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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
FOR THE FISCAL YEAR ENDED SEPTEMBER 30, 1999
(mark one)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES AND
EXCHANGE ACT OF 1934
For the transition period from _______________ to __________________
Commission File Number 0-23852
PROJECT SOFTWARE & DEVELOPMENT, INC.
(Exact name of registrant as specified in its charter)
MASSACHUSETTS 04-2448516
(State or other jurisdiction of (I.R.S. employer
incorporation or organization) identification number)
100 CROSBY DRIVE, BEDFORD, MASSACHUSETTS 01730
(Address of principal executive offices, including zip code)
(781) 280-2000
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
None
Securities registered pursuant to Section 12(g) of the Act:
COMMON STOCK, $.01 PAR VALUE
(TITLE OF CLASS)
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to the Form 10-K.
As of December 16, 1999, the aggregate market value of the voting stock held by
non-affiliates of the Registrant was approximately $496,684,432 based on the
last sale price of such stock on such date.
Number of shares outstanding of the Registrant's common stock as of the latest
practicable date: 21,487,326 shares of common stock, $.01 par value per share,
as of December 16, 1999.
DOCUMENT INCORPORATED BY REFERENCE
Certain portions of the Company's Definitive Proxy Statement for its
1999 Annual Meeting of Stockholders are incorporated by reference into Part III
of this Annual Report on Form 10-K.
Total number of pages:
Exhibit index is located on page:
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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 enterprise asset maintenance software with an
Internet-based business-to-business e-Commerce network and set of desktop
requisition and online procurement software products that enable businesses to
engage in electronic commerce. The Company's products are designed to enable
customers to reduce down-time, control maintenance expenses, cut spare parts
inventories and costs, improve purchasing efficiency and more effectively deploy
productive assets, personnel and other resources.
The Company's principal software product is MAXIMO(R), an enterprise-wide
client/server asset maintenance management application. The client/server
version of MAXIMO was first released in February 1991 and has been employed in
production applications for more than eight years. Revenues from licenses of
client/server MAXIMO have grown from $1,406,000 in fiscal year 1991 to
$56,389,000 in fiscal year 1999. The Company's MAXIMO client/server products
offer robust functionality, drawing upon the Company's established track record
as a provider of large-scale applications critical to the operations of major
industrial companies.
In fiscal 1998, the Company introduced an industry specific focused applications
strategy for MAXIMO. MAXIMO for Facilities, MAXIMO for Industry, and MAXIMO
Enterprise for Transportation are pre-configured applications with industry
specific MAXIMO modules that are packaged into the base MAXIMO product. These
offerings are priced competitively and supported by standard implementation
packages tailored specifically for facilities, mid-tier manufacturing and
companies with sophisticated fleet management needs. MAXIMO Enterprise for
Utilities, MAXIMO Enterprise for Energy, and MAXIMO Enterprise for Process
became available in fiscal 1999.
In fiscal 1999, the Company formed a new wholly-owned subsidiary, MRO.com, Inc.
MRO.com, Inc. ("MRO.com") has established subsidiaries in Australia, Canada,
Hong Kong, and the United Kingdom. MRO.com, Inc. provides on-line procurement
solutions for capital intensive industries and the manufacturing and
distribution channels that serve them. These solutions will enable buyers at
companies to efficiently manage the complex balance between both planned and
spot buy procurement activities. MRO.com, Inc. links an on-line community of MRO
("Maintenance,
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Repair and Operating") suppliers and buyers to a group of Internet-based
procurement products that reduce purchasing and inventory costs. The buyers,
many of whom are already using the Company's MAXIMO Enterprise Asset Management
software, will be offered a new set of Internet-based procurement products as
well as a connection to a community of MRO suppliers assembled by MRO.com. It is
expected that as a result, users will benefit from reduced purchasing and
inventory costs. Revenues from MRO.com products and services were $6,100,000 in
fiscal year 1999.
In April 1999, the Company signed agreements with W.W. Grainger, Inc., a leading
business-to-business provider of MRO supplies and related information in North
America. W.W. Grainger, Inc. acquired 1,000,000 shares of the Company's common
stock for $14.5 million and acquired a two-year option to purchase 5% of the
Company's wholly-owned subsidiary, MRO.com, Inc., for an exercise price of $3.8
million.
On February 6, 1998, the Company acquired the stock of A.R.M. Group Inc.,
Ontario, Canada. A.R.M. Group Inc. was a privately-held organization that helped
businesses solve maintenance and indirect materials management problems. A.R.M.
launched the M|net solution over which distributors, manufacturers and
purchasers of MRO supplies conduct their business through a shared inventory
network.
PRODUCTS
MAXIMO
The MAXIMO maintenance management software product is used to plan and manage
ongoing maintenance and repair operations and to track related labor, parts and
costs. Using MAXIMO, customers can prioritize tasks, assign work based on the
availability of necessary parts and labor and analyze equipment failures in
order to implement appropriate preventative maintenance measures. MAXIMO permits
work orders to be generated and tracked electronically, and also to be linked to
related information, such as labor and equipment records, job procedures, parts
inventories and purchasing systems. Failure analysis using MAXIMO can assist in
identifying root causes of equipment problems and can aid in designing
preventive maintenance procedures to reduce future equipment failure rates and
downtime.
In fiscal 1998, the Company released MAXIMO 4.0, which combines an open
architecture with Java components and enhanced safety work management and
materials management features, that helps organizations better manage
maintenance operations and prevent equipment disruptions and down time. MAXIMO
4.0 includes safety and compliance features so that companies can implement
in-depth tracking and reporting processes that adhere to mandated regulatory
guidelines. MAXIMO 4.0 is available in English, Brazilian Portuguese, Dutch,
French, German, Japanese, Latin American Spanish, and Swedish.
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MAXIMO FEATURES
MAXIMO is composed of a series of integrated modules, each of which is linked to
the others and to a relational database management system. Each module includes
one or more applications functions, including the following:
The Equipment Module tracks associated costs, histories, and failures of a
serialized piece of equipment as it moves throughout a plant or facility.
Work Orders Module provides the ability to view detailed planning information,
enter day to day maintenance requests, schedule work orders based on real-time
criticality and compare budgets or estimates against actuals and historical work
orders.
Preventative Maintenance Module generates preventative maintenance work orders
individually, batched or automatically.
Resources Module maintains detailed company, service contract, and tool records
for use in other modules to plan and analyze maintenance work.
Labor Module stores information by employee, craft or contractor. It maintains
personnel files and reports labor on work orders in timecard format.
Calendars Module provides the ability to view calendars by month or day and
associates calendars with labor and craft records to plan work based on
equipment and labor availability.
Jobs Plans Module tracks multiple quantities and costs by operation or job plan.
Purchasing Module creates requests for proposal, blanket purchase orders and
purchase agreements, purchase requisitions and purchase orders, records receipt
of parts, analyzes vendor performance and integrates with accounting
applications, including invoice matching and multiple currency functionality.
Inventory Module contains over 2,000 material classification templates, tracks
items, costs and balances by bin, lot or storeroom, reorders automatically,
forecasts materials, accesses up to date cost information and issues parts
directly to work orders.
Safety Module offers users safety features such as identification of hazardous
materials, lock out, tag out capabilities, identification of affected equipment
and locations and tracking of permits.
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MAXIMO OPTIONS
MAXIMO offers users a variety of integrated options, including, but not limited
to, the following:
MAXIMO Integration Gateways - MAXIMO integrates with multiple financial systems
including package integration to Oracle(R), PeopleSoft(R), and SAP(R).
Internet - MAXIMO allows the "Self Service" creation of new work requests and
review of existing requests through any Java-enabled Internet browser,
electronic commerce capabilities for the transfer of purchase orders to vendors
and MRO-Online ability to download job plans and PM schedules.
MAXIMO Analyzer - MAXIMO Analyzer provides detailed information allowing users
to rapidly pose multiple questions and assess responding data to make critical
business decisions. The product converts transaction data into a functional
analysis instrument utilizing PowerPlay(R) from Cognos, a leading supplier of
business intelligence tools. MAXIMO Analyzer delivers true distributed Online
Analytical Processing (OLAP) capabilities for MAXIMO users.
MAXIMO ARCHITECTURE
MAXIMO's client/server versions are provided by a direct link to many of today's
leading commercial SQL databases including the Oracle and Microsoft SQL Server
database products. MAXIMO accommodates database servers operating under Novell
NLM, Windows NT and UNIX operating systems, and supports a variety of network
operating systems, including Novell NetWare, Banyan VINES and IBM LAN Server for
OS/2, and standard network communications protocols including TCP/IP and
IPX/SPX. MAXIMO's use of a standard SQL database and support for a broad range
of server platforms, network operating systems and communications protocols
provides customers with the flexibility to match their computing resources to
their needs, and facilitates the integration of data from other applications
such as accounting and human resources.
The MAXIMO "Self Service" applications are the initial MAXIMO applications
developed in a Java-based, object oriented, component architecture designed to
replace, in an evolutionary manner, the existing MAXIMO client/server
architecture. This framework is initially being used to develop Java-based
self-service applications and wireless applications running on hand held
devices.
MRO.COM
MRO.com products are designed to enable organizations to purchase indirect MRO
items over the Internet quickly and easily. MRO buyers are provided with the
tools to gain immediate access to
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product catalog content from their selected suppliers. This buy-side software
solution also provides integration to the business system of the buying
organization and transaction management to connect buyers and suppliers in real
time.
The MRO.com product offerings include the following:
mroBuyer(TM):
mroBuyer was generally made available in June 1999. mroBuyer is part of a suite
of Internet-based procurement products designed to link buyers and suppliers in
streamlining purchasing efficiencies. mroBuyer provides a single interface for
electronic procurement of MRO supplies, materials, parts and services from
participating suppliers. mroBuyer links front-line employees to
mroMarketplace(TM), which is MRO.com's growing online community of supplier
catalogs through which a buyer can make MRO related purchases. mroBuyer also
includes the following components:
o Desktop Requisition: a browser-based interface to supplier catalog content
and purchase order transaction management information. The desktop
requisition tool provides users with the ability to search for and select
parts from online catalogs, create requisitions and purchase orders online
and electronically transfer purchase orders through the mroNetwork(TM) to a
company's selected suppliers. It also provides the ability to view
real-time inventory availability, /order status information, invoice and
shipping history and contract pricing.
o mroIntegration Gateway(TM): a standards-based, open architecture,
application program interface (API) that provides a connection to leading
ERP systems such as SAP, Oracle, and PeopleSoft.
o Workflow: a Java-based application that provides requisition routing and
approval based on a company's pre-defined business rules. Requisitions
requiring approval are automatically routed through the approval chain by
e-mail. An advanced graphical interface is used to create custom rules and
workflow models.
o mro Transaction Server(TM): an industry-standard, XML-based connection to
the mroMarketplace that provides live, real-time status on orders and
transactions between connected buyer and suppliers.
mroSupplier(TM):
mroSupplier provides MRO supplier organizations with the tools to overcome the
management and cost hurdles associated with Internet procurement. mroSupplier's
electronic catalog assists suppliers with catalog development and maintenance
activities, such as data scrubbing and formatting. Supplier catalogs are
aggregated at
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the mroMarketplace, where they can be posted for access by all buyers in the
community or customized to reflect the unique price and trading agreements of
individual buying organizations. mroSupplier provides additional functionality
to enable suppliers to update and change catalogs as needed. mroSupplier also
includes mroIntegration Gateway(TM) and mro Transaction Server(TM).
mroMarketplace(TM):
A Web-based community designed to establish the critical mass of buyers and
suppliers required for effective management of the indirect supply chain. The
mroMarketplace is a content aggregation hub for more than 40 suppliers.
CUSTOMER SUPPORT AND SERVICES
A high level of customer service and technical support is critical to customer
satisfaction because many of the Company's customers implement their
client/server maintenance management products in complex, large-scale
applications on which the success of their organizations depend. In addition,
implementation of enterprise-wide applications in a heterogeneous client/server
computing environment incorporating multiple operating systems, network
operating systems and communications protocols can present customers with
substantial technical challenges. The Company offers support and consulting
services designed to assist customers in meeting these challenges and in
successfully implementing business solutions which realize the benefits promised
by client/server computing. The Company believes that its approach to service
and support has been and will continue to be a significant factor in the market
acceptance of its products.
Customer Support Programs. As of September 30, 1999, the Company employed a
technical hot-line support staff of 79 employees operating out of the Company's
corporate headquarters in Massachusetts and three international technical
response centers located in the United Kingdom, Australia, and Canada.
Subscribers to the Company's annual support contracts are entitled to receive
(i) customer service and technical support by telephone, fax, support on line
via the Internet and electronic bulletin board, (ii) a newsletter and periodic
technical bulletins, (iii) an invitation to attend the Company's annual user
group meeting and (iv) any periodic software updates. The Company believes that
support contracts are a stable source of recurring revenue.
Implementation, Consulting and Training. As of September 30, 1999, the Company
employed a consulting and training staff of 200 employees. The Company's network
of international distributors also provides services within their geographic
territories.
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The Company provides consulting services, on a fee basis, to assist customers in
planning and carrying out the implementation of the Company's solutions. In some
cases, customers install and implement MAXIMO systems and perform any necessary
customization themselves with only limited assistance from the Company. In other
cases, particularly where a complex, integrated solution or extensive
customization is required, the Company provides comprehensive implementation
planning, project management, network communications, system integration and
custom modification services. The Company also contracts with third party
consultants, as needed, in order to meet any services backlog.
The Company conducts comprehensive training programs covering Company
applications and concepts for its end users. Training is offered at the
Company's headquarters in Massachusetts and at regional centers located in
California, Colorado, Georgia, Texas, Virginia, Australia, France, Germany,
Sweden, the United Kingdom and the Netherlands. The Company also offers on-site
training classes at customer sites upon request.
CUSTOMERS
The Company's customers include electric, water and other utilities,
educational, research and health care institutions, government agencies, hotels,
casinos, airlines and railroads, as well as large, well-known corporations in
manufacturing, oil and gas, construction, mining, aerospace, defense, ship
building, telecommunications, ground fleet transportation, data processing,
semiconductor, financial, computer, entertainment, banking, insurance,
pharmaceutical and other industries. The Company's products have been installed
and are supported in major markets worldwide. Local language support is provided
in many of these markets.
SALES AND MARKETING
The Company markets its products in the United States through a direct sales
force of 117 persons operating out of its Massachusetts headquarters and sales
offices located in California, Colorado, Florida, Georgia, Illinois, Maryland,
Michigan, New Hampshire, New Jersey, New York, Texas, and Virginia. The Company
markets its products outside the United States through a sales force of 127
persons from a network of sales offices in Argentina, Australia, Belgium,
Canada, China, France, Germany, Hong Kong, India, Mexico, the Netherlands,
Sweden, Thailand and the United Kingdom and through distributors in parts of
Africa, Asia, Europe, the Middle East and South America. Approximately 46% of
the Company's total revenues in fiscal 1999 were derived from sales outside the
United States.
The Company markets its products through advertising campaigns in national trade
periodicals, direct mail, seminars and its Web site (http://www.MAXIMO.com).
These efforts are supplemented by
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listings in relevant trade directories, exhibitions at trade shows and
conference appearances. Initial leads are qualified by the tele-marketing
operation before being turned over to either the direct sales force or
tele-sales.
The sales cycle for MAXIMO products, from the initial sales presentation to the
issuance of a purchase order, typically ranges from six to eighteen months for
the different MAXIMO vertical modules. The Company believes that customers
generally choose MAXIMO based on the features it provides and upon a preference
for the product architecture, implementation time, domain expertise and ease of
use.
The sales cycle for MRO.com products, from the initial sales presentation to the
issuance of a purchase order, typically ranges from six to nine months. The
Company has focused its sales strategy towards capital intensive industrial
companies more than the service type industries, such as banks and financial
institutions.
Delivery lead times for the Company's products are very short and, consequently,
substantially all of the Company's software revenues in each quarter result from
the orders received in the quarter. Accordingly, the Company only maintains a
backlog for its consulting and training services and believes that its backlog
at any point in time is not a reliable indicator of future sales and earnings.
The absence of significant backlog may contribute to unpredictability in the
Company's results of operations.
The Company has alliances with Oracle and PeopleSoft. The Company also offers a
solution to SAP through an alliance with IBM Global Services (an affiliate of
IBM). The Company develops reseller channels that supplement the direct sales
force. The Company has agreements with outsourcing vendors such as Johnson
Controls, Inc. and ABB Service Worldwide (an affiliate of Asea Brown Boveri).
The Company works closely with major systems integrators such as IBM Global
Services, Innolog, Inc., and Cordant Inc. (an affiliate of Tracor, Inc.). The
Company has OEM arrangements with companies such as Honeywell Incorporated, The
Foxboro Company, and Elsag-Bailey.
The Company also seeks out alliances with niche solution providers who provide a
complementary solution to MAXIMO. The Company has established the MAXIMO Connect
Program to develop integrated solutions with niche applications to enhance the
overall MAXIMO enterprise asset management solution.
COMPETITION
The market for applications software is intensely competitive and rapidly
changing. In general, the Company competes on the basis of (i) product
architecture, which includes distributed computing capability, access to
commercial SQL databases, and
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ease of customization and integration with other applications; (ii)
functionality, which includes the breadth and depth of features and functions,
and ease of use; (iii) support and service, which includes the range and quality
of technical support, training and consulting services, as well as the
capability to provide these on a global basis; (iv) product pricing in relation
to performance; (v) rapid implementation to achieve benefits and (vi) domain
expertise.
The market for asset maintenance software is fragmented by geography, hardware
platform and industry orientation, and is characterized by a large number of
competitors, including both independent software vendors and certain enterprise
resource planning vendors including SAP and JD Edwards, who offer a module
incorporating limited asset maintenance functionality. Over the past few years,
there has been a consolidation within the asset maintenance software market. The
Company expects that in the future MAXIMO may encounter competition from vendors
of low cost maintenance systems designed initially for use by a single user or
limited number of users, as vendors of these products upgrade their
functionality in an attempt to enter the client/server market. MAXIMO for
Industry and MAXIMO for Facilities compete with a number of competitors, one of
which is a public company, but most of which are small regional companies.
The Company believes that the functionality of MAXIMO, its open product
architecture and the Company's ability to provide global distribution and
support have been significant factors in the competitive success of MAXIMO.
While the Company believes that MAXIMO has competed effectively to date,
competition in its industry is likely to intensify as current competitors expand
their product lines and new companies enter the market. To remain successful in
the future, the Company must respond promptly and effectively to the challenges
of technological change, evolving standards and its competitors' innovations by
continually enhancing its own product, support and services offerings, as well
as its marketing programs. There can be no assurance that the Company will
continue to be able to compete successfully in the future.
The MRO supply chain management business using electronic commerce has many
diverse competitors offering a wide range of differing products, services and
technologies. The Company expects competition to intensify as current
competitors expand their product offerings and new competitors enter the market.
In addition, the market for electronic procurement solutions is relatively new
and underdeveloped. Many of the Company's enterprise asset management
competitors are also entering the MRO e-Commerce market. The current potential
competitors include, Ariba, Clarus, Commerce One, Concur, Connect, Harbinger,
IBM, Intellisys, Microsoft, Netscape, Oracle, PeopleSoft, SAP and others. This
market will be rapidly developing and changing.
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PRODUCT DEVELOPMENT
The Company has made substantial investments in research and software product
development. The Company's total product development expenses in 1999, 1998 and
1997 were $14,959,000, $13,247,000, and $11,387,000, respectively. The Company's
research and development staff consisted of 140 employees and a number of
consultants as of September 30, 1999. The Company's development organization is
comprised of relatively small teams of senior level developers and engineers,
who focus on different areas of development.
The Company will continue its MAXIMO client/server product development and work
closely with customers to define and develop market driven product enhancements.
The Company's product development efforts are also currently focused on a
standards based component architecture written in the Java programming language.
Moving beyond traditional client/server and three-tier architectures, an open
standards based component architecture provides benefits in terms of greater
flexibility, improved integration capabilities, lower "cost of ownerships" in
maintaining and application infrastructure, as well as improved developer
productivity in both development and implementations. The MAXIMO and mroBuyer
products are heavily leveraging this technology. The Company continues its
efforts to integrate MAXIMO and mroBuyer with the major Enterprise Resource
Planning ("ERP") systems, such as PeopleSoft, Oracle, SAP and BaaN to offer its
clients a complete and flexible integrated business system solution.
Some of the other projects that the development group is focused on include
developing business components to support mobile applications, self service
applications, enterprise integration and the MRO.com, Inc., electronic commerce
applications, as well as, researching and investigating new technologies that
should complement the Company's product strategies in the future.
The Company's products consist primarily of internally developed software and
the products acquired from The A.R.M. Group Inc. In addition, the Company has
incorporated in its products graphical user interfaces, report writers,
application development tools and database management systems developed by other
vendors.
The computer industry is characterized by rapid technological advances, changes
in customer requirements and frequent product introductions and enhancements.
The Company's future success will depend upon its ability to enhance its current
products and to develop and introduce new products that keep pace with
technological developments, respond to evolving customer requirements and
achieve market acceptance. In particular, the Company believes that it must
continue to respond quickly to users' needs for broad functionality and
multi-platform support and to advances in hardware and operating systems. Any
failure by the Company to anticipate or respond adequately to technological
development and customer requirements, or any
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significant delays in product development or introduction, could result in a
loss of competitiveness and revenues.
The Company has experienced delays in the past in the introduction of new
products and product enhancements. These delays have varied in duration
depending on the scope of the project and the nature of the problems
encountered. There can be no assurance, however, that the Company will be
successful in developing and marketing new products or product enhancements on a
timely basis or that the Company will not experience significant delays in the
future, which could have a material adverse effect on the Company's results of
operations. In addition, there can be no assurance that new products and product
enhancements developed by the Company will achieve market acceptance.
LICENSED TECHNOLOGY
The Company licenses certain software programs from third-party developers and
incorporates them into the Company's products. These licenses are non-exclusive
worldwide licenses that terminate on varying dates. The Company believes that it
will be able to renew these licenses or that it will be able to obtain
substitute products if needed.
The Company has entered into a non-exclusive license agreement with CENTURA
Corporation that permits the Company to include certain Centura proprietary
software products collectively called the "SQL System" in the Company's
products. Under the terms of the agreement, the Company is required to pay fixed
royalty fees to Centura. Centura may terminate the agreement on the occurrence
of a material, uncured breach of the agreement by the Company. The Company has
entered into a non-exclusive license agreement with Brio Technologies (formerly
Sqribe) ("Brio") that grants to the Company's end-users the rights to a
single-user, application specific SQR3 license to modify the standard reports
delivered with MAXIMO, as well as run-time licenses. Under the terms of the
agreement, the Company is currently required to pay fixed royalties to Brio. The
Company may terminate the agreement at any time. Brio may terminate the
agreement on the occurrence of a material, uncured breach of the agreement by
the Company. Currently, these products are included in MAXIMO Enterprise and
Workgroup. The Company has entered into a non-exclusive license agreement with
COGNOS Corporation ("Cognos") that permits the Company to incorporate Cognos'
Powerplay product in MAXIMO Analyzer. Under the term of the Agreement, the
Company is required to pay royalties to Cognos based on every MAXIMO Analyzer
module licensed. The Company has entered into a non-exclusive license agreement
with NETRONIC Software GmbH ("Netronic") that permits the Company to incorporate
certain graphic software programs into the Company's products. Under the terms
of the agreement, the Company is currently required to pay fixed royalties to
Netronic. The Company may terminate the
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agreement at any time. Netronic may terminate the agreement on the occurrence of
a material, uncured breach of the agreement by the Company. The Company has also
entered into non-exclusive license agreements after September 1999 with
Broadvision, Citrix, Moai, Verity, and Webmethods, which permit the Company to
incorporate certain software programs or data into the Company's products.
PROPRIETARY RIGHTS AND LICENSES
The Company has registered all of its trademarks with the United States Patent
and Trademark Office. Registrations with equivalent offices in many foreign
countries in which the Company or its distributors do business have been
obtained or are in process. A patent application has been filed with the United
States patent office for inventory sharing as it relates to electronic commerce.
There has been no objection to the patent in the United Sates. The Company
intends to file for a global patent for the same.
The Company regards its software as proprietary and attempts to protect its
rights with a combination of trademark, copyright and employee and third party
non-disclosure agreements. Despite these precautions, it may be possible for
unauthorized parties to copy or reverse-engineer portions of the Company's
products. While the Company's competitive position could conceivably be
threatened by its inability to protect its proprietary information, the Company
believes that copyright and trademark protection are less important to the
Company's success than other factors such as knowledge, ability and experience
of the Company's personnel, its name recognition and ongoing product development
and support.
The Company's software products are usually licensed to customers under a
perpetual, non-transferable, non-exclusive license that stipulates how many
concurrent users may access the system. The Company relies on both "shrink wrap"
licenses and negotiated agreements depending on various factors including the
size and level of integration. A shrink wrap license agreement is a printed
license agreement included with packaged software that sets forth the terms and
conditions under which the purchaser can use the product, and purports to bind
the purchaser to such terms and conditions by its acceptance and purchase of the
software. Certain provisions of the Company's shrink wrap licenses, including
provisions protecting against unauthorized use, copying, transfer and disclosure
of the licensed program, may be unenforceable under the laws of certain
jurisdictions. In addition, the laws of some foreign countries do not protect
the Company's proprietary rights to the same extent as do the laws of the United
States.
MAXIMO(R) and P/X(R) are registered trademarks of the Company. Microsoft(R) is a
registered trademark of Microsoft Corporation. Windows (TM) is a trademark of
Microsoft Corporation. This Annual
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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 manuals and training guides. The Company currently
uses third-party vendors to print its user manuals, packaging and related
materials, but duplicates program CD-Roms and diskettes in its manufacturing and
distribution facility located at its corporate headquarters. The Company then
assembles the third party produced documentation with diskettes and CD-Roms and
ships these directly from its manufacturing and distribution facility. To date,
the Company has been able to obtain adequate supplies of all components and
materials and has not experienced any material difficulties or delays in
manufacture and assembly of its products or materials due to product defects.
EMPLOYEES
As of September 30, 1999, the Company had 745 full-time employees including 244
in sales, marketing and related services, 140 in product research and
development, 79 in customer support, 200 in training and consulting services,
and 82 in finance, administration, information technology, human resources,
manufacturing and office services. The Company's employees are not represented
by any collective bargaining organization, and the Company has never experienced
a work stoppage. The Company believes that its relations with employees are
good.
ITEM 2. PROPERTY
The Company relocated both its corporate headquarters and its manufacturing and
distribution facilities in December 1997 to a leased facility consisting of
approximately 110,000 square feet, at an average annual base cost of $1,300,000,
under a 6 year net lease with a renewal option through December 31, 2009.
Additionally, the Company estimates that its annual operating expenses under the
lease will be approximately $1,000,000, based on information currently
available. The actual costs will depend on such factors as actual electricity
usage, real estate taxes and operating costs. Under the terms of its lease, the
Company has the ability to sublease the space and may elect to do so in the
future should business conditions dictate. The Company leases additional sales
offices in California, Colorado, Florida, Georgia, Idaho, Illinois, Maryland,
Missouri, New Hampshire, New Jersey, New York, Ohio, Tennessee, Texas, and
Virginia. The Company also leases offices for its international operations in
Argentina, Australia, Canada, China, France, Germany, Hong Kong, India, Mexico,
the Netherlands, Sweden, Thailand and the United Kingdom.
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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 16, 1999, there were approximately 53 holders of record of the
Company's Common Stock. This reflects the fact that most of the Company's stock
is held in street names through one or more nominees.
The following table sets forth the high and low per share sales prices of the
Company's Common Stock, as reported on the NASDAQ Stock Market consolidated
reporting system for each quarterly period within the two year period ended
September 30, 1999.
FISCAL 1999 HIGH LOW
First Quarter $16.00 $6.50
Second Quarter $21.06 $9.69
Third Quarter $17.19 $9.00
Fourth Quarter $27.00 $15.38
FISCAL 1998 HIGH LOW
First Quarter $13.94 $8.00
Second Quarter $12.22 $9.38
Third Quarter $14.25 $9.38
Fourth Quarter $11.88 $6.13
On October 15, 1999, the Company's Board of Directors approved a 2-for-1 stock
split in the form of a dividend of its common stock to be paid to all
shareholders of record on December 15, 1999. The payment distribution date for
the stock dividend was December 22, 1999. The stock split was subject to
shareholder approval of an increase in the Company's authorized common stock,
$0.01 par value per share, from 15,350,000 to 50,000,000 shares. Stockholders
approved the transaction on December 15, 1999. All share and per share data has
been restated to reflect this stock split in the form of a dividend as though it
had occurred at the beginning of the earliest period presented.
Since 1983, the Company has not declared or paid cash dividends on its Common
Stock, other than distributions to stockholders made with respect to fiscal
years 1992 and 1993 to satisfy certain federal and state tax obligations of the
stockholders attributable to the Company's S Corporation status prior to October
1, 1993. The Company currently intends to retain any
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future earnings to finance growth and therefore does not anticipate paying cash
dividends in the foreseeable future.
Certain provisions of the Company's Certificate of Incorporation and Bylaws
could delay the removal of incumbent directors and could make a merger, tender
offer or proxy contest involving the Company more difficult, even if such events
would be beneficial to the interests of the stockholders. In addition, the
Company has 1,000,000 shares of authorized Preferred Stock. The Company may
issue shares of such Preferred Stock in the future without further stockholder
approval and upon such terms and conditions, and having such rights, privileges
and preferences, as the Board of Directors may determine. The rights of the
holders of common stock will be subject to, and may be adversely affected by,
the rights of the holders of any Preferred Stock that may be issued in the
future. The issuance of Preferred Stock, while providing flexibility in
connection with possible acquisitions and other corporate purposes, could have
the effect of making it more difficult for a third party to acquire, or of
discouraging a third party from acquiring, a majority or the outstanding voting
stock of the Company. In addition, the staggered terms of the Company's Board of
Directors could have the effect of delaying or deferring a change in control of
the Company.
In January 1998, the Board of Directors of the Company adopted a stockholder
rights plan by declaring a dividend distribution of one preferred stock purchase
right (one "Right") on each share of the Company's Common Stock outstanding on
January 27, 1998 or, in certain circumstances, issued thereafter. Initially, the
Rights are not exercisable, not represented by separate Right certificates and
do not trade separately from the Company's Common Stock. Ten days after a tender
offer or acquisition of 15% or more of the Company's common stock, each right
may be exercised for $140 ("Exercise Price") to purchase one one-thousand of one
share of the Company's Series A Junior Participating Preferred Stock. Each one
one-thousandth of each share of Series A Junior Participating Preferred Stock
will generally be afforded economic rights similar to one share of the Company's
common stock. In addition, after such rights are triggered, each Right entitles
the holder to purchase common stock of the Company with a fair value of twice
the Exercise Price or, in certain circumstances, securities of the acquiring
company for the Exercise Price. Each Right expires in January 2008 and, during
specified periods, the Company may redeem or exchange each Right for $.01 or one
share of common stock, respectively. The Rights Agreement has been filed by the
Company with the Securities and Exchange Commission as an exhibit to a
Registration Statement on Form 8-A dated February 2, 1998. Stockholders are
urged to review the Rights Agreement for a complete understanding of the Rights
Plan. The Rights Plan, while providing the Board of Directors with flexibility
in connection with possible acquisitions and deterring unfair or coercive
takeover tactics, could have the effect of making it
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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,
--------------------------------------------------
(in thousands, except
per share data)
1999 1998 1997 1996 1995
---- ---- ---- ---- ----
Revenues $145,665 $120,016 $ 96,700 $73,329 $50,372
Income from operations 24,333 12,902 16,271 14,606 8,438
Net income 17,880 6,222 11,570 10,046 5,629
Net income per 0.87 0.32 0.59 0.53 0.33
share, basic
Net income per 0.85 0.31 0.58 0.50 0.32
share, basic
Weighted number of common 21,094 20,156 20,126 20,104 17,692
and dilutive potential
common shares
--------------------------------------------------
Total Assets 159,033 114,520 102,239 83,476 64,960
Long-Term Obligations 282 906 144 628 962
Dividends Per Share - - - - - - - - - - - - - - -
On October 15, 1999, the Company's Board of Director's approved a 2-for-1 stock
split in the form of a dividend of its common stock. The stock split was subject
to approval of an increase in the Company's authorized common stock.
Stockholders approved the transaction on December 15, 1999. All share and per
data has been restated to reflect this stock split as though it had occurred at
the beginning of the earliest period presented.
Included in net income for the year ended 1999 is a one-time charge for
purchased in-process product technology of $9,172,000 related to the purchase of
the A.R.M. Group Inc. on February 6, 1998.
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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 identified by footnotes in the text. The
forward-looking statements are subject to certain risks and uncertainties that
could cause actual results to differ materially from those reflected in such
forward-looking statements. Factors that might cause such a difference include,
but are not limited to, those discussed in the section entitled "Factors
Affecting Future Performance". Readers should carefully review the risk factors
described in other documents that the Company files from time to time with the
Securities and Exchange Commission, including the Quarterly Reports on Form 10-Q
filed by the Company in fiscal 1999.
OVERVIEW
The Company develops, markets and supports enterprise asset maintenance software
used by businesses, government agencies and other organizations to assist them
in maintaining high-value capital assets such as facilities, plants and
production equipment. The Company complements its enterprise asset maintenance
software with an Internet-based business-to-business e-Commerce network and set
of desktop requisition and online procurement software products that enables
businesses to engage in electronic commerce. The Company's products are designed
to enable customers to reduce down-time, control maintenance expenses, cut spare
parts inventories and costs, improve purchasing efficiency and more effectively
deploy productive assets, personnel and other resources. The Company's revenues
are derived primarily from two sources: (i) software licenses and (ii) fees for
services, including support contracts, training and consulting services and
commerce fees for on-line charges to engage in electronic commerce for
Maintenance, Repair and Operations ("MRO").
ACQUISITIONS AND OTHER RELATED MATTERS
On December 10, 1998, the Company acquired the shares and assumed net
liabilities of its Italian distributor, Work Management Consulting, s.r.l, for
the sum of $411,000. The transaction was accounted for using the purchase method
of accounting. The resulting goodwill is being amortized on a straight-line
basis over five years. This acquisition was deemed to be immaterial for
presentation of pro forma information purposes.
In April 1999, the Company signed agreements with W.W. Grainger, Inc.
("Grainger"), a business-to-business provider of MRO supplies and
related information, whereby Grainger acquired 1,000,000 shares of the Company's
common stock for $14.5 million, less expenses of $954 thousand,
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and acquired a two-year option to purchase 5% of the Company's wholly-owned
subsidiary, MRO.com, Inc. with an exercise price of $3.8 million.
RESULTS OF OPERATIONS
The following table sets forth, for the periods indicated, certain financial
data as a percentage of total revenues:
Year Ended September 30,
---------------------------
Revenues: 1999 1998 1997
---- ---- ----
Software 42.7% 45.0% 52.1%
Support and services 57.3 55.0 47.9
----- ----- -----
Total revenues: 100.0 100.0 100.0
Total cost of revenues 32.5 31.2 27.5
----- ----- -----
Gross margin 67.5 68.8 72.5
----- ----- -----
Operating expenses:
Sales and marketing 32.6 31.2 34.1
Product development 10.3 11.0 11.8
General and administrative 8.0 8.2 9.8
Purchased in-process
Product development -- 7.6 --
----- ----- -----
Total operating expenses: 50.9 58.0 55.7
----- ----- -----
Income from operations 16.6 10.8 16.8
Other income(expense), net 2.0 1.3 1.9
----- ----- -----
Income before income taxes 18.6 12.1 18.7
Income taxes 6.3 6.9 6.8
----- ----- -----
Net income 12.3% 5.2% 11.9%
----- ----- -----
FISCAL 1999 COMPARED TO FISCAL 1998
REVENUES
(in thousands) 1999 CHANGE % 1998
- --------------------------------------- -------- -------- --------
Software licenses $ 62,240 15.2% $ 54,007
Percentage of total revenues 42.7% 45.0%
Support and services $ 83,425 26.4% $ 66,009
Percentage of total revenues 57.3% 55.0%
Total revenues $145,665 21.4% $120,016
Total MAXIMO client/server revenues were $136.8 million in fiscal 1999, an
increase of 20% over fiscal 1998. The growth in revenues was generated primarily
by increases in support and services revenues from the Company's enterprise
asset management product, MAXIMO MRO.com revenues were $6.1 million, an increase
of 608.5% over 1998. A significant portion of the Company's revenues was derived
from operations outside of the United States. Revenues from sales outside the
United States for 1999 increased 23.4% to $67.6 million or 46.4% of revenues,
compared to $54.8 million or 45.7% of revenues in 1998. The increase in the
percentage of revenues generated outside the U.S. can be attributed to the
Company's continued global expansion.
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Software licenses for 1999 increased 15.2% to $62.2 million from $54.0 million.
MAXIMO client/server software license revenue for 1999 increased 9.1% to $56.3
million from $51.6 million. MRO.com software license revenue for 1999 increased
to $5.1 million from $179 thousand. The increase in MRO.com products was
attributable to the release of new products in fiscal 1999, specifically
MROBuyer(TM) anD mroSupplier(TM). During fiscal 1999. MRO.com, Inc. concluded
software license contracts with two customers that were in excess of 10% of its
total software revenues.
Total software licenses as a percentage of total revenues decreased to 42.7% in
1999 from 45.0% in 1998, but remained within the Company's targeted range of 40
to 45% for the year. The Company anticipates remaining in this range through
early fiscal 2000. (1)
Support and services revenues increased 26.4% in 1999 over the prior year.
Consulting services grew 29.6% in 1999 compared to 1998 and continues to be a
large percentage of total revenues due to additional service demands in
connection with large scale implementations of the Company's MAXIMO product.
MRO.com services were not a significant portion of revenues and represented only
1% of service revenues for fiscal 1999. Support services grew to 21.7% in 1999
compared to 1998. The increase in the percentage of support revenues was in
direct relation to the increase in software license revenues and the high
renewal rate for MAXIMO maintenance contracts.
COST OF REVENUES
(in thousands) 1999 CHANGE % 1998
- --------------------------------------- -------- -------- --------
Software licenses $ 5,018 10.6% $ 4,537
Percentage of software licenses 8.1% 8.4%
Support and services $42,310 28.5% $32,936
Percentage of support and services 50.7% 49.9%
Total cost of revenues $47,328 26.3% $37,473
Percentage of total revenues 32.5% 31.2%
Cost of software revenues consists of software purchased for resale, royalties
paid to vendors of third party software, the amortization of capitalized
software, the cost of software product packaging and media, and certain employee
costs related to software duplication, packaging and shipping. The increase in
the cost of software revenues was due primarily to software purchased for
resale, royalties paid to third party vendors, and production materials. This
increase was partially offset by a significant decrease in software amortization
in 1999.
Cost of support and services consists primarily of personnel costs for employees
and the related costs of benefits and facilities. The increase in the cost of
support and services was
(1) Forward looking statement.
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attributable to the hiring of employees and the extensive use of third-party
consultants contracted to perform services for the Company. The Company utilizes
the services of these higher cost third-party consultants in order to meet the
services demand and backlog. The cost of support and services as a
percentage of support and services revenues increased slightly to 50.7% from
49.9% in 1999 and 1998, respectively. The increase as a percentage of revenues
is attributable to salary and benefit increases for new hires and the costs for
third party contractors.
OPERATING EXPENSES
(in thousands) 1999 CHANGE % 1998
- --------------------------------------- -------- -------- --------
Sales and marketing $47,417 26.7% $37,418
Percentage of total revenues 32.6% 31.2%
Product development $14,959 12.9% $13,247
Percentage of total revenues 10.3% 11.0%
General and administrative $11,628 18.6% $ 9,804
Percentage of total revenues 8.0% 8.2%
In-Process Product Development N/A (100)% $ 9,172
Percentage of total revenues N/A 7.6%
The increase in sales and marketing expenses in 1999 was primarily due to
increases in sales support and marketing personnel, sales commissions, marketing
research and telemarketing expenses and higher travel costs.
The increase in product development expenses in 1999 was primarily due to the
hiring of additional employees and no capitalization of software costs in fiscal
1999. No software development costs were capitalized in 1999 since costs
incurred subsequent to the establishment of technological feasibility were not
significant. Capitalization of software costs were $675 thousand in 1998. The
decrease as a percentage of revenues was attributable to the efficiencies in
managing product development goals without commensurate increases in expenses.
The Company intends to make significant investments in electronic commerce
products for MRO supply chain management. (1) The Company will also continue to
invest in client/server MAXIMO Java applications.
The increase in general and administrative expenses in 1999 was primarily due to
an increase in bad debt reserves to cover foreign receivables and professional
fees and other expenses to support the global expansion of the Company.
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NON-OPERATING EXPENSES
(in thousands) 1999 CHANGE % 1998
- --------------------------------------- -------- -------- --------
Interest income $3,052 26.6% $2,411
Interest (expense) $ (50) (87.1)% $ (389)
Other income (expense) $ (175) (53.5)% $ (376)
Loss on minority interest $ N/A (100)% $ (44)
Interest income in 1999 was attributable to interest earned on marketable
securities and cash equivalents from cash flow generated from operations
including accounts receivable collections offset by premiums amortized for
purchased marketable securities.
In fiscal 1998, the Company obtained financing from a third party for a
receivable due from the United States Government, which is the reason for the
higher amount of interest expense in fiscal 1998.
The decrease in other income (expense) was attributable to income derived from
the MAXIMO Users Group Conference, offset by foreign translation losses.
PROVISION FOR INCOME TAXES
The Company's effective tax rate was 34.2% in 1999. The decrease in the
effective tax rate in 1999 is primarily due to foreign tax credits and benefits
from a foreign sales corporation. The Company's effective tax rate before a one
time non-deductible charge for purchased in-process product development was
35.0% in 1998. The income tax expense provided during 1998 reflects the
non-deductible nature of certain charges related to the acquisition of the
A.R.M. Group Inc. The Company anticipates that its fiscal 2000 effective tax
rate will not exceed 36%. (1)
FISCAL 1998 COMPARED TO FISCAL 1997
REVENUES
(in thousands) 1998 CHANGE % 1997
- --------------------------------------- -------- -------- --------
Software licenses $ 54,007 7.2% $50,393
Percentage of total revenues 45.0% 52.1%
Support and services $ 66,009 42.5% $46,307
Percentage of total revenues 55.0% 47.9%
Total revenues $120,016 24.1% $96,700
The growth in total revenues was generated from the Company's MAXIMO
client/server software and related support and services. A significant portion
of the Company's total revenues was derived from operations outside of the
United States. Revenues from sales outside the United States for 1998 increased
29.2% to $54.8 million or 45.7% of total revenues, compared to $42.4 million or
43.8% of total revenues in 1997. The increases in the percentage of total
revenues generated outside the United States in 1998 can be
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attributed to the expansion of the Company's international sales organization.
The Company experienced an increase in the average selling price of its MAXIMO
client/server software licenses during fiscal 1998. These client/server versions
of MAXIMO have a higher entry price and are typically implemented in
configurations involving a larger number of users, for whom additional license
fees are paid.
Software sales for 1998 increased 7.2% to $54.0 million from $50.4 million. This
growth was attributable to licenses of MAXIMO client/server software, which grew
8.6% primarily attributable to a large multi-million dollar software license and
the general availability of MAXIMO Release 4.0 in English. Software licenses as
a percentage of revenues decreased to 45.0% in 1998 from 52.1% in 1997 due to
the increase in services support to implement the Company's MAXIMO client/server
product in connection with customers large-scale enterprise-wide financial
installations
The increase in support and services revenues was attributable to increases in
both MAXIMO support contracts and consulting services. Consulting services grew
49.5% in 1998 and was a large percentage of total revenues due to additional
service demands in connection with large-scale implementations of the Company's
MAXIMO client/server product. Support services grew 30.2% in 1998.
COST OF REVENUES
(in thousands) 1998 CHANGE % 1997
- --------------------------------------- -------- -------- --------
Software licenses $ 4,537 78.1% $ 2,547
Percentage of software licenses 8.4% 5.1%
Support and services $32,936 37.1% $24,025
Percentage of support and services 49.9% 51.9%
Total cost of revenues $37,473 41.0% $26,572
Percentage of total revenues 31.2% 27.5%
Cost of software revenues consists of royalties paid to vendors of third party
software, the amortization of capitalized software, the cost of software product
packaging and media, and certain employee costs related to software duplication,
packaging and shipping. The increase in the cost of software revenues was due
primarily to royalties paid to third party vendors for software and costs for
third party software products.
Cost of support and services consists primarily of personnel costs for employees
and the related costs of benefits and facilities. The increase in the cost of
support and services was attributable to the hiring of employees and the
extensive use of third-party consultants contracted to perform services for the
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Company. The Company utilizes the services of these higher cost third-party
consultants in order to meet the services backlog. The cost of support and
services as a percentage of support and services revenues decreased to 49.9%
from 51.9% in 1998 and 1997, respectively. The decrease as a percentage of
revenues is attributable to economies of scale realized in connection with the
establishment of four support centers which provide round the clock support
rather than providing support in all countries, combined with improved margins
on third party consulting expenses.
OPERATING EXPENSES
(in thousands) 1998 CHANGE % 1997
- --------------------------------------- -------- -------- --------
Sales and marketing $37,418 13.4% $32,985
Percentage of total revenues 31.2% 34.1%
Product development $13,247 16.3% $11,387
Percentage of total revenues 11.0% 11.8%
General and administrative $ 9,804 3.4% $ 9,485
Percentage of total revenues 8.2% 9.8%
In-Process Product Development $ 9,172 100% N/A
Percentage of total revenues 7.6% N/A
The increase in sales and marketing expenses in 1998 was primarily due to
increases in sales support and marketing personnel and sales commissions. Also,
contributing to this increase was higher costs for travel and lodging due
partially to price increases imposed by the airline and travel industries. The
comparative year's expense levels were a larger percentage of revenues as they
were established for budgeted revenue levels that were not achieved.
The increase in product development expenses in 1998 is primarily due to the
engagement of additional employees, third-party consultants and product
translation services costs. Capitalization of software costs were $675 thousand
and $0 in 1998 and 1997, respectively.
The increase in general and administrative expenses in 1998 is primarily due to
professional legal, audit and tax services to support the increase in growth in
global operations and an increase in bad debt reserves. The comparative year's
expense levels were a larger percentage of revenues as they were established for
budgeted revenue levels that were not achieved.
In February 1998, the Company acquired The A.R.M. Group Inc. The acquisition was
accounted for as a purchase. The Company allocated the purchase price to the
assets acquired and liabilities assumed based on their estimated fair value. The
fair value assigned to intangible assets acquired consisted of
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purchased in-process product development and completed technology. In the
opinion of management, the purchased in-process product development had not yet
reached technological feasibility and had no alternative future use.
Accordingly, the Company recorded a non-recurring charge of $9.2 million during
the second quarter of fiscal 1998. The value was determined by estimating the
costs to develop the purchased in-process technology into commercially viable
products, estimating the net cash flows from such projects, and discounting the
net cash flows back to their present values.
NON-OPERATING EXPENSES
(in thousands) 1998 CHANGE % 1997
- --------------------------------------- -------- -------- --------
Interest income $2,411 .1% $2,409
Interest (expense) $ (389) 1520.8% $ (24)
Other income (expense) $ (376) (28.9%) $ (529)
Loss on minority interest $ (44) N/A
Interest income in 1998 was attributable to interest earned on cash equivalents
from cash flow generated from operations including accounts receivable
collections offset by premiums amortized for purchased marketable securities.
The increase in interest expense was attributable to the discount paid on a U.S.
Government receivable financed by a third party.
The decrease in other income (expense) is attributable to income derived from
the MAXIMO Users Group Conference, offset by foreign translation losses.
PROVISION FOR INCOME TAXES
The Company's effective tax rate before a one time non-deductible charge for
purchased in-process product development was 35.0% in 1998. The Company's
effective tax rate in 1997 was 36.2%. The income tax expense provided during
1998 reflects the non-deductible nature of certain charges related to the
acquisition of the A.R.M. Group Inc.
LIQUIDITY AND CAPITAL RESOURCES
As of September 30, 1999, the Company had cash and cash equivalents and
marketable securities of approximately $98.2 million and working capital of
$95.1 million. Cash generated by operations for fiscal year 1999 was $21.1
million, primarily attributable to net income and an increase in deferred
revenue, accounts payable, and accrued compensation offset by an increase in
receivables as a result of the increases in revenues for the fourth quarter of
1999.
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Cash used in investing activities totaled $6.1 million, primarily for the
purchase of marketable securities.
Cash generated by financing activities was $16.9 million, primarily from
proceeds from an investment by Grainger. In April 1999, the Company signed
agreements with Grainger, whereby Grainger acquired 1,000,000 shares of the
Company's common stock for $14.5 million less expenses of $954 thousand, and
acquired a two-year option to purchase 5% of the Company's wholly-owned
subsidiary, MRO.com, Inc. for an exercise price of $3.8 million. Also
contributing to cash generated by financing activities are proceeds received
from exercises of employee stock options.
As of September 30, 1999, the Company's principal commitment consisted primarily
of an office lease for its headquarters. Under the terms of the lease agreement,
upon termination of the lease the Company has the right to extend the lease for
an additional six year term for an agreed upon fixed cost. The Company leases
its facilities and certain equipment under non-cancelable operating lease
agreements that expire at various dates through September 2006.
The Company may use a portion of its cash to acquire businesses, products and
technologies complementary to its business. (1) The Company also plans on making
significant investments over the next year in its new MRO.com web-based products
and to develop content and add suppliers to WWW.MRO.COM, MRO.com's e-Commerce
hub.
The Company believes that its current cash balances and marketable securities
combined with cash flow from operations will be sufficient to meet its working
capital and capital expenditure requirements through at least September 30,
2000. (1)
YEAR 2000
"The information contained under this heading constitutes a 'Year 2000 Readiness
Disclosure' under the Year 2000 Information and Readiness Disclosure Act."
The Year 2000 issue is the result of computer programs being written using two
digits rather than four to define the applicable year. Certain computer programs
that have date sensitive software and use two digits only may recognize a date
using "00" as the year 1900 rather than the year 2000.
During 1998, Management initiated a program to prepare the Company's financial,
manufacturing and other critical systems and applications for the year 2000. The
focus of the program was to identify affected software and hardware, develop a
plan to correct that software or hardware in the most effective manner and
implement and monitor that plan. The Company assessed the
(1) Forward Looking Statement
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readiness of its significant suppliers to determine the extent to which the
Company is vulnerable to those third parties' failure to remediate their own
Year 2000 issues. The Company utilizes other third party software products,
network equipment and telecommunications products. Failure of any critical
technology components to operate properly in the Year 2000 may have an adverse
impact on business operations or require the Company to incur unanticipated
expenses to remedy any problems. There can be no guarantee that the systems of
other companies will be timely converted, or that a failure to convert by
another company would not have a material adverse effect on the Company. To
date, the Company has not had to spend any material funds on updating its
internal systems. Costs associated with preparing internal systems for the Year
2000 were approximately $100,000. There can be no assurances that as the Company
experiences the phenomenon of Year 2000 that more costs will not occur. The
Company has made its best efforts to prepare for the Year 2000 based on the
final results gathered from its suppliers and third parties. The Company's
assessment is that they will be adequately prepared for the Year 2000, but can
offer no positive guarantees.
The Company has evaluated its software products and determined that the current
versions of MAXIMO Release 4.0.0, 4.0.1, 4.0.2, 4.0.3, and 3.0.3 will continue
to operate properly into the Year 2000. MAXIMO version 3.0.2 is not fully
compliant. Customers must take the steps described in the Company's year 2000
readiness documentation to address the issues or the customers must upgrade to a
later MAXIMO release and allow adequate time for conversion of data. MAXIMO
releases prior to MAXIMO Release 3.0.2 must be upgraded from the user's existing
version to a later MAXIMO release order to be year 2000 compliant. MAXIMO
ADvantage 4.0 will continue to operate properly into the Year 2000. Customers
using prior versions of ADvantage must be upgraded to ADvantage 4.0 and allow
adequate time for conversion of data in order to be year 2000 compliant. The
Company's product PROJECT/2 is no longer sold but the Company does offer support
for this product. PROJECT/2 is not fully compliant. Customers must take the
steps described in the Company's year 2000 readiness documentation to address
the issues or the customers must upgrade to the recommended versions and allow
adequate time for conversion of data. MAXIMO Scheduler releases prior to MAXIMO
Scheduler Release 3.0 and P/X releases prior to P/X Version 2.2.0 are not fully
compliant. Customers must take the steps described in the Company's year 2000
readiness documentation to address issues or the customers must upgrade to the
recommended versions and allow adequate time for conversion of data. The Company
estimates that the cost to upgrade all of its products to be year 2000 enabled
were approximately $500,000.
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EURO COMPLIANCE
On January 1, 1999, eleven European Union member states adopted the euro as
their common national currency. Thereafter, until January 1, 2002, ("the
transition period"), either the euro or a participating country's present
currency will be accepted as legal tender. Beginning on January 1, 2002,
euro-denominated bills and coins will be issued, and by July 1, 2002, only the
euro will be used. A significant number of the Company's customers are located,
or transact business with, or have operations in, participating European Union
countries. As a result, the computer systems or software used by these companies
may need to be upgraded to comply with data storage and computational euro
requirements. In the first fiscal quarter of 1999, the Company released a new
English language client/server version of MAXIMO (MAXIMO 4.0.1) that accepts,
stores, calculates, converts and reports euro currency. In the second quarter of
fiscal 1999, the Company released primary language versions of MAXIMO 4.0.1 in
Brazilian Portuguese, Dutch, French, German, Latin American Spanish, and
Swedish. The Company also released a new English language client/server version
of MAXIMO (MAXIMO 4.0.2) for Workflow in the second quarter of fiscal 1999 that
is euro compliant as defined above. In the third quarter of fiscal 1999, the
Company released an English language version of mroBuyer's(TM) Desktop
Requisition that is also euro compliant as defined above. The amount of
development dollars spent on the euro releases did not and is not expected to
have a material adverse effect on the Company's results of operations or
financial condition. (1)
FACTORS AFFECTING FUTURE PERFORMANCE
The nature of forward-looking information is that such information involves
assumptions, risks and uncertainties. Certain public documents of the Company
and oral statements made by authorized officers, directors, employees, agents
and representatives of the Company, acting on its behalf, may include
forward-looking information which will be influenced by the following and other
assumptions, risks and uncertainties. Forward-looking information requires
management of the Company to make assumptions, estimates, forecasts and
projections regarding the Company's future results as well as the future
effectiveness of the Company's strategic plans and future operational decisions.
Forward-looking statements made by or on behalf of the Company are subject to
the risk that the forecasts, projections, and expectations of management, or
assumptions underlying such forecasts, projections and expectations, may become
inaccurate. Accordingly, actual results and the Company's implementation of its
plans and operations may differ materially from forward-looking statements made
by or on behalf of the Company. The following discussion identifies certain
important factors that could affect the Company's actual results and actions and
could cause such results and actions to differ
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materially from any forward-looking statements made by or on behalf of the
Company that related to such results and actions.
Other factors, which are not identified herein, could also have such an effect.
RAPID TECHNOLOGICAL CHANGE
The computer software industry is characterized by rapid technological advances,
changes in customer requirements and frequent product introductions and
enhancements. The Company's success depends upon its ability to continue to
enhance its current products and to develop and introduce new products that keep
pace with technological developments, respond to evolving customer requirements
and achieve market acceptance. In particular, the Company believes that it must
continue to respond quickly to users' needs for broad functionality and to
advances in hardware and operating systems. Any failure by the Company to
anticipate or respond adequately to technological developments and customer
requirements, or any significant delays in product development or introduction,
could result in a loss of competitiveness and revenues. There can be no
assurance that the Company will be successful in developing and marketing new
products or product enhancements, or that the Company will not experience
significant delays in developing such new products or product enhancements. Such
delays could have a material adverse effect on the Company's results of
operations. In addition, there can be no assurance that new products and product
enhancements developed by the Company will achieve market acceptance.
DEPENDENCE ON MAXIMO
The Company's revenues are primarily attributable to the licensing of its MAXIMO
client/server product, introduced in 1991, and to related services and support.
Revenues from licenses of MAXIMO and related services and support accounted for
approximately 94% of the Company's total revenues in 1999. The Company's
financial performance in 2000 depends largely on continued market acceptance of
MAXIMO. The Company believes that continued market acceptance of MAXIMO will
largely depend on its ability to enhance and broaden the capabilities of MAXIMO
by among other things, developing additional application modules for MAXIMO,
versions of MAXIMO and by developing and incorporating into the MAXIMO product
technologies that are emerging in connection with the Internet. Any factor
adversely affecting sales of MAXIMO, such as delays in development, significant
software flaws, incompatibility with significant hardware platforms, operating
systems or databases, increased competition or negative evaluations of the
products, would have a material adverse effect on the Company's business and
financial results.
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NEW PRODUCTS; NEW MARKETS
In the second quarter of fiscal 1999, the Company formed a new wholly-owned
subsidiary, MRO.com, Inc. MRO.com, Inc. links an on-line community of MRO
suppliers and buyers to a group of Internet-based procurement products. There
can be no assurance that the Company's MRO products will be sold successfully in
the business-to-business electronic commerce market or that the Company's MRO
products will achieve market acceptance. There is also no assurance that the
Company can create a large enough community of sellers and buyers.
The Company's future success in the electronic commerce market may depend on its
ability to accurately determine the functionality and features required by its
customers, as well as the ability to enhance its MRO products and deliver them
in a timely manner.
The Internet procurement market is a nascent market that may undergo rapid
technological change. The Company cannot predict the present and future size of
the potential market for its MRO products and services. The Company may incur
substantial costs to enhance and modify its MRO products and services in order
to meet the demands of this growing and changing market. The Company's MRO
product segment is not yet profitable and may not be profitable for sometime, if
ever.
FLUCTUATIONS IN QUARTERLY OPERATING RESULTS; SEASONALITY
The Company has experienced, and may in the future experience, significant
period-to-period fluctuations in revenues and operating results. The Company's
revenues and income from operations typically grow at a lower rate or decline in
the first quarter of each fiscal year, compared to the fourth quarter of the
preceding fiscal year. In addition, revenues are typically higher in the fourth
quarter than in other quarters of the year. The Company believes that these
quarterly patterns are partly attributable to the Company's sales commission
policies, which compensate members of the Company's direct sales force for
meeting or exceeding annual quotas. In addition, the Company's quarterly
revenues and operating results have fluctuated historically due to the number
and timing of product introductions and enhancements, the budgeting and
purchasing cycles of customers, the timing of product shipments and the timing
of marketing and product development expenditures. The Company typically
realizes a significant portion of its revenue from sales of software licenses in
the last two weeks of a quarter, frequently even in the last days of a quarter.
Large software license contracts may have a significant impact on revenues for
any quarter and could, therefore, result in significant fluctuations in
quarterly revenues and operating results. Accordingly, the Company believes that
period-to-period comparisons of its results of operations are not necessarily
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meaningful and should not be relied upon as an indication of future performance.
The Company generally ships its products upon receipt of orders and maintains no
significant product backlog. As a result, revenues from license fees in any
quarter are substantially dependent on orders booked and shipped in that
quarter. A delay in or loss of orders can cause significant variations in
operating results. A significant portion of the Company's operating expenses are
fixed in the short term, and planned expenditures are based primarily on sales
forecasts. Accordingly, if revenues do not meet the Company's expectations in
any given quarter, operating results may be materially adversely affected.
COMPETITION
The market for applications software is intensely competitive and rapidly
changing. While the Company believes that it has competed effectively to date,
competition in its industry is likely to intensify as current competitors expand
their product lines and new companies enter the market. To remain successful in
the future, the Company must respond promptly and effectively to the challenges
of technological change, evolving standards and its competitors' innovations by
continually enhancing its own products, services and support offerings, as well
as its marketing programs. There can be no assurance that the Company will
continue to be able to compete successfully in the future.
The market for asset maintenance software is fragmented by geography, by
hardware platform and by industry orientation, and is characterized by a large
number of competitors including both independent software vendors and certain
enterprise resource planning vendors. Independent software vendors include
Datastream, Inc. and Indus Group. MAXIMO also competes with integrated
enterprise resource planning systems which are provided by several large
vendors, such as SAP and JD Edwards and others, and which include maintenance
modules. Currently, the Company's client/server versions of MAXIMO compete with
products of a number of large vendors some of which have traditionally provided
maintenance software running on mainframes and minicomputers and are now
offering systems for use in the client/server environment. MAXIMO also
encounters competition from vendors of low cost maintenance management systems
designed initially for use by a single user or limited number of users as
vendors of these products upgrade their functionality to enter the client/server
market.
The MRO supply chain management business using the Internet has many diverse
competitors offering a wide range of differing products, services and
technologies. The Company expects competition to intensify as current
competitors expand their product offerings and new competitors enter the market.
In addition, the market for electronic procurement solutions is
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relatively new and underdeveloped. While the Company believes that electronic
commerce products and technologies complement the Company's existing products,
there can be no assurance that the Company will be able to compete successfully
in this market. Many of the Company's enterprise asset management competitors
are also entering the MRO e-commerce market. The current potential competitors
include Ariba, Clarus, Commerce One, Concur, Connect, Harbinger, IBM,
Intellisys, Microsoft, Netscape, Oracle, PeopleSoft, SAP and others.
Certain of the Company's competitors have greater financial, marketing, service
and support and technological resources than the Company. To the extent that
such competitors increase their focus on the asset maintenance or planning and
cost systems markets, the Company could be at a competitive disadvantage.
INTERNATIONAL OPERATIONS
A significant portion of the Company's total revenues are derived from
operations outside the United States. The Company derived 46.4%, 45.7%, and
43.8% of its total revenue from sales outside the United States in fiscal years
1999, 1998, and 1997, respectively. The Company expects that international
revenues will continue to be a significant percentage of total revenues. The
Company expects international revenues to continue to grow in absolute dollars
during 1999, and accordingly, continues to invest in international
infrastructure, global product functionality and translated versions of
financial and other software products. In the event international expansion
and/or product globalization efforts are not successful, the Company's business
operating results and financial condition may be adversely affected. This
international business is subject to various risks common to international
activities, including exposure to currency fluctuations, greater difficulty in
collecting accounts receivable, political and economic instability, the greater
difficulty of administering business abroad and the need to comply with a wide
variety of foreign import and United States export laws and regulatory
requirements.
A significant portion of the Company's total revenue is derived from
international operations that are conducted in foreign currencies. Changes in
the values of these foreign currencies relative to the United States dollar have
in the past adversely affected, and may in the future affect, the Company's
results of operations and financial position. Gains and losses on translation to
United States dollars and settlement of receivables from international
subsidiaries may contribute to fluctuations in the Company's results of
operations. To date, the Company has not engaged in currency hedging
transactions. The Company may in the future undertake currency hedging, although
there can be no assurance that hedging transactions, if entered into, would
materially reduce the effects of fluctuations in foreign currency exchange rates
on the Company's results of operations. The Company experienced lower than
anticipated
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revenue growth rates in the Asia Pacific region during 1999 in part due to the
economic difficulties that have occurred throughout this region. There can be no
assurances that the economy of this region will recover in the near future or
that the Company's growth rates in this geographic region will return to the
previous levels if the recovery occurs.
DEPENDENCE ON THIRD PARTIES
The client/server versions of MAXIMO operate with the Oracle, SQLServer, and
SQLBase database management systems. Introduction and increased market
acceptance of database management systems with which the Company's products do
not operate could adversely affect the market for the Company's products.
The Company has entered into nonexclusive license agreements with including, but
not limited to, Broadvision Incorporated, Centura Software Corporation, Scribe
Technologies, Incorporated, Cognos Corporation, Netronic Software GmbH, HSB
Reliability Technologies Corporation, Intelligent Labeling Technologies,
Incorporated, Verity Software, webMethods, Inc., and Intermat, Inc. pursuant to
which the Company incorporates into its products software providing certain
application development, user interface, business intelligence, content and
graphics capabilities developed by these companies. If the Company were unable
to renew these licenses, or if any of such vendors were to become unable to
support and enhance its products, the Company could be required to devote
additional resources to the enhancement and support of these products or to
acquire or develop software providing equivalent capabilities, which could cause
delays in the development and introduction of products incorporating such
capabilities.
The MRO.com business operations are dependent on third party data centers, which
could be destroyed or damaged. MRO operations are dependent upon the ability to
protect computer equipment and the information stored in these third party data
centers against damage that may be caused by natural disasters, fire, power
loss, telecommunication or Internet failures, unauthorized intrusions, computer
viruses and other similar damaging events. The Company cannot assure that any of
these damaging events would not result in a prolonged outage of the Company's
network services or that the Company would not experience a reduction of
revenues, which could have a material adverse effect on our business and
financial results.
PRODUCT DEVELOPMENT: INTERNET
The Company has developed a Java-based component architect software application
to incorporate into the MAXIMO product technologies emerging in conjunction with
the Internet. Internet technologies and applications generally are developing
and gaining acceptance rapidly in the market. MRO supply chain management using
electronic commerce is a nascent market with
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many standards and technologies remaining to be developed. Accordingly,
developing technologies pose risks to the Company. The Company believes that
electronic commerce products and technologies complement the Company's
Enterprise Asset Management products. There can be no assurance that the Company
will successfully anticipate trends in this market, that the Company will be
successful in Internet technology development or acquisition efforts or that the
Company's Internet applications, if developed, will achieve market acceptance.
If Internet usage continues to grow rapidly, its infrastructure may not be able
to support customer and user demands and its performance and reliability may
decline. If outages or delays on the Internet occur frequently or increase in
frequency, overall Internet usage including usage of the Company's products and
services could grow more slowly or decline. The Company is dependent upon
improvements being made to the entire Internet as well as to particular
customers' networking infrastructures to alleviate overloading and congestion.
If these improvements are not made, the ability of the Company's customers to
utilize the Company's solution will be hindered, and the Company's business,
operating results and financial condition may suffer.
LIMITED INTELLECTUAL PROPERTY PROTECTION
The Company's success is dependent upon proprietary technology. The Company
currently has no patents and protects its technology primarily through
copyrights, trademarks, trade secrets and employee and third party nondisclosure
agreements. The Company's software products are sometimes licensed to customers
under "shrink wrap" licenses included as part of the product packaging.
Although, in larger sales, the Company's shrink-wrap licenses may be accompanied
by specifically negotiated agreements signed by the licensee, in many cases its
shrink-wrap licenses are not negotiated with or signed by individual licensees.
Certain provisions of the Company's shrink-wrap licenses, including provisions
protecting against unauthorized use, copying, transfer and disclosure of the
licensed program, may be unenforceable under the laws of certain jurisdictions.
In addition, the laws of some foreign countries do not protect the Company's
proprietary rights to the same extent as do the laws of the United States. There
can be no assurance that the steps taken by the Company to protect its
proprietary rights will be adequate to prevent misappropriation of its
technology or development by others of similar technology. Although the Company
believes that its products and technology do not infringe on any existing
proprietary rights of others, there can be no assurance that third parties will
not assert infringement claims in the future. Litigation may be necessary to
enforce our intellectual property rights, to protect our trade secrets, to
determine the validity and scope of the proprietary rights of others, or to
defend against claims of infringement or invalidity. Such litigation could
result in substantial costs and diversion of resources and
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could potentially have a material adverse result on our operating results and
financial condition.
GENERAL ECONOMIC RISK FACTORS
To date, inflation has not had a material impact on the Company's financial
results. There can be no assurance, however, that inflation will not adversely
affect the Company's financial results in the future.
DEPENDENCE ON KEY PERSONNEL
The Company is highly dependent on certain key executive officers and technical
employees, the loss of one or more of who could have an adverse impact on the
future operations of the Company. The Company does not have employment contracts
with, and does not maintain key person life insurance policies on, any
personnel. The Company continues to hire a significant number of additional
sales, services and technical personnel. Competition for hiring of such
personnel in the software industry is intense, and the Company from time to time
experiences difficulty in locating candidates with the appropriate
qualifications within the desired geographic locations, or with certain industry
specific domain expertise. It is widely believed that the technology industry is
at or beyond a condition of full employment. There can be no assurance that the
Company will be able to retain its existing personnel or attract additional
qualified employees.
CERTAIN RISKS ASSOCIATED WITH ACQUISITIONS
As part of its overall strategy, the Company plans to continue to acquire or
invest in complementary companies, products, or technologies and to enter into
joint ventures and strategic alliances with other companies. There can be no
assurance that the Company would be successful in overcoming the risks
associated or problems encountered in connection with such business
combinations, investments, or joint ventures, or that such transactions will not
materially adversely affect the Company's business, financial condition, or
operating results.
POSSIBLE CONTINUED VOLATILITY OF STOCK PRICE
Fiscal 1999 was marked by significant fluctuations in the market price of the
common stock, par value $.01 per share, of the Company (the "Common Stock").
Factors such as announcements of technological innovations or new products by
the Company, its competitors and other third parties, as well as quarterly
variations in the Company's results of operations and market conditions in the
industry, may cause the market price of the Common Stock to continue to
fluctuate significantly. In addition, the stock market in general has recently
experienced substantial price and volume fluctuations, which have
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particularly affected the market prices of many software companies and which
have often been unrelated to the operating performance of such companies. These
broad market fluctuations also may adversely affect the market price of the
Common Stock.
LITIGATION RISKS
The Company is subject to the normal risks of litigation with respect to its
business operation.
YEAR 2000
The information contained under this heading constitutes a 'Year 2000 Readiness
Disclosure' under the Year 2000 Information and Readiness Disclosure Act.
The Year 2000 issue is the result of computer programs being written using two
digits rather than four to define the applicable year. Certain computer programs
that have date sensitive software and use two digits only may recognize a date
using "00" as the year 1900 rather than the year 2000.
During 1998, Management initiated a program to prepare the Company's financial,
manufacturing and other critical systems and applications for the year 2000. The
focus of the program was to identify affected software and hardware, develop a
plan to correct that software or hardware in the most effective manner and
implement and monitor that plan. The Company assessed the readiness of its
significant suppliers to determine the extent to which the Company is vulnerable
to those third parties' failure to remediate their own Year 2000 issues. The
Company utilizes other third party software products, network equipment and
telecommunications products. Failure of any critical technology components to
operate properly in the Year 2000 may have an adverse impact on business
operations or require the Company to incur unanticipated expenses to remedy any
problems. There can be no guarantee that the systems of other companies will be
timely converted, or that a failure to convert by another company would not have
a material adverse effect on the Company. To date, the Company has not had to
spend any material funds on updating its internal systems. Costs associated with
preparing internal systems for the Year 2000 were approximately $100,000. There
can be no assurances that as the Company experiences the phenomenon of Year 2000
that more costs will not occur. The Company has made its best efforts to prepare
for the Year 2000 based on the final results gathered from its suppliers and
third parties.
The Company has evaluated its software products and determined that the current
versions of MAXIMO Release 4.0.0, 4.0.1, 4.0.2, 4.0.3, and 3.0.3 will continue
to operate properly into the Year 2000. MAXIMO version 3.0.2 is not fully
compliant. Customers must take the steps described in the Company's year 2000
readiness documentation to address the issues or the customers
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must upgrade to MAXIMO Release 4.0.3, 4.0.1, 4.0.2, or 3.0.3 and allow adequate
time for conversion of data. MAXIMO releases prior to MAXIMO Release 3.0.2 must
be upgraded from the user's existing version to MAXIMO Release 4.0.3, 4.0.1,
4.0.2, or 3.0.3 in order to be year 2000 compliant. MAXIMO ADvantage 4.0 will
continue to operate properly into the Year 2000. Customers using prior versions
of ADvantage must be upgraded to ADvantage 4.0 and allow adequate time for
conversion of data in order to be year 2000 compliant. The Company's product
PROJECT/2 is no longer sold but the Company does offer support for this product.
PROJECT/2 is not fully compliant. Customers must take the steps described in the
Company's year 2000 readiness documentation to address the issues or the
customers must upgrade to the recommended versions and allow adequate time for
conversion of data. MAXIMO Scheduler releases prior to MAXIMO Scheduler Release
3.0 and P/X releases prior to P/X Version 2.2.0 are not fully compliant.
Customers must take the steps described in the Company's year 2000 readiness
documentation to address issues or the customers must upgrade to the recommended
versions and allow adequate time for conversion of data. The Company estimates
that the cost to upgrade all of its products to be year 2000 enabled were
approximately $500,000.
The Company does not believe that the advent of the Millennium has caused any
positive or negative impact on revenues from the Company's software products
during fiscal 1999. While the Company has experienced customer requests to
replace non-compliant Year 2000 applications, thereby increasing revenues, it
also believes that certain market segments have deferred procuring asset
maintenance systems while they complete the implementation of ERP systems.
EURO COMPLIANCE
On January 1, 1999, eleven European Union member states adopted the euro as
their common national currency. Thereafter, until January 1, 2002, the
transition period, either the euro or a participating country's present currency
will be accepted as legal tender. Beginning on January 1, 2002, euro-denominated
bills and coins will be issued, and by July 1, 2002, only the euro will be used.
A significant number of the Company's customers are located, or transact
business with, or have operations in participating European Union countries. As
a result, the computer systems or software used by these companies may need to
be upgraded to comply with data storage and computational euro requirements. In
the first fiscal quarter of 1999, the Company released a new English language
client/server version of MAXIMO (MAXIMO 4.0.1) that accepts, stores, calculates,
converts and reports euro currency. In the second quarter of fiscal 1999, the
Company released primary language versions of MAXIMO 4.0.1 in Brazilian
Portuguese, Dutch, French, German, Latin American Spanish, and Swedish. The
Company also
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released a new English language client/server version of MAXIMO (MAXIMO 4.0.2)
for Workflow in the second quarter of fiscal 1999 that is euro compliant as
defined above. In the third quarter of fiscal 1999, the Company released an
English language version of mroBuyer's(TM) Desktop Requisition that is also euro
compliant as defined above. The amount of development dollars spent on the euro
releases did not and does not expect to have a material adverse effect on the
Company's results of operations or financial condition.
EFFECT OF ACCOUNTING PRONOUNCEMENTS
Statement of Financial Accounting Standards No. 133, "Accounting for Derivative
Instruments and Hedging Activities" (SFAS 133) was issued in June 1998. The
effective date of this Standard was modified by Statement of Financial
Accounting Standards No. 137, "Accounting for Derivative Instruments and Hedging
Activities-Deferral of the Effective Date of FASB Statement No. 133" and is
effective for fiscal quarters of fiscal years beginning after June 15, 2000,
with earlier adoption encouraged. The Company will adopt SFAS 133 in the fiscal
year ended September 30, 2001. The Company believes that the provisions of SFAS
133 will not, when adopted, have a material impact on the Company's consolidated
financial statements.
NO REVISIONS OR UPDATES TO FORWARD-LOOKING STATEMENTS
The Company has no obligation to release publicly any revision or update to any
forward-looking statements to reflect events or circumstances after the date of
such statements or to reflect the occurrence of anticipated or unanticipated
events.
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ITEM 7 A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company's primary exposures to market risk are the effect of fluctuations
in interest rates earned on its cash equivalents and marketable securities.
At September 30, 1999, the Company held $98.2 million in cash equivalents and
marketable securities consisting of taxable and tax exempt municipal securities.
Cash equivalents are classified as available for sale and valued at amortized
cost which approximates fair market value. A hypothetical 10 percent increase in
interest rates would not have a material impact on the fair market value of
these instruments due to their short maturity and the Company's intention that
all securities will be sold within one year.
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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)
Year
1999 QUARTER Dec.31, Mar. 31, June 30, Sep. 30, Ended
ENDED: 1998 1999 1999 1999 1999
- ------ ------- ------- ------- ------- --------
Total revenues $33,917 $32,910 $36,425 $42,413 $145,665
Gross margin 23,190 21,694 24,730 28,723 98,337
Income from 5,892 6,091 6,340 6,010 24,333
operations
Income before 6,595 6,440 6,747 7,378 27,160
income taxes
Provision for 2,309 2,146 2,269 2,556 9,280
income taxes
Net income 4,286 4,294 4,478 4,822 17,880
Net income per
share, diluted $0.21 $ 0.21 $ 0.21 $ 0.22 $ 0.85
Year
1998 QUARTER Dec.31, Mar. 31, June 30, Sep. 30, Ended
ENDED: 1997 1998 1998 1998 1998
- ------ ------- ------- ------- ------- --------
Total revenues $25,110 $28,239 $31,250 $35,417 $120,016
Gross margin 17,920 18,980 21,065 24,578 82,543
Income from 4,815 (4,722) 5,176 7,633 12,902
operations
Income before 5,564 (4,305) 5,735 7,511 14,504
income taxes
Provision for 2,059 1,678 2,052 2,493 8,282
income taxes
Net income 3,505 (5,983) 3,683 5,018 6,222
Net income per
share, diluted $0.18 $ (0.30) $ 0.18 $ 0.25 $ 0.31
Included in net income for the quarter ended March 1998 is a one-time charge for
purchased in-process product technology of $9,172,000 related to the purchase of
the A.R.M. Group Inc on February 6, 1998.
On October 15, 1999, the Company's Board of Director's approved a 2-for-1 stock
split in the form of a dividend of its common stock. All share and per data has
been restated to reflect this stock split as though it had occurred at the
beginning of the earliest period presented.
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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,
1999 are as follows. Messrs. Drapeau and Fishman are Class III Directors, whose
terms expire in 2002. Messrs. Birch and Daniels are Class I Directors, whose
terms expire in 2000. Messrs. Sayre and Stanzler are Class II Directors, whose
terms expire in 2001.
NAME AGE POSITION
- ---- --- --------
Norman E. Drapeau, Jr. 39 President and Chief Executive
Officer and Director - Class
III
Robert L. Daniels 57 Executive Chairman of the
Board - Class I
Paul D. Birch 41 Executive Vice President -
Finance and Administration,
Chief Financial Officer and
Treasurer and Director - Class
I
William J. Sawyer 53 Executive Vice President -
Operations
Ted D. Williams 51 Executive Vice President -
Worldwide Sales
John W. Young 47 Executive Vice President -
Research and Development
Richard P. Fishman 53 Director - Class III
Stephen B. Sayre 48 Director - Class II
Alan L. Stanzler 56 Director - Class II
NORMAN E. DRAPEAU, JR. joined the Company in 1982 as an applications
analyst. Since that time, he has held various
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positions with the Company, including, from 1984 to 1987, that of Manager of
Customer Support and from 1989 through 1991, that of Director, Product
Marketing. In 1991, Mr. Drapeau was appointed Vice President, Corporate
Marketing, in 1992 was appointed Vice President - Americas and in July 1996 was
appointed Executive Vice President - Worldwide Sales and Marketing, serving in
that capacity until January 1998. In January 1998, Mr. Drapeau was appointed
Executive Vice President and Chief Operating Officer and was also elected a
director of the Company. In May 1998, Mr. Drapeau was elected President and
Chief Executive Officer.
PAUL D. BIRCH joined the Company in 1991 as Vice President, Finance,
was appointed Vice President, Finance and Administration in 1992 and Executive
Vice President - Finance and Administration in 1996. Since 1992 he has been the
Chief Financial Officer of the Company, and since 1993 has held the additional
office of Treasurer. In May 1998, Mr. Birch was elected a director of the
Company.
WILLIAM J. SAWYER joined the Company in 1978 as an applications
consultant and served in various sales and services positions from 1978 to 1984.
Mr. Sawyer was a Vice President of the Company from 1984 to 1990 and Executive
Vice President from 1990 until November 1997. In November 1997, Mr. Sawyer left
the Company and joined Peritus Software Services, Inc. as Vice President,
Operations. Mr. Sawyer rejoined the Company in October 1998 as Executive Vice
President of Operations.
TED D. WILLIAMS originally joined the Company in 1984 and served as
Director, MAXIMO until 1988. From 1988 to 1993, Mr. Williams was President and
Chief Operating Officer of Comac Systems Corporation, a software application
company. In 1993, Mr. Williams rejoined the Company as Director, Eastern
Regional Sales. He was appointed Vice President-North American Sales in 1996 and
Vice President-Worldwide Sales in January 1998. In October 1998, Mr. Williams
was appointed Executive Vice President-Worldwide Sales.
JOHN W. YOUNG originally joined the Company in 1985 and served until
1988 as MAXIMO Product Manager. From 1988 to 1992, Mr. Young was Vice President
of Sales of Comac Systems Corporation, a software application company. In 1992
he rejoined the Company as Director of MAXIMO Product Design, was appointed Vice
President Research and Development of the Company in 1995 and was appointed
Executive Vice President - Research and Development of the Company in 1998.
ROBERT L. DANIELS founded the Company in 1968 and has been a director
since that time. Mr. Daniels served as Chairman of the Board and Chief Executive
Officer from 1968 to 1996 and as President from 1968 to 1995. In May 1998, Mr.
Daniels was
43
45
elected executive Chairman of the Board.
RICHARD P. FISHMAN was elected as a director in March 1999. Mr.
Fishman is currently Senior Vice President at MacAndrews & Forbes Group, Inc.,
where he is in charge of venture capital investing. From 1995 through 1998, Mr.
Fishman served as Managing Director of GeoPartners Research, Inc., a strategy
and management consulting firm where he headed the firm's venture capital
activities. From 1995 to 1997, Mr. Fishman was Of Counsel at the law firm of
Akin, Gump, Strauss, Hauer & Feld L.L.P. Mr. Fishman served as President and
Chief Executive Officer of Thinking Machines Corporation from 1993 to 1994 and
was a partner at the law firm of Milbank, Tweed, Hadley & McCloy from 1987 until
1993.
ALAN L. STANZLER was elected as a director in May 1998. Mr. Stanzler
served as a director of the Company from 1992 to 1994, and as Clerk of the
Company from 1990 to 1996. Mr. Stanzler is a member of the law firm of Maselan
Jones & Stanzler, P.C. From 1995 to 1998, Mr. Stanzler was a member of the law
firm of Davis, Malm & D'Agostine, P.C. and from 1978 to 1995 he was a partner in
the law firm of Finnegan & Stanzler, P.C.
STEPHEN B. SAYRE was elected as a director in September 1998. Mr. Sayre
is currently the Senior Vice President of marketing at Lotus Development
Corporation, a subsidiary of IBM Corporation. Prior to joining Lotus in 1994,
Mr. Sayre was President of Boston Treasury Systems and has held other senior
executive level positions with Cullinet Software and Easel Corporation.
All directors hold office until the expiration of their respective
terms as described above and until their respective successors are duly elected
and qualified. Executive officers of the Company are appointed by and serve at
the discretion of the Board of Directors.
The information concerning the compliance by the Company's officers, directors
and 10% shareholders with Section 16(a) of the Securities Exchange Act of 1934
is incorporated by reference to the information contained in the Company's
definitive Proxy Statement for its 1999 Annual Meeting of Stockholders under the
heading "Section 16(a) Beneficial Ownership Reporting Compliance" to be filed,
pursuant to Regulation 14A, within 120 days after the end of the Company's
fiscal year ended September 30, 1999.
(ITEMS 11,12,13)
In accordance with general instruction G(3) to Form 10-K, information
required by Part III is incorporated by reference from the Company's definitive
Proxy Statement for its 1999 Annual Meeting of Stockholders to be filed,
pursuant to Regulation 14A, within 120 days after the end of the Company's
fiscal year ended September 30, 1999.
44
46
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
The financial statements and schedules filed as part of this Report are
listed in the following Index to Financial Statements and Schedules. The
exhibits filed as part of this Report are listed in the accompanying Index to
Exhibits.
(a) The following documents are filed as a part of this Report:
1. Consolidated Financial Statements. The following Consolidated
Financial Statements of the Company are filed as part of this
report:
PAGE
----
Report of Independent Accountants......................... 50
Consolidated Balance Sheets -
September 30, 1999 and 1998............................. 51
Consolidated Statements of Operations -
Years Ended September 30, 1999, 1998 and 1997........... 52
Consolidated Statements of Cash Flows -
Years Ended September 30, 1999, 1998 and 1997........... 53
Consolidated Statements of Stockholders' Equity -
Years Ended September 30, 1999, 1998 and 1997........... 54
Notes to Consolidated Financial Statements................ 55
2. Financial Statement Schedules.
SCHEDULE PAGE
-------- ----
II Valuation and Qualifying Accounts........................ 73
Schedules not listed above have been omitted because they are not
applicable or are not required, or the information required to be set
forth therein is included in the consolidated Financial Statements or
Notes thereto.
3. Exhibits.
Exhibits 10.1 through 10.5 comprise the Company's management
contracts, compensatory plans or compensatory arrangements
required to be identified pursuant to Item 14(a) of Form 10-K.
45
47
3. Instruments Defining the Rights of Security-Holders
3.1 Amended and Restated Articles of Organization of
the Company (included as Exhibit 3.3 to the Company's
Registration Statement on Form S-1, Registration No.
33-76420, and incorporated herein by reference)
3.2 Restated By-Laws of the Company, as amended
(included as Exhibit 3.2 to the Company's Annual
Report on Form 10-K for the fiscal year ended
September 30, 1996 File No. 0-23852 and incorporated
herein by reference)
3.3 Form of Certificate of Designation of Series A
Junior Participating Preferred Stock of Project
Software & Development, Inc. (which is attached as
Exhibit A to the Rights Agreement included as Exhibit
4 (b) to the Company's Current Report on Form 8-K
dated February 2, 1998, File No. 0-23852, and
incorporated herein by reference)
4. Instruments defining the Rights of Security Holders,
Including Indentures
4.1 Specimen certificate for the Common Stock of the
Company (included as Exhibit 4.1 to the Company's
Registration Statement on Form S-1, Registration No.
33-76420, and incorporated herein by references)
4.2 Article 4B of the Amended and Restated Articles
of Organization of the Company (included as Exhibit
4.1 to the Company's Registration Statement on Form
S-1, Registration No. 33-76420, and incorporated
herein by reference)
4.3 Rights Agreement dated as of January 27, 1998,
between Project Software & Development, Inc. and
BankBoston, N.A. as Rights Agent (included as Exhibit
4 (a) to the Company's Current Report on Form 8-K
dated February 2, 1998, File No. 0-23852, an
incorporated herein by reference)
4.4 Form of Certificate of Designation of Series A
Junior Participating Preferred Stock of Project
Software & Development, Inc. (included as Exhibit 4
(b) to the Company's Current report on Form 8-K dated
February 2,
46
48
1998, File No. 0-23852, and incorporated herein by
reference)
4.5 Form of Rights Certificate (included as Exhibit 4
(c) to the Company's Current Report on Form 8-K dated
February 2, 1998, File No. 0-23852, and incorporated
herein by reference)
9. Voting Trust Agreements
9.1 1996 Daniels Voting Trust Agreement dated August
19,1996 among Susan H. Daniels, Robert L. Daniels and
Robert L. Daniels, as trustee (included as Exhibit
9.1 to the Company's Annual Report on Form 10-K for
the fiscal year ended September 30, 1996, and
incorporated herein by reference)
10. Material Contracts
10.1 1999 Equity Incentive Plan (included as Exhibit
10.1 to the Company's Quarterly Report on Form 10-Q
for the quarter ended March 31, 1999, Commission File
No. 0-23852 and incorporated herein by reference)
10.2 Amended and Restated 1994 Incentive and
Nonqualified Stock Option Plan (included as Exhibit
10.2 to the Company's Quarterly Report on Form 10-Q
for the quarter ended March 31, 1999, Commission File
No. 0-23852 and incorporated herein by reference)
10.3 Stock Purchase Agreement between W.W. Grainger,
Inc. and the Company dated April 20, 1999 (included
as Exhibit 10.3 to the Company's Quarterly Report on
Form 10-Q for the quarter ended June 30, 1999,
Commission File No. 0-23852 and incorporated herein
by reference)
10.4 Stock Option Agreement between W.W. Grainger,
Inc. and the Company dated April 20, 1999 (included
as Exhibit 10.4 to the Company's Quarterly Report on
Form 10-Q for the quarter ended June 30, 1999,
Commission File No. 0-23852 and incorporated herein
by reference)
10.5 Registration Rights Agreement between W.W.
Grainger, Inc. and the Company dated April 20, 1999
(included as Exhibit 10.5 to the Company's Quarterly
report on Form 10-Q
47
49
for the quarter ended June 30, 1999, Commission File
No. 0-23852 and incorporated herein by reference)
21. Subsidiaries of the registrant
21.1 Subsidiaries of the Company
23. Consents of independent accountants
23.1 Consent of PricewaterhouseCoopers LLP
27. Financial Data Schedule
27.1 Financial Data Schedule
(b) Reports on Form 8-K
During the three months ended September 30, 1999, the Company did not
file a current report on Form 8-K.
The Company will furnish a copy of any exhibit listed to requesting
stockholders upon payment of the Company's reasonable expense in
furnishing those materials.
48
50
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
Dated: DECEMBER 29, 1999
PROJECT SOFTWARE & DEVELOPMENT, INC.
------------------------------------
By: /s/ Norman E. Drapeau, Jr.
--------------------------------
Norman E. Drapeau, Jr.
President and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the registrant and
in the capacities and on the dates indicated.
/s/ Norman E. Drapeau, Jr. President and Chief December 29, 1999
- ------------------------- Executive Officer
Norman E. Drapeau, Jr. (Principal Executive
Officer)
Executive Chairman December 29, 1999
- ------------------------- of the Board
Robert L. Daniels
/s/ Paul D. Birch Executive Vice December 29, 1999
- ------------------------- President, Chief
Paul D. Birch Financial Officer
and Treasurer
(Principal Financial
and Accounting
Officer), Director
/s/ Richard P. Fishman Director December 29, 1999
- -------------------------
Richard P. Fishman
/s/ Stephen B. Sayre Director December 29, 1999
- -------------------------
Stephen B. Sayre
/s/ Alan L. Stanzler Director December 29, 1999
- -------------------------
Alan L. Stanzler
49
51
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders of Project Software & Development,
Inc.:
In our opinion, the consolidated financial statements listed in the index
appearing under Item 14(a)(1) present fairly, in all material respects, the
financial position of Project Software & Development, Inc. and its subsidiaries
at September 30, 1999 and 1998, and the results of their operations and their
cash flows for each of the three years in the period ended September 30, 1999 in
conformity with accounting principles generally accepted in the United States.
In addition, in our opinion, the financial statement schedule listed in the
index appearing under Item 14(a)(2) presents fairly, in all material respects,
the information set forth therein when read in conjunction with the related
consolidated financial statements. These financial statements and financial
statement schedule are the responsibility of the Company's management; our
responsibility is to express an opinion on these financial statements and
financial statement schedule based on our audits. We conducted our audits of
these statements in accordance with auditing standards generally accepted in the
United States, which require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for the opinion expressed above.
PricewaterhouseCoopers LLP
Boston, Massachusetts
November 3, 1999, except
for Note O, which is
dated December 15, 1999
50
52
PROJECT SOFTWARE & DEVELOPMENT, INC.
CONSOLIDATED BALANCE SHEETS
ASSETS September 30, September 30,
------------- -------------
1999 1998
---- ----
(IN THOUSANDS,EXCEPT SHARE DATA)
Current assets:
Cash and cash equivalents $ 59,903 $ 28,454
Marketable securities 30,920 38,922
Accounts receivable, trade, less allowance
for doubtful accounts of $2,867 and $2,614 at
September 30, 1999 and 1998, respectively 38,736 30,658
Prepaid expenses 3,919 2,799
Other current assets 1,171 1,128
Deferred income taxes 2,017 1,697
-------- --------
Total current assets 136,666 103,658
-------- --------
Marketable securities 7,413 --
Property and equipment, net 12,055 8,823
Computer software costs, net -- 248
Intangible assets, net 1,509 1,082
Other assets 406 38
Deferred income taxes 984 671
-------- --------
Total assets $159,033 $114,520
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued expenses $ 12,172 $ 8,189
Accrued compensation 8,429 5,800
Income taxes payable 4,227 4,063
Deferred revenue 16,580 12,651
Deferred income taxes 187 287
-------- --------
Total current liabilities 41,595 30,990
-------- --------
Deferred income taxes -- 103
Deferred rent 146 144
Deferred revenue 92 615
Commitments and contingencies
Equity in minority interest 44 44
Stockholders' equity
Preferred stock, $.01 par value;1,000,000 authorized,
none issued and outstanding
Common stock, $.01 par value;50,000,000 authorized;
21,301,674 and 19,964,460 issued at September 30,
1999 and 1998, respectively 213 200
Additional paid-in capital 67,418 50,310
Retained earnings 50,210 32,330
Accumulated other comprehensive income (685) (216)
-------- --------
Total stockholders' equity 117,156 82,624
-------- --------
Total liabilities and stockholders' equity $159,033 $114,520
======== ========
The accompanying notes are an integral part of the consolidated financial
statements.
51
53
PROJECT SOFTWARE & DEVELOPMENT, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
YEAR ENDED SEPTEMBER 30,
----------------------------------
1999 1998 1997
-------- -------- -------
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
Revenues:
Software $ 62,240 $ 54,007 $50,393
Support and services 83,425 66,009 46,307
-------- -------- -------
Total revenues 145,665 120,016 96,700
-------- -------- -------
Cost of revenues:
Software 5,018 4,537 2,547
Support and services 42,310 32,936 24,025
-------- -------- -------
Total cost of revenues 47,328 37,473 26,572
-------- -------- -------
Gross margin 98,337 82,543 70,128
Operating expenses:
Sales and marketing 47,417 37,418 32,985
Product development 14,959 13,247 11,387
General and administrative 11,628 9,804 9,485
Charge for purchased in-process
product development -- 9,172 --
-------- -------- -------
Total operating expenses 74,004 69,641 53,857
-------- -------- -------
Income from operations 24,333 12,902 16,271
Interest income 3,052 2,411 2,409
Interest expense (50) (389) (24)
Other income (expense), net (175) (376) (529)
Loss on minority interest -- (44) --
-------- -------- -------
Income before income taxes 27,160 14,504 18,127
Provision for income taxes 9,280 8,282 6,557
-------- -------- -------
Net income $ 17,880 $ 6,222 $ 11,570
======== ======== ========
Net income per share, basic $ 0.87 $ 0.32 $ 0.59
-------- -------- -------
Net income per share, diluted $ 0.85 $ 0.31 $ 0.58
-------- -------- -------
Shares used to calculate net income
per share
Basic 20,459,023 19,864,524 19,574,288
Diluted 21,093,715 20,156,246 20,125,536
The accompanying notes are an integral part of the consolidated financial
statements.
52
54
PROJECT SOFTWARE & DEVELOPMENT, INC
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEAR ENDED SEPTEMBER 30,
1999 1998 1997
------- ------- --------
(IN THOUSANDS)
Cash flows from operating activities:
Net income $17,880 $ 6,222 $ 11,570
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 4,255 4,392 3,358
Loss on sale and disposal of property
and equipment 32 151 131
Amortization of discount on marketable
securities 188 (563) 409
Deferred rent 2 132 (73)
Deferred income taxes (857) (355) (238)
Charge for purchased in-process product
development -- 9,036 --
Changes in operating assets and liabilities,
net of effect of acquisitions:
Accounts receivable (7,860) (6,300) 2,824
Prepaid expenses (1,132) (891) (480)
Other assets (1,080) 134 (1,164)
Accounts payable 3,276 (2,970) 1,805
Accrued compensation 2,631 1,354 (532)
Income taxes payable 252 325 3,477
Deferred revenue 3,477 3,403 627
------- ------- --------
Net cash provided by operating activities 21,064 14,070 21,714
------- ------- --------
Cash flows from investing activities:
Acquisitions of businesses, net of cash 397 (6,962) --
Acquisitions of property and equipment (6,824) (4,172) (5,390)
Additions to computer software costs -- (1,284) --
Purchases of marketable securities (41,022) (90,433) (151,375)
Sales of marketable securities 41,300 90,234 149,540
------- ------- --------
Net cash used in investing activities (6,149) (12,617) (7,225)
------- ------- --------
Cash flows from financing activities:
Payments on bank loans -- (460) --
Payments of debenture -- (1,032) --
Proceeds from issuance of common stock,
net of issuance costs 13,546 -- --
Proceeds from exercise of stock options
including related tax benefit 3,319 1,791 2,841
------- ------- --------
Net cash provided by financing activities 16,865 299 2,841
------- ------- --------
Effect of exchange rate changes on cash (331) 738 (463)
------- ------- --------
Net increase/(decrease) in cash and cash
equivalents 31,449 2,490 16,867
Cash and cash equivalents, beginning of year 28,454 25,964 9,097
------- ------- --------
Cash and cash equivalents, end of year $59,903 $28,454 $ 25,964
======= ======= ========
The accompanying notes are an integral part of the consolidated financial
statements.
53
55
PROJECT SOFTWARE & DEVELOPMENT, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED SEPTEMBER 30, 1999, 1998 AND 1997
Accumulated Other
Comprehensive Income
------------------------
Net
Common Stock Unrealized
--------------------- Additional Cumulative Gain(Loss)
Shares Paid-in Retained Translation on Comprehensive
(in thousands, except share data) Issued Amount Capital Earnings Adjustment Marketable Income
Securities
- ------------------------------------------------------------------------------------------------------------------------------------
Balance at
September 30, 1996 ........ 19,405,098 194 $45,227 $14,538 $ 49 $154
Stock options exercised
and related tax benefit,
employee stock purchases. 307,850 4 2,837
Net income .................. 11,570 $11,570
Translation adjustment ...... (678) (678)
Net unrealized gain on
marketable securities.... 75 75
Comprehensive income......... 10,967
- ------------------------------------------------------------------------------------------------------------------------------------
Balance at
September 30, 1997 ........ 19,712,948 198 48,064 26,108 (629) 229
Stock options exercised
and related tax benefit,
employee stock purchases. 196,596 2 1,789
Acquisition, net of
merger expenses.......... 54,916 457
Net income ................. 6,222 6,222
Translation adjustment ...... 323 323
Net unrealized gain on
marketable securities.... (139) (139)
Comprehensive income......... 6,406
- ------------------------------------------------------------------------------------------------------------------------------------
Balance at
September 30, 1998 ........ 19,964,460 200 50,310 32,330 (306) 90
Stock options exercised
and related tax benefit,
employee stock purchases. 317,214 3 3,316
Acquisition, net of
merger expenses........ 20,000 256
Purchases of Shares by
W.W. Grainger, Inc.,
net of legal expenses... 1,000,000 10 13,536
Net income ................. 17,880 17,880
Translation adjustment ...... (346) (346)
Net unrealized loss on
marketable securities.... (123) (123)
Comprehensive income......... $17,411
- ------------------------------------------------------------------------------------------------------------------------------------
Balance at
September 30, 1999 ..... 21,301,674 $213 $67,418 $50,210 $(652) $ (33)
- ------------------------------------------------------------------------------------------------------------------------------------
Total
Stockholders'
Equity
- ----------------------------------------------
Balance at
September 30, 1996 ........ $ 60,162
Stock options exercised
and related tax benefit,
employee stock purchases. 2,841
Net income .................. 11,570
Translation adjustment ...... (678)
Net unrealized gain on
marketable securities.... 75
Comprehensive income.........
- ----------------------------------------------
Balance at
September 30, 1997 ........ 73,970
Stock options exercised
and related tax benefit,
employee stock purchases. 1,791
Acquisition, net of
merger expenses.......... 457
Net income ................. 6,222
Translation adjustment ...... 323
Net unrealized gain on
marketable securities.... (139)
Comprehensive income.........
- ----------------------------------------------
Balance at
September 30, 1998 ........ 82,624
Stock options exercised
and related tax benefit,
employee stock purchases. 3,319
Acquisition, net of
merger expenses........ 256
Purchases of Shares by
W.W. Grainger, Inc.,
net of legal expenses... 13,546
Net income ................. 17,880
Translation adjustment ...... (346)
Net unrealized loss on
marketable securities.... (123)
Comprehensive income.........
- ----------------------------------------------
Balance at
September 30, 1999 ..... $117,156
- ----------------------------------------------
The accompanying notes are an integral part of the consolidated financial
statements.
54
56
PROJECT SOFTWARE & DEVELOPMENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
A. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Nature of Business
The Company develops, markets, sells and supports enterprise asset
maintenance software used by businesses, government agencies, and other
organizations to assist them in maintaining high-value capital assets such as,
plants, facilities and production equipment. The Company also provides an
Internet-based business-to-business e-Commerce network and set of desktop
requisition and online procurement software products that enable businesses to
engage in electronic commerce.
Basis of Presentation
The consolidated financial statements include the accounts of Project
Software & Development, Inc. ("PSDI") and its majority-owned subsidiaries
(collectively, the "Company"). All intercompany accounts and transactions have
been eliminated. Minority ownership interests greater than or equal to 20% and
less than 50% are accounted for by the equity method. Certain prior year
financial statement items have been reclassified to the current year's format.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amount of assets and liabilities and
disclosures of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Cash and Cash Equivalents
The Company considers all highly liquid instruments purchased with original
maturities of three months or less to be cash equivalents. Cash equivalents
consist primarily of money market funds, which are stated at cost, which
approximates fair market value.
Concentration of Credit Risk
Financial instruments which potentially subject the Company to
concentration of credit risk consist primarily of temporary cash investments and
accounts receivable. Credit risk on accounts receivable is minimized as a result
of the diverse nature of the Company's customer base. The Company has not
experienced significant losses related to accounts receivable from individual
customers or groups of customers in a particular industry or geographic area.
Due to these factors, no additional credit risk beyond amounts provided for
collection losses is believed inherent in the Company's accounts receivable.
Marketable Securities
The Company's marketable securities are classified as available-for-sale
and are stated at their fair value. The fair value of marketable securities was
determined based on quoted market prices. Unrealized gains and losses on
securities classified as available-for-sale are reported as a separate component
of stockholders' equity and is included in other comprehensive income.
55
57
PROJECT SOFTWARE & DEVELOPMENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
Computer Software Costs
Computer software costs consist of internally developed software.
Development costs incurred in the research and development of new software
products, and enhancements to existing products, are expensed in the period
incurred unless they qualify for capitalization under Statement of Financial
Accounting Standards No. 86, "Accounting for the Cost of Computer Software to Be
Sold, Leased or Otherwise Marketed." These costs are amortized on a
straight-line basis over the estimated useful or market life of the software
(generally, one to two years). Amortization expense for 1999, 1998, and 1997 was
$248,000, $879,000 and $359,000, respectively.
Goodwill
Goodwill represents the excess of the cost of acquired businesses over the
fair value of their net tangible and identified intangible assets. Goodwill is
evaluated at each balance sheet date to determine whether any potential
impairment exists. Goodwill is generally amortized on a straight-line basis over
the estimated useful life, usually five years.
Depreciation and Amortization Property and equipment are stated at cost.
Depreciation is computed over the estimated useful lives of the
assets as follows:
DESCRIPTION ESTIMATED USEFUL LIFE
----------- ---------------------
Computer equipment & software 3 years
Vehicles 3 years
Furniture and fixtures 5 years
Leasehold improvements are amortized on the straight-line method over the
shorter of their estimated useful life or term of the lease. Maintenance and
repairs are charged to expense as incurred. Upon retirement or sale, the cost of
the assets disposed of and the related accumulated depreciation are removed from
the accounts and any resulting gain or loss is included in the determination of
net income.
Income per Share
Basic earnings per share is computed by dividing income available to common
shareholders by the weighted average number of common shares outstanding.
Diluted earnings per share is computed by dividing income available to common
shareholders by the weighted average common shares outstanding plus additional
common shares that would have been outstanding if dilutive potential common
shares had been issued. For purposes of this calculation, stock options are
considered dilutive potential common shares in periods in which they have a
dilutive effect.
All historical earnings per share amounts have been restated to reflect a
two-for-one stock split.
Basic and diluted earnings per share are calculated as follows:
FISCAL YEARS ENDED
BASIC EPS 09/30/99 09/30/98 09/30/97
- --------------------------------------------------------------------------------
Net income $17,879,718 $ 6,222,327 $11,570,383
Weighted average common
shares outstanding 20,459,023 19,864,524 19,574,288
Basic income per share $ 0.87 $ 0.32 $ 0.59
DILUTED EPS
- --------------------------------------------------------------------------------
Net income $17,879,718 $ 6,222,327 $11,570,383
Weighted average common
shares outstanding 20,459,023 19,864,524 19,574,288
Common stock equivalents 634,692 291,722 551,248
----------- ----------- -----------
Total diluted shares 21,093,715 20,156,246 20,125,536
Diluted income per share $ 0.85 $ 0.31 $ 0.58
Income Taxes
The Company accounts for income taxes under Statement of Financial
Accounting Standards No. 109, "Accounting for Income Taxes" (SFAS 109), which
requires an asset and liability approach for accounting and reporting for income
taxes. SFAS 109 also requires a valuation allowance
56
58
PROJECT SOFTWARE & DEVELOPMENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
against net deferred tax assets if, based upon the available evidence, it is
more likely than not that some or all of the deferred tax assets will not be
realized.
The Company has not provided for the U.S. income tax on earnings of its
foreign subsidiaries as it considers certain of these earnings are intended to
be permanently reinvested. At September 30, 1999, the undistributed earnings of
foreign subsidiaries were $ 2,178,000.
Revenue Recognition
The Company licenses its software products under noncancellable license
agreements and provides services including training, installation, consulting,
and maintenance, consisting of product support services and periodic updates.
License fee revenues are generally recognized upon contract execution and
shipment, collection of the resulting receivable is deemed probable and the
fees are fixed and determinable.
The revenue from maintenance contracts is recognized ratably over the term
of the agreement, generally one year. Revenues from services include
implementation fees, consulting and training fees, and subscription fees for the
Company's electronic commerce product. Subscription fees are recognized as
transactions are processed. Implementation, consulting and training fees are
recognized under both time and materials or when services are performed.
Deferred Revenue
Revenue on all software license transactions in which there are significant
outstanding obligations is deferred and recognized once such obligations are
fulfilled. Deferred revenue also includes maintenance contracts billed in
advance.
Foreign Currency
Assets and liabilities are translated at current exchange rates at the
balance sheet dates. The translation adjustments made on translation of the
balance sheet are recorded as a separate component of stockholders' equity.
Revenues and expenses are translated into U.S. dollars at average exchange
rates. Foreign currency transaction gains and losses are included in determining
net income. The Company recorded losses of $571,000, $604,000 and $476,000 for
1999, 1998, and 1997, respectively.
Comprehensive Income
The Company reports comprehensive income in accordance with Statement of
Financial Accounting Standards No. 130, "Reporting Comprehensive Income."
Accumulated other Comprehensive Income/(Loss) is included in the Shareholder's
Equity section of the balance sheet. Amounts are reported net of tax and include
gains and losses on foreign currency translation adjustments and unrealized
gains and losses on marketable securities.
Accounting Standards
57
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PROJECT SOFTWARE & DEVELOPMENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
Statement of Financial Accounting Standards No. 133, "Accounting for
Derivative Instruments and Hedging Activities" (SFAS 133) was issued in June
1998. The effective date of this Standard was modified by Statement of Financial
Accounting Standards No. 137, "Accounting for Derivative Instruments and Hedging
Activities - Deferral of the Effective Date of FASB Statement No. 133" and is
effective for fiscal quarters of fiscal years beginning after June 15, 2000,
with earlier adoption encouraged. The Company will adopt SFAS 133 in the fiscal
year ended September 30, 2001.
B. INCOME TAXES:
The components of income before income taxes consist of the following:
Year Ended September 30,
---------------------------------------
(in thousands) 1999 1998 1997
------- ------- -------
Income before income taxes:
United States........................................... $24,725 $21,935 $16,098
Foreign................................................. 2,435 (7,431) 2,029
------- ------- -------
$27,160 $14,504 $18,127
======= ======= =======
The provision for income taxes consists of:
Current taxes:
Federal................................................. 7,466 6,354 4,970
State................................................... 1,002 897 843
Foreign................................................. 1,103 1,129 887
Foreign withholding taxes............................... 527 266 77
------- ------- -------
$10,098 $ 8,646 $ 6,777
======= ======= =======
Deferred taxes:
Federal................................................. (652) (124) (235)
State................................................... (75) (41) (26)
Foreign................................................. (91) (199) 41
------- ------- -------
(818) (364) (220)
------- ------- -------
Total............................................... $ 9,280 $ 8,282 $ 6,557
======= ======= =======
58
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PROJECT SOFTWARE & DEVELOPMENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
The reconciliation of the Company's income tax provision to the statutory
federal tax rate is as follows:
Year Ended September 30,
--------------------------------------
1999 1998 1997
---- ---- ----
Statutory federal tax rate................................... 35.0% 35.0% 35.0%
FSC benefit.................................................. (2.6) (2.5) (1.3)
State taxes, net of federal tax benefit...................... 2.6 2.9 3.0
Foreign rate differential.................................... 0.10 0.30 0.40
R&D credit................................................... (1.3) (1.3) (0.7)
Exempt interest.............................................. (0.9) (1.3) (1.4)
Other........................................................ 1.3 1.9 1.2
---- ---- ----
Effective tax rate before purchased
in-process development.................................... 34.2% 35.0% 36.2%
Non-deductible charge for purchased
in-process development................................... -- 22.1 --
---- ---- ----
Effective tax rate........................................... 34.2% 57.1% 36.2%
==== ==== ====
The components of the deferred tax provision are:
Year Ended September 30,
----------------------------------------
(in thousands) 1999 1998 1997
------ ------ ------
Depreciation................................................. (90) $ 82 $(340)
Allowance for doubtful accounts.............................. (25) (87) (45)
Software capitalization...................................... (96) 96 (141)
Deferred revenue............................................. (111) (96) (135)
Deferred rent................................................ 2 (52) 29
Deferred merchandise......................................... -- -- 36
Package design............................................... (9) (5) (4)
Accrued vacation............................................. (50) (44) 35
Net operating losses......................................... (57) -- 585
Goodwill..................................................... (36) (85) --
Intangibles.................................................. (14) -- --
Translation loss............................................. (107) (116) (191)
Foreign tax credit........................................... (250) -- --
Other........................................................ 25 (57) (49)
----- ----- -----
$(818) $(364) $(220)
===== ===== =====
59
61
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PROJECT SOFTWARE & DEVELOPMENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
The components of the deferred tax assets and liabilities are as follows:
Year Ended September 30,
-------------------------
(in thousands) 1999 1998
------ ------
Deferred tax assets:
Deferred revenue............................ $ 503 $ 392
Deferred rent............................... 54 56
Allowance for doubtful accounts............. 790 765
Accrued vacation............................ 160 110
Depreciation................................ 347 257
Package design.............................. 73 64
Amortized software.......................... 22 22
Amortization of intangibles................. 14 --
Other reserves.............................. 117 155
Goodwill.................................... 239 203
Sec. 481 cash to accrual adjustment......... -- 94
Translation loss............................ 432 307
Net operating loss carryforwards............ 806 881
Foreign tax credit carryforward/carryback... 250 --
Valuation allowance......................... (806) (938)
------ ------
$3,001 $2,368
====== ======
Deferred tax liabilities:
Software Capitalization..................... $ -- $ 96
Sec. 475 Account Receivable Adjustment...... 187 281
Other Liabilities........................... -- 13
------ ------
$ 187 $ 390
------ ------
Net deferred tax assets.......................... $2,814 $1,978
====== ======
At September 30, 1999, the Company had foreign tax credit carryforwards of
approximately $37,000 which expire in fiscal year 2003. At September 30, 1999,
the Company had foreign net operating loss carryforwards of approximately
$1,687,000 which will generally expire as follows: $26,000 in fiscal year 2000,
$74,000 in fiscal year 2001, $293,000 in fiscal year 2002, $539,000 in fiscal
year 2003, $576,000 in fiscal year 2004, $70,000 in fiscal year 2005 and
$109,000 in fiscal year 2007. The valuation allowance represents foreign net
operating loss carryforwards which are not expected to be realized.
C. ACQUISITIONS:
On December 10, 1998, the Company acquired the shares and assumed net
liabilities of its Italian distributor, Work Management Consulting, s.r.l, for
the sum of $411,000. The transaction was accounted for using the purchase method
of accounting. The resulting goodwill is being
60
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PROJECT SOFTWARE & DEVELOPMENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
amortized on a straight-line basis over five years. This acquisition was deemed
to be immaterial for presentation of pro forma information.
On February 6, 1998, the Company acquired the stock of A.R.M. Group Inc.,
Ontario, Canada for the sum of $10,281,000 in cash, stock and assumed
liabilities. A.R.M. Group Inc. was a privately held organization that helped
businesses solve maintenance and materials management problems. The Company
recorded the acquisition using the purchase method of accounting with $9,172,000
of the purchase price allocated to in-process product development and charged to
the consolidated statement of operations on March 31, 1998, $452,000 allocated
to purchased technology, and $657,000 allocated to tangible assets. The Company
determined that certain aspects of the acquired technology had not reached
technological feasibility and had no alternative future use. The Company
expensed the portion of the purchase price allocable to such in-process product
development at the date of acquisition. The operating results of this acquired
business have been included in the consolidated statement of operations from the
date of acquisition.
D. MARKETABLE SECURITIES:
The Company classifies its marketable securities as "available for sale"
and carries them at aggregate fair value. Unrealized gains and losses are
included as a component of stockholders' equity, net of tax effect. Realized
gains and losses are determined based on the specific identified cost of the
securities. The marketable securities have various contractual maturities
through 2017. Dividend and interest income, including amortization of the
premium and discount arising at acquisition, are included in other income. The
pre-tax unrealized holding gains and (losses) for September 30, 1999 were
$11,000 and $(62,000), respectively. The pre-tax unrealized holding gains and
(losses) for September 30, 1998 were $104,000 and $(14,000), respectively.
Year Ended September 30, 1999
-----------------------------
Amortized Fair Market
(in thousands) Cost Value
------- -------
Current:
Securities with maturity date of less than one year:
U.S. Government Securities.............................. $17,248 $17,226
Tax exempt municipal securities......................... 13,705 13,694
------- -------
30,953 30,920
------- -------
Noncurrent:
Securities with maturity date greater than one year:
U.S. Government Securities.............................. 884 884
Tax exempt municipal securities......................... 6,548 6,529
------- -------
7,432 7,413
------- -------
Total............................................... $38,385 $38,333
======= =======
61
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PROJECT SOFTWARE & DEVELOPMENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
Year Ended September 30, 1998
-----------------------------
Amortized Fair Market
(in thousands) Cost Value
------- -------
Securities with maturity date of less than one year:
U.S. Government Securities.............................. $20,612 $20,688
Tax exempt municipal securities......................... 18,220 18,234
------- -------
Total....................................... $38,832 $38,922
======= =======
E. PREPAID EXPENSES:
A summary of prepaid expenses consists of the following:
Year Ended September 30,
-------------------------
(in thousands) 1999 1998
------ ------
Prepaid insurance............................................ $ 204 $ 73
Prepaid rent................................................. 452 228
Prepaid royalties............................................ 1,320 1,500
Prepaid expenses-other....................................... 1,943 998
------ ------
$3,919 $2,799
====== ======
F. PROPERTY AND EQUIPMENT:
Property and equipment are stated at cost and consist of the following:
Year Ended September 30,
--------------------------
(in thousands) 1999 1998
------- -------
Computer equipment and software.............................. $16,055 $10,560
Vehicles..................................................... 119 143
Furniture and fixtures....................................... 5,576 5,305
Leasehold improvements....................................... 3,051 2,866
------- -------
24,801 18,874
Less accumulated depreciation and amortization............... (12,746) (10,051)
------- -------
$12,055 $ 8,823
======= =======
Depreciation and amortization expense was $3,702,000, $3,300,000, and
$2,577,000 for 1999, 1998 and 1997, respectively.
62
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PROJECT SOFTWARE & DEVELOPMENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
G. INTANGIBLE ASSETS:
Intangible assets consist of the following:
Year Ended September 30,
--------------------------
(in thousands) 1999 1998
------- -------
Goodwill..................................................... $2,687 $2,296
Customer lists............................................... 411 --
Other intangible assets...................................... 100 --
------ ------
3,198 2,296
Less accumulated amortization................................ (1,689) (1,214)
------ ------
$1,509 $1,082
====== ======
Amortization expense was $475,000, $365,000 and $421,000 for 1999, 1998
and 1997, respectively.
H. ACCRUED COMPENSATION:
A summary of accrued compensation consists of the following:
Year Ended September 30,
--------------------------
(in thousands) 1999 1998
------- -------
Accrued bonus................................................ $1,444 $ 244
Accrued 401(k) Company contribution.......................... 322 217
Accrued payroll.............................................. 736 700
Accrued sales commissions.................................... 5,286 4,012
Accrued vacation pay......................................... 641 627
------ ------
$8,429 $5,800
====== ======
I. COMMITMENTS AND CONTINGENCIES:
The Company leases its office facilities under operating lease agreements
which expire at various dates through September 30, 2006. The Company pays all
insurance, utilities, and pro rated portions of any increase in certain
operating expenses and real estate taxes. The aggregated rent expense under
these leases was $4,772,000, $4,272,000, and $3,780,000 for 1999, 1998 and 1997,
respectively.
63
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PROJECT SOFTWARE & DEVELOPMENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
The operating leases provide for minimum aggregate future rentals as of
September 30, 1999 as follows:
(in thousands)
2000............................... $3,078
2001............................... 2,757
2002............................... 1,871
2003............................... 662
2004 and thereafter................ 1,034
------
$9,402
======
At September 30, 1999, the Company is also obligated to pay $364,000 in
fiscal year 2000 under guaranteed royalty arrangements.
The Company is not a party to any legal proceedings the outcome of which,
in the opinion of management, would have a material adverse effect on the
Company's results of operations or financial condition.
J. EMPLOYEE BENEFITS:
Cash or Deferred Plan
The PSDI Cash or Deferred Plan (the "Plan") is a defined contribution plan
available to substantially all of PSDI's domestic employees. The Plan was
established in 1988 under Section 401(a) of the Internal Revenue Code. Under the
Plan, employees may make voluntary contributions based on a percentage of their
pretax earnings.
Effective January 1, 1993, the Plan was amended to provide for both a
guaranteed and a discretionary contribution made by PSDI. Amounts charged to
expense for this Plan in 1999, 1998, and 1997 were $340,000, $329,000, and
$268,000, respectively.
1994 Incentive and Nonqualified Stock Option Plans
On March 10, 1994, the Board of Directors of the Company adopted the 1994
Incentive and Nonqualified Stock Option Plan (the "1994 Option Plan") that
provided for the grant of nonqualified and incentive stock options to directors
and employees. On January 25, 1996, the Board of Directors of the Company voted
to increase the number of shares of Common Stock that may be issued from
1,800,000 to 3,600,000.
During the last quarter of 1997, the Company's Board of Directors approved
a stock option repricing program for all stock options granted during the grant
period from August 1, 1996 through March 31, 1997 ("Grant Period"). Each group
of stock options covering two shares of the Company's Common Stock granted
during this period was replaced with an option covering one share of the
Company's Common Stock. Each employee had to elect to cancel all or none of the
64
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PROJECT SOFTWARE & DEVELOPMENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
shares granted to each during the Grant Period. The price of these stock options
was determined as of the closing of the stock market on July 31, 1997.
The exercise price of Incentive Options must be at least equal to the fair
market value on the date of grant. The exercise price of Nonqualified options
must not be less than 85% of the fair market value on the date of grant. These
options vest in equal annual installments over four years, commencing on
December 31, 1994.
On March 4, 1999, the Board of Directors of the Company elected to
terminate the 1994 Option Plan upon the adoption of the 1999 Equity Incentive
Plan (the "1999 Plan"). The stockholders of the Company, on March 24, 1999,
approved amendments to the vesting and transferability of options granted to
outside directors under the 1994 Option Plan.
1999 Equity Incentive Plan
On March 4, 1999, the Company's stockholders approved and the Board of
Directors of the Company adopted the 1999 Equity Incentive Plan (the "1999
Plan") that provided for the grant of incentive stock options, non statutory
stock options, stock bonuses, rights to purchase restricted stock, stock
appreciation rights and other awards based upon the Company's common stock. Up
to 1,850,000 shares of Common Stock (subject to adjustment upon certain changes
in the capitalization of the Company) may be issued pursuant to grants awarded
under the 1999 Plan.
Stock option activity is summarized as follows:
NO. OF SHARES PRICE PER SHARE
------------- ---------------
Outstanding shares at September 30, 1996 1,834,808 $ 2.84 - $15.50
1997
- ----
Granted 1,096,196 $10.56 - $20.57
Canceled (1,131,996) $ 2.84 - $21.32
Exercised (291,070) $ 2.84 - $11.88
Outstanding at September 30, 1997 1,507,938 $ 2.84 - $20.57
Exercisable at September 30, 1997 519,576 $ 2.84 - $15.50
NO. OF SHARES PRICE PER SHARE
1998 ------------- ---------------
- ----
Granted 700,400 $ 6.81 - $13.25
Canceled (477,362) $ 2.84 - $15.50
Exercised (221,508) $ 2.84 - $11.88
Outstanding at September 30, 1998 1,509,468 $ 2.84 - $21.32
Exercisable at September 30, 1998 591,070 $ 2.84 - $21.32
1999
- ----
Granted 1,061,000 $ 9.06 - $21.88
Canceled (129,954) $ 9.00 - $15.50
Exercised (274,478) $ 2.84 - $20.57
Outstanding at September 30, 1999 2,166,036 $ 2.84 - $21.88
Exercisable at September 30, 1999 671,400 $ 2.84 - $21.32
65
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PROJECT SOFTWARE & DEVELOPMENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
The following table summarizes information about stock options outstanding at
September 30, 1999:
Options Outstanding Options Exercisable
- ------------------------------------------------------------------------- --------------------------------
Number Weighted-Avg
Outstanding Remaining Number
Range of As of Contractual Weighted-Avg Exercisable Weighted-Avg
Exercise Prices 9/30/99 Life (years) Exercise Price As of 9/30/99 Exercise Price
- --------------- --------- ------------ -------------- ------------- --------------
$ 2.84 - $ 3.17 124,150 4.6 $ 2.89 124,150 $ 2.89
$ 6.82 - $ 9.82 1,107,404 8.4 $ 9.08 175,154 $ 8.92
$10.57 - $15.50 885,482 7.6 $12.31 347,596 $11.95
$16.75 - $21.88 49,000 6.0 $20.35 24,500 $19.34
--------- -------
$ 2.84 - $21.88 2,166,036 7.8 $10.30 671,400 $ 9.75
========= =======
The Company complies with the pro forma disclosure requirements of
Statement of Financial Accounting Standards Board No. 123. "Accounting for
Stock-Based Compensation" (SFAS 123). The fair value method of the Company's
stock options was estimated using the Black-Scholes option pricing model. This
model was developed for use in estimated fair value of traded options that have
no vesting restrictions and are fully transferable. This model requires the
input of highly subjective assumptions including the expected stock price
volatility. Because the Company's stock options have characteristics
significantly different from those of traded options, and because changes in the
subjective input assumptions can materially affect the fair value estimates, in
management's opinion, the existing model does not necessarily provide a reliable
single measure of the fair value of its stock options.
The fair value of the Company's stock options was estimated using the
following weighted-average assumptions:
Year Ended September 30,
------------------------------------
1999 1998 1997
---- ---- ----
Expected life (in years) 3.49 3.25 3.78
Volatility 76% 70% 75%
Risk-free interest rate 4.40% 5.63% 6.10%
Dividend yield 0% 0% 0%
66
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PROJECT SOFTWARE & DEVELOPMENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
For pro forma purposes, the estimated fair value of the Company's stock
options is amortized over the options' vesting period. The Company's pro forma
information is as follows:
Year Ended September 30,
--------------------------------
1999 1998 1997
------- ------ -------
(in thousands, except per share amounts)
Net income
As reported...................... $17,880 $6,222 $11,570
Pro forma $14,644 $5,252 $10,443
Net income per share, diluted
As reported...................... $ 0.85 $ 0.31 $ 0.58
Pro forma $ 0.70 $ 0.26 $ 0.52
Because SFAS 123 is applicable only to options granted subsequent to
September 30, 1995, its pro forma effect will not be fully reflected until
approximately the year 2000. There are 278,754 options outstanding related to
shares granted prior to the effective date of SFAS 123. Under SFAS 123, the
weighted-average estimated fair value of options granted during fiscal 1999,
1998, and 1997 were $4.25, $3.29 and $3.88 per share, respectively.
Employee Stock Purchase Plan
On March 10, 1994, the Board of Directors of the Company adopted the 1994
Employee Stock Purchase Plan that provides for a maximum issuance of 450,000
shares of Common Stock for purchase by eligible employees at 85% of the lower of
the fair market value of the Company's Common Stock on either the first or last
day of the semi-annual offering period. No compensation expense is recorded in
connection with the plan. During fiscal year ended 1999, employees purchased
42,736 shares at a price of $8.85 and $12.09 for the offering periods ended
November 30, 1998 and May 31, 1999, respectively. Approximately 137 employees
participated in the plan during the fiscal year ended 1999. Total shares
purchased in 1998 and 1997 were 48,654 and 16,780, respectively.
K. STOCKHOLDERS' EQUITY:
Preferred Stock
On March 11,1994, the issuance of up to 1,000,000 shares of preferred
stock, $0.01 par value was authorized. The Board of Directors has the authority
to issue the preferred stock in one or more series and to fix rights,
preferences, privileges and restrictions, including dividends, and the number of
shares constituting any series and the designation of such series.
In January 1998, the Board of Directors of the Company adopted a
stockholder rights plan by declaring a dividend distribution of one preferred
stock purchase right (one "Right") on each share of the Company's Common Stock
outstanding on January 27, 1998 or, in certain circumstances,
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PROJECT SOFTWARE & DEVELOPMENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
issued thereafter. Initially, the Rights are not exercisable, not represented by
separate Right certificates and do not trade separately from the Company's
Common Stock. Ten days after a tender offer or acquisition of 15% or more of the
Company's common stock, each right may be exercised for $140 ("Exercise Price")
to purchase one one-thousand of one share of the Company's Series A Junior
Participating Preferred Stock. Each one one-thousandth of each share of Series A
Junior Participating Preferred Stock will generally be afforded economic rights
similar to one share of the Company's common stock. In addition after such
rights are triggered, each Right entitles the holder to purchase common stock of
the Company with a fair value of twice the Exercise Price or, in certain
circumstances, securities of the acquiring company for the Exercise price. Each
Right expires in January 2008 and, during specified periods, the Company may
redeem or exchange each Right for $.01 or one share of common stock,
respectively. The Rights Agreement has been filed by the Company with the
Securities and Exchange Commission as an exhibit to a Registration Statement on
Form 8-A dated February 2, 1998. Stockholders are urged to review the Rights
Agreement for a complete understanding of the Rights Plan. The Rights Plan,
while providing the Board of Directors with flexibility in connection with
possible acquisitions and deterring unfair or coercive takeover tactics, could
have the effect of making it more difficult for a third party to acquire, or of
discouraging a third party from acquiring, beneficial ownership of 15% or more
of the outstanding shares of the Company's Common Stock.
Common Stock
In April 1999, the Company signed agreements with W.W. Grainger, Inc., a
provider of MRO ("Maintenance, Repair and Operating") supplies and related
information in North America. W.W. Grainger, Inc. acquired 1,000,000 shares of
the Company's common stock for $14.5 million, less expenses of $954 thousand and
acquired a two-year option to purchase 5% of the Company's wholly-owned
subsidiary, MRO.com, Inc. for an exercise price of $3.8 million.
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PROJECT SOFTWARE & DEVELOPMENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
L. SUPPLEMENTAL CASH FLOW DISCLOSURES:
Cash paid for interest and taxes were as follows:
Year Ended September 30,
---------------------------
(in thousands) 1999 1998 1997
------ ------ ------
Interest......................... $ 38 $ 389 $ 24
Income taxes..................... 8,657 7,382 2,856
Acquisitions of businesses were as follows:
Year Ended September 30,
---------------------------
(in thousands) 1999 1998 1997
---- ------- ----
Fair value of assets acquired.......... $592 $10,280 $--
Fair value of liabilities assumed...... 729 2,751 --
Net cash payments...................... 180 6,400 --
M. SEGMENT INFORMATION, GEOGRAPHIC DATA AND MAJOR CUSTOMERS:
The following is presented in accordance with SFAS No. 131, "Disclosures
about Segments of an Enterprise and Related Information." The Company has
identified two reportable industry segments: the development, marketing and
support of asset maintenance management software (MAXIMO) and internet
e-Commerce Software products and network services (MRO.com). Asset information
by reportable segment is not reported, since the Company does not produce such
information internally. The Company also manages these product lines across
geographic reportable segments: United States, Other Americas (Canada and Latin
America) Europe/Middle East and Africa, and Asia Pacific. The accounting polices
for each segment are the same as those described in the summary of significant
policies (Note A). All segments are managed by the same board of directors and
executive officers.
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PROJECT SOFTWARE & DEVELOPMENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
A summary of the Company's operations by product line was as follows:
Year Ended September 30,
-------------------------------------
(in thousands) 1999 1998 1997
-------- -------- -------
Revenues:
Asset maintenance software and services............ $139,569 $119,156 $96,700
Internet e-Commerce software and services.......... 6,096 860 --
-------- -------- -------
$145,665 $120,016 $96,700
Income (loss) from operations:
Asset maintenance software and services............ $ 31,768 $23,282 $16,271
Internet e-Commerce software and services.......... (7,435) (10,232) --
-------- -------- -------
$ 24,333 $ 12,902 $16,271
-------- -------- -------
Depreciation and amortization:
Asset maintenance software and services............ $ 4,291 $ 4,042 $ 3,358
Internet e-Commerce software and services.......... 132 502 --
-------- -------- -------
$ 4,423 $ 4,544 $ 3,358
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PROJECT SOFTWARE & DEVELOPMENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
A summary of the Company's operations by geographical area was as follows:
Year Ended September 30,
-------------------------------------
(in thousands) 1999 1998 1997
-------- -------- --------
Revenues:
United States................................................... $ 86,603 $ 70,284 $ 58,254
Other Americas.................................................. 2,594 5,436 5,121
Intercompany revenues........................................... 11,869 14,944 8,291
-------- -------- --------
$101,066 $ 90,664 $ 71,666
-------- -------- --------
Europe/Middle East and Africa................................... 44,757 36,956 28,063
Asia/Pacific 11,711 7,340 5,262
Consolidating eliminations...................................... (11,869) (14,944) (8,291)
-------- -------- --------
$145,665 $120,016 $ 96,700
-------- -------- --------
Income from operations:
United States................................................... $ 23,782 $ 21,345 $ 15,028
Other Americas.................................................. (1,731) (9,780) 67
Europe/Middle East and Africa................................... 1,655 879 998
Asia/Pacific.................................................... 627 458 178
-------- -------- --------
$ 24,333 $ 12,902 $ 16,271
-------- -------- --------
Long-lived assets:
United States................................................... $ 10,510 $ 7,192 $ 5,499
Other Americas.................................................. 316 143 26
Europe/Middle East and Africa 2,577 2,410 2,981
Asia/Pacific.................................................... 567 446 308
-------- -------- --------
$ 13,970 $ 10,191 $ 8,814
-------- -------- --------
The Company has subsidiaries in foreign countries, which sell the Company's
products and services in their respective geographic areas from which the sales
are made. Intercompany revenues primarily represent shipments of software to
international subsidiaries and are eliminated from consolidated revenues. Income
(loss) from operations excludes interest income, interest expense, provision for
income taxes and transaction gains and losses.
In 1998, 11% of the Company's operating revenues were derived from U.S.
Government agencies and affiliates. No customer accounted for more than 10% of
revenue in 1999 or 1997.
N. RELATED PARTY TRANSACTIONS:
The Company leased its former corporate headquarters pursuant to a 13 year
lease which expired on December 31, 1997, from a partnership in which the
Executive Chairman of the Board, Founder and Director of the Company has a 1.69%
limited partnership interest. Rent payments to the partnership for 1998, and
1997 totaled $285,000 and $1,510,000, respectively.
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O. SUBSEQUENT EVENTS
On October 15, 1999, the Company's Board of Director's approved a 2-for-1
stock split in the form of a dividend of its common stock to be paid to all
shareholders on December 22, 1999. The stock split was subject to shareholder
approval of an increase in the Company's authorized common stock, $0.01 par
value per share, from 15,350,000 shares to 50,000,000 shares. Stockholders
approved the transaction on December 15, 1999. All share and per share data has
been restated to reflect this stock split as though it had occurred at the
beginning of the earliest period presented.
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PROJECT SOFTWARE & DEVELOPMENT, INC.
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
COL. A COL. B COL. C COL. D COL. E
- ---------------------------------------------------------------------------------------------------------
ADDITIONS
------------------------
BALANCE AT CHARGED TO CHARGED TO BALANCE AT
BEGINNING COSTS AND OTHER END OF
OF PERIOD EXPENSES ACCOUNTS DEDUCTIONS PERIOD
-----------------------------------------------------------------
YEAR ENDED SEP. 30, 1999
Allowance for doubtful accounts $2,614,137 $1,137,694 $ 885,080 $2,866,751
YEAR ENDED SEP. 30, 1998
Allowance for doubtful accounts $2,286,574 $1,916,189 $1,588,626 $2,614,137
YEAR ENDED SEP. 30, 1997
Allowance for doubtful accounts $1,954,000 $4,383,293 $4,050,719 $2,286,574
75
EXHIBIT INDEX
EXHIBIT
NO. DESCRIPTION PAGE
- --- ----------- ----
3.1 Amended and Restated Articles of Organization of the Company (included
as Exhibit 3.3 to the Company's Registration Statement on Form S-1,
Registration No. 33-76420, and incorporated herein by reference)
3.2 Restated By-Laws of the Company, as amended (included as Exhibit 3.2 to
the Company's Annual Report on Form 10-K for the fiscal year ended
September 30, 1996 File No. 0-23852 and incorporated herein by
reference)
3.3 Form of Certificate of Designation of Series A Junior Participating
Preferred Stock of Project Software & Development, Inc. (which is
attached as Exhibit A to the Rights Agreement included as Exhibit 4 (b)
to the Company's Current Report on Form 8-K dated February 2, 1998,
File No. 0-23852, and incorporated herein by reference)
4.1 Specimen certificate for the Common Stock of the Company (included as
Exhibit 4.1 to the Company's Registration Statement on Form S-1,
Registration No. 33-76420, and incorporated herein by reference)
4.2 Article 4B of the Amended and Restated Articles of Organization of the
Company (included as Exhibit 4.1 to the Company's Registration
Statement on Form S-1, Registration No. 33-76420, and incorporated
herein by reference)
4.3 Rights Agreement dated as of January 27, 1998, between Project Software
& Development, Inc. and BankBoston, N.A. as Rights Agent (included as
Exhibit 4 (a) to the Company's Current Report on Form 8-K dated
February 2, 1998, File No.0-23852, and incorporated herein by
reference)
4.4 Form of Certificate of Designation of Series A Junior Participating
Preferred Stock of Project Software & Development, Inc. (included as
Exhibit 4 (b) to the Company's Current Report on Form 8-K dated
February 2, 1998, File No. 0-23852, and incorporated herein by
reference)
4.5 Form of Rights Certificate (included as Exhibit 4 (c) to the Company's
Current Report on Form 8-K dated February 2, 1998, File No. 0-23852,
and incorporated herein by reference)
9.1 1996 Daniels Voting Trust Agreement dated August 19, 1996 among Susan
H. Daniels, Robert L. Daniels and Robert L. Daniels, as Trustee
(included as Exhibit 9.1 to the Company's Annual Report on Form 10-K
for the fiscal year ended September 30, 19996, and incorporated herein
by reference)
10.1 1999 Equity Incentive Plan, as approved by the stockholders of the
Company by written consent dated
76
March 24, 1999 (included as Exhibit 10.1 to the Company's Quarterly
Report on Form 10-Q for the quarter ended March 31, 1999, Commission
File No. 0-23852 and incorporated herein by reference)
10.2 Amended and Restated 1994 Incentive and Nonqualified Stock Option Plan,
as approved by the stockholders of the Company by written consent dated
March 24, 1999 (included as Exhibit 10.2 to the Company's Quarterly
Report on Form 10-Q for the quarter ended March 31, 1999, Commission
File No. 0-23852 and incorporated herein by reference)
10.3 Stock Purchase Agreement between W.W. Grainger, Inc. and the Company
dated April 20, 1999 (included as Exhibit 10.3 to the Company's
Quarterly Report on Form 10-Q for the quarter ended June 30, 1999,
Commission File No. 0-23852 and incorporated herein by reference)
10.4 Stock Option Agreement between W.W. Grainger, Inc. and the Company
dated April 20, 1999 (included as Exhibit 10.4 to the Company's
Quarterly Report on Form 10-Q for the quarter ended June 30, 1999,
Commission File No. 0-23852 and incorporated herein by reference)
10.5 Registration Rights Agreement between W.W. Grainger, Inc. and the
Company dated April 20, 1999 (included as Exhibit 10.5 to the Company's
Quarterly Report on Form 10-Q for the quarter ended June 30, 1999,
Commission File No. 0-23852 and incorporated herein by reference)
21.1 Subsidiaries of the Company
23.1 Consent of PricewaterhouseCoopers LLP
27.1 Financial Data Schedule