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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
FOR THE FISCAL YEAR ENDED SEPTEMBER 30, 1998
(mark one)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES AND
EXCHANGE ACT OF 1934
For the transition period from _______________ to __________________
Commission File Number 0-23852
PROJECT SOFTWARE & DEVELOPMENT, INC.
(Exact name of registrant as specified in its charter)
MASSACHUSETTS 04-2448516
(State or other jurisdiction of (I.R.S. employer
incorporation or organization) identification number)
100 CROSBY DRIVE, BEDFORD, MASSACHUSETTS 01730
(Address of principal executive offices, including zip code)
(781) 280-2000
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $.01 par value
----------------------------
(Title of class)
----------------
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to the Form 10-K.
As of December 15, 1998, the aggregate market value of the voting stock held by
non-affiliates of the Registrant was approximately $207,959,815 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: 10,023,508 shares of common stock, $.01 par value per share,
as of December 15, 1998.
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:
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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 asset maintenance software with a computer
communications network 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 principal software product, an enterprise-wide client/server asset
maintenance management application is MAXIMO(R). The client/server
version of MAXIMO was first released in February 1991 and has been employed in
production applications for more than seven years. Revenues from licenses of
client/server MAXIMO have grown from $1,406,000 in fiscal year 1991 to
$51,633,000 in fiscal year 1998. In fiscal 1996, the Company introduced a new
suite of MAXIMO client/server products: MAXIMO Enterprise and MAXIMO Workgroup.
MAXIMO Enterprise is intended for the high function, high usage segment of the
maintenance management market. MAXIMO Workgroup is intended for the mid-range
segment of the maintenance management market. On March 1, 1996 the Company
acquired Maintenance Automation Corporation ("MAC"). The product acquired as a
result of the acquisition of MAC, Chief Advantage, was renamed MAXIMO ADvantage.
MAXIMO ADvantage is intended for the low end maintenance market.
In fiscal 1998, the Company enhanced its previous product offerings with
industry specific focused applications. The new product offerings include
MAXIMO for Industry, MAXIMO for Facilities, and MAXIMO Enterprise for
Transportation. Additional Enterprise modules for Utilities, Energy, and
Process will be released in the first quarter of fiscal 1999.
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 and emerged as a leader in shared inventory networks
over which distributors, manufacturers and purchasers of Maintenance Repair
Parts and Operating ("MRO") supplies conduct their business.
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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 aids in designing preventive
maintenance procedures to reduce future equipment failure rates and downtime.
MAXIMO incorporates an intuitive graphical user interface based on Microsoft
Windows, operates on a variety of commonly used server hardware platforms and
network operating systems, and uses leading commercial SQL database management
systems, including Oracle and Microsoft SQL Server. MAXIMO also offers the
capability of fine tuning applications to suit specific work processes and
mobile applications for gathering and downloading data. MAXIMO's open
architecture supports connectivity to financial and other applications.
MAXIMO runs on personal computers and provides the maintenance worker with an
intuitive, easily mastered graphical user interface employing mouse-driven
"point and click" commands, pull-down menus, icon bars and other standard
features of Windows. MAXIMO permits the use of touch screens, bar code readers
and other specialized input devices, providing for flexible and efficient data
collection and input. An application launching feature provides access from
within any MAXIMO module to other MAXIMO modules, as well as to word processing,
spreadsheet, graphics, computer-aided-design ("CAD") and other personal
productivity tools provided by third parties.
The Company's MAXIMO client/server products are designed to enable customers to
take full advantage of the computing environment, and offer robust
functionality, drawing upon the Company's established track record as a provider
of large-scale applications critical to the operations of major industrial
companies.
In March 1998, the Company made the English language version of MAXIMO 4.0
generally available for new clients. The release of MAXIMO 4.0 combines an open
architecture with self-service Java components and enhanced safety work
management and materials management features, 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
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that adhere to mandated regulatory guidelines. In the fourth quarter of fiscal
year ended 1998, the Company released primary language versions of MAXIMO 4.0 in
Brazilian Portuguese, Dutch, French, German, Japanese, Latin American Spanish,
and Swedish.
In fiscal 1998, the Company introduced an industry specific focused applications
strategy for MAXIMO and made generally available MAXIMO for Facilities, MAXIMO
for Industry, and MAXIMO Enterprise for Transportation. These products are
pre-configured applications with industry specific MAXIMO modules that are
packaged into the base MAXIMO product. The new offerings will be priced
competitively and will be supported by standard implementation packages
tailored specifically for facilities, mid-tier manufacturing and companies with
sophisticated fleet management needs. MAXIMO Enterprise for Utilities, MAXIMO
Enterprise for Energy, and MAXIMO Enterprise for Process will be available in
the first quarter of fiscal 1999. MAXIMO ADvantage is no longer an integral
product offering of the Company.
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 equipment, 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.
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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.
MAXIMO OPTIONS
MAXIMO offers users a variety of integrated options, including, but not limited
to, the following:
MAXIMO Integration Gateway's - MAXIMO integrates with multiple financial systems
including package integration to Oracle(R), PeopleSoft(R), and SAP(R)
financials.
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 significant transaction data into a
functional analysis instrument utilizing PowerPlay(R) from Cognos, a leading
supplier of business intelligence tools. MAXIMO Analyzer delivers true
distributed Online Analytical Processing (OLAP) capabilities for MAXIMO users.
MAXIMO Rounds & MAXIMO Procedure Builder - MAXIMO Rounds & MAXIMO Procedure
Builder are mobile and paperless work management systems, that integrate with
other MAXIMO modules and install directly onto hand-held computers and utilize
bar coding technology to ensure compliance with procedures and automation of
routine and preventive practices for maintenance engineers.
MAXIMO ARCHITECTURE
MAXIMO's client/server versions are provided by a direct link to today's leading
commercial SQL databases including the ORACLE and Microsoft SQL Server database
products. MAXIMO accommodates
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database servers operating under Novell NLM, Windows NT and UNIX operating
systems, and supports a variety of network operating systems, including Novell
NetWare, Banyan VINES and IBM LAN Server for OS/2, and standard network
communications protocols including TCP/IP and IPX/SPX. MAXIMO's use of a
standard SQL database and support for a broad range of server platforms, network
operating systems and communications protocols provides customers with the
flexibility to match their computing resources to their needs, and facilitates
the integration of data from other applications such as accounting and human
resources.
MAXIMO client/server versions were built using a commercially available
application development tool set, Centura Developer from Centura Corporation. As
a result, MAXIMO's "front-end" user interface, including screens, menus and help
messages, can readily be modified by the customer, using standard tools. In
addition, tables, data structures and other elements of the "back-end" database
can be modified by the customer using utilities provided by the Company.
Therefore, the customer is neither constrained by a proprietary system design,
nor does the customer need to rely on outside consultants with special expertise
or knowledge of programming languages in order to customize the system to fit
their needs.
The MAXIMO "Self Service" applications are the initial 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.
MAXIMO ADvantage runs on the Microsoft Access database and runs on stand-MAXIMO
ADvantage was built using a commercially available application development tool
set, Visual Basic from Microsoft Corporation. The core of the software
constituting MAXIMO ADvantage was acquired by the Company through its
acquisition of MAC. MAC's product, Chief Advantage, has been renamed MAXIMO
ADvantage and enhanced since the acquisition.
M|NET
M|net is the electronic commerce product acquired as a result of the purchase of
the A.R.M. Group Inc. in February 1998. M|net is an integrated maintenance
supply network used by manufacturers and distributors that offers a solution for
end users to improve processes by taking cost and redundancy out of the purchase
of MRO products. It provides the electronic communication link between the
manufacturer, distributor and end users. The Company has developed an M|net
electronic commerce link to the MAXIMO purchasing module, that will enable
customers to connect their MRO supply partners to their purchasing system.
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M|net allows end users to locate, price, purchase and confirm order status of
MRO supplies. By enabling MAXIMO users to procure their spare parts inventories
electronically, M|net increases the efficiency of the maintenance supply chain,
simplifies procurement, reduces machine downtimes and lowers acquisition costs.
M|net allows participating distributors and other service providers who
subscribe to improve their service and scope of coverage with manufacturers.
Manufacturers and distributors can reduce their transactions costs, improve
delivery performance and customer service, and better manage their inventories.
It also allows non-competing distributors to partner and compete against large
distributors.
PRODUCT PRICING
The current U.S. list price for a single-user configuration of MAXIMO for
Facilities or Industry is approximately $1,500, with an added fee for each
additional user. The current U.S. list price for the minimum ten-user
configuration of MAXIMO Enterprise for the vertical industry specific modules is
$74,500 with an added fee for each additional user. The current U.S. list price
for a single configuration of MAXIMO ADvantage is a minimum $2,995 for use with
Microsoft Corporation's Access database. A number of optional modules are
available for all products and the pricing varies by module. Discounts from the
Company's list prices may be made available for volume purchasers or for
competitive or strategic reasons. Original equipment manufacturers ("OEMs")
customers who purchase the Company's products in significant quantities receive
discounts of 35% to 60%, depending upon the level of initial purchases and
commitments. The Company also offers site-license arrangements to major
accounts.
International pricing for the Company's products varies by territory, depending
on the cost of localizing, marketing, selling and supporting the product.
Generally, list prices outside North America exceed the comparable U.S. list
prices by 15% or more. The Company's international distributors and agents
receive discounts ranging from 35% to 50% of U.S. list price.
The license fee for MAXIMO generally includes 90 days of technical support. At
the time of initial licensing, customers typically purchase a support contract
providing for an additional year of technical support. The current U.S. list
price for support contracts is approximately 15% to 20% of the applicable
license fee. In most circumstances, customers also purchase installation,
customization, integration and training services, and in many instances
customers subsequently license additional seats, platform upgrades or options.
The total first-year revenues to the Company from a typical MAXIMO
implementation, including paid-up license fees and revenues from support
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contracts and installation, customization and training services, can range from
$5,000 to more than $500,000. A large multi-site implementation can result in
significantly larger first-year revenues.
CUSTOMER SUPPORT AND SERVICES
A high level of customer service and technical support is critical to customer
satisfaction because many of the Company's customers implement their
client/server maintenance management products in complex, large-scale
applications on which the success of their organizations depend. In addition,
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.
In October 1998, the Company signed a collaborative services agreement with
Grainger Consulting Services, the consulting division of W.W. Grainger, Inc.
The alliance with Grainger Consulting Services is intended to provide MAXIMO
users with a complete solution for reducing costs associated with indirect
materials and inventory management.
Customer Support Programs. As of September 30, 1998, the Company employed a
technical hot-line support staff of 59 employees operating out of the Company's
headquarters in Massachusetts and three international technical response centers
located in the United Kingdom, Australia, and Canada. Telephone support calls
are handled by applications and system software specialists, supported by a
computerized call tracking and problem reporting system. The Company has a
MAXIMO support on-line service that offers down-loadable documents, upgrade
support, a searchable knowledge base, and a user to user discussion area. This
on-line support is available five days a week, twenty-four hours a day. The
Company's field based solution analysts also provide additional technical
support, as needed, within their territories. The Company's network of
international distributors also provide first-level technical support within
their geographical territories.
Subscribers to the Company's annual support contracts are entitled to receive
(i) customer service and technical support by telephone, 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
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Company believes that support contracts are a stable source of recurring
revenue.
Implementation, Consulting and Training. As of September 30, 1998, the Company
employed a consulting and training staff of 176 employees. The Company's network
of international distributors also provides services within their geographic
territories.
The Company provides consulting services, on a fee basis, to assist customers in
planning and carrying out the implementation of the Company's solutions. In some
cases, customers install and implement MAXIMO systems and perform any necessary
customization themselves with only limited assistance from the Company. In other
cases, particularly where a complex, integrated solution or extensive
customization is required, the Company provides comprehensive implementation
planning, project management, network communications, system integration and
custom modification services. The Company's professional services group has
expert knowledge of the Company's products and tools and the concepts and
theories of maintenance and planning. They can also draw upon experience in
implementing systems addressing diverse applications on a number of different
platforms in a wide range of industries worldwide. The Company also contracts
with third party consultants, as needed, in order to meet any services backlog.
The Company maintains a network services group which provides technical support
to assist customers in implementing MAXIMO in distributed computing environments
involving one or more complex networks. These specialists in server and client
hardware platforms, network operating systems and communications protocols
supplement the applications and systems expertise of the Company's technical
support staff. The network services group helps customers plan complex network
installations, troubleshoot and resolve conflicts arising from heterogeneous
hardware configurations, communications protocols and network operating systems,
and optimize network performance.
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. The Company has found that most
clients desire initial user training classes in connection with the license of a
system and often attend subsequent advanced schools or send additional users to
schools.
CUSTOMERS
The Company's customers include electric, water and other utilities,
educational, research and health care institutions, government agencies, hotels,
casinos, airlines and railroads, as
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well as large, well-known corporations in the manufacturing, oil and gas,
construction, mining, aerospace, defense, ship building, telecommunications,
ground fleet transportation, data processing, semiconductor, financial,
computer, entertainment, banking, insurance, pharmaceutical and other
industries. The Company's products have been installed and are supported in
major markets worldwide. Local language support is provided in many of these
markets. MAXIMO has been installed at more than 5,000 sites by more than 1,000
companies, government agencies and other organizations.
SALES AND MARKETING
The Company markets its products in the United States through a direct sales
force of 97 persons operating out of its Massachusetts headquarters and sales
offices located in California, Colorado, Florida, Georgia, Illinois, Michigan,
New Hampshire, New Jersey, New York, Oregon, Texas, Virginia, and Washington.
The Company markets its products outside the United States through a sales
force of 107 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 1998 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 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 Company's direct and tele-sales personnel are compensated through salaries
plus commissions based on annual quotas and may also receive quarterly bonuses.
Sales management personnel receive salaries plus bonuses based on monthly,
quarterly and annual revenue and contribution targets.
The sales cycle for MAXIMO products, from the initial sales presentation to the
issuance of a purchase order, typically ranges from thirty to one-hundred twenty
days for ADvantage,and 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 Company
experienced a longer sales cycle for MAXIMO in the first six months of the year
as its procurement was tightly linked to the selection of a backbone enterprise
resource planning system and until the release of MAXIMO 4.0 there were fewer
significant competitive features of MAXIMO compared to the other market leading
enterprise systems.
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Since the release of MAXIMO 4.0, product sales cycles for the second six months
of the year have remained stable.
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.
An important part of the Company's sales and marketing strategy is to build and
maintain marketing relationships with companies that can assist in penetrating
new markets. The Company has established a Strategic Alliances Group to help
meet this challenge. Through its Strategic Alliances Group the Company creates
alliances with other enterprise application providers to leverage opportunities
as part of an integrated best of breed solution.
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 (an affiliate of IBM), 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 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
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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:
Datastream Inc. acquired SQL Systems Group BV and three small geopraphically
dispersed vendors, Indus Group acquired TSW International Inc. and Walker
Interactive acquired Revere. Currently, MAXIMO sometimes competes with products
of a number of large vendors which have traditionally provided maintenance
software running on mainframes and minicomputers, and are now offering systems
for use in the client/server environment. The Company expects that in the
future MAXIMO 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, for Facilities, and ADvantage
compete with a number of competitors, one of which is a public company, but
most of which are small regional companies.
The MRO supply chain management business using electronic commerce has many
diverse competitors offering a wide range of differing products, services and
technologies. This market will be rapidly developing and changing.
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.
PRODUCT DEVELOPMENT
The Company has made substantial investments in research and software product
development. The Company's total product development expenses in 1998, 1997 and
1996 were $13,247,000, $11,387,000, and $7,653,000, respectively. The Company's
research and development staff consisted of 113 employees and a number of
consultants as of September 30, 1998. The Company's development organization is
comprised of relatively small teams of senior level developers and engineers,
who focus on different areas of development.
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The Company will continue its MAXIMO client/server product development and work
closely with customers to define specific product enhancements. The Company will
continue its efforts to integrate MAXIMO with other major Enterprise Resource
Planning ("ERP") systems, such as PeopleSoft, Oracle, and SAP to offer its
clients a complete and flexible financial application. The Company's product
development efforts are also currently focused on a component architecture fully
based on the Java programming language and utilizing Java. Moving beyond
traditional client/server and three-tier architectures, an open JavaBeans
component-based application can operate on multiple application servers and
connect to multiple database servers.
Some of the other projects that the development group will be focused on will be
writing business objects to support mobile applications, self service
applications and M|net electronic commerce applications, as well as, researching
and investigating new technologies that should complement the Company's product
strategies in the future. In addition, the technology research group is
currently researching, developing and incorporating into the MAXIMO product
technologies that are emerging in conjunction with the Internet.
The Company's products consist primarily of internally developed software and
the products acquired from MAC and 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 significant delays in product
development or introduction could result in a loss of competitiveness and
revenues.
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The Company has experienced delays 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 Scribe Technologies
("Scribe") 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 Scribe. The Company may
terminate the agreement at any time. Scribe may terminate the agreement on the
occurrence of a material, uncured breach of the agreement by the Company.
Currently, these products are included in MAXIMO Enterprise and Workgroup. The
Company has entered into a non-exclusive license agreement with Cognos
Corporation ("Cognos") that permits the Company to incorporate Cognos' Powerplay
product in MAXIMO Analyzer. Under the term of the Agreement, the Company is
required to pay royalties to Cognos based on every MAXIMO Analyzer module
licensed. The Company has entered into a non-exclusive license agreement with
Netronic Software GmbH ("Netronic") that permits the Company to incorporate
certain graphic software programs into the Company's products. Under the terms
of the agreement, the Company is currently required to pay fixed royalties to
Netronic. The Company may terminate the agreement at any time. Netronic may
terminate the agreement on the occurrence of a material, uncured breach of the
agreement by the Company. The Company has also entered into non-exclusive
license agreements with HSB Reliability Technologies Corporation,
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Intelligent Labeling Technologies, Incorporated, WebLogic, Incorporated,
Marimba, Inc., and Intermat, Inc. These agreements permit the Company to
incorporate certain software programs or data into the Company's products.
Either the Company or the licensor may terminate the agreement on the
occurrence of a material, uncured breach of the agreement by the Company.
PROPRIETARY RIGHTS AND LICENSES
The Company has registered its MAXIMO and P/X trademarks with the United States
Patent and Trademark Office. Registrations with equivalent offices in many
foreign countries in which the Company or its distributors do business have
been obtained or are in process. The M|net trademark is pending final approval
in the United States Patent and Trademark office. A patent has been filed for
M|net inventory sharing as it relates to electronic commerce. There has been no
objection in the U.S., which will allow for filing for a global patent.
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
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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 materials 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 CD-Roms
and diskettes 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, 1998, the Company had 619 full-time employees including 204
in sales, marketing and related services, 113 in product research and
development, 59 in customer support, 171 in training and consulting services,
and 72 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
new 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, Connecticut, Florida, Georgia, Idaho, Illinois,
Kentucky, Michigan, Missouri, New Hampshire, New Jersey, New York, Ohio,
Tennessee, Texas, Virginia, Washington, and Oregon. The Company also leases
offices for its international operations in Argentina, Australia, Belgium,
Canada, China, France, Germany,
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Hong Kong, Japan, Mexico, the Netherlands, Sweden, Thailand and the United
Kingdom.
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.
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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 15, 1998, there were approximately 47 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, 1998.
FISCAL 1998 HIGH LOW
First Quarter $27.87 $16.00
Second Quarter $24.44 $18.75
Third Quarter $28.50 $18.75
Fourth Quarter $23.75 $12.25
FISCAL 1997 HIGH LOW
First Quarter $44.25 $30.50
Second Quarter $47.00 $27.75
Third Quarter $31.87 $11.12
Fourth Quarter $29.50 $14.25
Since 1983, the Company has not declared or paid cash dividends on its Common
Stock, other than distributions to stockholders made with respect to fiscal
years 1992 and 1993 to satisfy certain federal and state tax obligations of the
stockholders attributable to the Company's S Corporation status prior to October
1, 1993. The Company currently intends to retain any future earnings to finance
growth and therefore does not anticipate paying cash dividends in the
foreseeable future.
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
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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 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.
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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,
---------------------------------------------------
1998 1997 1996 1995 1994
-------- -------- ------- ------- -------
(in thousands, except
share and per share data)
Revenues $120,016 $ 96,700 $73,329 $50,372 $36,753
Income from operations 12,902 16,271 14,606 8,438 4,702
Historical net income 6,222 11,570 10,046 5,629 2,315
Historical income per
share, basic 0.63 1.18 1.05 0.66 0.34
Historical income per
share, diluted 0.62 1.15 1.00 0.64 0.33
Pro forma data
(unaudited):
Pro forma net income (1) -- -- -- -- 2,601
Pro forma income per
share, diluted (1) -- -- -- -- 0.37
Weighted number of common
and common equivalent
shares 10,078 10,064 10,052 8,846 6,942
---------------------------------------------------
Total Assets 114,520 102,239 83,476 64,960 28,713
Long-Term Obligations 906 144 628 962 1,333
Dividends Per Share -- -- -- -- --
The consolidated financial statements of the Company for all periods presented
include the results and balances of an acquisition accounted for as a
pooling-of-interests.
(1) For the three-month period ended December 31, 1993, the provision for income
tax is adjusted to exclude the expense of the cumulative deferred tax provision
required on termination of S corporation status. Proforma net income for the
fiscal year ended September 30, 1994 was $2,601,000.
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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. 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 of 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 1998.
OVERVIEW
The Company develops, markets and supports enterprise asset maintenance software
used by businesses, governments and other organizations to improve the
productivity of facilities, plants and production equipment. The Company
complements its asset maintenance software with a computer communications
network that enables businesses to engage in electronic commerce. The Company's
revenues are derived primarily from two sources: software licenses and fees for
services, including support contracts, training and consulting services and
connect fees for on-line charges to engage in electronic commerce for
Maintenance Repair Operations ("MRO") supplies.
ACQUISITIONS
On February 6, 1998, the Company acquired the stock of A.R.M. Group Inc.,
Ontario, Canada for the sum of $10.3 million in cash, stock and assumed
liabilities. A.R.M. Group Inc. was a privately-held organization that helped
businesses solve maintenance and materials management problems. A.R.M. launched
the M|net solution and emerged as a leader in shared inventory networks over
which distributors, manufacturers and purchasers of MRO supplies conduct their
business. The Company recorded the acquisition using the purchase method of
accounting with $9.2 million of the purchase price allocated to in-process
product development and charged to the consolidated statement of operations on
March 31, 1998, $452 thousand allocated to purchased technology, and $657
thousand allocated to tangible assets.
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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,
--------------------------------
1998 1997 1996(1)
------ ------ -------
Revenues:
Software 45.0% 52.1% 59.2%
Support and services 55.0 47.9 40.8
----- ----- -----
Total revenues: 100.0 100.0 100.0
Total cost of revenues 31.2 27.5 24.9
----- ----- -----
Gross margin 68.8 72.5 75.1
----- ----- -----
Operating expenses:
Sales and marketing 31.2 34.1 33.3
Product development 11.0 11.8 10.4
General and administrative 8.2 9.8 10.2
Purchased in-process product development 7.6 -- --
Merger expenses -- -- 1.3
----- ----- -----
Total operating expenses: 58.0 55.7 55.2
----- ----- -----
Income from operations 10.8 16.8 19.9
Other income(expense), net 1.3 1.9 2.6
----- ----- -----
Income before income taxes 12.1 18.7 22.5
Income taxes 6.9 6.8 8.8
----- ----- -----
Net income 5.2% 11.9% 13.7%
----- ----- -----
(1) Fiscal year ended September 30, 1996 has been restated to include the
results and balances of an acquisition accounted for as a pooling-of-interests.
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 is generated from the Company's MAXIMO
client/server software and related support and services. A significant portion
of the Company's total revenues are 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 U.S. in 1998 can be 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
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and are typically implemented in configurations involving a larger number of
users, for whom additional license fees are paid. Larger software license
contracts, if any, may have a significant impact on revenues for any quarter and
could, therefore, result in significant fluctuations in quarterly revenues and
operating results. (1)
Software sales for 1998 increased 7.2% to $54.0 million from $50.4 million. This
growth is 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 have 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 Company anticipates that services growth will
continue to be a larger portion of revenues due to customers requiring
customization and integration to ERP systems. (1)
The increase in support and services revenues is attributable to increases in
both MAXIMO support contracts and consulting services. Consulting services have
grown 49.5% in 1998 and continue to be 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 have grown 30.2% in
1998. Currently, approximately 90% of all domestic MAXIMO client/server
customers renew their maintenance contracts.
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 is due
primarily to royalties paid to third party vendors for software and costs for
third party software products.
- -----------------------------
(1) Forward looking statement
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Cost of support and services consists primarily of personnel costs for employees
and the related costs of benefits and facilities. The increase in the cost of
support and services is attributable to the hiring of employees and the
extensive use of third-party consultants contracted to perform services for the
Company. The Company utilizes the services of these higher cost third-party
consultants in order to meet the services backlog. 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 is primarily due to
increases in sales support and marketing personnel and sales commissions. Also,
contributing to this increase is 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 Company will continue to make investments in a new MAXIMO Java-based
component architecture including a mobile application suite of products. (1) The
Company will also expend development dollars on its M|net electronic commerce
product for MRO supply chain management. (1) The Company will continue to invest
in
- -----------------------------
(1) Forward looking statement
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client/server MAXIMO including application programming interfaces to enterprise
resource planning application software products developed by Oracle, PeopleSoft
and SAP. (1) Additionally, a new version of client/server MAXIMO will be made
available in the first quarter of fiscal 1999 that will support the European
Monetary Policy. (1)
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 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. If these projects are not successfully
developed, future revenues and profitability may be adversely affected.
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 is 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 days sales outstanding improved to 78 days for the quarter ended September
1998 compared to 79 days for the quarter ended September 1997. If the Company
had not financed a receivable due from the U.S. Government, the days sales
outstanding for the quarter ended September 30, 1998 would have been 93 days.
The Company has established a target of 90 to 95 days for its quarterly days
sales outstanding.(1)
- -----------------------------
(1) Forward looking statement
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The increase in interest expense is 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 that are described in
the preceding page related to the acquisition of the A.R.M. Group Inc. The
Company anticipates that its fiscal 1999 effective tax rate will not exceed
36%.(1)
FISCAL 1997 COMPARED TO FISCAL 1996
REVENUES
(in thousands) 1997 CHANGE % 1996
- --------------------------------------------------------------------
Software licenses $50,393 16.2% $43,382
Percentage of total revenues 52.1% 59.2%
Support and services $46,307 54.6% $29,947
Percentage of total revenues 47.9% 40.8%
Total revenues $96,700 31.9% $73,329
The growth in total revenues is generated from the Company's MAXIMO software and
related support and services. A significant portion of the Company's total
revenues are derived from operations outside the United States. Revenues from
sales outside the United States for 1997 increased 42.8% to $42.4 million or
43.8% of total revenues, compared to $29.7 million or 40.5% of total revenues in
1996. The increases in the percentage of total revenues generated outside the
U.S. in 1997 can be attributed to the expansion of the Company's international
sales organization and the signing of a significant license in Canada.
The progressive growth in software revenues is attributable to increases in the
number of MAXIMO licenses, the number of users per license of MAXIMO and a few
large MAXIMO Enterprise software licenses, combined with the release of the
client/server versions of MAXIMO supporting the SQL Server platform. Revenues
from licenses of MAXIMO and from related support and services increased 39.5% to
$93.1 million or 96.3% of total revenues in 1997 compared to $66.7 million or
91.0% of total revenues in 1996.
Revenues from licenses of P/X and from related support and services decreased
44.9% to $2.7 million or 2.8% of total
- -----------------------------
(1) Forward looking statement
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revenues in 1997 compared to $4.9 million or 6.7% of total revenues in 1996. The
decline in P/X revenues occurred most significantly in P/X software license
revenues and can be attributed to product performance issues, diminished demand
for high-end planning and cost solutions, increased competition, and the
Company's declining focus on selling and marketing this product.
The increase in support and services revenues is attributable to increased sales
of MAXIMO support contracts and consulting and training services as a direct
result of the increase in MAXIMO software licenses sold and services sold in
connection with large scale software implementations.
COST OF REVENUES
(in thousands) 1997 CHANGE % 1996
- ------------------------------------------------------------------------------
Software licenses $ 2,547 (18.0%) $ 3,106
Percentage of software licenses 5.1% 7.2%
Support and services $24,025 58.8% $15,132
Percentage of support and services 51.09% 50.5%
Total cost of revenues $26,572 45.7% $18,238
Percentage of total revenues 27.5% 24.9%
Cost of software revenues consists of the amortization of capitalized software,
royalties paid to vendors of third party software, the cost of software product
packaging and media, and certain employee costs related to software duplication,
packaging and shipping.
The decrease in the cost of software revenues is due primarily to lower
amortization expense for capitalized development costs and economies resulting
from increased sales volume. In fiscal 1996, the Company changed the estimated
useful life of its MAXIMO Enterprise product from three years to fifteen months
to accurately reflect the lifecycles for new releases of this product. This
change resulted in additional amortization expense of $565,000.
Cost of support and services consists primarily of personnel costs for employees
and the related costs of benefits and facilities. The increase in the cost of
support and services is attributable to extensive use of third-party consultants
contracted to perform services for the Company as a result of the increases in
the number of licenses sold and the timing of hiring permanent employees. The
increase is also attributable to the costs of personnel to support international
distributors in certain territories where the distributors performed a larger
proportion of services without corresponding increases in service revenues to
the Company.
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OPERATING EXPENSES
(in thousands) 1997 CHANGE % 1996
- --------------------------------------------------------------------
Sales and marketing $32,985 35.1% $24,422
Percentage of total revenues 34.1% 33.3%
Product development $11,387 48.8% $ 7,653
Percentage of total revenues 11.8% 10.4%
General and administrative $ 9,485 27.4% $ 7,445
Percentage of total revenues 9.8% 10.2%
The increase in sales and marketing expenses in 1997 is primarily due to
increases in the number of sales personnel, sales commissions, travel and
lodging expenses, an increase in advertising costs and expense levels
established to achieve a high level of revenues. The increase as a percentage of
revenues for 1997 is due primarily to increases in sales commissions paid to
both the geographic sales representatives and in some cases the industry
oriented vertical sales representative, which decreases the margin on the sale
combined with the costs of expanding into new territories and the training of
new sales personnel to sell the Company's product.
The increase in product development expenses in 1997 is primarily due to the
engagement of additional employees and third-party consultants who worked on the
new client/server releases of MAXIMO. Capitalization of software costs were $0
and $634,000 in 1997 and 1996, respectively. During fiscal 1997 and 1996, the
Company spent its development expenditures on MAXIMO. The increase as a
percentage of revenues in 1997 is attributable to the investment in both new
releases of the current version of MAXIMO and the research for a new
MAXIMO-architected application, as well as the absence of any capitalization of
expenses in 1997.
The increase in general and administrative expenses in 1997 is primarily due to
goodwill amortization for the purchase of its Swedish and German distributors
and expenses related to professional fees in connection with growth of the
Company. Also contributing to the increase is an increase in personnel to
support the increase in the revenue base. The decrease as a percentage of
revenues in 1997 is primarily attributable to the Company's ability to manage a
larger revenue base without a commensurate increase in general and
administrative expenses.
NON OPERATING EXPENSES
(in thousands) 1997 CHANGE % 1996
- -------------------------------------------------------------------
Interest income $2,409 22.2% $1,971
Interest (expense) $ (24) (36.8%) $ (38)
Other income (expense),net $ (529) 1,159.5% $ (42)
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The increase in interest income in 1997 is attributable to interest earned on
increased cash equivalents from cash flow generated from operations.
The increase in other income (expense), net, is attributable to an increase in
foreign currency translation losses.
PROVISION FOR INCOME TAXES
The Company's effective tax rates were 36.2% and 39.1% in 1997 and 1996,
respectively. The decrease in the effective tax rate for fiscal 1997 can be
attributed to research and development tax credits, use of a foreign sales
corporation and tax exempt interest income.
LIQUIDITY AND CAPITAL RESOURCES
As of September 30, 1998, the Company had cash and cash equivalents and
marketable securities of approximately $67.4 million and working capital of
$72.7 million. Cash generated by operations for fiscal year 1998 was $14.1
million, primarily attributable to net income and an increase in deferred
revenues, offset by an increase in receivables as a result of the increase in
revenues, payments made to trade vendors, and prepaid royalties paid to third
party software vendors.
Cash used in investing activities totaled $12.6 million, primarily for the
acquisition of the A.R.M. Group Inc., improvements related to the relocation of
the Company's corporate headquarters in December 1997, the purchase of
marketable securities and the purchase of property and equipment. Cash provided
by financing activities was $299 thousand, primarily from proceeds received from
exercises of employee stock options, offset by payment of debentures and bank
loans assumed from the acquisition of the A.R.M. Group Inc.
As of September 30, 1998, the Company's principal commitments consisted
primarily of an office lease for its headquarters. The Company leases its
facilities and certain equipment under non-cancelable operating lease agreements
that expire at various dates through November 2003. The Company relocated its
corporate headquarters in December 1997. Under the terms of the lease agreement,
upon termination of the lease the Company has the right to extend the lease for
an additional six year term for an agreed upon fixed cost.
The Company may use a portion of its cash to acquire businesses, products and
technologies complementary to its business. (1)
- -----------------------------
(1) Forward looking statement
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The Company believes that its current cash balances combined with cash flow from
operations will be sufficient to meet its working capital and capital
expenditure requirements through at least September 30, 1999. (1)
YEAR 2000
The Year 2000 issue is the result of computer programs being written using two
digits rather than four to define the applicable year. Certain computer programs
that have date sensitive software and use two digits only may recognize a date
using "00" as the year 1900 rather than the year 2000. Management has initiated
a program to prepare the Company's financial, manufacturing and other critical
systems and applications for the year 2000. The focus of the program is to
identify affected software and hardware, develop a plan to correct that software
or hardware in the most cost efficient and effective manner and implement and
monitor that plan. The Company will also assess the readiness of its significant
suppliers to determine the extent to which the Company is vulnerable to those
third parties' failure to remediate their own Year 2000 issues. The Company
utilizes other third party software products, network equipment and
telecommunications products. Failure of any critical technology components to
operate properly in the Year 2000 may have an adverse impact on business
operations or require the Company to incur unanticipated expenses to remedy any
problems. There can be no guarantee that the systems of other companies will be
timely converted, or that a failure to convert by another company would not have
a material adverse effect on the Company. The Company currently estimates that
the costs associated with preparing internal systems for the Year 2000 should
not exceed $100,000. (1) There can be no assurances that as the Company
continues its program of reviewing internal systems that the costs will not
exceed $100,000.
The Company warrants to its customers that its current versions of MAXIMO
Release 4.0.0 and 4.0.1 are compliant. MAXIMO Release 3.0.3 is intended to be
compliant, with the year 2000 version to be released by the end of December
1998. Earlier versions of MAXIMO need to be upgraded to be compliant. The
Company's other product PROJECT/2 is no longer sold but the Company does offer
support for this product. The Company will release an upgrade of this product
that will enable this product to recognize date data. The Company's other
products, MAXIMO Scheduler 4.0 and 3.0 and P/X are currently being tested for
compliancy. The Company estimates that the cost to upgrade these products and
any other older versions of its products will be approximately $500,000.(1) (For
further discussion on the Year 2000, please see Year 2000 under Factors
Affecting Future Performance.)
EURO COMPLIANCE
On January 1, 1999, eleven European Union member states will adopt the euro as
their common national currency. Thereafter, until January 1, 2002, (the
transition period), either the euro or a participating country's present
currency will be accepted as
- -----------------------------
(1) Forward looking statement
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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 will release a new English language
client/server version of MAXIMO (MAXIMO 4.0.1) that will accept, store,
calculate, convert and report euro currency. Other primary languages will be
made generally available in the second fiscal quarter of 1999. The amount of
development dollars spent on the euro release will not have a material adverse
effect on the Company's results of operations or financial condition. (1) The
Company has initiated a program to determine what, if any, internal systems need
to be replaced to comply with the requirements for the adoption of the euro.
FACTORS AFFECTING FUTURE PERFORMANCE
The nature of forward-looking information is that such information involves
assumptions, risks and uncertainties. Certain public documents of the Company
and oral statements made by authorized officers, directors, employees, agents
and representatives of the Company, acting on its behalf, may include
forward-looking information which will be influenced by the following and other
assumptions, risks and uncertainties. Forward-looking information requires
management of the Company to make assumptions, estimates, forecasts and
projections regarding the Company's future results as well as the future
effectiveness of the Company's strategic plans and future operational decisions.
Forward-looking statements made by or on behalf of the Company are subject to
the risk that the forecasts, projections, and expectations of management, or
assumptions underlying such forecasts, projections and expectations, may become
inaccurate. Accordingly, actual results and the Company's implementation of its
plans and operations may differ materially from forward-looking statements made
by or on behalf of the Company. The following discussion identifies certain
important factors that could affect the Company's actual results and actions and
could cause such results and actions to differ materially from any
forward-looking statements made by or on behalf of the Company that related to
such results and actions. Other factors, which are not identified herein, could
also have such an effect.
- -----------------------------
(1) Forward looking statement
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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 93.8% of the Company's total revenues in fiscal 1998. The
Company's financial performance in fiscal 1999 will depend on continued market
acceptance of MAXIMO. The Company believes that continued market acceptance of
MAXIMO will largely depend on its ability to enhance and broaden the
capabilities of MAXIMO, by, among other things, developing additional
application modules for MAXIMO, versions of MAXIMO and by developing and
incorporating into the MAXIMO product technologies that are emerging in
connection with the Internet. Any factor adversely affecting sales of MAXIMO,
such as delays in development, significant software flaws, incompatibility with
significant hardware platforms, operating systems or databases, increased
competition or negative evaluations of the products, would have a material
adverse effect on the Company's business and financial results.
The Company made the English language version of MAXIMO Release 4.0 generally
available in March 1998 for new clients. In the
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fourth quarter of the fiscal year ended 1998, the Company released primary
language versions of MAXIMO 4.0 in Brazilian Portuguese, Dutch, French, German,
Japanese, Latin American Spanish, and Swedish. The failure of MAXIMO 4.0 to
achieve market acceptance would have a material adverse effect on the Company's
business and financial results.
FLUCTUATIONS IN QUARTERLY OPERATING RESULTS; SEASONALITY
The Company has experienced, and may in the future experience, significant
period-to-period fluctuations in revenues and operating results. The Company's
revenues and income from operations typically grow at a lower rate or decline in
the first quarter of each fiscal year, compared to the fourth quarter of the
preceding fiscal year. In addition, revenues are typically higher in the fourth
quarter than in other quarters of the year. The Company believes that these
quarterly patterns are partly attributable to the Company's sales commission
policies, which compensate members of the Company's direct sales force for
meeting or exceeding annual quotas. In addition, the Company's quarterly
revenues and operating results have fluctuated historically, due to the number
and timing of product introductions and enhancements, the budgeting and
purchasing 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
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
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lines and new companies enter the market. To remain successful in the future,
the Company must respond promptly and effectively to the challenges of
technological change, evolving standards and its competitors' innovations by
continually enhancing its own product, services and support offerings, as well
as its marketing programs. There can be no assurance that the Company will
continue to be able to compete successfully in the future. The market for asset
maintenance software is fragmented by geography, by hardware platform and by
industry orientation, and is characterized by a large number of competitors.
Currently, the Company's client/server versions of MAXIMO 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 competes
with integrated enterprise resource planning systems which are provided by
several large vendors and which include maintenance modules. 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 electronic commerce has many
diverse competitors offering a wide range of differing products, services and
technologies. While the Company believes that electronic commerce products and
technologies complement the Company's existing products, there can be no
assurance that the Company will be able to compete successfully in this market.
Certain of the Company's competitors have greater financial, marketing, service
and support and technological resources than the Company. To the extent that
such competitors increase their focus on the asset maintenance or planning and
cost systems markets, the Company could be at a competitive disadvantage.
INTERNATIONAL OPERATIONS
A significant portion of the Company's total revenues are derived from
operations outside the United States. The Company derived 45.7%, 43.8%, and
40.5% of its total revenue from sales outside the United States in fiscal years
1998, 1997, and 1996, 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 heavily in international
infrastructure, global product functionality and translated versions of
financial and other software products. In the event international expansion
and/or product globalization efforts are not successful, the Company's business
operating results and financial condition may be adversely affected. This
international business is subject to various risks common to international
activities, including
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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 revenue growth rates
in the Asia Pacific region during 1998 in part due to the economic difficulties
that have occurred throughout this region. There can be no assurances that the
economy of this region will recover in the near future or that the Company's
growth rates in this geographic region will return to the previous levels if the
recovery occurs.
DEPENDENCE ON THIRD PARTIES
The client/server of MAXIMO operate with the Oracle, SQLServer, and SQLBase
database management systems. MAXIMO ADvantage runs on the Microsoft Access
database. Introduction and increased market acceptance of database management
systems with which the Company's products do not operate, or failure of Oracle,
or SQLServer could adversely affect the market for the Company's products.
The Company has entered into nonexclusive license agreements with Centura
Software Corporation, Scribe Technologies, Incorporated, Cognos Corporation,
Netronic Software GmbH, HSB Reliability Technologies Corporation, Intelligent
Labeling Technologies, Incorporated, WebLogic, Incorporated, Marimba, Inc., and
Intermat, Inc. pursuant to which the Company incorporates into its products
software providing certain application development, user interface, business
intelligence, content and graphics capabilities developed by these companies. If
the Company were unable to renew these licenses, or if any of such vendors were
to become unable to support and enhance its products, the Company could be
required to devote additional resources to the enhancement and support of these
products or to acquire or develop software providing equivalent capabilities,
which could cause delays in the development and introduction of products
incorporating such capabilities.
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PRODUCT DEVELOPMENT: INTERNET
The Company is currently developing a Java-based component architect software
application to incorporate into the MAXIMO product technologies emerging in
conjunction with the Internet. Internet technologies and applications generally
are developing and gaining acceptance rapidly in the market. MRO supply chain
management using electronic commerce is a nascent market with many standards and
technologies remaining to be developed. Accordingly, developing technologies
pose risks to the Company. The Company believes that electronic commerce
products and technologies complement the Company's existing products. There can
be no assurance that the Company will successfully anticipate trends in this
market, that the Company will be successful in Internet technology development
or acquisition efforts or that the Company's Internet applications, if
developed, will achieve market acceptance.
LIMITED INTELLECTUAL PROPERTY PROTECTION
The Company's success is dependent upon proprietary technology. The Company
currently has no patents and protects its technology primarily through
copyrights, trademarks, trade secrets and employee and third party nondisclosure
agreements. The Company's software products are sometimes licensed to customers
under "shrink wrap" licenses included as part of the product packaging.
Although, in larger sales, the Company's shrink wrap licenses may be accompanied
by specifically negotiated agreements signed by the licensee, in many cases its
shrink wrap licenses are not negotiated with or signed by individual licensees.
Certain provisions of the Company's shrink wrap licenses, including provisions
protecting against unauthorized use, copying, transfer and disclosure of the
licensed program, may be unenforceable under the laws of certain jurisdictions.
In addition, the laws of some foreign countries do not protect the Company's
proprietary rights to the same extent as do the laws of the United States. There
can be no assurance that the steps taken by the Company to protect its
proprietary rights will be adequate to prevent misappropriation of its
technology or development by others of similar technology. Although the Company
believes that its products and technology do not infringe on any existing
proprietary rights of others, there can be no assurance that third parties will
not assert infringement claims in the future.
GENERAL ECONOMIC RISK FACTORS
To date, inflation has not had a material impact on the Company's financial
results. There can be no assurance, however, that inflation will not adversely
affect the Company's financial results in the future.
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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 continues to hire a significant
number of additional sales, services and technical personnel. Competition for
hiring of such personnel in the software industry is intense, and the Company
from time to time experiences difficulty in locating candidates with the
appropriate qualifications within the desired geographic locations, or with
certain industry specific domain expertise. It is widely believed that the
technology industry is at or beyond a condition of full employment. The Company
does not have employment contracts with, and does not maintain key person life
insurance policies on, any personnel. In addition, the Company may need to hire
additional skilled personnel to support the continued growth of its business.
There can be no assurance that the Company will be able to retain its existing
personnel or attract additional qualified employees.
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 1998 was marked by significant fluctuations in the market price of the
common stock, par value $.01 per share, of the Company (the "Common Stock").
Factors such as announcements of technological innovations or new products by
the Company, its competitors and other third parties, as well as quarterly
variations in the Company's results of operations and market conditions in the
industry, may cause the market price of the Common Stock to continue to
fluctuate significantly. In addition, the stock market in general has recently
experienced substantial price and volume fluctuations, which have particularly
affected the market prices of many software companies and which have often been
unrelated to the operating performance of such companies. These broad market
fluctuations also may adversely affect the market price of the Common Stock.
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LITIGATION RISKS
The Company is subject to the normal risks of litigation with respect to its
business operation.
YEAR 2000
The Year 2000 issue is the result of computer programs being written using two
digits rather than four to define the applicable year. Certain computer programs
that have date sensitive software and use two digits only may recognize a date
using "00" as the year 1900 rather than the year 2000.
Management has initiated a program to prepare the Company's financial,
manufacturing and other critical systems and applications for the year 2000. The
focus of the program is to identify affected software and hardware, develop a
plan to correct that software or hardware in the most effective manner and
implement and monitor that plan. The Company has begun to assess the readiness
of its significant suppliers to determine the extent to which the Company is
vulnerable to those third parties' failure to remediate their own Year 2000
issues. The Company utilizes other third party software products, network
equipment and telecommunications products. Failure of any critical technology
components to operate properly in the Year 2000 may have an adverse impact on
business operations or require the Company to incur unanticipated expenses to
remedy any problems. There can be no guarantee that the systems of other
companies will be timely converted, or that a failure to convert by another
company would not have a material adverse effect on the Company. The Company
currently estimates that the costs associated with preparing internal systems
for the Year 2000 should not exceed $100,000. There can be no assurances that as
the Company continues its program of reviewing internal systems that the costs
will not exceed $100,000. The Company has begun to develop a contingency plan
based on the final results gathered from its suppliers and third parties. The
Company plans to finalize this plan by end of September 1999.
The Company warrants to its customers that its current versions of MAXIMO
Release 4.0.0 and 4.0.1 are compliant. MAXIMO Release 3.0.3 is intended to be
compliant, with the year 2000 version to be released by the end of December
1998. MAXIMO version 3.0.2 is not fully compliant. Customers must upgrade to
Release 3.0.3 or Release 4.0.1 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 3.0.3 in order to be year 2000 compliant. Upgrades
will be provided free of charge.
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MAXIMO ADvantage 4.0 is intended to be year 2000 compliant. The production
release for ADvantage 4.0 is scheduled for the end of March 1999. Customers
using prior versions of ADvantage must be upgraded to ADvantage 4.0 to be year
2000 compliant. Upgrades will be provided free of charge. The Company's
electronic commerce product, M|net, is currently being tested for year 2000
compliance. Testing is scheduled to be completed by the end of June 1999. The
Company's other product PROJECT/2 is no longer sold but the Company does offer
support for this product. The Company will release an upgrade of this product
targeted for the fourth quarter of fiscal 1999 that will enable this product to
recognize date data after January 1, 2000 and handle leap year calculations.
MAXIMO Scheduler 4.0 and 3.0 and P/X are currently being tested for compliancy.
The Company estimates that the cost to upgrade all of its products to be year
2000 enabled will be 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.
While the Company has experienced customer requests to replace non-compliant
Year 2000 applications, it also believes that certain market segments have
deferred procuring asset maintenance systems while they complete the
implementation of ERP systems. The Company will continue to monitor the
potential impact of the arrival of the Millennium on its software revenues.
EURO COMPLIANCE
On January 1, 1999, eleven European Union member states will adopt the euro as
their common national currency. Thereafter, until January 1, 2002, (the
transition period), either the euro or a participating country's present
currency will be accepted as legal tender. Beginning on January 1, 2002,
euro-denominated bills and coins will be issued, and by July 1, 2002, only the
euro will be used. A significant number of the Company's customers are located,
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 will release a
new English language client/server version of MAXIMO (MAXIMO 4.0.1) that will
accept, store, calculate, convert and report euro currency. Other primary
languages will be made generally available in the second fiscal quarter of 1999.
The amount of development dollars spent on the euro release will not have a
material adverse effect on the Company's results of operations or financial
condition. (1) The Company has initiated a program to determine what, if any,
internal systems need to be replaced to comply with the requirements for the
adoption of the euro.
EFFECT OF ACCOUNTING PRONOUNCEMENTS
Statement of Financial Accounting Standards No. 130, "Reporting Comprehensive
Income" (SFAS 130) is effective for fiscal years
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beginning after December 15, 1997. SFAS 130 requires that changes in
comprehensive income be shown in a financial statement that is displayed with
the same prominence as other financial statements. The Company will adopt SFAS
130 in fiscal year ended September 30, 1999.
Statement of Financial Accounting Standards No. 131, "Disclosures about Segments
of an Enterprise and Related Information" (SFAS 131) is effective for financial
statements for periods beginning after December 15, 1997. This statement will
change the way companies report annual financial statements and requires them to
report selected segment information in their quarterly reports issued to
shareholders. It also requires entity-wide disclosures about the products and
services an entity provides, the material countries in which it holds assets and
reports revenues, and its major customers. The Company will adopt SFAS 131 for
the current fiscal year ended September 30, 1999.
Statement of Financial Accounting Standards No. 132, "Employers' Disclosure
about Pensions and Other Postretirement Benefits" (SFAS 132) is effective for
financial statements for fiscal years beginning after December 15, 1997. SFAS
132 revises employers' disclosures about pension and other postretirement
benefit plans. It does not change the measurement or recognition of those plans.
The Company will adopt SFAS 132 in the fiscal year ended September 30, 1999.
Statement of Financial Accounting Standards No. 133 "Accounting for Derivative
Instruments and Hedging Activities" (SFAS 133) was issued in June 1998. It is
effective for fiscal years beginning after June 15, 1999, with earlier adoption
encouraged. The new standard requires companies to record derivatives on the
balance sheet as assets or liabilities, measured at fair value. Gains or losses
resulting from changes in the values of those derivatives would be accounted for
depending on the use of the derivatives and whether they qualify for hedge
accounting. The key criterion for hedge accounting is that the hedging
relationship must be highly effective in achieving offsetting changes in fair
value or cash flows. The Company will adopt SFAS 133 in the fiscal year ended
September 30, 2000.
Statement of Position ("SOP") 97-2, "Software Revenue Recognition" was issued in
October 1997 and addresses software revenue recognition matters. The SOP
supersedes SOP 91-1 and is effective for transactions entered into for fiscal
years beginning after December 15, 1997. Based upon its reading and
interpretation of SOP 97-2 the Company believes its current revenue recognition
policies and practices are materially consistent with the SOP.
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NO REVISIONS OR UPDATES TO FORWARD-LOOKING STATEMENTS
The Company will have no obligation to release publicly any revision or update
to any forward-looking statements to reflect events or circumstances after the
date of such statements or to reflect the occurrence of anticipated or
unanticipated events.
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ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
NOT APPLICABLE
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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)
1998 Quarter Year
- ------------ 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
operations 4,815 (4,722) 5,176 7,633 12,902
Income before income
taxes 5,564 (4,305) 5,735 7,511 14,504
Provision for income
taxes 2,059 1,678 2,052 2,493 8,282
Net income 3,505 (5,983) 3,683 5,018 6,222
Net income per
share, diluted $ 0.35 $ (0.60) $ 0.36 $ 0.50 $ 0.62
1997 Quarter
- ------------ Dec. 31, Mar. 31, June 30, Sep. 30, Year Ended
Ended: 1996 1997 1997 1997 1997
- ------ -------- -------- -------- -------- ----------
Total revenues $23,379 $22,186 $23,652 $27,483 $96,700
Gross margin 17,458 15,674 16,612 20,384 70,128
Income from
operations 5,106 2,122 3,273 5,770 16,271
Income before income
taxes 5,623 2,410 3,903 6,191 18,127
Provision for income
taxes 2,094 874 1,413 2,176 6,557
Net income 3,528 1,535 2,490 4,015 11,570
Net income per
share, diluted $ 0.35 $ 0.15 $ 0.25 $ 0.40 $ 1.15
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.
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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,
1998 are as follows. Messrs. Drapeau and Nelson are Class III Directors,
whose terms expire in 1999. 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. 38 President and Chief Executive Officer and
Director - Class III
Robert L. Daniels 56 Executive Chairman of the Board - Class I
Paul D. Birch 40 Executive Vice President - Finance and
Administration, Chief Financial Officer and
Treasurer and Director - Class I
John W. Young 46 Executive Vice President - Research and
Development
William G. Nelson 64 Director - Class III
Stephen B. Sayre 47 Director - Class II
Alan L. Stanzler 55 Director - Class II
NORMAN E. DRAPEAU, JR. joined the Company in 1982 as an applications
analyst. Since that time, he has held various 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
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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.
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 elected executive Chairman of the Board.
WILLIAM G. NELSON has been a director of the Company since 1994. Since
1996, Mr. Nelson has been Chairman of the Board and Chief Executive Officer
of GEAC Computer Corporation Limited. From 1995 until 1996, Mr. Nelson was
Chairman and Chief Executive Officer of HarrisData, a developer and licensor
of application software. Mr. Nelson served as President and Chief Executive
Officer of Pilot Software, Inc. from 1991 to 1994. Mr. Nelson also is a
director of Manugistics, Inc. and serves as a director of a number of
privately-held companies.
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
44
46
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, 1998.
(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, 1998.
45
47
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, 1998 and 1997........................... 51
Consolidated Statements of Operations -
Years Ended September 30, 1998,1997 and 1996.......... 52
Consolidated Statements of Cash Flows -
Years Ended September 30, 1998, 1997 and 1996......... 53
Consolidated Statements of Stockholders' Equity -
Years Ended September 30, 1998, 1997 and 1996......... 54
Notes to Consolidated Financial Statements............. 55
2. Financial Statement Schedules. The following financial
statement schedule of Project Software & Development, Inc. for the
Years Ended September 30, 1998, 1997 and 1996 will be filed as part of
this Report and should be read in conjunction with the Consolidated
Financial Statements of the Company.
SCHEDULE PAGE
-------- ----
II Valuation and Qualifying Accounts............ 72
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 10.2 comprise the Company's management contracts,
compensatory plans or compensatory arrangements required to be
identified pursuant to Item 14(a) of Form 10-K.
3. Instruments Defining the Rights of Security-Holders
3.1 Amended and Restated Articles of Organization of the
Company (included as Exhibit 3.3 to the Company's
46
48
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)
3.4 Form of Certificate of Designation of Series A Junior
Participating Preferred Stock of Project Software &
Development, Inc. (which is attached as Exhibit A to the
Rights Agreement 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 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)
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49
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 Stock Purchase Agreement dated as of
February 6, 1998 among Project Software &
Development, Inc., PSDI Canada Limited, Inc., A.R.M.
Group Inc. and the Stockholders of A.R.M. Group Inc.
(included as Exhibit 10.1 to the Company's Quarterly
Report on Form 10-Q for the quarter ended March 31,
1998, Commission File No. 0-23852 and incorporated
herein by reference)
10.2 1998 Executive Bonus Plan (included as
Exhibit 10.2 to the Company's Quarterly Report on
Form 10-Q for the quarter ended March 31, 1998,
Commission File No. 0-23852 and incorporated herein
by reference)
21. Subsidiaries of the registrant
21.1 Subsidiaries of the Company
23. Consents of experts and counsel
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, 1998, 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.
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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, 1998
-----------------
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 Executive December 29, 1998
- ------------------------- Officer (Principal Executive
Norman E. Drapeau, Jr. Officer)
/s/ Robert L. Daniels Executive Chairman of the December 29, 1998
- ------------------------- Board
Robert L. Daniels
/s/ Paul D. Birch Executive Vice President, December 29, 1998
- ------------------------- Chief Financial Officer
Paul D. Birch and Treasurer (Principal
Financial and Accounting
Officer), Director
/s/ William G. Nelson Director December 29, 1998
- -------------------------
William G. Nelson
/s/ Alan L. Stanzler Director December 29, 1998
- -------------------------
Alan L. Stanzler
/s/ Stephen B. Sayre Director December 29, 1998
- -------------------------
Stephen B. Sayre
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, 1998 and 1997, and the results of their operations and their
cash flows for each of the three years in the period ended September 30, 1998,
in conformity with generally accepted accounting principles. 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
generally accepted auditing standards 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 4, 1998
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52
PROJECT SOFTWARE & DEVELOPMENT, INC.
CONSOLIDATED BALANCE SHEETS
ASSETS SEPTEMBER 30, SEPTEMBER 30,
------------- -------------
1998 1997
------------- -------------
(IN THOUSANDS,EXCEPT SHARE DATA)
Current assets:
Cash and cash equivalents $ 28,454 $ 25,964
Marketable securities 38,922 38,299
Accounts receivable, trade, less allowance
for doubtful accounts of $2,614 at September 30,
1998 and $2,286 at September 30, 1997 30,658 24,021
Prepaid expenses 2,799 1,877
Other assets 1,128 1,244
Deferred income taxes 1,697 1,806
--------- ---------
Total current assets 103,658 93,211
--------- ---------
Property and equipment, net 8,823 7,322
Computer software costs, net 248 --
Goodwill, net 1,082 1,447
Deferred income taxes 671 214
Other assets 38 45
--------- ---------
Total assets $ 114,520 $ 102,239
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 8,189 $ 9,809
Accrued compensation 5,800 4,494
Income taxes payable 4,063 3,678
Deferred revenue 12,651 9,750
Deferred income taxes 287 394
--------- ---------
Total current liabilities 30,990 28,125
--------- ---------
Deferred income taxes 103 12
Deferred rent 144 12
Deferred revenue 615 120
Minority interest 44 --
Commitments and contingencies
Stockholders' Equity
Preferred stock, $.01 par value;1,000,000 authorized,
none issued and outstanding -- --
Common stock, $.01 par value;15,350,000 authorized;
9,982,230 and 9,856,474 issued for September 30,
1998 and September 30, 1997, respectively 100 99
Additional paid-in capital 50,410 48,163
Retained earnings 32,330 26,108
Cumulative translation adjustment (306) (629)
Net unrealized gain on marketable securities 90 229
--------- ---------
Total stockholders' equity 82,624 73,970
--------- ---------
Total liabilities and stockholders' equity $ 114,520 $ 102,239
========= =========
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,
---------------------------------------
1998 1997 1996
----------- ----------- -----------
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
Revenues:
Software $ 54,007 $ 50,393 $ 43,382
Support and services 66,009 46,307 29,947
----------- ----------- -----------
Total revenues 120,016 96,700 73,329
----------- ----------- -----------
Cost of revenues:
Software 4,537 2,547 3,106
Support and services 32,936 24,025 15,132
----------- ----------- -----------
Total cost of revenues 37,473 26,572 18,238
----------- ----------- -----------
Gross margin 82,543 70,128 55,091
Operating expenses:
Sales and marketing 37,418 32,985 24,422
Product development 13,247 11,387 7,653
General and administrative 9,804 9,485 7,445
Merger expenses -- -- 965
Charge for purchased in-process
product development 9,172 -- --
----------- ----------- -----------
Total operating expenses 69,641 53,857 40,485
----------- ----------- -----------
Income from operations 12,902 16,271 14,606
Interest income 2,411 2,409 1,971
Interest expense (389) (24) (38)
Other income (expense), net (376) (529) (42)
Loss on minority interest (44) -- --
----------- ----------- -----------
Income before income taxes 14,504 18,127 16,497
Provision for income taxes 8,282 6,557 6,451
----------- ----------- -----------
Net income $ 6,222 $ 11,570 $ 10,046
=========== =========== ===========
Net income per share, basic $ 0.63 $ 1.18 $ 1.05
----------- ----------- -----------
Net income per share, diluted $ 0.62 $ 1.15 $ 1.00
----------- ----------- -----------
Shares used to calculate net income per share
Basic 9,932,262 9,787,144 9,602,710
Diluted 10,078,123 10,064,268 10,051,908
The accompanying notes are an integral part of the consolidated financial
statements.
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54
PROJECT SOFTWARE & DEVELOPMENT, INC
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEAR ENDED SEPTEMBER 30,
1998 1997 1996
-------- --------- ---------
(IN THOUSANDS)
Cash flows from operating activities:
Net income $ 6,222 $ 11,570 $ 10,046
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 4,392 3,358 2,662
Loss on sale and disposal of property
and equipment 151 131 17
Amortization of discount on marketable securities (563) 409 331
Deferred rent 132 (73) (73)
Deferred taxes (355) (238) (908)
Charge for purchased in-process product development 9,036 -- --
Changes in operating assets and liabilities, net of effect of
acquisitions:
Accounts receivable (6,300) 2,824 (12,935)
Prepaid expenses (891) (480) (90)
Other assets 134 (1,164) 144
Accounts payable (2,970) 1,805 2,209
Accrued compensation 1,354 (532) 1,361
Income taxes payable 325 3,477 (347)
Deferred revenue 3,403 627 2,374
-------- --------- ---------
Net cash provided by operating activities 14,070 21,714 4,791
-------- --------- ---------
Cash flows from investing activities:
Acquisitions of businesses, net of cash (7,009) -- (1,837)
Acquisitions of property and equipment (4,172) (5,390) (3,204)
Proceeds from sale of property and equipment -- -- 6
Additions to computer software costs (1,284) -- (1,084)
Investment in minority interest 47 -- --
Purchases of marketable securities (90,433) (151,375) (191,574)
Sales of marketable securities 90,234 149,540 190,552
-------- --------- ---------
Net cash used in investing activities (12,617) (7,225) (7,141)
-------- --------- ---------
Cash flows from financing activities:
Payments on leased equipment -- -- (29)
Payments on bank loans (460) -- (325)
Payments of debenture (1,032) -- (124)
Proceeds from exercise of stock options
including related tax benefit 1,791 2,841 2,600
-------- --------- ---------
Net cash provided by financing activities 299 2,841 2,122
-------- --------- ---------
Effect of exchange rate changes on cash 738 (463) (21)
-------- --------- ---------
Net increase/(decrease) in cash and cash equivalents 2,490 16,867 (249)
Cash and cash equivalents, beginning of year 25,964 9,097 9,346
-------- --------- ---------
Cash and cash equivalents, end of year $ 28,454 $ 25,964 $ 9,097
======== ========= =========
The accompanying notes are an integral part of the consolidated financial
statements.
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55
PROJECT SOFTWARE & DEVELOPMENT, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED SEPTEMBER 30, 1998, 1997 AND 1996
Net Unrealized
Gain(Loss)
Common Stock Additional Cumulative on Total
Shares Paid-in Accumulated Translation Marketable Stockholders'
(in thousands, except share data) Issued Amount Capital Earnings Adjustment Securities Equity
===================================================================================================================================
Balance at September 30, 1995 ....... 9,566,712 $ 96 $42,725 $ 4,492 $ 159 $ 72 $47,544
Stock options exercised
and related tax benefit,
employee stock purchases ...... 135,837 1 2,599 2,600
Net income ........................ 10,046 10,046
Translation adjustment ............ (110) (110)
Net unrealized gain on
marketable securities ......... 82 82
- -----------------------------------------------------------------------------------------------------------------------------------
Balance at September 30, 1996 ....... 9,702,549 97 45,324 14,538 49 154 60,162
Stock options exercised
and related tax benefit,
employee stock purchases ...... 153,925 2 2,839 2,841
Net income ........................ 11,570 11,570
Translation adjustment ............ (678) (678)
Net unrealized gain on
marketable securities ......... 75 75
- -----------------------------------------------------------------------------------------------------------------------------------
Balance at September 30, 1997........ 9,856,474 99 48,163 26,108 (629) 229 73,970
Stock options exercised
and related tax benefit,
employee stock purchases ...... 98,298 1 1,790 1,791
Acquisition, net of
merger expenses ............... 27,458 457 457
Net income ........................ 6,222 6,222
Translation adjustment ............ 323 323
Net unrealized loss on
marketable securities ......... (139) (139)
- -----------------------------------------------------------------------------------------------------------------------------------
Balance at September 30, 1998 ....... 9,982,230 $100 $50,410 $32,330 $(306) $ 90 $82,624
- -----------------------------------------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of the consolidated financial
statements.
54
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PROJECT SOFTWARE & DEVELOPMENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
A. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Nature of Business
The Company's primary business is the development, marketing, sales and
support of enterprise asset maintenance software used by businesses, government
agencies, and other organizations to improve the productivity of facilities,
plants, and production equipment. The Company also provides computer
communications network and services 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 between 20% - 50% are accounted
for by the Equity method.
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
maturities of three months or less to be cash equivalents. Cash equivalents
consist primarily of money market funds, which are stated at cost, which
approximates market.
Concentration of Credit Risk
Financial instruments which potentially subject the Company to
concentration of credit risk consist primarily of temporary cash investments and
accounts 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
In 1994, the Company adopted Statement of Financial Accounting Standards
No. 115, "Accounting for Certain Investments in Debt and Equity Securities"
(SFAS 115). The Company's marketable securities are classified as
available-for-sale and are stated at their fair market value. The fair market
value of marketable securities was determined based on quoted market prices.
55
57
PROJECT SOFTWARE & DEVELOPMENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
Unrealized gains and losses on securities classified as available-for-sale are
reported as a separate component of stockholders' equity.
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 1998, 1997, and 1996 was
$879,000, $359,000 and $948,000, respectively.
Goodwill
The excess cost over net assets of acquired companies is being amortized
over five years using the straight-line method of amortization.
Depreciation and Amortization
Property and equipment are stated at cost.
Depreciation is computed over the estimated useful lives of the assets as
follows:
Description Estimated Useful Life
----------- ---------------------
Computer equipment & software......... 3 years
Vehicles.............................. 3 years
Furniture and fixtures................ 5 years
Leasehold improvements are amortized on the straight-line method over the
shorter of their estimated useful life or term of the lease. Maintenance and
repairs are charged to expense as incurred and betterments are capitalized. Upon
retirement or sale, the cost of the assets disposed of and the related
accumulated depreciation are removed from the accounts and any resulting gain or
loss is included in the determination of net income.
Income per Share
Statement of Financial Accounting Standards No. 128, "Earnings Per Share"
(SFAS 128) replaces APB Opinion No. 15, Earnings Per Share. SFAS 128 simplifies
the computation of EPS by replacing the presentation of primary EPS with a
presentation of basic EPS. It requires dual presentation of basic and diluted
EPS by entities with complex capital structures. The Company adopted SFAS 128
per the effective date for the periods ended after December 15, 1997. All prior
period net income (loss) data presented in these financial statements has been
restated to conform to the provisions of SFAS 128.
56
58
PROJECT SOFTWARE & DEVELOPMENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
Basic earnings per share is computed by dividing income available to common
shareholders by the weighted average number of common shares outstanding.
Diluted earnings per share is computed by dividing income available to common
shareholders by the weighted average common shares outstanding plus additional
common shares that would have been outstanding if dilutive potential common
shares had been issued. For purposes of this calculation, stock options are
considered common stock equivalents in periods in which they have a dilutive
effect.
Basic and diluted earnings per share are calculated as follows:
THREE YEARS ENDED
BASIC EPS 09/30/98 09/30/97 09/30/96
------------------------------------------------------------------------------
Net income $ 6,222,327 $11,570,383 $10,046,361
Weighted average common
shares outstanding 9,932,262 9,787,144 9,602,710
Basic income per share $ 0.63 $ 1.18 $ 1.05
DILUTED EPS
------------------------------------------------------------------------------
Net income $ 6,222,327 $11,570,383 $10,046,361
Weighted average common
shares outstanding 9,932,262 9,787,144 9,602,710
Common stock equivalents 145,861 277,124 449,198
---------------------------------------------
Total diluted Shares 10,078,123 10,064,268 10,051,908
Diluted income per share $ 0.62 $ 1.15 $ 1.00
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 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.
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59
PROJECT SOFTWARE & DEVELOPMENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
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, 1998, the undistributed earnings of
foreign subsidiaries were $3,100,000.
Revenue Recognition
The Company licenses its software products upon contract execution and
shipment, provided that no significant vendor obligations remain outstanding and
collection of the resulting receivable is deemed probable. Insignificant vendor
obligations, if any, remaining after contract execution and shipment are
accounted for either by deferring a pro rata portion of revenue for the
remaining tasks or by accruing the costs related to the remaining obligation.
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 includes revenues from fixed fee license agreements
with payment terms greater than one year and 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 $604,000, $476,000 and $142,000 for
1998, 1997, and 1996, respectively.
Accounting Standards
Statement of Financial Accounting Standards No. 130, "Reporting
Comprehensive Income" (SFAS 130) is effective for fiscal years beginning after
December 15, 1997. SFAS 130 requires that changes in comprehensive income be
shown in a financial statement that is displayed with the same prominence as
other financial statements. The Company will adopt SFAS 130 beginning in the
first quarter of the fiscal year ended September 30, 1999.
Statement of Financial Accounting Standards No. 131, "Disclosures about
Segments of an Enterprise and Related Information" (SFAS 131) is effective for
fiscal years beginning after December 15, 1997. This statement will change the
way companies report annual financial statements and requires them to report
selected segment information in their quarterly reports issued to shareholders.
It also requires entity-wide disclosures about the products and services an
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60
PROJECT SOFTWARE & DEVELOPMENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
entity provides, the material countries in which it holds assets and reports
revenues, and its major customers. The Company will adopt SFAS 131 in the fiscal
year ended September 30, 1999.
Statement of Financial Accounting Standards No. 132, "Employers' Disclosure
about Pensions and Other Postretirement Benefits" (SFAS 132) is effective for
financial statements for fiscal years beginning after December 15, 1997. SFAS
132 revises employers' disclosures about pension and other postretirement
benefit plans. It does not change the measurement or recognition of those plans.
The Company will adopt SFAS 132 in the fiscal year ended September 30, 1999.
Statement of Financial Accounting Standards No. 133, "Accounting for
Derivative Instruments and Hedging Activities" (SFAS 133) was issued in June
1998. It is effective for fiscal years beginning after June 15, 1999, with
earlier adoption encouraged. The new standard requires companies to record
derivatives on the balance sheet as assets or liabilities, measured at fair
value. Gains or losses resulting from changes in the values of those derivatives
would be accounted for depending on the use of the derivatives and whether they
qualify for hedge accounting. The key criterion for hedge accounting is that the
hedging relationship must be highly effective in achieving offsetting changes in
fair value or cash flows. The Company will adopt SFAS 133 in the fiscal year
ended September 30, 2000.
Statement of Position ("SOP") 97-2, "Software Revenue Recognition" was
issued in October 1997 and addresses software revenue recognition matters. The
SOP supersedes SOP 91-1 and is effective for transactions entered into for
fiscal years beginning after December 15, 1997. Based upon its reading and
interpretation of SOP 97-2 the Company believes its current revenue recognition
policies and practices are materially consistent with the SOP.
59
61
PROJECT SOFTWARE & DEVELOPMENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
B. INCOME TAXES:
The components of income before income taxes consist of the following:
Year Ended September 30,
----------------------------------
(in thousands) 1996 1997 1998
------- ------- -------
Income before income taxes:
United States ....................... $21,935 $16,098 $15,484
Foreign ............................. (7,431) 2,029 1,013
------- ------- -------
$14,504 $18,127 $16,497
======= ======= =======
Current taxes:
Federal ............................. 6,354 4,970 5,291
State ............................... 897 843 1,075
Foreign ............................. 1,129 887 757
Foreign withholding taxes ........... 266 77 233
------- ------- -------
$ 8,646 $ 6,777 $ 7,356
======= ======= =======
Deferred taxes:
Federal ............................. (124) (235) (382)
State ............................... (41) (26) (63)
Foreign ............................. (199) 41 (460)
------- ------- -------
(364) (220) (905)
------- ------- -------
Total ......................... $ 8,282 $ 6,557 $ 6,451
======= ======= =======
60
62
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,
----------------------------
1998 1997 1996
---- ---- ----
Statutory federal tax rate.................. 35.0% 35.0% 35.0%
FSC benefit................................. (2.5) (1.3) (1.5)
State taxes, net of federal tax benefit..... 2.9 3.0 4.3
Foreign withholding taxes................... 1.1 0.4 1.4
R&D credit.................................. (1.3) (0.7) --
Exempt interest............................. (1.3) (1.4) (1.0)
Other....................................... 1.1 1.2 0.9
---- ---- ----
Effective tax rate before purchased
in-process development.................... 35.0% 36.2% 39.1%
---- ---- ----
Non-deductible charge for purchased
in-process product development............ 22.1 -- --
---- ---- ----
Effective tax rate.......................... 57.1% 36.2% 39.1%
==== ==== ====
The components of the deferred tax provision are:
Year Ended September 30,
----------------------------
(in thousands) 1998 1997 1996
----- ---- ----
Depreciation............................... 82 $(340) $ 47
Allowance for Doubtful Accounts............ (87) (45) (283)
Software Capitalization.................... 96 (141) (121)
Deferred Revenue........................... (96) (135) 45
Deferred Rent.............................. (52) 29 23
Deferred Merchandise....................... -- 36 (49)
Package Design............................. (5) (4) 3
Accrued Vacation........................... (44) 35 (40)
Net Operating Losses....................... -- 585 (564)
Goodwill................................... (85) -- --
Translation Loss........................... (116) (191) --
Other...................................... (57) (49) 34
----- ----- -----
$(364) $(220) $(905)
===== ===== =====
61
63
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) 1998 1997
------ ------
Deferred Tax Assets:
Deferred Revenue ......................... $ 392 $ 296
Deferred Rent ............................ 56 4
Allowance for Doubtful Accounts .......... 765 678
Accrued Vacation ......................... 110 66
Depreciation ............................. 257 340
Package Design ........................... 64 59
Amortized Software ....................... 22 --
Other Reserves ........................... 155 80
Goodwill ................................. 203 118
Sec. 481 Cash to Accrual Adjustment ...... 94 188
Translation Loss ......................... 307 191
Net Operating Loss Carryforwards ......... 881 --
Valuation Allowance ...................... (938) --
------ ------
$2,368 $2,020
====== ======
Deferred Tax Liabilities:
Software Capitalization .................. $ 96 $ --
Sec. 475 Account Receivable Adjustment ... $ 281 $ 359
Other Liabilities ........................ 13 47
------ ------
$ 390 $ 406
------ ------
Net Deferred Tax Asset ........................ $1,978 $1,614
====== ======
At September 30, 1998, the Company had foreign tax credit carryforwards of
approximately $74,000 which expire in fiscal year 2003. At September 30, 1998,
the Company had foreign net operating loss carryforwards of approximately
$1,857,000, which will generally expire as follows: $29,000 in fiscal year 2001,
$328,000 in fiscal year 2002, $660,000 in fiscal year 2003, $549,000 in fiscal
year 2004, and $291,000 in fiscal year 2005. The valuation allowance represents
foreign net operating loss carryforwards which are not expected to be realized.
C. ACQUISITIONS:
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
62
64
PROJECT SOFTWARE & DEVELOPMENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
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.
On March 1, 1996, the Company acquired all of the outstanding common stock
of Maintenance Automation Corporation ("MAC"), a developer of PC-based
maintenance management software, in exchange for the issuance of 368,946 shares
of common stock. The transaction was accounted for as a pooling-of-interests.
Costs of the merger were $965,000. The Company's consolidated financial
statements for all periods presented were restated to include MAC.
D. MARKETABLE SECURITIES:
Marketable equity and debt securities available for current operations are
classified in the balance sheet as current assets. The contractual maturity
dates of securities range from one to two years, however, it is the Company's
intention that all securities held at the balance sheet date will be sold within
one year based upon historical experience to date. Dividend and interest income,
including amortization of premium and discount arising at acquisition, are
included in other income. The unrealized holding gains and (losses) for the year
ended September 30, 1998 were $104,000 and $(14,000), respectively. The
unrealized holding gains and (losses) for the year ended September 30, 1998 were
$575,000 and $(500,000), respectively.
Amortized Fair Market
1998 (in thousands) Cost Value
- ---- --------- -----------
U.S. Government securities $20,612 $20,688
Tax exempt municipal securities 18,220 18,234
------- -------
$38,832 $38,922
======= =======
Amortized Fair Market
1997 (in thousands) Cost Value
- ---- --------- -----------
U.S. Government securities $17,017 $17,591
Tax exempt municipal securities 20,794 20,708
------- -------
$37,811 $38,299
======= =======
63
65
PROJECT SOFTWARE & DEVELOPMENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
E. PROPERTY AND EQUIPMENT:
Property and equipment are stated at cost and consist of the following:
Year Ended September 30,
------------------------
(in thousands) 1998 1997
-------- --------
Computer equipment and software .................. $ 10,560 $ 10,972
Vehicles ......................................... 143 367
Furniture and fixtures ........................... 5,305 4,899
Leasehold improvements ........................... 2,866 3,415
-------- --------
18,874 19,653
Less accumulated depreciation and amortization ... (10,051) (12,331)
-------- --------
$ 8,823 $ 7,322
======== ========
Depreciation and amortization expense was $3,300,000, $2,577,000, and
$1,588,000 for 1998, 1997 and 1996, respectively.
F. GOODWILL
Goodwill represents the excess of the cost of acquired businesses over the
fair market value of their net tangible and identified intangible assets.
Goodwill is evaluated at each balance sheet date to determine whether any
potential impairment exists. The Company believes that no material impairment
exists at September 30, 1998.
Goodwill is being amortized on the straight-line method over a period of
five years. Amortization expense was $365,000, $421,000 and $268,000 for 1998,
1997, and 1996, respectively.
G. ACCRUED COMPENSATION:
A summary of accrued compensation consists of the following:
Year Ended September 30,
------------------------
(in thousands) 1998 1997
-------- --------
Accrued bonus ................................... $ 244 $ 683
Accrued 401(k) Company contribution ............. 217 224
Accrued payroll ................................. 700 396
Accrued sales commissions ....................... 4,012 2,687
Accrued vacation pay ............................ 627 504
------ ------
$5,800 $4,494
====== ======
64
66
PROJECT SOFTWARE & DEVELOPMENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
H. 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 $4,272,000, $3,780,000, and $3,033,000 for 1998, 1997 and 1996,
respectively. The Company relocated its corporate headquarters in December 1997.
The operating leases provide for minimum aggregate future rentals as of
September 30, 1998 as follows:
(in thousands)
1999................................................... 2,541
2000................................................... 2,353
2001................................................... 2,016
2002................................................... 1,727
2003 and thereafter.................................... 2,781
-------
$11,418
At September 30, 1998, the Company is also obligated to pay $763,000 in
1999 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.
The Company sold a U.S. government receivable, with certain recourse
provisions, in the amount of $6,740,000, to a third party financing company for
proceeds of $6,370,000 which was recorded as a reduction in accounts receivable.
Interest expense of $370,000 was recorded in connection with this financing
arrangement.
I. 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.
65
67
PROJECT SOFTWARE & DEVELOPMENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
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 1998, 1997, and 1996 were $329,000, $268,000, and
$40,000, respectively.
Incentive and Nonqualified Stock Option Plan
On March 10, 1994, the Board of Directors of the Company adopted the 1994
Incentive and Nonqualified Stock Option Plan (the "Option Plan") that provided
for the grant of 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 900,000 to
1,800,000. The exercise price of Incentive Options must be at least equal to the
fair market value on the date of grant. The exercise price of Nonqualified
Options must not be less than 85% of the fair market value on the date of grant.
These options vest in equal annual installments over four years, commencing on
December 31, 1994.
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
shares granted to each during the Grant Period. The price of these stock options
was determined as of the closing of the stock market on July 31, 1997.
Stock option activity is summarized as follows:
No. of shares Price per share
------------- ---------------
Outstanding shares at September 30, 1995 744,130 $ 5.67 - $18.00
1996
- ----
Granted 310,850 $23.75 - $31.00
Canceled (10,868) $ 5.67 - $31.00
Exercised (126,708) $ 5.67 - $18.00
Outstanding at September 30, 1996 917,404 $ 5.67 - $31.00
Exercisable at September 30, 1996 167,812 $ 5.67 - $18.00
1997
- ----
Granted 548,098 $21.125 - $41.13
Canceled (565,998) $ 5.667 - $42.63
Exercised (145,535) $ 5.667 - $23.75
Outstanding at September 30, 1997 753,969 $ 5.667 - $41.13
Exercisable at September 30, 1997 259,788 $ 5.667 - $31.00
66
68
PROJECT SOFTWARE & DEVELOPMENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
1998 No. of shares Price per share
- ---- ------------- ---------------
Granted 350,200 $13.625 - $26.50
Canceled (238,681) $ 5.667 - $31.00
Exercised (110,754) $ 5.667 - $23.75
Outstanding at September 30, 1998 754,734 $ 5.667 - $42.63
Exercisable at September 30, 1998 295,535 $ 5.667 - $42.63
Available for grant at September 30, 1998 587,069
The following table summarizes information about stock options outstanding at
September 30, 1998:
- ----------------------------------------------------------------------------------------------------------------
Options Outstanding Options Exercisable
- ----------------------------------------------------------------------------------------------------------------
Number Weighted-Avg
Outstanding Remaining Number
Range of As of Contractual Weighted-Avg Exercisable Weighted-Avg
Exercise Prices of 9/30/98 Life (years) Exercise Price As of 9/30/98 Exercise Price
- --------------- ----------- ------------ -------------- ------------- --------------
$ 5.67 - $ 6.33 125,020 5.2 $ 5.75 125,020 $ 5.75
$13.63 - $19.63 137,177 6.5 $17.71 69,706 $17.83
$21.13 - $31.00 468,037 8.7 $24.77 76,684 $23.41
$33.50 - $42.63 24,500 3.0 $37.42 24,125 $37.34
- --------------- ------- --- ------ ------- ------
$ 5.67 - $42.63 754,734 7.5 $20.75 295,535 $15.76
=============== ======= === ====== ======= ======
Statement of Financial Accounting Standards No. 123, "Accounting for
Stock-Based Compensation" (SFAS 123) encourages, but does not require,
recognition of compensation expense based on the fair value of employee
stock-based compensation instruments. The Company did not adopt the fair value
method of accounting for employee stock-based compensation but instead complies
with the pro forma disclosure requirements. The fair value method of the
Company's stock options was estimated using the Black-Scholes option pricing
model. This model was developed for use in estimated fair value of traded
options that have no vesting restrictions and are fully transferable. This model
requires the input of highly subjective assumptions including the expected stock
price volatility. Because the Company's stock options have characteristics
significantly different from those of traded options, and because changes in the
subjective input assumptions can materially affect the fair value estimates, in
management's opinion, the existing model does not necessarily provide a reliable
single measure of the fair value of its stock options.
67
69
PROJECT SOFTWARE & DEVELOPMENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
The fair value of the Company's stock options was estimated using the following
weighted-average assumptions:
Year Ended September 30,
------------------------
1998 1997 1996
---- ---- ----
Expected life (in years) 3.25 3.78 3.00
Volatility 70% 75% 75%
Risk-free interest rate 5.63% 6.10% 6.24%
Dividend yield 0% 0% 0%
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,
-------------------------
(in thousands, except per share amounts) 1998 1997 1996
---- ---- ----
Net income
As reported. ................................. $6,222 $11,570 $10,046
Pro forma 5,252 10,443 9,706
Net income per share, diluted
As reported .................................. $ 0.62 $ 1.15 $ 1.00
Pro forma $ 0.52 1.04 0.97
Because SFAS 123 is applicable only to options granted subsequent to
September 30, 1995, its pro forma effect will not be fully reflected until
approximately the year 2000. There are 223,197 options outstanding related to
shares granted prior to the effective date of SFAS 123. Under SFAS 123, the
weighted-average estimated fair value of purchase rights granted during fiscal
1998 and 1997 were $6.57 and $7.76 per share, respectively.
Employee Stock Purchase Plan
On March 10, 1994, the Board of Directors of the Company adopted the 1994
Employee Stock Purchase Plan that provides for a maximum issuance of 225,000
shares of Common Stock for purchase by eligible employees at 85% of the lower of
the fair market value of the Company's Common Stock on either the first or last
day of the semi-annual offering period. No compensation expense is recorded in
connection with the plan. During fiscal year ended 1998, employees purchased
24,327 shares at a price of $16.47 and $16.89 for the offering periods ended
November 30, 1997 and May 31, 1998, respectively. Approximately 124 employees
participated in the plan during the fiscal year ended 1998. Total shares
purchased in 1997 and 1996 were 8,390 and 9,129, respectively.
68
70
PROJECT SOFTWARE & DEVELOPMENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
J. 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, 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.
K. SUPPLEMENTAL CASH FLOW DISCLOSURES:
Cash paid for interest and taxes were as follows:
Year Ended September 30,
--------------------------
1998 1997 1996
---- ---- ----
(in thousands)
Interest................................... $ 389 $ 24 $ 38
Income taxes............................... 7,382 2,856 6,175
Acquisitions of businesses were as follows:
Year Ended September 30,
--------------------------
1998 1997 1996
---- ---- ----
(in thousands)
Fair value of assets acquired.............. $10,280 $ -- $2,729
Fair value of liabilities assumed.......... 2,751 -- 892
------- ---- ------
Net cash payments.......................... 6,400 -- 1,837
------- ---- ------
69
71
PROJECT SOFTWARE & DEVELOPMENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
L. GEOGRAPHIC DATA AND MAJOR CUSTOMERS:
A summary of the Company's operations by geographical area was as follows:
Year Ended September 30,
---------------------------------------
1998 1997 1996
-------- ------- -------
(in thousands)
Revenues:
The Americas
US.................................... $ 65,210 $54,348 $43,595
Canada................................ 5,436 5,121 2,089
Export sales.......................... 5,074 3,906 3,091
Intercompany revenues................. 14,944 8,291 8,676
-------- ------- -------
$ 90,664 $71,666 $57,451
Europe................................ 36,956 28,063 20,224
Asia/Pacific.......................... 7,340 5,262 4,330
Consolidating eliminations............ (14,944) (8,291) (8,676)
-------- ------- -------
$120,016 $96,700 $73,329
-------- ------- -------
Income from operations:
US ...................................... $ 21,281 $15,030 $13,671
Canada.................................... (9,716) 65 56
Europe.................................... 879 998 756
Asia/Pacific.............................. 458 178 147
Consolidating eliminations................ -- -- (24)
-------- ------- -------
$ 12,902 $16,271 $14,606
-------- ------- -------
Cash and cash equivalents:
US ...................................... $ 21,449 $17,579 $ 3,657
Canada.................................... 279 641 151
Europe.................................... 6,154 6,929 4,846
Asia/Pacific.............................. 572 815 443
-------- ------- -------
$ 28,454 $25,964 $ 9,097
-------- ------- -------
Accounts receivable, net:
US ...................................... $ 16,050 $14,755 $13,940
Canada.................................... 952 111 498
Europe.................................... 9,796 6,945 10,207
Asia/Pacific.............................. 3,860 2,210 2,385
-------- ------- -------
$ 30,658 $24,021 $27,030
-------- ------- -------
70
72
PROJECT SOFTWARE & DEVELOPMENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
Identifiable assets:
US ...................................... $88,220 $ 79,733 $60,979
Canada.................................... 1,512 782 662
Europe.................................... 19,536 17,606 18,828
Asia/Pacific.............................. 5,252 4,118 3,005
Consolidated eliminations................. -- -- 2
-------- -------- -------
$114,520 $102,239 $83,476
-------- -------- -------
The Company operates in one business segment: the development, marketing,
sales and support, of software products. 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.
M. 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, 1997,
and 1996 totaled $285,000, $1,510,000 and $1,650,000, respectively.
71
73
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, 1998 $2,286,574 $1,916,189 $1,588,626 $2,614,137
Allowance for doubtful accounts
YEAR ENDED SEP.30, 1997 $1,954,000 $4,383,185 $4,050,719 $2,286,574
Allowance for doubtful accounts
YEAR ENDED SEP.30, 1996 $1,346,000 $1,040,000 $ 432,000 $1,954,000
Allowance for doubtful accounts
74
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)
3.4 Form of Certificate of Designation of Series A Junior
Participating Preferred Stock of Project Software &
Development, Inc. (which is attached as Exhibit A to the
Rights Agreement 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 Sotware & 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, 1996, and incorporated herein by
reference)
75
10.1 Stock Purchase Agreement dated as of February 6, 1998
among Project Software & Development, Inc., PSDI Canada
Limited, Inc., A.R.M. Group Inc. and the Stockholders of
A.R.M. Group Inc. (included as Exhibit 10.1 to the
Company's Quarterly Report on Form 10-Q for the quarter
ended March 31, 1998, Commission File No. 0-23552 and
incorporated herein by reference)
10.2 Executive Bonus Plan (included as Exhibit 10.2 to the
Company's Quarterly Report on Form 10-Q for the quarter
ended March 31, 1998, 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