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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 1998
(mark one)
|X| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
___ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES AND
EXCHANGE ACT OF 1934
For the transition period from _______________ to __________________
Commission File Number 0-23852
PROJECT SOFTWARE & DEVELOPMENT, INC.
(Exact name of registrant as specified in its charter)
MASSACHUSETTS 04-2448516
(State or other jurisdiction (I.R.S employer
incorporation or organization) identification number)
100 CROSBY DRIVE, BEDFORD MASSACHUSETTS 01730
(Address of principal executive offices, including zip code)
(formerly at 20 University Road
Cambridge, MA. 02138)
(781) 280-2000
(Registrant's telephone number, including area code)
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes |X| No
Number of shares outstanding of the Registrant's common stock as of the latest
practicable date: 9,955,089 shares of common stock, $.01 par value per share, as
of April 30, 1998.
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PROJECT SOFTWARE & DEVELOPMENT, INC.
10-Q INDEX
PAGE
- ----
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS PAGE
Consolidated Balance Sheets (unaudited) as of March 3
31, 1998 and September 30, 1997.
Consolidated Statements of Operations (unaudited) 4
for the three and six months ended March 31, 1998
and 1997.
Consolidated Statements of Cash Flows (unaudited) 5
for the three and six months ended March 31, 1998
and 1997.
Notes to Consolidated Financial Statements 6
(unaudited).
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL 10
CONDITION AND RESULTS OF OPERATIONS
PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K 29
SIGNATURE 31
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PROJECT SOFTWARE & DEVELOPMENT, INC.
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
ASSETS MARCH 31, SEPTEMBER 30,
1998 1997
---- ----
(IN THOUSANDS,EXCEPT SHARE DATA)
Current assets:
Cash and cash equivalents $ 17,285 $ 25,964
Marketable securities 38,692 38,299
Accounts receivable, trade, less allowance
for doubtful accounts of $2,200 at March 31,
1998 and $2,286 at September 30, 1997, respectively 25,761 24,021
Prepaid expenses 2,861 1,877
Other assets 1,045 1,244
Deferred income taxes 1,851 1,806
--------- ---------
Total current assets 87,495 93,211
--------- ---------
Property and equipment, net 9,432 7,322
Computer software costs, net 518 --
Goodwill, net 1,175 1,447
Deferred income taxes 316 214
Other assets 51 45
--------- ---------
Total assets $ 98,987 $ 102,239
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 10,064 $ 9,809
Accrued compensation 2,951 4,494
Income taxes payable 2,294 3,678
Deferred revenue 11,083 9,750
Deferred income taxes 213 394
--------- ---------
Total current liabilities 26,605 28,125
--------- ---------
Deferred income taxes 436 12
Deferred rent 63 12
Deferred revenue 128 120
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 9,935,484 and 9,856,474 for March 31,
1998 and September 30, 1997, respectively 99 99
Additional paid-in capital 49,026 48,163
Retained earnings 23,630 26,108
Cumulative translation adjustment (825) (629)
Net unrealized (loss)/gain on marketable securities (175) 229
--------- ---------
Total stockholders' equity 71,755 73,970
--------- ---------
Total liabilities and stockholders' equity $ 98,987 $ 102,239
========= =========
The accompanying notes are an integral part
of the consolidated financial statements.
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PROJECT SOFTWARE & DEVELOPMENT, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
THREE MONTHS ENDED SIX MONTHS ENDED
MARCH 31, MARCH 31,
---------------------------- -----------------------------
1998 1997 1998 1997
---- ---- ---- ----
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
Revenues:
Software $ 13,252 $ 11,215 $ 24,395 $ 24,888
Support and services 14,987 10,971 28,954 20,677
------------ ------------ ------------ ------------
Total revenues 28,239 22,186 53,349 45,565
------------ ------------ ------------ ------------
Cost of revenues:
Software 1,225 618 1,829 1,251
Support and services 8,034 5,894 14,620 11,182
------------ ------------ ------------ ------------
Total cost of revenues 9,259 6,512 16,449 12,433
------------ ------------ ------------ ------------
Gross margin 18,980 15,674 36,900 33,132
Operating expenses:
Sales and marketing 9,090 8,232 17,171 15,571
Product development 3,085 2,883 5,769 5,374
General and administrative 2,355 2,437 4,695 4,959
Charge for purchased in-process 9,172 - - - 9,172 - - -
product development
------------ ------------ ------------ ------------
Total operating expenses 23,702 13,552 36,807 25,904
------------ ------------ ------------ ------------
(Loss)/income from operations (4,722) 2,122 93 7,228
Interest income (expense), net 665 487 1,402 946
Other income (expense), net (248) (199) (236) (141)
------------ ------------ ------------ ------------
(Loss)/income before income taxes (4,305) 2,410 1,259 8,033
Provision for income taxes 1,678 874 3,737 2,968
------------ ------------ ------------ ------------
Net (loss)/income $ (5,983) $ 1,536 $ (2,478) $ 5,065
============ ============ ============ ============
Net (loss)/income per share, basic $ (0.60) $ 0.16 $ (0.25) $ 0.52
------------ ------------ ------------ ------------
Net (loss)/income per share, diluted $ (0.60) $ 0.15 $ (0.25) $ 0.50
------------ ------------ ------------ ------------
Shares used to calculate net (loss)/income per share
Basic 9,911,496 9,767,352 9,888,015 9,737,837
Diluted 9,911,496 10,133,795 9,888,015 10,130,841
Supplemental Data: (1)
Adjusted operating income $ 4,450 $ 2,122 $ 9,265 $ 7,228
Adjusted net income applicable to $ 3,190 $ 1,536 $ 6,694 $ 5,065
shareholders
Shares used to calculate net income 10,067,707 10,133,795 10,055,016 10,130,841
per share, diluted
Adjusted net income per share, diluted $ 0.32 $ 0.15 $ 0.67 $ 0.50
(1) Excludes charge for purchased in-process product development.
The accompanying notes are an integral part
of the consolidated financial statements.
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PROJECT SOFTWARE & DEVELOPMENT, INC
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
SIX MONTHS ENDED SIX MONTHS ENDED
MARCH 31, MARCH 31,
1998 1997
----- ----
(IN THOUSANDS)
Cash flows from operating activities:
Net income $ (2,478) $ 5,065
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 1,941 1,680
Loss on sale and disposal of property
and equipment 6 28
Amortization of discount on marketable securities 55 794
Deferred rent 51 (34)
Deferred taxes 88 (407)
Charge for purchased in-process product development 9,173 --
Changes in operating assets and liabilities,
net of effect of acquisitions:
Accounts receivable (1,543) 3,713
Prepaid expenses (967) (64)
Other assets 184 (740)
Accounts payable (1,006) 533
Accrued compensation (1,513) (2,330)
Income taxes payable (1,370) 1,198
Deferred revenue 1,424 306
--------- ---------
Net cash provided by/(used in) operating activities 4,045 9,742
--------- ---------
Cash flows from investing activities:
Acquisitions of business, net of cash (7,464) --
Acquisitions of property and equipment (2,800) (2,345)
Additions to computer software costs (891) (70)
Purchase of marketable securities (59,518) (48,278)
Sale of marketable securities 58,666 47,006
--------- ---------
Net cash used in investing activities (12,007) (3,687)
--------- ---------
Cash flows from financing activities:
Payments on bank loans (471) --
Payments of debenture (1,056) --
Proceeds from exercise of stock options 863 1,380
including related tax benefit
--------- ---------
Net cash (used in)/provided by financing activities (664) 1,380
--------- ---------
Effect of exchange rate changes on cash (53) (196)
--------- ---------
Net (decrease) increase in cash and cash equivalents (8,679) 7,239
Cash and cash equivalents, beginning of period 25,964 9,097
--------- ---------
Cash and cash equivalents, end of period $ 17,285 $ 16,336
========= =========
The accompanying notes are an integral part
of the consolidated financial statements.
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PROJECT SOFTWARE & DEVELOPMENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
A. BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements include the
accounts of Project Software & Development, Inc. (PSDI) and its majority-owned
subsidiaries (collectively, the "Company"), as of March 31, 1998 and have been
prepared by the Company in accordance with generally accepted accounting
principles for interim reporting and with the instructions to Form 10-Q and
Article 10 of Regulation S-X. All intercompany accounts and transactions have
been eliminated. In the opinion of management, the accompanying unaudited
consolidated financial statements contain all adjustments, consisting only of
those of a normal recurring nature, necessary for a fair presentation of the
Company's financial position, results of operations and cash flows at the dates
and for the periods indicated. The results of operations for the periods
presented herein are not necessarily indicative of the results of operations to
be expected for the entire fiscal year, which ends on September 30, 1998, or for
any other future period.
These consolidated financial statements should be read in conjunction with the
consolidated financial statements and notes thereto for the year ended September
30, 1997 included in the Company's Annual Report on Form 10-K filed with the
Securities and Exchange Commission on December 29, 1997.
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
B. INCOME PER SHARE
Basic earnings per share is computed by dividing income available to common
shareholders by the weighted average number of common shares outstanding.
Diluted earnings per share is computed by dividing income available to common
shareholders by the weighted average common shares outstanding plus additional
common shares that would have been outstanding if dilutive potential common
shares had been issued. For purposes of this calculation, stock options are
considered common stock equivalents in periods in which they have a dilutive
effect.
Statement of Financial Accounting Standards No. 128, "Earnings Per Share (SFAS
128) replaces APB Opinion No. 15, Earnings Per
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Share. SFAS 128 simplifies the computation of EPS by replacing the presentation
of primary EPS with a presentation of basic EPS. It requires dual presentation
of basic and diluted EPS by entities with complex capital structures. The
Company adopted SFAS 128 per the effective date for the periods ended after
December 15, 1997.
Basic and diluted earnings per share are calculated as follows:
THREE MONTHS ENDED
BASIC EPS 03/31/98 03/31/97
- --------------------------------------------------------------------------------
Net income $(5,982,818) $ 1,535,729
Weighted average common
shares outstanding 9,911,496 9,767,352
Basic income per share $ (0.60) $ 0.16
DILUTED EPS
- --------------------------------------------------------------------------------
Net income $(5,982,818) $ 1,535,729
Weighted average common
shares outstanding 9,911,496 9,767,352
Common stock equivalents (1) 366,443
---------------------------------------------
Total diluted
shares 9,911,496 10,133,795
Diluted income
per share $ (0.60) $ 0.15
SIX MONTHS ENDED
BASIC EPS 03/31/98 03/31/97
- --------------------------------------------------------------------------------
Net income $(2,478,008) $ 5,064,556
Weighted average common
shares outstanding 9,888,015 9,737,837
Basic income per share $ (0.25) $ 0.52
DILUTED EPS
- --------------------------------------------------------------------------------
Net income $(2,478,008) $ 5,064,556
Weighted average common
shares outstanding 9,888,015 9,737,837
Common stock equivalents (1) 393,004
---------------------------------------------
Total diluted
shares 9,888,015 10,130,841
Diluted income
per share $ (0.25) $ 0.50
(1) Common stock equivalents are not included because they are anti-dilutive.
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C. ACCOUNTING STANDARDS
Statement of Financial Accounting Standards No. 130, "Reporting Comprehensive
Income" (SFAS 130) is effective for fiscal years beginning after December 15,
1997. SFAS 130 requires that changes in comprehensive income be shown in a
financial statement that is displayed with the same prominence as other
financial statements. The Company will adopt SFAS 130 in fiscal year ended
September 30, 1999.
Statement of Financial Accounting Standards No. 131, "Disclosures about Segments
of an Enterprise and Related Information" (SFAS 131) is effective for financial
statements for periods beginning after December 15, 1997. This statement will
change the way companies report annual financial statements and requires them to
report selected segment information in their quarterly reports issued to
shareholders. It also requires entity-wide disclosures about the products and
services an entity provides, the material countries in which it holds assets and
reports revenues, and its major customers. The Company will adopt SFAS 131 for
the current fiscal year ended September 30, 1998.
Statement of Financial Accounting Standards No. 132, "Employers' Disclosure
about Pensions and Other Postretirement Benefits" (SFAS 132) is effective for
financial statements for fiscal years beginning after December 15, 1997. SFAS
132 revises employers' disclosures about pension and other postretirement
benefit plans. It does not change the measurement or recognition of those plans.
The Company will adopt SFAS 132 in the fiscal year ended September 30, 1999.
Statement of Position ("SOP") 97-2, "Software Revenue Recognition" was issued in
October 1997 and addresses software revenue recognition matters. The SOP
supersedes SOP 91-1 and is effective for transactions entered into for fiscal
years beginning after December 15, 1997. In March 1998, the adoption date of
certain provisions of SOP No. 97-2 were postponed. Based upon its reading and
interpretation of SOP 97-2 the Company believes its current revenue recognition
policies and practices are materially consistent with the SOP.
D. COMPUTER SOFTWARE COSTS
Internally developed software costs capitalized were $0 and $675,000 for the
three and six months ended March 31, 1998. There were no software costs
capitalized in the three and six months ended March 31, 1997. Amortization
expense was $135,000 and $127,000 for the three months ended March 31, 1998 and
1997, respectively, and $158,000 and $254,000 for the six months ended March 31,
1998 and 1997, respectively. Software costs are
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amortized on a straight-line basis over the estimated useful or market life of
the software (generally, fifteen months).
E. ACQUISITIONS
On February 6, 1998, the Company acquired the stock of A.R.M. Group Inc.,
Ontario, Canada for the sum of $10.3 million in cash, stock and assumed
liabilities. A.R.M. Group Inc. was a privately-held organization that helped
businesses solve maintenance and materials management problems. A.R.M launched
the M|Net solution and emerged as a leader in shared inventory networks over
which distributors, manufacturers and purchasers of Maintenance Repair
Operations (MRO) supplies conduct their business. The Company recorded the
acquisition using the purchase method of accounting with $9.2 million of the
purchase price allocated to in-process product development and charged to the
consolidated statement of operations on March 31, 1998, $452 thousand allocated
to purchased technology, and $657 thousand allocated to tangible assets. The
Company determined that certain aspects of the acquired technology had not
reached technological feasibility and had no alternative future use. The Company
expensed the portion of the purchase price allocable to such in-process product
development at the date of acquisition. The operating results of this acquired
business has been included in the consolidated statement of operations from the
date of acquisition.
F. SUPPLEMENTAL CASH FLOW DISCLOSURES
Cash paid for interest and taxes were as follows:
Six Month Ended
--------------------------
(in thousands) 1998 1997
---- ----
Interest........................................... $ 4 $ 2
Income taxes....................................... 4,113 525
Acquisitions of businesses were as follows:
Six Month Ended
--------------------------
(in thousands) 1998 1997
---- ----
Fair value of assets acquired...................... $10,280 $ --
Fair value of liabilities assumed.................. 2,751 --
Net cash payments.................................. 6,400 --
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
FORWARD-LOOKING STATEMENTS
In addition to historical information this Quarterly Report contains
forward-looking statements. The forward-looking statements are subject to
certain risks and uncertainties that could cause actual results to differ
materially from those reflected in such forward-looking statements. Factors that
might cause such a difference include, but are not limited to, those discussed
in the section entitled "Management's Discussion and Analysis of Financial
Condition and Results of Operations--Factors Affecting Future Performance."
Readers are cautioned not to place undue reliance on these forward-looking
statements, which reflect management's opinions only as of the date hereof. The
Company undertakes no obligation to revise or publicly release the results of
any revision to these forward-looking statements. Readers should carefully
review the risk factors described in other documents of the Company files from
time to time with the Securities and Exchange Commission, including the Annual
Report on Form 10-K for the fiscal year ended September 30, 1997 and the
Quarterly Reports on Form 10-Q filed by the Company in fiscal 1998.
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, training and consulting services and connect fees for on-line
charges to engage in electronic commerce for Maintenance Repair Operations (MRO)
supplies. 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's principal products are its client/server versions of MAXIMO.
Client/server MAXIMO runs on Oracle 7, SQLServer, SYBASE and SQLBase platforms.
The product acquired as a result of the acquisition of Maintenance Automation
Corporation ("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 made MAXIMO 4.0 generally available in March 1998. The release of
MAXIMO 4.0 will combine an open architecture with self-service Java components,
business process workflow, and enhanced safety features. This helps
organizations better manage maintenance operations and prevent equipment
disruptions and down
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time. MAXIMO 4.0 includes safety and compliance features so that companies can
implement in-depth tracking and reporting processes that adhere to mandated
regulatory guidelines.
The Company's other client/server product, P/X is no longer actively sold or
marketed. The Company also no longer actively markets its mainframe and other
project management software products. However, the Company does provide
technical support and other services to the P/X and mainframe installed customer
base.
ACQUISITIONS
On February 6, 1998, the Company acquired the stock of A.R.M. Group Inc.,
Ontario, Canada for the sum of $10.3 million in cash, stock and assumed
liabilities. A.R.M. Group Inc. was a privately-held organization that helped
businesses solve maintenance and materials management problems. A.R.M launched
the M|Net solution and emerged as a leader in shared inventory networks over
which distributors, manufacturers and purchasers of MRO supplies conduct their
business. The Company recorded the acquisition using the purchase method of
accounting with $9.2 million of the purchase price allocated to in-process
product development and charged to the consolidated statement of operations on
March 31, 1998, $452 thousand allocated to purchased technology, and $657
thousand allocated to tangible assets.
RESULTS OF OPERATIONS
THREE MONTHS ENDED MARCH 31, 1998 COMPARED TO THREE MONTHS ENDED MARCH 31, 1997
REVENUES
Three Months CHANGE % Three Months
(in thousands) Ended 03/31/98 Ended 03/31/97
- ----------------------------------------------------------------------------------
Software licenses $13,252 18.2% $11,215
Percentage of total revenues 46.9% 50.5%
Support and services $14,987 36.6% $10,971
Percentage of total revenues 53.1% 49.5%
Total revenues $28,239 27.3% $22,186
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 increased 51.1% to $13.9 million or 49.1% of
total revenues for the three months ended March 31, 1998,
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compared to $9.2 million or 41.5% of total revenues for the three months ended
March 31, 1997.
Revenues from the client/server versions of MAXIMO increased 30.2% to $26.3
million or 93.0% of total revenues for the three months ended March 31, 1998
compared to $20.2 million or 91.2% of total revenues for the three months ended
March 31, 1997. The increase in MAXIMO client/server software licenses for the
quarter is attributable in part to an increase in the number of licenses sold
and the general availability of MAXIMO Release 4.0.
Revenues from MAXIMO ADvantage decreased 1.2% or 4.3% of total revenues for the
three months ended March 31, 1998 compared to 5.5% of total revenues for the
three months ended March 31, 1997.
Revenues from licenses of P/X and from related support and services decreased
24.4% to $384 thousand or 1.4% of total revenues for the three months ended
March 31, 1998 compared to $508 thousand or 2.3% of total revenues for the three
months ended March 31, 1997. The Company no longer focuses on selling and
marketing this product.
The Company's new electronic commerce product, M|Net, acquired as a result of
the A.R.M. Group Inc. acquisition on February 6, 1998, recognized revenues of
$237 thousand for the quarter.
The increase in support and services revenues is attributable to increases in
both MAXIMO support contracts and consulting services. Consulting services
continue to be a larger percentage of total revenues due to additional service
demands in connection with large scale implementations of the Company's MAXIMO
client/server product. For the period, over 90% of all MAXIMO client/server
customers have renewed their maintenance contracts.
COST OF REVENUES
Three Months CHANGE % Three Months
(in thousands) Ended 03/31/98 Ended 03/31/97
- -------------------------------------------------------------------------------------------
Software licenses $1,225 98.2% $618
Percentage of software licenses 9.2% 5.5%
Support and services $8,034 36.3% $5,894
Percentage of support and services 53.6% 53.7%
Total cost of revenues $9,259 42.2% $6,512
Percentage of total revenues 32.8% 29.4%
Cost of software revenues consists of royalties paid to vendors of third party
software, the amortization of capitalized software, the cost of software product
packaging and media, and
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certain employee costs related to software duplication, packaging and shipping.
The increase in the cost of software revenues is due primarily to royalties paid
to third party vendors for software and costs for third party software products.
Cost of support and services consists primarily of personnel costs for employees
and the related costs of benefits and facilities. The increase in the cost of
support and services is attributable to the hiring of employees and the
extensive use of third-party consultants contracted to perform services for the
Company. The Company utilizes the services of these higher cost third party
consultants in order to meet the services backlog. The cost of the services
component as a percentage of services revenues increased to 74.0% from 68.7% for
the three months ended March 31, 1998 and 1997, respectively. The increase is
partially attributable to the loss of billable days associated with a global
services meeting for MAXIMO Release 4.0 training and the costs associated with
the meeting, which will not recur this fiscal year.(1)
OPERATING EXPENSES
Three Months CHANGE % Three Months
(in thousands) Ended 03/31/98 Ended 03/31/97
- --------------------------------------------------------------------------------------------
Sales and marketing $9,090 10.4 % $8,232
Percentage of total revenues 32.2% 37.1%
Product development $3,085 7.0 % $2,883
Percentage of total revenues 10.9% 13.0%
General and administrative $2,355 (3.4)% $2,437
Percentage of total revenues 8.3% 11.0%
In-Process Product Development $9,172 N/A
Percentage of total revenues 32.5% 100% N/A
The increase in sales and marketing expenses in the three months ended March 31,
1998 is primarily due to increases in sales, sales support and marketing
personnel and travel and lodging expenses due partially to price increases
imposed by the airline and travel industries. The comparative quarters expense
levels were a larger percentage of revenues as they were established for
budgeted revenue levels that were not achieved.
The increase in product development expenses in the three months ended March 31,
1998 is primarily due to the engagement of additional employees and third party
consultants who worked on the new client/server release of MAXIMO. The Company's
new release of MAXIMO 4.0 was generally made available in March 1998.
- ----------
(1) Forward looking statement
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There were no internal software costs capitalized in the three months ended
March 31, 1998 and 1997. The comparative quarters expense levels were a larger
percentage of revenues as they were established for budgeted revenue levels that
were not achieved. The Company will continue to make investments in a new MAXIMO
Java-based component architecture application.(1) The Company will also expend
development dollars on its M|Net electronic commerce product for MRO supply
chain management.(1) The Company will continue to invest in client/server MAXIMO
including application software products developed by Oracle, Peoplesoft and
SAP.(1) Additionally, a new version of client/server MAXIMO will be made
available later in the year that will support the European Monetary Policy.(1)
The decrease in general and administrative expenses for the three months ended
March 31, 1998 is primarily due to a decrease in bad debt expenses, as adequate
reserves already exist. Partially offsetting the reduction of bad debt expenses
in the three months ended March 31, 1998 was an increase in legal fees for
counsel for outside directors, proxy statement review and preparation, and
growth in international operations.
In connection with the A.R.M. Group Inc. acquisition, the Company acquired
in-process product development of $9.2 million. The Company determined that
certain aspects of the acquired technology had not reached technological
feasibility and had no alternative future use. The Company reached this
conclusion based on information prepared by a third party. The Company expensed
the portion of the purchase price allocable to in-process product development at
the date of acquisition.
NON-OPERATING EXPENSES
Three Months CHANGE % Three Months
(in thousands) Ended 03/31/98 Ended 03/31/97
- ---------------------------------------------------------------------------------------------------------
Interest income(expense),net $ 665 36.6 % $ 487
Other income (expense),net $(248) (24.6)% $(199)
The increase in interest income for the three months ended March 31, 1998 is
attributable to interest earned on increased cash equivalents from cash flow
generated from operations including accounts receivable collections. The days
sales outstanding were improved to 82 days from 96 days at March 31, 1998 and
March 31, 1997, respectively. The Company has established a target of 90 to 95
days for its days sales outstanding.(1) The increase in other expense is
primarily attributable to accrued translation losses on certain Asian
receivables. Given the nature of the
- ----------
(1) Forward looking statement
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Asian economies, further losses may be realized in the future if the currencies
do not stabilize in relation to the dollar. (1)
PROVISION FOR INCOME TAXES
The Company's effective tax rate before a one time non-deductible charge for
purchased in-process product development was 34.4% for the three months ended
March 31, 1998. The Company's effective tax rate for the three months ended
March 31, 1997 was 36.3%. The Company anticipates that its 1998 effective
quarterly rates will not exceed 37%. (1)
SIX MONTHS ENDED MARCH 31, 1998 COMPARED TO SIX MONTHS ENDED MARCH 31, 1997
REVENUES
Six Months CHANGE % Six Months
(in thousands) Ended 03/31/98 Ended 03/31/97
- ----------------------------------------------------------------------------------------------
Software licenses $24,395 (2.0)% $24,888
Percentage of total revenues 45.7% 54.6%
Support and services $28,954 40.0 % $20,677
Percentage of total revenues 54.3% 45.4%
Total revenues $53,349 17.1 % $45,565
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 increased 27.7% to $24.9 million or 47% of total
revenues for the six months ended March 31, 1998, compared to $19.5 million or
42.8% of total revenues for the six months ended March 31, 1997.
Revenues from the client/server versions of MAXIMO increased 19.9% to $49.5
million or 92.9% of total revenues for the six months ended March 31, 1998
compared to $41.3 million or 90.6% of total revenues for the six months ended
March 31, 1997.
Revenues from MAXIMO Advantage decreased 1.0% or 4.5% of total revenues for the
six months ended March 31, 1998 compared or 5.4% of total revenues for the six
months ended March 31, 1997.
Revenues from licenses of P/X and from related support and services decreased
31.7% to $888 thousand or 1.7% of total revenues for the six months ended March
31, 1998 compared to $1.3 million or 2.9% of total revenues for the six months
ended March
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(1) Forward looking statement
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31, 1997. The Company no longer focuses on selling and marketing this product.
The decrease in software license revenues is attributable to the lengthening of
the sales cycle experienced by the Company with respect to its client/server
product during the first quarter of 1998. The Company believes that the
expansion or lengthening of the sales cycle can be attributed to a number of
factors, including but not limited to, the timing of new product releases by the
Company and its competitors, which has resulted in more demonstrations and
competitive analysis by potential customers and the linkage by customers of the
selection of a maintenance management system with the selection of an ERP
system. Another factor that may have contributed to the decrease in software
license revenues is that the Company was not adequately focused on the lower,
mid-price segment of the client/server market. Lastly, the Company believes that
a Schedule 13D filed by one of the directors of the Company concerning the
potential sale of the Company may have also adversely affected sales for the
period. There can be no assurances that these factors will not continue to have
adverse effects on software license revenue. (1)
The increase in support and services revenues is attributable to increases in
both MAXIMO support contracts and consulting services. Consulting services
continue to be a larger percentage of total revenues due to additional service
demands in connection with large scale implementations of the Company's MAXIMO
client/server product.
COST OF REVENUES
Six Months CHANGE % Six Months
(in thousands) Ended 03/31/98 Ended 03/31/97
- ----------------------------------------------------------------------------------------------------------
Software licenses $1,829 46.2% $1,251
Percentage of software licenses 7.5% 5.0%
Support and services $14,620 30.7% $11,182
Percentage of support and services 50.5% 54.1%
Total cost of revenues $16,449 32.3% $12,433
Percentage of total revenues 30.8% 27.3%
Cost of software revenues consists of royalties paid to vendors of third party
software, the amortization of capitalized software, the cost of software product
packaging and media, and certain employee costs related to software duplication,
packaging and shipping. The increase in the cost of software revenues is due
primarily to royalties paid to third party vendors for software and costs for
third party software products.
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(1) Forward looking statement
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Cost of support and services consists primarily of personnel costs for employees
and the related costs of benefits and facilities. The increase in the cost of
support and services is attributable to the hiring of employees and the
extensive use of third-party consultants contracted to perform services for the
Company. The Company utilizes the services of these higher cost third party
consultants in order to meet the services backlog.
OPERATING EXPENSES
Six Months CHANGE % Six Months
(in thousands) Ended 03/31/98 Ended 03/31/97
- --------------------------------------------------------------------------------------------
Sales and marketing $17,171 10.3 % $15,571
Percentage of total revenues 32.2% 34.2%
Product development $5,769 7.4 % $5,374
Percentage of total revenues 10.8% 11.8%
General and administrative $4,695 (5.3)% $4,959
Percentage of total revenues 8.8% 10.9%
In-Process Product Development $9,172 N/A
Percentage of total revenues 17.2% 100% N/A
The increase in sales and marketing expenses in the six months ended March 31,
1998 is primarily due to increases in the number of sales, sales support and
marketing personnel and price increases imposed by the airline and travel
industries. The comparative quarters expense levels were a larger percentage of
revenues as they were established for budgeted revenue levels that were not
achieved.
The increase in product development expenses in the six months ended March 31,
1998 is primarily due to the engagement of additional employees and third party
consultants who worked on the new client/server releases of MAXIMO. The
Company's new release of MAXIMO 4.0 was generally made available in March 1998.
Software costs capitalized in the six months ended March 31, 1998 and 1997 were
$675,000 and $0, respectively. The comparative quarters expense levels were a
larger percentage of revenues as they were established for budgeted revenue
levels that were not achieved. The Company will continue to make investments in
a new MAXIMO Java-based component architecture application.(1) The Company will
also expend development dollars on its M|Net electronic commerce product for MRO
supply chain management.(1) The Company will continue to invest in client/server
MAXIMO including application software products developed by Oracle, Peoplesoft
and SAP.(1) Additionally, a new version of client/server MAXIMO will be made
available later in the year that will support the European Monetary Policy.(1)
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(1) Forward looking statement
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The decrease in general and administrative expenses for the six months ended
March 31, 1998 is primarily due to a decrease in bad debt expenses, as adequate
reserves already exist. Partially offsetting the reduction of bad debt expenses
in the six months ended March 31, 1998 was an increase in legal fees for counsel
for outside directors, proxy statement review and preparation, and growth in
international operations.
In connection with the A.R.M. Group Inc. acquisition, the Company acquired
in-process product development of $9.2 million. The Company determined that
certain aspects of the acquired technology had not reached technological
feasibility and had no alternative future use. The Company reached this
conclusion based on information prepared by a third party. The Company expensed
the portion of the purchase price allocable to such in-process product
development at the date of acquisition.
NON-OPERATING EXPENSES
Six Months CHANGE % Six Months Ended
(in thousands) Ended 03/31/98 03/31/97
- ----------------------------------------------------------------------------------------
Interest income(expense),net $1,402 48.2% $946
Other income (expense),net $(236) (67.4)% $(141)
The increase in interest income for the six months ended March 31, 1998 is
attributable to interest earned on increased cash equivalents from cash flow
generated from operations including accounts receivable collections. The
increase in other expense is primarily attributable to accrued translation
losses on certain Asian receivables. Given the nature of the Asian economies,
further losses may be realized in the future if the currencies do not stabilize
in relation to the dollar. (1)
PROVISION FOR INCOME TAXES
The Company's effective tax rate before a one time non-deductible charge for
purchased in-process product development was 35.8% for the six months ended
March 31, 1998. The Company's effective tax rate for the six months ended March
31, 1997 was 36.9%. The income tax expense provided during 1998 reflects the
nondeductible nature of certain acquisition related charges of the A.R.M. Group
Inc. The Company anticipates that its 1998 effective annual rates will not
exceed 37%. (1)
LIQUIDITY AND CAPITAL RESOURCES
As of March 31, 1998, the Company had cash and cash equivalents and marketable
securities of approximately $56 million and
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(1) Forward looking statement
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working capital of $60.9 million. Cash generated by operations for the six
months ended March 31, 1998 was $4.1 million, primarily attributable to the
purchase of in-process product development in connection with the A.R.M. Group
acquisition. Also contributing to the use of cash by operations was an increase
in receivables as a result of the increase in revenues, bonuses paid to
employees, income taxes paid, payments made to trade vendors, and prepaid
royalties paid to third party software vendors. Also offsetting the use of cash
by operating activities is cash generated by depreciation and deferred
maintenance revenues. Cash used in investing activities totaled $2.8 million,
primarily for improvements related to the relocation of the Company's corporate
headquarters in December 1997 and the purchase of marketable securities. Cash
used in financing activities was $664 thousand, primarily for payment of bank
loans and debentures assumed from the acquisition of the ARM Group, offset by
proceeds received from exercises of employee stock options.
As of March 31, 1998, the Company's principal commitments consisted primarily of
an office lease for its headquarters. The Company leases its facilities and
certain equipment under non-cancelable operating lease agreements that expire at
various dates through November 2003. The Company relocated its corporate
headquarters in December 1997. Under the terms of the lease agreement, upon
termination of the lease the Company has the right to extend the lease for an
additional six year term for an agreed upon fixed cost. The Company's
expenditures for construction and leasehold improvements in connection with the
relocation were $2.2 million.
The Company believes that its current cash balances combined with cash flow from
operations will be sufficient to meet its working capital and capital
expenditure requirements through at least September 30, 1999. (1)
YEAR 2000
The Year 2000 issue is the result of computer programs being written using two
digits rather than four to define the applicable year. Certain computer programs
that have date sensitive software and use two digits only may recognize a date
using "00" as the year 1900 rather than the year 2000.
The Company has made a recent assessment of its internal business information
systems and estimate that the costs associated with preparing internal systems
for the Year 2000 should not exceed $100,000.(1) The Company also utilizes other
third party software products, network equipment and telecommunications
products. The Company is currently taking steps to address the impact, if any,
of the Year 2000 issue relating to third party products, failure of any critical
technology components to operate properly in the
- ----------
(1) Forward looking statement
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Year 2000 may have an adverse impact on business operations or require the
Company to incur unanticipated expenses to remedy any problems.(1)
The Company warrants that its current versions of MAXIMO and P/X client/server
products and MAXIMO ADvantage are year 2000 enabled. The Company's other product
Project 2 is no longer sold but the Company does offer support for this product.
The Company will release an upgrade of this product that is year 2000 enabled.
The Company estimates that the cost to upgrade this product and any other older
versions of its products will not have a material adverse effect on its results
of operations or financial condition.(1)
FACTORS AFFECTING FUTURE PERFORMANCE
The nature of forward-looking information is that such information involves
assumptions, risks and uncertainties. Certain public documents of the Company
and oral statements made by authorized officers, directors, employees, agents
and representatives of the Company, acting on its behalf, may include
forward-looking information which will be influenced by the following and other
assumptions, risks and uncertainties. Forward-looking information requires
management of the Company to make assumptions, estimates, forecasts and
projections regarding the Company's future results as well as the future
effectiveness of the Company's strategic plans and future operational decisions.
Forward-looking statements made by or on behalf of the Company are subject to
the risk that the forecasts, projections, and expectations of management, or
assumptions underlying such forecasts, projections and expectations, may become
inaccurate. Accordingly, actual results and the Company's implementation of its
plans and operations may differ materially from forward-looking statements made
by or on behalf of the Company. The following discussion identifies certain
important factors that could affect the Company's actual results and actions and
could cause such results and actions to differ materially from any
forward-looking statements made by or on behalf of the Company that related to
such results and actions. Other factors, which are not identified herein, could
also have such an effect.
GENERAL ECONOMIC RISK FACTORS
To date, inflation has not had a material impact on the Company's financial
results. There can be no assurance, however, that inflation will not adversely
affect the Company's financial results in the future.
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(1) Forward looking statement
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RAPID TECHNOLOGICAL CHANGE
The computer software industry is characterized by rapid technological advances,
changes in customer requirements and frequent product introductions and
enhancements. The Company's success depends upon its ability to continue to
enhance its current products and to develop and introduce new products that keep
pace with technological developments, respond to evolving customer requirements
and achieve market acceptance. In particular, the Company believes that it must
continue to respond quickly to users' needs for broad functionality and to
advances in hardware and operating systems. Any failure by the Company to
anticipate or respond adequately to technological developments and customer
requirements, or any significant delays in product development or introduction,
could result in a loss of competitiveness and revenues. There can be no
assurance that the Company will be successful in developing and marketing new
products or product enhancements, or that the Company will not experience
significant delays in developing such new products or product enhancements,
which delays could have a material adverse effect on the Company's results of
operations. In addition, there can be no assurance that new products and product
enhancements developed by the Company will achieve market acceptance.
DEPENDENCE ON MAXIMO
The Company's revenues are primarily attributable to the licensing of its MAXIMO
client/server product, introduced in 1991, and to related services and support.
Revenues from licenses of MAXIMO and related services and support accounted for
approximately 96.3% of the Company's total revenues in fiscal 1997. The
Company's financial performance in fiscal 1998 will depend on continued market
acceptance of MAXIMO. The Company believes that continued market acceptance of
MAXIMO will largely depend on its ability to enhance and broaden the
capabilities of MAXIMO, by, among other things, developing additional
application modules for MAXIMO, versions of MAXIMO and by developing and
incorporating into the MAXIMO product technologies that are emerging in
connection with the Internet. Any factor adversely affecting sales of MAXIMO,
such as delays in development, significant software flaws, incompatibility with
significant hardware platforms, operating systems or databases, increased
competition or negative evaluations of the products, would have a material
adverse effect on the Company's business and financial results.
The Company made MAXIMO Release 4.0 generally available in March 1998. The
failure of MAXIMO 4.0 to achieve market acceptance would have a material adverse
effect on the Company's business and financial results.
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FLUCTUATIONS IN QUARTERLY OPERATING RESULTS; SEASONALITY
The Company has experienced, and may in the future experience, significant
period-to-period fluctuations in revenues and operating results. The Company's
revenues and income from operations typically grow at a lower rate or decline in
the first quarter of each fiscal year, compared to the fourth quarter of the
preceding fiscal year. In addition, revenues are typically higher in the fourth
quarter than in other quarters of the year. The Company believes that these
quarterly patterns are partly attributable to the Company's sales commission
policies, which compensate members of the Company's direct sales force for
meeting or exceeding annual quotas. In addition, the Company's quarterly
revenues and operating results have fluctuated historically, due to the number
and timing of product introductions and enhancements, the budgeting and
purchasing cycles of customers, the timing of product shipments and the timing
of marketing and product development expenditures. The Company typically
realizes more than 60% of its revenue from sales of software licenses in the
last two weeks of a quarter, frequently even in the last days of a quarter.
Large software license contracts may have a significant impact on revenues for
any quarter and could therefore result in significant fluctuations in quarterly
revenues and operating results. Accordingly, the Company believes that
period-to-period comparisons of its results of operations are not necessarily
meaningful and should not be relied upon as an indication of future performance.
The Company generally ships its products upon receipt of orders and maintains no
significant backlog. As a result, revenues from license fees in any quarter are
substantially dependent on orders booked and shipped in that quarter. A delay in
or loss of orders can cause significant variations in operating results. A
significant portion of the Company's operating expenses are fixed in the short
term, and planned expenditures are based primarily on sales forecasts.
Accordingly, if revenues do not meet the Company's expectations in any given
quarter, operating results may be materially adversely affected.
COMPETITION
The market for applications software is intensely competitive and rapidly
changing. While the Company believes that it has competed effectively to date,
competition in its industry is likely to intensify as current competitors expand
their product lines and new companies enter the market. To remain successful in
the future, the Company must respond promptly and effectively to the challenges
of technological change, evolving standards and its competitors' innovations by
continually enhancing its own product, services and support offerings, as well
as its marketing programs. There can be no assurance that the Company will
continue to be able to compete successfully in the future.
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The market for asset maintenance software is fragmented by geography, by
hardware platform and by industry orientation, and is characterized by a large
number of competitors. Currently, the Company's client/server versions of
MAXIMO, MAXIMO Enterprise and Workgroup, compete with products of a number of
large vendors some of which have traditionally provided maintenance software
running on mainframes and minicomputers and are now offering systems for use in
the client/server environment. MAXIMO Enterprise also competes with integrated
enterprise resource planning systems which are provided by several large vendors
and which include maintenance modules. MAXIMO Workgroup encounters competition
from vendors of low cost maintenance management systems designed initially for
use by a single user or limited number of users as vendors of these products
upgrade their functionality to enter the client/server market. MAXIMO ADvantage
competes with a number of competitors, including a national vendor and other
various small regional companies.
The MRO supply chain management business using electronic commerce has many
diverse competitors offering a wide range of differing products, services and
technologies. While the Company believes that electronic commerce products and
technologies compliment the Company's existing products, there can be no
assurance that the Company will be able to compete successfully in this market.
Certain of the Company's competitors have greater financial, marketing, service
and support and technological resources than the Company. To the extent that
such competitors increase their focus on the asset maintenance or planning and
cost systems markets, the Company could be at a competitive disadvantage.
INTERNATIONAL OPERATIONS
A significant portion of the Company's total revenues are derived from
operations outside the United States. The Company derived 43.8%, 40.5%, and
38.4% of its total revenue from sales outside the United States in fiscal years
1997, 1996, and 1995, respectively. The Company expects that international
revenues will continue to be a significant percentage of total revenues. The
Company expects international revenues to continue to grow in absolute dollars
during 1998, and accordingly, continues to invest heavily in international
infrastructure, global product functionality and translated versions of
financial and other software products. In the event international expansion
and/or product globalization efforts are not successful, the Company's business
operating results and financial condition may be adversely affected. This
international business is subject to various risks common to international
activities, including exposure to currency fluctuations, greater difficulty in
collecting accounts receivable, political and economic instability, the greater
difficulty of administering business abroad and the need to comply with a wide
variety of foreign import and United States export laws and regulatory
requirements.
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A significant portion of the Company's total revenue is derived from
international operations which are conducted in foreign currencies. Changes in
the values of these foreign currencies relative to the United States dollar have
in the past adversely affected, and may in the future affect, the Company's
results of operations and financial position. Gains and losses on translation to
United States dollars and settlement of receivables from international
subsidiaries may contribute to fluctuations in the Company's results of
operations. To date, the Company has not engaged in currency hedging
transactions. The Company may in the future undertake currency hedging, although
there can be no assurance that hedging transactions, if entered into, would
materially reduce the effects of fluctuations in foreign currency exchange rates
on the Company's results of operations. The Company experienced lower than
anticipated revenue growth rates in the Asia Pacific region during the first and
second quarters of fiscal 1998 in part due to the economic difficulties that
have occurred throughout this region. There can be no assurances that the
economy of this region will recover in the near future or that the Company's
growth rates in this geographic region will return to the previous levels if the
recovery occurs.
DEPENDENCE ON THIRD PARTIES
The client/server versions of MAXIMO operate with the Oracle 7, SQLServer,
SYBASE and SQLBase, SQLServer database management systems. MAXIMO ADvantage runs
on the Microsoft Access database. Introduction and increased market acceptance
of database management systems with which the Company's products do not operate,
or failure of Oracle, SYBASE, SQLBase, SQLServer or Access to achieve continued
market acceptance, could adversely affect the market for the Company's products.
The Company has entered into non-exclusive license agreements with Centura
Software Corporation, Scribe Technologies, Incorporated, Logical Software
Solutions Corporation, Cognos Corporation , Netronic Software GmbH, HSB
Reliability Technologies Corporation, Intelligent Labeling Technologies,
Incorporated, and WebLogic, Incorporated, pursuant to which the Company
incorporates into its products software providing certain application
development, user interface, business intelligence, workflow and graphics
capabilities developed by these companies. If the Company were unable to renew
these licenses, or if any of such vendors were to become unable to support and
enhance its products, the Company could be required to devote additional
resources to the enhancement and support of these products or to acquire or
develop software providing equivalent capabilities, which could cause delays in
the development and introduction of products incorporating such capabilities.
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PRODUCT DEVELOPMENT: INTERNET
The Company is currently developing a Java-based component architect software
application to incorporate into the MAXIMO product technologies emerging in
conjunction with the Internet. Internet technologies and applications generally
are developing and gaining acceptance rapidly in the market. MRO supply chain
management using electronic commerce is a nascent market with many standards and
technologies remaining to be developed. Accordingly, developing technologies
pose risks to the Company. The Company believes that electronic commerce
products and technologies compliment the Company's existing products. There can
be no assurance that the Company will successfully anticipate trends in this
market, that the Company will be successful in Internet technology development
or acquisition efforts or that the Company's Internet applications, if
developed, will achieve market acceptance.
LIMITED INTELLECTUAL PROPERTY PROTECTION
The Company's success is dependent upon proprietary technology. The Company
currently has no patents and protects its technology primarily through
copyrights, trademarks, trade secrets and employee and third party
non-disclosure agreements. The Company's software products are sometimes
licensed to customers under "shrink wrap" licenses included as part of the
product packaging. Although, in larger sales, the Company's shrink wrap licenses
may be accompanied by specifically negotiated agreements signed by the licensee,
in many cases its shrink wrap licenses are not negotiated with or signed by
individual licensees. Certain provisions of the Company's shrink wrap licenses,
including provisions protecting against unauthorized use, copying, transfer and
disclosure of the licensed program, may be unenforceable under the laws of
certain jurisdictions. In addition, the laws of some foreign countries do not
protect the Company's proprietary rights to the same extent as do the laws of
the United States. There can be no assurance that the steps taken by the Company
to protect its proprietary rights will be adequate to prevent misappropriation
of its technology or development by others of similar technology. Although the
Company believes that its products and technology do not infringe on any
existing proprietary rights of others, there can be no assurance that third
parties will not assert infringement claims in the future.
DEPENDENCE ON KEY PERSONNEL
The Company is highly dependent on certain key executive officers and technical
employees, the loss of one or more of whom could have an adverse impact on the
future operations of the Company. The Company continues to hire a significant
number of additional sales, services and technical personnel. Competition for
hiring of such personnel in the software industry is intense, and the Company
from time to time experiences difficulty in
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locating candidates with the appropriate qualifications within the desired
geographic locations, or with certain industry specific domain expertise. It is
widely held that the technology industry is at or beyond a condition of full
employment. The Company does not have employment contracts with, and does not
maintain key person life insurance policies on, any personnel although it does
have an arrangement relating to severance payments with David M. Sample, the
Company's President, Chief Executive Officer and Chairman of the Board. In
addition, the Company may need to hire additional skilled personnel to support
the continued growth of its business. There can be no assurance that the Company
will be able to retain its existing personnel or attract additional qualified
employees.
MAXIMO ADVANTAGE; MAINTENANCE AUTOMATION CORPORATION
The core of the software constituting MAXIMO ADvantage was acquired by the
Company through its acquisition of Maintenance Automation Corporation ("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 significantly different from the client/server architecture of MAXIMO
Enterprise and Workgroup. Since its acquisition of MAC, the Company has incurred
significant additional and unexpected costs in developing a new release of
MAXIMO ADvantage that meets the quality and functionality standards demanded by
the Company. In addition to these unexpected costs, there was a delay in excess
of six months in completing a new release of this product. The Company has
restructured MAC's telesales distribution operation for MAXIMO ADvantage. No
assurance can be given that MAC will in the future be profitable or that its
telesales distribution operation for MAXIMO ADvantage will achieve the Company's
goals.
CERTAIN RISKS ASSOCIATED WITH ACQUISITIONS
As part of its overall strategy, the Company plans to continue to acquire or
invest in complementary companies, products, or technologies and to enter into
joint ventures and strategic alliances with other companies. There can be no
assurance that the Company would be successful in overcoming the risks
associated or problems encountered in connection with such business
combinations, investments, or joint ventures, or that such transactions will not
materially adversely affect the Company's business, financial condition, or
operating results.
POSSIBLE CONTINUED VOLATILITY OF STOCK PRICE
Fiscal 1997 was marked by significant fluctuations in the market price of the
common stock, par value $.01 per share, of the Company (the "Common Stock").
Factors such as announcements of technological innovations or new products by
the Company, its competitors and other third parties, as well as quarterly
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variations in the Company's results of operations and market conditions in the
industry, may cause the market price of the Common Stock to continue to
fluctuate significantly. In addition, the stock market in general has recently
experienced substantial price and volume fluctuations, which have particularly
affected the market prices of many software companies and which have often been
unrelated to the operating performance of such companies. These broad market
fluctuations also may adversely affect the market price of the Common Stock.
LITIGATION RISKS
The Company is subject to the normal risks of litigation with respect to its
business operation.
YEAR 2000
The Year 2000 issue is the result of computer programs being written using two
digits rather than four to define the applicable year. Certain computer programs
that have date sensitive software and use two digits only may recognize a date
using "00" as the year 1900 rather than the year 2000.
The Company has made a recent assessment of its internal business information
systems and estimate that the costs associated with preparing internal systems
for the Year 2000 should not exceed $100,000. The Company also utilizes other
third party software products, network equipment and telecommunications
products. The Company is currently taking steps to address the impact, if any,
of the Year 2000 issue relating to third party products, failure of any critical
technology components to operate properly in the Year 2000 may have an adverse
impact on business operations or require the Company to incur unanticipated
expenses to remedy any problems.
The Company warrants that its current versions of MAXIMO and P/X client/server
products and MAXIMO ADvantage are year 2000 enabled. The Company's other product
Project 2 is no longer sold but the Company does offer support for this product.
The Company will release an upgrade of this product that is year 2000 enabled.
The Company estimates that the cost to upgrade this product and any other older
versions of its products will not have a material adverse effect on its results
of operations or financial condition.
EFFECT OF ACCOUNTING PRONOUNCEMENTS
Statement of Position ("SOP") 97-2, "Software Revenue Recognition" was issued in
October 1997 and addresses software revenue recognition matters. The SOP
supersedes SOP 91-1 and is effective for transactions entered into for fiscal
years beginning after December 15, 1997. In March 1998, the adoption date of
certain provisions of SOP No. 97-2 were postponed. Based upon its reading and
interpretation of SOP 97-2 the Company
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believes its current revenue recognition policies and practices are materially
consistent with the SOP.
NO REVISIONS OR UPDATES TO FORWARD-LOOKING STATEMENTS
The Company will have no obligation to release publicly any revision or update
to any forward-looking statements to reflect events or circumstances after the
date of such statements or to reflect the occurrence of anticipated or
unanticipated events.
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Part II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
3.1 Amended and Restated Articles of Organization of the Company
(included as Exhibit 3.3 to the Company's Registration Statement on
Form S-1, Registration No. 33-76420, and incorporated herein by
reference)
3.2 Restated By-Laws of the Company, as amended (included as Exhibit 3.2
to the Company's Annual Report on Form 10-K for the fiscal year
ended September 30, 1996,) and incorporated herein by reference)
3.3 Form of Certificate of Designation of Series A Junior Participating
Preferred Stock of Project Software & Development, Inc. (which is
attached as Exhibit A to the Rights Agreement and included as
Exhibit 4(b) to the Company's Current Report on Form 8-K dated
February 2, 1998, File No. 0-23852, and incorporated herein by
reference)
4. Intruments Defining the Rights of Security-Holders
4.1 Specimen certificate for the Common Stock of the Company
(included as Exhibit 4.1 to the Company's Registration
Statement on Form S-1, Registration No. 33-76420, and
incorporated herein by reference)
4.2 Article 4B of the Amended and Restated Articles of
Organization of the Company (included as Exhibit 4.1 to the
Company's Registration Statement on Form S-1, Registration No.
33-76420, and incorporated herein by reference)
4.3 Rights Agreement dated as of January 27, 1998, between
Project Software & Development, Inc. and BankBoston, N.A. as
Rights Agent (included as Exhibit 4(a) to the Company's
Current Report on Form 8-K dated February 2, 1998, File No.
0-23852, and incorporated herein by reference)
4.4 Form of Certificate of Designation of Series A Junior
Participating Preferred Stock of Project
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Software & Development, Inc. (which is attached as Exhibit A
to the Rights Agreement and included as Exhibit 4(b) to the
Company's Current Report on Form 8-K dated February 2, 1998,
File No. 0-23852, and incorporated herein by reference)
4.5 Form of Rights Certificate (which is attached as Exhibit B
to the Rights Agreement and included as included as Exhibit
4(c) to the Company's Current Report on Form 8-K dated
February 2, 1998, File No. 0-23852, and incorporated herein by
reference)
10 Material Contracts
10.1 Stock Purchase Agreement dated as of February 6, 1998 among
Project Software & Development, Inc. PSDI Canada Limited,
Inc., A.R.M. Group Inc. and the Stockholders of A.R.M. Group
Inc.
10.2 1998 Executive Bonus Plan
27.1 Financial Data Schedule
27.2 Financial Data Schedule
27.3 Financial Data Schedule
27.4 Financial Data Schedule
27.5 Financial Data Schedule
27.6 Financial Data Schedule
27.7 Financial Data Schedule
(b) Reports filed on Form 8-K
The Company filed a current report on Form 8-K on February 2,
1998 with respect to the adoption of a stockholder rights
plan.
30
31
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
PROJECT SOFTWARE & DEVELOPMENT, INC.
Date: May 15, 1998 By: /s/ Paul D. Birch
------------ ------------------------------
Paul D. Birch
Authorized Officer
Executive Vice President Finance &
Administration, Chief Financial
Officer and Treasurer
(Principal Financial Officer)
31
32
EXHIBIT INDEX
EXHIBIT
NO. DESCRIPTION PAGE
- --- ---------------------------------------------------------------------
3.1 Amended and Restated Articles of Organization of the Company
(included as Exhibit 3.3 to the Company's Registration
Statement on Form S-1, Registration No. 33 -76420, and
incorporated herein by reference)
3.2 Restated By-Laws of the Company, as amended(included as
Exhibit 3.2 to the Company's Annual Report on Form 10-K for
the fiscal year ended September 30, 1996, commission File No.
0-23852) and incorporated herein by reference)
3.3 Form of Certificate of Designation of Series A Junior
Participating Preferred Stock of Project Software &
Development, Inc. (included as Exhibit 4(b)to the Company's
Current Report on Form 8-K dated February 2, 1998, File No.
0-23852,and incorporated herein by reference)
4.1 Specimen certificate for the Common Stock of the Company
(included as exhibit4.1 to the Company's Registration
Statement on Form S-1, Registration No. 33-76420, and
incorporated herein by reference)
4.2 Article 4B of the Amended and Restated Articles of
Organization of the Company (included as Exhibit 4.1 to the
Company's Registration Statement on Form S-1, Registration No.
33-76420, and incorporated herein by reference)
4.3 Rights Agreement dated as of January 27, 1998, between Project
Software & Development, Inc. and BankBoston, N.A. as Rights
Agent (included as Exhibit 4(a) to the Company's Current
Report on Form 8-K dated February 2, 1998, File No.
0-23852,and incorporated herein by reference)
4.4 Form of Certificate of Designation of Series A Junior
Participating Preferred Stock of Project Software &
Development, Inc. (included as Exhibit 4(b)to the Company's
Current Report on Form 8-K dated February 2, 1998, File No.
0-23852,and incorporated herein by reference)
4.5 Form of Rights Certificate (included as Exhibit 4(c)to the
Company's Current Report on Form 8-K dated February 2, 1998,
File No. 0-23852,and incorporated herein by reference)
10.1 Stock Purchase Agreement dated as of February 6, 1998 among
Project Software & Development, Inc., PSDI Canada Limited,
Inc., A.R.M. Group Inc. ad the Stockholders of A.R.M. Group
Inc.
10.2 1998 Executive Bonus Plan
27.1 Financial Data Schedule
27.2 Financial Data Schedule
27.3 Financial Data Schedule
27.4 Financial Data Schedule
27.5 Financial Data Schedule
27.6 Financial Data Schedule
27.7 Financial Data Schedule