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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 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)
(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: 10,587,877 shares of common stock, $.01 par value per share,
as of July 31, 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 June 30, 1999 and September 30, 3
1998.
Consolidated Statements of Operations (unaudited) for the three and nine 4
months ended June 30, 1999 and 1998.
Consolidated Statements of Cash Flows (unaudited) for the nine months ended 5
June 30, 1999 and 1998.
Notes to Consolidated Financial Statements (unaudited). 6
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF 11
OPERATIONS
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK 35
PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K 36
SIGNATURE 38
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PROJECT SOFTWARE & DEVELOPMENT, INC.
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
ASSETS JUNE 30, SEPTEMBER 30,
-------- -------------
1999 1998
--------- ---------
(IN THOUSANDS,EXCEPT SHARE DATA)
Current assets:
Cash and cash equivalents $ 50,070 $ 28,454
Marketable securities 27,137 38,922
Accounts receivable, trade, less allowance
for doubtful accounts of $2,745 at June 30,
1999 and $2,614 at September 30, 1998, respectively 38,440 30,658
Prepaid expenses 4,665 2,799
Other assets 1,444 1,128
Deferred income taxes 1,503 1,697
--------- ---------
Total current assets 123,259 103,658
--------- ---------
Marketable securities 12,645 --
Property and equipment, net 9,767 8,823
Computer software costs, net -- 248
Goodwill, net 1,154 1,082
Deferred income taxes 748 671
Other assets 418 38
--------- ---------
Total assets $ 147,991 $ 114,520
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 11,228 $ 8,189
Accrued compensation 4,931 5,800
Income taxes payable 4,003 4,063
Deferred revenue 17,067 12,651
Deferred income taxes 187 287
--------- ---------
Total current liabilities 37,416 30,990
--------- ---------
Deferred income taxes 168 103
Deferred rent 155 144
Deferred revenue 285 615
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;
10,557,202 and 9,982,230 issued at June 30,
1999 and September 30, 1998, respectively 106 100
Additional paid-in capital 65,154 50,410
Retained earnings 45,388 32,330
Accumulated other comprehensive income (725) (216)
--------- ---------
Total stockholders' equity 109,923 82,624
--------- ---------
Total liabilities and stockholders' equity $ 147,991 $ 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 NINE MONTHS ENDED
JUNE 30, JUNE 30,
----------------------------- ---------------------------
1999 1998 1999 1998
------------ ----------- ------------ ------------
(in thousands, except share and per share data)
Revenues:
Software $ 15,605 $ 13,754 $ 43,481 $ 38,150
Support and services 20,820 17,496 59,771 46,450
------------ ----------- ------------ ------------
Total revenues 36,425 31,250 103,252 84,600
------------ ----------- ------------ ------------
Cost of revenues:
Software 1,034 1,147 3,694 2,976
Support and services 10,661 9,038 29,944 23,658
------------ ----------- ------------ ------------
Total cost of revenues 11,695 10,185 33,638 26,634
------------ ----------- ------------ ------------
Gross margin 24,730 21,065 69,614 57,966
Operating expenses:
Sales and marketing 11,824 9,856 32,239 27,027
Product development 3,700 3,622 10,804 9,391
General and administrative 2,866 2,411 8,248 7,106
Charge for purchased in-process
product development - - - - - - - - - 9,172
------------ ----------- ------------ ------------
Total operating expenses 18,390 15,889 51,291 52,696
------------ ----------- ------------ ------------
Income from operations 6,340 5,176 18,323 5,270
Interest income 685 664 2,012 2,066
Interest expense (1) (5) (25) (11)
Other income (expense), net (277) (100) (528) (331)
------------ ----------- ------------ ------------
Income before income taxes 6,747 5,735 19,782 6,994
Provision for income taxes 2,269 2,052 6,724 5,789
------------ ----------- ------------ ------------
Net income $ 4,478 $ 3,683 $ 13,058 $ 1,205
============ =========== ============ ============
Net income per share, basic $ 0.44 $ 0.37 $ 1.29 $ 0.12
------------ ----------- ------------ ------------
Net income per share, diluted $ 0.43 $ 0.36 $ 1.26 $ 0.12
------------ ----------- ------------ ------------
Shares used to calculate net income per share
Basic 10,272,928 9,971,370 10,102,820 9,915,800
Diluted 10,516,711 10,121,729 10,348,409 10,077,254
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)
NINE MONTHS ENDED NINE MONTHS ENDED
JUNE 30, JUNE 30,
1999 1998
-------- --------
(IN THOUSANDS)
Cash flows from operating activities:
Net income $ 13,058 $ 1,205
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 3,308 3,087
Loss on sale and disposal of property
and equipment 22 --
Amortization of discount on marketable securities 142 84
Deferred rent 12 91
Deferred income taxes 55 287
Charge for purchased in-process product development -- 9,184
Changes in operating assets and liabilities, net of effect of
acquisitions:
Accounts receivable (8,003) (5,230)
Prepaid expenses (1,902) (1,360)
Other assets (1,074) 183
Accounts payable 2,666 (1,515)
Accrued compensation (821) (723)
Income taxes payable 37 (437)
Deferred revenue 4,350 2,626
-------- --------
Net cash provided by operating activities 11,850 7,482
-------- --------
Cash flows from investing activities:
Acquisitions of business, net of cash 141 (7,466)
Acquisitions of property and equipment (3,641) (3,571)
Additions to computer software costs -- (1,081)
Purchase of marketable securities (33,934) (66,605)
Sale of marketable securities 32,827 65,785
-------- --------
Net cash used in investing activities (4,607) (12,938)
-------- --------
Cash flows from financing activities:
Payments on bank loans -- (467)
Payments of debenture -- (1,050)
Proceeds from issuance of common stock,
net of issuance costs 13,554 --
Proceeds from exercise of stock options
including related tax benefit 1,195 1,442
-------- --------
Net cash provided by/(used in) financing activities 14,749 (75)
-------- --------
Effect of exchange rate changes on cash (376) 369
-------- --------
Net increase/(decrease) in cash and cash equivalents 21,616 (5,162)
Cash and cash equivalents, beginning of period 28,454 25,964
-------- --------
Cash and cash equivalents, end of period $ 50,070 $ 20,802
======== ========
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 June 30, 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 dilutive potential common shares 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 06/30/99 06/30/98
- ------------------------------------------------------------------------
Net income $ 4,477,723 $ 3,682,532
Weighted average common
shares outstanding 10,272,928 9,971,370
Basic income per share $ 0.44 $ 0.37
DILUTED EPS
- ------------------------------------------------------------------------
Net income $ 4,477,723 $ 3,682,532
Weighted average common
shares outstanding 10,272,928 9,971,370
Dilutive potential common shares 243,783 150,359
-------------------------------
Total diluted 10,516,711 10,121,729
Shares
Diluted income $ 0.43 $ 0.36
Per share
NINE MONTHS ENDED
BASIC EPS 06/30/99 06/30/98
- ------------------------------------------------------------------------
Net income $13,058,119 $ 1,204,524
Weighted average common
shares outstanding 10,102,820 9,915,800
Basic income per share $ 1.29 $ 0.12
DILUTED EPS
- ------------------------------------------------------------------------
Net income $13,058,119 $ 1,204,524
Weighted average common
shares outstanding 10,102,820 9,915,800
Dilutive potential common shares 245,589 161,454
-------------------------------
Total diluted 10,348,409 10,077,254
Shares
Diluted income $ 1.26 $ 0.12
Per share
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 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
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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.
Statement of Financial Accounting Standards No. 133, "Accounting for Derivative
Instruments and Hedging Activities" (SFAS 133) was issued in June 1998. It is
effective for fiscal years beginning after June 15, 2000, with earlier adoption
encouraged. The Company will adopt SFAS 133 in the fiscal year ended September
30, 2001. 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 98-1, "Accounting for the Costs of Computer Software
Developed or Obtained for Internal Use" (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. 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.
E. SUPPLEMENTAL CASH FLOW DISCLOSURES
Cash paid for interest and taxes were as follows:
Nine Months Ended
---------------------
(in thousands) 1999 1998
---- ----
Interest........................................ $ 25 $ 11
Income taxes ................................... 6,415 4,753
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Acquisitions of businesses were as follows:
Nine 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
F. 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)
THREE MONTHS THREE MONTHS
ENDED JUNE 30, ENDED JUNE 30,
1999 1998
------- -------
Net income $ 4,478 $ 3,683
Other comprehensive income, net of tax:
Unrealized gain/(loss) on securities 58 (217)
arising during period
Foreign currency translation adjustment (28) 176
Comprehensive income $ 4,508 $ 3,642
THREE MONTHS THREE MONTHS
ENDED JUNE 30, ENDED JUNE 30,
1999 1998
------- -------
Net income $ 13,058 $ 1,205
Other comprehensive income, net of tax:
Unrealized loss on securities (105) (621)
arising during period
Foreign currency translation adjustment (404) (20)
Comprehensive income $ 12,549 $ 564
G. COMMON STOCK
In April 1999, the Company signed an agreement with W.W. Grainger, Inc., whereby
W.W. Grainger acquired 500,000 shares of
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the Company's common stock. Net proceeds to the Company, after issuance costs
was approximately $13.6 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 identified by footnotes in the text. 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 also 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. 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 transactions fees for on-line
charges to engage in electronic commerce for MRO supplies. 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. provides 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 and that reduce purchasing and inventory costs. The buyers,
many of whom 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
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costs. The Company will be making significant investments in MRO.com over the
next few quarters and will most likely experience losses in this business
segment. (1)
The new MRO.com initial product offerings will include the following:
mroBuyer(TM): mroBuyer was generally made available in June 1999. mroBuyer is
part of a suite of Internet-based procurement products designed to link buyers
and suppliers in streamlining purchasing efficiencies. mroBuyer links front-line
employees to mroMarketplace(TM), which is mro.com's growing online community of
supplier catalogs to make MRO related purchases. mroBuyer includes the following
four components:
- - Desktop Requisition: a browser-based interface to supplier catalog content
and purchase order transaction management information. The desktop
requisition tool provides users with the ability to search for and select
parts from online catalogs, create requisitions and purchase orders online
and electronically transfer purchase orders through the mroNetwork(TM) to a
company's selected suppliers. It also provides the ability to view
real-time inventory availability, order status information, invoice and
shipping history and contract pricing.
- - mroIntegration Gateway(TM): a standards-based, open architecture,
application program interface (API) that provides a seamless connection to
leading ERP systems such as SAP, Oracle, and PeopleSoft. The Gateway
provides a connection to the leading points of integration with human
resources, storeroom inventory, purchase order management, general ledger
accounts and accounts payable.
- - Workflow: a Java-based application that provides requisition routing and
approval based on a company's pre-defined business rules. Requisitions
requiring approval are automatically routed through the approval chain by
e-mail. An advanced graphical interface is used to create custom rules and
workflow models.
- - mroTransaction Server(TM): an industry-standard, XML-based connection to
the mroMarketplace that provides live, real-time status on orders and
transactions between connected buyer and suppliers.
mroSupplier(TM): mroSupplier provides MRO supplier organizations with the tools
to overcome the management and cost hurdles associated with Internet
Procurement.
- -----------------------------
(1) Forward looking statement
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- - mroSupplier's electronic catalog assists suppliers with catalog development
and maintenance activities, such as data scrubbing and formatting. Supplier
catalogs are aggregated at the mroMarketplace, where they can be posted for
access by all buyers in the community or customized to reflect the unique
price and trading agreements of individual buying organizations.
mroSupplier provides additional functionality to enable suppliers to update
and change catalogs as needed.
- - mroIntegration Gateway(TM): a standards-based, open architecture,
application program interface (API) that provides a seamless connection to
leading ERP systems such as SAP, Oracle, and PeopleSoft. The Gateway
provides a connection to the leading points of integration with human
resources, storeroom inventory, purchase order management, general ledger
accounts and accounts payable.
- - mroTransaction Server(TM): an industry-standard, XML-based connection to
the mroMarketplace that provides live, real-time status on orders and
transactions between connected buyer and suppliers.
Suppliers can also leverage the mroTransaction Server software to provide
trading partners with access to price and availability information on items
listed in their catalog in a secure, real-time environment.
mroMarketplace(TM): A Web-based community designed to establish the critical
mass of buyers and suppliers required for effective management of the indirect
supply chain.
The mroMarketplace is a content aggregation hub for more than 40 suppliers,
including MRO distribution leader W.W. Grainger, Inc., whose catalog represents
2,000 suppliers and more than 2 million MRO products and services.
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)
- -----------------------------
(1) Forward looking statement
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RESULTS OF OPERATIONS
THREE MONTHS ENDED JUNE 30, 1999 COMPARED TO THREE MONTHS ENDED JUNE 30, 1998
REVENUES
Three Months CHANGE % Three Months
Ended 06/30/99 Ended 06/30/98
--------------------------------------------
(in thousands)
Software licenses $15,605 13.5% $13,754
Percentage of total revenues 42.8% 44.0%
Support and services $20,820 19.0% $17,496
Percentage of total revenues 57.2% 56.0%
Total revenues $36,425 16.6% $31,250
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 18.0% to $16.4 million
or 45.2% of revenues for the three months ended June 30, 1999, compared to $13.9
million or 44.5% of revenues for the three months ended June 30, 1998. The
increase in the percentage of revenues generated outside the U.S. for the three
months ended June 30, 1999 compared to the three months ended June 30, 1998 can
be attributed to the Company's continued global expansion.
Software licenses for the three months ended June 30, 1999 increased 13.5% to
$15.6 million from $13.8 million. MAXIMO client/server software license revenue
for the three months ended June 30, 1999 increased 12.2% to $14.7 million from
$13.1 million. While software licenses as a percentage of revenues decreased to
42.8% in the three months ended June 30, 1999 from 44.0% in the three months
ended June 30, 1998, they remained within the Company's targeted range of 40 to
45% for the quarter. The Company anticipates remaining in this range through
early 2000. (1)
During the quarter ended June 30, 1999, the Company's MRO.com business unit
concluded a significant e-commerce sale to a major global manufacturer for which
it recorded approximately $500,000 of revenue.
- -----------------------------
(1) Forward looking statement
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Support and services revenues increased 19.0% over the prior quarter. Consulting
services grew 18.0% for the three months ended June 30, 1999 compared to the
three months ended June 30, 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. Support services grew to 22.7%
for the three months ended June 30, 1999 compared to the three months ended June
30, 1998. The increase in the percentage of support revenues is in direct
relation to the increase in software license revenues and the high renewal rate
for MAXIMO maintenance contracts.
COST OF REVENUES
Three Months CHANGE % Three Months
Ended 06/30/99 Ended 06/30/98
--------------------------------------------------
(in thousands)
Software licenses $ 1,034 (9.9)% $ 1,147
Percentage of software licenses 6.6% 8.3%
Support and services $ 10,661 18.0% $ 9,038
Percentage of support and services 51.2% 51.7%
Total cost of revenues $ 11,695 14.8% $10,185
Percentage of total revenues 32.1% 32.6%
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 decrease in
the cost of software revenues is due primarily to no amortization of capitalized
software and documentation, offset somewhat by software purchased for resale.
The decrease as a percentage of revenue is attributable to leverage from fixed
third party license fee commitments and no software amortization.
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 Company
has not been successful in hiring personnel in this area due to current job
market and expertise needed to fill these positions. The cost of support and
services as a percentage of support and services revenues decreased to 51.2%
from 51.7% for the three months ended June 30, 1999 and 1998, respectively. The
Company realizes the cost of third party consulting expenses according to when
the service is
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performed.
OPERATING EXPENSES
Three Months CHANGE % Three Months
(in thousands) Ended 06/30/99 Ended 06/30/98
--------------------------------------------------
Sales and marketing $ 11,824 20.0% $9,856
Percentage of total revenues 32.5% 31.5%
Product development $ 3,700 2.2% $3,622
Percentage of total revenues 10.2% 11.6%
General and administrative $ 2,866 18.9% $2,411
Percentage of total revenues 7.9% 7.7%
The increase in sales and marketing expenses for the three months ended June 30,
1999 is primarily due to increases in sales and marketing personnel, sales
commissions based on revenue growth, travel expenses, and costs for global
expansion.
The increase in product development expenses for the three months ended June 30,
1999 is attributable to an increase in salary related expenses due to the timing
of hiring of additional personnel and no capitalization of software costs for
the three months ended June 30, 1999. Capitalization of software costs were $0
and $675 thousand for the three months ended June 30, 1999 and 1998,
respectively. The decrease as a percentage of revenues for the three months
ended June 30, 1999 is primarily attributable to the delays in hiring personnel.
The Company plans to continue to expend development dollars on its electronic
commerce products for MRO supply chain management.(1) The Company will also
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)
The increase in general and administrative expenses for the three months ended
June 30, 1999 is primarily due to the hiring of additional general and
administrative personnel and related benefits, as well as, professional fees and
other expenses to support the global expansion of the Company.
- -----------------------------
(1) Forward looking statement
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NON-OPERATING EXPENSES
(in thousands) Three Months CHANGE % Three Months
Ended 06/30/99 Ended 06/30/98
--------------------------------------------
Interest income $ 685 3.2% $ 664
Interest (expense) $ (1) (80.0)% $ (5)
Other income (expense) $(277) 177.0% $(100)
Interest income for the period ended June 30, 1999 is attributable to interest
earned on cash equivalents from cash flow generated from operations including
accounts receivable collections.
The increase in other 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 rates were 33.6% and 35.8% for the three months
ended June 30, 1999 and 1998, respectively. The Company anticipates that its
fiscal 1999 effective tax rate will not exceed 35%. (1)
NINE MONTHS ENDED JUNE 30, 1999 COMPARED TO NINE MONTHS ENDED JUNE 30, 1998
REVENUES
Nine Months CHANGE % Nine Months
(in thousands) Ended 06/30/99 Ended 06/30/98
---------------------------------------------
Software licenses $ 43,481 14.0% $ 38,150
Percentage of total revenues 42.1% 45.1%
Support and services $ 59,771 28.7% $ 46,450
Percentage of total revenues 57.9% 54.9%
Total revenues $103,252 22.0% $ 84,600
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 the United States.
Revenues from sales outside the United States increased 27.3% to $49.4 million
or 48.0% of revenues for the nine months ended June 30, 1999, compared to $38.8
million or 45.8% of revenues for the nine
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(1) Forward looking statement
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months ended June 30, 1998. The increase in the percentage of revenues generated
outside the U.S. for the nine months ended June 30, 1999 compared to the nine
months ended June 30, 1998 can be attributed to the Company's continued global
expansion.
Software licenses for the nine months ended June 30, 1999 increased 14.0% to
$43.5 million from $38.2 million. Contributing to this increase was a
significant e-commerce license concluded with W.W. Grainger, Inc. in December
1998 for which the Company recognized approximately $3.0 million in revenue, as
well as, increases in the number of MAXIMO licenses. MAXIMO client/server
software license revenue for the nine months ended June 30, 1999 increased 8.6%
to $39.3 million from $36.2 million. While software licenses as a percentage of
revenues have decreased to 42.1% in the nine months ended June 30, 1999 from
45.1% in the nine months ended June 30, 1998, they still remain within the
Company's targeted range of 40 to 45% of revenues. The Company anticipates
remaining in this range through early 2000 (1).
During the quarter ended June 30, 1999, the Company's MRO.com business unit
concluded a significant e-commerce sale to a major global manufacturer for which
it recorded approximately $500,000 of revenue.
Support and services revenues have increased 28.7% over the comparable period.
Consulting services grew 32.3% for the nine months ended June 30, 1999 compared
to the nine months ended June 30, 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. Support services grew to 23.7%
for the nine months ended June 30, 1999 compared to the nine months ended June
30, 1998. The increase in the percentage of support revenues is in direct
relation to the increase in software license revenues and the high renewal rate
for MAXIMO maintenance contracts.
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(1) Forward looking statement
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COST OF REVENUES
Nine Months CHANGE % Nine Months
(in thousands) Ended 06/30/99 Ended 06/30/98
-------------------------------------------------
Software licenses $ 3,694 24.1% $ 2,976
Percentage of software licenses 8.5% 7.8%
Support and services $ 29,944 26.6% $23,658
Percentage of support and services 50.1% 50.9%
Total cost of revenues $ 33,638 26.3% $26,634
Percentage of total revenues 32.6% 31.5%
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 and production materials.
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 Company
has not been successful in hiring personnel in this area due to current job
market and expertise needed to fill these positions. The cost of support and
services as a percentage of support and services revenues decreased to 50.1%
from 50.9% for the nine months ended June 30, 1999 and 1998, respectively. The
Company realizes the cost of third party consulting expenses according to when
the service is performed.
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OPERATING EXPENSES
Nine Months CHANGE % Nine Months
(in thousands) Ended 06/30/99 Ended 06/30/98
--------------------------------------------------
Sales and marketing $ 32,239 19.3% $27,027
Percentage of total revenues 31.2% 31.9%
Product development $ 10,804 15.0% $ 9,391
Percentage of total revenues 10.5% 11.1%
General and administrative $ 8,248 16.1% $ 7,106
Percentage of total revenues 8.0% 8.4%
In-Process Product Development N/A $ 9,172
Percentage of total revenues N/A (100%) 10.8%
The increase in sales and marketing expenses for the nine months ended June 30,
1999 is primarily due to increases in sales and marketing personnel, sales
commissions based on revenue growth, travel expenses, and costs for global
expansion.
The increase in product development expenses for the nine months ended June 30,
1999 is attributable to an increase in salary related expenses due to the hiring
of additional personnel and no capitalization of software costs for the nine
months ended June 30, 1999. Capitalization of software costs were $0 and $675
thousand for the nine months ended June 30, 1999 and 1998, respectively.
The Company plans to continue to expend development dollars on its electronic
commerce products for MRO supply chain management.(1) The Company will also
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)
The increase in general and administrative expenses for the nine months ended
June 30, 1999 is primarily due to the hiring of additional general and
administrative personnel and related benefits, as well as professional fees and
other expenses to support the global expansion of the Company.
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
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(1) Forward looking statement
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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 nine months ended
June 30, 1998.
NON-OPERATING EXPENSES
(in thousands) Nine Months CHANGE % Nine Months
Ended 06/30/99 Ended 06/30/98
------------------------------------------------
Interest income $ 2,012 (2.6)% $ 2,065
Interest(expense) $ (25) 127.3% $ (10)
Other income (expense) $ (528) 59.5% $ (331)
Interest income for the period ended June 30, 1999 is attributable to interest
earned on cash equivalents from cash flow generated from operations including
accounts receivable collections.
The increase in other 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 34.0% for the nine months ended June 30,
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 nine months ended
June 30, 1998. The income tax expense provided during 1998 reflects the
nondeductible nature of certain acquisition-related charges. The Company
anticipates that its fiscal 1999 effective tax rate will not exceed 35%. (1)
LIQUIDITY AND CAPITAL RESOURCES
As of June 30, 1999, the Company had cash and cash equivalents and marketable
securities of approximately $89.9 million and working capital of $85.8 million.
Cash generated by operations for the nine months ended June 30, 1999 was $11.9
million, primarily attributable to net income and an increase in deferred
revenue and accounts payable, offset by an increase in receivables as a result
of the geographic distribution of revenues. The days sales outstanding were 95
days for the quarter ended June 30, 1999 compared to 84 days for the quarter
ended June 30, 1998. The increase is primarily due to the geographic
distribution of revenues. The Company has established a target of 90 to 95 days
for its quarterly days sales outstanding. (1)
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(1) Forward looking statement
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Cash used in investing activities totaled $4.6 million, primarily for the
purchase of marketable securities and the purchase of property and equipment.
Cash generated by financing activities was $14.7 million, primarily from
proceeds of an investment by W.W. Grainger, Inc., ("Grainger"), a leading
business-to-business provider of MRO supplies and related information. In April
1999, the Company signed agreements with Grainger, whereby Grainger acquired
500,000 shares of the Company's common stock for $14.5 million and acquired a
two-year option to purchase 5% of the Company's wholly-owned subsidiary,
MRO.com, Inc. for $3.8 million. Also contributing to cash generated by financing
activities are proceeds received from exercises of employee stock options.
As of June 30, 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.
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, 2000. (1)
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.
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(1) Forward looking statement
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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 continues 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) To date, the Company has not
had to spend any material funds on updating its internal systems. However, 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 is in the
process of finalizing 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, 4.0.3, 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 4.0.3, 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 4.0.3, 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 products are currently being tested for year 2000 compliance. Testing
is scheduled to be completed by the end of September 1999. The Company's product
PROJECT/2 is no longer sold but the Company does offer support for this product.
PROJECT/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 the recommended versions and allow adequate time for
conversion of data. Upgrades will be provided free of charge. MAXIMO
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(1) Forward looking statement
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Scheduler releases prior to MAXIMO Scheduler Release 3.0 and P/X releases prior
to P/X Version 2.2.0 are not fully compliant. Customers must take the steps
described in the Company's year 2000 readiness documentation to address issues
or the customers must upgrade to the recommended versions and allow adequate
time for conversion of data. Upgrades will be provided free of charges. The
Company estimates that the cost to upgrade all of its products to be year 2000
enabled will be approximately $500,000. (1)
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
Company also released a new English language client/server version of MAXIMO
(MAXIMO 4.0.2) for Workflow in the second quarter of fiscal 1999 that is euro
compliant as defined above. In the third quarter of fiscal 1999, the Company
released an English language version of mroBuyer's(TM) Desktop Requisition that
is also euro compliant as defined above. 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.
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(1) Forward looking statement
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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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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.
NEW PRODUCTS; NEW MARKETS
In the second quarter of fiscal 1999, the Company formed a new wholly-owned
subsidiary, MRO.com, Inc. MRO.com links an on-line community of MRO suppliers
and buyers to a group of internet-based procurement products. There can be no
assurance that the Company's MRO products will be sold successfully in the
business-to-business electronic commerce market or if the Company's MRO products
will achieve market acceptance.
The Company's future success in the electronic commerce market may depend on its
ability to accurately determine the functionality and features required by its
customers, as well as, the ability to enhance its MRO products and deliver them
in a timely manner.
The Internet procurement market is a nascent market that may undergo rapid
technological change. The Company cannot predict the present and future size of
the potential market for its MRO products and services. The Company may incur
substantial costs to enhance and modify its MRO products and services in order
to meet the demands of this growing and changing market.
FLUCTUATIONS IN QUARTERLY OPERATING RESULTS; SEASONALITY
The Company has experienced, and may in the future experience, significant
period-to-period fluctuations in revenues and operating results. 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 revenues for
any quarter and could, therefore, result in
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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
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expects competition to intensify as current competitors expand their product
offerings and new competitors enter the market. In 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
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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 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, webMethods, Inc.,
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 Enterprise Asset Management
products. There can be no assurance that the Company will successfully
anticipate trends in this market, that the Company will be successful in
Internet technology development or acquisition efforts or that the Company's
Internet applications, if developed, will achieve market acceptance.
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If Internet usage continues to grow rapidly, its infrastructure may not be able
to support customer and user demands and its performance and reliability may
decline. If outages 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,
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and the Company from time to time experiences difficulty in locating candidates
with the appropriate qualifications within the desired geographic locations, or
with certain industry specific domain expertise. It is widely believed that the
technology industry is at or beyond a condition of full employment. 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 continues 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. To date, the Company has not had
to spend any material funds on updating its internal systems. However, 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 is in the process
of finalizing 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, 4.0.3, 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 4.0.3, 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 4.0.3, 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 products are currently being tested for year 2000 compliance. Testing
is scheduled to be completed by the end of September 1999. The Company's product
PROJECT/2 is no longer sold but the Company does offer support for this product.
PROJECT/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 the recommended versions and allow adequate time for
conversion of data. Upgrades will be provided free of charge. MAXIMO Scheduler
releases prior to MAXIMO Scheduler Release 3.0 and P/X releases prior to P/X
Version 2.2.0 are not fully compliant. Customers must take the steps described
in the Company's year 2000 readiness documentation to
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address issues or the customers must upgrade to the recommended versions and
allow adequate time for conversion of data. Upgrades will be provided free of
charges. 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
Company also released a new English language client/server version of MAXIMO
(MAXIMO 4.0.2) for Workflow in the second quarter of fiscal 1999 that is euro
compliant as defined above. In the third quarter of fiscal 1999, the Company
released an English language version of mroBuyer's(TM) Desktop Requisition that
is also euro compliant as defined above. The amount of development dollars spent
on the euro release will not have a material adverse effect on the
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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.
NO REVISIONS OR UPDATES TO FORWARD-LOOKING STATEMENTS
The Company has no obligation to release publicly any revision or update to any
forward-looking statements to reflect events or circumstances after the date of
such statements or to reflect the occurrence of anticipated or unanticipated
events.
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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 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.376420, 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 dated
February 2, 1998, File No. 0-23852, and incorporated herein by
reference)
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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
10.3 Stock Purchase Agreement between W.W. Grainger, Inc.
and the Company dated April 20, 1999.
10.4 Stock Option Agreement between W.W. Grainger, Inc. and
the Company dated April 20, 1999.
10.5 Registration Rights Agreement between W.W. Grainger,
Inc. and the Company dated April 20, 1999.
27. Financial Data Schedule
27.1 Financial Data Schedule
(b) Reports on Form 8-K
There were no current reports filed on Form 8-K for the three months
ended June 30, 1999.
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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: August 13, 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)
10.3 Stock Purchase Agreement between W.W. Grainger, Inc. and the Company
dated April 20, 1999.
10.4 Stock Option Agreement between W.W. Grainger, Inc. and the Company
dated April 20, 1999.
10.5 Registration Rights Agreement between W.W. Grainger, Inc. and the
Company dated April 20, 1999.
27.1 Financial Data Schedule