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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
FOR THE FISCAL YEAR ENDED SEPTEMBER 30, 1997
(mark one)
/X/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
AND EXCHANGE ACT OF 1934
For the transition period from _______________ to __________________
Commission File Number 0-23852
PROJECT SOFTWARE & DEVELOPMENT, INC.
(Exact name of registrant as specified in its charter)
MASSACHUSETTS 04-2448516
(State or other jurisdiction of (I.R.S. employer
incorporation or organization) identification number)
100 CROSBY DRIVE, BEDFORD, MASSACHUSETTS 01730
(Address of principal executive offices, including zip code)
(781) 280-2000
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $.01 par value
(Title of class)
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes /X/ No / /
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to the Form 10-K.
As of December 15, 1997, the aggregate market value of the voting stock held by
non-affiliates of the Registrant was approximately $116,995,865 based on the
last sale price of such stock on such date.
Number of shares outstanding of the Registrant's common stock as of the latest
practicable date: 9,882,071 shares of common stock, $.01 par value per share, as
of December 15, 1997.
DOCUMENT INCORPORATED BY REFERENCE
Certain portions of the Company's Definitive Proxy Statement for
its 1998 Annual Meeting of Stockholders are incorporated by reference into Part
III of this Annual Report on Form 10-K.
Total number of pages:
Exhibit index is located on page:
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PART I
ITEM 1. BUSINESS
GENERAL
Project Software & Development, Inc. ("PSDI" or the "Company") develops, markets
and supports applications software used by businesses, government agencies and
other organizations to assist them in maintaining high-value capital assets such
as facilities, plants and production equipment. The Company's products are
designed to enable customers to reduce down-time, control maintenance expenses,
cut spare parts inventories and costs, improve purchasing efficiency and more
effectively deploy productive assets, personnel and other resources.
PRODUCTS
The Company's enterprise-wide client/server application products are MAXIMO(R)
and P/X(R). MAXIMO, an asset maintenance management system, is the Company's
principal product and its first client/server product. The client/server version
of MAXIMO was first released in February 1991 and has been employed in
production environments for more than six years. Revenues from licenses of
client/server MAXIMO have grown from $1,406,000 in fiscal year 1991 to
$47,504,000 in fiscal year 1997. In fiscal 1996, the Company introduced a new
suite of MAXIMO products: MAXIMO Enterprise, MAXIMO Workgroup and MAXIMO
ADvantage. MAXIMO Enterprise 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 is also a client/server
product and runs on SQLBase, SQL Server and Oracle7 Workgroup Server. MAXIMO
Workgroup is intended for the mid-range segment of the maintenance management
market. On March 1, 1996 the Company acquired Maintenance Automation Corporation
("MAC"). The product acquired as a result of the acquisition of MAC, Chief
Advantage, was renamed MAXIMO ADvantage. MAXIMO ADvantage is intended as a point
solution for the lowerend of the maintenance management market. MAXIMO ADvantage
supports Microsoft Access for the single user, PC LAN segment. Revenues from
licenses of MAXIMO ADvantage declined from $3,631,000 in fiscal 1996 to
$2,253,000 in fiscal 1997. Maintenance Automation Corporation has incurred
operating losses of $1,203,000 and $1,420,000, in fiscal 1996 and 1997,
respectively.
MAXIMO permits work orders to be generated and tracked electronically, and also
to be linked to related information, such as labor and equipment records, job
procedures, parts inventories and purchasing systems. Failure analysis using
MAXIMO can assist in identifying root causes of equipment problems and aids in
designing preventive maintenance procedures to reduce future equipment failure
rates and downtime.
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The Company's MAXIMO client/server products are designed to enable customers to
take full advantage of the computing environment, and offer robust
functionality, drawing upon the Company's established track record as a provider
of large-scale applications critical to the operations of major industrial
companies. MAXIMO Enterprise and Workgroup provide access to standard commercial
SQL databases and incorporate a modular design and an open architecture which
permits end users to customize their applications.
P/X, the Company's client/server planning and cost system, was released in June
1992. Revenues from licenses of P/X grew from $1,148,000 in fiscal year 1992 to
$3,604,000 in fiscal 1994. However, revenues from P/X licenses have declined
since then to $551,000 in fiscal 1997. The decline in P/X revenues can be
attributed to product performance issues, delays in releasing a new version of
the product, diminished demand for high-end planning and cost solutions,
increased competition, and the Company's declining focus on selling and
marketing this product.
MAXIMO ENTERPRISE AND WORKGROUP
MAXIMO Enterprise and Workgroup are comprised of a series of integrated
modules, each of which is linked to the others and to a relational database
management system. Each module includes one or more applications functions,
including the following:
Work Order Management organizes maintenance work, including labor, parts
and tools and tracks actual usage and associated costs.
Asset Management tracks corporate assets, including facilities and
equipment and their associated warranty, downtime, maintenance costs,
failure history and performance data.
Spare Parts Inventory Control maintains spare parts inventory balances,
tracks parts issued from stock and automatically reorders parts when
minimum balances have been reached, including multiple storerooms for
Enterprise.
Purchasing generates request for proposal, blanket purchase orders and
purchase agreements, purchase requisitions and purchase orders, records
receipt of parts, analyzes vendor performance and integrates with
accounting applications, including invoice matching and multiple currency
functionality for Enterprise.
Labor Management manages employee records and tracks employee attendance
and employee time reporting, including productive and non-productive time
such as travel and waiting for parts.
Planning and Scheduling schedules work orders based on availability of
labor, materials and equipment and automatically
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generates routine preventive maintenance work orders based on time, meter
frequencies or other criteria.
Work Manager creates and closes work orders, assigns labor to outstanding
work, manages backlogs and tracks ongoing jobs in real time.
MAXIMO ADVANTAGE
The following is a list of some of the functionality aspects of the MAXIMO
ADvantage maintenance management system:
Work and Labor Management creates, edits and closes new and existing work
orders.
Time Cards charges time to work orders, service requests/QUIK calls or time
and materials accounts.
Inventory adds items, edits stock levels and sets reorder points to create
purchase requisitions automatically. It also issues items to work orders,
service requests, maintenance records or inventory accounts.
Preventive Maintenance allows the set up of PM schedules for equipment
items or facilities. Work orders will be created automatically at the
appointed time, complete with tools, supplies and procedures. PM schedules
can also be based on meters, run time or usage.
Purchase Order allows the creation of purchase orders, including setting
dollar-value approval levels.
MAXIMO Enterprise and Workgroup's database server functions are provided by a
direct link to ORACLE, SQL Server, SYBASE and Centura Corporation's (Centura)
SQLBase, widely-used commercial relational database management systems,
employing industry-standard SQL commands. MAXIMO accommodates database servers
operating under Novell NLM, Windows NT and UNIX operating systems, and supports
a variety of network operating systems, including Novell NetWare, Banyan VINES
and IBM LAN Server for OS/2, and standard network communications protocols
including TCP/IP and IPX/SPX. MAXIMO's use of a standard SQL database and
support for a broad range of server platforms, network operating systems and
communications protocols provides customers with the flexibility to match their
computing resources to their needs, and facilitates the integration of data from
other applications such as accounting and human resources.
MAXIMO Enterprise and Workgroup were built using a commercially available
application development tool set, SQLWindows from Centura Corporation. As a
result, MAXIMO's "front-end" user interface, including screens, menus and help
messages, can readily be modified by the customer, using standard tools. In
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addition, tables, data structures and other elements of the "back-end" database
can be modified by the customer using utilities provided by the Company.
Therefore, the customer is neither constrained by a proprietary system design,
nor does the customer need to rely on outside consultants with special expertise
or knowledge of programming languages in order to customize the system to fit
their needs.
MAXIMO ADvantage runs on the Microsoft Access database and runs on stand-alone
PC's, LANs and WANs. MAXIMO ADvantage's open architecture supports connectivity
to numerous applications, including predictive, energy or reliability centered
management, vibrations analysis, accounting, estimating and purchasing systems.
MAXIMO ADvantage was built using a commercially available application
development tool set, Visual Basic from Microsoft Corporation. The core of the
software constituting MAXIMO ADvantage was acquired by the Company through its
acquisition of MAC. MAC's product, Chief ADvantage, has been renamed MAXIMO
ADvantage and enhanced since the acquisition. The software architecture for
PC-based MAXIMO ADvantage is considerably different from the client/server
architecture of MAXIMO Enterprise and Workgroup. Since its acquisition of MAC,
the Company incurred significant additional and unexpected costs to complete the
development of MAXIMO ADvantage in order to meet the quality and functionality
standards demanded by the Company.
MAXIMO runs on personal computers and provides the maintenance worker with an
intuitive, easily mastered graphical user interface employing mouse-driven
"point and click" commands, pull-down menus, icon bars and other standard
features of Windows. MAXIMO permits the use of touch screens, bar code readers
and other specialized input devices, providing for flexible and efficient data
collection and input. An application launching feature provides access from
within any MAXIMO module to other MAXIMO modules, as well as to word processing,
spreadsheet, graphics, computer-aided-design ("CAD") and other personal
productivity tools provided by third parties.
P/X
P/X is a multi-user, multi-project planning and cost system. The key functions
of P/X include planning and prioritizing tasks, multi-project scheduling and
project management, cost/schedule integration, and graphical reporting.
Development efforts of the P/X product are focused on integrating the P/X
scheduling functionality tightly with the MAXIMO product and on providing the
scheduling features required for the markets supported by the MAXIMO product.
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PRODUCT PRICING
The current U.S. list price for the minimum five-user configuration of MAXIMO
Workgroup for use with Centura's SQLBase databases is approximately $20,000,
with an added fee of $3,000 for each additional user. The current U.S. list
price for the minimum ten-user configuration of MAXIMO Enterprise for use with
ORACLE and SYBASE databases is approximately $65,000, with an added fee of
$5,000 for each additional user. MAXIMO Enterprise application modules generally
are bundled for an additional fee and not licensed separately. The current U.S.
list price for a single configuration of MAXIMO ADvantage is $2,995 for use with
Microsoft Corporation's Access database. The current U.S. list price for a
five-user LAN version is $3,995. A number of optional modules are available.
Discounts from the Company's list prices may be made available for volume
purchasers or for competitive or strategic reasons. OEM customers who purchase
the Company's products in significant quantities receive discounts of 35% to
60%, depending upon the level of initial purchases and commitments. The Company
also offers site-license arrangements to major accounts.
International pricing for the Company's products varies by territory, depending
on the cost of localizing, marketing, selling and supporting the product.
Generally, list prices outside North America exceed the comparable U.S. list
prices by 15% or more. The Company's international distributors and agents
receive discounts ranging from 35% to 50%.
The license fee for MAXIMO generally includes 90 days of technical support. At
the time of initial licensing, customers typically purchase a support contract
providing for an additional year of technical support, at a current U.S. list
price generally equal to 20% of the applicable license fee. In most
circumstances, customers also purchase installation, customization, integration
and training services, and in many instances customers subsequently license
additional seats, platform upgrades or modules. The total first-year revenues to
the Company from a typical MAXIMO Enterprise and Workgroup implementation,
including paid-up license fees and revenues from support contracts and
installation, customization and training services, average from $200,000 to
$500,000 and from $50,000 to $75,000, respectively. A large multi-site
implementation can result in significantly larger first-year revenues.
CUSTOMER SUPPORT AND SERVICES
A high level of customer service and technical support is critical to customer
satisfaction because many of the Company's customers implement their
client/server maintenance management products in complex, large-scale
applications on which the success of their organizations depend. In addition,
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implementation of enterprise-wide applications in a heterogeneous client/server
computing environment incorporating multiple operating systems, network
operating systems and communications protocols can present customers with
substantial technical challenges. The Company offers support and consulting
services designed to assist customers in meeting these challenges and in
successfully implementing business solutions which realize the benefits promised
by client/server computing. The Company believes that its approach to service
and support has been and will continue to be a significant factor in the market
acceptance of its products. Revenues from support and services accounted for 48%
of the Company's total revenues in fiscal year 1997, and the Company expects
that recurring revenues from support and services will continue to account for a
substantial portion of its total revenues.
Customer Support Programs. As of September 30, 1997, the Company employed a
technical hot-line support staff of 49 employees, of whom 31 are based at the
Company's headquarters in Massachusetts, 4 are located in Florida, and 14
operate out of two international technical response centers located in the
United Kingdom and Australia. Telephone support calls are handled by
applications software specialists, supported by a computerized call tracking and
problem reporting system. The Company's field based account managers also
provide additional technical support, as needed, within their territories. The
Company's network of international distributors also provide first-level
technical support within their geographical territories.
Subscribers to the Company's annual support contracts are entitled to receive
(i) customer service and technical support by telephone (including dial-in
diagnostics), fax, support on line via the Internet and electronic bulletin
board, (ii) a newsletter and periodic technical bulletins, (iii) a discounted
admission to attend the Company's annual user group meeting and (iv) any
periodic software updates. The Company believes that support contracts are a
stable source of recurring revenue.
The Company maintains a network operations group within the support organization
which provides technical support to assist customers in implementing MAXIMO in
distributed computing environments involving one or more complex networks. These
specialists in server and client hardware platforms, network operating systems
and communications protocols supplement the applications and systems expertise
of the Company's technical support staff. The network operations group helps
customers plan complex network installations, troubleshoot and resolve conflicts
arising from heterogeneous hardware configurations, communications protocols and
network operating systems, and optimize network performance.
Implementation, Consulting and Training. As of September 30, 1997, the
Company employed a consulting and training staff of 117
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employees of whom 70 are located in the U.S., 42 in Europe, and 5 in
Asia/Pacific and Latin America. The Company's network of international
distributors also provides services within their geographic territories.
The Company provides consulting services, on a fee basis, to assist customers in
planning and carrying out the implementation of the Company's solutions. In some
cases, customers install and implement MAXIMO systems and perform any necessary
customization themselves with only limited assistance from the Company. In other
cases, particularly where a complex, integrated solution or extensive
customization is required, the Company provides comprehensive implementation
planning, project management, network communications, system integration and
custom modification services. The Company's professional services group has
expert knowledge of the Company's products and tools and the concepts and
theories of maintenance and planning. They can also draw upon experience in
implementing systems addressing diverse applications on a number of different
platforms in a wide range of industries worldwide.
The Company conducts comprehensive training programs covering Company
applications and concepts for its end users. Training is offered at the
Company's headquarters in Massachusetts and at regional centers located in
California, Colorado, Florida, Michigan, Texas, Virginia, Australia, France,
Germany, Sweden, the United Kingdom and the Netherlands. The Company also offers
on-site training classes at customer sites upon request. The Company has found
that most clients desire initial user training classes in connection with the
license of a system and often attend subsequent advanced schools or send
additional users to schools.
CUSTOMERS
The Company's customers include electric, water and other utilities,
educational, research and health care institutions, government agencies, hotels,
casinos, airlines and railroads, as well as large, well-known corporations in
the manufacturing, oil and gas, construction, mining, aerospace, defense, ship
building, telecommunications, ground fleet transportation, data processing,
semiconductor, financial, computer, entertainment, banking, insurance,
pharmaceutical and other industries. The Company's products have been installed
and are supported in major markets worldwide. Local language support is provided
in many of these markets. MAXIMO has been installed at more than 5,000 sites by
more than 3,000 companies, government agencies and other organizations. No
customer has accounted for more than 10% of the Company's total revenue in any
of its three most recent fiscal years.
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SALES AND MARKETING
The Company markets its products in North America through a direct sales force
of 87 persons including pre-sales engineers, account managers and engagement
managers operating out of its Massachusetts headquarters, and sales offices
located in California, Colorado, Florida, Illinois, Michigan, New Hampshire, New
Jersey, New York, Oregon, Texas, Virginia, and Washington, and a tele-sales and
tele-marketing force of 15 persons operating out of its Florida and Georgia
offices. The Company markets its products outside North America through a sales
force of 65 persons and a network of sales offices in Argentina, Australia,
Canada, France, Germany, Hong Kong, India, the Netherlands, Sweden, Thailand and
the United Kingdom and through distributors in parts of Africa, Asia, Europe,
the Middle East and South America. Approximately 44% of the Company's total
revenues in fiscal 1997 were derived from sales outside the United States.
The Company markets its products through advertising campaigns in national trade
periodicals, direct mail and seminar series. These efforts are supplemented by
listings in relevant trade directories, exhibitions at trade shows and
conference appearances. Initial leads are qualified by the tele-marketing
operation before being turned over to either the direct sales force or
tele-sales. MAXIMO Enterprise and Workgroup sales representatives work closely
with sales engineers in each of the Company's sales offices throughout the sales
process, although to a lesser degree for Workgroup.
The Company's direct and tele-sales personnel are compensated through salaries
plus commissions based on annual quotas and may also receive quarterly bonuses.
Sales management personnel receive salaries plus bonuses based on monthly,
quarterly and annual revenue and contribution targets.
The sales cycle for MAXIMO products, from the initial sales presentation to the
issuance of a purchase order, typically ranges from thirty to ninety days for
ADvantage, six to nine months for Workgroup and nine to fifteen months for
Enterprise. The Company believes that customers generally choose MAXIMO based on
the features it provides and upon a preference for the product architecture,
rapid time to benefit, domain expertise and ease of use. The Company has
experienced a longer sales cycle for MAXIMO Enterprise in the last year as its
procurement is increasingly tightly linked to the selection of a backbone
enterprise resource planning system.
Delivery lead times for the Company's products are very short and, consequently,
substantially all of the Company's software revenues in each quarter result from
the orders received in the quarter. Accordingly, the Company only maintains a
backlog for its consulting and training services and believes that its backlog
at any point in time is not a reliable indicator of
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future sales and earnings. The absence of significant backlog may contribute to
unpredictability in the Company's results of operations.
An important part of the Company's sales and marketing strategy is to build and
maintain marketing relationships with companies that PSDI believes can assist it
to penetrate new markets. The Company has agreements with IBM Global Services
(an affiliate of IBM), ABB Service Worldwide (an affiliate of Asea Brown Boveri)
and Cordant Inc. (an affiliate of Tracor, Inc.). The Company plans to work more
closely with major systems integrators and to expand and leverage its
relationships with engineering and construction firms and original equipment
manufacturers ("OEMs") which incorporate the Company's products into facilities
or systems developed by them through its MAXIMO Alliance Program. The Company
has OEM arrangements with companies such as Honeywell Incorporated and Johnson
Controls, Inc., under which these companies may integrate MAXIMO with their
building controls systems and with The Foxboro Company (an affiliate of Siebe
Plc) under which Foxboro uses Java-based applets to integrate MAXIMO with its
shop floor controls system.
PRODUCT DEVELOPMENT
As of September 30, 1997, the Company employed 96 persons and a number of
consultants in product management, application development, technology research
and quality assurance. The Company's product management group (consisting of 9
persons) is responsible for identifying application trends in the market and
works closely with key customers to define and specify product requirements. The
applications development group (consisting of 37 persons) is organized in groups
focused on application functionality, user interface and output, and database
and systems development. This group also works closely with the product
management group to develop new products and functional modules, and maintains
and enhances the functionality and usability of the Company's existing products.
The Company's technology research group (consisting of 13 persons) investigates
and researches new technologies that provide functionality that is targeted for
commercial release in time frames ranging from several months to several years
into the future. The Company's quality assurance group (consisting of 37
persons) tests the Company's software for compliance with the functional and
technical specifications established by the product design group and confirms
that it operates as expected with third-party databases, operating systems,
network operating systems and applications software, tests manufactured
products, manages non-English language releases and prepares and updates user
documentation and training manuals.
The Company's total product development expenses in 1997, 1996 and 1995 were
$11,387,000, $7,653,000, and $6,639,000, respectively. The Company capitalizes
certain software development costs in accordance with Statement of Financial
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Accounting Standards No. 86, "Accounting for Costs of Computer Software to be
Sold, Leased or Otherwise Marketed." Capitalized software costs are amortized
over the estimated market life of the product (generally one to three years) and
amounts amortized are included in the cost of software revenues. The Company
capitalized $0, $634,000 and $0 of software development costs in 1997, 1996 and
1995, respectively. In fiscal years 1997, 1996 and 1995, the Company amortized
$360,000, $948,000, and $1,120,000, of software development costs, respectively.
The Company's products consist primarily of internally developed software and
the product acquired from MAC. In addition, the Company has incorporated in its
products graphical user interfaces, report writers, applications development
tools and database management systems developed by other vendors.
In March 1997, the Company released a version of client/server MAXIMO for use
with the Microsoft SQL Server database and Microsoft NT(R) Workstation 4.0. In
August 1997, the Company released MAXIMO Analyzer, a new business intelligence
tool. MAXIMO Analyzer provides detailed information allowing users to rapidly
pose multiple questions and assess responding data to make critical business
decisions. The product converts significant transaction data into a functional
analysis instrument utilizing PowerPlay(R) from Cognos, a leading supplier of
business intelligence tools. MAXIMO Analyzer delivers true distributed Online
Analytical Processing (OLAP) capabilities for MAXIMO users. In September 1997,
the Company released the MAXIMO Mobile Application Suite, a mobile and paperless
work management system. MAXIMO Mobile Application Suite is a set of new
integrated MAXIMO modules which install directly onto hand-held computers and
utilize bar coding technology to ensure compliance with procedures and
automation of routine and preventive practices for maintenance engineers. The
MAXIMO Mobile Application Suite consists of three applications, MAXIMO(R)
Procedure Builder, MAXIMO(R) Rounds and MAXIMO(R) Lockout/Tagout/Lineup.
Together, these applications provide:
- - Point-of-Performance Data Access: Engineers can now have access to critical
maintenance data, such as job plans and safety information, while greatly
improving the speed and accuracy of field data collection.
- - Enhanced Procedural Compliance: Automation procedures, coupled with the use
of hand-held computers and barcode labels, ensures that procedures are
performed the same way, every time throughout the operation. In the event
the user's input into the application is outside of specification, an alert
for corrective action is automatically initiated. Every procedural step is
also time and date stamped.
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- - Increased Data Integrity: Data automatically populates the maintenance
database from the paperless solution, eliminating repetitive and
error-prone data entry. The quality and accessibility of data also
simplifies regulatory reporting.
In 1996, the Company released an application programming interface ("API") to
ORACLE's accounting software. The Company is also a third-party reseller of
Centura Corporation's SQLBase, and developed its MAXIMO product using
applications tools developed by Centura Corporation which have subsequently been
made commercially available by Centura Corporation. In May 1996, the Company
released a version of MAXIMO Enterprise for use with the SYBASE database. The
Company's relationships with these leading database management system vendors
enable the Company's customers to take advantage of the latest developments in
database technology. The Company also maintains ongoing relationships with other
third-party software developers, such as Netronic Software GmbH (graphics and
interface technology), Cognos Corporation (OLAP Technology), Scribe Technologies
(report generation) and Intersolv Inc. (ODBC drivers). See "Licensed
Technology."
The Company's product development efforts are currently focused on providing
application enhancements for the MAXIMO product line (Enterprise, Workgroup and
ADvantage). The Company also is in the process of developing a version of MAXIMO
to enable other third-party applications software to be more easily integrated
with the Company's products. The initial product offering utilizing this
technology is MAXIMO Work Order component that has been used by The Foxboro
Company as an imbedded component in their shop floor distributed control system.
In addition, the technology research group is currently researching, developing
and incorporating into the MAXIMO product technologies that are emerging in
conjunction with the Internet.
The computer industry is characterized by rapid technological advances, changes
in customer requirements and frequent product introductions and enhancements.
The Company's future success will depend upon its ability to enhance its current
products and to develop and introduce new products that keep pace with
technological developments, respond to evolving customer requirements and
achieve market acceptance. In particular, the Company believes that it must
continue to respond quickly to users' needs for broad functionality and
multi-platform support and to advances in hardware and operating systems. Any
failure by the Company to anticipate or respond adequately to technological
development and customer requirements, or any significant delays in product
development or introduction could result in a loss of competitiveness and
revenues.
The Company has experienced delays in the introduction of new products and
product enhancements. These delays have varied in
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duration depending on the scope of the project and the nature of the problems
encountered. There can be no assurance, however, that the Company will be
successful in developing and marketing new products or product enhancements on a
timely basis or that the Company will not experience significant delays in the
future, which could have a material adverse effect on the Company's results of
operations. In addition, there can be no assurance that new products and product
enhancements developed by the Company will achieve market acceptance.
COMPETITION
The market for applications software is intensely competitive and rapidly
changing. In general, the Company competes on the basis of (1) product
architecture, which includes distributed computing capability, access to
commercial SQL databases, and ease of customization and integration with other
applications; (2) functionality, which includes the breadth and depth of
features and functions, and ease of use; (3) support and service, which includes
the range and quality of technical support, training and consulting services, as
well as the capability to provide these on a global basis; (4) product pricing
in relation to performance; (5) rapid implementation to achieve benefits and (6)
domain expertise.
The market for asset maintenance software is fragmented by geography, hardware
platform and industry orientation, and is characterized by a large number of
competitors, including both independent software vendors and certain enterprise
resource planning vendors including SAP AG, JD Edwards and The Baan Company who
offer a module incorporating limited asset maintenance functionality. During the
year there has been consolidation within the asset maintenance software market
with the acquisition of SQL Group BV by Datastream Systems, Inc., TSW
International Inc. by Indus Group and Revere, Inc. by Walker Interactive
Systems. Currently, MAXIMO Enterprise and Workgroup compete with products of a
number of large vendors which have traditionally provided maintenance software
running on mainframes and minicomputers, and are now offering systems for use in
the client/server environment. The Company expects that in the future MAXIMO
Enterprise and Workgroup may encounter competition from vendors of low cost
maintenance systems designed initially for use by a single user or limited
number of users, as vendors of these products upgrade their functionality in an
attempt to enter the client/server market. MAXIMO ADvantage competes with a
number of competitors, one of which is a public company, but most of which are
small regional companies.
The Company believes that the functionality of MAXIMO, its open product
architecture and the Company's ability to provide global distribution and
support have been significant factors in the competitive success of MAXIMO.
While the Company believes that MAXIMO has competed effectively to date,
competition in its industry is likely to intensify as current competitors expand
their product lines and new companies enter the market. To
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remain successful in the future, the Company must respond promptly and
effectively to the challenges of technological change, evolving standards and
its competitors' innovations by continually enhancing its own product, support
and services offerings, as well as its marketing programs. There can be no
assurance that the Company will continue to be able to compete successfully in
the future.
PRODUCTION
The principal materials and components used in the Company's software products
include computer media, user materials and training guides. The Company
currently uses third-party vendors to print its user manuals, packaging and
related materials, but duplicates program diskettes and CD-Roms in its
manufacturing and distribution facility located at its corporate headquarters.
The Company then assembles the third party produced documentation with diskettes
and CD-Roms and ships these directly from its manufacturing and distribution
facility. To date, the Company has been able to obtain adequate supplies of all
components and materials and has not experienced any material difficulties or
delays in manufacture and assembly of its products or materials due to product
defects.
PROPRIETARY RIGHTS AND LICENSES
The Company has registered its MAXIMO and P/X trademarks with the United States
Patent and Trademark Office. Registrations with equivalent offices in many
foreign countries in which the Company or its distributors do business have been
obtained or are in process.
The Company regards its software as proprietary and attempts to protect its
rights with a combination of trademark, copyright and employee and third party
non-disclosure agreements. Despite these precautions, it may be possible for
unauthorized parties to copy or reverse-engineer portions of the Company's
products. While the Company's competitive position could conceivably be
threatened by its inability to protect its proprietary information, the Company
believes that copyright and trademark protection are less important to the
Company's success than other factors such as knowledge, ability and experience
of the Company's personnel, its name recognition and ongoing product development
and support.
The Company's software products are usually licensed to customers under a
perpetual, non-transferable, non-exclusive license that stipulates how many
concurrent users may access the system. The Company relies on both "shrink wrap"
licenses and negotiated agreements depending on various factors including the
size and level of integration. A shrink wrap license agreement is a printed
license agreement included with packaged software that sets forth the terms and
conditions under which the purchaser can use the product, and purports to bind
the purchaser
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to such terms and conditions by its acceptance and purchase of the software.
Certain provisions of the Company's shrink wrap licenses, including provisions
protecting against unauthorized use, copying, transfer and disclosure of the
licensed program, may be unenforceable under the laws of certain jurisdictions.
In addition, the laws of some foreign countries do not protect the Company's
proprietary rights to the same extent as do the laws of the United States.
MAXIMO(R) and P/X(R) are registered trademarks of the Company. Microsoft(R) is a
registered trademark and Windows(TM) is a trademark of Microsoft Corporation.
This Annual Report on Form 10-K also includes other trademarks of the Company
and trademarks of companies other than the Company.
LICENSED TECHNOLOGY
The Company licenses certain software programs from third-party developers and
incorporates them into the Company's products. These licenses are non-exclusive
worldwide licenses which terminate on varying dates. The Company believes that
it will be able to renew these licenses or that it will be able to obtain
substitute products if needed.
The Company has entered into a non-exclusive license agreement with Centura
Corporation that permits the Company to include certain Centura proprietary
software products collectively called the "SQL System" in the Company's
products. Under the terms of the agreement, the Company is required to pay fixed
royalty fees to Centura. Centura may terminate the agreement on the occurrence
of a material, uncured breach of the agreement by the Company. The Company has
entered into a non-exclusive license agreement with Scribe Technologies
("Scribe") that grants the Company's end-users to the rights to a single-user,
application specific SQR3 license to modify the standard reports delivered with
MAXIMO, as well as, run-time licenses. Under the terms of the agreement, the
Company is currently required to pay fixed royalties to Scribe. The Company may
terminate the agreement at any time. Scribe may terminate the agreement on the
occurrence of a material, uncured breach of the agreement by the Company.
Currently, these products are included in MAXIMO Enterprise and Workgroup. The
Company has entered into a non-exclusive license agreement with Cognos
Corporation ("Cognos") that permits the Company to incorporate Cognos' Powerplay
product in MAXIMO Analyzer. Under the term of the Agreement, the Company is
required to pay royalties to Cognos based on every MAXIMO Analyzer module
licensed. The Company has entered into a non-exclusive license agreement with
Netronic Software GmbH ("Netronic") that permits the Company to incorporate
certain graphic software programs into the Company's products. Under the terms
of the agreement, the Company is currently required to pay fixed royalties to
Netronic. The Company may terminate the agreement at any time. Netronic may
terminate the agreement on
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the occurrence of a material, uncured breach of the agreement by the Company.
EMPLOYEES
As of September 30, 1997, the Company had 489 full-time employees including 167
in sales, marketing and related services, 96 in product research, applications
development, technology research, and quality assurance, 166 in customer
support, training and consulting services, and 59 in finance and administration,
human resources, manufacturing and office services. The Company's employees are
not represented by any collective bargaining organization, and the Company has
never experienced a work stoppage. The Company believes that its relations with
employees are good.
ITEM 2. PROPERTY
Until December 8, 1997, the Company's headquarters were located in Cambridge,
Massachusetts in a leased facility consisting of approximately 45,000 square
feet, at an average annual cost including parking, of approximately $2,000,000,
under a 13 year lease that expires on December 31, 1997. The Company was also
leasing a 13,000 square foot manufacturing and distribution facility in
Watertown, Massachusetts at an average annual cost of approximately $100,000
under a lease originally expiring on May 31, 1998. The Company negotiated a no
penalty termination to this lease effective December 31, 1997. The Company has
relocated both its corporate headquarters and its manufacturing and distribution
facilities in December 1997 to a leased facility consisting of approximately
110,000 square feet, at an average annual base cost of $1,300,000, under a 6
year net lease with a renewal option through December 31, 2009. Additionally,
the Company estimates that its annual operating expenses under the new lease
will be approximately $900,000, based on information currently available. The
actual costs will depend on such factors as actual electricity usage, real
estate taxes and operating costs. Under the terms of its lease, the Company has
the ability to sublease the space and may elect to do so in the future should
business conditions dictate. The operating expenses for both the Cambridge and
Bedford facilities described above exclude depreciation and amortization. The
Company expects to spend $2.5 million for construction and leasehold
improvements in connection with the relocation. It also plans to spend
approximately $1 million on furniture, fixtures and equipment. The Company
leases additional sales offices in California, Colorado, Connecticut, Florida,
Georgia, Illinois, Michigan, Missouri, New Hampshire, New Jersey, New York,
Texas, Virginia, Washington, and Oregon. The Company also leases offices for its
international operations in Argentina, Australia, Belgium, Canada, France,
Germany, Hong Kong, India, the Netherlands, Sweden, Thailand and the United
Kingdom.
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ITEM 3. LEGAL PROCEEDINGS
As of the date of this Annual Report on Form 10-K, the Company is not a party to
any legal proceedings the outcome of which, in the opinion of management, would
have a material adverse effect on the Company's results of operations or
financial condition.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND STOCKHOLDER
MATTERS
STOCK INFORMATION
Price Range of Common Stock
The Company's Common Stock is traded in the over-the-counter market and prices
are quoted on the National Association of Securities Dealers Automated Quotation
National Market System ("NASDAQ National Market") under the symbol PSDI. As of
December 15, 1997, there were approximately 60 holders of record of the
Company's Common Stock. This reflects the fact that most of the Company's stock
is held in street names through one or more nominees.
The following table sets forth the high and low per share sales prices of the
Company's Common Stock, as reported on the NASDAQ National Market consolidated
reporting system for each quarterly period within the two year period ended
September 30, 1997.
FISCAL 1997 HIGH LOW
First Quarter $44.25 $30.50
Second Quarter $47.00 $27.75
Third Quarter $31.87 $11.12
Fourth Quarter $29.50 $14.25
FISCAL 1996 HIGH LOW
First Quarter $37.75 $21.75
Second Quarter $40.75 $22.25
Third Quarter $48.50 $29.50
Fourth Quarter $49.75 $28.00
Since 1983, the Company has not declared or paid cash dividends on its Common
Stock, other than distributions to stockholders made with respect to fiscal
years 1992 and 1993 to satisfy certain federal and state tax obligations of the
stockholders attributable to the Company's S Corporation status prior to October
1, 1993. The Company currently intends to retain any future earnings to finance
growth and therefore does not anticipate paying cash dividends in the
foreseeable future.
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ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
The selected consolidated financial data of the Company set forth below has been
derived from the consolidated financial statements for the Company for the
periods indicated. This selected consolidated financial data should be read in
conjunction with "Management's Discussion and Analysis of Consolidated Financial
Condition and Results of Operations" and the Company's consolidated financial
statements and the notes thereto included elsewhere herein.
YEAR ENDED SEPTEMBER 30,
----------------------------------------------------------------
(in thousands, except 1997 1996 1995 1994 1993
share and per share data) -------- ------- ------- ------- -------
Revenues $ 96,700 $73,329 $50,372 $36,753 $29,978
Income from operations 16,271 14,606 8,438 4,702 1,857
Historical net income $ 11,570 $10,046 $ 5,629 $ 2,315 $ 1,265
Historical income per share $ 1.15 $ 1.00 $ 0.64 $ 0.33 $ 0.22
Pro forma data
(unaudited):
Pro forma net income (1) -- -- -- $ 2,601 $ 1,277
Pro forma income per -- -- -- $ 0.37 $ 0.22
share (1)
Weighted number of 10,064 10,052 8,846 6,942 5,811
common and common
equivalent shares
----------------------------------------------------------------
Total Assets 102,239 83,476 64,960 28,713 13,899
Long-Term Obligations 144 628 962 1,333 2,718
Dividends Per Share -- -- -- -- $ 0.11
(1) From October 1, 1981 through September 30, 1993, the Company operated as an
S corporation under Subchapter S of the Internal Revenue Code of 1986, as
amended and comparable provisions of certain state tax laws. The pro forma
adjustment for the fiscal year ended 1993 reflect provision for federal and
state income taxes as if the Company has been subject to federal and state
income taxation as a corporation during such period. For the three-month period
ended December 31, 1993, the provision for income tax is adjusted to exclude the
expense of the cumulative deferred tax provision required on termination of S
corporation status.
(2) The consolidated financial statements of the Company for all periods
presented include the results and balances of an acquisition accounted for as a
pooling-of-interests.
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
OVERVIEW
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.
The Company released MAXIMO, its first client/server product, in 1991, and
released P/X, its second client/server product, in 1992. In the fiscal year
ended September 30, 1997, revenues from client/server software accounted for 95%
of software revenues, of which 99% was attributable to the client/server
versions of MAXIMO. 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.
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 Windows 95, Windows 95B, all Windows 3.x systems, and NT
3.5.1 and NT 4.0 clients.
In August 1997, the Company released MAXIMO Analyzer, a new business
intelligence tool. MAXIMO Analyzer provides detailed information allowing users
to rapidly pose multiple questions and assess responding data to make critical
business decisions.
In September 1997, the Company released the MAXIMO Mobile Application Suite, a
mobile and paperless work management system. MAXIMO Mobile Application Suite is
a set of new integrated MAXIMO modules which install directly onto hand-held
computers and utilize bar coding technology to ensure compliance with procedures
and automation of routine and preventive practices for maintenance engineers.
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
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client/server product and runs on SQLBase and Oracle Workgroup and is intended
for the mid-range segment of the maintenance management market.
The product acquired as a result of the acquisition of MAC on March 1, 1996,
MAXIMO ADvantage, is intended for the lowerend maintenance market. MAXIMO
ADvantage supports Microsoft Access for the single user, PC LAN segment. The
Company incurred 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
affecting 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. In March 1997, the Company released the first significant version
of MAXIMO ADvantage since the acquisition of Maintenance Automation Corporation.
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 have been reduced to a level
commensurate with the lower revenue expectations. The unexpected costs and
shortfalls in expected revenues resulted in net operating losses of $1,420,000,
and $1,203,000 for MAC for fiscal 1997 and 1996, respectively.
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.
The Company experienced an increase in the average selling price of its MAXIMO
client/server software licenses during fiscal 1997. The Company attributes this
increase in part to licenses of a version of MAXIMO for use with the ORACLE and
SYBASE database management systems. These client/server versions of MAXIMO have
a higher entry price and are typically implemented in configurations involving a
larger number of users, for whom additional license fees are paid. Larger
software license contracts, if any, may have a significant impact on revenues
for any quarter and could therefore result in significant fluctuations in
quarterly revenues and operating results.
Revenues from licenses of P/X have declined sharply, dropping to $551,000 of
total license revenues in the fiscal year ended 1997. The Company no longer
actively markets the P/X product as a stand alone solution. Revenues from
licenses of mainframe and other project management software have also declined
sharply, dropping to less than 1% of total license revenues in the fiscal year
ended 1997. The Company no longer actively markets its mainframe and other
project management software products, although it
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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 total 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 Thai baht, the Dutch guilder, the
Indian rupee, the Japanese yen, the Swedish krona, 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 accounts
receivable of the Company are denominated changes between the date the account
receivable is recorded 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 $476,000, $142,000, and $117,000
for the fiscal years 1997, 1996 and 1995, 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 will not adversely
affect the Company's financial results in the future.
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Results of Operations
The following table sets forth, for the periods indicated, certain financial
data as a percentage of total revenues:
Year Ended September 30,
------------------------
Revenues: 1997 1996 1995
------ ------ ------
Software 52.1 % 59.2 % 59.7 %
Support and services 47.9 40.8 40.3
------ ------ ------
Total revenues: 100.0 100.0 100.0
Total cost of revenues 27.5 24.9 25.3
------ ------ ------
Gross margin 72.5 75.1 74.7
------ ------ ------
Operating expenses:
Sales and marketing 34.1 33.3 32.8
Product development 11.8 10.4 13.2
General and 9.8 10.2 12.0
administrative
Merger expenses -- 1.3 --
------ ------ ------
Total operating
expenses: 55.7 55.2 58.0
------ ------ ------
Income from operations 16.8 19.9 16.7
Other income(expense), net 1.9 2.6 1.8
------ ------ ------
Income before income taxes 18.7 22.5 18.5
Income taxes 6.8 8.8 7.4
------ ------ ------
Net income 11.9 % 13.7 % 11.1 %
------ ------ ------
(1) Fiscal years ended September 30, 1996 and 1995 have been restated to include
the results and balances of an acquisition accounted for as a
pooling-of-interests.
FISCAL 1997 COMPARED TO FISCAL 1996
REVENUES
(in thousands) 1997 CHANGE % 1996
- -------------------------------------------------------------------------------------
Software licenses $50,393 16.2% $43,382
Percentage of total revenues 52.1% 59.2%
Support and services $46,307 54.6% $29,947
Percentage of total revenues 47.9% 40.8%
Total revenues $96,700 31.9% $73,329
The growth in total revenues is generated from the Company's MAXIMO software and
related support and services. A significant portion of the Company's total
revenues are derived from operations outside the United States. Revenues from
sales outside the United States for 1997 increased 42.8% to $42.4 million or
43.8% of total revenues, compared to $29.7 million or 40.5% of total revenues in
1996. The increases in the percentage of total revenues generated outside the
U.S. in 1997 can be attributed to the expansion of the Company's international
sales organization and the signing of a significant license in Canada.
The progressive growth in software revenues is attributable to increases in the
number of MAXIMO licenses, the number of users per license of MAXIMO and a few
large MAXIMO Enterprise software licenses, combined with the release of the
client/server versions
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of MAXIMO supporting the SQL Server platform. Revenues from licenses of MAXIMO
and from related support and services increased 39.5% to $93.1 million or 96.3%
of total revenues in 1997 compared to $66.7 million or 91.0% of total revenues
in 1996.
Revenues from licenses of P/X and from related support and services decreased
44.9% to $2.7 million or 2.8% of total revenues in 1997 compared to $4.9 million
or 6.7% of total revenues in 1996. The decline in P/X revenues occurred most
significantly in P/X software license revenues and can be attributed to product
performance issues, diminished demand for high-end planning and cost solutions,
increased competition, and the Company's declining focus on selling and
marketing this product.
The increase in support and services revenues is attributable to increased sales
of MAXIMO support contracts and consulting and training services as a direct
result of the increase in MAXIMO software licenses sold and services sold in
connection with large scale software implementations.
COST OF REVENUES
(in thousands) 1997 CHANGE % 1996
- ---------------------------------------------------------------------------------------------
Software licenses $ 2,547 -18.0% $ 3,106
Percentage of software licenses 5.1% 7.2%
Support and services $ 24,025 58.8% $15,132
Percentage of support and services 51.9% 50.5%
Total cost of revenues $ 26,572 45.7% $18,238
Percentage of total revenues 27.5% 24.9%
Cost of software revenues consists of the amortization of capitalized software,
royalties paid to vendors of third party software, the cost of software product
packaging and media, and certain employee costs related to software duplication,
packaging and shipping.
The decrease in the cost of software revenues is due primarily to lower
amortization expense for capitalized development costs and economies resulting
from increased sales volume. In fiscal 1996, the Company changed the estimated
useful life of its MAXIMO Enterprise product from three years to fifteen months
to accurately reflect the lifecycles for new releases of this product. This
change resulted in additional amortization expense of $565,000.
Cost of support and services consists primarily of personnel costs for employees
and the related costs of benefits and facilities. The increase in the cost of
support and services is
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attributable to extensive use of third-party consultants contracted to perform
services for the Company as a result of the increases in the number of licenses
sold and the timing of hiring permanent employees. The increase is also
attributable to the costs of personnel to support international distributors in
certain territories where the distributors performed a larger proportion of
services without corresponding increases in service revenues to the Company.
OPERATING EXPENSES
(in thousands) 1997 CHANGE % 1996
- --------------------------------------------------------------------------------------
Sales and marketing $ 32,985 35.1% $24,422
Percentage of total revenues 34.1% 33.3%
Product development $ 11,387 48.8% $ 7,653
Percentage of total revenues 11.8% 10.4%
General and administrative $ 9,485 27.4% $ 7,445
Percentage of total revenues 9.8% 10.2%
The increase in sales and marketing expenses in 1997 is primarily due to
increases in the number of sales personnel, sales commissions, travel and
lodging expenses, an increase in advertising costs and expense levels
established to achieve a high level of revenues. The increase as a percentage of
revenues for 1997 is due primarily to increases in sales commissions paid to
both the geographic sales representatives and in some cases the industry
oriented vertical sales representative, which decreases the margin on the sale
combined with the costs of expanding into new territories and the training of
new sales personnel to sell the Company's product.
The increase in product development expenses in 1997 is primarily due to the
engagement of additional employees and third party consultants who worked on the
new client/server releases of MAXIMO. Capitalization of software costs were $0
and $634,000 in 1997 and 1996, respectively. During fiscal 1997 and 1996, the
Company spent its development expenditures on MAXIMO. The increase as a
percentage of revenues in 1997 is attributable to the investment in both new
releases of the current version of MAXIMO and the research for a new
MAXIMO-architected application, as well as the absence of any capitalization of
expenses in 1997.
The increase in general and administrative expenses in 1997 is primarily due to
goodwill amortization for the purchase of two of its Swedish and German
distributors and expenses related to professional fees in connection with growth
of the Company. Also contributing to the increase is an increase in personnel to
support the increase in the revenue base. The decrease as a percentage of
revenues in 1997 is primarily attributable to the Company's ability to manage a
larger revenue base without a commensurate increase in general and
administrative expenses.
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NON-OPERATING EXPENSES
(in thousands) 1997 CHANGE % 1996
- ----------------------------------------------------------------------------------
Interest income $ 2,409 22.2% $ 1,971
Interest (expense) $ (24) -36.8% $ (38)
Other income (expense) $ (529) 1,159.5% $ (42)
The increase in interest income in 1997 is attributable to interest earned on
increased cash equivalents from cash flow generated from operations.
The increase in other income (expense), net, is attributable to an increase
foreign currency translation losses.
PROVISION FOR INCOME TAXES
The Company's effective tax rates were 36.2% and 39.1% in 1997 and 1996,
respectively. The decrease in the effective tax rate for fiscal 1997 can be
attributed to research and development tax credits, use of a foreign sales
corporation and tax exempt interest income.
FISCAL 1996 COMPARED TO FISCAL 1995
REVENUES
(in thousands) 1996 CHANGE % 1995
- --------------------------------------------------------------------------------------
Software licenses $ 43,382 44.3% $30,054
Percentage of total revenues 59.2% 59.7%
Support and services $ 29,947 47.4% $20,318
Percentage of total revenues 40.8% 40.3%
Total revenues $ 73,329 45.6% $50,372
(1) Comparative revenues for 1995 include only nine months of MAC expenses in
fiscal 1995, as MAC's fiscal year was changed to coincide with the Company's.
The growth in total revenues is generated from the Company's MAXIMO software and
related support and services. A significant portion of the Company's total
revenues are derived from operations outside the United States. Revenues from
sales outside the United States for 1996 increased 53.9% to $29.7 million or
40.5% of total revenues, compared to $19.3 million or 38.3% of total revenues in
1995. The increase in the percentage of total revenues generated outside the
U.S. in 1996 can be attributed to the expansion of the Company's international
sales organization.
The growth in software revenues is attributable to increases in the number of
MAXIMO licenses, the number of users per license of MAXIMO and a few large
MAXIMO Enterprise software licenses, combined with the release of the
client/server versions of MAXIMO supporting the SYBASE and Oracle platforms.
Revenues from licenses of MAXIMO and from related support and services increased
60.7% to $66.7 million or 91.0% of total revenues in
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1996 compared to $41.5 million or 82.3% of total revenues in 1995. Revenues from
licenses of P/X and from related support and services decreased 12.5% to $4.9
million or 6.7% of total revenues in 1996 compared to $5.6 million or 11.1% of
total revenues in 1995. The decline in P/X revenues occurred most significantly
in P/X software license revenues and can be attributed to product performance
issues, diminished demand for high-end planning and cost solutions, increased
competition, and the Company's declining focus on selling and marketing this
product.
The increase in support and services revenues are attributable to increased
sales of MAXIMO support contracts and consulting and training services,
partially offset by declines in sales of support contracts and services relating
to the Company's project management software.
COST OF REVENUES
(in thousands) 1996 CHANGE % 1995
- --------------------------------------------------------------------------------------------
Software licenses $ 3,106 14.5% $ 2,713
Percentage of software licenses 7.2% 9.0%
Support and services $ 15,132 51.2% $10,006
Percentage of support and services 50.5% 49.2%
Total cost of revenues $ 18,238 43.4% $12,719
Percentage of total revenues 24.9% 25.3%
(1) Comparative expenses for 1995 include only nine months of MAC expenses in
fiscal 1995, as MAC's fiscal year was changed to coincide with the Company's.
Cost of software revenues consists of the amortization of capitalized software,
royalties paid to vendors of third party software, the cost of software product
packaging and media, and certain employee costs related to software duplication,
packaging and shipping.
In 1996, the Company changed the estimated useful life of its MAXIMO Enterprise
product from three years to fifteen months to accurately reflect the lifecycles
for new releases of this product. This change resulted in additional
amortization expense of $565,000. In 1995, the Company accelerated the
amortization expense of its internally developed software related to its P/X
product, which resulted in $514,000 of additional expense. The increase in 1996
is also attributable to production costs associated with increased licenses of
software.
Cost of support and services consists primarily of personnel costs for employees
and the related costs of benefits and facilities. The increase in the cost of
support and services in 1996 is attributable to extensive use of third-party
consultants contracted to perform services for the Company as a result of the
increases in the number of licenses sold and the timing of hiring
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permanent employees. Also in fiscal 1996, the Company created a Business
Solutions group whose goal is to manage large industry implementations in
certain vertical markets. The increase is also attributable to the costs of
personnel to support international distributors in certain territories where the
distributors performed a larger proportion of services without corresponding
increases in service revenues to the Company.
OPERATING EXPENSES
(in thousands) 1996 CHANGE % 1995
- --------------------------------------------------------------------------------------
Sales and marketing $ 24,422 47.5% $16,555
Percentage of total revenues 33.3% 32.8%
Product development $ 7,653 15.3% $ 6,639
Percentage of total revenues 10.4% 13.2%
General and administrative $ 7,445 23.7% $ 6,021
Percentage of total revenues 10.2% 12.0%
(1) Comparative expenses for 1995 include only nine months of MAC expenses in
fiscal 1995, as MAC's fiscal year was changed to coincide with the Company's.
The increase in sales and marketing expenses in 1996 is primarily due to
increases in the number of sales personnel, sales commissions, travel and
lodging expenses, and an increase in advertising costs and the restructuring of
the MAC tele-sales operation. The increase as a percentage of revenues for 1996
is due primarily to increases in sales commissions paid to both the geographic
sales representatives and in some cases the industry oriented vertical sales
representatives, which decrease the margins on the sales.
The increase in product development expenses in 1996 is primarily due to the
engagement of additional employees and third party consultants who worked on the
new client/server release of MAXIMO during the first six months of the year,
offset by the capitalization of the software costs related to the product, as no
software costs were capitalized for 1995. Capitalization of software costs were
$634,000 and $0 in 1996 and 1995, respectively. During 1996, the Company spent
progressively more of its development expenditures on MAXIMO such that virtually
all of its development dollars were incurred on the MAXIMO product line by the
end of the year. The decrease as a percentage of revenues in 1996 is
attributable to the delays in planned hires of new development staff until the
later half of 1996 and capitalization of internal software developments costs in
1996 versus no capitalization of expenses in 1995.
The increase in general and administrative expenses in 1996 is attributable to
goodwill amortization for the purchase of its Swedish and German distributors,
expenses related to professional fees in connection with growth of the company,
as well as, increases in insurance premiums resulting for the second public
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offering in July 1995. The decrease as a percentage of revenues in 1996 is
attributable to salary costs due to the departure of several MAC executives and
administrative employees, and the ability of the Company to manage a larger
revenue base without commensurate increases in general and administrative
expenses.
NON OPERATING EXPENSES
(in thousands) 1996 CHANGE % 1995
- ----------------------------------------------------------------------------------
Interest income $ 1,971 78.5% $ 1,104
Interest (expense) $ (38) -22.4% $ (49)
Other income (expense),net $ (42) 69.1% $ (136)
The increase in interest income in 1996 is attributable to interest earned on
cash equivalents and marketable securities purchased with the net proceeds of
the Company's public offering in 1995.
The decrease in interest expense in 1996 is attributable to an increase in
income derived from the MAXIMO Users Group Conference, offset by foreign
currency translation losses.
PROVISION FOR INCOME TAXES
The Company's effective tax rates were 39.1% and 39.8% in 1996 and 1995,
respectively. The decrease in the effective tax rate for fiscal 1996 can be
attributed to the use of a foreign sales corporation and tax exempt interest
income partially offset by non-deductible merger expenses. At September 30,
1996, the Company had net operating loss carryforwards of approximately $1.3
million and $94 thousand of credit carryforwards in certain foreign
jurisdictions.
LIQUIDITY AND CAPITAL RESOURCES
As of September 30, 1997, the Company had cash and cash equivalents and
marketable securities of approximately $64.3 million and working capital of
$65.1 million. Cash provided by operations for fiscal year 1997 was $21.7
million, generated primarily by income earned for the period and depreciation,
and cash generated by accounts receivable collections. Cash used in investing
activities totaled $7.2 million, primarily for the purchase of computer
equipment and purchases of marketable securities. The Company also funded the
purchases of office equipment, office furniture and leasehold improvements
related to the relocation of its corporate headquarters in December 1997. Cash
provided by financing activities was $2.8 million, generated by proceeds from
exercises of employee stock options.
As of September 30, 1997, the Company's principal commitments consisted
primarily of an office lease for its headquarters. The Company leases its
facilities and certain equipment under non-cancelable operating lease agreements
that expire at various
27
29
dates through November 2003. The Company has relocated its corporate
headquarters in December 1997. The Company expects to spend $2.5 million for
construction and leasehold improvements in connection with the relocation. It
also plans to spend approximately $1 million on furniture, fixtures and
equipment, most of which was capitalized in fiscal 1997.
The Company may use a portion of its cash to acquire businesses, products and
technologies complementary to its business.
The Company believes that its current cash balances combined with cash flow from
operations will be sufficient to meet its working capital and capital
expenditure requirements through at least September 30, 1998.
FLUCTUATIONS IN QUARTERLY OPERATING RESULTS; SEASONALITY
The Company generally ships its product 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 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
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.
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 condition 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.
FACTORS AFFECTING FUTURE PERFORMANCE
Further information on factors that could affect the Company's business and
financial results are included in the exhibits to this Annual Report on Form
10-K.
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30
ITEM 7 A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
NOT APPLICABLE
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Information with respect to exhibits and financial statement schedules are
included in Part IV item 14(a)(1) and (2).
Quarterly Financial Data (Unaudited)
The company believes that period-to-period comparisons of its results of
operations are not necessarily meaningful and should not be relied upon as an
indication of future performance.
(in thousands, except per share amounts)
1997 Quarter Dec.31, Mar. 31, June 30, Sep. 30, Year Ended
Ended: 1996 1997 1997 1997 1997
---- ---- ---- ---- ----
Total revenues $23,379 $22,186 $23,652 $27,483 $96,700
Income from operations 5,106 2,122 3,273 5,770 16,271
Income before income taxes 5,623 2,410 3,903 6,191 18,127
Provision for income taxes 2,094 874 1,413 2,176 6,557
Net income 3,528 1,535 2,490 4,015 11,570
Net income per share $ 0.35 $ 0.15 $ 0.25 $ 0.40 $ 1.15
1996 Quarter Dec.31, Mar. 31, June 30, Sep. 30, Year Ended
Ended: 1995 1996 1996 1996 1996
---- ---- ---- ---- ----
Total revenues $16,187 $16,376 $18,151 $22,615 $73,329
Income from operations 3,213 2,676 3,720 4,997 14,606
Income before income taxes 3,634 2,993 4,207 5,663 16,497
Provision for income taxes 1,507 1,546 1,457 1,941 6,451
Net income 2,127 1,447 2,750 3,722 10,046
Net income per share $ 0.21 $ 0.14 $ 0.27 $ 0.37 $ 1.00
The consolidated financial statements of the Company for all periods presented
include the results and balances of an acquisition accounted for as a pooling-of
interests. The acquisition occurred in March 1996.
29
31
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE.
None.
PART III
(ITEMS 10, 11, 12, 13)
In accordance with general instruction G(3) to Form 10-K, information required
by Part III is incorporated by reference from the Company's definitive Proxy
Statement for its 1998 Annual Meeting of Stockholders to be filed, pursuant to
Regulation 14A, within 120 days after the end of the Company's fiscal year
ended September 30, 1997.
30
32
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON
FORM 8-K
The financial statements and schedules filed as part of this Report are
listed in the following Index to Financial Statements and Schedules. The
exhibits filed as part of this Report are listed in the accompanying Index to
Exhibits.
(a) The following documents are filed as a part of this Report:
1. Consolidated Financial Statements. The following Consolidated Financial
Statements of the Company are filed as part of this report:
PAGE
----
Report of Independent Accountants............................. 36
Consolidated Balance Sheets -
September 30, 1997 and 1996.................................. 37
Consolidated Statements of Operations -
Years Ended September 30, 1997, 1996 and 1995................ 38
Consolidated Statements of Cash Flows -
Years Ended September 30, 1997, 1996 and 1995................ 39
Consolidated Statements of Stockholders' Equity -
Years Ended September 30, 1997, 1996 and 1995................ 40
Notes to Consolidated Financial Statements.................... 41
2. Financial Statement Schedules. The following financial statement
schedules of Project Software & Development, Inc. for the Years Ended
September 30, 1997, 1996 and 1995 are filed as part of this Report and
should be read in conjunction with the Consolidated Financial Statements of
the Company.
SCHEDULE PAGE
-------- ----
II Valuation and Qualifying Accounts....................... 57
Schedules not listed above have been omitted because they are not
applicable or are not required, or the information required to be set forth
therein is included in the Consolidated Financial Statements or Notes
thereto.
3. Exhibits.
Exhibits 10.1 through 10.4 include the Company's management contracts,
compensatory plans or compensatory arrangements required to be identified
pursuant to Item 14(2) of Form 10-K.
3. Instruments Defining the Rights of Security-Holders
3.1 Amended and Restated Articles of Organization of the Company
(included as Exhibit 3.3 to the Company's
31
33
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, Commission File No. 0-23852, and
incorporated herein by reference)
4. Instruments defining the Rights of Security Holders, Including
Indentures
4.1 Specimen certificate for the Common Stock of the Company
(included as Exhibit 4.1 to the Company's Registration Statement
on Form S-1, Registration No. 33-76420, and incorporated herein
by reference)
4.2 Article 4B of the Amended and Restated Articles of Organization
of the Company (included as Exhibit 4.1 to the Company's
Registration Statement on Form S-1, Registration No. 33-76420,
and incorporated herein by reference)
9. Voting Trust Agreements
9.1 1996 Daniels Voting Trust Agreement dated August 19, 1996 among
Susan H. Daniels, Robert L. Daniels and Robert L. Daniels, as
Trustee (included as Exhibit 9.1 to the Company's Annual Report
on Form 10-K for the fiscal year ended September 30, 1996, and
incorporated herein by reference)
10. Material Contracts
10.1 1997 Executive Bonus Plan (included as Exhibit 10.1 to the
Company's Quarterly Report on Form 10-Q for the quarter ended
December 31, 1996, Commission File No. 0-23852 and incorporated
herein by reference)
10.2 Amended and Restated 1994 Incentive and Nonqualified Stock
Option Plan
10.3 Offer letter by and between the Company and David M. Sample
dated January 30, 1997 (included as Exhibit 10.1 to the
Company's Current Report on Form 8-K dated February 26, 1997,
File No. 0-23852, and incorporated herein by reference)
10.4 1994 Employee Stock Purchase Plan
32
34
10.5 Agreement and Plan of Merger, dated as of March 1, 1996, by
and among the Company, Toolbox Acquisition Corp., Maintenance
Automation Corporation, Johnson Controls, Inc., Eli G. Katz,
Phyllis S. Katz, Mitchell B. Knecht, Heidi D. Knecht, Nicholas E.
Meola, Naomi R. Meola, Johnson Controls, Inc. and Eli G. Katz, as
agent (included as Exhibit 10.4 to the Company's Quarterly Report
on Form 10-Q for the quarter ended March 31, 1996, File No.
0-23852, and incorporated herein by reference)
10.6 Escrow Agreement, dated as of March 1, 1996, by and among
the Company, Toolbox Acquisition Corp., Maintenance Automation
Corporation, Johnson Controls, Inc., Eli G. Katz, Phyllis S.
Katz, Mitchell B. Knecht, Heidi D. Knecht, Nicholas E. Meola,
Naomi R. Meola, Johnson Controls, Inc. and Eli G. Katz, as agent
(included as Exhibit 10.5 to the Company's Quarterly Report on
Form 10-Q for the quarter ended March 31, 1996, File No. 0-23852,
and incorporated herein by reference)
10.7 Registration Rights Agreement, dated as of March 1, 1996, by
and among the Company, Toolbox Acquisition Corp., Maintenance
Automation Corporation, Johnson Controls, Inc., Eli G. Katz,
Phyllis S. Katz, Mitchell B. Knecht, Heidi D. Knecht, Nicholas E.
Meola, Naomi R. Meola, Johnson Controls, Inc. and Eli G. Katz, as
agent (included as Exhibit 10.6 to the Company's Quarterly Report
on Form 10-Q for the quarter ended March 31, 1996, File No.
0-23852, and incorporated herein by reference)
10.8 Form of PSDI 1994 Authorized Value Added Reseller Agreement
(included as Exhibit 10.22 to the Company's Registration
Statement on Form S-1, Registration No. 33-76420, and
incorporated herein by reference)
11. Statements re computation of per share earnings
11.1 Statement re computation of per share earnings
21. Subsidiaries of the registrant
21.1 Subsidiaries of the Company
33
35
23. Consents of experts and counsel
23.1 Consent of Coopers & Lybrand L.L.P.
27. Financial Data Schedule
27.1 Financial Data Schedule
99. Certain Factors
99.1 Certain Factors - Certain factors concerning the Company
dated December 23, 1997 concerning certain cautionary
statements of the Company to be taken into account in
conjunction with the consideration and review of the
Company's publicly-disseminated documents and oral
statements (including oral statements made by others on
behalf of the Company) that include forward-looking
information.
(b) Reports on Form 8-K
During the three months ended September 30, 1997, the Company did not file
a current Report on Form 8-K.
The Company will furnish a copy of any exhibit listed to requesting
stockholders upon payment of the Company's reasonable expense in furnishing
those materials.
34
36
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
Dated: December 22, 1997
PROJECT SOFTWARE & DEVELOPMENT, INC.
By: /s/ David M. Sample
--------------------------
David M. Sample
Chairman of the Board, President and
Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the registrant and
in the capacities and on the dates indicated.
/s/ David M. Sample Chairman of the Board, December 22, 1997
- ---------------------- President, and Chief
David M. Sample Executive Officer
(Principal Executive
Officer)
/s/ Paul D. Birch
- ----------------------
Paul D. Birch Executive Vice December 22, 1997
President, Chief
Financial Officer and
Treasurer
(Principal Financial
and Accounting Officer)
Director December 22, 1997
- ----------------------
Robert L. Daniels
/s/ Charles S. Jones Director December 22, 1997
- ----------------------
Charles S. Jones
Director December 22, 1997
- ----------------------
Michael D. Marvin
/s/ William G. Nelson Director December 22, 1997
- ----------------------
William G. Nelson
35
37
REPORT OF INDEPENDENT ACCOUNTANTS
We have audited the consolidated financial statements and the financial
statement schedule of Project Software & Development, Inc. and its subsidiaries
listed in the index on page 31 of this Form 10-K. These financial statements and
financial statement schedule are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements and
the financial statement schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatements. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of Project
Software & Development, Inc. and its subsidiaries as of September 30, 1997 and
1996, and the consolidated results of their operations and their cash flows for
each of the three years in the period ended September 30, 1997 in conformity
with generally accepted accounting principles. In addition, in our opinion, the
financial statement schedule referred to above, when considered in relation to
the basic financial statements taken as a whole, present fairly, in all material
respects, the information required to be included therein.
Coopers & Lybrand L.L.P.
Boston, Massachusetts
November 7, 1997
36
38
PROJECT SOFTWARE & DEVELOPMENT, INC.
CONSOLIDATED BALANCE SHEETS
ASSETS SEPTEMBER 30, SEPTEMBER 30,
1997 1996
---- ----
(IN THOUSANDS,EXCEPT SHARE DATA)
Current assets:
Cash and cash equivalents $ 25,964 $ 9,097
Marketable securities 38,299 36,798
Accounts receivable, trade, less allowance
for doubtful accounts of $2,286 in 1997 and
$1,954 in 1996 24,021 27,030
Prepaid expenses 1,877 1,410
Other assets 1,244 748
Deferred income taxes 1,806 892
--------- -------
Total current assets 93,211 75,975
--------- -------
Property and equipment, net 7,322 4,602
Computer software costs, net -- 359
Goodwill, net 1,447 1,832
Deferred income taxes 214 675
Other assets 45 33
--------- -------
Total assets $ 102,239 $83,476
========= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 9,809 $ 8,384
Accrued compensation 4,494 5,007
Income taxes payable 3,678 248
Deferred revenue 9,750 9,042
Deferred income taxes 394 5
--------- -------
Total current liabilities 28,125 22,686
--------- -------
Deferred income taxes 12 168
Deferred rent 12 85
Deferred revenue 120 375
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 9,856,474 and 9,702,579 for 1997 and 1996,
respectively 99 97
Additional paid-in capital 48,163 45,324
Retained earnings 26,108 14,538
Cumulative translation adjustment (629) 49
Net unrealized gain on marketable securities 229 154
--------- -------
Total stockholders' equity 73,970 60,162
--------- -------
Total liabilities and stockholders' equity $ 102,239 $83,476
========= =======
The accompanying notes are an integral part of the
consolidated financial statements.
37
39
PROJECT SOFTWARE & DEVELOPMENT, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
YEAR ENDED SEPTEMBER 30,
---------------------------------------------------
1997 1996 1995
---- ---- ----
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
Revenues:
Software $ 50,393 $ 43,382 $ 30,054
Support and services 46,307 29,947 20,318
------------ ------------ -----------
Total revenues 96,700 73,329 50,372
------------ ------------ -----------
Cost of revenues:
Software 2,547 3,106 2,713
Support and services 24,025 15,132 10,006
------------ ------------ -----------
Total cost of revenues 26,572 18,238 12,719
------------ ------------ -----------
Gross margin 70,128 55,091 37,653
Operating expenses:
Sales and marketing 32,985 24,422 16,555
Product development 11,387 7,653 6,639
General and administrative 9,485 7,445 6,021
Merger expenses -- 965 --
------------ ------------ -----------
Total operating expenses 53,857 40,485 29,215
------------ ------------ -----------
Income from operations 16,271 14,606 8,438
Interest income 2,409 1,971 1,104
Interest (expense) (24) (38) (49)
Other income (expense), net (529) (42) (136)
------------ ------------ -----------
Income before income taxes 18,127 16,497 9,357
Provision for income taxes 6,557 6,451 3,728
------------ ------------ -----------
Net income $ 11,570 $ 10,046 $ 5,629
============ ============ ===========
Net income per share $ 1.15 $ 1.00 $ 0.64
------------ ------------ -----------
Weighted number of common and
common equivalent shares 10,064,268 10,051,908 8,845,746
------------ ------------ -----------
The accompanying notes are an integral part of the consolidated
financial statements.
38
40
PROJECT SOFTWARE & DEVELOPMENT, INC
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEAR ENDED SEPTEMBER 30,
1997 1996 1995
---- ---- ----
(IN THOUSANDS)
Cash flows from operating activities:
Net income $ 11,570 $ 10,046 $ 5,629
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 3,358 2,662 2,391
Loss on sale and disposal of property
and equipment 131 17 42
Amortization of discount on marketable securities 409 331 172
Deferred rent (73) (73) (34)
Deferred taxes (238) (908) (735)
Changes in operating assets and liabilities,
net of effect of acquisitions:
Accounts receivable 2,824 (12,935) (4,871)
Prepaid expenses (480) (90) (519)
Other assets (1,164) 144 54
Accounts payable 1,805 2,209 1,577
Accrued compensation (532) 1,361 2,522
Income taxes payable 3,477 (347) (227)
Deferred revenue 627 2,374 2,613
--------- --------- ---------
Net cash provided by operating activities 21,714 4,791 8,614
--------- --------- ---------
Cash flows from investing activities:
Acquisitions of businesses, net of cash -- (1,837) --
Acquisitions of property and equipment (5,390) (3,204) (2,007)
Proceeds from sale of property and equipment -- 6 5
Additions to computer software costs -- (1,084) (83)
Purchases of marketable securities (151,375) (191,574) (148,609)
Sales of marketable securities 149,540 190,552 112,484
--------- --------- ---------
Net cash used in investing activities (7,225) (7,141) (38,210)
--------- --------- ---------
Cash flows from financing activities:
Payments on leased equipment -- (29) (413)
(Payments)/Borrowings on line of credit, net -- (325) 244
(Payments)/ Borrowings on long-term notes, net -- (124) 35
Proceeds from issuance of common stock,
net of issuance costs -- -- 23,552
Proceeds from exercise of stock options
including related tax benefit 2,841 2,600 915
--------- --------- ---------
Net cash provided by financing activities 2,841 2,122 24,333
--------- --------- ---------
Effect of exchange rate changes on cash (463) (21) 2
--------- --------- ---------
Net increase/(decrease) in cash and cash equivalents 16,867 (249) (5,261)
Cash and cash equivalents, beginning of year 9,097 9,346 14,607
--------- --------- ---------
Cash and cash equivalents, end of year $ 25,964 $ 9,097 $ 9,346
========= ========= =========
The accompanying notes are an integral part of the consolidated financial statements.
39
41
PROJECT SOFTWARE & DEVELOPMENT, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED SEPTEMBER 30, 1997, 1996 AND 1995
Net
Unrealized
Common Stock Additional Accumulated Cumulative Gains on Total
Shares Paid-in Earnings Translation Marketable Stockholders'
(in thousands, except share data) Issued Amount Capital (Deficit) Adjustment Securities Equity
- ------------------------------------------------------------------------------------------------------------------------------------
Balance at
September 30, 1994 ..... 8,273,207 $83 $18,271 ($1,137) $109 $17,326
Issuance of common stock,
net of issuance cost
of $470 .............. 1,207,500 12 23,540 23,552
Stock options exercised
and related tax benefit,
employee stock purchases 86,005 1 914 915
Net income ............... 5,629 5,629
Translation adjustment ... 50 50
Net unrealized gain on
marketable securities. $72 72
- ------------------------------------------------------------------------------------------------------------------------------------
Balance at
September 30, 1995 ..... 9,566,712 96 42,725 4,492 159 72 47,544
Stock options exercised
and related tax benefit,
employee stock purchases 135,837 1 2,599 2,600
Net income .............. 10,046 10,046
Translation adjustment ... (110) (110)
Net unrealized gain on
marketable securities. 82 82
- ------------------------------------------------------------------------------------------------------------------------------------
Balance at
September 30, 1996 ..... 9,702,549 97 45,324 14,538 49 154 60,162
Stock options exercised
and related tax benefit,
employee stock purchases 153,925 2 2,839 2,841
Net income .............. 11,570 11,570
Translation adjustment ... (678) (678)
Net unrealized gain on
marketable securities. 75 75
- ------------------------------------------------------------------------------------------------------------------------------------
Balance at
September 30, 1997 ..... 9,856,474 $99 $48,163 $26,108 $(629) $229 $73,970
- ------------------------------------------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of the consolidated financial statements.
40
42
PROJECT SOFTWARE & DEVELOPMENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
A. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Nature of Business
The Company's primary business is the development, marketing, sales and
support of applications software used by business, government and other
organizations to improve the productivity of facilities, plants and production
equipment.
Basis of Presentation
The consolidated financial statements include the accounts of Project
Software & Development, Inc. ("PSDI") and its majority-owned subsidiaries
(collectively, the "Company"). All intercompany accounts and transactions have
been eliminated. Certain prior year financial statement items have been
reclassified to the current year's format.
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 periods in which they
have a dilutive effect. All share and per share data has been restated to
account for businesses acquired as pooling of interests. Fully diluted and
primary income per share data are the same for each period presented.
Depreciation and Amortization
Property and equipment are stated at cost.
Depreciation is computed over the estimated useful lives of the assets as
follows:
Description Estimated Useful Life
----------- ---------------------
Computer equipment & software......... 3 years
Vehicles.............................. 3 years
Furniture and fixtures................ 5 years
Leasehold improvements are amortized on the straight-line method over the
shorter of their estimated useful life or term of the lease. Maintenance and
repairs are charged to expense as incurred and betterments are capitalized. Upon
retirement or sale, the cost of the assets disposed of and the related
accumulated depreciation are removed from the accounts and any resulting gain or
loss is included in the determination of net income.
Goodwill
The excess cost over net assets of acquired companies is being amortized
over five years using the straight-line method of amortization.
41
43
PROJECT SOFTWARE & DEVELOPMENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
Computer Software Costs
Computer software costs consist of internally developed and purchased or
licensed software. Development costs incurred in the research and development of
new software products and enhancements to existing products are expensed in the
period incurred unless they qualify for capitalization under Statement of
Financial Accounting Standards No. 86, "Accounting for the Cost of Computer
Software to Be Sold, Leased or Otherwise Marketed." These costs are amortized on
a straight-line basis over the estimated useful or market life of the software
(generally, one to two years). Amortization expense for 1997, 1996 and 1995 was
$359,000, $948,000 and $1,120,000, respectively. In fiscal 1996, the Company
changed the estimated useful life of its MAXIMO Enterprise product from three
years to 15 months to accurately reflect the lifecycles for new releases of this
product.
Income Taxes
In 1993, the Company adopted Statement of Financial Accounting Standards
No. 109, "Accounting for Income Taxes" (SFAS 109), which requires an asset and
liability approach for accounting and reporting for income taxes. SFAS 109 also
requires a valuation allowance against net deferred tax assets if, based upon
the available evidence, is more likely than not that some or all of the deferred
tax assets will not be realized. As permitted under SFAS 109, prior years'
financial statements were not restated. The adoption of SFAS 109 did not have a
material impact on the Company's financial position or results of operations.
The Company has not provided for the U.S. income tax on earnings of its
foreign subsidiaries as it considers these earnings to be permanently
reinvested. At September 30, 1997, the undistributed earnings of foreign
subsidiaries were $2,112,000.
Revenue Recognition
The Company licenses its software products upon contract execution and
shipment, provided that no significant vendor obligations remain outstanding and
collection of the resulting receivable is deemed probable. Insignificant vendor
obligations, if any, remaining after contract execution and shipment are
accounted for either by deferring a pro rata portion of revenue for the
remaining tasks or by accruing the costs related to the remaining obligations.
The revenue from maintenance contracts is recognized ratably over the term
of the agreement, generally one year. Revenues from services and system
implementations are recognized as the services are performed. Revenue from
hardware sales is recognized upon shipment. To date, the Company's warranty and
product return expenses have been immaterial.
Deferred Revenue
Deferred revenue includes revenues from fixed fee license agreements with
payment terms greater than one year and maintenance contracts billed in advance.
42
44
PROJECT SOFTWARE & DEVELOPMENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
Foreign Currency
Assets and liabilities are translated at current exchange rates at the
balance sheet dates. The translation adjustments made on translation of the
balance sheet are recorded as a separate component of stockholders' equity.
Revenues and expenses are translated into U.S. dollars at average exchange
rates. Foreign currency transaction gains and losses are included in determining
net income. The Company recorded losses of $476,000, $142,000 and $117,000 for
1997, 1996, and 1995, respectively.
Cash and Cash Equivalents
The Company considers all highly liquid instruments purchased with
maturities of three months or less to be cash equivalents. Cash equivalents
consist primarily of money market funds, which are stated at cost, which
approximates market.
Concentration of Credit Risk
Financial instruments which potentially subject the Company to
concentration of credit risk consist primarily of temporary cash investments and
accounts receivables.
The Company restricts investment of temporary cash investments to financial
institutions with high credit standing. The Company has not experienced any
losses on these investments to date. Credit risk on trade receivables is
minimized as a result of the diverse nature of the Company's customer base. The
Company has not experienced significant losses related to accounts receivable
from individual customers or groups of customers in a particular industry or
geographic area. Due to these factors, no additional credit risk beyond amounts
provided for collection losses is believed inherent in the Company's accounts
receivable.
Marketable Securities
In 1994, the Company adopted Statement of Financial Accounting Standards
No. 115, "Accounting for Certain Investments in Debt and Equity Securities"
(SFAS 115). The Company's marketable securities are classified as
available-for-sale and are stated at their fair market value. The fair market
value of marketable securities was determined based on quoted market prices.
Unrealized gains and losses on securities classified as available-for-sale are
reported as a separate component of stockholders' equity.
Accounting Standards
Statement of Financial Accounting Standards No. 128, "Earnings Per Share"
(SFAS 128) is effective for financial statements issued for periods ending after
December 15, 1997. SFAS 128 replaces APB Opinion No. 15, Earnings Per Share.
SFAS 128 simplifies the computation of EPS by replacing the presentation of
primary EPS with a presentation of basic EPS. It requires dual presentation of
basic and diluted EPS by entities with complex capital structures. The Company
will adopt SFAS 128 per the effective date for the periods ended after December
15, 1997. The adoption of SFAS 128 will not have a material impact on the
Company's financial position or results of operations.
43
45
PROJECT SOFTWARE & DEVELOPMENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
Statement of Financial Accounting Standards No. 130, "Reporting
Comprehensive Income" (SFAS 130) is effective for financial statements beginning
after December 15, 1997. SFAS 130 requires that changes in comprehensive income
be shown in a financial statement that is displayed with the same prominence as
other financial statements. The Company will adopt SFAS 130 beginning in the
first quarter of the fiscal year ended September 30, 1998.
Statement of Financial Accounting Standards No. 131, "Disclosures about
Segments of an Enterprise and Related Information" (SFAS 131) is effective for
fiscal years beginning after December 15, 1997. This statement will change the
way companies report annual financial statements and requires them to report
selected segment information in their quarterly reports issued to shareholders.
It also requires entity-wide disclosures about the products and services an
entity provides, the material countries in which it holds assets and reports
revenues, and its major customers. The Company will adopt SFAS 131 in the fiscal
year ended September 30, 1998.
Use of estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosures of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
B. INCOME TAXES:
The components of income before income taxes consist of the following:
Year Ended September 30,
-------------------------------------
(in thousands) 1997 1996 1995
------- ------- -------
Income before income taxes:
United States .................................... $16,098 $15,484 $ 8,240
Foreign .......................................... 2,029 1,013 1,117
------- ------- -------
$18,127 $16,497 $ 9,357
======= ======= =======
(Liability Method)
-------------------------------------
Current taxes:
Federal .......................................... 4,970 5,291 3,146
State ............................................ 843 1,075 765
Foreign .......................................... 887 757 347
Foreign withholding taxes ........................ 77 233 206
------- ------- -------
$ 6,777 $ 7,356 $ 4,464
======= ======= =======
44
46
PROJECT SOFTWARE & DEVELOPMENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
Deferred taxes:
Federal...................................................... (235) (382) (561)
State........................................................ (26) (63) (134)
Foreign...................................................... 41 (460) (41)
----------- ---------- ----------
(220) (905) (736)
--------- ---------- ----------
Total.................................................. $ 6,557 $ 6,451 $ 3,728
======== ========== ========
The reconciliation of the Company's income tax provision to the statutory
federal tax rate is as follows:
Year Ended September 30,
-------------------------------------------
1997 1996 1995
---- ---- ----
Statutory federal tax rate................................... 35.0% 35.0% 34.0%
FSC benefit.................................................. (1.3) (1.5) --
State taxes, net of federal tax benefit...................... 3.0 4.3 5.0
Foreign withholding taxes.................................... 0.4 1.4 0.4
Incremental tax of foreign withholding....................... -- -- 0.5
Non-deductible acquisition costs............................. -- 2.1 --
Unbenefited net operating losses............................. -- (0.3) 2.4
Utilization of net operating loss carryforwards.............. -- (0.3) (1.3)
R&D credit................................................... (0.7) -- (1.1)
Exempt interest.............................................. (1.4) (1.0) (0.4)
Other........................................................ 1.2 (0.6) 0.3
-------- -------- -----
36.2% 39.1% 39.8%
===== ===== =====
45
47
PROJECT SOFTWARE & DEVELOPMENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
The components of the deferred tax provision are:
Year Ended September 30,
-------------------------------------------
(in thousands) 1997 1996
---- ----
Depreciation................................................. $(340) $ 47
Allowance for Doubtful Accounts.............................. (45) (283)
Software Capitalization...................................... (141) (121)
Deferred Revenue............................................. (135) 45
Deferred Rent................................................ 29 23
Deferred Merchandise......................................... 36 (49)
Package Design............................................... (4) 3
Accrued Vacation............................................. 35 (40)
Net Operating Losses......................................... 585 (564)
Translation Loss............................................. (191) --
Other........................................................ (49) 34
==== ======
$(220) $(905)
====== ======
The components of the deferred tax assets and liabilities are as follows:
Year Ended September 30,
---------------------------
(in thousands) 1997 1996
------- -------
Deferred Tax Assets:
Deferred Revenue............................................. $ 296 $ 161
Deferred Rent................................................ 4 33
Allowance for Doubtful Accounts.............................. 678 633
Accrued Vacation............................................. 66 101
Depreciation................................................. 340 --
Package Design............................................... 59 55
Other Reserves............................................... 80 20
Goodwill..................................................... 118 --
Section 481 Cash to Accrual Adjustment....................... 188 --
Translation Loss............................................. 191 --
Net Operating Loss Carryforwards............................. -- 585
Valuation Allowance.......................................... -- (21)
------ -------
$2,020 $1,567
====== ======
46
48
PROJECT SOFTWARE & DEVELOPMENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
Deferred Tax Liabilities:
Software Capitalization...................................... -- $ 141
Section 475 Account Receivable Adjustment.................... $ 359 --
Other Liabilities............................................ 47 32
------- ---------
$ 406 $ 173
------- -------
Net Deferred Tax Asset $ 1,614 $ 1,394
======= =======
The French tax authorities are examining the French income tax returns for
the fiscal years ended 1989 through 1991. The French tax authorities have
proposed an adjustment with which the Company is in disagreement and which it
has protested. Management does not believe that any additional tax liability for
such periods which might arise out of such examination would have a material
adverse effect on the results of operations or financial position of the
Company.
C. ACQUISITIONS:
On March 1, 1996, the Company acquired all of the outstanding common stock
of Maintenance Automation Corporation ("MAC"), a developer of PC-based
maintenance management software, in exchange for the issuance of 368,946 shares
of common stock. The transaction was accounted for as a pooling-of-interests.
Costs of the merger were $965,000. The Company's consolidated financial
statements for all periods presented were restated to include MAC. MAC's fiscal
year for financial reporting purposes was changed from December 31 to September
30 for the period ended September 30, 1995. MAC's results of operations for the
nine-month period ended September 30, 1995 has been included in the Company's
1995 results.
The following is certain financial information for PSDI and MAC which is
included in the current combined financial statements:
Year Ended September 30,
------------------------
1996 1995
--------- ---------
Revenue:
PSDI $ 66,789 $ 46,293
MAC 6,540 4,079
--------- ---------
Combined $ 73,329 $ 50,372
--------- ---------
Net income (loss):
PSDI $ 10,882 $ 6,322
MAC (836) (693)
--------- ---------
Combined $ 10,046 $ 5,629
--------- ---------
47
49
PROJECT SOFTWARE & DEVELOPMENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
D. LEASED EQUIPMENT OBLIGATION
The Company acquired computer equipment and vehicles under capital lease
agreements which expired at various dates through December 31, 1996. The
capitalized cost of the leased equipment and vehicles was $0 and $199,000 with
related accumulated amortization of $0 and $183,000 at September 30, 1997 and
1996, respectively.
E. MARKETABLE SECURITIES:
Marketable equity and debt securities available for current operations are
classified in the balance sheet as current assets. It is the Company's intention
that all securities held at the balance sheet date will be sold within one year
based upon historical experience to date. Dividend and interest income,
including amortization of premium and discount arising at acquisition, are
included in other income. The unrealized holding gains and (losses) for the year
ended September 30, 1997 were $575,000 and $(500,000), respectively. The
unrealized holding gains and (losses) for the year ended September 30, 1996 were
$359,000 and $(275,000), respectively.
Amortized Fair Market
1997 Cost Value
- ---- --------------- ---------------
(in thousands)
U.S. Government securities $ 17,017 $ 17,591
Tax exempt municipal securities 20,794 20,708
--------------- ---------------
$ 37,811 $ 38,299
=============== ===============
Amortized Fair Market
1996 Cost Value
--------------- ---------------
(in thousands)
U.S. Government securities $ 17,000 $ 17,412
Tax exempt municipal securities 19,267 19,186
Corporate debt securities 200 200
--------------- ---------------
$ 36,467 $ 36,798
=============== ===============
48
50
PROJECT SOFTWARE & DEVELOPMENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
F. PROPERTY AND EQUIPMENT:
Property and equipment are stated at cost and consist of the following:
Year Ended September 30,
----------------------------
(in thousands) 1997 1996
-------- --------
Computer equipment and software................................... $10,972 $ 9,660
Vehicles.......................................................... 367 397
Furniture and fixtures............................................ 4,899 3,372
Leasehold improvements............................................ 3,415 1,980
-------- --------
19,653 15,409
Less accumulated depreciation and amortization.................... (12,331) (10,807)
-------- --------
$ 7,322 $ 4,602
======== ========
Depreciation and amortization expense was $2,577,000, $1,588,000, and
$1,004,000 for 1997, 1996 and 1995, respectively.
G. GOODWILL
Goodwill represents the excess of the cost of acquired businesses over the
fair market value of their net tangible and identified intangible assets.
Goodwill is evaluated at each balance sheet date to determine whether any
potential impairment exists. The Company believes that no material impairment
exists at September 30, 1997.
Goodwill is being amortized on the straight-line method over a period of
five years. Amortization expense was $421,000 and $268,000 for 1997 and 1996,
respectively.
H. ACCRUED COMPENSATION:
A summary of accrued compensation consists of the following:
Year Ended September 30,
---------------------------
(in thousands) 1997 1996
------- ------
Accrued bonus..................................................... $ 683 $1,778
Accrued 401(k) Company contribution............................... 224 133
Accrued payroll................................................... 396 140
Accrued sales commissions......................................... 2,687 2,547
Accrued vacation pay.............................................. 504 409
------- -------
$4,494 $5,007
======= =======
49
51
PROJECT SOFTWARE & DEVELOPMENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
I. COMMITMENTS AND CONTINGENCIES:
The Company leases its office facilities under operating lease agreements
which expire at various dates through September 30, 2006. The Company pays all
insurance, utilities, and pro rated portions of any increase in certain
operating expenses and real estate taxes. Rent expense under these leases
aggregated $3,780,000, $3,033,000, and $2,649,000 for 1997, 1996 and 1995,
respectively. The Company will be relocating its corporate headquarters in
December 1997.
The operating leases provide for minimum aggregate future rentals as of
September 30, 1997 as follows:
(in thousands)
1998............................................................ $ 2,910
1999............................................................ 2,359
2000............................................................ 2,068
2001............................................................ 1,936
2002 and thereafter............................................. 4,422
-------
$13,695
=======
At September 30, 1997, the Company is also obligated to pay $300,000 in
1998 under guaranteed royalty arrangements.
The Company is not a party to any legal proceedings the outcome of which,
in the opinion of management, would have a material adverse effect on the
Company's results of operations or financial condition.
J. EMPLOYEE BENEFITS:
Cash or Deferred Plan
The PSDI Cash or Deferred Plan (the "Plan") is a defined contribution plan
available to substantially all of PSDI's domestic employees. The Plan was
established in 1988 under Section 401(a) of the Internal Revenue Code. Under the
Plan, employees may make voluntary contributions based on a percentage of their
pretax earnings.
Effective January 1, 1993, the Plan was amended to provide for both a
guaranteed and a discretionary contribution made by PSDI. Amounts charged to
expense for this Plan in 1997, 1996, and 1995 were $268,000, $40,000, and
$237,000, respectively.
Incentive and Nonqualified Stock Option Plan
On March 10, 1994, the Board of Directors of the Company adopted the 1994
Incentive and Nonqualified Stock Option Plan (the "Option Plan") that provided
for the grant of 900,000 nonqualified and incentive stock options to directors
and employees. On January 25, 1996, the
50
52
PROJECT SOFTWARE & DEVELOPMENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
Board of Directors of the Company voted to increase the number of shares of
Common Stock that may be issued from 900,000 to 1,800,000. The exercise price of
Incentive Options must be at least equal to the fair market value on the date of
grant. The exercise price of Nonqualified Options must not be less than 85% of
the fair market value on the date of grant. These options vest in equal annual
installments over periods of two to four years, commencing on December 31, 1994.
During the last quarter of 1997, the Company's Board of Directors approved
a stock repricing program for all stock options granted during the grant period
from August 1, 1996 through March 31, 1997 ("Grant Period"). Each group of stock
options covering two shares of the Company's Common Stock granted during this
period was replaced with one share of the Company's Common Stock. Each employee
had to elect to cancel all or none of the shares granted to each during the
Grant Period. The price of these stock options was determined as of the closing
of the stock market on July 31, 1997.
Stock option activity is summarized as follows:
1995
- ----
Granted 303,750 $ 15.50 - $18.00
Canceled (17,820) $ 5.67 - $18.00
Exercised (75,200) $ 5.67 - $ 6.33
Outstanding at September 30, 1995 744,130 $ 5.67 - $18.00
Exercisable at September 30, 1995 70,450 $ 5.67 - $ 6.33
Available for grant at September 30, 1995 80,670
1996
- ----
Granted 310,850 $ 23.75 - $31.00
Canceled (10,868) $ 5.67 - $31.00
Exercised (126,708) $ 5.67 - $18.00
Outstanding at September 30, 1996 917,404 $ 5.67 - $31.00
Exercisable at September 30, 1996 167,812 $ 5.67 - $18.00
Available for grant at September 30, 1996 680,688
1997
- ----
Granted 548,098 $ 21.125 - $ 41.13
Canceled (565,998) $ 5.667 - $ 42.63
Exercised (145,535) $ 5.667 - $ 23.75
Outstanding at September 30, 1997 753,969 $ 5.667 - $ 41.13
Exercisable at September 30, 1997 259,788 $ 5.667 - $ 31.00
Available for grant at September 30, 1997 698,588
51
53
PROJECT SOFTWARE & DEVELOPMENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
The following table summarizes information about stock options outstanding at
September 30, 1997:
Options Outstanding Options Exercisable
- --------------------------------------------------------------------- -------------------------------
Weighted-Avg
Number Remaining Number
Range of Outstanding Contractual Weighted-Avg Exercisable Weighted-Avg
Exercise Prices As of 9/30/97 Life (years) Exercise Price As of 9/30/97 Exercise Price
- --------------- ------------- ------------ -------------- ------------- --------------
$ 5.67 - 6.33 220,050 5.0 $ 5.67 145,575 $ 5.78
15.50 - 23.75 445,069 8.5 20.47 86,134 18.87
31.00 - 33.50 76,350 5.4 31.39 28,079 32.07
41.13 - 42.63 12,500 4.6 41.19 0 --
$ 5.67 - 42.63 753,969 7.1 $17.63 259,788 $ 12.96
Statement of Financial Accounting Standards No. 123, "Accounting for
Stock-Based Compensation" (SFAS 123) encourages, but does not require,
recognition of compensation expense based on the fair value of employee
stock-based compensation instruments. The Company will not adopt the fair value
method of accounting for employee stock-based compensation but will instead
comply with the pro forma disclosure requirements. The fair value method of the
Company's stock options was estimated using the Black-Scholes option pricing
model. This model was developed for use in estimated fair value of traded
options that have no vesting restrictions and are fully transferable. This model
requires the input of highly subjective assumptions including the expected stock
price volatility. Because the Company's stock options have characteristics
significantly different from those of traded options, and because changes in the
subjective input assumptions can materially affect the fair value estimates, in
management's opinion, the existing model does not necessarily provide a reliable
single measure of the fair value of its stock options. The fair value of the
Company's stock options was estimated using the following weighted-average
assumptions:
Year Ended September 30,
----------------------------
1997 1996
------- -------
Expected life (in years)........................... 3.78 3.00
Volatility......................................... 75% 75%
Risk-free interest rate............................ 6.10% 6.24%
Dividend yield..................................... 0% 0%
52
54
PROJECT SOFTWARE & DEVELOPMENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
The weighted average estimated fair value of stock options granted during
fiscal 1997 and 1996 was $13.18 and $16.41 per share, respectively. For pro
forma purposes, the estimated fair value of the Company's stock options is
amortized over the options' vesting period. The Company's pro forma information
is as follows:
Year Ended September 30,
--------------------------------
1997 1996
---------- ----------
Net income
As reported ................... $ 11,570 $ 10,046
Pro forma ..................... 10,443 9,706
Net income per share
As reported ................... $ 1.15 $ 1.00
Pro forma ..................... 1.04 0.97
Because SFAS 123 is applicable only to options granted subsequent to
September 30, 1995, its pro forma effect will not be fully reflected until
approximately the year 2000. Under SFAS 123, the weighted-average estimated fair
value of purchase rights granted during fiscal 1997 and 1996 were $7.76 and
$13.23 per share, respectively.
Employee Stock Purchase Plan
On March 10, 1994, the Board of Directors of the Company adopted the 1994
Employee Stock Purchase Plan that provides for a maximum issuance of 225,000
shares of Common Stock for purchase by eligible employees at 85% of the lower of
the fair market value of the Company's Common Stock on either the first or last
day of the semi-annual offering period. No compensation expense is recorded in
connection with the plan. During fiscal year ended 1997, employees purchased
8,390 shares at a price of $32.73 and $16.47 for the offering periods ended
November 30, 1996 and May 31, 1997, respectively. Approximately 110 employees
participated in the plan during the fiscal year ended 1997.
K. STOCKHOLDERS' EQUITY:
Preferred Stock
On March 11,1994, the issuance of up to 1,000,000 shares of preferred
stock, $0.01 par value was authorized. The Board of Directors has the authority
to issue the preferred stock in one or more series and to fix rights,
preferences, privileges and restrictions, including dividends, and the number of
shares constituting any series and the designation of such series.
53
55
PROJECT SOFTWARE & DEVELOPMENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
L. DEBT AND CREDIT AGREEMENTS:
Bank Demand Loan
The Company did not extend its $5,000,000 unsecured line of credit
agreement with Chase Manhattan Bank, N.A., which expired in March 1997.
PSDI UK Limited has a line of credit agreement authorized to a limit of
pounds sterling 200,000, payable upon demand with interest at the bank's base
rate plus 2-1/4%. The line of credit is collateralized by all business assets of
PSDI UK Limited. There was no outstanding balance on the PSDI UK Limited line of
credit at September 30, 1997 and 1996.
M. SUPPLEMENTAL CASH FLOW DISCLOSURES:
Cash paid for interest and taxes were as follows:
Year Ended September 30,
---------------------------------
(in thousands) 1997 1996 1995
------ ------ ------
Interest.............................................. $ 24 $ 38 $ 49
Income taxes.......................................... 2,856 6,175 3,393
Acquisitions of businesses were as follows:
Year Ended September 30,
---------------------------------
(in thousands) 1997 1996 1995
------ ------ ------
Fair value of assets acquired......................... -- $ 2,729 $ --
Fair value of liabilities assumed..................... -- 892 --
------ -------- -----
Net cash payments..................................... -- $ 1,837 --
------ -------- -----
54
56
PROJECT SOFTWARE & DEVELOPMENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
N. GEOGRAPHIC DATA AND MAJOR CUSTOMERS:
A summary of the Company's operations by geographical area was as follows:
Year Ended September 30,
-------------------------------------------------
(in thousands) 1997 1996 1995
-------- -------- --------
Revenues:
The Americas
US ....................... $ 54,348 $ 43,595 $ 31,032
Canada ................... 5,121 2,089 1,615
Export sales ............. 3,906 3,091 2,307
Intercompany revenues .... 8,291 8,676 5,878
-------- -------- --------
$ 63,375 $ 57,451 $ 40,832
Europe ................... 28,063 20,224 13,138
Asia/Pacific ............. 5,262 4,330 2,280
Consolidating eliminations (8,291) (8,676) (5,878)
-------- -------- --------
$ 96,700 $ 73,329 $ 50,372
-------- -------- --------
Income from operations:
US ........................... 15,030 13,671 7,338
Canada ....................... 65 56 361
Europe ....................... 998 756 659
Asia/Pacific ................. 178 147 19
Consolidating eliminations ... -- (24) 61
-------- -------- --------
$ 16,271 $ 14,606 $ 8,438
-------- -------- --------
Cash and cash equivalents:
US ........................... 17,579 3,657 6,764
Canada ....................... 641 151 483
Europe ....................... 6,929 4,846 1,747
Asia/Pacific ................. 815 443 352
-------- -------- --------
$ 25,964 $ 9,097 $ 9,346
-------- -------- --------
Accounts receivable, net:
US ........................... 14,755 13,940 8,939
Canada ....................... 111 498 414
Europe ....................... 6,945 10,207 4,002
Asia/Pacific ................. 2,210 2,385 567
-------- -------- --------
$ 24,021 $ 27,030 $ 13,922
-------- -------- --------
55
57
PROJECT SOFTWARE & DEVELOPMENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
Identifiable assets:
US ........................... 79,733 60,979 56,593
Canada ....................... 782 662 922
Europe ....................... 17,606 18,828 6,398
Asia/Pacific ................. 4,118 3,005 1,045
Consolidated eliminations .... -- 2 2
-------- -------- --------
$102,239 $ 83,476 $ 64,960
-------- -------- --------
The Company operates in one business segment: software business
applications. The Company has subsidiaries in foreign countries which sell the
Company's products and services in their respective geographic areas from which
the sales are made. Intercompany revenues primarily represent shipments of
software to international subsidiaries and are eliminated from consolidated
revenues. Income (loss) from operations excludes interest income, interest
expense, provision for income taxes and transaction gains and losses.
No single customer accounted for 10% or more of total revenues in the years
ended September 30, 1997, 1996, and 1995.
O. RELATED PARTY TRANSACTIONS:
The Company leases its corporate headquarters pursuant to a 13 year lease
which expires on December 31, 1997, from a partnership in which the Founder and
Director of the Company has a 1.69% limited partnership interest. Rent payments
to the partnership for 1997, 1996, and 1995 totaled $1,510,000, $1,650,000 and
$1,480,000, respectively.
56
58
PROJECT SOFTWARE & DEVELOPMENT, INC.
SCHEDULE VIII - VALUATION AND QUALIFYING ACCOUNTS
COL. A COL. B COL. C COL. D COL. E
------ ------ ----------------------------- ------ ------
ADDITIONS
-----------------------------
BALANCE AT CHARGED TO BALANCE
BEGINNING COSTS AND CHARGED TO END OF
OF PERIOD EXPENSES OTHER ACCOUNTS DEDUCTIONS PERIOD
---------- ---------- -------------- ---------- --------
YEAR ENDED SEPTEMBER 30, 1997 $1,954,000 $4,383,185 $4,050,719 $2,286,574
Allowance for doubtful accounts
YEAR ENDED SEPTEMBER 30, 1996 $1,346,000 $1,040,000 $ 432,000 $1,954,000
Allowance for doubtful accounts
YEAR ENDED SEPTEMBER 30, 1995
Allowance for doubtful accounts $ 854,000 $1,409,000 $ 917,000 $1,346,000
59
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, commission File No. 0-23852) and incorporated
herein by reference)
4.1 Specimen certificate for the Common Stock of the Company (included as
Exhibit 4.1 to the Company's Registration Statement on Form S-1,
Registration No. 33-76420, and incorporated herein by reference)
4.2 Article 4B of the Amended and Restated Articles of Organization of the
Company (included as Exhibit 4.1 to the Company's Registration
Statement on Form S-1, Registration No. 33-76420, and incorporated
herein by reference)
9.1 1996 Daniels Voting Trust Agreement dated August 19, 1996 among Susan
H. Daniels, Robert L. Daniels and Robert L. Daniels, as Trustee
(included as Exhibit 9.1 to the Company's Annual Report on Form 10-K
for the fiscal year ended September 30, 1996, and incorporated herein
by reference)
10.1 1997 Executive Bonus Plan (included as Exhibit 10.1 to the Company's
Quarterly Report on Form 10-Q for the quarter ended December 31, 1996,
Commission File No. 0-23852 and incorporated herein by reference)
10.2 Amended and Restated 1994 Incentive and Nonqualified Stock Option Plan
10.3 Offer letter by and between the Company and David M. Sample dated
January 30, 1997 (included as Exhibit 10.1 to the Company's Current
Report on Form 8-K dated February 26, 1997, File No. 0-23852, and
incorporated herein by reference)
10.4 1994 Employee Stock Purchase Plan
10.5 Agreement and Plan of Merger, dated as of March 1, 1996, by and among
the Company, Toolbox Acquisition Corp., Maintenance Automation
Corporation, Johnson Controls, Inc., Eli G. Katz, Phyllis S. Katz,
Mitchell B. Knecht, Heidi D. Knecht, Nicholas E. Meola, Naomi R. Meola,
Johnson Controls, Inc. and Eli G. Katz, as agent (included
60
as Exhibit 10.4 to the Company's Quarterly Report on Form 10-Q for the
quarter ended March 31, 1996, File No. 0-23852, and incorporated herein
by reference)
10.6 Escrow Agreement, dated as of March 1, 1996, by and among the Company,
Toolbox Acquisition Corp., Maintenance Automation Corporation, Johnson
Controls, Inc., Eli G. Katz, Phyllis S. Katz, Mitchell B. Knecht, Heidi
D. Knecht, Nicholas E. Meola, Naomi R. Meola, Johnson Controls, Inc.
and Eli G. Katz, as agent (included as Exhibit 10.5 to the Company's
Quarterly Report on Form 10-Q for the quarter ended March 31, 1996,
File No. 0-23852, and incorporated herein by reference)
10.7 Registration Rights Agreement, dated as of March 1, 1996, by and among
the Company, Toolbox Acquisition Corp., Maintenance Automation
Corporation, Johnson Controls, Inc., Eli G. Katz, Phyllis S. Katz,
Mitchell B. Knecht, Heidi D. Knecht, Nicholas E. Meola, Naomi R. Meola,
Johnson Controls, Inc. and Eli G. Katz, as agent (included as Exhibit
10.6 to the Company's Quarterly Report on Form 10-Q for the quarter
ended March 31, 1996, File No. 0-23852, and incorporated herein by
reference)
10.8 Form of PSDI 1994 Authorized Value Added Reseller Agreement (included
as Exhibit 10.22 to the Company's Registration Statement on Form S-1,
Registration No. 33-76420, and incorporated herein by reference)
11.1 Statement re computation of per share earnings
21.1 Subsidiaries of the Company
23.1 Consent of Coopers & Lybrand L.L.P.
27.1 Financial Data Schedule
99. Certain Factors - Certain factors concerning the Company dated December
15, 1997 concerning certain cautionary statements of the Company to be
taken into account in conjunction with the consideration and review of
the Company's publicly-disseminated documents and oral statements
(including oral statements made by others on behalf of the Company)
that include forward-looking information.