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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 1999
(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: 10,043,585 shares of common stock, $.01 par value per share,
as of April 30, 1999.
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PROJECT SOFTWARE & DEVELOPMENT, INC.
10-Q INDEX
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS PAGE
Consolidated Balance Sheets (unaudited) as of March 31, 1999
and September 30, 1998. 3
Consolidated Statements of Operations (unaudited) for the
three and six months ended March 31, 1999 and 1998. 4
Consolidated Statements of Cash Flows (unaudited) for the
six months ended March 31, 1999 and 1998. 5
Notes to Consolidated Financial Statements (unaudited). 6
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS 12
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK 35
PART II. OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS 36
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K 37
SIGNATURE 39
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PROJECT SOFTWARE & DEVELOPMENT, INC.
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
ASSETS MARCH 31, SEPTEMBER 30,
--------- -------------
1999 1998
-------- --------
(IN THOUSANDS,EXCEPT SHARE DATA)
Current assets:
Cash and cash equivalents $ 31,112 $ 28,454
Marketable securities 27,539 38,922
Accounts receivable, trade, less allowance
for doubtful accounts of $2,811 at March 31,
1999 and $2,614 at September 30, 1998, respectively 35,596 30,658
Prepaid expenses 3,386 2,799
Other assets 1,185 1,128
Deferred income taxes 1,500 1,697
-------- --------
Total current assets 100,318 103,658
-------- --------
Marketable securities 12,308 --
Property and equipment, net 9,930 8,823
Computer software costs, net -- 248
Goodwill, net 1,281 1,082
Deferred income taxes 686 671
Other assets 329 38
-------- --------
Total assets $124,852 $114,520
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 10,467 $ 8,189
Accrued compensation 3,837 5,800
Income taxes payable 3,980 4,063
Deferred revenue 13,981 12,651
Deferred income taxes 187 287
-------- --------
Total current liabilities 32,452 30,990
-------- --------
Deferred income taxes 96 103
Deferred rent 162 144
Deferred revenue 409 615
Equity in minority interest 44 44
Commitments and contingencies
Stockholders' Equity
Preferred stock, $.01 par value; 1,000,000 authorized,
none issued and outstanding
Common stock, $.01 par value; 15,350,000 authorized;
10,042,948 and 9,982,230 issued for March 31,
1999 and September 30, 1998, respectively 100 100
Additional paid-in capital 51,288 50,410
Retained earnings 40,910 32,330
Accumulated other comprehensive income (609) (216)
-------- --------
Total stockholders' equity 91,689 82,624
-------- --------
Total liabilities and stockholders' equity $124,852 $114,520
======== ========
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,
----------------------------- -----------------------------
1999 1998 1999 1998
----------- ---------- ----------- ----------
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
Revenues:
Software $ 13,470 $ 13,252 $ 27,876 $ 24,395
Support and services 19,440 14,987 38,951 28,954
----------- ---------- ----------- ----------
Total revenues 32,910 28,239 66,827 53,349
----------- ---------- ----------- ----------
Cost of revenues:
Software 1,516 1,225 2,660 1,829
Support and services 9,700 8,034 19,283 14,620
----------- ---------- ----------- ----------
Total cost of revenues 11,216 9,259 21,943 16,449
----------- ---------- ----------- ----------
Gross margin 21,694 18,980 44,884 36,900
Operating expenses:
Sales and marketing 9,460 9,090 20,415 17,171
Product development 3,628 3,085 7,104 5,769
General and administrative 2,515 2,355 5,382 4,695
Charge for purchased in-process
product development -- 9,172 -- 9,172
----------- ---------- ----------- ----------
Total operating expenses 15,603 23,702 32,901 36,807
----------- ---------- ----------- ----------
Income/(loss) from operations 6,091 (4,722) 11,983 93
Interest income 679 665 1,327 1,402
Interest expense (7) (2) (24) (5)
Other income (expense), net (323) (246) (251) (231)
----------- ---------- ----------- ----------
Income/(loss) before income taxes 6,440 (4,305) 13,035 1,259
Provision for income taxes 2,146 1,678 4,455 3,737
----------- ---------- ----------- ----------
Net income/(loss) $ 4,294 $ (5,983) $ 8,580 $ (2,478)
=========== ========== =========== ==========
Net income/(loss) per share, basic $ 0.43 $ (0.60) $ 0.86 $ (0.25)
----------- ---------- ----------- ----------
Net income/(loss) per share, diluted $ 0.42 $ (0.60) $ 0.84 $ (0.25)
----------- ---------- ----------- ----------
Shares used to calculate net income/(loss) per share
Basic 10,033,348 9,911,496 10,017,765 9,888,015
Diluted 10,326,052 9,911,496 10,264,257 9,888,015
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,
1999 1998
(IN THOUSANDS)
Cash flows from operating activities:
Net income $ 8,580 $ (2,478)
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 2,234 1,941
Loss on sale and disposal of property
and equipment 23 6
Amortization of discount on marketable securities 94 55
Deferred rent 18 51
Deferred taxes 54 88
Charge for purchased in-process product development -- 9,172
Changes in operating assets and liabilities, net of effect of
acquisitions:
Accounts receivable (5,020) (1,543)
Prepaid expenses (609) (967)
Other assets (774) 184
Accounts payable 1,830 (1,006)
Accrued compensation (1,922) (1,513)
Income taxes payable (56) (1,370)
Deferred revenue 1,322 1,424
-------- --------
Net cash provided by operating activities 5,774 4,044
-------- --------
Cash flows from investing activities:
Acquisitions of business, net of cash 141 (7,464)
Acquisitions of property and equipment (2,825) (2,800)
Additions to computer software costs -- (891)
Purchase of marketable securities (23,553) (59,518)
Sale of marketable securities 22,517 58,666
-------- --------
Net cash used in investing activities (3,720) (12,007)
-------- --------
Cash flows from financing activities:
Payments on bank loans -- (471)
Payments of debenture -- (1,056)
Proceeds from exercise of stock options
including related tax benefit 877 863
-------- --------
Net cash provided by/(used in) financing activities 877 (664)
-------- --------
Effect of exchange rate changes on cash (273) (53)
-------- --------
Net increase/(decrease) in cash and cash equivalents 2,658 (8,680)
Cash and cash equivalents, beginning of period 28,454 25,964
-------- --------
Cash and cash equivalents, end of period $ 31,112 $ 17,285
======== ========
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, 1999 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, 1999, 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, 1998 included in the Company's Annual Report on Form 10-K filed with the
Securities and Exchange Commission on December 29, 1998.
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.
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Basic and diluted earnings per share are calculated as follows:
THREE MONTHS ENDED
BASIC EPS 03/31/99 03/31/98
- --------------------------------------------------------------------------------------
Net income $ 4,294,147 $(5,982,818)
Weighted average common shares outstanding 10,033,348 9,911,496
Basic income per share $ 0.43 $ (0.60)
DILUTED EPS
- --------------------------------------------------------------------------------------
Net income $ 4,294,147 $(5,982,818)
Weighted average common shares outstanding 10,033,348 9,911,496
Common stock equivalents (1) 292,704
-------------------------------
Total diluted Shares 10,326,052 9,911,496
Diluted income $ 0.42 $ (0.60)
Per share
SIX MONTHS ENDED
BASIC EPS 03/31/99 03/31/98
- --------------------------------------------------------------------------------------
Net income $ 8,580,396 $(2,478,008)
Weighted average common shares outstanding 10,017,765 9,888,015
Basic income per share $ 0.86 $ (0.25)
DILUTED EPS
- --------------------------------------------------------------------------------------
Net income $ 8,580,396 $(2,478,008)
Weighted average common shares outstanding 10,017,765 9,888,015
Common stock equivalents (1) 246,492
-------------------------------
Total diluted Shares 10,264,257 9,888,015
Diluted income $ 0.84 $ (0.25)
Per share
(1) Common stock equivalents are not included because they are anti-dilutive.
C. ACCOUNTING STANDARDS
Statement of Financial Accounting Standards No. 131, "Disclosures about Segments
of an Enterprise and Related Information" (SFAS 131) is effective for financial
statements for
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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, 1999. The Company has not yet completed
its analysis of the operating segments it will report on.
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. The
Company believes that the provisions of SFAS 132 will not, when adopted, have a
material impact on the Company's consolidated financial statements.
Statement of Financial Accounting Standards No. 133 on accounting for derivative
instruments and hedging activities was issued in June 1998. It is effective for
fiscal years beginning after June 15, 1999, with earlier adoption encouraged.
The new standard requires companies to record derivatives on the balance sheet
as assets or liabilities, measured at fair value. Gains or losses resulting from
changes in the values of those derivatives would be accounted for depending on
the use of the derivatives and whether they qualify for hedge accounting. The
key criterion for hedge accounting is that the hedging relationship must be
highly effective in achieving offsetting changes in fair value or cash flows.
The Company will adopt SFAS 133 in the fiscal year ended September 30, 2000. The
Company believes that the provisions of SFAS 133 will not, when adopted, have a
material impact on the Company's consolidated financial statements.
Statement of Position 98-9 ("SOP 98-9") was issued in December 1998. SOP 98-9
amends paragraphs 11 and 12 of SOP 97-2, Software Revenue Recognition, to
require recognition of revenue using the residual method when (1) there is
vendor-specific objective evidence of the fair values of all undelivered
elements in a multiple-element arrangement that is not accounted for using
long-term contract accounting (2) vendor-specific objective evidence of fair
value does not exist for one or more of the delivered elements in the
arrangement, and (3) all revenue-recognition criteria in SOP 97-2 other than the
requirement for vendor-specific objective evidence of the fair value of each
delivered element of the arrangement are satisfied. Under the residual method,
the arrangement fee is recognized as follows: (1) the total fair value of the
undelivered elements, as indicated by vendor-specific objective evidence, is
deferred and
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subsequently recognized in accordance with the relevant sections of SOP 97-2 and
(2) the difference between the total arrangement fee and the amount deferred for
the undelivered elements is recognized as revenue related to the delivered
elements.
Effective December 15, 1998, SOP 98-9 amends SOP 98-4, Deferral of the Effective
Date of a Provision of SOP 97-2, Software Revenue Recognition, to extend the
deferral of the application of certain passages of SOP 97-2 provided by SOP 98-4
through fiscal years beginning on or before March 15, 1999.
All other provisions of SOP 98-9 are effective for transactions entered into in
fiscal years beginning after March 15, 1999. Earlier adoption is permitted as of
the beginning of fiscal years or interim periods for which financial statements
or information have not been issued. Retroactive application of the provisions
of SOP 98-9 is prohibited. Based upon its reading and interpretations of SOP
98-9, the Company believes its current revenue recognition policies and
procedures are materially consistent with SOP 98-9.
Statement of Position 98-1 ("SOP 98-1") provides guidance on accounting for the
costs of computer software developed or obtained for internal use. SOP 98-1 is
effective for financial statements for fiscal years beginning after December 15,
1998, and should be applied to internal-use computer software costs incurred
those fiscal years for all projects, including those projects in progress upon
initial application of the SOP. The Company adopted SOP 98-1 in the second
quarter of fiscal 1999.
D. COMPUTER SOFTWARE COSTS
There were no internally developed software costs capitalized for the three and
six months ended March 31, 1999, respectively, and $0 and $675,000 for the three
and six months ended March 31, 1998, respectively. Amortization expense was
$113,00 and $135,000 for the three months ended March 31, 1999 and 1998,
respectively, and $248,000 and $158,000 for the six months ended March 31, 1999
and 1998, respectively. Software costs are amortized on a straight-line basis
over the estimated useful or market life of the software (generally, one to two
years).
E. ACQUISITIONS
On December 10, 1998, the Company acquired the shares and assumed net
liabilities of its Italian distributor, Work Management Consulting, s.r.l, for
the sum of $411,000. The transaction was accounted for using the purchase method
of accounting. The resulting goodwill is being amortized on a straight-line
basis over five years. This acquisition was deemed to be immaterial for
presentation of pro forma information.
On February 6, 1998, the Company acquired the stock of The A.R.M. Group Inc.,
Ontario, Canada for the sum of $10.3 million in cash,
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stock and assumed liabilities. The 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 ("Maintenance, Repair and Operating") 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.
F. SUPPLEMENTAL CASH FLOW DISCLOSURES
Cash paid for interest and taxes were as follows:
Six Months Ended
---------------------
(in thousands) 1999 1998
------ ------
Interest........................................ $ 25 $ 4
Income taxes.................................... 4,559 4,113
Acquisitions of businesses were as follows:
Six Months Ended
-------------------
(in thousands) 1999 1998
---- -------
Fair value of assets acquired................... $592 $10,280
Fair value of liabilities assumed............... 729 2,751
Net cash payments............................... 180 6,400
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G. COMPREHENSIVE INCOME
Effective October 1, 1998, the Company adopted the provisions of Statement of
Financial Accounting Standards No. 130, "Reporting Comprehensive Income." The
following is presented in accordance with this statement:
(in thousands)
- --------------------------------------------------------------------------------
SIX SIX
MONTHS MONTHS
ENDED ENDED
03/31/99 03/31/98
- --------------------------------------------------------------------------------
Net income/(loss) $8,580 $(2,478)
- --------------------------------------------------------------------------------
Other comprehensive income, net of tax:
- --------------------------------------------------------------------------------
Unrealized (loss) on securities (17) (404)
Arising during period
- --------------------------------------------------------------------------------
Foreign currency translation adjustment (376) (196)
- --------------------------------------------------------------------------------
Comprehensive income $8,187 $(3,078)
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
THREE THREE
MONTHS MONTHS
ENDED ENDED
03/31/99 03/31/98
- --------------------------------------------------------------------------------
Net income/(loss) $4,294 $(5,983)
- --------------------------------------------------------------------------------
Other comprehensive income, net of tax:
- --------------------------------------------------------------------------------
Unrealized (loss) on securities (41) (194)
Arising during period
- --------------------------------------------------------------------------------
Foreign currency translation adjustment (412) (140)
- --------------------------------------------------------------------------------
Comprehensive income $3,841 $(6,317)
- --------------------------------------------------------------------------------
H. SUBSEQUENT EVENTS
In April 1999, the Company signed agreements with W.W. Grainger, Inc., a leading
business-to-business provider of MRO supplies and related information in North
America. W.W. Grainger, Inc. will invest $14.5 million (subject to certain
closing conditions) to acquire 500,000 shares of the Company's common stock and
an option to acquire certain shares of common stock, equal to 5% of the
aggregate number of shares outstanding, for a fixed price, of the Company's
wholly-owned subsidiary, MRO.com, Inc. Also, in the three months ended December
1998, the Company concluded a significant e-commerce software license with W.W.
Grainger, Inc. in excess of $2.5 million.
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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 "Factors Affecting Future Performance". Readers should
carefully review the risk factors described in other documents that the Company
files from time to time with the Securities and Exchange Commission, including
the Annual Report on Form 10-K filed by the Company on December 29, 1998.
OVERVIEW
The Company develops, markets and supports enterprise asset maintenance
software. Businesses, government agencies and other organizations use MAXIMO to
assist them in maintaining high-value capital assets such as plants, facilities
and production equipment. Through its subsidiary MRO.com, Inc., the Company
complements its enterprise asset maintenance software with an Internet-based
business-to-business e-Commerce network and set of desktop requisition and
on-line procurement software products. The Company's products are designed to
enable customers to reduce downtime, control maintenance expenses, cut spare
parts inventories and costs, improve purchasing efficiency, and more effectively
deploy productive assets, personnel and other resources.
In the second quarter of fiscal 1999, the Company formed a new wholly-owned
subsidiary, MRO.com, Inc. MRO.com, Inc. will provide on-line procurement
solutions for capital intensive industries and the manufacturing and
distribution channels that serve them. These solutions will enable buyers at
companies to efficiently manage the complex balance between both planned and
spot buy procurement activities. MRO.com, Inc. links an on-line community of MRO
("Maintenance, Repair and Operating") suppliers and buyers to a group of
Internet-based procurement products that reduce purchasing and inventory costs.
The buyers, many of which are already using the Company's MAXIMO Enterprise
Asset Management software, will be offered a new set of Internet-based
procurement products as well as a connection to the community of MRO suppliers
being assembled by MRO.com. It is intended that as a result, users will benefit
from reduced purchasing and inventory costs.
The new MRO.com initial product offerings will include the following:
- - mroBuyer: the desktop requisition, workflow and integration gateway software
that allows the buyer to connect to the mro Marketplace, and other open content
intermediaries and place
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orders. mroBuyer will provide order management to transport orders from buyer to
supplier and real time integration technology to integrate with leading
financial systems from SAP, Oracle, and PeopleSoft.
- - mroSupplier: the software that connects the supplier to mroMarketplace,
receives and sends XML-based transactions to and from the mroMarketplace
operations center, and allows suppliers to manage their electronic catalogs.
- - mroMarketplace: the collection of suppliers that have partnered with MRO.com,
Inc. and who are connected to MRO.com, Inc. buyers.
- - mroTransaction Server: the high availability, high bandwidth worldwide network
infrastructure and transaction server that connects buyers and suppliers.
The initial MRO.com, Inc. suite of products will be available in the third
quarter of fiscal 1999. (1)
The Company's revenues are derived primarily from two sources: (i) software
licenses and (ii) fees for services, including support contracts, training and
consulting services and transaction fees for on-line charges to engage in
electronic commerce for MRO supplies. The Company plans to invest significantly
over the next year in its new MRO web-based products and to develop content and
add suppliers to www.mro.com, MRO.com's e-Commerce hub. (1)
ACQUISITIONS
On December 10, 1998, the Company acquired the shares and assumed net
liabilities of its Italian distributor, Work Management Consulting, s.r.l, for
the sum of $411,000. The transaction was accounted for using the purchase method
of accounting. The resulting goodwill is being amortized on a straight-line
basis over five years. This acquisition was deemed to be immaterial for
presentation of pro forma information.
On February 6, 1998, the Company acquired the stock of The A.R.M. Group Inc.,
Ontario, Canada for the sum of $10.3 million in cash, stock and assumed
liabilities. The 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
- -----------------------------
(1) Forward looking statement
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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, 1999 COMPARED TO THREE MONTHS ENDED MARCH 31, 1998
REVENUES
Three CHANGE % Three
Months Months
Ended Ended
(in thousands) 03/31/99 03/31/98
- --------------------------------------------------------------------------------
Software licenses $13,470 1.6% $13,252
Percentage of total revenues 40.9% 46.9%
Support and services $19,440 29.7% $14,987
Percentage of total revenues 59.1% 53.1%
Total revenues $32,910 16.5% $28,239
The growth in revenues is generated primarily by support and services from the
Company's enterprise asset management product, MAXIMO. A significant portion of
the Company's revenues are derived from operations outside of the United States.
Revenues from sales outside the United States increased 16.5% to $16.2 million
or 49.4% of revenues for the three months ended March 31, 1999, compared to
$13.9 million or 49.1% of revenues for the three months ended March 31, 1998.
The increase in the percentage of revenues generated outside the U.S. for the
three months ended March 31, 1999 compared to the three months ended March 31,
1998 can be attributed to the Company's continued global expansion, which in the
first quarter of fiscal 1999 included the acquisition of its Italian
distributor, the incorporation of a wholly-owned owned subsidiary in the
People's Republic of China and the opening of a regional headquarters in Hong
Kong.
Software licenses for the three months ended March 31, 1999 increased slightly
to 1.6% to $13.4 million from $13.2 million while MAXIMO client/server software
licenses grew 4.9%. Software licenses as a percentage of revenues decreased to
40.9% in the three months ended March 31, 1999 from 46.9% in the three months
ended March 31, 1998. While the Company experienced a slowing growth rate in
MAXIMO software licenses, it did not experience a decline. The Company cautions
that the enterprise software application market in general is showing declining
revenues due to cautious information technology spending due to the year 2000
issues. (1)
- -----------------------------
(1) Forward looking statement
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Support and services revenues increased 29.7% over the prior quarter. Consulting
services grew 33.8% for the three months ended March 31, 1999 compared to the
three months ended March 31, 1998 and continue to be a large percentage of total
revenues due to additional service demands in connection with large scale
implementations of the Company's MAXIMO product. The Company also attributes
some of the growth in services to the preference of companies outsourcing
enterprise software application implementations so that its internal Information
Systems ("IS") departments can concentrate on Year 2000 issues. Support services
have grown 25.1% for the three months ended March 31, 1999 compared to the three
months ended March 31, 1998. The increase in the percentage of support revenues
is in direct relation to the increase in software license revenues and a high
renewal rate for MAXIMO maintenance contracts. Currently, in excess of 90% of
all domestic MAXIMO customers renew their maintenance contracts.
COST OF REVENUES
Three CHANGE % Three
Months Months
Ended Ended
(in thousands) 03/31/99 03/31/98
- --------------------------------------------------------------------------------
Software licenses $ 1,516 23.8% $1,225
Percentage of software licenses 11.3% 9.2%
Support and services $ 9,700 20.7% $8,034
Percentage of support and services 49.9% 53.6%
Total cost of revenues $11,216 21.1% $9,259
Percentage of total revenues 34.1% 32.8%
Cost of software revenues consists of software purchased for resale, royalties
paid to vendors of third party software, the amortization of capitalized
software, the cost of software product packaging and media, and certain employee
costs related to software duplication, packaging and shipping. The increase in
the cost of software revenues is due primarily to software purchased for resale,
production materials and royalties paid to third party vendors.
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 heavy services demand and backlog. The cost of
support and services as a percentage of support and services revenues decreased
to 49.9% from 53.6% for the three months ended March 31, 1999 and 1998,
respectively. The decrease as a percentage of revenues is attributable to growth
in support revenues without a
15
16
proportionate increase in support personnel, combined with timing of realizing
third party consulting expenses in relation to the recognition of services
revenue. The Company realizes the cost of third party consulting expenses
according to when the service is performed. However, revenue on fixed fee
contracts cannot be recorded until a percentage of the contract has been
completed or an acceptance milestone has been met.
OPERATING EXPENSES
Three CHANGE % Three
Months Months
Ended Ended
(in thousands) 03/31/99 03/31/98
- --------------------------------------------------------------------------------
Sales and marketing $9,460 4.1% $9,090
Percentage of total revenues 28.7% 32.2%
Product development $3,628 17.6% $3,085
Percentage of total revenues 11.0% 10.9%
General and administrative $2,515 6.8% $2,355
Percentage of total revenues 7.6% 8.3%
In-Process Product Development N/A (100%) $9,172
Percentage of total revenues N/A 32.5%
The increase in sales and marketing expenses for the three months ended March
31, 1999 is primarily due to increases in sales and marketing personnel, costs
for global expansion and sales commissions based on revenue growth. The decrease
as a percentage of revenues for the three months ended March 31, 1999 is
primarily attributable to increases in revenue growth without a commensurate
increase in sales and marketing expenses.
The increase in product development expenses for the three months ended March
31, 1999 is attributable to an increase in salary related expenses due to the
hiring of additional personnel. There were no internally developed software
costs capitalized for the three months ended March 31, 1999 and 1998,
respectively.
The Company will be expending development dollars on its electronic commerce
product for MRO supply chain management. (1) The Company will continue to make
investments in a new MAXIMO Java-based web application component architecture
including a mobile application suite of products. (1) The Company will continue
to invest in client/server MAXIMO including application-programming interfaces
to enterprise resource planning application software products developed by
Oracle, PeopleSoft, Baan and SAP. (1)
- -----------------------------
(1) Forward looking statement
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The increase in general and administrative expenses for the three months ended
March 31, 1999 is primarily due to the hiring of additional general and
administrative personnel and related benefits and other expenses to support the
global expansion of the Company. The decrease as a percentage of revenues for
the three months ended March 31, 1999 is primarily attributable to increases in
revenue growth without a commensurate increase in general and administrative
expenses.
In connection with the 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 in the three months ended March 31, 1998.
NON-OPERATING EXPENSES
Three CHANGE % Three
Months Months
Ended Ended
(in thousands) 03/31/99 03/31/98
- --------------------------------------------------------------------------------
Interest income $ 679 2.1% $ 665
Interest (expense) $ (7) 250.0% $ (2)
Other income (expense) $(323) 31.3% $(246)
Interest income for the period ended March 31, 1999 is attributable to interest
earned on cash equivalents from cash flow generated from operations including
accounts receivable collections. The days sales outstanding were 98 days for the
quarter ended March 31, 1999 compared to 82 days for the quarter ended March 31,
1998. The increase is primarily due to both the geographic distribution of
revenues and timing of invoicing. The Company has established a target of 90 to
95 days for its quarterly days sales outstanding.(1)
The increase in other income (expense) is primarily attributable to expenses
related to exchange rate fluctuations in Latin America and Asia Pacific.
PROVISION FOR INCOME TAXES
The Company's effective tax rate was 33.3% for the three months ended March 31,
1999. 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 anticipates that its fiscal 1999 effective tax
rate will not exceed 35%. (1)
- -----------------------------
(1) Forward looking statement
17
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SIX MONTHS ENDED MARCH 31, 1999 COMPARED TO SIX MONTHS ENDED MARCH 31, 1998
REVENUES
Six CHANGE % Six
Months Months
Ended Ended
(in thousands) 03/31/99 03/31/98
- --------------------------------------------------------------------------------
Software licenses $27,876 14.3% $24,395
Percentage of total revenues 41.7% 45.7%
Support and services $38,951 34.5% $28,954
Percentage of total revenues 58.3% 54.3%
Total revenues $66,827 25.3% $53,349
The growth in revenues is generated from the Company's MAXIMO software and
related support and services. A significant portion of the Company's revenues
are derived from operations outside the United States. Revenues from sales
outside the United States increased 32.1% to $32.9 million or 49.3% of revenues
for the six months ended March 31, 1999, compared to $24.9 million or 47% of
revenues for the six months ended March 31, 1998. The increase in the percentage
of revenues generated outside the U.S. for the six months ended March 31, 1999
compared to the six months ended March 31, 1998 can be attributed to the
Company's continued global expansion, which in the first quarter of fiscal 1999
included the acquisition of its Italian distributor, the incorporation of a
wholly-owned subsidiary in the People's Republic of China and the opening of a
regional headquarters in Hong Kong.
Software licenses for the six months ended March 31, 1999 increased 14.3% to
$27.8 million from $24.3 million. Contributing to this increase was a
significant e-Commerce license concluded with W.W. Grainger, Inc. in December
1998. The Company recognized in excess of $2.5 million for this license. MAXIMO
client/server software licenses grew 6.5%. Software licenses as a percentage of
revenues have decreased to 41.7% in the six months ended March 31, 1999 from
45.7% in the six months ended March 31, 1998. While the Company experienced a
slowing growth rate in MAXIMO software licenses, it did not experience a
decline. The Company cautions that the enterprise software application market in
general is showing declining revenues due to cautious information technology
spending due to the year 2000 issues. (1)
- -----------------------------
(1) Forward looking statement
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Support and services revenues have increased 34.5% over the comparable period.
Consulting services grew 41.3% for the six months ended March 31, 1999 compared
to the six months ended March 31, 1998 and continue to be a large percentage of
total revenues due to additional service demands in connection with large scale
implementations of the Company's MAXIMO product. The Company also attributes
some of the growth in services to the preference of companies outsourcing
enterprise software application implementations so that its internal IS
departments can concentrate on Year 2000 issues. Support services have grown
24.3% for the six months ended March 31, 1999 compared to the six months ended
March 31, 1998. The increase in the percentage of support revenues is in direct
relation to the increase in software license revenues and a high renewal rate
for MAXIMO maintenance contracts. Currently, in excess of 90% of all domestic
MAXIMO customers renew their maintenance contracts.
COST OF REVENUES
Six CHANGE % Six
Months Months
Ended Ended
(in thousands) 03/31/99 03/31/98
- --------------------------------------------------------------------------------
Software licenses $ 2,660 45.4% $ 1,829
Percentage of software licenses 9.5% 7.5%
Support and services $19,283 31.9% $14,620
Percentage of support and services 49.5% 50.5%
Total cost of revenues $21,943 33.4% $16,449
Percentage of total revenues 32.8% 30.8%
Cost of software revenues consists of software purchased for resale, royalties
paid to vendors of third party software, the amortization of capitalized
software, the cost of software product packaging and media, and certain employee
costs related to software duplication, packaging and shipping. The increase in
the cost of software revenues is due primarily to software purchased for resale,
royalties paid to third party vendors, production materials and amortization of
capitalized 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 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 heavy services demand and backlog. The cost of
support and services as a percentage of support and services revenues decreased
to 49.5% from 50.5% for the three months ended March 31, 1999 and 1998,
respectively. The decrease as a percentage of revenues is attributable to growth
in support revenues without a
19
20
proportionate increase in support personnel, combined with timing of realizing
third party consulting expenses in relation to the recognition of services
revenue. The Company realizes the cost of third party consulting expenses
according to when the service is performed. However, revenue on fixed fee
contracts cannot be recorded until a percentage of the contract has been
completed or an acceptance milestone has been met.
OPERATING EXPENSES
Six CHANGE % Six
Months Months
Ended Ended
(in thousands) 03/31/99 03/31/98
- --------------------------------------------------------------------------------
Sales and marketing $20,415 18.9% $17,171
Percentage of total revenues 30.5% 32.2%
Product development $ 7,104 23.1% $ 5,769
Percentage of total revenues 10.6% 10.8%
General and administrative $ 5,382 14.6% $ 4,695
Percentage of total revenues 8.1% 8.8%
In-Process Product Development N/A $ 9,172
Percentage of total revenues N/A (100%) 17.2%
The increase in sales and marketing expenses for the six months ended March 31,
1999 is primarily due to increases in sales and marketing personnel, costs for
global expansion and sales commissions based on revenue growth. Also,
contributing to this increase is higher costs for advertising expenses to
promote global expansion and products. The decrease as a percentage of revenues
for the three months ended March 31, 1999 is primarily attributable to increases
in revenue growth without a commensurate increase in sales and marketing
expenses.
The increase in product development expenses for the six months ended March 31,
1999 is attributable to an increase in salary related expenses due to the hiring
of additional personnel. There were no software costs capitalized for the six
months ended March 31, 1999 and 1998, respectively.
The Company will be expending development dollars on its electronic commerce
product for MRO supply chain management. (1) The Company will continue to make
investments in a new MAXIMO Java-based web application component architecture
including a mobile application suite of products. (1) The Company will continue
to invest in client/server MAXIMO including application-programming interfaces
to enterprise resource planning application software products developed by
Oracle, PeopleSoft, Bann and SAP. (1)
- -----------------------------
(1) Forward looking statement
20
21
The increase in general and administrative expenses for the six months ended
March 31, 1999 is primarily due to the hiring of additional general and
administrative personnel and related benefits and other expenses to support the
global expansion of the Company. The decrease as a percentage of revenues for
the six months ended March 31, 1999 is primarily attributable to increases in
revenue growth without a commensurate increase in general and administrative
expenses.
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 in the six months ended March 31, 1998.
NON-OPERATING EXPENSES
Six CHANGE % Six
Months Months
Ended Ended
(in thousands) 03/31/99 03/31/98
- --------------------------------------------------------------------------------
Interest income $1,327 (5.3)% $1,402
Interest(expense) $ (24) 380.0% $ (5)
Other income (expense) (251) 8.7% $ (231)
Interest income for the period ended March 31, 1999 is attributable to interest
earned on cash equivalents from cash flow generated from operations including
accounts receivable collections.
The increase in other income (expense) is primarily attributable to expenses
related to exchange rate fluctuations in Latin America and Asia Pacific.
PROVISION FOR INCOME TAXES
The Company's effective tax rate was 34.2% for the six months ended March 31,
1999. 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 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 fiscal 1999 effective tax rate will not
exceed 35%. (1)
- -----------------------------
(1) Forward looking statement
21
22
LIQUIDITY AND CAPITAL RESOURCES
As of March 31, 1999, the Company had cash and cash equivalents and marketable
securities of approximately $70.9 million and working capital of $67.9 million.
Cash generated by operations for the six months ended March 31, 1999 was $5.8
million, primarily attributable to net income and an increase in accounts
payable, offset by an increase in receivables as a result of the geographic
distribution of revenues and timing of invoicing.
Cash used in investing activities totaled $3.7 million, primarily for the
purchase of marketable securities and the purchase of property and equipment.
Cash generated by financing activities was $877 thousand, primarily from
proceeds received from exercises of employee stock options.
As of March 31, 1999, the Company's principal commitment consisted primarily of
an office lease for its headquarters. Under the terms of the lease agreement,
upon termination of the lease the Company has the right to extend the lease for
an additional six year term for an agreed upon fixed cost. The Company leases
its facilities and certain equipment under non-cancelable operating lease
agreements that expire at various dates through November 2003.
In April 1999, the Company signed agreements with W.W. Grainger, Inc., a leading
business-to-business provider of MRO supplies and related information in North
America. W.W. Grainger, Inc. will invest $14.5 million (subject to certain
closing conditions) to acquire 500,000 shares of the Company's common stock and
an option to acquire certain shares of common stock, equal to 5% of the
aggregate number of shares outstanding, for a fixed price, of the Company's
wholly-owned subsidiary, MRO.com, Inc.
The Company may use a portion of its cash to acquire businesses, products and
technologies complementary to its business. (1) The Company also plans on making
significant investments over the next year in its new MRO.com web-based products
and to develop content and add suppliers to www.mro.com, MRO.com's e-Commerce
hub.
The Company believes that its current cash balances 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)
- -----------------------------
(1) Forward looking statement
22
23
YEAR 2000
"The information contained under this heading constitutes a 'Year 2000 Readiness
Disclosure' under the Year 2000 Information and Readiness Disclosure Act."
The Year 2000 issue is the result of computer programs being written using two
digits rather than four to define the applicable year. Certain computer programs
that have date sensitive software and use two digits only may recognize a date
using "00" as the year 1900 rather than the year 2000.
Management has initiated a program to prepare the Company's financial,
manufacturing and other critical systems and applications for the year 2000. The
focus of the program is to identify affected software and hardware, develop a
plan to correct that software or hardware in the most effective manner and
implement and monitor that plan. The Company has begun to assess the readiness
of its significant suppliers to determine the extent to which the Company is
vulnerable to those third parties' failure to remediate their own Year 2000
issues. The Company utilizes other third party software products, network
equipment and telecommunications products. Failure of any critical technology
components to operate properly in the Year 2000 may have an adverse impact on
business operations or require the Company to incur unanticipated expenses to
remedy any problems. There can be no guarantee that the systems of other
companies will be timely converted, or that a failure to convert by another
company would not have a material adverse effect on the Company. The Company
currently estimates that the costs associated with preparing internal systems
for the Year 2000 should not exceed $100,000. (1) There can be no assurances
that as the Company continues its program of reviewing internal systems that the
costs will not exceed $100,000. The Company has begun to develop a contingency
plan based on the final results gathered from its suppliers and third parties.
The Company plans to finalize this plan by end of September 1999.
The Company has evaluated its software products and determined that the current
versions of MAXIMO Release 4.0.0, 4.0.1, 4.0.2, and 3.0.3 will continue to
operate properly into the Year 2000. MAXIMO version 3.0.2 is not fully
compliant. Customers must take the steps described in the Company's year 2000
readiness documentation to address the issues or the customers must upgrade to
MAXIMO Release 4.0.1, 4.0.2, or 3.0.3 and allow adequate time for conversion of
data. MAXIMO releases prior to MAXIMO Release 3.0.2 must be upgraded from the
user's existing version to MAXIMO Release 4.0.1, 4.0.2, or 3.0.3 in order to be
year 2000 compliant. Upgrades will be provided free of charge. MAXIMO
- -----------------------------
(1) Forward looking statement
23
24
ADvantage 4.0 will continue to operate properly into the Year 2000. Customers
using prior versions of ADvantage must be upgraded to ADvantage 4.0 and allow
adequate time for conversion of data in order to be year 2000 compliant.
Upgrades will be provided free of charge. The Company's electronic commerce
product, M|net, is currently being tested for year 2000 compliance. Testing is
scheduled to be completed by the end of June 1999. The Company's 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 targeted for the fourth
quarter of fiscal 1999 that will enable this product to run after January 1,
2000 and handle Year 2000 and leap year calculations correctly when used in
accordance with the Company's year 2000 readiness documentation. MAXIMO
Scheduler 4.0 and 3.0 and P/X Version 2.2.0 are currently being tested for
compliance. Testing is scheduled to be completed by the end of June 1999. The
Company estimates that the cost to upgrade all of its products to be year 2000
enabled will be approximately $500,000.
EURO COMPLIANCE
On January 1, 1999, eleven European Union member states adopted the euro as
their common national currency. Thereafter, until January 1, 2002, the
transition period, either the euro or a participating country's present currency
will be accepted as legal tender. Beginning on January 1, 2002, euro-denominated
bills and coins will be issued, and by July 1, 2002, only the euro will be used.
A significant number of the Company's customers are located, or transact
business with, or have operations in participating European Union countries. As
a result, the computer systems or software used by these companies may need to
be upgraded to comply with data storage and computational euro requirements. In
the first fiscal quarter of 1999, the Company released a new English language
client/server version of MAXIMO (MAXIMO 4.0.1) that accepts, stores, calculates,
converts and reports euro currency. In the second quarter of fiscal 1999, the
Company released primary language versions of MAXIMO 4.0.1 in Brazilian
Portuguese, Dutch, French, German, Latin American Spanish, and Swedish. The
amount of development dollars spent on the euro release will not have a material
adverse effect on the Company's results of operations or financial condition.(1)
The Company has initiated a program to determine what, if any, internal systems
need to be replaced to comply with the requirements for the adoption of the
euro.
- -----------------------------
(1) Forward looking statement
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25
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.
RAPID TECHNOLOGICAL CHANGE
The computer software industry is characterized by rapid technological advances,
changes in customer requirements and frequent product introductions and
enhancements. The Company's success depends upon its ability to continue to
enhance its current products and to develop and introduce new products that keep
pace with technological developments, respond to evolving customer requirements
and achieve market acceptance. In particular, the Company believes that it must
continue to respond quickly to users' needs for broad functionality and to
advances in hardware and operating systems. Any failure by the Company to
anticipate or respond adequately to technological developments and customer
requirements, or any significant delays in product development or introduction,
could result in a loss of competitiveness and revenues. There can be no
assurance that the Company will be successful in developing and marketing new
products or product enhancements, or that the Company will not experience
significant delays in developing such new products or product enhancements. Such
delays could have a material adverse effect on the Company's results of
operations. In addition, there can be no assurance that new products and product
enhancements developed by the Company will achieve market acceptance.
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26
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 93.8% of the Company's total revenues in fiscal 1998. The
Company's financial performance in fiscal 1999 depends 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 the English language version of MAXIMO Release 4.0 generally
available in March 1998 for new clients. In the fourth quarter of the fiscal
year ended 1998, the Company released primary language versions of MAXIMO 4.0 in
Brazilian Portuguese, Dutch, French, German, Japanese, Latin American Spanish,
and Swedish. The failure of MAXIMO 4.0 to achieve market acceptance would have a
material adverse effect on the Company's business and financial results.
FLUCTUATIONS IN QUARTERLY OPERATING RESULTS; SEASONALITY
The Company has experienced, and may in the future experience, significant
period-to-period fluctuations in revenues and operating results. The Company's
revenues and income from operations typically grow at a lower rate or decline in
the first quarter of each fiscal year, compared to the fourth quarter of the
preceding fiscal year. In addition, revenues are typically higher in the fourth
quarter than in other quarters of the year. The Company believes that these
quarterly patterns are partly attributable to the Company's sales commission
policies, which compensate members of the Company's direct sales force for
meeting or exceeding annual quotas. In addition, the Company's quarterly
revenues and operating results have fluctuated historically, due to the number
and timing of product introductions and enhancements, the budgeting and
purchasing cycles of customers, the timing of product shipments and the timing
of marketing and product development expenditures. The Company typically
realizes a significant portion of its revenue from sales of software licenses in
the last two weeks of a quarter, frequently even in the last days of a quarter.
Large software license contracts may have a significant impact on
26
27
'
revenues for any quarter and could, therefore, result in significant
fluctuations in quarterly revenues and operating results. Accordingly, the
Company believes that period-to-period comparisons of its results of operations
are not necessarily meaningful and should not be relied upon as an indication of
future performance.
The Company generally ships its products upon receipt of orders and maintains no
significant product backlog. As a result, revenues from license fees in any
quarter are substantially dependent on orders booked and shipped in that
quarter. A delay in or loss of orders can cause significant variations in
operating results. A significant portion of the Company's operating expenses are
fixed in the short term, and planned expenditures are based primarily on sales
forecasts. Accordingly, if revenues do not meet the Company's expectations in
any given quarter, operating results may be materially adversely affected.
COMPETITION
The market for applications software is intensely competitive and rapidly
changing. While the Company believes that it has competed effectively to date,
competition in its industry is likely to intensify as current competitors expand
their product lines and new companies enter the market. To remain successful in
the future, the Company must respond promptly and effectively to the challenges
of technological change, evolving standards and its competitors' innovations by
continually enhancing its own products, services and support offerings, as well
as its marketing programs. There can be no assurance that the Company will
continue to be able to compete successfully in the future.
The market for asset maintenance software is fragmented by geography, by
hardware platform and by industry orientation, and is characterized by a large
number of competitors including both independent software vendors and certain
enterprise resource planning vendors. Independent Software vendors include
Datastream, Inc. and Indus Group. MAXIMO also competes with integrated
enterprise resource planning systems which are provided by several large
vendors, such as SAP and JD Edwards and others, and which include maintenance
modules. Currently, the Company's client/server versions of MAXIMO compete with
products of a number of large vendors some of which have traditionally provided
maintenance software running on mainframes and minicomputers and are now
offering systems for use in the client/server environment. MAXIMO also
encounters competition from vendors of low cost maintenance management systems
designed initially for use by a single user or limited number of users as
vendors of these products upgrade their functionality to enter the client/server
market.
The MRO supply chain management business using electronic commerce has many
diverse competitors offering a wide range of differing products, services and
technologies. The Company expects competition to intensify as current
competitors expand their product offerings and new competitors enter the market.
In
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28
addition, the market for electronic procurement solutions is relatively new
and underdeveloped. While the Company believes that electronic commerce products
and technologies complement the Company's existing products, there can be no
assurance that the Company will be able to compete successfully in this market.
Many of the Company's enterprise asset management competitors are also entering
the MRO e-commerce market. The current potential competitors include, Ariba,
Clarus, Commerce One, Concur, Connect, Harbinger, IBM, Intellisys, Microsoft,
Netscape, Oracle, PeopleSoft, SAP and others.
Certain of the Company's competitors have greater financial, marketing, service
and support and technological resources than the Company. To the extent that
such competitors increase their focus on the asset maintenance or planning and
cost systems markets, the Company could be at a competitive disadvantage.
INTERNATIONAL OPERATIONS
A significant portion of the Company's total revenues are derived from
operations outside the United States. The Company derived 45.7%, 43.8%, and
40.5% of its total revenue from sales outside the United States in fiscal years
1998, 1997, and 1996, respectively. The Company expects that international
revenues will continue to be a significant percentage of total revenues. The
Company expects international revenues to continue to grow in absolute dollars
during 1999, and accordingly, continues to invest 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.
A significant portion of the Company's total revenue is derived from
international operations that are conducted in foreign currencies. Changes in
the values of these foreign currencies relative to the United States dollar have
in the past adversely affected, and may in the future affect, the Company's
results of operations and financial position. Gains and losses on translation to
United States dollars and settlement of receivables from international
subsidiaries may contribute to fluctuations in the Company's results of
operations. To date, the Company has not engaged in currency hedging
transactions. The Company may in the future undertake currency hedging, although
there can be no assurance that hedging transactions, if entered into, would
materially reduce the effects of fluctuations in foreign currency exchange rates
on the Company's results of
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29
operations. The Company experienced lower than anticipated revenue growth rates
in the Asia Pacific region during 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, SQLServer, and
SQLBase database management systems. Introduction and increased market
acceptance of database management systems with which the Company's products do
not operate could adversely affect the market for the Company's products.
The Company has entered into nonexclusive license agreements with Centura
Software Corporation, Scribe Technologies, Incorporated, Cognos Corporation,
Netronic Software GmbH, HSB Reliability Technologies Corporation, Intelligent
Labeling Technologies, Incorporated, WebLogic, Incorporated, Marimba, Inc., and
Intermat, Inc. pursuant to which the Company incorporates into its products
software providing certain application development, user interface, business
intelligence, content and graphics capabilities developed by these companies. If
the Company were unable to renew these licenses, or if any of such vendors were
to become unable to support and enhance its products, the Company could be
required to devote additional resources to the enhancement and support of these
products or to acquire or develop software providing equivalent capabilities,
which could cause delays in the development and introduction of products
incorporating such capabilities.
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 complement 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.
If Internet usage continues to grow rapidly, its infrastructure may not be able
to support customer and user demands and its
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performance and reliability may decline. If outages or delays on the Internet
occur frequently or increase in frequency, overall Internet usage including
usage of the Company's products and services could grow more slowly or decline.
The Company is dependent upon improvements being made to the entire Internet as
well as to its individual customers' networking infrastructures to alleviate
overloading and congestion. If these improvements are not made, the ability of
the Company's customers to utilize the Company's solution will be hindered, and
the Company's business, operating results and financial condition may suffer.
LIMITED INTELLECTUAL PROPERTY PROTECTION
The Company's success is dependent upon proprietary technology. The Company
currently has no patents and protects its technology primarily through
copyrights, trademarks, trade secrets and employee and third party nondisclosure
agreements. The Company's software products are sometimes licensed to customers
under "shrink wrap" licenses included as part of the product packaging.
Although, in larger sales, the Company's shrink-wrap licenses may be accompanied
by specifically negotiated agreements signed by the licensee, in many cases its
shrink-wrap licenses are not negotiated with or signed by individual licensees.
Certain provisions of the Company's shrink-wrap licenses, including provisions
protecting against unauthorized use, copying, transfer and disclosure of the
licensed program, may be unenforceable under the laws of certain jurisdictions.
In addition, the laws of some foreign countries do not protect the Company's
proprietary rights to the same extent as do the laws of the United States. There
can be no assurance that the steps taken by the Company to protect its
proprietary rights will be adequate to prevent misappropriation of its
technology or development by others of similar technology. Although the Company
believes that its products and technology do not infringe on any existing
proprietary rights of others, there can be no assurance that third parties will
not assert infringement claims in the future.
GENERAL ECONOMIC RISK FACTORS
To date, inflation has not had a material impact on the Company's financial
results. There can be no assurance, however, that inflation will not adversely
affect the Company's financial results in the future.
DEPENDENCE ON KEY PERSONNEL
The Company is highly dependent on certain key executive officers and technical
employees, the loss of one or more of who could have an adverse impact on the
future operations of the Company. The Company continues to hire a significant
number of additional sales, services and technical personnel. Competition for
hiring of such personnel in the software industry is intense, and the Company
from time to time experiences difficulty in locating candidates with the
appropriate qualifications within
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the desired geographic locations, or with certain industry specific domain
expertise. It is widely believed that the technology industry is at or beyond a
condition of full employment. The Company does not have employment contracts
with, and does not maintain key person life insurance policies on, any
personnel. 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.
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 1998 was marked by significant fluctuations in the market price of the
common stock, par value $.01 per share, of the Company (the "Common Stock").
Factors such as announcements of technological innovations or new products by
the Company, its competitors and other third parties, as well as quarterly
variations in the Company's results of operations and market conditions in the
industry, may cause the market price of the Common Stock to continue to
fluctuate significantly. In addition, the stock market in general has recently
experienced substantial price and volume fluctuations, which have particularly
affected the market prices of many software companies and which have often been
unrelated to the operating performance of such companies. These broad market
fluctuations also may adversely affect the market price of the Common Stock.
LITIGATION RISKS
The Company is subject to the normal risks of litigation with respect to its
business operation.
YEAR 2000
"The information contained under this heading constitutes a 'Year 2000 Readiness
Disclosure' under the Year 2000 Information and Readiness Disclosure Act."
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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.
Management has initiated a program to prepare the Company's financial,
manufacturing and other critical systems and applications for the year 2000. The
focus of the program is to identify affected software and hardware, develop a
plan to correct that software or hardware in the most effective manner and
implement and monitor that plan. The Company has begun to assess the readiness
of its significant suppliers to determine the extent to which the Company is
vulnerable to those third parties' failure to remediate their own Year 2000
issues. The Company utilizes other third party software products, network
equipment and telecommunications products. Failure of any critical technology
components to operate properly in the Year 2000 may have an adverse impact on
business operations or require the Company to incur unanticipated expenses to
remedy any problems. There can be no guarantee that the systems of other
companies will be timely converted, or that a failure to convert by another
company would not have a material adverse effect on the Company. The Company
currently estimates that the costs associated with preparing internal systems
for the Year 2000 should not exceed $100,000. There can be no assurances that as
the Company continues its program of reviewing internal systems that the costs
will not exceed $100,000. The Company has begun to develop a contingency plan
based on the final results gathered from its suppliers and third parties. The
Company plans to finalize this plan by end of September 1999.
The Company has evaluated its software products and determined that the current
versions of MAXIMO Release 4.0.0, 4.0.1, 4.0.2, and 3.0.3 will continue to
operate properly into the Year 2000. MAXIMO version 3.0.2 is not fully
compliant. Customers must take the steps described in the Company's year 2000
readiness documentation to address the issues or the customers must upgrade to
MAXIMO Release 4.0.1, 4.0.2, or 3.0.3 and allow adequate time for conversion of
data. MAXIMO releases prior to MAXIMO Release 3.0.2 must be upgraded from the
user's existing version to MAXIMO Release 4.0.1, 4.0.2, or 3.0.3 in order to be
year 2000 compliant. Upgrades will be provided free of charge. MAXIMO ADvantage
4.0 will continue to operate properly into the Year 2000. Customers using prior
versions of ADvantage must be upgraded to ADvantage 4.0 and allow adequate time
for conversion of data in order to be year 2000 compliant. Upgrades will be
provided free of charge. The Company's electronic commerce product, M|net, is
currently being tested for year 2000 compliance. Testing is scheduled to be
completed by the end of June 1999. The Company's 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 targeted for the fourth quarter of fiscal
1999 that will enable this product to run after
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January 1, 2000 and handle Year 2000 and leap year calculations correctly when
used in accordance with the Company's year 2000 readiness documentation. MAXIMO
Scheduler 4.0 and 3.0 and P/X Version 2.2.0 are currently being tested for
compliance. Testing is scheduled to be completed by the end of June 1999. The
Company estimates that the cost to upgrade all of its products to be year 2000
enabled will be approximately $500,000.
The Company does not believe that the advent of the Millennium has caused any
positive or negative impact on revenues from the Company's software products
during fiscal 1998. While the Company has experienced customer requests to
replace non-compliant Year 2000 applications, it also believes that certain
market segments have deferred procuring asset maintenance systems while they
complete the implementation of ERP systems. The Company cautions that there may
be a slow down in the future in the enterprise application market due to
cautious information technology spending due to the year 2000 issues. The
Company will continue to monitor the potential impact of the arrival of the
Millennium on its software revenues.
EURO COMPLIANCE
On January 1, 1999, eleven European Union member states adopted the euro as
their common national currency. Thereafter, until January 1, 2002, the
transition period, either the euro or a participating country's present currency
will be accepted as legal tender. Beginning on January 1, 2002, euro-denominated
bills and coins will be issued, and by July 1, 2002, only the euro will be used.
A significant number of the Company's customers are located, or transact
business with, or have operations in participating European Union countries. As
a result, the computer systems or software used by these companies may need to
be upgraded to comply with data storage and computational euro requirements. In
the first fiscal quarter of 1999, the Company released a new English language
client/server version of MAXIMO (MAXIMO 4.0.1) that accepts, stores, calculates,
converts and reports euro currency. In the second quarter of fiscal 1999, the
Company released primary language versions of MAXIMO 4.0.1 in Brazilian
Portuguese, Dutch, French, German, Latin American Spanish, and Swedish. The
amount of development dollars spent on the euro release will not have a material
adverse effect on the Company's results of operations or financial condition.
The Company has initiated a program to determine what, if any, internal systems
need to be replaced to comply with the requirements for the adoption of the
euro.
ACCOUNTING POLICIES THAT MAY HAVE AN ADVERSE EFFECT
Statement of Position 98-9 ("SOP 98-9") was issued in December 1998. SOP 98-9
amends paragraphs 11 and 12 of SOP 97-2, Software Revenue Recognition, to
require recognition of revenue using the residual method when (1) there is
vendor-specific objective evidence of the fair values of all undelivered
elements in a
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multiple-element arrangement that is not accounted for using long-term contract
accounting (2) vendor-specific objective evidence of fair value does not exist
for one or more of the delivered elements in the arrangement, and (3) all
revenue-recognition criteria in SOP 97-2 other than the requirement for
vendor-specific objective evidence of the fair value of each delivered element
of the arrangement are satisfied. Under the residual method, the arrangement fee
is recognized as follows: (1) the total fair value of the undelivered elements,
as indicated by vendor-specific objective evidence, is deferred and subsequently
recognized in accordance with the relevant sections of SOP 97-2 and (2) the
difference between the total arrangement fee and the amount deferred for the
undelivered elements is recognized as revenue related to the delivered elements.
Effective December 15, 1998, SOP 98-9 amends SOP 98-4, Deferral of the Effective
Date of a Provision of SOP 97-2, Software Revenue Recognition, to extend the
deferral of the application of certain passages of SOP 97-2 provided by SOP 98-4
through fiscal years beginning on or before March 15, 1999.
All other provisions of SOP 98-9 are effective for transactions entered into in
fiscal years beginning after March 15, 1999. Earlier adoption is permitted as of
the beginning of fiscal years or interim periods for which financial statements
or information have not been issued. Retroactive application of the provisions
of SOP 98-9 is prohibited. Based upon its reading and interpretations of SOP
98-9, the Company believes its current revenue recognition policies and
procedures are materially consistent with SOP 98-9.
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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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
THE COMPANY DOES NOT HAVE ANY MATERIAL RISKS UNDER THIS ITEM.
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PART II. OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO VOTE OF SECURITY HOLDERS.
The Company held a Special Meeting in lieu of the Annual Meeting of
Stockholders on March 24, 1999. At the Special Meeting the stockholders
of the Company voted to approve the following actions by the following
votes:
1. To elect Norman E. Drapeau Jr. and Richard P. Fishman as Class
III Directors of the company for a term of three years.
No. of Shares/Votes
-----------------------------------
For Authority Withheld
--------- ------------------
Norman E. Drapeau, Jr. 7,297,051 267,239
Richard P. Fishman 7,295,455 268,835
2. To approve the Company's 1999 Equity Incentive Plan.
No. of Shares/Votes
-------------------
For 4,996,053
Against 2,539,567
Abstain 28,670
3. To approve the amendments to the Company's 1994 Incentive and
Nonqualified Stock Option Plan.
No. of Shares/Votes
-------------------
For 5,985,517
Against 1,552,853
Abstain 25,920
4. To approve the proposal to ratify the selection of
PricewaterhouseCoopers LLP as the Company's independent
accountants.
No. of Shares/Votes
-------------------
For 7,559,749
Against 1,371
Abstain 3,170
In addition, Robert L. Daniels, Paul D. Birch, Alan L. Stanzler, and
Stephen B. Sayre continue to serve on the Company's Board of Directors
after the Special Meeting.
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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, File No. 0-23852 and incorporated herein by
reference)
3.3 Form of Certificate of Designation of Series A Junior Participating
Preferred Stock of Project Software & Development, Inc. (which is
attached as Exhibit A to the Rights Agreement included as Exhibit 4 (b)
to the Company's Current Report on Form 8-K dated February 2, 1998,
File No. 0-23852, and incorporated herein by reference)
4. Instruments defining the Rights of Security Holders, Including
Indentures
4.1 Specimen certificate for the Common Stock of the Company (included
as Exhibit 4.1 to the Company's Registration Statement on Form S-1,
Registration No. 33-76420, and incorporated herein by 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
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dated February 2, 1998, File No. 0-23852, and incorporated herein by
reference)
4.5 Form of Rights Certificate (included as Exhibit 4 (c) to the
Company's Current Report on Form 8-K dated February 2, 1998, File No.
0-23852, and incorporated herein by reference)
10. Material Contracts
10.1 1999 Equity Incentive Plan, as approved by the stockholders of
the Company by written consent dated March 24, 1999
10.2 Amended and Restated 1994 Incentive and Nonqualified Stock
Option Plan, as approved by the stockholders of the Company
by written consent dated March 24, 1999
27. Financial Data Schedule
27.1 Financial Data Schedule
(b) Reports on Form 8-K
During the three months ended March 31, 1999, the Company filed a
current report on Form 8-K related to the resignation of William G. Nelson on
January 11, 1999 from the Company's Board of Directors.
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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 14, 1999 By: /s/ Paul D. Birch
------------ ----------------------------------------
Paul D. Birch
Authorized Officer
Executive Vice President Finance &
Administration, Chief Financial
Officer and Treasurer
(Principal Financial Officer)
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EXHIBIT INDEX
EXHIBIT
NO. DESCRIPTION PAGE
- ------- ----------- ----
3.1 Amended and Restated Articles of Organization of the Company
(included as Exhibit 3.3 to the Company's Registration
Statement on Form S-1, Registration No. 33-76420, and
incorporated herein by reference)
3.2 Restated By-Laws of the Company, as amended (included as
Exhibit 3.2 to the Company's Annual Report on Form 10-K for the
fiscal year ended September 30, 1996 File No. 0-23852 and
incorporated herein by reference)
3.3 Form of Certificate of Designation of Series A Junior
Participating Preferred Stock of Project Software &
Development, Inc. (which is attached as Exhibit A to the Rights
Agreement included as Exhibit 4 (b) to the Company's Current
Report on Form 8-K dated February 2, 1998, File No. 0-23852,
and incorporated herein by reference)
4.1 Specimen certificate for the Common Stock of the Company
(included as Exhibit 4.1 to the Company's Registration
Statement on Form S-1, Registration No. 33-76420, and
incorporated herein by reference)
4.2 Article 4B of the Amended and Restated Articles of Organization
of the Company (included as Exhibit 4.1 to the Company's
Registration Statement on Form S-1, Registration No. 33-76420,
and incorporated herein by reference)
4.3 Rights Agreement dated as of January 27, 1998, between Project
Software & Development, Inc. and BankBoston, N.A. as Rights
Agent (included as Exhibit 4 (a) to the Company's Current
Report on Form 8-K dated February 2, 1998, File No. 0-23852,
and incorporated herein by reference)
4.4 Form of Certificate of Designation of Series A Junior
Participating Preferred Stock of Project Software &
Development, Inc. (included as Exhibit 4 (b) to the Company's
Current Report on Form 8-K dated February 2, 1998, File No.
0-23852, and incorporated herein by reference)
4.5 Form of Rights Certificate (included as Exhibit 4 (c) to the
Company's Current Report on Form 8-K dated February 2, 1998,
File No. 0-23852, and incorporated herein by reference)
10.1. 1999 Equity Incentive Plan, as approved by the stockholders of
the Company by written consent dated March 24, 1999
10.2 Amended and Restated 1994 Incentive and Nonqualified Stock
Option Plan, as approved by the stockholders of the Company by
written consent dated March 24, 1999
27.1 Financial Data Schedule