1 UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q FOR THE QUARTERLY PERIOD ENDED DECEMBER 31, 2000 (mark one) X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE - --- SECURITIES EXCHANGE ACT OF 1934 TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE - --- SECURITIES AND EXCHANGE ACT OF 1934 For the transition period from _______________ to __________________ Commission File Number 0-23852 PROJECT SOFTWARE & DEVELOPMENT, INC. (Exact name of registrant as specified in its charter) MASSACHUSETTS 04-2448516 (State or other jurisdiction (I.R.S employer incorporation or organization) identification number) 100 CROSBY DRIVE, BEDFORD MASSACHUSETTS 01730 (Address of principal executive offices, including zip code) (781) 280-2000 (Registrant's telephone number, including area code) Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No --------- --------- Number of shares outstanding of the Registrant's common stock as of the latest practicable date: 22,108,810 shares of common stock, $.01 par value per share, as of January 31, 2001. 2 PROJECT SOFTWARE & DEVELOPMENT, INC. 10-Q INDEX PART I. FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS PAGE Consolidated Balance Sheets (unaudited) as of December 31, 2000 and September 30, 2000. 3 Consolidated Statements of Operations (unaudited) for the three months ended December 31, 2000 and 1999. 4 Consolidated Statements of Cash Flows (unaudited) for the three months ended December 31, 2000 and 1999. 5 Notes to Consolidated Financial Statements (unaudited). 6 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS 11 ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK 28 PART II. OTHER INFORMATION ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K 29 SIGNATURE 31 2 3 PROJECT SOFTWARE & DEVELOPMENT, INC. CONSOLIDATED BALANCE SHEETS (UNAUDITED) ASSETS DECEMBER 31, SEPTEMBER 30, 2000 2000 ----------- ------------- (in thousands) Current assets: Cash and cash equivalents $ 36,330 $ 31,584 Marketable securities 2,243 4,241 Accounts receivable, trade, less allowance for doubtful accounts of $2,680 at December 31, 2000 and $2,825 at September 30, 2000, respectively 42,534 47,699 Prepaid expenses and other current assets 6,968 7,148 Deferred income taxes 7,080 6,097 --------- --------- Total current assets 95,155 96,769 --------- --------- Marketable securities 999 1,059 Property and equipment, net 15,322 14,571 Intangible assets, net 59,891 63,286 Other assets 2,105 2,168 Deferred income taxes 4,052 3,203 --------- --------- Total assets $ 177,524 $ 181,056 ========= ========= LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable and accrued expenses $ 17,048 $ 16,013 Accrued compensation 6,253 8,551 Income taxes payable 2,996 660 Deferred revenue 20,371 19,080 Deferred income taxes --- 94 Line of credit --- 2,278 --------- --------- Total current liabilities 46,668 46,676 --------- --------- Deferred income taxes 17 17 Deferred rent 102 112 Deferred revenue 51 59 Other long term liabilities 35 --- Commitments and contingencies Stockholders' equity Preferred stock, $.01 par value;1,000 authorized, none issued and outstanding Common stock, $.01 par value;50,000 authorized; 22,109 and 22,069 issued at December 31, 2000 and September 30, 2000, respectively 221 220 Additional paid-in capital 86,786 83,185 Deferred compensation (214) (233) Retained earnings 44,617 52,312 Accumulated other comprehensive income (759) (1,292) --------- --------- Total stockholders' equity 130,651 134,192 --------- --------- Total liabilities and stockholders' equity $ 177,524 $ 181,056 ========= ========= The accompanying notes are an integral part of the consolidated financial statements. 3 4 PROJECT SOFTWARE & DEVELOPMENT, INC. CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED) THREE MONTHS ENDED DECEMBER 31, ---------------------- 2000 1999 -------- -------- (in thousands, except per share data) Revenues: Software $ 12,597 $ 15,737 Support and services 28,871 22,249 -------- -------- Total revenues 41,468 37,986 -------- -------- Cost of revenues: Software 466 659 Support and services 16,069 12,528 -------- -------- Total cost of revenues 16,535 13,187 -------- -------- Gross margin 24,933 24,799 Operating expenses: Sales and marketing 21,086 13,821 Product development 5,560 4,495 General and administrative 4,246 3,095 Amortization of goodwill and other intangibles 3,636 169 -------- -------- Total operating expenses 34,528 21,580 -------- -------- (Loss)/income from operations (9,595) 3,219 Interest income 449 937 Interest expense (79) (1) Other income (expense), net 275 (194) -------- -------- (Loss)/income before income taxes (8,950) 3,961 (Benefit)/provision for income taxes (1,255) 1,365 -------- -------- Net (loss)/income $ (7,695) $ 2,596 ======== ======== Net (loss)/ income per share, basic $ (0.35) $ 0.12 -------- -------- Net (loss)/income per share, diluted $ (0.35) $ 0.11 -------- -------- Shares used to calculate net (loss)/income per share Basic 22,083 21,415 Diluted 22,083 22,706 The accompanying notes are an integral part of the consolidated financial statements. 4 5 PROJECT SOFTWARE & DEVELOPMENT, INC CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) THREE MONTHS ENDED DECEMBER 31, ------------------------------ 2000 1999 ------------ ------------ (IN THOUSANDS) Cash flows from operating activities: Net (loss)/income $ (7,695) $ 2,596 Adjustments to reconcile net (loss)/income to net cash provided by operating activities: Depreciation and amortization 5,022 1,427 Loss /(Gain )on sale and disposal of property and equipment 60 (15) Amortization of discount on marketable securities 4 62 Deferred rent (9) (6) Deferred compensation 19 -- Non-cash marketing expense 3,287 -- Deferred income taxes (1,904) (350) Changes in operating assets and liabilities, net of effect of acquisitions: Accounts receivable 5,508 (2,433) Prepaid expenses (1,607) (1,131) Other assets 1,491 (755) Accounts payable and accrued expenses 862 4,393 Accrued compensation (2,331) (4,042) Income taxes payable 2,313 930 Deferred revenue 1,151 (469) -------- -------- Net cash provided by operating activities 6,171 207 -------- -------- Cash flows from investing activities: Acquisitions of businesses, net of cash acquired -- 12 Acquisitions of property and equipment and other capital expenditures (2,029) (1,376) Purchase of marketable securities -- (17,797) Sale of marketable securities 2,058 20,640 -------- -------- Net cash provided by investing activities 29 1,479 -------- -------- Cash flows from financing activities: Payment of line of credit (2,278) -- Proceeds from exercise of stock options 315 2,185 -------- -------- Net cash (used in)/provided by financing activities (1,963) 2,185 -------- -------- Effect of exchange rate changes on cash 509 (194) -------- -------- Net increase in cash and cash equivalents 4,746 3,677 Cash and cash equivalents, beginning of period 31,584 59,903 -------- -------- Cash and cash equivalents, end of period $ 36,330 $ 63,580 ======== ======== The accompanying notes are an integral part of the consolidated financial statements. 5 6 PROJECT SOFTWARE & DEVELOPMENT, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) A. BASIS OF PRESENTATION The accompanying unaudited consolidated financial statements include the accounts of Project Software & Development, Inc. ("PSDI") and its majority-owned subsidiaries (collectively, the "Company"), as of December 31, 2000 and have been prepared by the Company in accordance with generally accepted accounting principles for interim reporting and with the instructions to Form 10-Q and Article 10 of Regulation S-X. All intercompany accounts and transactions have been eliminated. In the opinion of management, the accompanying unaudited consolidated financial statements contain all adjustments, consisting only of those of a normal recurring nature, necessary for a fair presentation of the Company's financial position, results of operations and cash flows at the dates and for the periods indicated. The results of operations for the periods presented herein are not necessarily indicative of the results of operations to be expected for the entire fiscal year, which ends on September 30, 2001, or for any other future period. These consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto, for the year ended September 30, 2000 included in the Company's Annual Report on Form 10-K filed with the Securities and Exchange Commission on December 29, 2000. The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. B. INCOME PER SHARE Basic income (loss) per share is computed by dividing income or loss available to common shareholders by the weighted average number of common shares outstanding. Diluted income per share is 6 7 computed by dividing income or loss available to common shareholders by the weighted average common shares outstanding plus dilutive potential common shares. For purposes of this calculation, stock options are considered dilutive potential common shares in periods in which they have a dilutive effect. All potential dilutive common shares are excluded from the computation of net loss per share because they are anti-dilutive. Basic and diluted income (loss) per share are calculated as follows: THREE MONTHS ENDED (IN THOUSANDS, EXCEPT PER SHARE DATA) 12/31/00 12/31/99 - ------------------------------------- --------- -------- Net (loss)/income $ (7,695) $ 2,596 Denominator: Weighted average common shares outstanding-basic 22,083 21,415 Effect of dilutive securities (1) -- 1,291 -------- ------- Weighted average common shares outstanding-diluted 22,083 22,706 ======== ======= Net (loss)/income per share-basic $ (0.35) $ 0.12 Net (loss)/income per share-diluted $ (0.35) $ 0.11 (1) In the period ended December 31, 2000 common stock equivalents of 168 thousand are not included because they are anti-dilutive. 7 8 C. COMPREHENSIVE INCOME The following table reflects the components of comprehensive income: (in thousands) - -------------------------------------------------------------------------------- THREE MONTHS ENDED DECEMBER 31, 2000 1999 - -------------------------------------------------------------------------------- Net (loss)/income $(7,695) $ 2,596 - -------------------------------------------------------------------------------- Other comprehensive income, net of tax: Unrealized gain/(loss) on Securities arising during Period 4 (28) Foreign currency translation Adjustment 529 (165) - -------------------------------------------------------------------------------- Comprehensive (loss)/income $(7,162) $ 2,403 - -------------------------------------------------------------------------------- D. SEGMENT INFORMATION, GEOGRAPHIC DATA AND MAJOR CUSTOMERS: In December 2000, the Company announced the repositioning of its Internet-based business-to-business software products. The Company now operates in two new reportable industry segments: (1) the development, marketing and support of the "Demand-Side" software products and services, consisting of MAXIMO Enterprise and MAXIMO Extended Enterprise (which includes MAXIMO Buyer, the e-procurement application that was integrated with MAXIMO during fiscal 2000), and (2) the development, marketing and support of the MRO.COM "Supply-Side" software products and services, and the Internet-based content management tools and cataloging services developed and marketed by our INTERMAT, Inc. subsidiary. The MRO.COM Supply-Side products consist of the mroDistributor, mroManufacturer and mroConnect products. Asset information by reportable segment is not reported, since the Company does not produce such information internally. The Company also manages these segments across geographic reportable segments: United States, Other Americas (Canada and Latin America), Europe/Middle East and Africa, and Asia Pacific. All segments are managed by the same board of directors and executive officers. 8 9 A summary of the Company's operations by industry segment was as follows: THREE MONTHS ENDED DECEMBER 31, (IN THOUSANDS) 2000 1999 -------- -------- Revenues: Demand-Side $ 37,039 $ 35,822 Supply-Side 4,429 2,164 -------- -------- $ 41,468 $ 37,986 ======== ======== (Loss)/income from operations: Demand-Side $ 6,700 $ 5,459 Supply-Side (16,295) (2,240) -------- -------- $ (9,595) $ 3,219 ======== ======== 9 10 A summary of the Company's revenues by geographical area was as follows: THREE MONTHS ENDED DECEMBER 31, (IN THOUSANDS) 2000 1999 -------- -------- Revenues: United States $ 25,894 $ 21,019 Other Americas 2,541 2,774 Intercompany revenues 961 2,020 -------- -------- Subtotal $ 29,396 $ 25,813 -------- -------- Europe/Middle East and Africa 10,114 11,279 Asia/Pacific 2,919 2,914 Consolidating eliminations (961) (2,020) -------- -------- Total revenues $ 41,468 $ 37,986 ======== ======== The Company has subsidiaries in foreign countries, which sell the Company's products and services in their respective geographic areas. 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/(benefit) for income taxes and foreign currency translation gains and losses. E. COMMON STOCK: In December 2000, the Company issued a warrant to i2 Technologies, Inc. ("i2") under which i2 has the right to purchase up to 500,000 shares of the Company's common stock at an exercise price of $10.25 per share. The Company valued the warrant at $3.3 million using the Black-Scholes valuation model, with the following assumptions: (1) risk-free interest rate of 4.8%; (2) life of 2.5 years; and (3) volatility of 105%. The warrant is immediately exercisable and has been recorded as a one-time non-cash sales and marketing expense. The warrant was issued in connection with a strategic agreement for the two companies to resell each other's offerings and integrate their technologies to create a solution for the strategic maintenance, repair and operations market. F. SUBSEQUENT EVENT: On February 1, 2001, the Company's Board of Directors amended the Company's By-Laws to change the date of the annual meeting of stockholders from the second Tuesday in February to the first Tuesday in March of each year. 10 11 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS FORWARD-LOOKING STATEMENTS In addition to historical information, this Quarterly report on Form 10-Q, as well as documents incorporated herein by reference, may contain forward-looking statements (within the meaning of section 27A of the Securities Act of 1933, as amended, and section 21E of the Securities Exchange Act of 1934, as amended). The following and similar expressions identify forward-looking statements: "expects", "anticipates", and "estimates". Forward-looking statements include, but are not limited to, statements related to: the Company's plans, objectives, expectations and intentions; the timing of, availability and functionality of products under development or recently introduced; and market and general economic conditions. Actual results may differ materially from those suggested by the forward-looking statements for various reasons, including those discussed under "Factors Affecting Future Performance." These forward-looking statements speak only as of the date of this Quarterly Report, or in the case of forward-looking statements in documents incorporated by reference, as of the dates of those documents. OVERVIEW On December 11, 2000, the Company's Board of Directors voted to change the Company's name to MRO Software, Inc., and to propose this change at the next annual meeting of the Company's stockholders (the "Annual Meeting"). This change will become legally effective immediately following the Annual Meeting, assuming that the Company's stockholders vote in favor of the change. The Company also intends to change its NASDAQ trading symbol from "PSDI" to "MROI", effective at approximately the same time. In December 2000, the Company announced the repositioning of its Internet-based business-to-business marketplace software products. Commencing in fiscal 2001, the Company operates in the following two reportable industry segments: (1) the development, marketing and support of "Demand-Side" software products and services, consisting of MAXIMO Enterprise and MAXIMO Extended Enterprise (which includes MAXIMO Buyer, the e-procurement application that was integrated with MAXIMO during fiscal year 2000) and (2) the development, marketing and support of the 11 12 MRO.COM "Supply-Side" software products and services, and the Internet-based content management tools and cataloging services developed and marketed by our INTERMAT, Inc. subsidiary. The Supply-Side products consist of the mroDistributor, mroManufacturer and mroConnect products. The Company also offers application hosting services delivered through the mroHosting Center, and the MRO.COM website will act as an administrative hub for all activities generated by these solutions. As of September 30, 2000, the Company reported revenues related to two industry segments: the development, marketing and support of asset maintenance management software (MAXIMO) and the development, marketing and support of Internet e-commerce software products and the related network services (MRO.COM). All segment reported financial information contained in this report has been restated to reflect the Company's repositioning. RESULTS OF OPERATIONS REVENUES 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. The Company also offers data normalization services through its INTERMAT, Inc. subsidiary. Three Months Three Months Ended CHANGE Ended (in thousands) 12/31/00 % 12/31/99 - --------------------------------------------------------------------------- Software licenses $12,597 (20)% $15,737 Percentage of total revenues 30% 41% Support and services $28,871 30% $22,249 Percentage of total revenues 70% 59% Total revenues $41,468 9% $37,986 12 13 Total revenues for the quarter increased $3.5 million over the comparable quarter. Total revenues for the Demand-Side business segment increased 3% to $37.0 million from $35.8 million over the comparable quarter. Total revenues for the Supply-Side business segment increased 100% to $4.4 million from $2.2 million over the comparable quarter. Software license revenues decreased 20% or $3.1 million over the comparable quarter. Software licenses revenue for the Demand-Side business segment decreased 10% to $12.5 million from $13.9 million over the comparable quarter. The Company attributes this decline to soft market conditions. In the quarter ended December 31, 2000, the Company transitioned to an Application Service Provider ("ASP") subscription revenue model for the Supply-Side of the business. ASP revenues are recognized ratably over the contract period and are recognized as service revenues. Support and services revenue increased 30% or $6.6 million over the comparable quarter. Support revenues were $11.3 million and $8.1 million for the three months ended December 31, 2000 and 1999, respectively. Demand-Side support revenues represented 96% and 99% of total support revenues for the three months ended December 31, 2000 and 1999, respectively. Support revenues have increased as a result of an increase in the number of customers supported by the Company. Service revenues were $17.5 million and $14.1 million for the three months ended December 31, 2000 and 1999, respectively. Services revenues are comprised of consulting and training services offered to customers, data normalization services, annual commerce fees and ASP fees. The increase in total service revenues is primarily attributable to a large contract for data normalization services. Demand-Side service revenues represented 78% and 98% of total services revenues for the three months ended December 31, 2000 and 1999, respectively. 13 14 COST OF REVENUES Three Months Three Months Ended CHANGE Ended (in thousands) 12/31/00 % 12/31/99 - -------------------------------------------------------------------------------- Software licenses $ 466 (29)% $ 659 Percentage of software licenses 4% 4% Support and services $16,069 28% $12,528 Percentage of support and services 56% 56% Total cost of revenues $16,535 25% $13,187 Percentage of total revenues 40% 35% Cost of software license revenues consists of software purchased for resale, royalties paid to vendors of third-party software, the cost of software product packaging and media, and certain employee costs related to software duplication, packaging and shipping. The decrease in the cost of software licenses revenues was due primarily to a decrease in the amount of royalties paid to Demand-Side third-party vendors. Cost of support and services consists primarily of personnel costs for employees and the related costs of benefits and facilities. Cost of support revenues were $2.8 million and $1.9 million for the three months ended December 31, 2000 and 1999, respectively. Cost of support revenues as a percentage of total support revenues were 25% and 23% for the three months ended December 31, 2000 and 1999, respectively. The increase is primarily attributable to an increase in personnel to support the increase in revenues for both the Demand- and Supply-Side segments. Cost of services revenues were $13.3 million and $10.6 million for the three months ended December 31, 2000 and 1999, respectively. The increase in cost of services is primarily attributable to utilization of third-party consultants to perform services related to a large Supply-Side contract, as well as, additional personnel hired to support the growth of the Supply-Side segment. Cost of services revenues as a percentage of total services revenues was 76% for both the three months ended December 31, 2000 and 1999. 14 15 OPERATING EXPENSES Three Months Three Months Ended CHANGE Ended (in thousands) 12/31/00 % 12/31/99 - -------------------------------------------------------------------------------- Sales and marketing $21,086 53% $13,821 Percentage of total revenues 51% 36% Product development $ 5,560 24% $ 4,495 Percentage of total revenues 13% 12% General and administrative $ 4,246 37% $ 3,095 Percentage of total revenues 10% 8% Goodwill amortization and other intangibles $ 3,636 205% $ 169 Percentage of total revenues 9% --- --- The increase in sales and marketing expenses was due to increases in sales, sales support and marketing personnel, sales commissions, market research, telemarketing expenses and higher travel costs. The additional sales support and marketing personnel were hired to support the MRO.COM e-commerce organization. The Company has made significant investments in the MRO.COM e-commerce sales and marketing organization. Also contributing to the increase in sales and marketing expenses is a one-time charge of $3.3 million for a warrant to i2 Technologies, Inc. ("i2"). In December 2000, the Company issued a warrant to i2 under which i2 has the right to purchase up to 500,000 shares of the Company's common stock at an exercise price of $10.25 per share. The Company valued the warrant using the Black-Scholes valuation model. The warrant was issued in connection with a strategic agreement between the two companies to resell each other's offerings and integrate their technologies to create a solution for the strategic maintenance, repair and operations market. During the three months ended December 31, 2000, the Company also wrote off a $1 million receivable owed by a company that had ceased operations. The increase in product development expenses was primarily due to an increase in employees through recruiting and acquisitions of businesses, and the cost of third-party research and development consultants. The additional personnel were hired and acquired to further enhance and develop e-commerce technologies. 15 16 The Company intends to continue to make investments in electronic commerce products for MRO supply chain management and e-procurement. The Company will also make further enhancements to its MAXIMO (Demand-Side) products. The increase in general and administrative expenses were primarily due to an increase in personnel through recruiting and acquisitions of businesses, as well as other expenses to support the increase in revenues and global expansion of the Company. The increase in goodwill amortization expense is attributable to the acquisitions of businesses completed during fiscal year ended September 30, 2000. There were no acquisitions in the three months ended December 31, 2000. NON-OPERATING EXPENSES Three Months Three Months Ended CHANGE Ended (in thousands) 12/31/00 % 12/31/99 - -------------------------------------------------------------------------------- Interest income $ 449 (52)% $ 937 Interest expense $ (79) 78% $ (1) Other income (expense) $ 275 (242)% $(194) Interest income is attributable to interest earned on marketable securities and cash equivalents from cash flow generated from operations including accounts receivable collections. The Company liquidated a portion of its marketable securities in March 2000 in order to complete the purchase of INTERMAT, Inc. and has thus earned less interest income from investments. The Company may decide to make further investments in marketable securities in the future. The increase in interest expense was due to interest paid on a line of credit of $2.3 million that the Company assumed upon completion of an acquisition in September 2000. The Company terminated and paid off the line of credit in full in December 2000. Other income was primarily attributable to currency translation gains recorded in the current quarter. 16 17 PROVISION FOR INCOME TAXES The Company's effective tax rate for the current quarter was a benefit of 14%. The Company will not be able to benefit from all of its losses due to the non-deductible nature of certain intangible and goodwill costs. Also, the $3.3 million marketing expense related to the warrant issued to i2 is not deductible for tax purposes. The company's effective tax rate was 35% for the comparable quarter. LIQUIDITY AND CAPITAL RESOURCES As of December 31, 2000, the Company had cash and cash equivalents and marketable securities of approximately $39.6 million and working capital of $48.5 million. Cash provided by operations for the three months ended December 31, 2000 was $6.2 million, primarily attributable to collection of outstanding accounts receivable. Cash provided by investing activities totaled $29 thousand, primarily attributable to sales of marketable securities, offset by capital expenditures related to purchases of financial software. Cash used in financing activities was $2.0 million. The Company paid down a $2.3 million line of credit during the current quarter. As of December 31, 2000, the Company's principal commitments consist primarily of office leases for its U.S. and European headquarters. Under the terms of the U.S. 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 June 2006. The Company may use a portion of its cash to acquire additional businesses, products and technologies complementary to its business. The Company also plans to make investments over the next year in its e-commerce products. The Company believes that its current cash balances and marketable securities combined with cash flow from operations 17 18 will be sufficient to meet its working capital and capital expenditure requirements through at least September 30, 2001. FACTORS AFFECTING FUTURE PERFORMANCE The nature of forward-looking information is that such information involves significant assumptions, risks and uncertainties. Certain public documents of the Company and 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 factors described below, and by other assumptions, risks and uncertainties. Forward-looking information is based on assumptions, estimates, forecasts and projections regarding the Company's future results as well as the future effectiveness of the Company's strategic plans and future operational decisions. Forward-looking statements made by or on behalf of the Company are subject to the risk that the forecasts, projections, and expectations of management, or assumptions underlying such forecasts, projections and expectations, may become inaccurate. Accordingly, actual results and the Company's implementation of its plans and operations may differ materially from forward-looking statements made by or on behalf of the Company. The following discussion identifies certain important factors that could affect the Company's actual results and actions and could cause such results and actions to differ materially from any forward-looking statements made by or on behalf of the Company that related to such results and actions. Other factors, which are not identified herein, could also have such an effect. RAPID TECHNOLOGICAL CHANGE The computer software industry is characterized by rapid technological advances, changes in customer requirements and frequent product introductions and enhancements. The Company's success depends upon its ability to continue to enhance its current products and to develop and introduce new products that keep pace with technological developments, respond to evolving customer requirements and industry standards, and achieve market acceptance. In particular, the Company believes that it must continue to respond quickly to users' needs for new functionality and to advances in hardware and operating systems, and that it must continue to create products that conform to industry 18 19 standards regarding the communication and interoperability between software products of different vendors. 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 A significant portion of the Company's revenues are derived from the licensing of its MAXIMO family of products and to related services and support. Revenues from licenses of MAXIMO and related services and support accounted for approximately 83% of the Company's total revenues in fiscal 2000, but declined in absolute dollar amount compared with fiscal 1999. The Company's financial performance in 2001 depends largely on continued market acceptance of MAXIMO, and the acceptance of its Demand-Side e-commerce procurement application MAXIMO Buyer. 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 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 MAXIMO, would have a material adverse effect on the Company's business and financial results. NEW PRODUCTS; NEW MARKETS In the first quarter of fiscal 2001, the Company repositioned its MRO.COM brand Internet-based business-to-business marketplace as mroDistributor, mroManufacturer and mroConnect, offering the suppliers of MRO goods and services the ability to drive and control their Internet-based e-commerce initiatives. 19 20 There can be no assurance that the Company's Supply-Side products will be sold successfully, or that the Company's Supply-Side products will achieve market acceptance. There is also no assurance that the Company and its customers will create a large enough community of sellers, connected to a large enough community of buyers, for the Company to achieve leverage and market synergy between its Demand-Side and Supply-Side products. 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 Supply-Side products and deliver them in a timely manner. The Company may incur substantial costs to enhance and modify its Supply-Side products and services in order to meet the demands of this growing and changing market. The Company's Supply-Side product segment is not yet profitable and may not be profitable for sometime. MAXIMO Extended Enterprise is now marketed to satisfy prospective customers' e-procurement requirements, and its pricing has been changed from user-based pricing to demand capacity pricing, where the customer purchases the right to process a certain number of transactions during the year. There can be no assurance that this pricing model will be accepted in the market, and sales of MAXIMO could be delayed or lost if the Company has to change its pricing model. MAXIMO Buyer is also offered to non-MAXIMO customers who wish to engage in e-procurement. The Internet e-procurement market is a nascent market that may undergo rapid technological change and rapid influx of competing technologies and vendors. The Company cannot predict the present and future size of the potential market for its MAXIMO Extended Enterprise and MAXIMO Buyer products, or whether the Demand-Side products will achieve acceptance in that market. 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, which may negatively impact the price of our stock. 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 20 21 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. Failure to close a small number of large software license contracts may have a significant impact on revenues for any quarter and could, therefore, result in significant fluctuations in quarterly revenues and operating results. Accordingly, the Company believes that period-to-period comparisons of its results of operations are not necessarily meaningful and should not be relied upon as an indication of future performance. The Company generally ships its products upon receipt of orders and maintains no significant product backlog. As a result, revenues from license fees in any quarter are substantially dependent on orders booked and shipped in that quarter. A delay in or loss of orders can cause significant variations in operating results. A significant portion of the Company's operating expenses is 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 enterprise asset maintenance software such as MAXIMO 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 ("ERP") vendors. Independent software vendors include Datastream, Manugistics and Indus. MAXIMO also competes with integrated ERP systems which include integrated maintenance modules provided by several large vendors, such as SAP, Oracle and JD Edwards and others. Currently, MAXIMO competes 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 21 22 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. Some of the companies mentioned above have also developed e-procurement applications that are competitive with MAXIMO Buyer. The Company's Supply-Side business 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. We may not remain competitive, and increased competition could seriously harm our business. Our competitors offer a variety of e-business products that compete with ours including supply chain and other core Supply-Side business. We may compete with vendors who have established electronic marketplaces and indirect procurement capabilities, such as Ariba and Commerce One. Other competitive factors include internal development efforts by corporate information technology departments and companies offering customized products. 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, or on the industrial supply chain market, the Company could be at a competitive disadvantage. INTERNATIONAL OPERATIONS A significant portion of the Company's total revenues is derived from operations outside the United States. The Company derived 39%, 46%, and 46% of its total revenue from sales outside the United States in fiscal years 2000, 1999, and 1998, respectively. The Company 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 22 23 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. DEPENDENCE ON THIRD PARTIES The Company has entered into nonexclusive license agreements with other third-party software developers, 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 unable to renew them on commercially reasonable terms), 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 Supply-Side operations, is dependent on Digital Island, a third-party data center, which could be destroyed or damaged. In addition, the Company must stay on good terms with this vendor, and be able to renew its agreement with this vendor on commercially reasonably terms. If this data center were to become inoperable or unavailable on commercially reasonable terms, the Company would incur significant expense, and potentially lose its ability to provide these services altogether during the period of downtime and transition, resulting in customer dissatisfaction and market rejection of its Supply-Side offerings. The Company's Supply-Side operations are dependent upon the Company's ability to protect 23 24 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 or unexpected expenses which could have a material adverse effect on our business and financial results. HOSTING The Company does not have extensive experience in hosting applications. We may not adequately predict the flow of traffic. If we do not predict the volume of traffic adequately, we may experience slower response times or other problems. Any delays in response time or performance problems could cause our customers to perceive this service as not functioning properly and they may discontinue use of our products and services. The Company's success and profitability in its Supply-Side business is dependent on the Company's ability to increase the scaleability and performance of its Supply-Side solutions, meaning that the Company must be able to host and operate a large number of mroDistributor, mroManufacturer and mroConnect product instances on a single computer using multiple processors. This is because the Company incurs fixed costs associated with the hosting environment, regardless of how many, or how few, Supply-Side products are hosted at the same time. If the Company is unable to host a certain number of Supply-Side solutions per computer, then the Supply-Side business may not become profitable for a long time. Moreover, if the Company is not able to operate a large number of Supply-Side product instances on the same computer without denigrating product performance, the Supply-Side solutions may not gain customer acceptance and market penetration. ERRORS IN DATA The Company needs to publish accurate catalog data, as this is critical to our customers' businesses. Our content management tools help suppliers manage the collection and publication of catalog content. Any defects or errors in these tools, or in the 24 25 catalog data produced by using them, could deter businesses from utilizing our Supply-Side solutions. 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 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. INTERNET RELATED RISKS 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, delays, or viruses 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 its proprietary technology. The Company currently has one patent 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 25 26 customers under "shrink wrap" or "click wrap" licenses included as part of the product packaging or acknowledged by customers who register on-line. Although, in larger sales, the Company's shrink-wrap and click wrap licenses may be accompanied by specifically negotiated agreements signed by the licensee, in many cases its shrink-wrap and click wrap licenses are not negotiated with or signed by individual licensees. Certain provisions of the Company's shrink-wrap and click 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 valid claim of any patent or any other 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 the Company's intellectual property rights, to protect the Company's 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 could potentially have a material adverse result on our operating results and financial condition. DEPENDENCE ON KEY PERSONNEL The Company is highly dependent on certain key executive officers, technical and sales employees, and 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 26 27 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 will 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 and 2000 was marked by significant fluctuations in the market price of the common stock, par value $.01 per share, of the Company (the "Common Stock"). Factors such as announcements of technological innovations or new products by the Company, its competitors and other third parties, as well as quarterly variations in the Company's results of operations and market conditions in the industry, may cause the market price of the Common Stock to continue to fluctuate significantly. In addition, the stock market in general has recently experienced substantial price and volume fluctuations, which have particularly affected the market prices of many software and e-commerce 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. 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. 27 28 ITEM 3. 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 and exposures to foreign currency exchange rate fluctuations. At December 31, 2000, the Company held $39.6 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. The Company develops its products in the United States and markets them in North America, Europe, Middle East and Africa, Australia, Asia Pacific and Latin America. As a result, our financial results could be affected by factors such as changes in foreign currency exchange rates or weak economic conditions in foreign markets. Currently, the Company has no hedging contracts. 28 29 PART II. OTHER INFORMATION ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits 3.1 Amended and Restated Articles of Organization of the Company (included as Exhibit 3.3 to the Company's Registration Statement on Form S-1, File No. 0-23852, 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) 3.4 Amendment to Articles of Organization adopted on December 15, 1999 (included as Exhibit 3.4 to the Company's Quarterly Report on Form 10-Q for the quarter ended December 31, 1999, File No. 0-23852, and incorporated herein by reference) 3.5 Restated By-Laws of the Company, as amended 4. Instruments defining the Rights of Security Holders, Including Indentures 4.1 Specimen certificate for the Common Stock of the Company (included as Exhibit 4.1 to the Company's Registration Statement on Form S-1, Registration No. 33-76420, and incorporated herein by reference) 4.2 Article 4B of the Amended and Restated Articles of Organization of the Company (included as Exhibit 4.1 to the Company's Registration Statement on Form S-1, Registration No. 33-76420, and incorporated herein by reference) 4.3 Rights Agreement dated as of January 27, 1998, between Project Software & Development, Inc. and BankBoston, N.A. as Rights Agent (included as Exhibit 4 (a) to the Company's 29 30 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) 10. Material Contracts 10.1 i2 Technologies, Inc. warrant (b) Reports on Form 8-K There were no current reports filed on Form 8-K for the three months ended December 31, 2000. 30 31 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. PROJECT SOFTWARE & DEVELOPMENT, INC. Date: February 14, 2001 By: /s/ Peter J. Rice ----------------- ------------------------ Peter J. Rice Executive Vice President - Finance and Administration, Chief Financial Officer and Treasurer (Principal Financial Officer) 31 32 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) 3.4 Amendment to Articles of Organization adopted on December 15, 1999 (included as Exhibit 3.4 to the Company's Form 10-Q for the quarter ended December 31, 1999, File No. 0-23852, and incorporated herein by reference) 3.5 Restated By-Laws of the Company, as amended 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) 32 33 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)File No. 0-23852 and incorporated herein by reference) 10.1 i2 Technologies, Inc. warrant 33