competitors expand their product offerings and new competitors enter the market. In addition, the market for electronic procurement solutions is 32 34 relatively new and underdeveloped. While the Company believes that electronic commerce products and technologies complement the Company's existing products, there can be no assurance that the Company will be able to compete successfully in this market. Many of the Company's enterprise asset management competitors are also entering the MRO e-commerce market. The current potential competitors include Ariba, Clarus, Commerce One, Concur, Connect, Harbinger, IBM, Intellisys, Microsoft, Netscape, Oracle, PeopleSoft, SAP and others. 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 46.4%, 45.7%, and 43.8% of its total revenue from sales outside the United States in fiscal years 1999, 1998, and 1997, 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 1999, and accordingly, continues to invest 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 that 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. The Company experienced lower than anticipated 33 35 revenue growth rates in the Asia Pacific region during 1999 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, SQLServer, and SQLBase database management systems. Introduction and increased market acceptance of database management systems with which the Company's products do not operate could adversely affect the market for the Company's products. The Company has entered into nonexclusive license agreements with including, but not limited to, Broadvision Incorporated, Centura Software Corporation, Scribe Technologies, Incorporated, Cognos Corporation, Netronic Software GmbH, HSB Reliability Technologies Corporation, Intelligent Labeling Technologies, Incorporated, Verity Software, webMethods, 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. The MRO.com business operations are dependent on third party data centers, which could be destroyed or damaged. MRO operations are dependent upon the ability to protect computer equipment and the information stored in these third party data centers against damage that may be caused by natural disasters, fire, power loss, telecommunication or Internet failures, unauthorized intrusions, computer viruses and other similar damaging events. The Company cannot assure that any of these damaging events would not result in a prolonged outage of the Company's network services or that the Company would not experience a reduction of revenues, which could have a material adverse effect on our business and financial results. PRODUCT DEVELOPMENT: INTERNET The Company has developed 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 34 36 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 complement the Company's Enterprise Asset Management 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 the Company's Internet applications, if developed, will achieve market acceptance. If Internet usage continues to grow rapidly, its infrastructure may not be able to support customer and user demands and its performance and reliability may decline. If outages or delays on the Internet occur frequently or increase in frequency, overall Internet usage including usage of the Company's products and services could grow more slowly or decline. The Company is dependent upon improvements being made to the entire Internet as well as to particular customers' networking infrastructures to alleviate overloading and congestion. If these improvements are not made, the ability of the Company's customers to utilize the Company's solution will be hindered, and the Company's business, operating results and financial condition may suffer. 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. Litigation may be necessary to enforce our intellectual property rights, to protect our trade secrets, to determine the validity and scope of the proprietary rights of others, or to defend against claims of infringement or invalidity. Such litigation could result in substantial costs and diversion of resources and 35 37 could potentially have a material adverse result on our operating results and financial condition. 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 who could have an adverse impact on the future operations of the Company. The Company does not have employment contracts with, and does not maintain key person life insurance policies on, any personnel. 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. There can be no assurance that the Company will be able to retain its existing personnel or attract additional qualified employees. 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 1999 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 36 38 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. YEAR 2000 The information contained under this heading constitutes a 'Year 2000 Readiness Disclosure' under the Year 2000 Information and Readiness Disclosure Act. 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. During 1998, Management 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 was 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 assessed 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. To date, the Company has not had to spend any material funds on updating its internal systems. Costs associated with preparing internal systems for the Year 2000 were approximately $100,000. There can be no assurances that as the Company experiences the phenomenon of Year 2000 that more costs will not occur. The Company has made its best efforts to prepare for the Year 2000 based on the final results gathered from its suppliers and third parties. The Company has evaluated its software products and determined that the current versions of MAXIMO Release 4.0.0, 4.0.1, 4.0.2, 4.0.3, and 3.0.3 will continue to operate properly into the Year 2000. MAXIMO version 3.0.2 is not fully compliant. Customers must take the steps described in the Company's year 2000 readiness documentation to address the issues or the customers 37 39 must upgrade to MAXIMO Release 4.0.3, 4.0.1, 4.0.2, or 3.0.3 and allow adequate time for conversion of data. MAXIMO releases prior to MAXIMO Release 3.0.2 must be upgraded from the user's existing version to MAXIMO Release 4.0.3, 4.0.1, 4.0.2, or 3.0.3 in order to be year 2000 compliant. MAXIMO ADvantage 4.0 will continue to operate properly into the Year 2000. Customers using prior versions of ADvantage must be upgraded to ADvantage 4.0 and allow adequate time for conversion of data in order to be year 2000 compliant. The Company's product PROJECT/2 is no longer sold but the Company does offer support for this product. PROJECT/2 is not fully compliant. Customers must take the steps described in the Company's year 2000 readiness documentation to address the issues or the customers must upgrade to the recommended versions and allow adequate time for conversion of data. MAXIMO Scheduler releases prior to MAXIMO Scheduler Release 3.0 and P/X releases prior to P/X Version 2.2.0 are not fully compliant. Customers must take the steps described in the Company's year 2000 readiness documentation to address issues or the customers must upgrade to the recommended versions and allow adequate time for conversion of data. The Company estimates that the cost to upgrade all of its products to be year 2000 enabled were approximately $500,000. The Company does not believe that the advent of the Millennium has caused any positive or negative impact on revenues from the Company's software products during fiscal 1999. While the Company has experienced customer requests to replace non-compliant Year 2000 applications, thereby increasing revenues, it also believes that certain market segments have deferred procuring asset maintenance systems while they complete the implementation of ERP systems. EURO COMPLIANCE On January 1, 1999, eleven European Union member states adopted 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, or transact business with, or have operations in participating European Union countries. As a result, the computer systems or software used by these companies may need to be upgraded to comply with data storage and computational euro requirements. In the first fiscal quarter of 1999, the Company released a new English language client/server version of MAXIMO (MAXIMO 4.0.1) that accepts, stores, calculates, converts and reports euro currency. In the second quarter of fiscal 1999, the Company released primary language versions of MAXIMO 4.0.1 in Brazilian Portuguese, Dutch, French, German, Latin American Spanish, and Swedish. The Company also 38 40 released a new English language client/server version of MAXIMO (MAXIMO 4.0.2) for Workflow in the second quarter of fiscal 1999 that is euro compliant as defined above. In the third quarter of fiscal 1999, the Company released an English language version of mroBuyer's(TM) Desktop Requisition that is also euro compliant as defined above. The amount of development dollars spent on the euro releases did not and does not expect to have a material adverse effect on the Company's results of operations or financial condition. EFFECT OF ACCOUNTING PRONOUNCEMENTS Statement of Financial Accounting Standards No. 133, "Accounting for Derivative Instruments and Hedging Activities" (SFAS 133) was issued in June 1998. The effective date of this Standard was modified by Statement of Financial Accounting Standards No. 137, "Accounting for Derivative Instruments and Hedging Activities-Deferral of the Effective Date of FASB Statement No. 133" and is effective for fiscal quarters of fiscal years beginning after June 15, 2000, with earlier adoption encouraged. The Company will adopt SFAS 133 in the fiscal year ended September 30, 2001. The Company believes that the provisions of SFAS 133 will not, when adopted, have a material impact on the Company's consolidated financial statements. NO REVISIONS OR UPDATES TO FORWARD-LOOKING STATEMENTS The Company has 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. 39 41 ITEM 7 A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK The Company's primary exposures to market risk are the effect of fluctuations in interest rates earned on its cash equivalents and marketable securities. At September 30, 1999, the Company held $98.2 million in cash equivalents and marketable securities consisting of taxable and tax exempt municipal securities. Cash equivalents are classified as available for sale and valued at amortized cost which approximates fair market value. A hypothetical 10 percent increase in interest rates would not have a material impact on the fair market value of these instruments due to their short maturity and the Company's intention that all securities will be sold within one year. 40 42 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) Year 1999 QUARTER Dec.31, Mar. 31, June 30, Sep. 30, Ended ENDED: 1998 1999 1999 1999 1999 - ------ ------- ------- ------- ------- -------- Total revenues $33,917 $32,910 $36,425 $42,413 $145,665 Gross margin 23,190 21,694 24,730 28,723 98,337 Income from 5,892 6,091 6,340 6,010 24,333 operations Income before 6,595 6,440 6,747 7,378 27,160 income taxes Provision for 2,309 2,146 2,269 2,556 9,280 income taxes Net income 4,286 4,294 4,478 4,822 17,880 Net income per share, diluted $0.21 $ 0.21 $ 0.21 $ 0.22 $ 0.85 Year 1998 QUARTER Dec.31, Mar. 31, June 30, Sep. 30, Ended ENDED: 1997 1998 1998 1998 1998 - ------ ------- ------- ------- ------- -------- Total revenues $25,110 $28,239 $31,250 $35,417 $120,016 Gross margin 17,920 18,980 21,065 24,578 82,543 Income from 4,815 (4,722) 5,176 7,633 12,902 operations Income before 5,564 (4,305) 5,735 7,511 14,504 income taxes Provision for 2,059 1,678 2,052 2,493 8,282 income taxes Net income 3,505 (5,983) 3,683 5,018 6,222 Net income per share, diluted $0.18 $ (0.30) $ 0.18 $ 0.25 $ 0.31 Included in net income for the quarter ended March 1998 is a one-time charge for purchased in-process product technology of $9,172,000 related to the purchase of the A.R.M. Group Inc on February 6, 1998. On October 15, 1999, the Company's Board of Director's approved a 2-for-1 stock split in the form of a dividend of its common stock. All share and per data has been restated to reflect this stock split as though it had occurred at the beginning of the earliest period presented. 41 43 42 ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None PART III ITEM 10. DIRECTORS AND OFFICERS OF THE REGISTRANT The directors and executive officers of the Company as of September 30, 1999 are as follows. Messrs. Drapeau and Fishman are Class III Directors, whose terms expire in 2002. Messrs. Birch and Daniels are Class I Directors, whose terms expire in 2000. Messrs. Sayre and Stanzler are Class II Directors, whose terms expire in 2001. NAME AGE POSITION - ---- --- -------- Norman E. Drapeau, Jr. 39 President and Chief Executive Officer and Director - Class III Robert L. Daniels 57 Executive Chairman of the Board - Class I Paul D. Birch 41 Executive Vice President - Finance and Administration, Chief Financial Officer and Treasurer and Director - Class I William J. Sawyer 53 Executive Vice President - Operations Ted D. Williams 51 Executive Vice President - Worldwide Sales John W. Young 47 Executive Vice President - Research and Development Richard P. Fishman 53 Director - Class III Stephen B. Sayre 48 Director - Class II Alan L. Stanzler 56 Director - Class II NORMAN E. DRAPEAU, JR. joined the Company in 1982 as an applications analyst. Since that time, he has held various 42 44 positions with the Company, including, from 1984 to 1987, that of Manager of Customer Support and from 1989 through 1991, that of Director, Product Marketing. In 1991, Mr. Drapeau was appointed Vice President, Corporate Marketing, in 1992 was appointed Vice President - Americas and in July 1996 was appointed Executive Vice President - Worldwide Sales and Marketing, serving in that capacity until January 1998. In January 1998, Mr. Drapeau was appointed Executive Vice President and Chief Operating Officer and was also elected a director of the Company. In May 1998, Mr. Drapeau was elected President and Chief Executive Officer. PAUL D. BIRCH joined the Company in 1991 as Vice President, Finance, was appointed Vice President, Finance and Administration in 1992 and Executive Vice President - Finance and Administration in 1996. Since 1992 he has been the Chief Financial Officer of the Company, and since 1993 has held the additional office of Treasurer. In May 1998, Mr. Birch was elected a director of the Company. WILLIAM J. SAWYER joined the Company in 1978 as an applications consultant and served in various sales and services positions from 1978 to 1984. Mr. Sawyer was a Vice President of the Company from 1984 to 1990 and Executive Vice President from 1990 until November 1997. In November 1997, Mr. Sawyer left the Company and joined Peritus Software Services, Inc. as Vice President, Operations. Mr. Sawyer rejoined the Company in October 1998 as Executive Vice President of Operations. TED D. WILLIAMS originally joined the Company in 1984 and served as Director, MAXIMO until 1988. From 1988 to 1993, Mr. Williams was President and Chief Operating Officer of Comac Systems Corporation, a software application company. In 1993, Mr. Williams rejoined the Company as Director, Eastern Regional Sales. He was appointed Vice President-North American Sales in 1996 and Vice President-Worldwide Sales in January 1998. In October 1998, Mr. Williams was appointed Executive Vice President-Worldwide Sales. JOHN W. YOUNG originally joined the Company in 1985 and served until 1988 as MAXIMO Product Manager. From 1988 to 1992, Mr. Young was Vice President of Sales of Comac Systems Corporation, a software application company. In 1992 he rejoined the Company as Director of MAXIMO Product Design, was appointed Vice President Research and Development of the Company in 1995 and was appointed Executive Vice President - Research and Development of the Company in 1998. ROBERT L. DANIELS founded the Company in 1968 and has been a director since that time. Mr. Daniels served as Chairman of the Board and Chief Executive Officer from 1968 to 1996 and as President from 1968 to 1995. In May 1998, Mr. Daniels was 43 45 elected executive Chairman of the Board. RICHARD P. FISHMAN was elected as a director in March 1999. Mr. Fishman is currently Senior Vice President at MacAndrews & Forbes Group, Inc., where he is in charge of venture capital investing. From 1995 through 1998, Mr. Fishman served as Managing Director of GeoPartners Research, Inc., a strategy and management consulting firm where he headed the firm's venture capital activities. From 1995 to 1997, Mr. Fishman was Of Counsel at the law firm of Akin, Gump, Strauss, Hauer & Feld L.L.P. Mr. Fishman served as President and Chief Executive Officer of Thinking Machines Corporation from 1993 to 1994 and was a partner at the law firm of Milbank, Tweed, Hadley & McCloy from 1987 until 1993. ALAN L. STANZLER was elected as a director in May 1998. Mr. Stanzler served as a director of the Company from 1992 to 1994, and as Clerk of the Company from 1990 to 1996. Mr. Stanzler is a member of the law firm of Maselan Jones & Stanzler, P.C. From 1995 to 1998, Mr. Stanzler was a member of the law firm of Davis, Malm & D'Agostine, P.C. and from 1978 to 1995 he was a partner in the law firm of Finnegan & Stanzler, P.C. STEPHEN B. SAYRE was elected as a director in September 1998. Mr. Sayre is currently the Senior Vice President of marketing at Lotus Development Corporation, a subsidiary of IBM Corporation. Prior to joining Lotus in 1994, Mr. Sayre was President of Boston Treasury Systems and has held other senior executive level positions with Cullinet Software and Easel Corporation. All directors hold office until the expiration of their respective terms as described above and until their respective successors are duly elected and qualified. Executive officers of the Company are appointed by and serve at the discretion of the Board of Directors. The information concerning the compliance by the Company's officers, directors and 10% shareholders with Section 16(a) of the Securities Exchange Act of 1934 is incorporated by reference to the information contained in the Company's definitive Proxy Statement for its 1999 Annual Meeting of Stockholders under the heading "Section 16(a) Beneficial Ownership Reporting Compliance" to be filed, pursuant to Regulation 14A, within 120 days after the end of the Company's fiscal year ended September 30, 1999. (ITEMS 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 1999 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, 1999. 44 46 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......................... 50 Consolidated Balance Sheets - September 30, 1999 and 1998............................. 51 Consolidated Statements of Operations - Years Ended September 30, 1999, 1998 and 1997........... 52 Consolidated Statements of Cash Flows - Years Ended September 30, 1999, 1998 and 1997........... 53 Consolidated Statements of Stockholders' Equity - Years Ended September 30, 1999, 1998 and 1997........... 54 Notes to Consolidated Financial Statements................ 55 2. Financial Statement Schedules. SCHEDULE PAGE -------- ---- II Valuation and Qualifying Accounts........................ 73 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 10.5 comprise the Company's management contracts, compensatory plans or compensatory arrangements required to be identified pursuant to Item 14(a) of Form 10-K. 45 47 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 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 File No. 0-23852 and incorporated herein by reference) 3.3 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 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, 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 references) 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, an 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, 46 48 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) 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 1999 Equity Incentive Plan (included as Exhibit 10.1 to the Company's Quarterly Report on Form 10-Q for the quarter ended March 31, 1999, Commission File No. 0-23852 and incorporated herein by reference) 10.2 Amended and Restated 1994 Incentive and Nonqualified Stock Option Plan (included as Exhibit 10.2 to the Company's Quarterly Report on Form 10-Q for the quarter ended March 31, 1999, Commission File No. 0-23852 and incorporated herein by reference) 10.3 Stock Purchase Agreement between W.W. Grainger, Inc. and the Company dated April 20, 1999 (included as Exhibit 10.3 to the Company's Quarterly Report on Form 10-Q for the quarter ended June 30, 1999, Commission File No. 0-23852 and incorporated herein by reference) 10.4 Stock Option Agreement between W.W. Grainger, Inc. and the Company dated April 20, 1999 (included as Exhibit 10.4 to the Company's Quarterly Report on Form 10-Q for the quarter ended June 30, 1999, Commission File No. 0-23852 and incorporated herein by reference) 10.5 Registration Rights Agreement between W.W. Grainger, Inc. and the Company dated April 20, 1999 (included as Exhibit 10.5 to the Company's Quarterly report on Form 10-Q 47 49 for the quarter ended June 30, 1999, Commission File No. 0-23852 and incorporated herein by reference) 21. Subsidiaries of the registrant 21.1 Subsidiaries of the Company 23. Consents of independent accountants 23.1 Consent of PricewaterhouseCoopers LLP 27. Financial Data Schedule 27.1 Financial Data Schedule (b) Reports on Form 8-K During the three months ended September 30, 1999, 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. 48 50 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 29, 1999 PROJECT SOFTWARE & DEVELOPMENT, INC. ------------------------------------ By: /s/ Norman E. Drapeau, Jr. -------------------------------- Norman E. Drapeau, Jr. 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/ Norman E. Drapeau, Jr. President and Chief December 29, 1999 - ------------------------- Executive Officer Norman E. Drapeau, Jr. (Principal Executive Officer) Executive Chairman December 29, 1999 - ------------------------- of the Board Robert L. Daniels /s/ Paul D. Birch Executive Vice December 29, 1999 - ------------------------- President, Chief Paul D. Birch Financial Officer and Treasurer (Principal Financial and Accounting Officer), Director /s/ Richard P. Fishman Director December 29, 1999 - ------------------------- Richard P. Fishman /s/ Stephen B. Sayre Director December 29, 1999 - ------------------------- Stephen B. Sayre /s/ Alan L. Stanzler Director December 29, 1999 - ------------------------- Alan L. Stanzler 49 51 REPORT OF INDEPENDENT ACCOUNTANTS To the Board of Directors and Stockholders of Project Software & Development, Inc.: In our opinion, the consolidated financial statements listed in the index appearing under Item 14(a)(1) present fairly, in all material respects, the financial position of Project Software & Development, Inc. and its subsidiaries at September 30, 1999 and 1998, and the results of their operations and their cash flows for each of the three years in the period ended September 30, 1999 in conformity with accounting principles generally accepted in the United States. In addition, in our opinion, the financial statement schedule listed in the index appearing under Item 14(a)(2) presents fairly, in all material respects, the information set forth therein when read in conjunction with the related consolidated financial statements. 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 financial statement schedule based on our audits. We conducted our audits of these statements in accordance with auditing standards generally accepted in the United States, which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for the opinion expressed above. PricewaterhouseCoopers LLP Boston, Massachusetts November 3, 1999, except for Note O, which is dated December 15, 1999 50 52 PROJECT SOFTWARE & DEVELOPMENT, INC. CONSOLIDATED BALANCE SHEETS ASSETS September 30, September 30, ------------- ------------- 1999 1998 ---- ---- (IN THOUSANDS,EXCEPT SHARE DATA) Current assets: Cash and cash equivalents $ 59,903 $ 28,454 Marketable securities 30,920 38,922 Accounts receivable, trade, less allowance for doubtful accounts of $2,867 and $2,614 at September 30, 1999 and 1998, respectively 38,736 30,658 Prepaid expenses 3,919 2,799 Other current assets 1,171 1,128 Deferred income taxes 2,017 1,697 -------- -------- Total current assets 136,666 103,658 -------- -------- Marketable securities 7,413 -- Property and equipment, net 12,055 8,823 Computer software costs, net -- 248 Intangible assets, net 1,509 1,082 Other assets 406 38 Deferred income taxes 984 671 -------- -------- Total assets $159,033 $114,520 ======== ======== LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable and accrued expenses $ 12,172 $ 8,189 Accrued compensation 8,429 5,800 Income taxes payable 4,227 4,063 Deferred revenue 16,580 12,651 Deferred income taxes 187 287 -------- -------- Total current liabilities 41,595 30,990 -------- -------- Deferred income taxes -- 103 Deferred rent 146 144 Deferred revenue 92 615 Commitments and contingencies Equity in minority interest 44 44 Stockholders' equity Preferred stock, $.01 par value;1,000,000 authorized, none issued and outstanding Common stock, $.01 par value;50,000,000 authorized; 21,301,674 and 19,964,460 issued at September 30, 1999 and 1998, respectively 213 200 Additional paid-in capital 67,418 50,310 Retained earnings 50,210 32,330 Accumulated other comprehensive income (685) (216) -------- -------- Total stockholders' equity 117,156 82,624 -------- -------- Total liabilities and stockholders' equity $159,033 $114,520 ======== ======== The accompanying notes are an integral part of the consolidated financial statements. 51 53 PROJECT SOFTWARE & DEVELOPMENT, INC. CONSOLIDATED STATEMENTS OF OPERATIONS YEAR ENDED SEPTEMBER 30, ---------------------------------- 1999 1998 1997 -------- -------- ------- (IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA) Revenues: Software $ 62,240 $ 54,007 $50,393 Support and services 83,425 66,009 46,307 -------- -------- ------- Total revenues 145,665 120,016 96,700 -------- -------- ------- Cost of revenues: Software 5,018 4,537 2,547 Support and services 42,310 32,936 24,025 -------- -------- ------- Total cost of revenues 47,328 37,473 26,572 -------- -------- ------- Gross margin 98,337 82,543 70,128 Operating expenses: Sales and marketing 47,417 37,418 32,985 Product development 14,959 13,247 11,387 General and administrative 11,628 9,804 9,485 Charge for purchased in-process product development -- 9,172 -- -------- -------- ------- Total operating expenses 74,004 69,641 53,857 -------- -------- ------- Income from operations 24,333 12,902 16,271 Interest income 3,052 2,411 2,409 Interest expense (50) (389) (24) Other income (expense), net (175) (376) (529) Loss on minority interest -- (44) -- -------- -------- ------- Income before income taxes 27,160 14,504 18,127 Provision for income taxes 9,280 8,282 6,557 -------- -------- ------- Net income $ 17,880 $ 6,222 $ 11,570 ======== ======== ======== Net income per share, basic $ 0.87 $ 0.32 $ 0.59 -------- -------- ------- Net income per share, diluted $ 0.85 $ 0.31 $ 0.58 -------- -------- ------- Shares used to calculate net income per share Basic 20,459,023 19,864,524 19,574,288 Diluted 21,093,715 20,156,246 20,125,536 The accompanying notes are an integral part of the consolidated financial statements. 52 54 PROJECT SOFTWARE & DEVELOPMENT, INC CONSOLIDATED STATEMENTS OF CASH FLOWS YEAR ENDED SEPTEMBER 30, 1999 1998 1997 ------- ------- -------- (IN THOUSANDS) Cash flows from operating activities: Net income $17,880 $ 6,222 $ 11,570 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 4,255 4,392 3,358 Loss on sale and disposal of property and equipment 32 151 131 Amortization of discount on marketable securities 188 (563) 409 Deferred rent 2 132 (73) Deferred income taxes (857) (355) (238) Charge for purchased in-process product development -- 9,036 -- Changes in operating assets and liabilities, net of effect of acquisitions: Accounts receivable (7,860) (6,300) 2,824 Prepaid expenses (1,132) (891) (480) Other assets (1,080) 134 (1,164) Accounts payable 3,276 (2,970) 1,805 Accrued compensation 2,631 1,354 (532) Income taxes payable 252 325 3,477 Deferred revenue 3,477 3,403 627 ------- ------- -------- Net cash provided by operating activities 21,064 14,070 21,714 ------- ------- -------- Cash flows from investing activities: Acquisitions of businesses, net of cash 397 (6,962) -- Acquisitions of property and equipment (6,824) (4,172) (5,390) Additions to computer software costs -- (1,284) -- Purchases of marketable securities (41,022) (90,433) (151,375) Sales of marketable securities 41,300 90,234 149,540 ------- ------- -------- Net cash used in investing activities (6,149) (12,617) (7,225) ------- ------- -------- Cash flows from financing activities: Payments on bank loans -- (460) -- Payments of debenture -- (1,032) -- Proceeds from issuance of common stock, net of issuance costs 13,546 -- -- Proceeds from exercise of stock options including related tax benefit 3,319 1,791 2,841 ------- ------- -------- Net cash provided by financing activities 16,865 299 2,841 ------- ------- -------- Effect of exchange rate changes on cash (331) 738 (463) ------- ------- -------- Net increase/(decrease) in cash and cash equivalents 31,449 2,490 16,867 Cash and cash equivalents, beginning of year 28,454 25,964 9,097 ------- ------- -------- Cash and cash equivalents, end of year $59,903 $28,454 $ 25,964 ======= ======= ======== The accompanying notes are an integral part of the consolidated financial statements. 53 55 PROJECT SOFTWARE & DEVELOPMENT, INC. CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY FOR THE YEARS ENDED SEPTEMBER 30, 1999, 1998 AND 1997
Accumulated Other Comprehensive Income ------------------------ Net Common Stock Unrealized --------------------- Additional Cumulative Gain(Loss) Shares Paid-in Retained Translation on Comprehensive (in thousands, except share data) Issued Amount Capital Earnings Adjustment Marketable Income Securities - ------------------------------------------------------------------------------------------------------------------------------------ Balance at September 30, 1996 ........ 19,405,098 194 $45,227 $14,538 $ 49 $154 Stock options exercised and related tax benefit, employee stock purchases. 307,850 4 2,837 Net income .................. 11,570 $11,570 Translation adjustment ...... (678) (678) Net unrealized gain on marketable securities.... 75 75 Comprehensive income......... 10,967 - ------------------------------------------------------------------------------------------------------------------------------------ Balance at September 30, 1997 ........ 19,712,948 198 48,064 26,108 (629) 229 Stock options exercised and related tax benefit, employee stock purchases. 196,596 2 1,789 Acquisition, net of merger expenses.......... 54,916 457 Net income ................. 6,222 6,222 Translation adjustment ...... 323 323 Net unrealized gain on marketable securities.... (139) (139) Comprehensive income......... 6,406 - ------------------------------------------------------------------------------------------------------------------------------------ Balance at September 30, 1998 ........ 19,964,460 200 50,310 32,330 (306) 90 Stock options exercised and related tax benefit, employee stock purchases. 317,214 3 3,316 Acquisition, net of merger expenses........ 20,000 256 Purchases of Shares by W.W. Grainger, Inc., net of legal expenses... 1,000,000 10 13,536 Net income ................. 17,880 17,880 Translation adjustment ...... (346) (346) Net unrealized loss on marketable securities.... (123) (123) Comprehensive income......... $17,411 - ------------------------------------------------------------------------------------------------------------------------------------ Balance at September 30, 1999 ..... 21,301,674 $213 $67,418 $50,210 $(652) $ (33) - ------------------------------------------------------------------------------------------------------------------------------------
Total Stockholders' Equity - ---------------------------------------------- Balance at September 30, 1996 ........ $ 60,162 Stock options exercised and related tax benefit, employee stock purchases. 2,841 Net income .................. 11,570 Translation adjustment ...... (678) Net unrealized gain on marketable securities.... 75 Comprehensive income......... - ---------------------------------------------- Balance at September 30, 1997 ........ 73,970 Stock options exercised and related tax benefit, employee stock purchases. 1,791 Acquisition, net of merger expenses.......... 457 Net income ................. 6,222 Translation adjustment ...... 323 Net unrealized gain on marketable securities.... (139) Comprehensive income......... - ---------------------------------------------- Balance at September 30, 1998 ........ 82,624 Stock options exercised and related tax benefit, employee stock purchases. 3,319 Acquisition, net of merger expenses........ 256 Purchases of Shares by W.W. Grainger, Inc., net of legal expenses... 13,546 Net income ................. 17,880 Translation adjustment ...... (346) Net unrealized loss on marketable securities.... (123) Comprehensive income......... - ---------------------------------------------- Balance at September 30, 1999 ..... $117,156 - ----------------------------------------------
The accompanying notes are an integral part of the consolidated financial statements. 54 56 PROJECT SOFTWARE & DEVELOPMENT, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS A. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: Nature of Business The Company develops, markets, sells and supports enterprise asset maintenance software used by businesses, government agencies, and other organizations to assist them in maintaining high-value capital assets such as, plants, facilities and production equipment. The Company also provides an Internet-based business-to-business e-Commerce network and set of desktop requisition and online procurement software products that enable businesses to engage in electronic commerce. 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. Minority ownership interests greater than or equal to 20% and less than 50% are accounted for by the equity method. Certain prior year financial statement items have been reclassified to the current year's format. 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 amount 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. Cash and Cash Equivalents The Company considers all highly liquid instruments purchased with original 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 fair market value. Concentration of Credit Risk Financial instruments which potentially subject the Company to concentration of credit risk consist primarily of temporary cash investments and accounts receivable. Credit risk on accounts receivable 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 The Company's marketable securities are classified as available-for-sale and are stated at their fair value. The fair 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 and is included in other comprehensive income. 55 57 PROJECT SOFTWARE & DEVELOPMENT, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED Computer Software Costs Computer software costs consist of internally developed 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 1999, 1998, and 1997 was $248,000, $879,000 and $359,000, respectively. Goodwill Goodwill represents the excess of the cost of acquired businesses over the fair value of their net tangible and identified intangible assets. Goodwill is evaluated at each balance sheet date to determine whether any potential impairment exists. Goodwill is generally amortized on a straight-line basis over the estimated useful life, usually five years. 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. 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. 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 dilutive potential common shares in periods in which they have a dilutive effect. All historical earnings per share amounts have been restated to reflect a two-for-one stock split. Basic and diluted earnings per share are calculated as follows:
FISCAL YEARS ENDED BASIC EPS 09/30/99 09/30/98 09/30/97 - -------------------------------------------------------------------------------- Net income $17,879,718 $ 6,222,327 $11,570,383 Weighted average common shares outstanding 20,459,023 19,864,524 19,574,288 Basic income per share $ 0.87 $ 0.32 $ 0.59 DILUTED EPS - -------------------------------------------------------------------------------- Net income $17,879,718 $ 6,222,327 $11,570,383 Weighted average common shares outstanding 20,459,023 19,864,524 19,574,288 Common stock equivalents 634,692 291,722 551,248 ----------- ----------- ----------- Total diluted shares 21,093,715 20,156,246 20,125,536 Diluted income per share $ 0.85 $ 0.31 $ 0.58
Income Taxes The Company accounts for income taxes under 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 56 58 PROJECT SOFTWARE & DEVELOPMENT, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED against net deferred tax assets if, based upon the available evidence, it is more likely than not that some or all of the deferred tax assets will not be realized. The Company has not provided for the U.S. income tax on earnings of its foreign subsidiaries as it considers certain of these earnings are intended to be permanently reinvested. At September 30, 1999, the undistributed earnings of foreign subsidiaries were $ 2,178,000. Revenue Recognition The Company licenses its software products under noncancellable license agreements and provides services including training, installation, consulting, and maintenance, consisting of product support services and periodic updates. License fee revenues are generally recognized upon contract execution and shipment, collection of the resulting receivable is deemed probable and the fees are fixed and determinable. The revenue from maintenance contracts is recognized ratably over the term of the agreement, generally one year. Revenues from services include implementation fees, consulting and training fees, and subscription fees for the Company's electronic commerce product. Subscription fees are recognized as transactions are processed. Implementation, consulting and training fees are recognized under both time and materials or when services are performed. Deferred Revenue Revenue on all software license transactions in which there are significant outstanding obligations is deferred and recognized once such obligations are fulfilled. Deferred revenue also includes maintenance contracts billed in advance. 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 $571,000, $604,000 and $476,000 for 1999, 1998, and 1997, respectively. Comprehensive Income The Company reports comprehensive income in accordance with Statement of Financial Accounting Standards No. 130, "Reporting Comprehensive Income." Accumulated other Comprehensive Income/(Loss) is included in the Shareholder's Equity section of the balance sheet. Amounts are reported net of tax and include gains and losses on foreign currency translation adjustments and unrealized gains and losses on marketable securities. Accounting Standards 57 59 PROJECT SOFTWARE & DEVELOPMENT, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED Statement of Financial Accounting Standards No. 133, "Accounting for Derivative Instruments and Hedging Activities" (SFAS 133) was issued in June 1998. The effective date of this Standard was modified by Statement of Financial Accounting Standards No. 137, "Accounting for Derivative Instruments and Hedging Activities - Deferral of the Effective Date of FASB Statement No. 133" and is effective for fiscal quarters of fiscal years beginning after June 15, 2000, with earlier adoption encouraged. The Company will adopt SFAS 133 in the fiscal year ended September 30, 2001. B. INCOME TAXES: The components of income before income taxes consist of the following:
Year Ended September 30, --------------------------------------- (in thousands) 1999 1998 1997 ------- ------- ------- Income before income taxes: United States........................................... $24,725 $21,935 $16,098 Foreign................................................. 2,435 (7,431) 2,029 ------- ------- ------- $27,160 $14,504 $18,127 ======= ======= ======= The provision for income taxes consists of: Current taxes: Federal................................................. 7,466 6,354 4,970 State................................................... 1,002 897 843 Foreign................................................. 1,103 1,129 887 Foreign withholding taxes............................... 527 266 77 ------- ------- ------- $10,098 $ 8,646 $ 6,777 ======= ======= ======= Deferred taxes: Federal................................................. (652) (124) (235) State................................................... (75) (41) (26) Foreign................................................. (91) (199) 41 ------- ------- ------- (818) (364) (220) ------- ------- ------- Total............................................... $ 9,280 $ 8,282 $ 6,557 ======= ======= =======
58 60 PROJECT SOFTWARE & DEVELOPMENT, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED The reconciliation of the Company's income tax provision to the statutory federal tax rate is as follows:
Year Ended September 30, -------------------------------------- 1999 1998 1997 ---- ---- ---- Statutory federal tax rate................................... 35.0% 35.0% 35.0% FSC benefit.................................................. (2.6) (2.5) (1.3) State taxes, net of federal tax benefit...................... 2.6 2.9 3.0 Foreign rate differential.................................... 0.10 0.30 0.40 R&D credit................................................... (1.3) (1.3) (0.7) Exempt interest.............................................. (0.9) (1.3) (1.4) Other........................................................ 1.3 1.9 1.2 ---- ---- ---- Effective tax rate before purchased in-process development.................................... 34.2% 35.0% 36.2% Non-deductible charge for purchased in-process development................................... -- 22.1 -- ---- ---- ---- Effective tax rate........................................... 34.2% 57.1% 36.2% ==== ==== ==== The components of the deferred tax provision are: Year Ended September 30, ---------------------------------------- (in thousands) 1999 1998 1997 ------ ------ ------ Depreciation................................................. (90) $ 82 $(340) Allowance for doubtful accounts.............................. (25) (87) (45) Software capitalization...................................... (96) 96 (141) Deferred revenue............................................. (111) (96) (135) Deferred rent................................................ 2 (52) 29 Deferred merchandise......................................... -- -- 36 Package design............................................... (9) (5) (4) Accrued vacation............................................. (50) (44) 35 Net operating losses......................................... (57) -- 585 Goodwill..................................................... (36) (85) -- Intangibles.................................................. (14) -- -- Translation loss............................................. (107) (116) (191) Foreign tax credit........................................... (250) -- -- Other........................................................ 25 (57) (49) ----- ----- ----- $(818) $(364) $(220) ===== ===== =====
59 61 ' PROJECT SOFTWARE & DEVELOPMENT, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED The components of the deferred tax assets and liabilities are as follows: Year Ended September 30, ------------------------- (in thousands) 1999 1998 ------ ------ Deferred tax assets: Deferred revenue............................ $ 503 $ 392 Deferred rent............................... 54 56 Allowance for doubtful accounts............. 790 765 Accrued vacation............................ 160 110 Depreciation................................ 347 257 Package design.............................. 73 64 Amortized software.......................... 22 22 Amortization of intangibles................. 14 -- Other reserves.............................. 117 155 Goodwill.................................... 239 203 Sec. 481 cash to accrual adjustment......... -- 94 Translation loss............................ 432 307 Net operating loss carryforwards............ 806 881 Foreign tax credit carryforward/carryback... 250 -- Valuation allowance......................... (806) (938) ------ ------ $3,001 $2,368 ====== ====== Deferred tax liabilities: Software Capitalization..................... $ -- $ 96 Sec. 475 Account Receivable Adjustment...... 187 281 Other Liabilities........................... -- 13 ------ ------ $ 187 $ 390 ------ ------ Net deferred tax assets.......................... $2,814 $1,978 ====== ====== At September 30, 1999, the Company had foreign tax credit carryforwards of approximately $37,000 which expire in fiscal year 2003. At September 30, 1999, the Company had foreign net operating loss carryforwards of approximately $1,687,000 which will generally expire as follows: $26,000 in fiscal year 2000, $74,000 in fiscal year 2001, $293,000 in fiscal year 2002, $539,000 in fiscal year 2003, $576,000 in fiscal year 2004, $70,000 in fiscal year 2005 and $109,000 in fiscal year 2007. The valuation allowance represents foreign net operating loss carryforwards which are not expected to be realized. C. ACQUISITIONS: On December 10, 1998, the Company acquired the shares and assumed net liabilities of its Italian distributor, Work Management Consulting, s.r.l, for the sum of $411,000. The transaction was accounted for using the purchase method of accounting. The resulting goodwill is being 60 62 PROJECT SOFTWARE & DEVELOPMENT, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED amortized on a straight-line basis over five years. This acquisition was deemed to be immaterial for presentation of pro forma information. On February 6, 1998, the Company acquired the stock of A.R.M. Group Inc., Ontario, Canada for the sum of $10,281,000 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. The Company recorded the acquisition using the purchase method of accounting with $9,172,000 of the purchase price allocated to in-process product development and charged to the consolidated statement of operations on March 31, 1998, $452,000 allocated to purchased technology, and $657,000 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 have been included in the consolidated statement of operations from the date of acquisition. D. MARKETABLE SECURITIES: The Company classifies its marketable securities as "available for sale" and carries them at aggregate fair value. Unrealized gains and losses are included as a component of stockholders' equity, net of tax effect. Realized gains and losses are determined based on the specific identified cost of the securities. The marketable securities have various contractual maturities through 2017. Dividend and interest income, including amortization of the premium and discount arising at acquisition, are included in other income. The pre-tax unrealized holding gains and (losses) for September 30, 1999 were $11,000 and $(62,000), respectively. The pre-tax unrealized holding gains and (losses) for September 30, 1998 were $104,000 and $(14,000), respectively.
Year Ended September 30, 1999 ----------------------------- Amortized Fair Market (in thousands) Cost Value ------- ------- Current: Securities with maturity date of less than one year: U.S. Government Securities.............................. $17,248 $17,226 Tax exempt municipal securities......................... 13,705 13,694 ------- ------- 30,953 30,920 ------- ------- Noncurrent: Securities with maturity date greater than one year: U.S. Government Securities.............................. 884 884 Tax exempt municipal securities......................... 6,548 6,529 ------- ------- 7,432 7,413 ------- ------- Total............................................... $38,385 $38,333 ======= =======
61 63 PROJECT SOFTWARE & DEVELOPMENT, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
Year Ended September 30, 1998 ----------------------------- Amortized Fair Market (in thousands) Cost Value ------- ------- Securities with maturity date of less than one year: U.S. Government Securities.............................. $20,612 $20,688 Tax exempt municipal securities......................... 18,220 18,234 ------- ------- Total....................................... $38,832 $38,922 ======= ======= E. PREPAID EXPENSES: A summary of prepaid expenses consists of the following: Year Ended September 30, ------------------------- (in thousands) 1999 1998 ------ ------ Prepaid insurance............................................ $ 204 $ 73 Prepaid rent................................................. 452 228 Prepaid royalties............................................ 1,320 1,500 Prepaid expenses-other....................................... 1,943 998 ------ ------ $3,919 $2,799 ====== ======
F. PROPERTY AND EQUIPMENT: Property and equipment are stated at cost and consist of the following:
Year Ended September 30, -------------------------- (in thousands) 1999 1998 ------- ------- Computer equipment and software.............................. $16,055 $10,560 Vehicles..................................................... 119 143 Furniture and fixtures....................................... 5,576 5,305 Leasehold improvements....................................... 3,051 2,866 ------- ------- 24,801 18,874 Less accumulated depreciation and amortization............... (12,746) (10,051) ------- ------- $12,055 $ 8,823 ======= =======
Depreciation and amortization expense was $3,702,000, $3,300,000, and $2,577,000 for 1999, 1998 and 1997, respectively. 62 64 PROJECT SOFTWARE & DEVELOPMENT, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED G. INTANGIBLE ASSETS: Intangible assets consist of the following:
Year Ended September 30, -------------------------- (in thousands) 1999 1998 ------- ------- Goodwill..................................................... $2,687 $2,296 Customer lists............................................... 411 -- Other intangible assets...................................... 100 -- ------ ------ 3,198 2,296 Less accumulated amortization................................ (1,689) (1,214) ------ ------ $1,509 $1,082 ====== ======
Amortization expense was $475,000, $365,000 and $421,000 for 1999, 1998 and 1997, respectively. H. ACCRUED COMPENSATION: A summary of accrued compensation consists of the following:
Year Ended September 30, -------------------------- (in thousands) 1999 1998 ------- ------- Accrued bonus................................................ $1,444 $ 244 Accrued 401(k) Company contribution.......................... 322 217 Accrued payroll.............................................. 736 700 Accrued sales commissions.................................... 5,286 4,012 Accrued vacation pay......................................... 641 627 ------ ------ $8,429 $5,800 ====== ======
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. The aggregated rent expense under these leases was $4,772,000, $4,272,000, and $3,780,000 for 1999, 1998 and 1997, respectively. 63 65 PROJECT SOFTWARE & DEVELOPMENT, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED The operating leases provide for minimum aggregate future rentals as of September 30, 1999 as follows: (in thousands) 2000............................... $3,078 2001............................... 2,757 2002............................... 1,871 2003............................... 662 2004 and thereafter................ 1,034 ------ $9,402 ====== At September 30, 1999, the Company is also obligated to pay $364,000 in fiscal year 2000 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 1999, 1998, and 1997 were $340,000, $329,000, and $268,000, respectively. 1994 Incentive and Nonqualified Stock Option Plans On March 10, 1994, the Board of Directors of the Company adopted the 1994 Incentive and Nonqualified Stock Option Plan (the "1994 Option Plan") that provided for the grant of nonqualified and incentive stock options to directors and employees. On January 25, 1996, the Board of Directors of the Company voted to increase the number of shares of Common Stock that may be issued from 1,800,000 to 3,600,000. During the last quarter of 1997, the Company's Board of Directors approved a stock option 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 an option covering one share of the Company's Common Stock. Each employee had to elect to cancel all or none of the 64 66 PROJECT SOFTWARE & DEVELOPMENT, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED 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. 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 four years, commencing on December 31, 1994. On March 4, 1999, the Board of Directors of the Company elected to terminate the 1994 Option Plan upon the adoption of the 1999 Equity Incentive Plan (the "1999 Plan"). The stockholders of the Company, on March 24, 1999, approved amendments to the vesting and transferability of options granted to outside directors under the 1994 Option Plan. 1999 Equity Incentive Plan On March 4, 1999, the Company's stockholders approved and the Board of Directors of the Company adopted the 1999 Equity Incentive Plan (the "1999 Plan") that provided for the grant of incentive stock options, non statutory stock options, stock bonuses, rights to purchase restricted stock, stock appreciation rights and other awards based upon the Company's common stock. Up to 1,850,000 shares of Common Stock (subject to adjustment upon certain changes in the capitalization of the Company) may be issued pursuant to grants awarded under the 1999 Plan. Stock option activity is summarized as follows: NO. OF SHARES PRICE PER SHARE ------------- --------------- Outstanding shares at September 30, 1996 1,834,808 $ 2.84 - $15.50 1997 - ---- Granted 1,096,196 $10.56 - $20.57 Canceled (1,131,996) $ 2.84 - $21.32 Exercised (291,070) $ 2.84 - $11.88 Outstanding at September 30, 1997 1,507,938 $ 2.84 - $20.57 Exercisable at September 30, 1997 519,576 $ 2.84 - $15.50 NO. OF SHARES PRICE PER SHARE 1998 ------------- --------------- - ---- Granted 700,400 $ 6.81 - $13.25 Canceled (477,362) $ 2.84 - $15.50 Exercised (221,508) $ 2.84 - $11.88 Outstanding at September 30, 1998 1,509,468 $ 2.84 - $21.32 Exercisable at September 30, 1998 591,070 $ 2.84 - $21.32 1999 - ---- Granted 1,061,000 $ 9.06 - $21.88 Canceled (129,954) $ 9.00 - $15.50 Exercised (274,478) $ 2.84 - $20.57 Outstanding at September 30, 1999 2,166,036 $ 2.84 - $21.88 Exercisable at September 30, 1999 671,400 $ 2.84 - $21.32 65 67 PROJECT SOFTWARE & DEVELOPMENT, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED The following table summarizes information about stock options outstanding at September 30, 1999:
Options Outstanding Options Exercisable - ------------------------------------------------------------------------- -------------------------------- Number Weighted-Avg Outstanding Remaining Number Range of As of Contractual Weighted-Avg Exercisable Weighted-Avg Exercise Prices 9/30/99 Life (years) Exercise Price As of 9/30/99 Exercise Price - --------------- --------- ------------ -------------- ------------- -------------- $ 2.84 - $ 3.17 124,150 4.6 $ 2.89 124,150 $ 2.89 $ 6.82 - $ 9.82 1,107,404 8.4 $ 9.08 175,154 $ 8.92 $10.57 - $15.50 885,482 7.6 $12.31 347,596 $11.95 $16.75 - $21.88 49,000 6.0 $20.35 24,500 $19.34 --------- ------- $ 2.84 - $21.88 2,166,036 7.8 $10.30 671,400 $ 9.75 ========= =======
The Company complies with the pro forma disclosure requirements of Statement of Financial Accounting Standards Board No. 123. "Accounting for Stock-Based Compensation" (SFAS 123). 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, ------------------------------------ 1999 1998 1997 ---- ---- ---- Expected life (in years) 3.49 3.25 3.78 Volatility 76% 70% 75% Risk-free interest rate 4.40% 5.63% 6.10% Dividend yield 0% 0% 0% 66 68 PROJECT SOFTWARE & DEVELOPMENT, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED 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, -------------------------------- 1999 1998 1997 ------- ------ ------- (in thousands, except per share amounts) Net income As reported...................... $17,880 $6,222 $11,570 Pro forma $14,644 $5,252 $10,443 Net income per share, diluted As reported...................... $ 0.85 $ 0.31 $ 0.58 Pro forma $ 0.70 $ 0.26 $ 0.52 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. There are 278,754 options outstanding related to shares granted prior to the effective date of SFAS 123. Under SFAS 123, the weighted-average estimated fair value of options granted during fiscal 1999, 1998, and 1997 were $4.25, $3.29 and $3.88 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 450,000 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 1999, employees purchased 42,736 shares at a price of $8.85 and $12.09 for the offering periods ended November 30, 1998 and May 31, 1999, respectively. Approximately 137 employees participated in the plan during the fiscal year ended 1999. Total shares purchased in 1998 and 1997 were 48,654 and 16,780, respectively. 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. In January 1998, the Board of Directors of the Company adopted a stockholder rights plan by declaring a dividend distribution of one preferred stock purchase right (one "Right") on each share of the Company's Common Stock outstanding on January 27, 1998 or, in certain circumstances, 67 69 PROJECT SOFTWARE & DEVELOPMENT, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED issued thereafter. Initially, the Rights are not exercisable, not represented by separate Right certificates and do not trade separately from the Company's Common Stock. Ten days after a tender offer or acquisition of 15% or more of the Company's common stock, each right may be exercised for $140 ("Exercise Price") to purchase one one-thousand of one share of the Company's Series A Junior Participating Preferred Stock. Each one one-thousandth of each share of Series A Junior Participating Preferred Stock will generally be afforded economic rights similar to one share of the Company's common stock. In addition after such rights are triggered, each Right entitles the holder to purchase common stock of the Company with a fair value of twice the Exercise Price or, in certain circumstances, securities of the acquiring company for the Exercise price. Each Right expires in January 2008 and, during specified periods, the Company may redeem or exchange each Right for $.01 or one share of common stock, respectively. The Rights Agreement has been filed by the Company with the Securities and Exchange Commission as an exhibit to a Registration Statement on Form 8-A dated February 2, 1998. Stockholders are urged to review the Rights Agreement for a complete understanding of the Rights Plan. The Rights Plan, while providing the Board of Directors with flexibility in connection with possible acquisitions and deterring unfair or coercive takeover tactics, could have the effect of making it more difficult for a third party to acquire, or of discouraging a third party from acquiring, beneficial ownership of 15% or more of the outstanding shares of the Company's Common Stock. Common Stock In April 1999, the Company signed agreements with W.W. Grainger, Inc., a provider of MRO ("Maintenance, Repair and Operating") supplies and related information in North America. W.W. Grainger, Inc. acquired 1,000,000 shares of the Company's common stock for $14.5 million, less expenses of $954 thousand and acquired a two-year option to purchase 5% of the Company's wholly-owned subsidiary, MRO.com, Inc. for an exercise price of $3.8 million. 68 70 PROJECT SOFTWARE & DEVELOPMENT, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED L. SUPPLEMENTAL CASH FLOW DISCLOSURES: Cash paid for interest and taxes were as follows: Year Ended September 30, --------------------------- (in thousands) 1999 1998 1997 ------ ------ ------ Interest......................... $ 38 $ 389 $ 24 Income taxes..................... 8,657 7,382 2,856 Acquisitions of businesses were as follows: Year Ended September 30, --------------------------- (in thousands) 1999 1998 1997 ---- ------- ---- Fair value of assets acquired.......... $592 $10,280 $-- Fair value of liabilities assumed...... 729 2,751 -- Net cash payments...................... 180 6,400 -- M. SEGMENT INFORMATION, GEOGRAPHIC DATA AND MAJOR CUSTOMERS: The following is presented in accordance with SFAS No. 131, "Disclosures about Segments of an Enterprise and Related Information." The Company has identified two reportable industry segments: the development, marketing and support of asset maintenance management software (MAXIMO) and internet e-Commerce Software products and network services (MRO.com). Asset information by reportable segment is not reported, since the Company does not produce such information internally. The Company also manages these product lines across geographic reportable segments: United States, Other Americas (Canada and Latin America) Europe/Middle East and Africa, and Asia Pacific. The accounting polices for each segment are the same as those described in the summary of significant policies (Note A). All segments are managed by the same board of directors and executive officers. 69 71 PROJECT SOFTWARE & DEVELOPMENT, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED A summary of the Company's operations by product line was as follows:
Year Ended September 30, ------------------------------------- (in thousands) 1999 1998 1997 -------- -------- ------- Revenues: Asset maintenance software and services............ $139,569 $119,156 $96,700 Internet e-Commerce software and services.......... 6,096 860 -- -------- -------- ------- $145,665 $120,016 $96,700 Income (loss) from operations: Asset maintenance software and services............ $ 31,768 $23,282 $16,271 Internet e-Commerce software and services.......... (7,435) (10,232) -- -------- -------- ------- $ 24,333 $ 12,902 $16,271 -------- -------- ------- Depreciation and amortization: Asset maintenance software and services............ $ 4,291 $ 4,042 $ 3,358 Internet e-Commerce software and services.......... 132 502 -- -------- -------- ------- $ 4,423 $ 4,544 $ 3,358
70 72 PROJECT SOFTWARE & DEVELOPMENT, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED A summary of the Company's operations by geographical area was as follows:
Year Ended September 30, ------------------------------------- (in thousands) 1999 1998 1997 -------- -------- -------- Revenues: United States................................................... $ 86,603 $ 70,284 $ 58,254 Other Americas.................................................. 2,594 5,436 5,121 Intercompany revenues........................................... 11,869 14,944 8,291 -------- -------- -------- $101,066 $ 90,664 $ 71,666 -------- -------- -------- Europe/Middle East and Africa................................... 44,757 36,956 28,063 Asia/Pacific 11,711 7,340 5,262 Consolidating eliminations...................................... (11,869) (14,944) (8,291) -------- -------- -------- $145,665 $120,016 $ 96,700 -------- -------- -------- Income from operations: United States................................................... $ 23,782 $ 21,345 $ 15,028 Other Americas.................................................. (1,731) (9,780) 67 Europe/Middle East and Africa................................... 1,655 879 998 Asia/Pacific.................................................... 627 458 178 -------- -------- -------- $ 24,333 $ 12,902 $ 16,271 -------- -------- -------- Long-lived assets: United States................................................... $ 10,510 $ 7,192 $ 5,499 Other Americas.................................................. 316 143 26 Europe/Middle East and Africa 2,577 2,410 2,981 Asia/Pacific.................................................... 567 446 308 -------- -------- -------- $ 13,970 $ 10,191 $ 8,814 -------- -------- --------
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. In 1998, 11% of the Company's operating revenues were derived from U.S. Government agencies and affiliates. No customer accounted for more than 10% of revenue in 1999 or 1997. N. RELATED PARTY TRANSACTIONS: The Company leased its former corporate headquarters pursuant to a 13 year lease which expired on December 31, 1997, from a partnership in which the Executive Chairman of the Board, Founder and Director of the Company has a 1.69% limited partnership interest. Rent payments to the partnership for 1998, and 1997 totaled $285,000 and $1,510,000, respectively. 71 73 O. SUBSEQUENT EVENTS On October 15, 1999, the Company's Board of Director's approved a 2-for-1 stock split in the form of a dividend of its common stock to be paid to all shareholders on December 22, 1999. The stock split was subject to shareholder approval of an increase in the Company's authorized common stock, $0.01 par value per share, from 15,350,000 shares to 50,000,000 shares. Stockholders approved the transaction on December 15, 1999. All share and per share data has been restated to reflect this stock split as though it had occurred at the beginning of the earliest period presented. 72 74 PROJECT SOFTWARE & DEVELOPMENT, INC. SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
COL. A COL. B COL. C COL. D COL. E - --------------------------------------------------------------------------------------------------------- ADDITIONS ------------------------ BALANCE AT CHARGED TO CHARGED TO BALANCE AT BEGINNING COSTS AND OTHER END OF OF PERIOD EXPENSES ACCOUNTS DEDUCTIONS PERIOD ----------------------------------------------------------------- YEAR ENDED SEP. 30, 1999 Allowance for doubtful accounts $2,614,137 $1,137,694 $ 885,080 $2,866,751 YEAR ENDED SEP. 30, 1998 Allowance for doubtful accounts $2,286,574 $1,916,189 $1,588,626 $2,614,137 YEAR ENDED SEP. 30, 1997 Allowance for doubtful accounts $1,954,000 $4,383,293 $4,050,719 $2,286,574
75 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 File No. 0-23852 and incorporated herein by reference) 3.3 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 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 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) 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, 19996, and incorporated herein by reference) 10.1 1999 Equity Incentive Plan, as approved by the stockholders of the Company by written consent dated 76 March 24, 1999 (included as Exhibit 10.1 to the Company's Quarterly Report on Form 10-Q for the quarter ended March 31, 1999, Commission File No. 0-23852 and incorporated herein by reference) 10.2 Amended and Restated 1994 Incentive and Nonqualified Stock Option Plan, as approved by the stockholders of the Company by written consent dated March 24, 1999 (included as Exhibit 10.2 to the Company's Quarterly Report on Form 10-Q for the quarter ended March 31, 1999, Commission File No. 0-23852 and incorporated herein by reference) 10.3 Stock Purchase Agreement between W.W. Grainger, Inc. and the Company dated April 20, 1999 (included as Exhibit 10.3 to the Company's Quarterly Report on Form 10-Q for the quarter ended June 30, 1999, Commission File No. 0-23852 and incorporated herein by reference) 10.4 Stock Option Agreement between W.W. Grainger, Inc. and the Company dated April 20, 1999 (included as Exhibit 10.4 to the Company's Quarterly Report on Form 10-Q for the quarter ended June 30, 1999, Commission File No. 0-23852 and incorporated herein by reference) 10.5 Registration Rights Agreement between W.W. Grainger, Inc. and the Company dated April 20, 1999 (included as Exhibit 10.5 to the Company's Quarterly Report on Form 10-Q for the quarter ended June 30, 1999, Commission File No. 0-23852 and incorporated herein by reference) 21.1 Subsidiaries of the Company 23.1 Consent of PricewaterhouseCoopers LLP 27.1 Financial Data Schedule EX-21.1 2 LIST OF SUBSIDIARIES 1 EXHIBIT 21.1 PROJECT SOFTWARE & DEVELOPMENT, INC. LIST OF SUBSIDIARIES -------------------- Name of Subsidiary Jurisdiction of Ownership - ------------------ Incorporation --------- ------------- PSDI International Delaware (1) Software, Inc. PSDI Security Corporation Massachusetts (1) PSDI International Delaware (2) Holdings, Inc. PSDI Export, Inc. Barbados (2) PSDI (UK) Limited United Kingdom (2) PSDI Canada Limited Canada (2) PSDI France S.A.R.L. France (2) PSDI Australia Pty. Australia (2) Limited PSDI Deutschland, GmbH Germany (2) PSDI Europe Ltd. United Kingdom (2) PSDI Espana S.A. Spain (2) PSDI Benelux NV Netherlands (2) PSDI Norden AB Sweden (2) PSDI Japan K.K. Japan (2) PSDI (Thailand) Limited Thailand (2) PSDI India Private Limited India (2) PSDI Brasil Ltda. Brazil (3) PSDI Hong Kong Limited Hong Kong (2) PSDI Mexico S.A. de C.V. Mexico (3) PSDI Computer Software China (1) Development (Shanghai) Co. Ltd. PSDI Italia s.r.l. Italy (1 & 2) MRO.com, Inc. Delaware (1) MRO.com, Limited United Kingdom (4) MRO.com, Limited Canada (4) MRO.com Pty Limited Australia (4) MRO.com (Asia) Limited Hong Kong (4) (1) All of the outstanding capital stock is owned by Project Software & Development, Inc. 2 (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. (4) All outstanding capital stock is owned by MRO.com, Inc. EX-23.1 3 CONSENT OF PRICEWATERHOUSECOOPERS 1 Exhibit 23.1 CONSENT OF INDEPENDENT ACCOUNTANTS We hereby consent to the incorporation by reference in the registration statements on Form S-8 (File Nos. 33-79074, 33-79142, 33-95774, 33-95780, 333-78883, and 333-3402) for Project Software & Development, Inc. of our report dated November 3, 1999, except for Note O, which is dated December 15, 1999, relating to the consolidated financial statements and financial statement schedule, which appears in this Form 10-K. PricewaterhouseCoopers LLP Boston, Massachusetts December 28, 1999 EX-27 4 FINANCIAL DATA SCHEDULE
5 1,000 U.S. DOLLARS 9-MOS SEP-30-1999 OCT-01-1998 SEP-30-1999 1 59,903 30,920 41,603 2,867 0 136,666 24,801 12,746 159,033 41,595 0 214 0 0 116,942 159,033 62,240 145,665 5,018 47,328 74,004 1,138 50 27,160 9,280 24,333 0 0 0 17,880 0.87 0.85
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