Back to GetFilings.com
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
FOR THE FISCAL YEAR ENDED SEPTEMBER 30, 2001
(mark one)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES AND
EXCHANGE ACT OF 1934
For the transition period from _______________ to __________________
Commission File Number 0-23852
MRO SOFTWARE, INC.
(Exact name of registrant as specified in its charter)
MASSACHUSETTS 04-2448516
(State or other jurisdiction of (I.R.S. employer
incorporation or organization) identification number)
100 CROSBY DRIVE, BEDFORD, MASSACHUSETTS 01730
(Address of principal executive offices, including zip code)
(781) 280-2000
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $.01 par value
----------------------------
(Title of Class)
----------------
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
---------
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to the Form 10-K [_]
As of December 18, 2001, the aggregate market value of the voting stock held by
non-affiliates of the Registrant was approximately $305,211,297 based on the
last sale price of such stock on such date.
Number of shares outstanding of the Registrant's common stock as of the latest
practicable date: 22,499,048 shares of common stock, $.01 par value per share,
as of December 18, 2001.
DOCUMENT INCORPORATED BY REFERENCE
Certain portions of the Company's Definitive Proxy Statement for its 2001 Annual
Meeting of Stockholders are incorporated by reference into Part III of this
Annual Report on Form 10-K.
- --------------------------------------------------------------------------------
Page 1
EXPLANATORY NOTE
This Annual Report on Form 10-K, as well as documents incorporated herein by
reference, may contain forward-looking statements (within the meaning of section
27A of the Securities Act of 1933, as amended, and section 21E of the Securities
Exchange Act of 1934, as amended). The following and similar expressions
identify forward-looking statements: "expects", "anticipates", and "estimates".
Forward-looking statements include, without limitation, statements related to:
the Company's plans, objectives, expectations and intentions; the timing of,
availability and functionality of products under development or recently
introduced; and market and general economic conditions. Important factors that
could cause actual results to differ materially from those suggested by the
forward-looking statements for various reasons, include those discussed under
"Factors Affecting Future Performance." These forward-looking statements speak
only as of the date of this Annual Report, and the Company disclaims any
obligation to update such forward looking statements as a result of any change
in circumstances or otherwise.
MRO Software, Inc., incorporated in May 1968, under the laws of the Commonwealth
of Massachusetts, is hereinafter sometimes referred to as the "Company", "MROI",
"our", "us", or "we".
MAXIMO(R), and Intermat(R) are registered trademarks of MROI. MRO Software(TM),
MAXIMO Enterprise(TM), MAXIMO Extended Enterprise(TM), MAXIMO Buyer(TM),
Standard Modifier Dictionary(TM), SMD(TM), Collego(TM), Collego Catalog
Manager(TM), AToMS(TM), MRO.COM(TM), mroMarketplace(TM), mroSupplier(TM),
mroDistributor(TM), mroManufacturer(TM), and mroConnect(TM) are trademarks and
service marks of MROI or its subsidiaries. Microsoft(R) is a registered
trademark of Microsoft Corporation and Oracle(R) is a registered trademark of
Oracle Corporation. Other company and product names may be trademarks of the
respective companies.
(C)2001 MRO Software, Inc. All rights reserved.
- --------------------------------------------------------------------------------
Page 2
PART I
ITEM 1. BUSINESS
FISCAL 2001 IN REVIEW
Fiscal 2001 marked our transition and expansion from the core Enterprise Asset
Maintenance ("EAM") market to a broader solution set that encompasses the entire
industrial supply chain. We entered fiscal 2001 with operations in two distinct
yet synergistic operating segments: (1) our "Demand-Side" software products and
services, consisting of MAXIMO Enterprise and MAXIMO Extended Enterprise, and
(2) our "Supply-Side" software products and services, consisting of Online
Commerce Services ("OCS") and Catalog Management. During fiscal 2001, the
Company strengthened these offerings and improved its market positioning in many
ways, including the following:
. In March 2001, the Company changed its name to MRO Software, Inc. and its
NASDAQ trading symbol to "MROI", formally signaling the increased reach of
the Company's offerings.
. In August 2001, the Company acquired the assets of Collego Corporation,
most notably the Collego Catalog Manager software product, which (i)
extends our "Supply-Side" Online Commerce Services ("OCS") offerings with
a powerful online industrial catalog management application, (ii) gives the
Company an entirely new enterprise application offering, and (iii) broadens
MAXIMO product functionality.
. In September 2001, the Company released the first customer shipment of
MAXIMO Version 5.0, a 100 percent pure Internet product developed on open
standards component architecture that lowers the total cost of ownership
for enterprise application portfolios and allows customers to support their
global enterprise or single sites via any browser-enabled device. MAXIMO
Version 5.0 significantly streamlines operations by reducing the time and
cost associated with deployment, maintenance and training. By virtue of its
new architecture, MAXIMO Version 5.0 also lowers the total cost of
ownership due to enhanced interoperability with core applications within
and outside an enterprise.
. At the start of fiscal 2001, our "Supply-Side" offerings were targeted at
three distinct segments of the industrial supplier market: distributors
(mroDistributor), manufacturers (mroManufacturer) and marketplace operators
(mroConnect). As the year progressed, we increased the overall
functionality delivered by all of the "Supply-Side" offerings, and blended
them into a single service known as our "Online Commerce Services", or
"OCS". These services, administered and supported through our MRO
Operations Center at http://network.mro.com, enable industrial suppliers of
any type, including distributors, manufacturers or e-commerce marketplaces,
to engage in various levels of online commerce according to their needs.
During the year, we found that certain elements of our "Supply-Side" offerings
could be sold into our MAXIMO customer base, either as a complete e-commerce
platform or as component enterprise applications. We found that our MAXIMO
customers could influence their online trading partners to subscribe to OCS as a
means of achieving supply-chain integration. As a result, the Company has found
that its "Demand-Side" and "Supply-Side" operations have become blended, and we
have recently begun to position all of our product and service offerings as an
enterprise product "suite" - the key set of enterprise applications and online
services that enable asset-intensive businesses to optimize the value of their
assets and to integrate and extend their information systems with those of their
industrial supply chain partners.
For fiscal 2002, the "Demand-Side" product offerings have been re-named
Strategic MRO, and the "Supply-Side" product (OCS) offerings have been split
into two distinct products lines: supplier enablement and enterprise catalog
management. All of the Company's products and services will be marketed as
components of a single
- --------------------------------------------------------------------------------
Page 3
integrated solution set, as the Company strengthens and expands its footprint,
and addresses the broad range of business needs for asset-intensive companies
and their business partners.
BUSINESS STRATEGY
The Company is currently building its business strategies around the following
key strengths that we believe will drive future success. First, our products and
services solve large and recurring problems for asset-intensive companies.
Second, as a company with a large and diverse customer base we have a stable
foundation on which to grow the business. Thirdly, our products have a
significant architectural advantage that both offers a unique solution to our
users and also establishes key differentiation from competitors in our market.
Lastly, we are expanding the total solution offering to our customers with new
product and service introductions that are logical extensions of current
products and services and which are based on our accumulated expertise and
market knowledge.
Based on the above strengths we are making six business assumptions that will,
taken together, drive our business decisions and investments to capture the
potential we see in the years ahead. These areas are:
. Web Architecture: Products built on a 100% web architecture offer a
superior solution that benefits customers with lower cost of ownership
and faster deployment, while providing MRO Software with an efficient
development environment
. Back to basics: Asset intensive companies are getting back to basics,
focusing on block-and-tackle management of fundamentals such as
inventory levels, work planning and scheduling, and safety and risk
management. The distraction of elusive gains expected from abstract
Internet projects has been replaced by a return to a focus on core
operational competence.
. Enterprise suite applications reign: Companies will look to a new class
of enterprise suite provider that can combine a demand engine for
industrial materials and services, supplier enablement, and catalog
management.
. Supplier enablement: Outsourcing of supplier e-commerce transactions
will be the most efficient investment choice for our target market.
. Digital product management: The importance of catalog publishing and
digital content management will gain momentum as companies increase
their investment in online commerce.
. Alliances: The importance of partnerships with systems integrators and
channel partners will continue to grow.
Informed by these assumptions, the Company leverages its key strengths
identified above to deliver powerful solutions that provide real value to its
customers, as follows.
The MRO Solution
Through our unique combination of domain expertise in maintenance repair and
operations ("MRO") and our EAM software products, and through our hosted
solutions enabling manufacturers and distributors to participate in e-commerce,
the Company provides a comprehensive industrial supply chain solution. MRO
Software's Strategic MRO solutions (MAXIMO) help companies in asset intensive
industries increase their return on assets while decreasing their operational
costs, including the costs of transacting with their suppliers.
Online Commerce Services provides the tools and technology to enable
distributors and manufacturers of industrial parts - through one catalog and one
connection -to gain exposure to all types of buyers via multiple marketplaces
and exchanges.
- --------------------------------------------------------------------------------
Page 4
Through strategic acquisitions, we have acquired domain expertise and product
offerings in industrial content and catalog management, namely the Standard
Modifier Dictionary ("SMD"), Struxure and Collego Catalog Manager products.
Our industrial product offerings combine to offer a comprehensive end-to-end
solution, (and provide demonstrable value) to all participants in the industrial
supply chain.
Market Leadership
Our flagship Strategic MRO product is MAXIMO Extended Enterprise. MAXIMO
Extended Enterprise combines a robust, proven, and market-leading EAM
application product with comprehensive e-commerce capabilities that enable
e-procurement of MRO materials, labor and services for both scheduled and
unscheduled tasks that are required to efficiently manage virtually any
industrial entity.
Our commitment to improving product architecture is evidenced by the release
of MAXIMO Version 5.0, a 100 percent pure Internet product developed on a
standards-based component architecture that lowers the total cost of ownership
of enterprise applications.
Alliances
We will continue to leverage our relationships with industry leaders, channel
partners and marketing partners. These business partners may play a key role in
the sales, marketing and distribution of our products. Through these
relationships, we will be able to deliver our solutions to a broader market.
Investing in the future
We will continue to develop technologies and products that will maintain our
competitive advantage and provide our customers with the tools that they need to
remain profitable and competitive. In order to remain the market leader, we will
continue to invest and innovate. We believe that strategic acquisitions will
further our advance as the market leader in the Strategic MRO space.
PRODUCTS OVERVIEW
MAXIMO, the Company's EAM system, was first released in February 1991. MAXIMO
enables customers to manage the MRO of their enterprise-wide capital assets.
Businesses, government agencies, and other organizations use MAXIMO across their
enterprises to assist in the management of their high-value capital assets such
as plants, facilities and production equipment to cut MRO inventories and supply
chain costs, control maintenance expenses, reduce downtime, and more effectively
deploy productive assets, personnel and other resources. MAXIMO delivers robust
functionality, drawing upon the Company's established track record as a provider
of large-scale applications critical to the operations of major industrial
companies.
In fiscal 1999, the Company released Online Commerce Services solutions,
initially branded as mroDistributor, mroManufacturer and mroConnect. These
applications enable users of MAXIMO or other enterprise systems to engage in
online procurement of the industrial goods and services that they need to
maintain and operate their capital assets, by connecting to the distributors and
manufacturers of those products and services through the MRO Software Operations
Center or through other e-commerce exchanges. These solutions enable buyers at
companies to efficiently manage the complex balance between both planned
procurement and spot buy activities. OCS links an online community of MRO
suppliers and buyers to a group of Internet-based procurement applications that
reduce purchasing and inventory costs. OCS are delivered via applications that
are hosted at our MRO Operations Center, and our http://network.mro.com website
acts as an administrative and support hub for these services.
Collego Catalog Manager is an Internet-based catalog content management
enterprise application that was acquired from Collego Corporation in August
2001. Collego Catalog Manager is targeted at manufacturers who need to aggregate
multiple sources of product data, manage catalog information in a central
location, and distribute
- --------------------------------------------------------------------------------
Page 5
custom electronic catalogs to diverse customers and sales channels. These
capabilities enable industrial manufacturers to more efficiently support their
sales channels and to serve customers; lower sales and operations costs; speed
time to market; and provide long-term adaptability. MAXIMO Catalog Manager
leverages the same technology to provide catalog content aggregation,
management, and distribution capabilities to MAXIMO customers and prospects. As
a result, MAXIMO Catalog Manager enables companies to create and maintain
consistent online MRO catalogs at the corporate and plant level, thereby
reducing inventory and procurement costs. The Company's INTERMAT, Inc.
subsidiary (re-branded as MRO Software Catalog Services), which has more than 20
years of domain expertise in catalog construction, provides several products
(Struxure and the Standard Modifier Dictionary) and services to cleanse and
normalize product information in order to create e-business ready catalogs. MRO
Software's Enterprise Catalog Management products and services, which
interoperate with each other and MAXIMO, provide a comprehensive solution to the
content challenges faced by major industrial companies.
STRATEGIC MRO PRODUCTS
The MAXIMO suite of software products are used to plan and manage ongoing MRO
and to track related labor, parts and costs. Using MAXIMO, customers can
prioritize tasks, assign work based on the availability of necessary parts and
labor, and analyze equipment failures in order to implement appropriate
preventive maintenance measures. MAXIMO permits work orders to be generated and
tracked electronically, and also to be linked to related information, such as
labor and equipment records, job procedures, parts inventories and purchasing
systems. Failure analysis using MAXIMO assists in identifying root causes of
equipment problems and aids in designing preventive maintenance procedures to
reduce future equipment failure rates and downtime. MAXIMO includes safety and
compliance features so that companies can implement in-depth tracking and
reporting processes that adhere to mandated regulatory guidelines. MAXIMO is
available in English, Brazilian Portuguese, Dutch, French, German, Italian,
Japanese, Latin American Spanish, Simplified Chinese and Swedish.
The Company has recognized opportunities to expand our market share in target
vertical markets by offering pre-configured, industry-specific, focused
applications for MAXIMO. Initiatives are focused on the following key
industries: Aviation, Facility & Property Management, Discrete & Process
Manufacturing, Public Sector, Oil & Gas, Transportation and Utilities. Each is
supported with scalable solutions running on industry-standard databases,
application servers and hardware platforms, complemented by offerings from key
alliance partners with the appropriate domain expertise.
MAXIMO FEATURES
MAXIMO is composed of a series of comprehensive capabilities that communicate
with a relational database management system. MAXIMO operates on a variety of
commonly used server hardware platforms and network operating systems and also
uses leading commercial SQL databases, including Oracle and Microsoft SQL
Server. MAXIMO is sold into vertical markets. Each capability below describes
core application features and functions available in all MAXIMO offerings.
Equipment: tracks associated costs, histories, and failures of a serialized
piece of equipment as it moves throughout a plant or facility.
Work Orders: provides the ability to view detailed planning information, enter
day- to-day maintenance requests, schedule work orders based on real-time
criticality and compare budgets or estimates against actual and historical work
orders.
Preventive Maintenance: generates preventative maintenance work orders
individually, batched or automatically.
Resources: maintains detailed company, service contract, and tool records for
use in other modules to plan and analyze maintenance work.
Labor: stores information by employee, craft or contractor. It maintains
personnel files and reports labor on work orders in timecard format.
- --------------------------------------------------------------------------------
Page 6
Calendars: provides the ability to view calendars by month or day and associates
calendars with labor and craft records to plan work based on equipment and labor
availability.
Jobs Plans: tracks multiple quantities and costs by operation or job plan.
Purchasing: creates requests for proposals, blanket purchase orders and purchase
agreements, purchase requisitions and purchase orders, records receipt of parts,
analyzes vendor performance and integrates with accounting applications,
including invoice matching and multiple currency functionality.
Inventory: contains over 2,000 material classification templates, tracks items,
costs and balances by bin, lot or storeroom, reorders automatically, forecasts
materials, accesses up to date cost information and issues parts directly to
work orders.
Safety: offers safety features such as identification of hazardous materials,
lock out, tag out capabilities, identification of affected equipment and
locations and tracking of permits.
Inspections: plans and schedules are defined and analyzed in support of
predictive and preventive maintenance.
MAXIMO OPTIONS
A variety of options can be added on to expand the capabilities of MAXIMO such
as optimized e-procurement features designed to streamline the MRO supply chain
and supply chain planning. MAXIMO options include the following:
MAXIMO Project Manager: offers robust planning and scheduling, materials
management, storeroom management, creation and organization of an asset
register, and various levels of procurement from planned replenishment through
tactical spot buying. It brings scheduling into focus as one of the key business
drivers within asset intensive companies, linking the tasks and schedules with
the skills and materials needed for operational efficiency.
MAXIMO Analyzer: delivers distributed online analytical processing ("OLAP")
capabilities to MAXIMO users, particularly management. It provides detailed
information allowing users to rapidly pose multiple questions and assess
responding data to make critical business decisions. The product converts
transaction data into a functional analysis instrument utilizing PowerPlay(R)
from Cognos, a leading supplier of business intelligence tools.
Desktop Requisition: supports the "Self Service" creation of new material
requests and review of existing requests through any Java-enabled Internet
browser, and electronic commerce capabilities for the transfer of purchase
orders to vendors. Desktop Requisitions provides punch-out capability that
supports searching and selecting parts from online catalogs, creation of
requisitions and purchase orders online, order status information, invoice and
shipping history, contract pricing, and real-time interaction with suppliers -
specifically access to real-time pricing and availability data.
MAXIMO Workflow: allows automation of maintenance operations business processes
and pushing of information to the right people at the right time. MAXIMO
Workflow allows organizations the ability to rapidly deploy new or enhance
existing business processes in response to ever changing business demands.
MAXIMO Illustrated Parts Catalog ("IPC"): enhances MAXIMO's work management
components by providing visual machine documentation on the plant floor. IPC is
a packaged solution that provides maintenance personnel and planners with
instant access to strategic technical documentation and spare parts information.
IPC allows a planner the ability to link back and forth between their MAXIMO
maintenance management system and an illustrated bill of materials for
equipment. IPC overcomes one of the largest barriers to maintenance productivity
in large plants today, namely incorrect, misfiled, or out-of-date critical
technical documentation. The time spent on searching for technical documentation
and part information can be significantly reduced.
- --------------------------------------------------------------------------------
Page 7
Standard Modifier Dictionary ("SMD"): provides a structured format, which forms
the foundation for consolidated materials catalogs. The SMD has over 2,200 noun-
modifier pairs along with the physical characteristics and values to identify
part items and variations.
MAXIMO Catalog Manager: The software aggregates and organizes internal and
external product and pricing information into a single corporate catalog, and
then publishes catalogs according to the audience. This catalog can be published
inside or outside the firewall to marketplaces or other internal systems. MAXIMO
Catalog Manager facilitates inventory sharing and visibility by making multi-
site and multi-company catalog content available to buyers and users through
various business systems including the Company's own OCS solutions and MAXIMO.
MAXIMO Catalog Manager will also be used for strategic sourcing, enabling buying
organizations to leverage catalog information in existing systems such a MAXIMO
and send it to suppliers who will update various RFP terms such as pricing,
availability, etc. Together with Catalog Services, Struxure, and the SMD, MAXIMO
Catalog Manager delivers a comprehensive solution to buy-side catalog
challenges.
MAXIMO Marketplace Manager: a service that provides access to a suite of hosted
applications that resides at the MRO Software Operations Center and lets
companies enable their suppliers, host a catalog, create an aggregated view of
all catalogs (complete with customer specific item information and pricing), and
house this information in a private marketplace. Users can access this private
marketplace from a web browser or via "punch out" from MAXIMO or other leading
purchasing and enterprise resource planning ("ERP") applications to perform
purchasing and sourcing functions.
MAXIMO Enterprise Adapters: products that support financial, purchasing,
materials and inventory integration with various enterprise business systems
including packaged integration to Oracle, PeopleSoft, and SAP.
E-Commerce Adapters: industry-standard, XML-based e-commerce collaboration
applications that provide live, real-time status on orders and transactions with
customer-specified distributors, manufacturers, and marketplaces, including but
not limited to MRO Software OCS solutions, Ariba's CSN, and i2 Technologies'
TradeMatrix.
MAXIMO EXTENDED ENTERPRISE:
The value of the MAXIMO offering has been extended to support strategic sourcing
of MRO goods and services and include a number of the options defined in the
Options section. MAXIMO Extended Enterprise includes maintenance and repair
optimized e-procurement features designed to streamline the MRO supply chain and
supply chain planning, as well as data management capabilities for consolidated
materials catalogs. Customer's who have previously licensed MAXIMO Enterprise
can upgrade to MAXIMO Extended Enterprise by purchasing these options
separately.
MAXIMO Extended Enterprise consists of all of the core MAXIMO capabilities
packaged with the following options:
. Desktop Requisitions
. Workflow
. Standard Modifier Dictionary ("SMD")
. E-Commerce Adapters
MAXIMO BUYER:
MAXIMO Buyer is an Internet-based procurement product designed to link buyers
and suppliers in streamlining purchasing efficiencies without the need for a
demand engine. MAXIMO Buyer provides a single interface for electronic
procurement of MRO supplies, materials, parts and services from suppliers.
MAXIMO Buyer can link front-line employees to marketplaces of their choice.
ONLINE COMMERCE SERVICES AND ENTERPRISE CATALOG MANAGEMENT
- --------------------------------------------------------------------------------
Page 8
These products and application services are designed to enable organizations to
sell MRO products and services over the Internet quickly and easily. Purchasers
can immediately access robust and transactionable product catalog content from
their selected suppliers, including product descriptions, pricing and
availability. Suppliers (manufacturers and distributors) of MRO products and
services can create a single master catalog, implement a connection to their
business systems, publish multiple catalogs, and have connections to a variety
of third party marketplaces, exchanges, and procurement systems, including
MAXIMO.
ONLINE COMMERCE SERVICES
MRO Software provides tools for distributors and manufacturers of industrial
products to succeed in today's e-Commerce world and to be more closely connected
with their customers. These tools give industrial suppliers a quick and easy way
to conduct business with their partners and customers over the Internet. By
utilizing these hosted solutions companies can immediately participate in
Internet-based commerce and ensure their ability to provide quality service to
existing customers in an era of heightened competition.
These flexible solutions enable manufacturers, distributors and marketplaces to
expand business potential, achieve lower order processing costs, eliminate
unnecessary duplication of data and decrease costs while improving the level of
customer service.
Solutions for Manufacturers: makes it easy for industrial suppliers to create
and maintain a sophisticated online catalog complete with text, photos,
drawings, and item-specific Web links. With a single repository of searchable
catalog content, this is accessible to distributors or end users anywhere via
the MRO Software Operations Center, providing information and availability on a
24/7/365 basis.
Solutions for Distributors: provide a cost effective online presence for
industrial suppliers by enabling the development and maintenance of a single
catalog. Working with a single connection to the distributor's business systems,
OCS can provide real-time order status and product availability information to a
variety of buyers. Buyers can access the catalog content from a variety of
purchasing applications, marketplaces and exchanges, and can also customize
their view to show contract pricing, special parts and only products relevant to
their business.
Solutions for Marketplace Managers: enable e-commerce participants to aggregate
and connect manufacturers and/or distributors of MRO goods and services, who are
already using OCS, to create a defined and controlled online marketplace. These
marketplaces may be generally available to the public, or they may be "private"-
branded and positioned to serve particular industry segments as determined by
the participants.
MRO Software Operations Center: serves as "home" to our OCS solutions, and
provides a secure, global e-commerce network that can handle multiple languages,
currencies and tax codes.
Our Online Commerce Services business potentially provides tremendous leverage
and competitive differentiation when used in combination with our other product
offerings. Our strategy is to promote the capabilities of these applications
into both capital asset intensive companies and the suppliers that service them
to position ourselves as the de-facto standard for supplier enablement in the
industrial product market.
CATALOG MANAGEMENT
Collego Catalog Manager: Collego Catalog Manager is a catalog content
management enterprise application for industrial suppliers that provides catalog
maintenance, customization and publishing. Collego Catalog Manager provides
additional capabilities that complement Struxure's data normalization functions.
Collego Catalog Manager empowers sales and marketing teams to expand sales
efforts, reduce costs and speed time-to-market, while reducing dependency on IT
resources. The Company has "cross-pollinated" this technology into OCS,
enhancing and expanding our existing supplier solutions.
- --------------------------------------------------------------------------------
Page 9
In order to gain a competitive advantage in their marketplaces, industrial
manufacturers need online catalogs to meet the requirements of multiple sales
channels and customers. To manage this process efficiently, the catalog content
needs to be accurate, searchable, managed from a central repository and easily
repurposed for a variety of destinations and applications. The difficulty and
expense of working with many data sources and supporting multiple buyers and
channels is a major roadblock manufacturers face in capitalizing on the
potential of their e-Business opportunities.
Collego Catalog Manager helps aggregate data from multiple sources into one
central repository, allowing easy customization, maintenance and publication of
data through a browser-based, drag-and-drop interface. Now, manufacturers can
create and present rich, structured product catalogs, complete with graphics,
URL links and other information such as diagrams, .pdf files and schematics.
These capabilities provide an additional competitive advantage for MRO
Software's industrial business-to-business ("b2b") customers in that they can
share these custom catalogs with many applications including websites,
distributors, procurement applications, and many other destinations.
Standard Modifier Dictionary ("SMD"): The SMD format is a classification
standard for organizing industrial product information. The SMD facilitates the
production of clean, consistent, parametrically searchable data that helps
buyers and MRO end users find and purchase the products necessary to keep their
businesses and plants operating. Suppliers of MRO goods and services can use the
SMD to structure their data into a consistent format that allows users to
identify a part by its attributes and offers more product visibility in cross
vendor searches. The SMD has over 2,200 noun-modifier pairs along with the
physical characteristics and values to accurately identify each item and its
variations.
STRUXURE: Struxure is a catalog construction tool that enables companies to
produce SMD-compliant catalogs from product data that is incomplete,
unstructured, or full of jargon and abbreviations. Struxure includes state-of-
the art search tools, line item construction functions, standard and custom
reporting features and network capabilities. It enables the user to search by
description or by a series of references such as vendor, plant, commodity code,
UN/SPSC code, and status.
PRODUCT ARCHITECTURE
MAXIMO Version 5.0 uses Java 2 Platform Enterprise Edition (J2EE) technology and
a Java-based component architecture. MAXIMO Version 5.0 is the first Strategic
MRO solution to be developed on a standards-based pure-Internet architecture.
MAXIMO, with its industry-leading, best-of-breed functionality, was designed
with global operations organizations in mind.
MAXIMO's use of open standards support a broad range of server platforms,
network operating systems and communications protocols provides customers with
the flexibility to match their computing resources to their needs, and
facilitates tight integration to critical business systems. It also provides the
ability to collaborate with virtually any procurement network, marketplace or
one-on-one with suppliers.
MAXIMO Version 5.0 is a multi-tier or "n-tier" application designed to be
deployed on an application server, creating the potential for virtually
unlimited scalability. MAXIMO Version 5.0 supports BEA's Weblogic core
functionality and enables the execution, scalability, and management of MAXIMO's
multi-tiered component architecture.
The Online Commerce Service applications utilize an Internet oriented,
scaleable architecture to support a full web browser-based environment.
Communication between buyers and suppliers is real-time, utilizing XML
standards. The applications are hosted on multiple servers located at the MRO
Software Operations Center.
Collego Catalog Manager leverages an Internet oriented, scalable architecture
and utilizes leading standards such as XML and SQL to enable companies to create
a central product information repository, yet allow users to access and manage
the information through a web browser from any location. The Company's patent-
pending
- --------------------------------------------------------------------------------
Page 10
engine, called AToMS(TM) (Adaptive Taxonomy Management System), provides
significant advantages over traditional methods of catalog management, including
greater flexibility, data quality, and time to market.
CUSTOMER SUPPORT
A high level of customer service and technical support is critical to customer
satisfaction because many of the Company's customers implement our products in
complex, large-scale applications on which the success of their organizations
depend. The Company believes that its approach to support has been and will
continue to be a significant factor in the market acceptance of its products.
As of September 30, 2001, the Company employed a technical hot-line support
staff of 102 employees operating out of the Company's corporate headquarters in
Massachusetts and five international technical response centers located in the
United Kingdom, Australia, Canada, Brazil and Mexico. Support services are
provided on a seven-day week, 24-hour day basis utilizing the UK, Australia and
Bedford support centers. The Company also provides premium support, which is
intended to meet the needs of our larger Enterprise-wide clients. This fee-
based service is provided in addition to all of the standard support agreements
provided to all of our clients
Subscribers to the Company's annual support contracts are entitled to receive
(i) customer service and technical support by telephone, fax, support on line
via the Internet and electronic bulletin board, (ii) a newsletter and periodic
technical bulletins, (iii) an invitation to attend the Company's annual user
group meeting and (iv) periodic software updates and software upgrades. The
Company believes that support contracts are a stable source of recurring
revenue.
SERVICES
Implementation, Consulting and Training: The Company offers consulting services
designed to assist customers in meeting the challenges of successfully
implementing business solutions. The Company believes that its approach to
services has been and will continue to be a significant factor in the market
acceptance of its products. As of September 30, 2001, the Company employed a
consulting and training staff of 325 employees. The Company's network of
international distributors also provides services within their geographic
territories.
The Company provides consulting services to assist customers in planning and
carrying out the implementation of the Company's solutions. In some cases,
customers install and implement MAXIMO systems and perform any necessary
modifications themselves with only limited assistance from the Company. In other
cases, particularly where a integrated solution is required, the Company
provides comprehensive implementation planning, project management, network
communications and system integration services. The Company also contracts with
third party consultants as needed in order to meet any services backlog.
The Company conducts comprehensive training programs covering Company
applications and concepts for its end users. Training is offered at the
Company's headquarters in Massachusetts and at regional centers located in
California, Georgia, Texas, Virginia, Australia, France, Germany, Sweden, the
United Kingdom and the Netherlands. The Company also offers on-site training
classes at customer sites upon request.
Catalog Services: the SMD is the world's most-widely used standard for the
description of MRO equipment and general supply terms. The SMD helps customers
to maintain world-class materials catalogs and cost-effectively manage their MRO
inventories. The Catalog Services organization has more than 20 years
experience, has cataloged more than 20 million MRO line items at more than 1,000
locations in more than 25 countries and has serviced customers in a wide variety
of industries including petrochemical, utilities, automotive, aerospace,
pharmaceuticals, food processing, pulp and paper and industrial distribution.
CUSTOMERS
The Company's customers include electric, water and other utilities,
educational, research and health care institutions, government agencies, hotels,
casinos,
- --------------------------------------------------------------------------------
Page 11
airlines and railroads, as well as large, well-known corporations in
manufacturing, oil and gas, construction, mining, aerospace, defense, ship
building, telecommunications, ground fleet transportation, data processing,
semiconductor, financial, computer, entertainment, banking, insurance,
pharmaceutical and other industries. The Company's products have been installed
and are supported in major markets worldwide. Local language support is provided
in many of these markets.
SALES AND MARKETING
The Company markets its products in the United States through a direct sales
organization of 155 persons operating out of its Massachusetts headquarters and
sales offices located in California, Colorado, Florida, Georgia, Illinois,
Maryland, Michigan, New Hampshire, New Jersey, New York, Texas, and Virginia.
The Company markets its products outside the United States through a sales force
of 139 persons from a network of sales offices in Australia, Belgium, Brazil,
Canada, China, France, Germany, Hong Kong, India, Italy, Japan, Mexico, the
Netherlands, Sweden, Thailand and the United Kingdom and through distributors in
parts of Africa, Asia, Europe, the Middle East and South America. Approximately
34% of the Company's total revenues in fiscal 2001 were derived from sales
outside the United States.
The Company markets its products through advertising campaigns in national trade
periodicals, direct mail, seminars and its Web site (http://www.mro.com). These
efforts are supplemented by listings in relevant trade directories, exhibitions
at trade shows and conference appearances. Initial leads are qualified by the
tele-marketing operation before being turned over to either the direct sales
force or tele-sales.
The sales cycle for Strategic MRO products, from the initial sales presentation
to the issuance of a purchase order, typically ranges from six to twelve months.
The Company believes that customers generally choose MAXIMO based on the
features it provides and upon a preference for the product architecture,
implementation time, domain expertise and ease of use.
The sales cycle for supplier enablement solutions, from the initial sales
presentation to the issuance of a purchase order, typically ranges from three to
nine months. The Company has focused its supplier enablement sales strategy,
which consists of a hybrid model of direct and channel sales, towards industrial
distribution and manufacturing companies more than the "white collar" suppliers,
such as software or office supply vendors. These suppliers tend to be the
companies that are relied on to service our capital-intensive end user
industrial clients that are typically Global 2000 businesses.
The sales cycle for enterprise catalog management products, from the initial
sales presentation to the issuance of a purchase order, typically ranges from
six to twelve months. The Company believes that customers generally choose
Collego Catalog Manager based on the features it provides and upon a preference
for the flexibility, ease of use, speed of implementation, and the combination
of software plus Catalog Services as a comprehensive solution.
Delivery lead times for the Company's products are very short and, consequently,
substantially all of the Company's software revenues in each quarter result from
the orders received in the quarter. Accordingly, the Company only maintains a
backlog for its consulting and training services and believes that its backlog
at any point in time is not a reliable indicator of future sales and earnings.
The absence of significant backlog may contribute to unpredictability in the
Company's results of operations.
STRATEGIC ALLIANCES
MRO Software has planned for and will introduce a new partner program in 2002.
The program will accommodate all of our current and future partners who support
the selling and servicing of our solutions, and will consist of two key
components: "Consulting and Systems Integration Partners" and "Channels
Partners". During 2002, we will make investments in people and campaigns to
support the revised partner program, and drive new sources of revenue with and
through alliance partners. These investments are expected to extend the
Company's reach in the marketplace and enable the Company to expand its
enterprise footprint.
- --------------------------------------------------------------------------------
Page 12
Management of our marketing and channel partners is an important component of
our business strategy and is expected to enhance our future revenue streams. The
Company has marketing alliances with Oracle, i2 Technologies, Inc.("i2"),
PeopleSoft, Inc. and Ariba, Inc. The Company also offers a solution to customers
of SAP's enterprise resource planning ("ERP") products through an alliance with
IBM Global Services (an affiliate of IBM). The Company develops reseller
channels that supplement the direct sales force as well as, VAR and OEM
agreements with vendors such as Rockwell Automation, Johnson Controls, Inc., ABB
Service Worldwide (an affiliate of Asea Brown Boveri), i2, Honeywell,
Incorporated and The Foxboro Company. The Company works closely with major
systems integrators such as IBM Global services.
In December 2001, the Company entered into a global agreement with i2. Pursuant
to this agreement, in May of 2001 the two companies introduced MRO Services, a
new set of supplier enablement services that offers the capabilities of MRO
Software's Online Commerce Services on the i2 TradeMatrix Open Commerce
Network(TM) (OCN). MRO Services are designed to enable MRO suppliers to improve
sales efficiencies through a hosted suite of applications that include
capabilities for MRO content, commerce, planning and collaboration, and
connectivity with customers. Using MRO Services, MRO suppliers can quickly
establish online product catalogs, manage catalog information, interconnect with
their customers' procurement systems, create a Web storefront, manage customer-
specific information, and conduct commerce, all in a secure Internet
environment.
The Company also seeks out alliances with niche solution providers who provide a
complementary solution to MAXIMO. These providers often address solution
requirements specific to an industry vertical. The Company is focused on several
verticals and these providers enhance the sales growth for the MAXIMO solutions
in these verticals. The Company has established the MAXIMO Complementary
Solution Provider ("CSP") Program to develop integrated solutions with these
niche applications to enhance the overall MAXIMO EAM solution.
COMPETITION
The market in which the Company operates is highly competitive and is
characterized by a large number of competitors including both independent
software vendors and certain ERP vendors.
The Company's suite of e-business solutions 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. The current potential
competitors in the MRO e-commerce market include Ariba, Commerce One, Peregrine,
IBM, i2, Oracle, PeopleSoft, SAP and others. Many of the Company's enterprise
asset maintenance management competitors have also entered the MRO e-commerce
market.
MAXIMO competes with products offered by independent software vendors, such as
Datastream Systems and Indus International. MAXIMO also competes with integrated
ERP systems which are provided by several large vendors, such as SAP and JD
Edwards and others, and which include maintenance modules. MAXIMO also
occasionally competes with small vendors of low cost maintenance management
systems designed initially for use by a single user or limited number of users,
although MAXIMO's functionality generally surpasses the capabilities of these
products in a feature-by-feature comparison.
Certain of the Company's ERP and other 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 enterprise asset
maintenance or planning and cost systems markets, or on the supply chain
management business, the Company could be at a competitive disadvantage.
PRODUCT DEVELOPMENT
The Company has made substantial investments in research and software product
development. The Company's total product development expenses in fiscal years
2001, 2000 and 1999 were $27.6 million, $21.3 million, and $15.0 million,
respectively. As of September 30, 2001, the Company's research and development
staff consisted of 210 employees and a number of outside consultants. The
Company's development
- --------------------------------------------------------------------------------
Page 13
organization is comprised of relatively small teams of senior level developers
and engineers, who focus on different areas of development. The Company
maintains development centers in Bedford, Massachusetts; London, Ontario; Ann
Arbor, Michigan; and Houston, Texas.
The Company's products consist primarily of internally developed software and
the products acquired through acquisitions. In addition, the Company has
incorporated in its products graphical user interfaces, report writers,
application development tools and database management systems under licenses
from other vendors. The Company has developed a Java-based component architect
software application, which has been incorporated into the MAXIMO product
technologies emerging in conjunction with the evolution of the Internet, as a
premier e-Commerce computing platform.
The Company will continue to work closely with customers to define and develop
market driven product enhancements. The Company's product development efforts
have been focused on a standards-based component architecture written in the
Java programming language. Moving beyond traditional client/server and three-
tier architectures, an open standards based component architecture provides
benefits in terms of greater flexibility, improved integration capabilities,
lower "cost of ownerships" in maintaining and application infrastructure, as
well as improved developer productivity in both development and implementations.
The Company will continue its efforts to integrate its products with major ERP
systems, such as PeopleSoft, Oracle and SAP, to offer its clients a complete and
flexible enterprise solution. The Company will continue to research and
investigate new technologies that would complement the Company's product
strategies in the future.
LICENSED TECHNOLOGY
The Company licenses and will continue to license certain software programs from
third-party developers and incorporate them into the Company's products. These
licenses are non-exclusive, generally worldwide licenses that terminate on
varying dates. If we are unable to continue to license any of this software on
favorable terms, we will face delays in releases of our software until
equivalent technology can be identified, licensed or developed, and integrated
into our current products. However, the Company believes that it will be able to
renew these licenses on favorable terms or that if necessary it will be able to
obtain substitute products on reasonable terms.
PROPRIETARY RIGHTS AND LICENSES
The Company has registered a number of its trademarks with the United States
Patent and Trademark Office. Registrations with equivalent offices in many
foreign countries in which the Company or its distributors do business have been
obtained or are in process. The Company has obtained one U. S. Patent (no.
6,325,522 B2) for inventory sharing as it relates to electronic commerce. The
Company has filed a second patent application with the United States Patent and
Trademark Office covering a unique system and method for representing structured
information. The Company has filed or intends to file patent applications in
other countries within key geographies for both.
The Company regards its software as proprietary and attempts to protect its
rights with a combination of trademark, copyright and employee and third party
non-disclosure agreements. Despite these precautions, it may be possible for
unauthorized parties to copy or reverse-engineer portions of the Company's
products. While the Company's competitive position could conceivably be
threatened by its inability to protect its proprietary information, the Company
believes that copyright and trademark protection are less important to the
Company's success than other factors such as knowledge, ability and experience
of the Company's personnel, and ongoing product development, support and
innovation.
The Company's software products are usually licensed to customers under a
perpetual, non-transferable, non-exclusive license that stipulates how many
concurrent users may access the system. The Company relies on both "shrink wrap"
and "click wrap" licenses and negotiated agreements. A shrink wrap license
agreement is a printed license agreement included with packaged software that
sets forth the terms and conditions under which the purchaser can use the
product, and purports to bind the purchaser to such terms and conditions by its
acceptance and purchase of the
- --------------------------------------------------------------------------------
Page 14
software. A click wrap license agreement is displayed to an end-user during the
online registration process, and purports to bind the end-user to its terms and
conditions when the end-user acknowledges and agrees to those terms and
conditions via an interactive process. Certain provisions of the Company's
shrink-wrap and click 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.
PRODUCTION
The principal materials and components used in the Company's software products
are CD-ROMs with documentation and occasionally hard copy installation guides.
The Company occasionally uses third-party vendors to print user manuals,
packaging and related materials. The majority of CD-ROM duplication is done by
the Company's manufacturing and distribution facility located at its corporate
headquarters. The Company also now offers documentation to its customers via its
web site. To date, the Company has been able to obtain adequate supplies of all
components and materials and has not experienced any material difficulties or
delays in manufacture and assembly of its products or materials due to product
defects.
EMPLOYEES
As of September 30, 2001, the Company had 1,042 full-time employees including
294 in sales, marketing and related services, 210 in product research and
development, 102 in customer support, 325 in training and consulting services,
and 111 in finance, administration, information technology, human resources,
manufacturing and office services. The Company's employees are not represented
by any collective bargaining organization, and the Company has never experienced
a work stoppage. The Company believes that its relations with employees are
good.
ITEM 2. PROPERTIES
The Company leases its corporate headquarters and its manufacturing and
distribution facilities in Bedford Massachusetts. The leased facility consists
of approximately 110,000 square feet, at an average annual base cost of
$1,794,000, under a 6-year net lease with a renewal option through December 31,
2009. Additionally, the Company estimates that its annual operating expenses
under the lease will be approximately $1,000,000, based on information currently
available. The actual costs will depend on such factors as actual electricity
usage, real estate taxes and operating costs. Under the terms of its lease, the
Company has the ability to sublease the space. In fiscal 2001, the Company
sublet 17,555 square feet to another company for a one-year term that expired in
November 2001. The Company is not renewing the sublease, but may elect to
sublease the space in the future should business conditions dictate. The Company
leases additional sales offices in California, Colorado, Florida, Georgia,
Idaho, Illinois, Maryland, Michigan, Missouri, New Hampshire, New Jersey, New
York, Tennessee, Texas, and Virginia. The Company also leases offices for its
international operations in Argentina, Australia, Brazil, Canada, China, France,
Germany, Hong Kong, India, Italy, Mexico, the Netherlands, Singapore, Sweden,
Thailand and the United Kingdom.
ITEM 3. LEGAL PROCEEDINGS
As of the date of this Annual Report on Form 10-K, the Company is not a party to
any legal proceedings the outcome of which, in the opinion of management, would
have a material adverse effect on the Company's results of operations or
financial condition.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
- --------------------------------------------------------------------------------
Page 15
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
STOCK INFORMATION
Price Range of Common Stock
The Company's Common Stock is traded in the over-the-counter market and prices
are quoted on the National Association of Securities Dealers Automated Quotation
National Market System ("NASDAQ National Market") under the symbol MROI. As of
December 18, 2001, there were approximately 101 holders of record of the
Company's Common Stock. This reflects the fact that most of the Company's stock
is held in street names through one or more nominees.
The following table sets forth the high and low per share sale prices of the
Company's Common Stock, as reported on the NASDAQ National Market consolidated
reporting system for each quarterly period within the two year period ended
September 30, 2001.
FISCAL 2001 HIGH LOW
First Quarter $14.00 $ 8.14
Second Quarter $18.13 $ 7.38
Third Quarter $16.32 $ 6.75
Fourth Quarter $17.15 $ 9.35
FISCAL 2000 HIGH LOW
First Quarter $63.06 $18.00
Second Quarter $97.38 $38.00
Third Quarter $56.75 $16.88
Fourth Quarter $24.00 $11.31
On October 15, 1999, the Company's Board of Directors approved a 2-for-1 stock
split in the form of a dividend of its common stock to be paid to all
shareholders of record on December 15, 1999. The payment distribution date for
the stock dividend was December 22, 1999. The Company's authorized common stock,
$0.01 par value per share, was also increased from 15,350,000 to 50,000,000
shares. All share and per share data has been restated to reflect this stock
split in the form of a dividend as though it had occurred at the beginning of
the earliest period presented.
Since 1983, the Company has not declared or paid cash dividends on its Common
Stock, other than distributions to stockholders made with respect to fiscal
years 1992 and 1993 to satisfy certain federal and state tax obligations of the
stockholders attributable to the Company's S Corporation status prior to October
1, 1993. The Company currently intends to retain any future earnings to finance
growth and therefore does not anticipate paying cash dividends in the
foreseeable future.
Certain provisions of the Company's Articles of Organization, as amended, and
Bylaws could delay the removal of incumbent directors and could make a merger,
tender offer or proxy contest involving the Company more difficult, even if such
events would be beneficial to the interests of the stockholders. In addition,
the Company has 1,000,000 shares of authorized Preferred Stock. The Company may
issue shares of such Preferred Stock in the future without further stockholder
approval and upon such terms and conditions, and having such rights, privileges
and preferences, as the Board of Directors may determine. The rights of the
holders of common stock will be subject to, and may be adversely affected by,
the rights of the holders of any Preferred Stock that may be issued in the
future. The issuance of Preferred Stock, while providing flexibility in
connection with possible acquisitions and other corporate purposes, could have
the effect of making it more difficult for a third party to acquire, or of
discouraging a third party from acquiring, a majority or the outstanding voting
stock of the Company. In addition, the staggered terms of the Company's Board of
Directors could have the effect of delaying or deferring a change in control of
the Company.
In January 1998, the Board of Directors of the Company adopted a stockholder
rights plan by declaring a dividend distribution of one preferred stock purchase
right (one
- --------------------------------------------------------------------------------
Page 16
"Right") on each share of the Company's Common Stock outstanding on January 27,
1998 or, in certain circumstances, issued thereafter. Initially, the Rights are
not exercisable, not represented by separate Right certificates and do not trade
separately from the Company's Common Stock. Ten days after a tender offer or
acquisition of 15% or more of the Company's common stock, each right may be
exercised for $140 ("Exercise Price") to purchase one one-thousandth of one
share of the Company's Series A Junior Participating Preferred Stock. Each one
one-thousandth of each share of Series A Junior Participating Preferred Stock
will generally be afforded economic rights similar to one share of the Company's
common stock. In addition, after such rights are triggered, each right entitles
the holder to purchase common stock of the Company with a fair value of twice
the Exercise Price or, in certain circumstances, securities of the acquiring
company for the Exercise Price. Each Right expires in January 2008 and, during
specified periods, the Company may redeem or exchange each Right for $.01 or one
share of common stock, respectively. The Rights Agreement has been filed by the
Company with the Securities and Exchange Commission as an exhibit to a
Registration Statement on Form 8-A dated February 2, 1998.
Stockholders are urged to review the Rights Agreement for a complete
understanding of the Rights Plan. The Rights Plan, while providing the Board of
Directors with flexibility in connection with possible acquisitions and
deterring unfair or coercive takeover tactics, could have the effect of making
it more difficult for a third party to acquire, or of discouraging a third party
from acquiring, beneficial ownership of 15% or more of the outstanding shares of
the Company's Common Stock.
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
The selected consolidated financial data of the Company set forth below has been
derived from the audited consolidated financial statements for the Company for
the periods indicated. This selected consolidated financial data should be read
in conjunction with "Management's Discussion and Analysis of Consolidated
Financial Condition and Results of Operations" and the Company's consolidated
financial statements and the notes thereto included elsewhere herein.
YEAR ENDED SEPTEMBER 30,
-----------------------------------------------------------------
(in thousands, except
per share data)
2001 2000 1999 1998 1997
---- ---- ---- ---- ----
Revenues $185,450 $168,661 $145,665 $120,016 $96,700
(Loss)/income from operations (20,755) (571) 24,333 12,902 16,271
Net (loss)/income (15,468) 2,102 17,880 6,222 11,570
Net (loss)/income per share, basic (0.70) 0.10 0.87 0.32 0.59
Net (loss)/income per share, diluted (0.70) 0.09 0.85 0.31 0.58
Weighted number of common and
common equivalent shares 22,148 22,786 21,094 20,156 20,128
-----------------------------------------------------------------
Total assets 171,453 180,945 159,033 114,520 102,239
Long-term obligations 150 171 282 906 144
Dividends per share - - - - - - - - - - - - - - -
On October 15, 1999, the Company's Board of Directors approved a 2-for-1 stock
split in the form of a dividend of its common stock to be paid to all
shareholders of record on December 15, 1999. The payment distribution date for
the stock dividend was December 22, 1999. All historical share and per data has
been restated to reflect this stock split as though it had occurred at the
beginning of the earliest period presented.
Included in net income for the year ended 1998 is a one-time charge for
purchased in-process product technology of $9,172,000 related to the purchase of
the A.R.M. Group Inc., on February 6, 1998.
- --------------------------------------------------------------------------------
Page 17
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
FORWARD-LOOKING STATEMENTS
In addition to historical information, this Annual Report on Form 10-K may
contain forward-looking statements (within the meaning of section 27A of the
Securities Act of 1933, as amended, and section 21E of the Securities Exchange
Act of 1934, as amended). The following and similar expressions identify
forward-looking statements: "expects", "anticipates", and "estimates". Forward-
looking statements include, but are not limited to, statements related to: the
Company's plans, objectives, expectations and intentions; the timing of,
availability and functionality of products under development or recently
introduced; and market and general economic conditions. Important factors that
could cause actual results to differ materially from those suggested by the
forward-looking statements for various reasons, include those discussed under
"Factors Affecting Future Performance." These forward-looking statements speak
only as of the date of this Annual Report, and the Company disclaims any
obligation to update such forward looking statements as a result of any change
in circumstances or otherwise.
OVERVIEW
MRO Software, Inc. provides solutions for enterprise asset maintenance ("EAM")
optimization, industrial supply chain planning and supplier enablement. Through
our unique combination of domain expertise in maintenance, repair and operations
("MRO") and EAM software products, and through our hosted solutions that enable
manufacturers and distributors to participate in e-commerce, the Company
provides a complete end-to-end industrial supply chain solution. MRO Software's
Strategic MRO solutions (MAXIMO) help companies in asset intensive industries
increase their return on assets while decreasing their operational costs,
including the costs of transacting with their suppliers. Our Online Commerce
Services ("OCS") solutions provide the tools and technology to enable
distributors and manufacturers of industrial parts - through one catalog and one
connection - to gain exposure to all types of buyers via multiple marketplaces
and exchanges. Through strategic acquisitions, we have acquired domain expertise
in catalog services management. The strengths of our MRO end-to-end industrial
product offerings combine to offer a comprehensive solution, which makes the
entire supply chain more efficient for all participants.
In March 2001, the Company changed its name to MRO Software, Inc., and changed
its NASDAQ trading symbol from "PSDI" to "MROI" effective March 8, 2001.
During fiscal 2001, the Company operated in two reportable industry segments:
(1) the development, marketing and support of our "Demand-Side" software
products and services, consisting of MAXIMO Enterprise and MAXIMO Extended
Enterprise and (2) the development, marketing and support of our "Supply-Side"
software products and services, consisting of Online Commerce Services
and Catalog Management. The mroDistributor, mroManufacturer and mroConnect
products have been grouped and renamed MRO Online Commerce Services. The Catalog
Management products are the Internet-based content management tools and
cataloging services. The Company also offers application hosting services
delivered through our MRO Operations Center, and our mro.com website acts as an
administrative and support hub for these solutions. All segment-reported
financial information contained in this report reflects the Company's
repositioning of its segments, effective in the first quarter of fiscal 2001.
For fiscal 2002, the "Demand-Side" product offerings have been re-named
Strategic MRO, and the "Supply-Side" product offerings have been split into two
distinct products lines: supplier enablement (OCS) and enterprise catalog
management. All of the Company's products and services will be marketed as
components of a single integrated solution set, as the Company strengthens and
expands its footprint, and addresses the broad range of business needs for
asset-intensive companies and their business partners.
ACQUISITIONS
- --------------------------------------------------------------------------------
Page 18
On August 22, 2001, the Company completed the acquisition of Collego
Corporation, a provider of catalog content management enterprise applications
for industrial suppliers. The acquisition, recorded under the purchase method of
accounting and subject to the SFAS 141 and certain provisions of SFAS 142,
included the purchase of certain assets and assumed liabilities for the purchase
price of $4.0 million. The Company estimated the fair value of assets acquired
and liabilities assumed at the date of acquisition and allocated $4.0 million to
goodwill and intangible assets. An additional $750,000 is payable contingent on
certain future events and has not been included in the purchase price accounting
as of September 30, 2001. This contingent amount is being held in escrow and
will be paid upon expiration of twelve months from the closing; provided that
these certain events occur per the Purchase Agreement. In accordance with SFAS
142, other intangible assets are being amortized over three years and goodwill
is not being amortized.
RESULTS OF OPERATIONS
The following table sets forth, for the periods indicated, certain financial
data as a percentage of total revenues:
YEAR ENDED SEPTEMBER 30,
------------------------
2001 2000 1999
---- ---- ----
Revenues:
Software 33% 42% 43%
Support and services 67 58 57
---- ---- ----
Total revenues: 100 100 100
Total cost of revenues 39 35 33
---- ---- ----
Gross margin 61 65 67
---- ---- ----
Operating expenses:
Sales and marketing 39 40 33
Product development 15 13 10
General and administration 10 9 8
Amortization of goodwill
and other intangibles 8 4 --
---- ---- ----
Total operating expenses: 72 66 51
---- ---- ----
(Loss)/income from operations (11) (1) 16
Other income (expense), net 1 2 2
---- ---- ----
(Loss)/income before income taxes (10) 1 18
(Benefit)/provision for income taxes (2) -- 6
---- ---- ----
Net (loss)/income (8)% 1% 12%
---- ---- ----
- --------------------------------------------------------------------------------
Page 19
REVENUES
The Company's revenues are derived primarily from two sources: (i) software
licenses, and (ii) fees for support and services, including support contracts,
training and consulting services, Online Commerce Services subscription fees,
electronic commerce transaction fees, and software catalog services offered
through the Company's INTERMAT, Inc. subsidiary.
Fiscal Fiscal Fiscal
Year Year Year
Ended Change Ended Change Ended
(in thousands) 9/30/01 % 9/30/00 % 9/30/99
- ---------------------------------------------------------------------------------------------------
Software licenses $ 61,337 (14)% $ 70,987 14% $ 62,240
Percentage of total revenues 33% 42% 43%
Support and services $124,113 27% $ 97,674 17% $ 83,425
Percentage of total of revenues 67% 58% 57%
Total revenues $185,450 10% $168,661 16% $145,665
Demand-Side revenues represented 90% of total revenues for fiscal 2001. Total
revenues for the Demand-Side business segment in fiscal 2001 increased to $167.6
million from $143.3 million in fiscal 2000 and $139.6 million in fiscal 1999.
The Company's North American and European markets made the strongest revenue
contributions for fiscal 2001 at 68% and 24%, respectively. Total revenues for
the Supply-Side business segment in fiscal 2001, which include revenues from the
Company's OCS subscription fees decreased 30% to $17.9 million from $25.4
million in fiscal 2000. Supply-Side revenues were $6.0 million in fiscal 1999.
In fiscal 2001, total software license revenue decreased 14% from the prior
year. This decline was attributable to the Supply-Side of the business offset by
a 10% increase in Demand-Side software license revenues. The decline in the
Supply-Side software license revenues is due to several factors: (1) The Company
transitioned to an ASP subscription model for its Supply-Side (OCS) products and
recorded this revenue as services revenues recognized ratably over the contract
period, generally one year. (2) In fiscal 2000, the Company successfully
penetrated the high-end of the supplier e-commerce market characterized by a
small number of large customers purchasing at a higher price point and recorded
these sales as software license sales at the time of shipment. In fiscal 2001,
the Company turned its attention to the middle and lower-end segments of the
supplier market, which includes a large number of smaller companies purchasing
at a lower price point, and we experienced a slower rate of adoption and less
revenue than fiscal 2000. (3) The Company recorded $7.2 million of software
catalog/content management software licenses in fiscal 2000 that were not
repeated in fiscal 2001. Offsetting the decrease in Supply-Side software
revenues in fiscal 2001 was an increase in Demand-Side software license
revenues. The increase was attributable to several large software licenses in
excess of $1 million sold in North America and Europe. The increase in software
license revenues in fiscal 2000 as compared to fiscal 1999 was mainly
attributable to increases in Supply-Side software licenses, attributable to the
successful penetration of the high-end supplier market and $7.2 million of
software catalog/content management software licenses concluded in fiscal 2000
(See above).
The increases in support and services in fiscal 2001 and fiscal 2000 were
attributable to increases in Demand-Side support revenues. Support revenues have
increased as a result of sequential increases in the Demand-Side software
revenue and a high retention of the existing customer base. Also contributing to
the increase in support and services revenues is an increase in Demand-Side
service revenues related to large-scale implementations of MAXIMO and an
increase in Supply-Side data normalization content services.
COST OF REVENUES
Fiscal Fiscal Fiscal
Year Year Year
Ended Change Ended Change Ended
(in thousands) 9/30/01 % 9/30/00 % 9/30/99
- ------------------------------------------------------------------------------------------------------
Software licenses $ 2,438 (49)% $ 4,739 (6)% $ 5,018
Percentage of software licenses 4% 7% 8%
Support and services $70,423 31% $53,651 27% $42,310
________________________________________________________________________________
Page 20
Percentage of support and services 57% 55% 51%
Total cost of revenues $72,861 25% $58,390 23% $47,328
Percentage of total revenues 39% 35% 32%
Cost of software license revenues consists of software purchased for resale,
royalties paid to vendors of third-party software, the cost of software product
packaging and media, and certain employee costs related to software duplication,
packaging and shipping. The decrease in the cost of software license revenues in
fiscal 2001 compared to fiscal 2000 was due primarily to a decrease in royalties
and software purchased for resale. Also, contributing to the decrease was the
purchase of less production materials and documentation, as the Company now
offers documentation to its customers via its web-site. The decrease of cost of
software licenses in fiscal 2000 compared to fiscal 1999 was due primarily to
decreases of software purchased for resale, offset by an increase in 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, costs for utilization of
third-party consultants, and costs to support the MRO Operations Center. The
increase in cost of support and services in fiscal 2001 was attributable to
utilization of third party consultants for the Demand-Side business segment and
services related to a large Supply-Side contract for software catalog/content
management services. The increase in cost of support and services in fiscal 2000
was attributable to the hiring of employees for the Company's support and
services organizations and the use of third party consultants. The increases in
cost of support and services as a percentage of support and services revenues is
attributable to higher utilization of third party consultants therefore
impacting services margins.
OPERATING EXPENSES
Fiscal Fiscal Fiscal
Year Year Year
Ended Change Ended Change Ended
(in thousands) 9/30/01 % 9/30/00 % 9/30/99
- -----------------------------------------------------------------------------------------------------
Sales and marketing $73,202 9% $66,870 42% $46,952
Percentage of total revenues 39% 40% 33%
Product development $27,559 29% $21,288 42% $14,959
Percentage of total revenues 15% 13% 10%
General and administrative $18,022 19% $15,131 30% $11,628
Percentage of total revenues 10% 9% 8%
Amortization of goodwill and other
intangibles $14,561 93% $ 7,553 1,524% $ 465
Percentage of total revenues 8% 4% ---
The increase in sales and marketing expenses in fiscal 2001 was mainly due to an
increase in sales commissions and to a one-time charge recorded in fiscal 2001
of $3.3 million for a warrant issued to i2 Technologies, Inc. The Company also
wrote off a $1 million receivable from a company that claimed bankruptcy. The
increases in sales and marketing expenses in fiscal 2000 were due to increases
in sales, sales support and marketing personnel, sales commissions, market
research, telemarketing expenses and higher travel costs.
The increase in product development expenses in fiscal 2001 and 2000 was
primarily due to the hiring of additional employees to further develop
e-commerce products and make enhancements to the Company's MAXIMO products, as
well as, translation of the Company's products to foreign languages. The Company
intends to continue to make investments in its products.
The increase in general and administrative expenses in fiscal 2001 and 2000 were
primarily due to salaries and related benefits, as well as, other expenses to
support the increase in revenues and global expansion of the Company. In fiscal
2001, the Company paid $650,000 to W.W. Grainger, Inc. as payment for the re-
purchase of a stock option agreement. Also contributing to the increases in
fiscal 2001 and 2000 were provisions for bad debt to cover doubtful foreign
receivables.
________________________________________________________________________________
Page 21
The increase in goodwill and other intangibles amortization expense in fiscal
2001 and 2000 were attributable to the acquisitions of businesses.
NON-OPERATING EXPENSES
Fiscal Fiscal Fiscal
Year Year Year
Ended Change Ended Change Ended
(in thousands) 9/30/01 % 9/30/00 % 9/30/99
- -----------------------------------------------------------------------------------------------------
Interest income $1,594 (49)% $3,114 4% $3,002
Other (expense)/income, net $ (450) (165)% $ 686 492% $ (175)
The decrease in interest income in fiscal 2001 as compared to fiscal 2000 was
attributable to a reduction in marketable securities and cash equivalents, which
occurred because the Company invested its cash for acquisitions of businesses.
The Company may decide to make further investments in marketable securities in
the future. The increase in fiscal 2000 as compared to fiscal 1999 was
attributable to interest income earned on marketable securities.
In fiscal 2001, the Company recognized translation gains on its foreign
intercompany investments. In fiscal 2000, the Company recorded a gain for the
sale of short-term investments, offset by foreign translation losses. To date,
the Company has not engaged in currency hedging transactions.
PROVISION FOR INCOME TAXES
The Company's effective tax rate for the fiscal year 2001 was a benefit of 21%.
The Company was not able to benefit all of its losses in fiscal 2001 due to the
non-deductible nature of certain intangible and goodwill costs. Also, the $3.3
million expense incurred in connection with the warrant issued to i2
Technologies, Inc was not deductible for tax purposes. The Company's effective
tax rate was 35% in fiscal 2000. The increase in the effective tax rate in
fiscal 2000 as compared to fiscal 1999 was mainly attributable to the effects of
state income tax law.
LIQUIDITY AND CAPITAL RESOURCES
As of September 30, 2001, the Company had cash and cash equivalents and
marketable securities of approximately $48.3 million and working capital of
$50.6 million.
Cash provided by operations for fiscal 2001 was $19.9 million, primarily
generated by collections of accounts receivables and an income tax refund of
$4.5 million.
Cash used in investing activities was $8.5 million, primarily for the purchases
of computer equipment and marketable securities. In addition, the Company
completed the acquisition of Collego Corporation for approximately $3.7 million.
Cash used in financing activities was $1.0 million. The Company paid off a $2.3
million line of credit related to the acquisition of Applied Image Technologies,
Inc. This was offset in part by proceeds from issuance of common stock from the
exercise of employee stock options.
As of September 30, 2001, the Company's principal commitments consist primarily
of office leases for its U.S. and European headquarters. Under the terms of the
U.S. 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
June 2006.
The Company may use a portion of its cash to acquire additional businesses,
products or technologies complementary to its business. The Company also plans
to make investments over the next year in its products and technology. Should
the Company acquire Datastream Inc. under the terms of its offer as described in
the Company's Notes to Consolidated Financial Statements-Subsequent Event, the
Company believes that its current cash balances and marketable securities
combined with cash flow from operations will be sufficient to meet its working
capital and capital expenditure requirements through at least September 30,
2002.
________________________________________________________________________________
Page 22
EFFECT OF ACCOUNTING PRONOUNCEMENTS
In June 2001, the Financial Accounting Standards Board ("FASB") issued Statement
of Financial Accounting Standards No. 141 ("SFAS 141") "Business Combinations",
which requires the purchase method of accounting for business combinations
initiated after June 30, 2001 and eliminates the pooling-of-interests method. In
addition, SFAS 141 establishes specific criteria for the recognition of
intangible assets separately from goodwill and requires unallocated negative
goodwill to be written off immediately as an extraordinary gain. The provisions
of SFAS 141 have been adopted as of July 1, 2001. The adoption of SFAS 141 has
not changed the method of accounting used in previous business combinations
initiated prior to July 1, 2001.
In June 2001, the FASB also issued Statement of Financial Accounting Standards
No. 142 ("SFAS 142") "Goodwill and Other Intangible Assets", which is effective
for fiscal years beginning after December 15, 2001. Certain provisions shall
also be applied to acquistions initiated subsequent to June 30, 2001. SFAS 142
requires, among other things, the discontinuance of amortization related to
goodwill and indefinite lived intangible assets. These assets will then be
subject to an impairment test at least annually. In addition, the standard
includes provisions upon adoption for the reclassification of certain existing
recognized intangibles as goodwill, reassessment of the useful lives of existing
recognized intangibles and reclassification of certain intangibles out of
previously reported goodwill. The Company will adopt SFAS 142 effective October
1, 2002, which will result in the Company no longer amortizing its existing
goodwill. At September 30, 2001, goodwill approximated $61.4 million and
goodwill amortization approximated $11.9 million. In addition, the Company will
be required to measure goodwill for impairment as part of the transition
provisions. The Company is required to complete transition impairment tests no
later than March 31, 2003. Any impairment resulting from these transition tests
will be recognized as the cumulative effect of a change in accounting principle.
The Company will not be able to determine if an impairment will be required
until completion of such impairment tests.
In October 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment or
Disposal of Long-Lived Assets" ("SFAS 144"). SFAS 144 provides guidance on the
accounting for the impairment or disposal of long-lived assets. The objectives
of SFAS 144 are to address issues relating to the implementation of SFAS No.
121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to Be Disposed Of", and to develop a model for long-lived assets to be
disposed of by sale, whether previously held and used or newly acquired. SFAS
144 is effective for financial statements issued for fiscal years beginning
after December 15, 2001 and will become effective for the Company commencing
October 1, 2002. The Company is currently evaluating the impact that this
statement will have on its results of operations and financial position.
FACTORS AFFECTING FUTURE PERFORMANCE
The nature of forward-looking information is that such information involves
significant assumptions, risks and uncertainties. Certain public documents of
the Company and 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 factors described
below, and by other assumptions, risks and uncertainties. Forward-looking
information is based on 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.
- --------------------------------------------------------------------------------
Page 23
RAPID TECHNOLOGICAL AND MARKET CHANGES
The computer software industry is characterized by rapid technological advances,
changes in customer requirements and frequent product introductions and
enhancements by the Company and by its competitors. 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 changing industry
standards, and achieve market acceptance. In particular, the Company believes
that it must continue to respond quickly to users' needs for new functionality
and to advances in hardware and operating systems, and that it must continue to
create products that conform to industry standards regarding the communication
and interoperability among software products of different vendors. Any failure
by the Company to anticipate or respond adequately to technological developments
and changes in 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 its development efforts. In
addition, there can be no assurance that new products and product enhancements
developed by the Company will achieve market acceptance. Finally, when the
Company develops new products or enhances its existing products, it is possible
that potential customers will defer or delay their decisions to purchase
existing products while the newer products and enhancements are being developed,
released and proven in the market. Such delays could have a material, adverse
impact on ongoing sales of existing products, and on the Company's business and
its results of operations.
DEPENDENCE ON MAXIMO
A significant portion of the Company's revenues are derived from the licensing
of its MAXIMO family of products and to related services and support. The
Company's financial performance depends largely on continued market acceptance
of MAXIMO, and the acceptance and market penetration of MAXIMO Version 5.0, the
new Internet based version of MAXIMO. The Company believes that continued market
acceptance of MAXIMO and revenue growth will largely depend on its ability to
continue to enhance and broaden the capabilities of MAXIMO Version 5.0, both by
broadening the core MAXIMO functionality and developing specialized
functionality targeted at key vertical industries. 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, negative evaluations of MAXIMO or potential
customers' delay in purchasing in anticipation of new product releases, would
have a material adverse effect on the Company's business and results of
operations
ONLINE COMMERCE SERVICES MARKET CHANGES
In the first quarter of fiscal 2001, the Company repositioned its Internet-based
supplier enablement products as mroDistributor, mroManufacturer and mroConnect,
offering the suppliers of MRO goods and services the ability to manage their
Internet-based e-commerce initiatives. By the end of fiscal 2001, the Company
had begun to combine these solutions into a single offering known as Online
Commerce Services.
There can be no assurance that the Company's OCS business will be sold
successfully, or that the Company's OCS solutions will achieve market
acceptance. There also can be no assurances that the Company's MAXIMO customers
will influence a meaningful number of their industrial suppliers to adopt our
OCS Solutions, or that our supplier customers will create a large enough
community of sellers, for the Company to achieve leverage and market synergy
between its MAXIMC and OCS Solutions.
The market for business-to-business e-commerce platforms and supporting
solutions has experienced significant turmoil and downturn, and there is no
clear indication of whether or when this market may re-emerge, or the direction
that it may take. As a result, the Company cannot predict whether or when
products that enable business-to-business e-commerce, marketplaces or exchanges
will gain acceptance and be adopted on a repeated or predictable basis. Sales of
the Company's OCS
- --------------------------------------------------------------------------------
Page 24
solutions will continue to fluctuate until the markets for business-to-business
solutions in general, and for Strategic MRO e-commerce initiatives in
particular, stabilize, move and grow in an understandable and predictable
direction.
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 OCS solutions and deliver them
in a timely manner. The Company may incur substantial costs to enhance and
modify its OCS solutions in order to meet the demands of this growing and
changing market. The Company's OCS business is not yet profitable, and may not
become profitable for some time.
OCS SUBSCRIPTION REVENUE MODEL
The Company derives revenues from OCS subscription agreements under which
customers pay a relatively low monthly or annual fee for the right to use the
OCS services. The OCS offering is delivered via software products that are
hosted by the Company and accessed by its customers via the Internet, and as a
result customers do not need to create or maintain extensive internal
information systems infrastructure to support the solution. As a result, the
customers' cost to discontinue their subscriptions, or to switch to other
solutions, would be lower than purchasing a license fee based revenue model.
The use of applications on a hosted basis presents difficulties to customers
that they do not face with software that they have licensed internally. For
instance, individual customers might not be able to modify the software to meet
their particular needs or request that we perform such modifications.
Conversely, the Company may implement changes to the software that it believes
will meet general market requirements, but which are not desired by certain
customers.
In the event that any of the foregoing difficulties are experienced by a
material number of OCS customers, it would be easy for those customers to
discontinue their subscriptions, which could cause a material, adverse impact on
the Company's OCS revenue, and on the Company's overall results of operations.
CATALOG MANAGEMENT PRODUCT RECENTLY DEVELOPED
The Company's Collego Catalog Manager ("CCM") product was recently acquired from
Collego Corporation, and is being made generally available to customers during
Fiscal 2002. As with any new product, there can be no assurance that the new
product will meet the needs of its targeted market, either in terms of desired
functionality, performance or quality. In addition, many features of this
product are being added to our On-Line Commerce Services offerings. As a result,
delays, deficiencies or difficulties with the ongoing development and release of
Collego Catalog Manager and its component feature set could have a material,
adverse impact on revenues from both CCM and OCS. The Company will continue to
develop CCM throughout the year, by adding functionality, porting the product to
additional platforms and operating environments, and translating and localizing
the product to meet the requirements of additional geographies. Difficulties or
delays in developing and releasing CCM as planned throughout the year could have
material, adverse impact on the revenues derived by the Company from its CCM and
OCS operations.
DEPENDENCE ON SALES CHANNELS AND BUSINESS ALLIANCES
In order for the Company to maintain and grow its revenues, the Company is both
dependent upon its existing distribution channels, and it must develop new
channels. The Company cannot control the actions of its distributors, resellers,
agents and other channel partners, and if these companies suffer business
downturns or fail to meet their objectives, the Company's revenues and results
of operations will suffer as a result.
With respect to its OCS business in particular, the Company will seek to develop
new channels, including e-commerce marketplaces or exchanges that use the
Company's OCS solutions. The ability of these marketplaces or exchanges to
- --------------------------------------------------------------------------------
Page 25
generate such fees for the Company will depend to a large degree on the validity
of their underlying business models, the vibrancy of their various markets and
various other factors specific to their businesses, including the general market
acceptance and growth of e-commerce marketplaces and exchanges.
The Company has entered into strategic partnerships with various larger
companies, such as i2, Ariba, Inc., Rockwell Automation, and others. The
Company's ability to generate incremental revenue through these partnerships
will depend upon the Company's ability to integrate its products and solutions
with those of the other companies, its ability to coordinate and support each
company's sales and marketing efforts, and the degree and nature of the sales
and marketing efforts made by each company. In particular, the Company has
integrated certain of its products with certain products offered by i2, and the
two companies may experience difficulties in gaining market acceptance of the
integrated products both within the i2 sales force and the marketplace in
general, and difficulties in integrating and coordinating the Company's
products and sales efforts with the products and sales efforts of i2. Finally,
competitive alliances may emerge among other companies that adversely affect
customers' interests in our strategic partnerships.
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, which may
negatively impact the price of our stock. The Company believes that these
quarterly fluctuations 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, customers' delaying their
purchasing decisions in anticipation of new product releases, 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.
Failure to close a small number of large software license contracts may have a
significant impact on revenues for any quarter and could, therefore, result in
significant fluctuations in quarterly revenues and operating results.
Accordingly, the Company believes that period-to-period comparisons of its
results of operations are not necessarily meaningful and should not be relied
upon as an indication of future performance.
COMPETITION
The market for enterprise asset maintenance software such as MAXIMO 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 ("ERP") vendors.
Independent software vendors include Datastream and Indus. MAXIMO also competes
with integrated ERP systems which include integrated maintenance modules offered
by several large vendors, such as SAP, Oracle and JD Edwards and others.
Currently, MAXIMO competes 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. Some of the companies mentioned above have
also developed e-procurement applications that are competitive with MAXIMO
Buyer, and e-commerce platforms and supply chain integration solutions that are
competitive with the Company's OCS solutions.
The Company's OCS business 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. We may not remain competitive, and
increased competition could seriously harm our business. Our competitors offer a
variety of e-business products that compete with ours. We may compete with
vendors who have established electronic marketplaces and indirect procurement
capabilities, such as Ariba and Commerce One.
- --------------------------------------------------------------------------------
Page 26
Other competitive factors include internal development efforts by corporate
information technology departments and companies offering customized products.
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, or on the industrial supply chain market, the Company
could be at a competitive disadvantage.
INTERNATIONAL OPERATIONS
A significant portion of the Company's total revenues is derived from operations
outside the United States. Our ability to sell our products internationally is
subject to a number of risks. General economic and political conditions in each
country could adversely affect demand for our products and services. Exposure to
currency fluctuations and greater difficulty in collecting accounts receivable
could affect our sales. We could be affected by the need to comply with a wide
variety of foreign import laws, United States export laws and regulatory
requirements. Trade protection measures and import and export licensing
requirements subject us to additional regulation and may prevent us from
shipping products to a particular market, and increase our operating costs.
DEPENDENCE ON THIRD PARTIES
The Company has entered into nonexclusive license agreements with other software
vendors, 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 unable to renew them on
commercially reasonable terms), 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. Our MRO Operations Center is dependent on Digital Island, a third-
party data center, which could be destroyed or damaged. The Company must stay on
good terms with this vendor, and be able to renew its agreement with this vendor
on commercially reasonably terms. If this data center were to become inoperable
or unavailable on commercially reasonable terms, the Company would incur
significant expense, and potentially lose its ability to provide these services
altogether during the period of downtime and transition, resulting in customer
dissatisfaction and market rejection of its OCS solutions. The Company's OCS
operations are dependent upon the Company's ability to protect computer
equipment and the information stored in these third- party data centers against
damage that may be caused by natural disasters, fire, power loss,
telecommunication or Internet failures, unauthorized intrusions, computer
viruses and other similar damaging events. The Company cannot assure that any of
these damaging events would not result in a prolonged outage of the Company's
network services or that the Company would not experience a reduction of
revenues or unexpected expenses which could have a material adverse effect on
our business and financial results.
HOSTING
The Company does not have extensive experience in hosting applications, and the
hosting industry is relatively young. If we do not accurately predict the volume
of traffic, or if we encounter technical difficulties with our software or our
infrastructure, we may experience slower response times or other problems. Any
delays in response time or performance problems could cause our customers to
perceive this service as not functioning properly and they may discontinue use
of our products and services.
The Company's success and profitability in its OCS business is dependent
on the Company's ability to increase the scalability and performance of its
OCS solutions, meaning that the Company must be able to host and operate
a large number of Online Commerce Service product instances on a single
computer using multiple processors. This is because the Company incurs fixed
costs associated with the hosting environment, regardless of how many, or how
few, OCS products are
- --------------------------------------------------------------------------------
Page 27
hosted at the same time. If the Company is unable to host a certain number of
OCS product instances per computer, then the OCS business may not become
profitable for a long time. Moreover, if the Company is not able to operate a
large number of OCS product instances on the same computer without degrading
product performance, the OCS solutions may not gain customer acceptance and
market penetration.
PRODUCT DEVELOPMENT: INTERNET
The Company recently released MAXIMO Version 5.0, which is entirely based upon
Java and other technologies emerging and recently adopted in conjunction with
the Internet. New Internet technologies and applications are developing rapidly
and are continuously being introduced, competing for acceptance in the market,
and changing. MRO supply chain management using electronic commerce is a nascent
market with many standards and technologies either competing for acceptance or
remaining to be developed. Accordingly, for the Company's OCS offerings to be
successful, the Company must accurately predict and successfully implement those
standards and technologies that ultimately gain long-term acceptance in the
market.
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.
PRODUCT DEVELOPMENT: ACQUISITIONS
The Company may from time to time purchase software products or technologies
from other companies, or as part of the Company's acquisition of other
companies. While the Company exercises due diligence in determining whether
acquired products or technologies are suitable and of commercial quality, there
can be no assurances that the new products or technologies will meet the
Company's expectations, that the Company will be able to employ and retain the
personnel necessary for the Company to effectively exploit the new products or
technologies, that the Company will be able to successfully integrate the new
products or technologies with or into the Company's existing products and
product architecture, that the Company will be able to effectively distribute
the new products or technologies through its existing sales force and channels,
that the Company will be able to retain existing customers and revenue streams
that may have been associated with the new products or technologies prior to
their acquisition by the Company, or that such existing customers may not demand
that the Company remedy problems that were not known or disclosed at the time of
the acquisition. As a result of the foregoing, the Company may not realize the
benefits intended from such acquisitions or recover its investments, which would
have a material adverse impact on the Company's business and its results of
operations.
LIMITED INTELLECTUAL PROPERTY PROTECTION
The Company's success is dependent upon its proprietary technology. The Company
currently has one United States patent and one patent pending within the U.S.
(and corresponding applications pending in various foreign countries), 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" or "click wrap"
licenses included as part of the product packaging or acknowledged by customers
who register on-line. Although, in larger sales, the Company's shrink-wrap and
click wrap licenses may be accompanied by specifically negotiated agreements
signed by the licensee, in many cases its shrink-wrap and click wrap licenses
are not negotiated with or signed by individual licensees. Certain provisions of
the Company's shrink-wrap and click 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 valid claim of
any patent or any other proprietary rights of others, there can be no assurance
that
- --------------------------------------------------------------------------------
Page 28
third parties will not assert infringement claims in the future. Litigation
may be necessary to enforce the Company's intellectual property rights, to
protect the Company's trade secrets, to determine the validity and scope of the
proprietary rights of others, or to defend against claims of infringement or
invalidity. Such litigation could result in substantial costs and diversion of
resources, could result in the deterioration or outright loss of the Company's
patent rights, copyrights or other intellectual property, and could potentially
have a material adverse result on our operating results and financial condition.
DEPENDENCE ON KEY PERSONNEL
The Company is highly dependent on certain key executive officers, technical and
sales employees, and the loss of one or more of such employees could have an
adverse impact on the future operations of the Company. The Company does not
have employment contracts with, and does not maintain any so-called "key person"
life insurance policies on, any personnel. 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 the desired geographic locations, or
with certain industry specific domain expertise. There can be no assurance that
the Company will be able to retain its existing personnel or attract additional
qualified employees.
POSSIBLE CONTINUED VOLATILITY OF STOCK PRICE AND ECONOMIC CONDITIONS
There have recently been significant fluctuations in the market price of the
common stock, par value $.01 per share, of the Company (the "Common Stock"). 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 and e-commerce 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 Company's common stock. In
addition, general macro economic and market conditions unrelated to our
performance may also affect demand for our products and services, our results of
operations, and our stock price.
OTHER RISK FACTORS
The foregoing is not a complete description of all Risk Factors relevant to the
Company's future performance, and the foregoing should be read and understood
together with and in the context of similar discussions which may be contained
in the documents that the Company files with the SEC in the future. However,
the Company undertakes no obligation to update the foregoing.
NO REVISIONS OR UPDATES TO FORWARD-LOOKING STATEMENTS
The Company undertakes 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.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company's primary exposures to market risk are the effect of fluctuations in
interest rates earned on its cash equivalents and marketable securities and
exposures to foreign currency exchange rate fluctuations.
At September 30, 2001, the Company held $48.3 million in cash equivalents and
marketable securities consisting of taxable and tax exempt municipal securities.
Cash equivalents are classified as available for sale and valued at amortized
cost, which approximates fair market value. A hypothetical 10 percent increase
in interest rates would not have a material impact on the fair market value of
these instruments due to their short maturity.
The Company develops its products in the United States and markets them in North
America, Europe, Middle East and Africa, Australia, Asia Pacific and Latin
America. As a result, our financial results could be affected by factors such as
changes in
- --------------------------------------------------------------------------------
Page 29
foreign currency exchange rates or weak economic conditions in foreign markets.
Currently, the Company has no hedging contracts.
- --------------------------------------------------------------------------------
Page 30
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Information with respect to exhibits and financial statement schedules are
included in Part IV item 14(a)(1) and (2).
QUARTERLY FINANCIAL DATA (UNAUDITED)
The company believes that period-to-period comparisons of its results of
operations are not necessarily meaningful and should not be relied upon as an
indication of future performance.
(in thousands, except per share amounts)
2001 QUARTER
- ------------- Year
Dec.31, Mar. 31, June 30, Sep. 30, Ended
ENDED: 2000 2001 2001 2001 2001
- ------ ------- ------- ------- ------- --------
Total revenues $41,468 $45,742 $47,316 $50,924 $185,450
Gross profit 24,933 27,668 29,963 30,025 112,589
Loss from operations (9,595) (4,823) (3,306) (3,031) (20,755)
Loss before income taxes (8,950) (4,797) (3,120) (2,744) (19,611)
Benefit for income taxes (1,255) (1,228) (936) (724) (4,143)
Net loss (7,695) (3,569) (2,184) (2,020) (15,468)
Net loss per share, diluted $ (0.35) $ (0.16) $ (0.10) $ (0.09) $ (0.70)
2000 QUARTER
- ------------- Year
Dec.31, Mar. 31, June 30, Sep. 30, Ended
ENDED: 1999 2000 2000 2000 2000
- ------ ------- ------- ------- ------- --------
Total revenues $37,986 $41,621 $45,293 $43,761 $168,661
Gross profit 24,799 28,604 29,471 27,397 110,271
Income/(loss) from operations 3,219 2,609 (605) (5,794) (571)
Income/(loss) before income taxes 3,961 3,708 (463) (3,977) 3,229
Provision/(benefit) for income taxes 1,365 1,345 (177) (1,406) 1,127
Net income/(loss) 2,596 2,363 (286) (2,571) 2,102
Net income/(loss) per share, diluted $ 0.11 $ 0.10 $ (0.01) $ (0.12) $0.09
On October 15, 1999, the Company's Board of Directors approved a 2-for-1 stock
split in the form of a dividend of its common stock. All historical share and
per data has been restated to reflect this stock split as though it had occurred
at the beginning of the earliest period presented.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None
- --------------------------------------------------------------------------------
Page 31
PART III
ITEM 10. DIRECTORS AND OFFICERS OF THE REGISTRANT
The directors and executive officers of the Company as of September 30, 2001 are
as follows. Messrs. Drapeau and Fishman are Class III Directors, whose terms
expire in 2002. Messrs. Daniels and McMullen are Class I Directors, whose terms
expire in 2003. Messrs. Sayre and Stanzler are Class II Directors, whose terms
expire in 2004.
NAME AGE POSITION
- ---- --- --------
Norman E. Drapeau, Jr. 41 President and Chief Executive Officer and Director Class III
Robert L. Daniels 59 Executive Chairman of the Board - Class I
Patricia C. Foye 46 Executive Vice President, Global Marketing & Strategic Alliances
Peter J. Rice 49 Executive Vice President - Finance and
Administration, Chief Financial Officer and
Treasurer
William J. Sawyer 55 Executive Vice President- Operations
Ted D. Williams 53 Executive Vice President- Worldwide Sales
John W. Young 49 Executive Vice President - Products and
Technology
Craig Newfield 42 Vice President, General Counsel and Clerk
Richard P. Fishman 55 Director - Class III
John A. McMullen 59 Director - Class I
Stephen B. Sayre 50 Director - Class II
Alan L. Stanzler 58 Director - Class II
NORMAN E. DRAPEAU, JR. joined the Company in 1982 as an applications
analyst. Since that time, he has held various positions with the Company,
including, from 1984 to 1987, that of Manager of Customer Support and from 1989
through 1991, that of Director, Product Marketing. In 1991, Mr. Drapeau was
appointed Vice President, Corporate Marketing, in 1992 was appointed Vice
President - Americas and in July 1996 was appointed Executive Vice President -
Worldwide Sales and Marketing, serving in that capacity until January 1998. In
January 1998, Mr. Drapeau was appointed Executive Vice President and Chief
Operating Officer and was also elected a director of the Company. In May 1998,
Mr. Drapeau was elected President and Chief Executive Officer.
ROBERT L. DANIELS founded the Company in 1968 and has been a director since
that time. Mr. Daniels served as Chairman of the Board and Chief Executive
Officer from 1968 to 1996 and as President from 1968 to 1995. In May 1998, Mr.
Daniels was elected Executive Chairman of the Board.
PATRICIA C. FOYE joined the Company in July 2001 as Executive Vice
President, Global Marketing and Strategic Alliances. From September 2000 to
June 2001, Ms. Foye was Vice President, Worldwide Sales and Marketing for HMS
Software, Inc., an application software company centered in the aerospace
defense markets. From May 1999 to May 2000, Ms. Foye was President of
Allenbrook, Inc., a private firm focused on the development of policy management
system for insurance and financial markets. From 1998 to 1999, Ms. Foye was
Vice President and General Manager of QAD, Inc., leading the Electronics and
Industrial business segment, the largest vertical business for QAD. From 1994
to 1998, Ms. Foye held senior management positions at
- --------------------------------------------------------------------------------
Page 32
Digital Equipment Corporation, a hardware and software vendor and Marcam
Corporation, an ERP applications vendor.
PETER J. RICE joined the Company in 2000 as Executive Vice President of
Finance and Administration, Chief Financial Officer, and Treasurer of the
Company. From 1998 to 2000, Mr. Rice was Vice President of Finance and
Administration, Chief Financial Officer, and Treasurer of Interleaf, a developer
of e-publishing and e-content software products. Interleaf was sold to
Broadvision, Inc. in 2000. From 1995 to 1998, Mr. Rice was Vice President, Chief
Financial Officer and Treasurer for Media 100, Inc., a provider of digital media
and content design, and creation and delivery tools. From 1990 to 1995, Mr. Rice
was Vice President, Corporate Controller and Chief Accounting Officer of M/A
Com, Inc. Prior there to, Mr. Rice held senior financial management positions at
Apollo Computer and Atex, Inc. On December 10, 2001, Mr. Rice was appointed to
the board of directors of Engage, Inc.
WILLIAM J. SAWYER joined the Company in 1978 as an applications consultant
and served in various sales and services positions from 1978 to 1984. Mr. Sawyer
was a Vice President of the Company from 1984 to 1990 and Executive Vice
President from 1990 until November 1997. In November 1997, Mr. Sawyer left the
Company and joined Peritus Software Services, Inc., a software application
company, as Vice President, Operations. Mr. Sawyer rejoined the Company in
October 1998 as Executive Vice President, Operations.
TED D. WILLIAMS originally joined the Company in 1984 and served as
Director, MAXIMO until 1988. From 1988 to 1993, Mr. Williams was President and
Chief Operating Officer of Comac Systems Corporation, a software application
company. In 1993, Mr. Williams rejoined the Company as Director, Eastern
Regional Sales. He was appointed Vice President-North American Sales in 1996 and
Vice President-Worldwide sales in January 1998. In October 1998, Mr. Williams
was appointed Executive Vice President-Worldwide Sales.
JOHN W. YOUNG originally joined the Company in 1985 and served until 1988
as MAXIMO Product Manager. From 1988 to 1992, Mr. Young was Vice President of
Sales of Comac Systems Corporation, a software application company. In 1992 he
rejoined the Company as Director of MAXIMO Product Design, was appointed Vice
President - Research and Development of the Company in 1995 and was appointed
Executive Vice President - Products and Technology of the Company in 1998.
CRAIG NEWFIELD joined the Company as Vice President, General Counsel and
Clerk in September 2000. From October 1997 through August 2000, Mr. Newfield was
Vice President, General Counsel and Clerk of Interleaf, Inc., a developer of e-
publishing and e-content software products. Interleaf was sold to Broadvision,
Inc. in 2000. From April 1996 through September 1997, Mr. Newfield was General
Counsel and Secretary of OneWave, Inc., since renamed Primix Solutions, an IT
service provider. From February 1993 to April 1996, Mr. Newfield served as in-
house counsel for Marcam Corporation.
RICHARD P. FISHMAN was elected as a director in March 1999. Mr. Fishman is
currently Executive Vice President at MacAndrews & Forbes Group, Inc., where he
is responsible for venture capital investing. From 1995 to 1997, Mr. Fishman
served as Managing Director of GeoPartners Research, Inc., a strategy and
management consulting firm, where he headed the firm's venture capital
activities. From 1995 to 1997, Mr. Fishman was also Of Counsel at the law firm
of Atkin, Gump, Strauss, Hauer & Feld L.L.P. Mr. Fishman served as President and
Chief Executive Officer of Thinking Machines Corporation from 1993 to 1994 and
was a partner at the law firm of Milbank, Tweed, Hadley & McCoy from 1987 until
1993.
JOHN A. MCMULLEN was elected as a director in April 2000. Mr. McMullen is
the Managing Principal of Cambridge Meridian Group, Inc., a strategy-consulting
firm that serves Fortune 500 and technology-based companies, with which he has
been employed since 1985. Mr. McMullen taught business strategy at Harvard Law
School from the mid 1980's to 1990 and, as one of the original members of CMGI's
Board of Directors, served on that Board from 1988 through 1999. He currently
serves on the Board of Ezenia!, Inc., a Nasdaq listed company, in a term that
began last year. In addition, he serves, or has served, on the boards of twelve
other private, chiefly technology-oriented companies. From 1993 to 1997 he was
an informal advisor to Senator Bill Bradley (NJ). In 1998 he ran for the United
States Senate from Vermont.
- --------------------------------------------------------------------------------
Page 33
STEPHEN B. SAYRE was originally elected as a director in September 1998,
and re-elected in March 2001. Mr. Sayre is currently the Vice President of
Marketing and Business Development for Endeca Technologies, Inc. From June 2000
to March 2001, Mr. Sayre was Vice President of Marketing for Idiom, Inc. From
1994 to 2000, he was the Senior Vice President of Marketing at Lotus Development
Corporation, a subsidiary of IBM Corporation, a hardware and software vendor.
Prior to joining Lotus in 1994, Mr. Sayre was President of Boston Treasury
Systems and has held other senior executive level positions with Cullinet
Software and Easel Corporation.
ALAN L. STANZLER was originally elected as a director in May 1998, and re-
elected in March 2001. Mr. Stanzler served as a director of the Company from
1992 to 1994, and as Clerk of the Company from 1990 to 1996. Mr. Stanzler is Of
Counsel at the law firm of Stanzler, Funderburk & Castellon, L.L.P. From 1998 to
September, 2001, Mr. Stanzler was a partner of the law firm of Maselan Jones &
Stanzler, P.C. From 1995 to 1998, Mr. Stanzler was a member of the law firm of
Davis, Malm & D'Agostine, P.C.
All directors hold office until the expiration of their respective terms as
described above and until their respective successors are duly elected and
qualified. Executive officers of the Company are appointed by and serve at the
discretion of the Board of Directors.
PART III
(ITEMS 11,12,13)
In accordance with general instruction G(3) to Form 10-K, certain information
required by Items 10-13 of this report are incorporated by reference from the
Company's definitive Proxy Statement for its 2001 Annual Meeting of Stockholders
to be filed, pursuant to Regulation 14A, within 120 days after the end of the
Company's fiscal year ended September 30, 2001.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND
REPORTS ON FORM 8-K
The financial statements and schedules filed as part of this Report are
listed in the following Index to Financial Statements and Schedules. The
exhibits filed as part of this Report are listed in the accompanying Index to
Exhibits.
(a) The following documents are filed as a part of this Report:
1. Consolidated Financial Statements. The following Consolidated
Financial Statements of the Company are filed as part of this report:
PAGE
----
Report of Independent Accountants
Consolidated Balance Sheets -
September 30, 2001 and 2000 39
Consolidated Statements of Operations -
Years Ended September 30, 2001, 2000 and 1999 40
Consolidated Statements of Cash Flows -
Years Ended September 30, 2001, 2000 and 1999 41
Consolidated Statements of Stockholders' Equity -
Years Ended September 30, 2001, 2000 and 1999 42
Notes to Consolidated Financial Statements
2. Financial Statement Schedule.
SCHEDULE PAGE
-------- ----
II Valuation and Qualifying Accounts 64
- --------------------------------------------------------------------------------
Page 34
Schedules not listed above have been omitted because they are not
applicable or are not required, or the information required to be set
forth therein is included in the consolidated Financial Statements or
Notes thereto.
2. Exhibits.
3. Instruments Defining the Rights of Security-Holders
3.1 Amended and Restated Articles of Organization of the Company
(included as Exhibit 3.3 to the Company's Registration Statement
on Form S-1, Registration No. 33-76420, and incorporated herein
by reference)
3.2 Restated By-Laws of the Company, as amended (included as Exhibit
3.2 to the Company's Annual Report on Form 10-K for the fiscal
year ended September 30, 1996, File No. 0-23852, and incorporated
herein by reference)
3.3 Amendment to By-Laws adopted on February 1, 2001 (included as
Exhibit 3.3 to the Company's Current Report on Form 10-Q for the
quarter ended March 31, 2001, File No. 0-23852 and incorporated
herein by reference)
3.4 Form of Certificate of Designation of Series A Junior
Participating Preferred Stock of MRO Software, 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)
3.5 Amendment to Articles of Organization adopted on December 15,
1999 (included as Exhibit 3.4 to the Company's Form 10-Q for the
quarter ended December 31, 1999, File No. 0-23852, and
incorporated herein by reference)
3.6 Amendment to Articles of Organization, dated March 6, 2001
(included as Exhibit 3.4 to the Company's Current Report on Form
8-K dated March 9, 2001, 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 references)
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, an
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)
9. Voting Trust Agreements
- --------------------------------------------------------------------------------
Page 35
9.1 Shareholders Agreement between Robert L. Daniels and Susan H.
Daniels dated August 1, 2001
10. Material Contracts
10.1 Fiscal Year 2000 Executive Bonus Plan (included as Exhibit 10.1
to the Company's Quarterly Report on Form 10-Q for the quarter
ended December 31, 2000, Commission File No. 0-23852 and
incorporated herein by reference)
21. Subsidiaries of the registrant
21.1 Subsidiaries of the Company
23. Consent of independent accountants
23.1 Consent of PricewaterhouseCoopers LLP
(b) Reports on Form 8-K
During the three months ended September 30, 2001, the Company did not file a
current report on Form 8-K.
The Company will furnish a copy of any exhibit listed to requesting stockholders
upon payment of the Company's reasonable expense in furnishing those materials.
- --------------------------------------------------------------------------------
Page 36
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
Dated: December 28, 2001
MRO SOFTWARE, INC.
By: /s/ Norman E. Drapeau, Jr.
---------------------------
Norman E. Drapeau, Jr.
President and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the registrant and
in the capacities and on the dates indicated.
/s/ Norman E. Drapeau, Jr. President and Chief December 28, 2001
- ---------------------------- Executive Officer
Norman E. Drapeau, Jr. (Principal Executive
Officer)
/s/ Robert L. Daniels Executive Chairman of December 28, 2001
- ---------------------------- the Board
Robert L. Daniels
/s/ Peter J. Rice Executive Vice President, December 28, 2001
- ---------------------------- Chief Financial Officer
Peter J. Rice and Treasurer
(Principal Financial and
Accounting Officer)
/s/ Richard P. Fishman Director December 28, 2001
- ----------------------------
Richard P. Fishman
/s/ John A. McMullen Director December 28, 2001
- ----------------------------
John A. McMullen
/s/ Stephen B. Sayre Director December 28, 2001
- ----------------------------
Stephen B. Sayre
/s/ Alan L. Stanzler Director December 28, 2001
- ----------------------------
Alan L. Stanzler
- --------------------------------------------------------------------------------
Page 37
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders of MRO Software, Inc.:
In our opinion, the consolidated financial statements listed in the index
appearing under Item 14(a)(1) present fairly, in all material respects, the
financial position of MRO Software, Inc. and its subsidiaries at September 30,
2001 and 2000, and the results of their operations and their cash flows for each
of the three years in the period ended September 30, 2001 in conformity with
accounting principles generally accepted in the United States of America. In
addition, in our opinion, the financial statement schedule listed in the index
appearing under Item 14(a)(2) presents fairly, in all material respects, the
information set forth therein when read in conjunction with the related
consolidated financial statements. These financial statements and financial
statement schedule are the responsibility of the Company's management; our
responsibility is to express an opinion on these financial statements and
financial statement schedule based on our audits. We conducted our audits of
these statements in accordance with auditing standards generally accepted in the
United States of America, which require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements, assessing
the accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
PricewaterhouseCoopers LLP
Boston, Massachusetts
October 31, 2001,
except for the information
described in Note P, as to
which the date is December 20, 2001
- --------------------------------------------------------------------------------
Page 38
MRO SOFTWARE, INC.
CONSOLIDATED BALANCE SHEETS
SEPTEMBER 30, SEPTEMBER 30,
2001 2000
-------- --------
(in thousands, except per share data)
Current assets:
Cash and cash equivalents $ 42,115 $ 31,584
Marketable securities 5,532 4,241
Accounts receivable, trade, less allowance
for doubtful accounts of $3,849 and $2,825
at September 30, 2001 and 2000, respectively 42,746 47,699
Prepaid expenses and other current assets 5,099 7,148
Deferred income taxes 3,045 6,003
-------- --------
Total current assets 98,537 96,675
-------- --------
Marketable securities 707 1,059
Property and equipment 11,669 14,571
Intangible assets, net 52,353 63,286
Other assets 2,082 2,168
Deferred income taxes 6,105 3,186
-------- --------
Total assets $171,453 $180,945
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued expenses $ 16,445 $ 16,013
Accrued compensation 10,789 8,551
Income taxes payable 823 660
Deferred revenue 19,893 19,080
Line of credit - 2,278
-------- --------
Total current liabilities 47,950 46,582
-------- --------
Other long term liabilities 150 171
Commitments and contingencies (Note K)
Stockholders' equity
Preferred stock, $.01 par value;1,000 authorized,
none issued and outstanding
Common stock, $.01 par value;50,000 authorized;
22,250 and 22,069 issued and outstanding at
September 30, 2001 and 2000, respectively 223 220
Additional paid-in capital 88,059 83,185
Deferred compensation (285) (233)
Retained earnings 36,844 52,312
Accumulated other comprehensive loss (1,488) (1,292)
-------- --------
Total stockholders' equity 123,353 134,192
-------- --------
Total liabilities and stockholders' equity $171,453 $180,945
======== ========
The accompanying notes are an integral part of the
consolidated financial statements.
- --------------------------------------------------------------------------------
Page 39
MRO SOFTWARE, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
YEAR ENDED SEPTEMBER 30,
-----------------------
2001 2000 1999
-------- -------- --------
(in thousands, except per share data)
Revenues:
Software $ 61,337 $ 70,987 $ 62,240
Support and services 124,113 97,674 83,425
-------- -------- --------
Total revenues 185,450 168,661 145,665
-------- -------- --------
Cost of revenues:
Software 2,438 4,739 5,018
Support and services 70,423 53,651 42,310
-------- -------- --------
Total cost of revenues 72,861 58,390 47,328
-------- -------- --------
Gross profit 112,589 110,271 98,337
Operating expenses:
Sales and marketing 73,202 66,870 46,952
Product development 27,559 21,288 14,959
General and administrative 18,022 15,131 11,628
Amortization of goodwill and other intangibles 14,561 7,553 465
-------- -------- --------
Total operating expenses 133,344 110,842 74,004
-------- -------- --------
(Loss)/income from operations (20,755) (571) 24,333
Interest income 1,594 3,114 3,002
Other (expense)/income, net (450) 686 (175)
-------- -------- --------
(Loss)/income before income taxes (19,611) 3,229 27,160
(Benefit)/provision for income taxes (4,143) 1,127 9,280
-------- -------- --------
Net (loss)/income $(15,468) $ 2,102 $ 17,880
======== ======== ========
Net (loss)/income per share, basic $ (0.70) $ 0.10 $ 0.87
-------- -------- --------
Net (loss)/income per share, diluted $ (0.70) $ 0.09 $ 0.85
-------- -------- --------
Shares used to calculate net (loss)/income per share
Basic 22,148 21,682 20,459
Diluted 22,148 22,786 21,094
The accompanying notes are an integral part of the
consolidated financial statements.
- --------------------------------------------------------------------------------
Page 40
MRO SOFTWARE, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEAR ENDED SEPTEMBER 30,
------------------------
2001 2000 1999
-------- -------- --------
(in thousands)
Cash flows from operating activities:
Net (loss)/income $(15,468) $ 2,102 $ 17,880
Adjustments to reconcile net (loss)/income to net
cash provided by operating activities:
Depreciation and amortization 20,073 13,094 4,255
Loss on sale and disposal of property
and equipment 1,407 49 32
Amortization of premium on marketable securities 7 108 188
Stock-based compensation 265 -- --
i2 warrant expense 3,287 -- --
Deferred income taxes 41 (6,484) (857)
Changes in operating assets and liabilities,
net of effect of acquisitions:
Accounts receivable 4,448 (9,350) (7,860)
Prepaid expenses and other assets 1,851 (4,855) (2,212)
Accounts payable and accrued expenses 516 6,076 3,278
Accrued compensation 2,323 (91) 2,631
Income taxes payable 177 (3,446) 252
Tax benefit on exercise of employee stock options 10 6,000 715
Deferred revenue 957 2,352 3,477
-------- -------- --------
Net cash provided by operating activities 19,894 5,555 21,779
-------- -------- --------
Cash flows from investing activities:
Acquisitions of businesses, net of cash acquired (3,700) (62,278) 397
Acquisitions of property and equipment and other (3,841) (9,291) (6,824)
capital expenditures
Purchases of marketable securities (10,012) (51,884) (41,022)
Sales of marketable securities 9,079 84,839 41,300
-------- -------- --------
Net cash used in investing activities (8,474) (38,614) (6,149)
-------- -------- --------
Cash flows from financing activities:
Payment of line of credit (2,278) -- --
Proceeds from issuance of common stock,
net of issuance costs -- -- 13,546
Proceeds from exercise of stock options 1,263 5,102 2,604
-------- -------- --------
Net cash(used in)/provided by financing activities (1,015) 5,102 16,150
-------- -------- --------
Effect of exchange rate changes on cash 126 (362) (331)
-------- -------- --------
Net increase/(decrease)in cash and cash equivalents 10,531 (28,319) 31,449
Cash and cash equivalents, beginning of year 31,584 59,903 28,454
-------- -------- --------
Cash and cash equivalents, end of year $ 42,115 $ 31,584 $ 59,903
======== ======== ========
The accompanying notes are an integral part of the
consolidated financial statements.
- --------------------------------------------------------------------------------
Page 41
MRO SOFTWARE, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Common Stock Accumulated
---------------- Additional Other Total
Shares Par Paid-in Deferred Retained Comprehensive Stockholders' Comprehensive
(in thousands) Issued Value Capital Compensation Earnings Income/(loss) Equity Income/(loss)
- ------------------------------------------------------------------------------------------------------------------------------------
Balance at September 30, 1998 19,965 $ 200 $ 50,310 -- $ 32,330 $ (216) $ 82,624
Stock options exercised and
related tax benefit,
employee stock purchases 317 3 3,316 3,319
Acquisitions, net of merger
expenses 20 256 256
Shares issued to W.W.
Grainger, Inc. net of
legal expenses 1,000 10 13,536 13,546
Net income 17,880 17,880 $17,880
Translation adjustment (346) (346) (346)
Net unrealized loss on
marketable securities,
net of tax (123) (123) (123)
--------
Comprehensive income 17,411
--------
- ------------------------------------------------------------------------------------------------------------------------------------
Balance at September 30, 1999 21,302 213 67,418 -- 50,210 (685) 117,156
Stock options exercised and
related tax benefit,
employee stock purchases 491 5 11,097 11,102
Acquisitions, net of merger
expenses 261 2 4,437 4,439
Deferred compensation,
related to common stock
grants 15 233 (233) --
Net income 2,102 2,102 2,102
Translation adjustment (636) (636) (636)
Net unrealized gain on
marketable securities,
net of tax 29 29 29
--
Comprehensive income 1,495
--------
- ------------------------------------------------------------------------------------------------------------------------------------
Balance at September 30, 2000 22,069 220 83,185 (233) 52,312 (1,292) 134,192
Stock options exercised and
related tax benefit,
employee stock purchases 156 2 1,271 1,273
Warrant issued to
i2 Technologies, Inc. 3,287 3,287
Deferred compensation,
related to common stock
grants 25 1 316 (317) --
Stock-based compensation 265 265
Net loss (15,468) (15,468) (15,468)
Translation adjustment (176) (176) (176)
Net unrealized loss on
marketable securities,
net of tax (20) (20) (20)
--
Comprehensive loss $(15,664)
--------
- ------------------------------------------------------------------------------------------------------------------------------------
Balance at September 30, 2001 22,250 $ 223 $ 88,059 $ (285) $ 36,844 $(1,488) $123,353
- ------------------------------------------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of the
consolidated financial statements.
- --------------------------------------------------------------------------------
42
MRO SOFTWARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
A. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Nature of Business
The Company develops, markets, sells and supports enterprise asset maintenance
software used by businesses, government agencies and other organizations to
assist in the management of their high-value capital assets, such as plants,
facilities, and production equipment, to cut inventories and supply chain costs,
control maintenance expenses, reduce downtime, and more effectively deploy
productive assets, personnel and other resources. The Company also develops,
markets, sells and supports a business-to-business internet-based e-Commerce
network, online procurement and desktop requisition software, content and
management tools, and cataloging services, which enable businesses to engage in
electronic commerce.
Basis of Presentation
The consolidated financial statements include the accounts of MRO Software,
Inc. ("MROI") and its majority-owned subsidiaries (collectively, the "Company").
All intercompany accounts and transactions have been eliminated. Certain prior
year financial statement items have been reclassified to the current year's
format.
Use of Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amount of assets and liabilities and disclosures of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
Cash and Cash Equivalents
The Company considers all highly liquid instruments purchased with original
maturities of three months or less to be cash equivalents. Cash equivalents
consist primarily of money market funds, which are stated at cost, which
approximates fair market value.
Concentration of Credit Risk
Financial instruments which potentially subject the Company to concentration
of credit risk consist primarily of temporary cash investments, marketable
securities and accounts receivable. The majority of the cash and cash
equivalents are maintained with major financial institutions in the United
States. The counter parties to the agreements relating to marketable securities
and investment instruments consist of various United States governmental units
and financial institutions of high credit standing. Credit risk on accounts
receivable is minimized as a result of the diverse nature of the Company's
customer base. The Company performs ongoing credit evaluations of its customers'
financial condition and limits the amount of credit when deemed necessary.
Fair Value of Financial Instruments
The carrying amounts of cash and cash equivalents, short-term investments,
accounts receivable, accounts payable and accrued expenses approximate fair
value because of their short-term nature.
Derivative Financial Instruments
The Company adopted Statement of Financial Accounting Standards No. 133.
"Accounting for Derivative Instruments and Hedging Activities" ("SFAS 133"), as
amended by SFAS 138, "Accounting for Certain Derivative Instruments and Certain
Hedging Activities" in the quarter ended December 31, 2000. SFAS 133, as
amended, establishes accounting and reporting standards for derivative
instruments, and requires that all derivatives be recorded on the balance sheet
at fair value. Adoption of SFAS 133 did not have a material effect on the
Company's financial statements. The Company does not use derivative financial
instruments.
Marketable Securities
The Company's marketable securities are classified as available-for-sale and
are stated at their fair value. All marketable securities are held in the
Company's name
- --------------------------------------------------------------------------------
Page 43
and are held in custody with one major financial institution. The fair value of
marketable securities was determined based on quoted market prices. Unrealized
gains and losses on securities classified as available-for-sale are reported as
a separate component of stockholders' equity and are included in other
comprehensive income.
Computer Software Costs
Computer software costs consist of internally developed software. Development
costs incurred in the research and development of new software products, and
enhancements to existing products, are expensed in the period incurred unless
they qualify for capitalization under Statement of Financial Accounting
Standards No. 86, "Accounting for the Cost of Computer Software to Be Sold,
Leased or Otherwise Marketed." These costs are amortized on a straight-line
basis over the estimated useful or market life of the software (generally, one
to two years). No software development costs were capitalized in fiscal 2001,
2000, and 1999 since costs incurred subsequent to the establishment of
technological feasibility were not significant. There was no amortization
expense in fiscal 2001 and 2000. Amortization expense was $248,000 for fiscal
1999.
Research and Development
Costs related to research, design and development of products are charged to
research and development expenses as incurred.
Goodwill and Other Intangibles
Goodwill and other intangibles represent core technology, customer lists,
assembled workforce and goodwill recorded in connection with acquisitions.
Goodwill is amortized on a straight-line basis over the estimated useful life,
generally five years. Other intangibles are amortized on a straight-line basis
over the estimated useful life, generally three to five years.
The Company evaluates the potential impairment of its long-lived assets
whenever events or changes in circumstances indicate that the carrying amount of
an asset may not be recoverable. Upon the occurrence of a material circumstance,
such as the failure of certain technology to demonstrate promise that it may
gain commercial acceptance or the failure of a business segment to achieve
certain performance objectives, the Company will reassess the value of
associated assets and if appropriate at that time, will recognize an impairment
charge. At the occurrence of a certain event or change in circumstances, the
Company evaluates the potential impairment of an asset based on the estimated
future undiscounted cash flows. In the event impairment exists, the Company will
measure the amount of such impairment based on the present value of the
estimated future cash flows using a discount rate commensurate with the risks
involved. As of September 30, 2001, the Company has determined that no
impairment of long-lived assets exists.
Depreciation and Amortization
Property and equipment are stated at cost.
Depreciation is computed over the estimated useful lives of the assets as
follows:
Description Estimated Useful Life
----------- ---------------------
Computer equipment & software 3 years
Vehicles 3 years
Furniture and fixtures 5 years
Leasehold improvements are amortized on the straight-line method over the
shorter of their estimated useful life or the remaining term of the lease.
Maintenance and repairs are charged to expense as incurred. Upon retirement or
sale, the cost of the assets disposed of and the related accumulated
depreciation are removed from the accounts and any resulting gain or loss is
included in the determination of net income.
Advertising Expense
The Company recognizes advertising expense as incurred. Advertising expense
was approximately $5,832,000, $6,269,000, and $4,176,000 for fiscal 2001, 2000,
and 1999, respectively.
- --------------------------------------------------------------------------------
Page 44
Income per Share
Basic income (loss) per share is computed by dividing income or loss available
to common shareholders by the weighted average number of common shares
outstanding. Diluted income per share is computed by dividing income or loss
available to common shareholders by the weighted average common shares
outstanding plus dilutive potential common shares. For purposes of this
calculation, stock options are considered dilutive potential common shares in
periods in which they have a dilutive effect. All potential dilutive common
shares are excluded from the computation of net loss per share because they are
anti-dilutive. All historical income per share amounts have been restated to
reflect a two-for-one stock split effective December 22, 1999.
Income Taxes
The Company accounts for income taxes under the asset and liability approach
for accounting and reporting for income taxes. The Company computes deferred
income taxes based on the differences between the financial statement and tax
basis of assets and liabilities using enacted rates in effect in the years in
which the differences are expected to reverse. The Company must establish a
valuation allowance to offset temporary deductible differences, net operating
loss carryforwards and tax credits when it is more likely than not that the
deferred tax assets will not be realized.
The Company has not provided for the U.S. income tax on earnings of its
foreign subsidiaries as it considers certain of these earnings are intended to
be permanently reinvested. At September 30, 2001, the undistributed earnings of
foreign subsidiaries were $3,966,000.
Revenue Recognition
The Company licenses its software products under noncancellable license
agreements and provides services including training, installation, consulting,
and maintenance, consisting of product support services and periodic updates.
Software license fee revenues are generally recognized upon contract execution
and shipment, provided collection of the resulting receivable is deemed
probable and the fees are fixed or determinable.
Services revenues are comprised of consulting and training fees related to
installation of the Company's software solutions, maintenance contracts for
software solutions, content management and cataloging services, annual commerce
and transaction fees, and subscription based fees related to the Company's
Online Commerce Services business ("OCS"). Consulting, training, content
management and cataloging services are recognized as the services are performed.
Maintenance revenues are recognized ratably over the term of the agreement,
generally one year. The Company recognizes subscription revenues in relation to
its OCS product offerings ratably over the term of the agreement, generally one
year.
Deferred Revenue
Revenue on all software license transactions in which there are significant
outstanding obligations is deferred and recognized once such obligations are
fulfilled. Deferred revenue also includes maintenance contracts, annual commerce
fees and OCS fees billed in advance.
Foreign Currency
Assets and liabilities are translated at current exchange rates at the balance
sheet dates. The translation adjustments made on translation of the balance
sheet are recorded as a separate component of stockholders' equity. Revenues and
expenses are translated into U.S. dollars at average exchange rates. Foreign
currency transaction gains and losses are included in determining net income.
The Company recorded a net gain of $103,000 and net losses of $890,000, and
$571,000 for fiscal 2001, 2000, and 1999, respectively.
Comprehensive Income
The Company's comprehensive income is comprised of net income, foreign
currency translation adjustments and unrealized gains and losses on available-
for-sale investments, net of tax. Comprehensive income is included in the
stockholders' equity section of the balance sheet.
- --------------------------------------------------------------------------------
Page 45
Stock-Based Compensation
The Company grants stock options to its employees and outside directors. Such
grants are for a fixed number of shares with an exercise price equal to the fair
value of the shares at the date of grant. As permitted by SFAS No. 123,
"Accounting for Stock-Based Compensation", the Company accounts for stock option
grants in accordance with Accounting Principles Board ("APB") Opinion No. 25,
"Accounting for Stock Issued to Employees" and FASB Interpretation No. 44.
Accordingly, the Company has adopted the provisions of SFAS No. 123 through
disclosure only.
Accounting Standards
In June 2001, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 141 ("SFAS 141") "Business
Combinations", which requires the purchase method of accounting for business
combinations initiated after June 30, 2001 and eliminates the pooling-of-
interests method. In addition, SFAS 141 establishes specific criteria for the
recognition of intangible assets separately from goodwill and requires
unallocated negative goodwill to be written off immediately as an extraordinary
gain. The provisions of SFAS 141 have been adopted as of July 1, 2001. The
adoption of SFAS 141 has not changed the method of accounting used in previous
business combinations initiated prior to July 1, 2001.
In June 2001, the FASB issued Statement of Financial Accounting Standards No.
142 ("SFAS 142") "Goodwill and Other Intangible Assets", which is effective for
fiscal years beginning after December 15, 2001. Certain provisions shall also be
applied to acquistions initiated subsequent to June 30, 2001. SFAS 142 requires,
among other things, the discontinuance of amortization related to goodwill and
indefinite lived intangible assets. These assets will then be subject to an
impairment test at least annually. In addition, the standard includes provisions
upon adoption for the reclassification of certain existing recognized
intangibles as goodwill, reassessment of the useful lives of existing recognized
intangibles and reclassification of certain intangibles out of previously
reported goodwill. The Company will adopt SFAS 142 effective October 1, 2002,
which will result in the Company no longer amortizing its existing goodwill. At
September 30, 2001, goodwill approximated $61.4 million and goodwill
amortization approximated $11.9 million. In addition, the Company will be
required to measure goodwill for impairment as part of the transition
provisions. The Company is required to complete transition impairment tests no
later than March 31, 2003. Any impairment resulting from these transition tests
will be recognized as the cumulative effect of a change in accounting principle.
The Company will not be able to determine if an impairment will be required
until completion of such impairment tests.
In October 2001, the FASB issued SFAS 144, "Accounting for the Impairment
or Disposal of Long-Lived Assets" ("SFAS 144"). SFAS 144 provides guidance on
the accounting for the impairment or disposal of long-lived assets. The
objectives of SFAS 144 are to address issues relating to the implementation of
SFAS 121, "Accounting for the Impairment of Long-Lived Assets and for Long-
Lived Assets to Be Disposed Of", and to develop a model for long-lived assets to
be disposed of by sale, whether previously held and used or newly acquired. SFAS
144 is effective for financial statements issued for fiscal years beginning
after December 15, 2001 and will become effective for the Company commencing
October 1, 2002. The Company is currently evaluating the impact that this
statement will have on its results of operations and financial position.
B. INCOME TAXES:
The components of (loss)/income before income taxes and the
(benefit)/provision for income taxes consist of the following:
Year Ended September 30,
-----------------------------
(in thousands) 2001 2000 1999
-------- ------- -------
(Loss)/income before income taxes:
United States..................................... $(22,183) $ 892 $24,725
Foreign........................................... 2,572 2,337 2,435
-------- ------- -------
$(19,611) $ 3,229 $27,160
======== ======= =======
The (benefit)/provision for income taxes consists of:
Current taxes:
Federal........................................... (2,850) 2,008 7,466
State............................................. 364 604 1,002
Foreign........................................... 1,034 792 1,103
Foreign withholding taxes......................... 868 522 527
-------- ------- -------
$ (584) $ 3,926 $10,098
- --------------------------------------------------------------------------------
Page 46
======== ======= =======
Deferred taxes:
Federal........................................... (3,159) (2,216) (652)
State............................................. (521) (378) (75)
Foreign........................................... 121 (205) (91)
-------- ------- -------
(3,559) (2,799) (818)
-------- ------- -------
Total........................................ $ (4,143) $ 1,127 $ 9,280
======== ======= =======
- --------------------------------------------------------------------------------
Page 47
The reconciliation of the Company's income tax provision to the statutory
federal tax rate is as follows:
Year Ended September 30,
------------------------------------
2001 2000 1999
-------- -------- --------
Statutory federal tax rate .................. (35.0%) 35.0% 35.0%
FSC benefit ................................. -- (4.9) (2.6)
State taxes, net of federal tax benefit ..... 1.3 13.9 2.6
R&D credit .................................. (1.5) (9.3) (1.3)
Exempt interest ............................. -- (5.7) (0.9)
Net operating loss utilization .............. -- (6.2) --
Meals and entertainment ..................... 1.1 5.8 --
Foreign taxes ............................... 3.2 7.8 --
Warrant expense.............................. 5.9 -- --
Goodwill amortization........................ 4.7 -- --
Other ....................................... (0.8) (1.5) 1.4
-------- -------- --------
Effective tax rate .......................... (21.1)% 34.9% 34.2%
======== ======== ========
The components of the deferred tax provision are:
Year Ended September 30,
------------------------------------
(in thousands) 2001 2000 1999
-------- -------- --------
Depreciation ................................ $ (17) $ (310) $ (90)
Allowance for doubtful accounts ............. (462) 110 (25)
Software capitalization ..................... 516 39 (96)
Deferred revenue ............................ (310) 63 (111)
Net operating loss utilization .............. -- (200) (57)
Goodwill .................................... (2,626) (1,459) (36)
Intangibles ................................. (408) (441) (14)
Translation loss ............................ 19 (347) (107)
Foreign tax credit .......................... -- 118 (250)
Research and development credit ............. (300) (300) --
Other ....................................... 29 (72) (32)
-------- -------- --------
$(3,559) $ (2,799) $ (818)
======== ======== ========
- --------------------------------------------------------------------------------
Page 48
11
The components of the deferred tax assets and liabilities are as follows:
As of September 30,
------------------------
(in thousands) 2001 2000
-------- --------
Deferred tax assets:
Deferred revenue ............................ $ 750 $ 440
Deferred rent ............................... 28 43
Allowance for doubtful accounts ............. 1,142 680
Accrued vacation ............................ 196 160
Depreciation ................................ 674 657
Package design .............................. 82 51
Amortized intangibles........................ 863 455
Other reserves .............................. 23 112
Goodwill .................................... 4,324 1,698
Translation loss ............................ 760 779
Net operating loss carryforward/carryback.... 2,248 5,814
Foreign tax credit carryforward/carryback.... 132 132
Research and development credit ............. 600 300
Valuation allowance ......................... (2,048) (2,021)
------- -------
$ 9,774 $ 9,300
------- -------
Deferred tax liabilities:
Amortized software ........................... $ 533 --
Other......................................... 91 111
------- -------
$ 624 $ 111
------- -------
Net deferred tax assets ........................... $ 9,150 $ 9,189
======= =======
At September 30, 2001, the Company had foreign tax credit carryforwards of
approximately $132,000, which expire in fiscal year 2004.
At September 30, 2001, the Company had foreign net operating loss
carryforwards of approximately $1,400,000, which will generally expire in
varying amounts from 2002 through 2008.
At September 30, 2001, the Company had total domestic net operating loss
carryforwards of approximately $4,600,000 attributable to the acquisition of
Applied Image Technology, Inc. ("AIT"). In accordance with the provisions of
Internal Revenue Code Section 382, the Company's utilization of AIT's net
operating loss carryforward is estimated to be limited to approximately,
$600,000 per year. The domestic net operating loss carryforwards will generally
expire in varying amounts from 2002 through 2019.
The Company has established a valuation allowance with respect to certain
Canadian net operating loss carryforwards and the net operating losses acquired
from AIT, which most likely will not be realized.
C. ACQUISITIONS:
On August 22, 2001, the Company completed the acquisition of Collego
Corporation, a provider of catalog content management enterprise applications
for industrial suppliers. The acquisition was recorded under the purchase method
of accounting and is subject to the new accounting pronouncements SFAS
141 and certain provisions of SFAS 142. The total purchase price of the
acquisition was $3,950,000. The Company estimated the fair value of the assets
acquired and liabilities assumed at the date of acquisition and allocated
$3,967,000 to goodwill and other intangible assets. An additional $750,000 is
payable contingent on certain future events and has not been included in the
purchase price accounting as of September 30, 2001. This contingent amount is
being held in escrow and will be paid upon expiration of twelve months from the
- --------------------------------------------------------------------------------
Page 49
12
closing; provided that these certain events occur per the Purchase Agreement.
The Company will periodically review and test its goodwill and other intangible
assets for impairment. Other intangible assets are being amortized over three
years, and goodwill is not being amortized in accordance with SFAS 142.
On September 29, 2000, the Company completed the acquisition of Applied
Image Technology, Inc. ("AIT"). AIT specializes in web-based illustrated parts
cataloging systems and graphical maintenance and repair documentation. The
acquisition was recorded under the purchase method of accounting. The Company
purchased all of the outstanding shares of common stock of AIT for $4,500,000,
215,000 shares of the Company's common stock and also assumed liabilities of
$3,100,000. A portion of the purchase price has been allocated to assets
acquired and liabilities assumed based on the estimated fair market value at the
date of acquisition while the remaining balance of $10,400,000 was recorded as
goodwill and other intangible assets. Goodwill of $5,600,000 is being amortized
over a period of 5 years on a straight-line basis. Other intangible assets,
including core technology and assembled workforce of $4,800,000, are being
amortized over periods of three to five years on a straight-line basis.
On August 21, 2000, the Company completed the acquisition of IDFM, Inc., a
research and development consulting firm specializing in enterprise asset
maintenance software. The acquisition, recorded under the purchase method of
accounting, included the purchase of certain assets for the purchase price of
$1,995,000 plus acquisition expenses. Goodwill of $2,014,000 is being amortized
on a straight-line basis over a period of five years.
On June 29, 2000, the Company completed the acquisition of the MAXIMO
reseller business unit of MIPS Information, Productivity and Systems, Limited in
Brazil. The acquisition, recorded under the purchase method of accounting,
included the purchase of certain assets and assumed liabilities for the purchase
price of $1,300,000 plus acquisition expenses. Goodwill of $1,400,000 million is
being amortized on a straight-line basis over a period of five years.
On March 2, 2000, the Company completed the acquisition of INTERMAT, Inc., a
leading provider of Maintenance, Repair and Operations ("MRO") content
management tools and cataloging services. The acquisition, recorded under the
purchase method of accounting, included the purchase of the outstanding shares
of common stock of INTERMAT, Inc. for $55,100,000 plus acquisition costs of
$1,300,000. A portion of the purchase price has been allocated to assets
acquired and liabilities assumed based on the estimated fair market value at the
date of acquisition while the remaining balance of $54,200,000 was recorded as
goodwill and other intangible assets. Goodwill of $47,700,000 is being amortized
over a period of 5 years on a straight-line basis. Other intangible assets,
including core technology and assembled workforce, of $6,500,000 are being
amortized over a period of three to five years on a straight-line basis.
On October 29, 1999, the Company completed the acquisition of Modern
Distribution Management, Inc., a leading newsletter publisher covering strategic
management issues affecting suppliers and distributors of MRO supplies. The
acquisition, recorded under the purchase method of accounting, included the
purchase of certain assets and assumed liabilities for the purchase price of
$1,200,000 plus acquisition expenses of $8,000. Other intangibles of $1,200,000
are being amortized on a straight-line basis over a period of five years.
The following reflects unaudited proforma combined results of MROI and
INTERMAT, Inc. as if the acquisition had taken place at the beginning of fiscal
year 2000. During the fiscal years 2001, 2000, and 1999, the Company did not
present proforma results of operations for any other acquisitions because the
effects of these acquisitions were not material.
Year Ended
September 30, 2000
------------------
(in thousands, except per share amounts)
Revenue
- -------
- --------------------------------------------------------------------------------
Page 50
13
- ------
MROI ................................. $ 168,661
INTERMAT, Inc. ....................... 3,629
---------
Combined ............................. $ 172,290
=========
Net (loss)/income
- -----------------
MROI ................................. $ 2,102
INTERMAT, Inc. ....................... (204)
Amortization of goodwill and
other intangible assets ........... (10,852)
---------
Combined ............................. $ (8,954)
=========
Basic (loss)/income per share ........ $ (0.41)
Diluted (loss)/income per share ...... $ (0.41)
- --------------------------------------------------------------------------------
Page 51
14
D. NET INCOME PER SHARE:
Basic and diluted income per share are calculated as follows:
Year Ended September 30,
---------------------------------------
(in thousands, except per share amounts) 2001 2000 1999
-------- ------- --------
Net (loss)/income ........................... $(15,468) $ 2,102 $ 17,880
Denominator:
Weighted average common shares
outstanding - basic ........................ 22,148 21,682 20,459
Effect of dilutive securities
(primarily stock options)................... -- 1,104 635
-------- ------- --------
Weighted average common shares
outstanding - diluted....................... 22,148 22,786 21,094
======= ======= ========
Net (loss)/income per share - basic .......... $ (0.70) $ 0.10 $ 0.87
Net (loss)/income per share - diluted ........ $ (0.70) $ 0.09 $ 0.85
Options to purchase shares of the Company's common stock of 1,879,000,
660,000 and 356,000 for fiscal 2001, 2000, and 1999, respectively, were
outstanding but were not included in the computations of diluted net
(loss)/income per share because the exercise price of the options was greater
than the weighted average market price of the common stock during the period.
Additionally, for the fiscal year ended September 30, 2001, 508,000 shares were
excluded from the computation of diluted net (loss)/income per share, as the
effect was anti-dilutive due to the Company's net loss.
E. MARKETABLE SECURITIES:
The Company classifies its marketable securities as "available for sale" and
carries them at aggregate fair value. Unrealized gains and losses are included
as a component of stockholders' equity, net of tax effect. Realized gains and
losses are determined based on the specific identified cost of the securities.
The marketable securities have various contractual maturities through the year
2017. Dividend and interest income, including amortization of the premium and
discount arising at acquisition, are included in other income. The pre-tax
unrealized holding gains and (losses) for September 30, 2001 were $18,000 and
$(4,000), respectively. The pre-tax unrealized holding gains and (losses) for
September 30, 2000 were $0 and $(6,000), respectively.
As of September 30, 2001, marketable securities consisted of the following:
Amortized Fair Market
--------- -----------
(in thousands) Cost Value
---- -----
Current:
Securities with maturity date of less than one year:
U.S. Government Securities ........................ $4,527 $4,541
Commercial Paper .................................. 991 991
------- --------
$5,518 $5,532
------- --------
Noncurrent:
Securities with maturity date greater than one year:
Tax exempt municipal securities ................... 707 707
------- --------
$ 707 $ 707
------- -------
- --------------------------------------------------------------------------------
Page 52
Total .................... $ 6,225 $ 6,239
======= ========
As of September 30, 2000, marketable securities consisted of the following:
Amortized Fair Market
--------- -----------
(in thousands) Cost Value
---- -----
Current:
Securities with maturity date of less than one year:
U.S. Government Securities ........................ $ 2,250 $ 2,249
Tax exempt municipal securities.................... 1,996 1,992
-------- --------
$ 4,246 $ 4,241
-------- --------
Noncurrent:
Securities with maturity date greater than one year:
Tax exempt municipal securities ................... 1,060 1,059
-------- --------
$ 1,060 $ 1,059
-------- --------
Total ................... $ 5,306 $ 5,300
======== ========
F. INVESTMENTS:
During fiscal 2000, the Company purchased shares of common stock of a
publicly traded company. In September 2000, the Company sold this common stock
and realized a gain of $1,664,000. The Company has no common stock investments
as of September 30, 2001.
- --------------------------------------------------------------------------------
Page 53
G. PROPERTY AND EQUIPMENT:
Property and equipment are stated at cost and consist of the following:
As of September 30,
----------------------
(in thousands) 2001 2000
-------- --------
Computer equipment .................................... $ 7,935 $ 7,537
Purchased software ................................... 13,212 11,796
Vehicles .............................................. 55 55
Furniture and fixtures ................................ 6,622 6,687
Leasehold improvements ................................ 4,227 3,832
-------- --------
32,051 29,907
Less accumulated depreciation and amortization ........ (20,382) (15,336)
-------- --------
$ 11,669 $ 14,571
======== ========
Total depreciation and amortization expense was $5,488,000, $5,516,000, and
$3,702,000 for fiscal 2001, 2000 and 1999, respectively. Included in
depreciation and amortization expense is amortization expense for purchased and
internal use software of $3,183,000, $2,628,000, and $374,000 for fiscal 2001,
2000 and 1999, respectively.
H. INTANGIBLE ASSETS:
Intangible assets consist of the following:
As of September 30,
----------------------
(in thousands) 2001 2000
-------- --------
Goodwill .............................................. $ 61,390 $ 59,615
Customer lists ........................................ 411 411
Other intangible assets ............................... 14,498 12,332
-------- --------
76,299 72,358
Less accumulated amortization ......................... (23,946) (9,072)
-------- --------
$ 52,353 $ 63,286
======== ========
Amortization expense was $14,585,000, $7,553,000 and $ 465,000 for fiscal
2001, 2000 and 1999, respectively.
I. ACCRUED COMPENSATION:
A summary of accrued compensation consists of the following:
As of September 30,
----------------------
(in thousands) 2001 2000
-------- --------
Accrued payroll ....................................... 3,018 2,037
Accrued sales commissions ............................. 6,454 5,496
Accrued vacation pay .................................. 1,317 1,018
-------- --------
$ 10,789 $ 8,551
======== ========
- --------------------------------------------------------------------------------
Page 54
J. BANK LINE OF CREDIT:
At September 30, 2000, the Company's subsidiary, AIT, had a $2,500,000 line
of credit with a bank, which was scheduled to mature on July 1, 2001. The note
bore interest at the bank's prime interest rate plus .50%. The Company paid this
note in its entirety and cancelled the line of credit in December 2000.
K. COMMITMENTS AND CONTINGENCIES:
The Company leases its office facilities under operating lease agreements,
which expire at various dates through June 30, 2019. The Company pays all
insurance, utilities, and pro rated portions of any increase in certain
operating expenses and real estate taxes. The aggregated rent expense under
these leases was $7,633,000 $5,969,000, and $4,772,000 for fiscal 2001, 2000 and
1999, respectively.
The operating leases provide for minimum aggregate future rentals as of
September 30, 2001 as follows:
(in thousands)
2002............................................... $ 5,046
2003............................................... 4,736
2004............................................... 2,120
2005............................................... 1,759
2006 and thereafter................................ 19,989
-------
$33,650
=======
The Company is not a party to any legal proceedings the outcome of which,
in the opinion of management, would have a material adverse effect on the
Company's results of operations or financial condition.
L. EMPLOYEE BENEFITS:
Cash or Deferred Plan
The MRO Software, Inc. Cash or Deferred Plan (the "Plan") is a defined
contribution plan available to substantially all of MROI's domestic employees.
The Plan was established in 1988 under Section 401(a) of the Internal Revenue
Code. Under the Plan, employees may make voluntary contributions based on a
percentage of their pretax earnings.
Effective January 1, 1993, the Plan was amended to provide for both a
guaranteed and a discretionary contribution made by MROI. Amounts charged to
expense for this Plan in fiscal 2001, 2000, and 1999 were $665,000, $656,000,
and $340,000, respectively.
1994 Incentive and Nonqualified Stock Option Plans
On March 10, 1994, the Board of Directors of the Company adopted the 1994
Incentive and Nonqualified Stock Option Plan (the "1994 Option Plan") that
provided for the grant of nonqualified and incentive stock options to directors
and employees. On January 25, 1996, the Board of Directors of the Company voted
to increase the number of shares of Common Stock that may be issued from
1,800,000 to 3,600,000.
The exercise price of incentive options must be at least equal to the fair
market value on the date of grant. The exercise price of nonqualified options
must not be less than 85% of the fair market value on the date of grant. Options
generally vest in equal installments over four years.
On March 4, 1999, the Board of Directors of the Company elected to
terminate the 1994 Option Plan upon the adoption of the 1999 Equity Incentive
Plan (the "1999 Plan"). The stockholders of the Company, on March 24, 1999,
approved amendments to the vesting and transferability of options granted to
outside directors under the 1994 Option Plan.
- --------------------------------------------------------------------------------
Page 55
On March 24, 1999, the Company's stockholders and the Board of Directors of
the Company adopted the 1999 Equity Incentive Plan (the "1999 Plan") that
provided for the grant of incentive stock options, non statutory stock options,
stock bonuses, rights to purchase restricted stock, stock appreciation rights
and other awards based upon the Company's common stock. Up to 1,850,000 shares
of Common Stock (subject to adjustment upon certain changes in the
capitalization of the Company) may be issued pursuant to grants awarded under
the 1999 Plan. The 1999 Plan was amended and restated on April 25, 2000 to
adjust the amount of options granted to non-employee directors of the Company.
On November 15, 2000, the Board of Directors of the Company voted to
increase the number of shares of Common Stock that may be issued from 1,850,000
to 4,050,000. This increase was approved by the Company's stockholders on March
6, 2001
The exercise price of incentive options must be at least equal to the fair
market value on the date of grant. The exercise price of nonqualified options
must not be less than 85% of the fair market value on the date of grant. Options
generally vest in equal installments over four years. Awards of options under
the 1999 Plan may be made until March 24, 2009. No incentive options may extend
for more than ten years from the date of grant.
Stock option activity is summarized as follows:
Weighted
No. of Shares Average Price
------------- -------------
Outstanding shares at September 30, 1998 1,509,468 $10.38
1999
- ----
Granted 1,061,000 $ 9.66
Canceled (129,954) $11.00
Exercised (274,478) $ 7.90
---------
Outstanding at September 30, 1999 2,166,036 $10.30
Exercisable at September 30, 1999 671,400 $ 9.75
2000
- ----
Granted 1,733,750 $34.48
Canceled (197,776) $23.66
Exercised (451,657) $10.08
---------
Outstanding at September 30, 2000 3,250,353 $22.42
Exercisable at September 30, 2000 671,974 $10.21
2001
- ----
Granted 1,125,000 $ 9.25
Canceled (203,726) $25.35
Exercised (26,650) $ 8.79
---------
Outstanding at September 30, 2001 4,144,977 $18.79
Exercisable at September 30, 2001 1,391,347 $17.14
The following table summarizes information about stock options outstanding at
September 30, 2001:
Options Outstanding Options Exercisable
- ---------------------------------------------------------------------------------------------------------
Number Weighted-Avg
Outstanding Remaining Number
Range of As of Contractual Weighted-Avg Exercisable Weighted-Avg
Exercise Prices 9/30/01 Life (years) Exercise Price As of 9/30/01 Exercise Price
- --------------- ------- ------------ -------------- ------------- --------------
$ 2.84-$ 3.17 64,538 2.6 $ 2.92 64,538 $ 2.92
$ 6.81-$ 9.81 1,766,267 8.1 $ 8.78 430,417 $ 9.06
$10.35-$15.50 689,297 6.0 $12.32 490,747 $12.24
$15.80-$21.69 188,000 9.2 $17.28 30,250 $18.57
$24.06-$29.63 662,750 8.6 $25.32 170,744 $25.41
$36.50-$54.50 596,625 8.0 $38.68 161,526 $38.57
- --------------------------------------------------------------------------------
Page 56
$59.13-$85.00 177,500 8.3 $61.00 43,125 $61.00
--------- --------- -------
Total 4,144,977 1,391,347
The Company complies with the pro forma disclosure requirements of
Statement of Financial Accounting Standards Board No. 123, "Accounting for
Stock-Based Compensation" (SFAS 123). The fair value method of the Company's
stock options was estimated using the Black-Scholes option-pricing model. This
model was developed for use in estimated fair value of traded options that have
no vesting restrictions and are fully transferable. This model requires the
input of highly subjective assumptions including the expected stock price
volatility. Because the Company's stock options have characteristics
significantly different from those of traded options, and because changes in the
subjective input assumptions can materially affect the fair value estimates, in
management's opinion, the existing model does not necessarily provide a reliable
single measure of the fair value of its stock options.
The fair value of the Company's stock options was estimated using the
following weighted-average assumptions:
Year Ended September 30,
----------------------------------
2001 2000 1999
---- ---- ----
Expected life (in years) 3.35 3.36 3.49
Volatility 95% 91% 76%
Risk-free interest rate 4.5% 6.22% 4.40%
Dividend yield 0% 0% 0%
For pro forma purposes, the estimated fair value of the Company's stock
options is amortized over the options' vesting period. The Company's pro forma
information is as follows:
Year Ended September 30,
----------------------------------
2001 2000 1999
---- ---- ----
(in thousands, except per share amounts)
Net (loss)/income
As reported................................ $(15,468) $ 2,102 $17,880
Pro forma $(24,935) $(4,713) $14,644
Net (loss)/income per share, basic
As reported................................ $ (0.70) $ 0.10 $ 0.87
Pro forma $ (1.13) $ (0.22) $ 0.72
Net (loss)/income per share, diluted
As reported................................ $ (0.70) $ 0.09 $ 0.85
Pro forma $ (1.13) $ (0.22) $ 0.70
Under SFAS 123, the weighted-average estimated fair value of options
granted during fiscal 2001, 2000 and 1999 was $5.95, $21.92 and $4.25 per share,
respectively.
Employee Stock Purchase Plan
On March 10, 1994, the Board of Directors of the Company adopted the 1994
Employee Stock Purchase Plan that provides for a maximum issuance of 450,000
shares of Common Stock for purchase by eligible employees at 85% of the lower of
the fair market value of the Company's Common Stock on either the first or last
day of the semi-annual offering period. No compensation expense is recorded in
connection with the plan. During fiscal year ended 2001, employees purchased
33,980 shares at a price of $8.45 and 95,796 shares at a price of $8.02 for the
offering periods ended
- --------------------------------------------------------------------------------
Page 57
November 30, 2000 and May 31, 2001, respectively. Approximately 370 employees
participated in the plan during the fiscal year ended 2001. Total shares
purchased in 2000 and 1999 were 39,699 and 42,736, respectively.
M. STOCKHOLDERS' EQUITY:
Preferred Stock
On March 11, 1994, the issuance of up to 1,000,000 shares of preferred
stock, $0.01 par value was authorized. The Board of Directors has the authority
to issue the preferred stock in one or more series and to fix rights,
preferences, privileges and restrictions, including dividends, and the number of
shares constituting any series and the designation of such series.
In January 1998, the Board of Directors of the Company adopted a
stockholder rights plan by declaring a dividend distribution of one preferred
stock purchase right (one "Right") on each share of the Company's Common Stock
outstanding on January 27, 1998 or, in certain circumstances, issued thereafter.
Initially, the Rights are not exercisable, not represented by separate Right
certificates and do not trade separately from the Company's Common Stock. Ten
days after a tender offer or acquisition of 15% or more of the Company's common
stock, each right may be exercised for $140 ("Exercise Price") to purchase one
one thousand of one share of the Company's Series A Junior Participating
Preferred Stock. Each one one-thousandth of each share of Series A Junior
Participating Preferred Stock will generally be afforded economic rights similar
to one share of the Company's common stock. In addition after such rights are
triggered, each Right entitles the holder to purchase common stock of the
Company with a fair value of twice the Exercise Price or, in certain
circumstances, securities of the acquiring company for the Exercise price. Each
Right expires in January 2008 and, during specified periods; the Company may
redeem or exchange each Right for $.01 or one share of common stock,
respectively. The Rights Agreement has been filed by the Company with the
Securities and Exchange Commission as an exhibit to a Registration Statement on
Form 8-A dated February 2, 1998. Stockholders are urged to review the Rights
Agreement for a complete understanding of the Rights Plan. The Rights Plan,
while providing the Board of Directors with flexibility in connection with
possible acquisitions and deterring unfair or coercive takeover tactics, could
have the effect of making it more difficult for a third party to acquire, or of
discouraging a third party from acquiring, beneficial ownership of 15% or more
of the outstanding shares of the Company's Common Stock.
Common Stock
In April 1999, the Company signed agreements with W.W. Grainger, Inc.
("Grainger"), a provider of MRO supplies and related information in North
America. Grainger acquired 1,000,000 shares of the Company's common stock for
$14,500,00, less expenses of $954,000 and acquired a two-year option to purchase
5% of the Company's wholly owned subsidiary, MRO.com, Inc. for an exercise price
of $3,800,000. This option was terminated by agreement of the parties in
November of 2000. In June 2001, the Company paid $650,000 to Grainger, recorded
as general and administrative expenses, to re-purchase the option grant.
On October 15, 1999, the Company's Board of Director's approved a 2-for-1
stock split in the form of a dividend of its common stock to be paid to all
shareholders on December 22, 1999. The stock split was subject to shareholder
approval of an increase in the Company's authorized common stock, $0.01 par
value per share, from 15,350,000 shares to 50,000,000 shares. Stockholders
approved the transaction on December 15, 1999. All share and per share data has
been restated to reflect this stock split as though it had occurred at the
earliest period presented.
In December 2000, the Company issued a warrant to i2 Technologies, Inc.
("i2") under which i2 has the right to purchase up to 500,000 shares of the
Company's common stock at an exercise price of $10.25 per share. i2 had not
exercised this warrant as of September 30, 2001. The Company valued the warrant
at $3,300,000 using the Black-Scholes valuation model, with the following
assumptions: (1) risk-free interest rate of 4.8%; (2) life of 2.5 years; and (3)
volatility of 105%. The warrant is immediately exercisable and has been recorded
as a one time non-cash sales and marketing expense. The warrant was issued in
connection with a strategic agreement for the two companies to resell each
other's offerings and integrate their
- --------------------------------------------------------------------------------
Page 58
technologies to create a solution for the strategic asset maintenance, repair
and operations market.
On September 28, 2000, the Company executed a restricted stock agreement
with one employee. In exchange for continued employment, the employee received
15,000 shares vesting equally in amounts of 5,000 on each September 30, 2001,
2002, and 2003. In May 2001, the vesting period of the 15,000 shares was
amended. Under the amended agreement, 5,000 shares will vest on October 1, 2001
and the remaining 10,000 shares will vest on January 2, 2002 and the restricted
stock agreement is no longer conditioned on employment. The shares were recorded
at fair market value on the date of issuance as deferred compensation and the
related amount was recorded as sales and marketing expense during fiscal 2001,
as there is no continuing oblgation of the employee beyond September 30, 2001.
On June 18, 2001, each non-employee Director received an outright grant of
6,250 shares of restricted stock vesting on a quarterly basis over three years
with twelve equal installments vesting on the 15th day of the second month of
each quarter, subject to acceleration under certain circumstances. The shares
were recorded at fair market value on the date of issuance as deferred
compensation and the related amount is being recorded as general and
administrative expenses over the vesting period.
- --------------------------------------------------------------------------------
Page 59
N. SUPPLEMENTAL CASH FLOW DISCLOSURES:
Cash paid for interest and taxes was as follows:
Year Ended September 30,
------------------------
(in thousands) 2001 2000 1999
---- ---- ----
Interest................................... $ 59 $ 107 $ 38
Income taxes............................... 1,430 4,773 8,657
Acquisitions of businesses were as follows:
Year Ended September 30,
------------------------
(in thousands) 2001 2000 1999
---- ---- ----
Fair value of assets acquired.............. 3,766 $ 71,783 $ 592
Fair value of liabilities assumed.......... 66 (4,446) (729)
Net cash paid for acquisitions............. $3,700 $ 62,278 $ 180
O. SEGMENT INFORMATION, GEOGRAPHIC DATA AND MAJOR CUSTOMERS:
During fiscal 2001, the Company operated in two reportable industry segments:
(1) the development, marketing and support of our "Demand-Side" software
products and services, consisting of MAXIMO Enterprise and MAXIMO Extended
Enterprise and (2) the development, marketing and support of our "Supply-Side"
software products and services, consisting of On-Line Commerce Services and
Catalog Management. The mroDistributor, mroManufacturer and mroConnect products
have been grouped and renamed MRO On-Line Commerce Services ("OCS"). The Catalog
Management products are the Internet-based content management tools and
cataloging services developed and marketed by the Company's INTERMAT, Inc.
subsidiary and the Collego Catalog Manager, acquired via acquisition of Collego
Corporation. The Company also offers application hosting services delivered
through our MRO Operations Center, and our mro.com website acts as an
administrative and support hub for these solutions.
Asset information by product line segment is not reported, since the
Company does not produce such information internally. The Company also manages
these segments across geographic areas: United States, Other Americas (Canada
and Latin America), Europe/Middle East and Africa, and Asia Pacific. All
segments are managed by the same board of directors and executive officers.
For periods ending on or before September 30, 2000, the Company reported
revenues related to two industry segments: the development, marketing and
support of asset maintenance management software (MAXIMO) and the development,
marketing and support of Internet e-commerce software products and the related
network services (MRO.COM). All segment-reported financial information contained
in this report reflects the Company's repositioning of its segments, effective
in the first quarter of fiscal 2001.
A summary of the Company's operations by product line was as follows:
Year Ended September 30,
------------------------
(in thousands) 2001 2000 1999
---- ---- ----
Revenues:
Demand-Side software and services $ 167,568 $ 143,288 $ 139,569
Supply-Side software and services 17,882 25,373 6,096
--------- --------- ---------
$ 185,450 $ 168,661 $ 145,665
- --------------------------------------------------------------------------------
Page 60
--------- --------- ---------
(Loss)/income from operations:
Demand-Side software and services $ 25,249 $ 18,620 $ 31,768
Supply-Side software and services (46,004) (19,191) (7,435)
--------- --------- ---------
$(20,755) $ (571) $ 24,333
--------- --------- ---------
Depreciation and amortization expense:
Demand-side software and services $ 7,021 $ 5,122 $ 4,291
Supply-side software and services 13,052 7,967 132
--------- --------- ---------
$ 20,073 $ 13,089 $ 4,423
--------- --------- ---------
- --------------------------------------------------------------------------------
Page 61
A summary of the Company's operations by geographical area was as follows:
Year Ended September 30,
------------------------
(in thousands) 2001 2000 1999
--------- --------- ---------
Revenues:
United States ............................ $ 122,025 $ 103,623 $ 86,603
Other Americas ........................... 9,246 12,458 2,594
Intercompany revenues .................... 6,717 2,867 11,869
--------- --------- ---------
Subtotal ............. $ 137,988 $ 118,948 $ 101,066
--------- --------- ---------
Europe/Middle East and Africa ............ 43,986 41,415 44,757
Asia/Pacific ............................. 10,193 11,165 11,711
Consolidating eliminations ............... (6,717) (2,867) (11,869)
--------- --------- ---------
Total revenues ....... $ 185,450 $ 168,661 $ 145,665
--------- --------- ---------
(Loss)/income from operations:
United States ............................ $ (21,329) $ 2,561 $ 23,782
Other Americas ........................... (8,203) (7,880) (1,731)
Europe/Middle East and Africa ............ 11,393 8,646 1,655
Asia/Pacific ............................. (2,616) (3,898) 627
--------- --------- ---------
$ (20,755) $ (571) $ 24,333
As of September 30,
-----------------------
(in thousands) 2001 2000
-------- ---------
Long-lived assets:
United States ............................. $ 60,282 $ 72,898
Other Americas ............................ 2,037 2,234
Europe/Middle East and Africa ............. 3,388 4,314
Asia/Pacific .............................. 397 579
--------- ---------
$ 66,104 $ 80,025
--------- ---------
The Company has subsidiaries in foreign countries, which sell the Company's
products and services in their respective geographic areas. Intercompany
revenues primarily represent shipments of software to international subsidiaries
and are eliminated from consolidated revenues. Income (loss) from operations
excludes interest income, interest expense, provision for income taxes and
transaction gains and losses.
No customer accounted for more than 10% of revenue in fiscal 2001, 2000 or
1999.
P. SUBSEQUENT EVENT
On December 20, 2001, the Company announced that it had sent a letter to the
Chairman and CEO of Datastream Systems, Inc. ("Datastream") offering to purchase
Datastream for a price of $6.00 per share, consisting of $1.00 in cash and $5.00
in the form of the Company's Common Stock, representing a total purchase price
of approximately $121,500,000, of which $20,200,000 would be payable by the
Company in
- --------------------------------------------------------------------------------
Page 62
cash. A copy of the Company's offer was filed with the SEC on Form 425.
- --------------------------------------------------------------------------------
Page 63
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
COL. A COL. B COL. C COL. D COL.E
- -----------------------------------------------------------------------------------------------------------
ADDITIONS
------------------------
BALANCE AT CHARGED TO CHARGED TO BALANCE AT
BEGINNING COSTS AND OTHER END OF
OF PERIOD EXPENSES ACCOUNTS DEDUCTIONS PERIOD
-----------------------------------------------------------------------
YEAR ENDED SEP.30, 2001
Allowance for doubtful accounts $ 2,824,714 $ 2,916,923 $ 1,892,721 $ 3,848,916
YEAR ENDED SEP.30, 2000
Allowance for doubtful accounts $ 2,866,751 $ 850,940 $ 892,977 $ 2,824,714
YEAR ENDED SEP.30, 1999
Allowance for doubtful accounts $ 2,614,137 $ 1,137,694 $ 885,080 $ 2,866,751
- --------------------------------------------------------------------------------
Page 64
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 Amendment to By-Laws adopted on February 1, 2001 (included as Exhibit3.3
to the Company's Current Report on Form 10-Q for the quarter ended March
31, 2001, File No. 0-23852 and incorporated herein by reference)
3.4 Form of Certificate of Designation of Series A Junior Participating
Preferred Stock of MRO Software, 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 MRO Software, 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 MRO Software, 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)
9.1 Shareholders Agreement between Robert L. Daniels and Susan H. Daniels
dated August 1, 2001
10.1 Fiscal Year 2000 Executive Bonus Plan (included as Exhibit 10.1 to the
Company's Quarterly Report on Form 10-Q for the quarter ended December
31, 2000, Commission File No. 0-23852 and incorporated herein by
reference)
21.1 Subsidiaries of the Company
23.1 Consent of PricewaterhouseCoopers
- --------------------------------------------------------------------------------
Page 65