1 UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q FOR THE QUARTERLY PERIOD ENDED JUNE 30, 1997 (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) 20 UNIVERSITY ROAD, CAMBRIDGE, MASSACHUSETTS 02138 Address of principal executive offices, including zip code) (617) 661-1444 (Registrant's telephone number, including area code) Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No --- --- Number of shares outstanding of the Registrant's common stock as of the latest practicable date: 9,842,383 shares of common stock, $.01 par value per share, as of July 31, 1997. 1 2 PROJECT SOFTWARE & DEVELOPMENT, INC. 10-Q INDEX PAGE PART I. FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS PAGE Consolidated Balance Sheets as of June 30, 3 1997 (unaudited) and September 30, 1996. Consolidated Statements of Operations 4 (unaudited) for the three and nine months ended June 30, 1997 and 1996. Consolidated Statements of Cash Flows 5 (unaudited) for the nine months ended June 30, 1997 and 1996. Notes to Consolidated Financial Statements. 6 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL 9 CONDITION AND RESULTS OF OPERATIONS PART II. OTHER INFORMATION ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K 18 SIGNATURE 19 2 3 PROJECT SOFTWARE & DEVELOPMENT, INC. CONSOLIDATED BALANCE SHEETS ASSETS June 30, September 30, 1997 1996 ---- ---- (IN THOUSANDS,EXCEPT SHARE DATA) (Unaudited) Current assets: Cash and cash equivalents $20,786 $ 9,097 Marketable securities 37,175 36,798 Accounts receivable, trade, less allowance for doubtful accounts of $2,277 in 1997 and $1,954 in 1996 22,784 27,030 Prepaid expenses 1,457 1,410 Other assets 724 748 Deferred income taxes 1,054 892 ------- ------- Total current assets 83,980 75,975 ------- ------- Property and equipment, net 5,491 4,174 Computer software costs, net 345 787 Goodwill, net 1,555 1,832 Deferred income taxes 655 675 Other assets 48 33 ------- ------- Total assets $92,074 $83,476 ======= ======= LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable $ 7,350 $ 8,389 Accrued compensation 3,149 5,007 Income taxes payable 1,050 248 Deferred revenue 10,196 9,042 ------- ------- Total current liabilities 21,745 22,686 ------- ------- Deferred income taxes 379 168 Deferred rent 34 85 Deferred revenue 127 375 Commitments and contingencies Preferred stock, $.01 par value;1,000,000 authorized, none issued and outstanding -- -- Common stock, $.01 par value;15,350,000 authorized; issued and outstanding 9,841,693 and 9,702,579 for 1997 and 1996, respectively 98 97 Additional paid-in capital 47,901 45,324 Retained earnings 22,093 14,538 Cumulative translation adjustment (497) 49 Net unrealized gain on marketable securities 194 154 ------- ------- Total stockholders' equity 69,789 60,162 ------- ------- Total liabilities and stockholders' equity $92,074 $83,476 ======= ======= The accompanying notes are an integral part of the consolidated financial statements. 3 4 PROJECT SOFTWARE & DEVELOPMENT, INC. CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited) Three Months Ended Nine Months Ended June 30, June 30, ------------------------------- ------------------------------- 1997 1996 1997 1996 ---------- ----------- ----------- ----------- (in thousands, except share and per share data) Revenues: Software $ 11,277 $ 10,679 $ 36,165 $ 29,489 Support and services 12,375 7,472 33,052 21,226 ---------- ----------- ----------- ----------- Total revenues 23,652 18,151 69,217 50,715 ---------- ----------- ----------- ----------- Cost of revenues: Software 747 667 1,998 2,267 Support and services 6,293 3,837 17,475 10,546 ---------- ----------- ----------- ----------- Total cost of revenues 7,040 4,504 19,473 12,813 ww ---------- ----------- ----------- ----------- Gross margin 16,612 13,647 49,744 37,902 Operating expenses: Sales and marketing 8,337 5,999 23,908 16,549 Product development 2,873 1,942 8,247 5,402 General and administrative 2,129 1,986 7,088 5,376 Merger expenses -- -- -- 965 ---------- ----------- ----------- ----------- Total operating expenses 13,339 9,927 39,243 28,292 ---------- ----------- ----------- ----------- Income from operations 3,273 3,720 10,501 9,610 Interest income 754 424 1,702 1,280 Interest expense (2) (6) (4) (36) Other income (expense), net (122) 69 (263) (20) ---------- ----------- ----------- ----------- Income before income taxes 3,903 4,207 11,936 10,834 Provision for income taxes 1,413 1,457 4,381 4,509 ---------- ----------- ----------- ----------- Net income $ 2,490 $ 2,750 $ 7,555 $ 6,325 ========== =========== =========== =========== Net income per share $ 0.25 $ 0.27 $ 0.75 $ 0.63 ---------- ----------- ----------- ----------- Weighted number of common and common equivalent shares 9,971,731 10,055,455 10,077,804 10,041,184 ---------- ----------- ----------- ----------- The accompanying notes are an integral part of the consolidated financial statements. 4 5 PROJECT SOFTWARE & DEVELOPMENT, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) Nine months ended Nine months ended June 30, June 30, 1997 1996 ----------------- ----------------- (in thousands) Cash flows from operating activities: Net income $ 7,555 $ 6,325 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 2,521 1,992 Loss on sale and disposal of property and equipment 37 29 Amortization of discount on marketable securities 315 234 Deferred rent (51) (56) Deferred taxes 54 (303) Changes in operating assets and liabilities, net of effect of acquisitions: Accounts receivable 4,306 (7,414) Prepaid expenses (55) (293) Other assets (548) (1,690) Accounts payable (640) 660 Accrued expenses (76) (589) Accrued compensation (1,901) (970) Income taxes payable 813 218 Deferred revenue 1,018 1,312 -------- ------- Net cash provided by/(used in) operating activities 13,348 (545) -------- ------- Cash flows from investing activities: Acquisitions of businesses, net of cash -- 108 Acquisitions of property and equipment (3,049) (1,703) Proceeds from sale of property and equipment -- 6 Additions to computer software costs (88) (1,002) Purchase of marketable securities (102,525) (36,056) Sale of marketable securities 101,874 36,049 -------- ------- Net cash used in investing activities (3,788) (2,598) -------- ------- Cash flows from financing activities: Payments on leased equipment -- (25) Payments on bank loan -- (450) Proceeds from exercise of stock options 2,580 744 including related tax benefit -------- ------- Net cash provided by financing activities 2,580 269 -------- ------- Effect of exchange rate changes on cash (451) (92) -------- ------- Net increase (decrease) in cash and cash equivalents 11,689 (2,966) Cash and cash equivalents, beginning of period 9,097 9,346 -------- ------- Cash and cash equivalents, end of period $ 20,786 $ 6,380 ======== ======= The accompanying notes are an integral part of the consolidated financial statements. 5 6 PROJECT SOFTWARE & DEVELOPMENT, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) A. BASIS OF PRESENTATION The accompanying unaudited consolidated financial statements include the accounts of Project Software & Development, Inc. (PSDI) and its majority-owned subsidiaries (collectively, the "Company"), as of June 30, 1997 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, 1997, 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, 1996 included in the Company's Annual Report on Form 10-K filed with the Securities and Exchange Commission on December 30, 1996. 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 Income per share is computed for each period based upon the weighted average number of common shares outstanding and dilutive common stock equivalents (using the treasury stock method). For purposes of this calculation, stock options are considered common stock equivalents in the periods in which they have a dilutive effect. Fully diluted and primary income per share data are the same for each period presented. 6 7 C. ACCOUNTING STANDARDS Statement of Financial Accounting Standards ("SFAS") No. 123, "Accounting for Stock-Based Compensation" is effective for fiscal years beginning after December 15, 1995. SFAS No. 123 prescribes accounting and reporting standards for all stock-based compensation plans, including employee stock options, restricted stock, and stock appreciation rights. SFAS No. 123 does not require companies to change their existing accounting for employee stock options under Accounting Principles Board ("APB") Opinion No. 25, "Accounting for Stock Issued to Employees" (the intrinsic value method) but requires pro forma disclosures of what net income and earnings per share would have been had the new fair value method been used. The Company has elected to continue following present accounting rules under APB Opinion No. 25 and will disclose all the required pro forma information in its Annual Report on Form 10-K for the fiscal year ended September 30, 1997. Statement of Financial Accounting Standards ("SFAS") No. 128, "Earnings Per Share" is effective for financial statements issued for periods ending after December 15, 1997. SFAS No. 128 replaces APB Opinion No. 15, Earnings Per Share. SFAS No. 128 simplifies the computation of EPS by replacing the presentation of primary EPS with a presentation of basic EPS. It requires dual presentation of basic and diluted EPS by entities with complex capital structures. The Company will adopt SFAS No. 128 per the effective date for the periods ended after December 15, 1997. Statement of Financial Accounting Standards ("SFAS") No. 130, "Reporting Comprehensive Income" is effective for financial statements beginning after December 15, 1997. SFAS No. 130 requires that changes in comprehensive income be shown in a financial statement that is displayed with the same prominence as other financial statements. The Company will adopt SFAS No. 130 beginning in the first quarter of the fiscal year ended September 30, 1998. Statement of Financial Accounting Standards ("SFAS") No. 131, "Disclosures about Segments of an Enterprise and Related Information" is effective for fiscal years beginning after December 15, 1997. This statement will change the way companies report annual financial statements and requires them to report selected segment information in their quarterly reports issued to shareholders. It also requires entity-wide disclosures about the products and services an entity provides, the material countries in which it holds assets and reports revenues, and its major customers. The Company will adopt SFAS No. 130 in the fiscal year ended September 30, 1998. 7 8 D. COMPUTER SOFTWARE COSTS There were no internally developed software costs capitalized for the three and nine months ended June 30, 1997. Internally developed software costs capitalized for the three and nine months ended June 30, 1996 were $0 and $634,000, respectively. Amortization expense was $106,000 and $127,000 for the three months ended June 30, 1997 and 1996, respectively, and $360,000 and $822,000 for the nine months ended June 30, 1997 and 1996. For the three months ended December 31, 1995, the Company changed the estimated useful life of its internally developed software related to the client/server version of MAXIMO from three years to fifteen months. This change in estimate resulted in additional amortization expense of $565,000 in the three months ended December 31, 1995. 8 9 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS General. The Company develops, markets and supports applications software used by businesses, government and other organizations to improve the productivity of facilities, plants and production equipment. The Company's revenues are derived primarily from two sources: software licenses and fees for services, including support contracts and training and consulting services. The Company has experienced a significant shift in the sources of its revenues as a result of its decision to concentrate its resources on the development and marketing of enterprise-wide asset maintenance management systems operating in a client/server environment. Prior to 1991, the Company's revenues were derived primarily from licenses of its project management software (consisting of character-based software designed to run on mainframe, minicomputers and personal computers), and, to a lesser extent, from sales of computer hardware. The Company acquired Maintenance Automation Corporation ("MAC") on March 1, 1996. MAC is a developer of maintenance management software for the single-user, PC LAN segment. The Company released MAXIMO, its first client/server product, in 1991, and released P/X, its second client/server product, in 1992. In fiscal year ended September 30, 1996, revenues from client/server software accounted for 89% of software revenues, of which 93% was attributable to the client/server versions of MAXIMO. In fiscal 1996, the Company introduced a new suite of MAXIMO products: MAXIMO Enterprise, MAXIMO Workgroup and MAXIMO ADvantage. MAXIMO Enterprise, a new version of which was released in March 1996, is a client/server product, which runs on Oracle7 and SYBASE platforms and is intended for the high function, high usage segment of the maintenance management market. MAXIMO Workgroup, released in July 1996, is also a client/server product and runs on SQLBase and Oracle Workgroup and is intended for the mid-range segment of the maintenance management market. In March 1997, the Company released a new SQL Server version of MAXIMO Enterprise and MAXIMO Workgroup for the Microsoft SQL Server database. The new SQL Server version is available for Windows NT servers, including NT 3.5.1 and NT 4.0, supporting Windows95, Windows 95B, all Windows 3.x systems, and NT 3.5.1 and NT 4.0 clients. The product acquired as a result of the acquisition of MAC on March 1, 1996, MAXIMO ADvantage, is intended for the lower-end maintenance market. MAXIMO ADvantage supports Microsoft Access for the single user, PC LAN segment. The Company incurred 9 10 significant additional and unexpected costs in developing a new release of MAXIMO ADvantage due to a delay in excess of six months in completing the new release of this product. The delay was necessary to meet both the quality expectations and functionality demanded by the Company. Further effecting MAXIMO ADvantage sales was the delay in availability of a CD-Rom based multi-media evaluation kit. This evaluation kit generally became available in December 1996. The first significant version of MAXIMO ADvantage released since the acquisition of MAC, version 3.4, was released in March 1997. The Company has not realized any significant revenues from this new release despite opening a new tele-sales operation in Atlanta in March 1997. Accordingly, expenses related to this product are being reduced to a level commensurate with the lower revenue expectations. The sources of the Company's revenues from support and services have also shifted since the introduction of the Company's new generation of client/server products. Revenues from support and services relating to the Company's MAXIMO products have increased, while those relating to the Company's P/X and mainframe and other project management software have declined. Revenues from licenses of P/X have declined sharply, dropping to 2% of total license revenues in the fiscal year ended 1996. The Company no longer actively markets its P/X product as a stand alone solution. Revenues from licenses of mainframe and other project management software have also declined sharply, dropping to 1% of total license revenues in the fiscal year ended 1996. The Company no longer actively markets its mainframe and other project management software products, although it provides technical support and other services to their installed customer base. The Company's revenues attributable to its operations outside the United States are a significant portion of revenues. The Company expects that international revenues will continue to be a significant percentage of total revenues. As the percentage of the Company's total revenues which are derived from international operations and are conducted in foreign currencies grows, changes in the values of these foreign currencies relative to the United States dollar will affect the Company's results of operations, and may contribute to fluctuations in the Company's results of operations. The functional currencies of the Company's international subsidiaries include the pound sterling, the French franc, the German deutschemark, the Dutch guilder, the Swedish krona, the Japanese yen, and the Australian and Canadian dollars, each of which has fluctuated significantly in relation to the United States dollar. In addition, the Company is exposed to potential losses as a result of transactions giving rise to accounts receivable in currencies other than the United States dollar or the functional currencies of its international subsidiaries. When the value of a foreign currency in which the 10 11 accounts receivable of the Company are denominated changes between the date the account receivable is accrued and the date on which it is settled, the resulting gain or loss is recorded as a foreign currency transaction adjustment. The Company recorded foreign currency transaction losses of $307,000 and $125,000 for the nine months ended June 30, 1997 and 1996, respectively. 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. To date, inflation has not had a material impact on the Company's financial results. There can be no assurance, however, that inflation may not adversely affect the Company's financial results in the future. RESULTS OF OPERATIONS Revenues. Total revenues increased 30% to $23,652,000 from $18,151,000 for the three months ended June 30, 1997 and 1996, respectively, and 36% to $69,217,000 from $50,715,000 for the nine months ended June 30, 1997 and 1996, respectively. The growth in revenues is generated from the Company's client/server versions of MAXIMO software and related support and services. A significant portion of the Company's total revenues are derived from operations outside the United States. Revenues generated outside the United States increased 51% to $10,024,000 or 42% of total revenues in the three months ended June 30, 1997 from $6,653,000 or 37% of total revenues in the three months ended June 30, 1996 and increased 46% to $29,509,000 or 43% of total revenues in the nine months ended June 30, 1997 from $20,281,000 or 40% of total revenues in the nine months ended June 30, 1996. The Company's software revenues increased 6% to $11,277,000 from $10,679,000 for the three months ended June 30, 1997 and 1996, respectively, and increased 23% to $36,165,000 from $29,489,000 for the nine months ended June 30, 1997 and 1996, respectively. The Company's MAXIMO client/server software revenues increased 15% to $10,448,000 from $9,109,000 for the three months ended June 30, 1997 and 1996, respectively, and increased 35% to $34,067,000 from $25,323,000 for the nine months ended June 30, 1997 and 1996, respectively. The Company's MAXIMO ADvantage software revenues decreased 41% to $763,000 from $1,291,000 for the three months ended June 30, 1997 and 1996, respectively, and decreased 47% to $1,723,000 from $3,238,000 for the nine months ended June 30, 1997 and 1996, respectively. The Company's P/X software revenues decreased 96% to $12,000 from $280,000 for the three months ended June 30, 1997 and 1996, respectively, and decreased 54% to $290,000 from $628,000 for the 11 12 nine months ended June 30, 1997 and 1996, respectively. The increases in MAXIMO client/server software revenues for the three and nine months ended June 30, 1997 can be attributed to increases in the average selling price, as well as, increases in the number of licenses. In the three months ended June 30, 1996, the Company recognized one large software license agreement of approximately $1.8 million dollars. There were no software licenses above one million dollars in the three months ended June 30, 1997. Software revenues as a percentage of total revenues decreased to 48% from 59% for the three months ended June 30, 1997 and 1996, respectively, and decreased to 52% from 58% for the nine months ended June 30, 1997 and 1996, respectively. The decreases for the three and nine months ended June 30, 1997 are largely attributable to a decline in MAXIMO client/server software license revenue in Europe and a shortfall in MAXIMO ADvantage revenues. Partially offsetting the software decline in Europe is an increase in European services revenue. European MAXIMO services revenues have increased 89% and 108% for the three and nine months ended June 30, 1997, respectively. European services revenues as a percentage of European revenues were 51% and 46% for the three and nine months ended June 30, 1997, respectively, in comparison to 41% and 32% for the three and nine months ended June 30, 1996, respectively. Revenues from MAXIMO client/server licenses and from related support and services increased 47% to $21,405,000 from $14,519,000 or 90% and 80% of total revenues for the three months ended June 30, 1997 and 1996, respectively, and increased 57% to $62,693,000 from $39,964,000 or 91% and 79% of total revenues for the nine months ended June 30, 1997 and 1996, respectively. Revenues from MAXIMO ADvantage licenses and from related support and services decreased 22% to $1,477,000 from $1,902,000 or 6% and 4% of total revenues for the three months ended June 30, 1997 and 1996, respectively, and decreased 29% to $3,921,000 from $5,540,000 or 6% and 11% of total revenues for the nine months ended June 30, 1997 and 1996, respectively. Revenues from licenses and related support and services of P/X decreased 59% to $551,000 from $1,356,000 or 2% and 7% of total revenues for the three months ended June 30, 1997 and 1996, respectively, and decreased 50% to $1,871,000 from $3,775,000 or 3% and 7% of total revenues for the nine months ended June 30, 1997 and 1996, respectively. The Company no longer actively markets its P/X product as a stand alone solution. Revenues from the Company's mainframe and other project management software and related support and services decreased 41% to $219,000 from $374,000 for the three months ended June 30, 1997 and 1996, respectively, and decreased 49% to $732,000 from $1,435,000 for the nine months ended June 30, 1997 and 1996, respectively. The Company no longer actively markets its mainframe and other project management software products. 12 13 Revenues from support and services increased 66% to $12,375,000 from $7,472,000 for the three months ended June 30, 1997 and 1996, respectively, and increased 56% to $33,052,000 from $21,226,000 for the nine months ended June 30, 1997 and 1996, respectively. Support and services revenues as a percentage of total revenues increased to 52% from 41% for the three months ended June 30, 1997 and 1996, respectively, and 48% from 42% for the nine months ended June 30, 1997 and 1996, respectively. The increases are due primarily to consulting and training services generated by the Company's MAXIMO Enterprise software. The Company anticipates that services revenues will continue to be a larger portion of total revenues than has been experienced in the past due to customers requiring high end domain implementation expertise including customization and integration to Enterprise Resource Planning projects. Also contributing to the increases are sales of support contracts in connection with licenses of the Company's MAXIMO client/server software, partially offset by declines in sales of support contracts relating to the Company's mainframe and other project management software. Cost of Revenues. The total cost of revenues increased 56% to $7,040,000 from $4,504,000 for the three months ended June 30, 1997 and 1996, respectively, and increased 52% to $19,473,000 from $12,813,000 for the nine months ended June 30, 1997 and 1996, respectively. The total cost of revenues as a percentage of total revenues was 30% and 25% for the three months ended June 30, 1997 and 1996, respectively, and 28% and 25% for the nine months ended June 30, 1997 and 1996, respectively and can be attributed primarily to the third party consulting costs and additional in house consultants hired in relation to increases in MAXIMO services revenue. Cost of software revenues increased 12% to $747,000 from $667,000 for the three months ended June 30, 1997 and 1996, respectively, and decreased 12% to $1,998,000 from $2,267,000 for the nine months ended June 30, 1997 and 1996, respectively. The cost of software revenues increased as a percentage of software revenues to 7% from 6% for the three months ended June 30, 1997 and 1996, respectively, and decreased to 6% from 8% for the nine months ended June 30, 1997 and 1996. The increase as a percentage of revenues for the three months ended June 30, 1997 is attributable to royalties paid to third party vendors and software purchased for resale. The decrease as a percentage of software revenues for the nine months ended June 30, 1997 is primarily attributable to a decrease in amortization expense of internally developed software as compared to the prior period and an increase in the revenue base for the nine months ended June 30, 1997. In the three months ended December 31, 1995, the Company changed the estimated useful life of its MAXIMO Enterprise product from three years to fifteen months to accurately reflect the lifecycles for major new 13 14 releases of this product. This change resulted in a one-time charge of an additional amortization expense of $565,000 for this three month period. Cost of support and services revenues consists primarily of personnel costs for employees and the related costs of benefits and facilities and costs for third party consultants. Cost of support and services revenues increased by 64% to $6,293,000 from $3,837,000 for the three months ended June 30, 1997 and 1996, respectively, and increased by 66% to $17,475,000 from $10,546,000 for the nine months ended June 30, 1997 and 1996, respectively. The increase for the three months ended June 30, 1997 is attributable to costs for third party consultants and the hire of employees to perform services. Cost of support and services as a percentage of support and services revenues was 51% for both the three months ended June 30, 1997 and 1996, respectively, and increased to 53% from 50% for the nine months ended June 30, 1997 and 1996, respectively. The increase for the nine months ended June 30, 1997 is attributable to costs for third party consultants whose effective hourly rate is higher than that of employees performing similar services. Third party consultants are utilized to perform services when the Company does not have adequate internal resources to complete services within acceptable time frames. Sales and Marketing Expenses. Sales and marketing expenses increased 39% to $8,337,000 from $5,999,000 for the three months ended June 30, 1997 and 1996, respectively, and increased 44% to $23,908,000 from $16,549,000 for the nine months ended June 30, 1997 and 1996, respectively. The increases are primarily due to increases in the number of sales personnel, sales commissions, travel and lodging expenses attributable to growth and expansion, and an increase in advertising costs. Sales and marketing expenses as a percentage of total revenues were 35% and 33% for the three months ended June 30, 1997 and 1996, and 35% and 33% for the nine months ended June 30, 1997 and 1996, respectively. The increases as a percentage of revenues are due primarily to increased sales and marketing staffs and an increase in advertising costs to promote the Company's MAXIMO products, and expense levels that were established to achieve a higher level of revenues. Product Development Expenses. Product development expenses increased 48% to $2,873,000 from $1,942,000 for the three months ended June 30, 1997 and 1996, respectively, and increased 53% to $8,247,000 from $5,402,000 for the nine months ended June 30, 1997 and 1996, respectively. The increases are attributable to costs for third party consultants and additional employees to work on upgrades of the MAXIMO product and investments in future technology. 14 15 Product development expenses increased to 12% from 11% of total revenues for the three months ended June 30, 1997 and 1996, respectively, and increased to 12% from 11% of total revenues for the nine months ended June 30, 1997 and 1996, respectively. Over the past two years, the Company has spent the majority of its development dollars on the MAXIMO product line and anticipates to continue to do so in the near future. The increases as a percentage of revenues are attributable to the capitalization of internal software developments costs in the prior period versus no capitalization of expenses in the current period. The increases are also attributable to increases in the number of developers hired and third party contractors. General and Administrative Expenses. General and administrative expenses include the cost of the Company's finance, human resources, information services and administrative operations. General and administrative expenses increased 7% to $2,129,000 from $1,986,000 for the three months ended June 30, 1997 and 1996, respectively, and increased 32% to $7,088,000 from $5,376,000 for the nine months ended June 30, 1997 and 1996, respectively. The increase for the three months ended June 30, 1997 is attributable to increases in personnel to support the increase in the revenue base offset by a decrease in the provision for bad debts. The increase for the nine months ended June 30, 1997 is attributable to increases in the provision for bad debt expenses, professional fees related to growth and expansion and goodwill amortization. Also contributing to the increases for both the three and nine months ended June 30, 1997 are increases in personnel to support the increase in the revenue base. General and administrative expenses as a percentage of total revenues decreased to 9% from 11% in the three months ended June 30, 1997 and 1996, respectively, and to 10% from 11% in the nine months ended June 30, 1997 and 1996, respectively. The decreases as a percentage of revenues for both periods demonstrates an ability to manage a larger revenue base without a commensurate increase in general and administrative expenses. Other Income/Expense. Interest income for the three months ended June 30, 1997 and 1996 was $754,000 and $424,000, respectively, and $1,702,000 and $1,280,000 for the nine months ended June 30, 1997 and 1996. The increases are due to interest earned on certain cash equivalents and marketable securities. Provision for Income Taxes. The Company's effective tax rate was 36% and 35% for the three months ended June 30, 1997 and 1996, respectively and 37% and 42% for the nine months ended June 30, 1997 and 1996, 15 16 respectively. The decrease for the nine months ended June 30, 1997 is attributable to tax-exempt income, research and development credits and utilization of a Foreign Sales Corporation. Also, in during the nine months ended June 30, 1996, the effective rate was high due to merger expenses of $965,000, which are not deductible for income tax purposes. LIQUIDITY AND CAPITAL RESOURCES As of June 30, 1997, the Company had cash and cash equivalents of approximately $20,786,000 and working capital of $62,235,000. The Company's favorable cash position is attributable to an increased effort in accounts receivable collections and a significant improvement in the days sales outstanding. The days sales outstanding is likely to increase due to economic climate, exchange rate fluctuations, components of revenues and geographic sources of revenues. Cash provided by operations for the nine months ended June 30, 1997 was $13,348,000 generated by income earned for the period, depreciation and amortization, and receivables collected for the period, offset by the payout of fiscal 1996 employee bonuses. Cash used in investing activities totaled $3,788,000 and was primarily used for the purchase of computer equipment, office furniture and leasehold improvements. Cash provided by financing activities was $2,580,000 and is attributable to exercises of employee stock options. The Company's principal commitments as of June 30, 1997 consisted primarily of an office lease for its headquarters. The Company leases its facilities under non-cancelable operating lease agreements which expire at various dates through February 2007. The Company will be relocating its corporate headquarters in November 1997. The Company expects to spend $2.5 million dollars for construction and buildout in connection with the relocation. It also plans to spend approximately $1 million on furniture, fixtures and equipment. The Company elected not to renew its $5,000,000 unsecured line of credit with Chase Manhattan Bank, N.A., which expired on March 31, 1997. The Company believes that its current liquidity and cash flows expected to be generated by operations will be sufficient to meet its cash needs for working capital, capital expenditures and market expansion through at least June 30, 1998. FLUCTUATIONS IN QUARTERLY OPERATING RESULTS;SEASONALITY The Company generally ships its products upon receipt of orders and maintains no significant 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 quarterly operating results. In addition, the Company's revenues and operating results have fluctuated historically, due to the 16 17 number and timing of product introductions and enhancements, the budgeting and purchasing cycles of customers and the timing of large orders, the timing of product shipments and the timing of marketing and product development expenditures. Large software license contracts, if any, may have a significant impact on revenues for any quarter and could therefore result in significant fluctuations in quarterly revenues and operating results. The Company's revenues and income from operations typically grow at a lower rate or decline in the first quarter of each fiscal year. In addition, revenues are typically higher in the fourth quarter than in other quarters of the year reflecting the Company's fiscal year end and a sales commission policy that bases rewards on achievement of annual quotas. As a result of these factors, the Company has experienced, and may in the future experience, significant period-to-period fluctuations in revenues and operating results. FACTORS AFFECTING FUTURE PERFORMANCE Further information on factors that could affect the Company's business and financial results are included in the Company's Annual Report on Form 10-K filed with the Securities and Exchange Commission on December 30, 1996. Forward-looking statements of the Company are subject to the risk that assumptions made by management of the Company concerning future general economic conditions such as recession, inflation, interest rates, tax rates, consumer spending and credit and other future conditions having an impact on software markets and the Company's business may prove to be incorrect. Adverse changes in such future economic conditions could have an adverse effect on the Company's business. 17 18 Part II. OTHER INFORMATION ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits 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,) and incorporated herein by reference) 10.1 Amended and Restated 1994 Incentive and NonQualified Stock Option Plan, as amended, as approved by the stockholders of the Company by written consent dated April 15, 1994. 11.1 Statement re computation of per share earnings 27. Financial Data Schedule (b) Reports filed on Form 8-K The Company filed no current reports on Form 8-K during the three months ended June 30, 1997. 18 19 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. PROJECT SOFTWARE & DEVELOPMENT, INC. Date: August 13, 1997 By: /s/ Paul D. Birch --------------- ------------------------------ Paul D. Birch Authorized Officer Executive Vice President Finance & Administration,Chief Financial Officer and Treasurer (Principal Financial Officer) 19 20 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,) and incorporated herein by reference) 10.1 Amended and Restated 1994 Incentive and NonQualified Stock Option Plan, as amended, as approved by the stockholders of the Company by written consent dated April 15, 1994. 11.1 Statement re computation of per share earnings 27 Financial Data Schedule