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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
FOR THE FISCAL YEAR ENDED SEPTEMBER 30, 2002
(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 20, 2002, the aggregate market value of the voting stock held by
non-affiliates of the Registrant was approximately $200,730,199 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: 24,373,006 shares of common stock, $.01 par value per share,
as of December 20, 2002.
DOCUMENT INCORPORATED BY REFERENCE
Certain portions of the Company's Definitive Proxy Statement for its 2002 Annual
Meeting of Stockholders are incorporated by reference into Part III of this
Annual Report on Form 10-K.
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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
the heading "Factors Affecting Future Performance" below. 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), MainControl(R), Struxure(R) and MC/Empower(R) are registered
trademarks of MROI. MRO Software(TM), MAXIMO Enterprise(TM), MAXIMO Extended
Enterprise(TM), MAXIMO Buyer(TM), MAXIMO(R) Scheduler(TM), MAXIMO(R)
Workflow(TM), MAXIMO(R) Catalog Manager(TM), MAXIMO Illustrated Parts
Catalog, Supplier E-Commerce Adapter(TM), Struxure(R), Standard Modifier
Dictionary(TM), SMD(TM), Collego(TM), Collego Catalog Manager(TM), MRO.COM(TM),
mroMarketplace(TM), mroSupplier(TM), mroDistributor(TM), mroManufacturer(TM),
and mroConnect(TM) are trademarks and service marks of MROI, IBM(R), Web Sphere,
AIX and DB2 are trademarks of IBM Corporation, or its subsidiaries. Microsoft(R)
is a registered trademark of Microsoft Corporation, Oracle(R) is a registered
trademark of Oracle Corporation, and Java(R) is a registered trademark of Sun
Microsystems Corporation. Other company and product names may be trademarks of
the respective companies.
(C)2002 MRO Software, Inc. All rights reserved.
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PART I
ITEM 1. BUSINESS
MRO Software is a leading global provider of strategic asset management
solutions. Strategic asset management is the management and optimization of our
customers' critical assets -- those that have a significant impact on operations
and performance, including assets used in production, facilities, fleet and
Information Technology (IT) operations. The Company's strategic asset management
solutions allow our customers to manage the complete lifecycle of their
strategic assets, including: planning, procurement, deployment, tracking,
maintenance and retirement. Our strategic asset management solutions include
MAXIMO for the Enterprise Asset Management (EAM) market, MAXIMO MainControl for
the IT Asset Management (ITAM) market and Online Commerce Services (OCS) that
enables our asset-centric procurement capabilities. Asset-centric procurement is
a combination of products and services designed to support the requirements of
industrial asset-related procurement. Using MRO Software's solutions, our
customers improve production reliability, labor efficiency, material
optimization, software license compliance, lease management, warranty and
service management and provisioning across their critical asset base.
HISTORICAL HIGHLIGHTS
MAXIMO, the Company's flagship product targeting the EAM market, was first
released in 1991. MAXIMO enables customers to manage the Maintenance, Repair and
Operations (MRO) of their significant 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 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 1999, as marketplace interest in business-to-business e-Commerce applications
began to emerge, we released the initial version of our Online Commerce Services
(OCS) solutions, enabling MAXIMO users and vendors of industrial goods and
services to engage in commerce via the Internet. The Company's investment in
this business continued through internal development and acquisitions of
INTERMAT, Inc. and the Collego Catalog Manager product. Acquired in March 2000,
INTERMAT has more than 20 years of domain expertise in catalog construction,
using leading technologies such as the Standard Modifier Dictionary (SMD) and
Struxure to cleanse and normalize product information in order to create
e-Business-ready catalogs. INTERMAT services were re-branded as Catalog
Management Services in fiscal 2002. In August 2001, we acquired the Collego
Catalog Manager product, which allows suppliers of industrial goods and services
to aggregate multiple sources of product data, manages catalog information in a
central location, and distributes custom electronic catalogs to diverse
customers and sales channels. During the course of fiscal 2002, this product was
incorporated into our OCS solution.
In fiscal 2001, the Company changed its name to MRO Software, Inc. and its
NASDAQ trading symbol to "MROI", formally signaling the Company's commitment to
and focus on the industrial market. Also, in fiscal 2001, the Company completed
its development of the next generation of MAXIMO, known as MAXIMO 5. MAXIMO 5 is
pure Internet component-based technology that lowers the total cost of ownership
for enterprise application systems and allows customers to support their global
enterprise or single sites via a Web browser. This architecture significantly
streamlines operations by reducing the time and cost associated with deployment,
maintenance and training. In addition, the pure Internet technology permits
universal access from any browser-enabled device, including wireless devices,
for increased mobility.
In June 2002, the Company acquired MainControl, Inc. and began to market and
sell the MainControl product, MC/Empower (re-branded as MAXIMO MainControl).
This product provides management of IT assets through procurement, contracts,
compliance, inventory, finance,
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service management, business continuity and retirement, while enabling
information to be correlated and shared across discrete functional areas of an
organization.
FISCAL 2002 IN REVIEW
In fiscal 2002, the Company broadened its product footprint and expanded its
solution portfolio beyond Enterprise Asset Maintenance ("EAM") to include IT
asset management and to become an enterprise product "suite". This set of
enterprise software applications and online services enables asset-intensive
businesses to optimize the value of their assets and to integrate and extend
their information systems with those of their supply chain partners. We also
offer asset-centric procurement capabilities by positioning Online Commerce
Services (OCS) and MAXIMO's purchasing features in a solution that enables
MAXIMO users to automate the planned procurement of industrial parts and
supplies, and that enables distributors and manufacturers of industrial parts to
gain exposure to a variety of buyers via multiple marketplaces and exchanges --
through one catalog and one connection.
While the Company's e-Commerce offerings (OCS and Enterprise Catalog Management)
met with initial success that reflected the overall explosive growth of the
Internet e-Commerce software market, more recently this market has suffered a
general, precipitous decline and our e-Commerce solutions now represent less
than 10% of the Company's revenues. The Company has incorporated its e-Commerce
technology into its MAXIMO product line where possible and has largely ceased
additional initiatives in the Internet e-Commerce market. By combining certain
e-Commerce technologies and redefining our OCS and Enterprise Catalog Management
businesses, we created an asset-centric procurement solution that would
complement our asset management solutions (MAXIMO and MAXIMO MainControl). We
offer a single integrated suite of complementary products and services that
enable our customers to manage all of their critical capital assets throughout
their respective lifecycles of planning, procurement, deployment, tracking,
maintenance and retirement.
In fiscal 2002, the Company reported all its revenue in one reportable business
segment.
BUSINESS STRATEGY
The Company has been building its business strategies around key strengths that
we believe will drive future success and allow the Company to continue to be a
stable, predictable software company. The Company will focus on growing
profitable business solutions that are considered strategic to its long-term
growth. MRO Software leverages its key strengths to deliver powerful solutions
that provide real value to its customers, including the following:
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PRODUCTS: Our products and services solve large, recurring problems for
companies. Asset-intensive companies focus on fundamentals such as
inventory tracking and levels, work planning and scheduling, safety and
risk management and contract compliance. Strategic asset management
covers four critical asset classes: production, facilities, fleet and
IT. MRO Software's solutions help companies effectively manage the
lifecycle of these assets.
DOMAIN EXPERTISE: We expect Companies will increasingly look to a new
class of enterprise suite providers that offer a complete solution for
all assets having direct and significant impact on company operations
and performance. The Company has extensive expertise in asset
management solutions for production, facilities, fleet, and IT, --
enhanced by its vertical domain knowledge in many industries and its
asset-centric procurement expertise.
CUSTOMER BASE AND ALLIANCES: We have a large and diverse customer base
providing a stable foundation on which to grow the business. We also
recognize the importance of partnerships with consulting and systems
integration firms, and product partners. These business partners play a
key role in the sales, marketing and distribution of our products, and
we will continue to enhance and leverage our relationships with all
partners. Through the combination of our extensive customer base and
our alliance and partner relationships, we are able to deliver our
solutions to a broader market.
ARCHITECTURAL ADVANTAGE: Our commitment to improving product
architecture is evidenced by the release of MAXIMO 5, a pure Internet
product developed on a standards-based component architecture that
lowers the total cost of ownership of enterprise applications. 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. 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.
MARKET EXPANSION: We have expanded and will continue to expand the
breadth of our offerings through expanded technology and deep vertical
industry expertise. We will introduce new products and services that
are logical extensions of our current offerings, based on our
accumulated expertise and industry-specific knowledge. We will continue
to develop and acquire technologies and products that will maintain our
competitive advantage and broaden our market opportunities. We believe
that vertical industry solutions and strategic acquisitions will
further advance the Company as the market leader in the strategic asset
management market.
PRODUCTS
STRATEGIC ASSET MANAGEMENT PRODUCTS
Strategic Asset Management is the management and optimization of all
assets that have a direct and significant impact on company operations and
performance. Strategic asset management covers four critical asset classes:
production, facilities, fleet and IT. MRO Software's strategic asset management
solutions help companies effectively manage the lifecycle of their most
significant assets.
MAXIMO
MAXIMO helps companies in asset-intensive industries increase their return on
assets while decreasing their operational costs, including the costs of
transacting with their suppliers. The MAXIMO suite of software products is used
to plan and manage ongoing Maintenance Repair and Operations (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
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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 to enable companies to 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, Swedish Latin American Spanish, and Simplified
Chinese.
The Company has recognized opportunities to expand its market share in target
vertical markets by offering pre-configured, industry-specific, focused
applications for MAXIMO. We are focused on the following industries: aviation,
facility and property management, discrete and process manufacturing, public
sector, oil and gas, transportation, utilities, financial services,
consumer/retail and professional services. 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. Core applications features and functions in MAXIMO include:
EQUIPMENT: tracks associated costs, histories, and failures of a serialized
piece of equipment.
WORK ORDERS: provides the ability to schedule work orders based on real-time
criticality, view detailed planning information, enter maintenance requests, 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 to
plan and analyze maintenance work.
LABOR: stores information by employee, craft or contractor, maintains personnel
files and reports labor on work orders in timecard format.
CALENDARS: provides the ability to view calendars and associates calendars with
labor and craft records to plan work based on equipment and labor availability.
JOB PLANS: provides a list of the operations, materials, labor and tools
required for a defined piece of work.
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 more than 2,200 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 users safety features such as identification of hazardous
materials, lock out/tag out capabilities, identification of affected equipment
and locations and permit tracking.
INSPECTIONS: allows plans and schedules to be defined and analyzed in support of
predictive and preventive maintenance.
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MAXIMO OPTIONS
A variety of options can be added on to expand the capabilities of MAXIMO
including the following:
MAXIMO MOBILE SUITE: MAXIMO Mobile Work Manager provides technicians with the
ability to access work orders and capture performance data remotely. The MAXIMO
Mobile Suite extends the value of MAXIMO by providing remote inventory and
auditing control capability, the ability to capture cycle counts, automate
purchase order processes and manage issues and transfers from handheld devices.
MAXIMO PROJECT MANAGER: offers 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.
DESKTOP REQUISITION: supports the creation of new material requests, reviews
existing requests manages access to real-time pricing and availability and the
transfer of purchase orders to vendors.
MAXIMO WORKFLOW: allows automation of maintenance operations and business
processes and allows organizations to rapidly deploy new or change existing
business processes.
MAXIMO ILLUSTRATED PARTS CATALOG ("IPC"): enhances MAXIMO's work management
components by providing visual documentation on the plant floor. IPC provides
instant access to strategic technical documentation and spare parts information
reducing time required to look up parts and inventory specifications.
STANDARD MODIFIER DICTIONARY ("SMD"): provides a structured format 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 ENTERPRISE ADAPTERS: support financial, purchasing, materials and
inventory integration with various enterprise business systems including
packaged integration to Oracle, PeopleSoft, and SAP.
MAXIMO E-COMMERCE ADAPTERS: includes industry-standard, XML-based collaboration
applications that provide live, real-time status on orders and transactions with
customer-specified distributors, manufacturers, and marketplaces.
MAXIMO MAINCONTROL
MAXIMO MainControl is an IT asset management product that provides management of
IT assets through procurement, contracts, compliance, inventory, finance,
service management, business continuity and retirement, enabling information to
be correlated and shared across these discrete functional areas of an
organization.
MAXIMO MAINCONTROL FEATURES
MAXIMO MainControl addresses the numerous IT asset management issues facing an
organization, such as:
PROCUREMENT: provides comprehensive, online management of IT asset procurement
and is able to fully integrate with a wide variety of procurement systems. It
enables users to select vendors and equipment from online catalogs, check
contract terms, generate requisitions, approve requests, generate orders and
allocate planned expenses to budget accounts. Users can fulfill orders from
stock or order new.
CONTRACTS: enables the user to track and manage contracts and obligations; from
purchase contracts to subscription, lease, maintenance, software licensing and
service contracts.
COMPLIANCE: ensures software license compliance, tracks and manages all software
installations in the organization. Provides the ability to establish a software
management process to track license terms and to assist with internal software
audits.
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INVENTORY: enables users to track history of asset location, owners, users and
configuration changes while tracking all moves, adds and changes.
FINANCE: supports budget planning with a spreadsheet import/export facility and
allows budget tracking by account, cost center and cost type to assist with
technology procurement.
SERVICE MANAGEMENT: manages all requests regarding IT assets and services,
provides a complete history of all activities involved in problem resolution,
planning and change management activities.
BUSINESS CONTINUITY: supports the requirements to integrate and automate the
response and recovery process for technology assets in the event of a business
disruption.
RETIREMENT: works with inventory, finance and service features to support proper
handling of retired or to be disposed of IT assets.
ASSET-CENTRIC PROCUREMENT
Asset-centric procurement is a combination of products and services designed to
support the requirements of industrial asset-related procurement for buyers and
suppliers. Online Commerce Services (OCS) (described below), and MAXIMO
purchasing capabilities (described above) are included in the Company's
asset-centric procurement offering.
ONLINE COMMERCE SERVICES (OCS)
MRO Software provides solutions to support asset-centric procurement by offering
distributors and manufacturers of industrial products the capabilities to
successfully implement their e-Commerce initiatives. These services give
industrial suppliers a fast and simple way to conduct business over the
Internet. By using these hosted services companies can immediately participate
in Internet-based commerce and ensure their ability to provide service to
existing customers and new prospects. OCS supports multiple languages,
currencies and tax codes, with 24/7/365 availability.
OCS FEATURES
OCS provides suppliers with a variety of hosted applications including the
ability to accept, process and respond to electronic purchase orders from MAXIMO
and other popular e-Procurement applications; to manage supplier and buyer
profiles and relationships; and to process e-Commerce transactions. The service
also provides suppliers with the capabilities to host an on-line searchable
electronic catalog; the tools for the management, customization and publishing
of electronic catalog content. OCS customers have the ability to provide a Web
store front with comparison tools, shopping cart, e-Commerce transaction
processing and payment processing. OCS also provides suppliers with the
capability to provide real-time pricing and availability to buyers as well as
real-time transaction processing by integrating with supplier back-end ERP
systems.
PRODUCT ARCHITECTURE
MAXIMO 5 components are built on Java technology, specifically the Java 2
Platform, Enterprise Edition (J2EE.) to take full advantage of today's
enterprise environment. J2EE defines the standard for developing multi-tier
enterprise applications. J2EE simplifies enterprise applications by basing them
on standardized, modular components, by providing a complete set of services to
those components, and by handling many details of application behavior
automatically. MAXIMO is the first asset management 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.
J2EE provides application portability, scalability, interoperability and
security models for Internet applications. For example, it has an extensive
library of routines for Internet protocols like HTTP and FTP. This makes
creating and managing network connections much easier, enabling applications to
open and access objects
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across the Internet via URLs with the same ease as accessing a local file
system. Also, because HTTP is a request-response protocol, individual requests
are treated independently. Consequently, Internet applications need a mechanism
for identifying a particular client and the state of any conversation it is
having with that client. By providing session management capabilities, Web
servers and applications servers can easily manage session states for
Internet-based connections.
MAXIMO's use of open standards supports a broad range of server platforms,
network operating systems and communications protocols. These open standards
provide customers with the flexibility to match their computing resources to
their needs, and facilitates tight integration to critical business systems.
These also provide the ability to collaborate with virtually any procurement
network, marketplace or one-on-one with suppliers.
The asset-centric procurement solutions use an Internet oriented, scaleable
architecture to support a full Web browser-based environment. OCS allows
communications between buyers and suppliers in a real-time manner, based on XML
standards. The applications are hosted by the Company at an outsourced hosting
facility.
STANDARDS BASED INTEROPERABILITY
Enterprises today are focused on operational and procedural efficiencies that
will make them more competitive and responsive across the board. They require
business systems that will address their business needs efficiently and adapt to
changes as their business needs or environment changes. They require systems
that will collaborate within their enterprise and with their partners and
customers. Our MAXIMO 5 interoperability framework supports the more common
collaboration patterns found between an asset management system like MAXIMO and
other enterprise business systems. This allows enterprises to focus on their
operational procedures and provides the flexibility on where to manage their
business processes.
CUSTOMER SUPPORT
A high level of customer service and technical support is critical to customer
satisfaction in our industry. Many of the Company's customers implement its
products in complex, large-scale IT environments 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.
The Company employs a technical hot-line support staff of 110 employees
operating out of the Company's corporate headquarters in Massachusetts and four
international technical response centers located in the United Kingdom,
Australia, Canada, and Brazil. Support services are provided on a seven-day
week, 24-hour day basis using the UK, Australia and Bedford support centers. The
Company also provides premium support via resources dedicated to meeting the
needs of our larger Enterprise-wide clients. Premium Support is a fee-based
service provided in addition to all of the standard support 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 media (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. 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 the Company's 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. The Company employs a consulting and
training staff of 297 employees. The Company's network of international
distributors also provides services within their geographic territories.
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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 an 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 augment its services needs.
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, Virginia, Australia, France, Germany, Italy, Sweden, the
United Kingdom and the Netherlands. The Company also offers on-site training
classes at customer sites upon request. We also offer Computer-Based Training
("CBT"). CBT, while not intended to replace instructor-led courses, provides a
series of distinct self-paced lessons.
CATALOG MANAGEMENT SERVICES: The Catalog Management 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. The Standard Modifier Dictionary
(SMD) is one of 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.
CUSTOMERS
The Company's customers are found in a broad range of vertical industries
including: aviation, facility/property management, discreet and process
manufacturing, public sector, oil and gas, transportation, utilities, financial
services consumer/retail and professional services. The Company's products have
been installed and are supported in all 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 marketing and
direct sales organization of 154 persons operating out of its Massachusetts
headquarters and sales offices located in California, Colorado, Florida,
Georgia, Illinois, Maryland, Michigan, New Jersey, New York, Texas and Virginia.
In addition, the Company markets its products outside the United States through
a sales force of 133 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 38%, 34%, and 39% of the Company's total revenues in
fiscal 2002, 2001, and 2000, respectively, were derived from sales outside the
United States. The United Kingdom represented 12%, 11%, and 11% of the sales
outside the United States in fiscal 2002, 2001, and 2000, respectively.
Approximately 7%, 8%, and 9% of the Company's total long-lived assets in fiscal
2002, 2001, and 2000, respectively, are located outside the United States.
The Company markets its products through advertising campaigns in national trade
periodicals, direct mail, public relations activities, 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 asset management products, from the initial sales
presentation to the issuance of a purchase order, typically ranges from nine to
twelve months. The Company believes that customers generally choose the
Company's products and services based on the features they provide and upon a
preference for the product architecture, implementation time, domain expertise
and ease of use.
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
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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.
STRATEGIC ALLIANCES
MRO Software's alliance program is designed to bring value to asset-intensive
companies on a global basis through collaboration with world-class product and
service partners. The alliance program enhances the Company's market reach while
at the same time ensuring that exacting standards of quality are met in all
partnering engagements. Management of our alliance partners is an important
component of our business strategy and is planned to enhance our future revenue
streams by broadening our market reach through the addition of partner
resources.
Two compelling forces have driven MRO Software's need to refine and expand its
alliance program. As the leading provider of strategic asset management
solutions, we are experiencing: (1) increased customer demand for enterprise
level solutions that can only be delivered in concert with partners; and (2)
increased demand from leading systems integration and consulting firms to
include MRO solutions as part of their enterprise engagements.
The Company works closely with major consulting and systems integrators and has
formed alliances with such firms as IBM, A.T. Kearney, SAIC and Deloitte
Consulting. During Fiscal 2002, the Company expanded its existing relationship
with IBM, further broadening its market reach, vertical depth and technology
offerings.
The Company also develops reseller (VAR and OEM) channels that supplement our
direct sales force. We have VAR and OEM agreements with vendors such as Rockwell
Automation, Johnson Controls, Inc., and ABB Service Worldwide (an affiliate of
Asea Brown Boveri). Our VAR and OEM partners sell our MRO solutions, either
under the MRO Software product names or on a re-branded basis, using their own
sales force. Resellers are located around the world and supplement our direct
sales force in territories where we do not have subsidiaries or a strong direct
sales infrastructure.
In addition, the Company has partnerships with specific solution providers that
offer a complementary solution to MAXIMO. These providers often address solution
requirements specific to an industry vertical. Complementary Solution Provider
("CSP") and Complementary Enterprise Software Provider ("CESP") partners are
partners whose software products or solutions enhance or extend MRO software
offerings. The Company has CSP and CESP alliances with PeopleSoft, Inc.,
ActiveG, Computational Systems, Inc., Fisher Rosemount, Work Technology, VFA,
Inc., Meridium, Inc., OSI Software Inc., Monitor Management Control Systems
Ltd., Bentley Nevada and Matrikon.
The Company has technology partnerships with companies that offer technology
complementary to our solutions. The Company re-brands and sells some of its
technology partners' products on an OEM basis, such as Syclo in our MAXIMO
Mobile Suite, while products from other technology partners are either embedded
in our solutions or offered as separate add-ons. We select technology partners
based on their technological expertise, and we seek partners with leading edge
technology conducive to the advancements that we have planned for our own
products and services. Some of our technology partners are IBM, Actuate,
BroadVision, WebMethods, Verity, BEA Software and Oracle.
COMPETITION
The Company's suite of strategic asset management 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 competitors include traditional Enterprise Resource Management
providers such as SAP, Oracle and JD Edwards. Our competitors also include
providers such as Datastream, and Indus International that focus on the EAM
market, and Computer Associates and Peregrine Systems that focus on the IT asset
management market.
Page 11
PRODUCT DEVELOPMENT
The Company has made substantial investments in research and software product
development. The Company's total product development expenses in fiscal years
2002, 2001 and 2000 were $26.9 million, $27.6 million and $21.3 million,
respectively. The Company's research and development staff consists of 218
employees and a number of outside consultants. The Company's development
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; Grand
Rapids, Michigan; Houston, Texas, and McLean, Virginia.
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 ownership" 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.
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 proprietary 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
Page 12
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
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
secured, customer support 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
The Company has 1,016 full-time employees including sales, marketing and related
services, product research and development, customer support, training and
consulting services, and 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 115,000 square feet. In October 2002, the Company and the
Sublandlord agreed to extend the lease term until December 31, 2009. The average
annual base rent is $1.1 million. Additionally, the Company estimates that its
annual operating expenses under the recently renegotiated 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. The Company leases additional sales offices in
California, Colorado, Florida, Georgia, Idaho, Illinois, Maryland, Michigan,
Missouri, New Jersey, New York, Tennessee, Texas and Virginia. The Company also
leases offices for its international operations in, Australia, Brazil, Canada,
China, France, Germany, Hong Kong, India, Italy, Mexico, the Netherlands,
Singapore, Sweden, Thailand and the United Kingdom.
Page 13
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.
ITEM 5. OTHER INFORMATION
CERTIFICATION UNDER SARBANES-OXLEY ACT
Our chief executive officer and chief financial officer have furnished to the
SEC the certification with respect to this Report that is required by Section
906 of the Sarbanes-Oxley Act of 2002.
Page 14
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
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 20, 2002, there were approximately 140 holders of record of the
Company's Common Stock. 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, 2002.
FISCAL 2002 HIGH LOW
First Quarter $25.84 $ 8.43
Second Quarter $29.85 $11.16
Third Quarter $15.07 $10.39
Fourth Quarter $12.30 $ 6.65
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
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 the Company's initial public offering in 1994, the Company has not
declared or paid cash dividends on its Common Stock. 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.
Page 15
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-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)
2002 2001 2000 1999 1998
---- ---- ---- ---- ----
Revenues $171,881 $185,450 $168,661 $145,665 $120,016
(Loss)/income from operations (15,319) (20,755) (571) 24,333 12,902
Net (loss)/income (10,551) (15,468) 2,102 17,880 6,222
Net (loss)/income per share, basic (0.46) (0.70) 0.10 0.87 0.32
Net (loss)/income per share, diluted (0.46) (0.70) 0.09 0.85 0.31
Shares used to calculate net (loss)/
Income per share
Basic 23,171 22,148 21,682 20,459 19,865
Diluted 23,171 22,148 22,786 21,094 20,156
-------- -------- -------- -------- --------
Total assets 192,153 171,453 180,945 159,033 114,520
Long-term obligations 405 150 171 282 906
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 16
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, 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 the heading "Factors Affecting Future
Performance" below. 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 is a leading global provider of strategic asset management
solutions. Strategic asset management is the management and optimization of
assets that have a significant impact on customer operations and performance,
including assets used in a company's production, facilities, fleet and
Information Technology (IT) operations. The Company's integrated suite of
software applications optimizes performance, improves productivity and service
levels and enables asset-centric procurement. Our strategic asset management
solutions include MAXIMO for the Enterprise Asset Management (EAM) market,
MAXIMO MainControl for the IT Asset Management (ITAM) market and our Online
Commerce Services (OCS) that enable asset-centric procurement capabilities.
During fiscal 2001, the Company operated in two reportable industry segments:
(1) the development, marketing and support of "Demand-Side" software products
and services, consisting of MAXIMO Enterprise and MAXIMO Extended Enterprise and
(2) the development, marketing and support of "Supply-Side" software products
and services, consisting of Enterprise Catalog Management and OCS.
At the beginning of fiscal 2002, the "Demand-Side" product offerings were
re-named Strategic MRO, and the "Supply-Side" product offerings were split into
two distinct product groups: Enterprise Catalog Management and OCS. As all of
these products were complementary to one another, the Company repositioned to
one reportable industry segment. In June 2002, we acquired MainControl, Inc. and
its IT asset management product, MC/Empower (re-branded MAXIMO MainControl).
During the course of the fiscal year, we also began incorporating portions of
our e-Commerce technologies into MAXIMO and we redefined our OCS and Enterprise
Catalog Management solution, creating an asset-centric procurement solution that
would complement our asset management solutions (MAXIMO and MAXIMO MainControl).
We offer a single integrated suite of complementary products and services that
enable our customers to manage all of their critical capital assets throughout
their respective lifecycles of planning, procurement, deployment, tracking,
maintenance and retirement.
All segment-reported financial information contained in this report has been
restated to reflect the Company's repositioning to one industry segment,
effective in the first quarter of fiscal year 2002. The Company's management
assesses operating results on an aggregate basis to make decisions about the
allocation of resources. As a result, we have redefined our one reportable
industry segment as Strategic Asset Management. Certain prior year financial
statement items have been reclassified to conform to the current year
presentation.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
The Company's discussion and analysis of its financial conditions and results of
operations are based upon its consolidated financial statements, which have been
prepared in accordance with accounting principles generally accepted in the
United States of America. The preparation of these financial statements requires
that management make estimates and judgments that affect the reported amounts of
assets,
Page 17
liabilities, revenues and expenses. These estimates and assumptions are affected
by management's application of accounting policies.
Critical accounting policies, in which different judgments and estimates by our
management could materially affect our reported condition and results of
operations, include revenue recognition, estimating the allowance for doubtful
accounts, deferred tax assets, and the valuation of long-lived assets.
REVENUE RECOGNITION
The Company licenses its software products under noncancellable license
agreements. Software license fee revenues are generally recognized upon contract
execution and shipment, provided collection of the resulting receivable is
deemed probable, the fees are fixed or determinable, and no significant
modification or customization of the software is required. Services revenues are
comprised of consulting and training fees related to installation of the
Company's software solutions, maintenance/support ("PCS") 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 ("OCS") business. Consulting, training, content management and
cataloging services are generally recognized as the services are performed. PCS
revenues are recognized ratably over the term of the agreement, generally one
year. Customers typically subscribe to OCS on an annual basis and revenue is
recorded as services revenue and recognized on a straight-line basis over the
applicable subscription period.
The Company's multi-element arrangements could include the following three
elements: (a) software license, (b) PCS, and (c) consulting, training and other
services ("services"). Revenue is allocated to the elements of the arrangement
based upon the vendor specific objective evidence ("VSOE") of fair value of each
element. The Company uses the residual method to recognize its software license
revenue, because while we are able to determine the VSOE of fair value of PCS
and services, we are unable to determine the VSOE of the fair value of software
licenses. Under the residual method, the fair value of undelivered elements (PCS
and/or services) is deferred and recognized when the PCS and/or services are
delivered. The difference between the amount of the total arrangement and the
amount attributable to the undelivered elements (PCS and/or services) is
recognized as software license revenue. VSOE is established for PCS and is based
on the price of PCS when sold separately. The PCS renewal rate is a relatively
consistent percentage of the stipulated software license fee, offered to all
customers. VSOE for consulting services is based on fixed hourly rates set
according to the skill level of the consultant required. VSOE for training
services is based on an established per-student fee structure. For those
multi-element arrangements, where we cannot establish VSOE for the undelivered
elements, the software license value is recognized together with the consulting
services over the period the consulting services are provided. Contract
accounting is applied to any arrangement that includes significant customization
or modification of the software.
Revenue for services is generally recognized as the services are performed. If
there is significant uncertainty about receipt of payment, revenue is deferred
until the uncertainty is sufficiently resolved. In situations that involve
disputes, any conceded amounts are written off against revenue in the period
that the dispute is resolved.
Our customers do not have any right of return except as stipulated under a
standard 90-day warranty that runs concurrent with PCS. The Company does not
maintain any reserves with respect to this warranty based on a history of high
performance of our software. On the rare occasion that a customer insists on
conditions of acceptance, the Company defers revenue until the customer's
acceptance is obtained and the condition has been satisfied.
We assess whether fees are fixed or determinable at the time of sale and
recognize revenue if all other revenue recognition requirements are met. Our
standard payment terms are net 30 days. Payment terms that extend beyond net 30
days from the contract date but are within twelve months are generally deemed to
be fixed or determinable based on our successful history of collecting on such
types of arrangements. Total accounts receivable with extended payment terms
were $3.8 million as of September 30, 2002. For those customers who are deemed
not to be credit-worthy, revenue is deferred until payment is received.
Revenue from products sold through indirect channels ("resellers") is recognized
upon shipment of the software, as long as evidence of an arrangement exists,
collectibility is probable and the fee is fixed or determinable. Revenue is
Page 18
recorded net of any commissions or discounts. Our resellers do not have any
right of return beyond the standard 90-day performance warranty that runs
concurrent with PCS.
ALLOWANCES FOR DOUBTFUL ACCOUNTS AND SALES RETURNS
The Company maintains allowances for doubtful accounts, which reflects the
Company's estimate of the amounts owed by customers that customers will be
unable or otherwise fail to pay. Management performs ongoing credit evaluations
of its customers' financial condition and limits the amount of credit when
deemed necessary. The Company believes that the current estimate of allowances
for doubtful accounts recorded as of September 30, 2002, adequately covers any
potential credit risks. However, if the financial condition of our customers
deteriorates and their payment defaults exceed our estimates, then we may need
to increase our allowance reserves, which will result in a charge to income in
the period that the adjustment is made.
The Company did not record a provision for estimated sales returns. Based on our
history of sales returns and an analysis of credit memos, we determined that a
provision was not needed. If the historical data we used to calculate the basis
for a provision does not properly reflect future returns, then a provision for
returns will be recorded in the period that such a determination is made.
DEFERRED INCOME TAXES
The Company accounts for income taxes under the asset and liability approach for
accounting and reporting for income taxes in accordance with FAS 109. The
Company computes deferred income taxes, net of valuation allowances, for the
estimated future tax effects of temporary differences between the financial
statement and tax basis of assets and liabilities. Changes in deferred tax
assets and liabilities are recorded in the provision for income taxes. The
Company continually assesses the realizability of its deferred tax asset. A
valuation allowance is recorded to reduce deferred tax assets to the amount of
future expected tax benefit when it is more likely than not to be realized. All
available evidence, both positive and negative, is considered in the
determination of recording a valuation allowance. We consider future taxable
income and ongoing tax planning strategies when assessing the need for a
valuation allowance. Negative evidence that would suggest the need for a
valuation allowance for the Company consists of our recent cumulative operating
losses. However, since these operating losses are attributable to several
charges that we believe are non-recurring in nature, the Company has not
recorded a valuation allowance in relation to these losses. The non-recurring
charges contributing to the Company's recent cumulative operating losses consist
of goodwill amortization from recent acquisitions and a large initial investment
into the Internet e-Commerce market. Positive evidence that would negate the
need for a valuation allowance consists of the projection of future pre-tax
profits and a strong earnings history for the Company prior to these operating
loss years. The Company believes future taxable income will be sufficient to
realize the deferred tax benefit of the net deferred tax assets. In the event
that it is determined that we cannot realize the net deferred tax assets, an
adjustment to the net deferred tax assets will be made and will result in a
charge to income in the period such a determination is made. The net deferred
tax asset amount recorded as of September 30, 2002 is $11.7 million.
The Company has established a valuation allowance with respect to certain
Canadian net operating loss carryforwards, the net operating losses acquired
from Applied Image Technologies, Inc. (AIT), and various State net operating
loss carryforwards. The valuation allowance was based upon expected earnings
within individual tax jurisdictions and statutory limitations imposed by tax
jurisdictions, which will more likely than not reduce our ability to realize the
net operating loss carryforwards. These valuation allowances are $156 thousand,
$1.6 million and $581 thousand, respectively.
VALUATION OF LONG-LIVED ASSETS
Long-lived assets are amortized over their estimated useful lives. The Company
periodically reviews its long-lived assets, including intangible assets
resulting from acquisitions, for impairment whenever events or changes in
circumstances indicate that the carrying amount of these assets may exceed their
fair value. The Company estimates whether future cash flows expected to result
from the use of assets exceed the carrying amount of the assets. In the
Page 19
event that the Company judges that an impairment exists, all or a portion of the
asset will be written-off based on the amount by which the carrying amount
exceeds the fair value of the asset. In order to determine the fair value, the
Company obtains quoted market prices or utilizes valuation techniques, such as
discounted cash flows. The Company's products and businesses are operated as a
single product suite and do not maintain separate cash flows or operating
margins. As of September 30, 2002, all remaining goodwill has been assigned to
one reporting unit and will be reviewed for impairment at the entity level.
The Company also periodically assesses the useful life of its fixed assets and
intangibles and may in the future need to adjust the life of an asset and
write-it off.
ACQUISITIONS
On June 14, 2002, the Company completed the acquisition of MainControl, Inc.
("MainControl"), a provider of IT asset management solutions. The purpose of the
acquisition was to expand the Company's product base and enable us to offer
products that manage a broader range of an enterprise's strategic assets. The
Company reports the revenues of IT asset management with its Strategic MRO
product offering and has re-named this combined product offering strategic asset
management. Under the terms of the acquisition agreement, the Company acquired
all outstanding equity of MainControl for a combination of MRO common stock and
cash. The Company paid $2.8 million in cash and issued 1,096,296 shares valued
at $13.80 per share. The share price was calculated by averaging the closing
price of a share of MRO Software's stock for five days before and five days
after the announcement date of the merger, as reported by the NASDAQ National
Market. The total purchase price, including transaction expenses of $784
thousand, was $18.6 million. An additional amount of $700 thousand is payable
contingent upon reaching certain revenue thresholds through December 2002; $420
thousand of the contingent amount has been paid and recorded as goodwill at
September 30, 2002. If the remaining $280 thousand of contingent payments are
made, the Company will account for the payments as additional purchase price and
will allocate it to goodwill. The Company allocated the purchase price as such:
$3.7 million to current and other assets, $3.1 million to acquired technology,
$1.2 million to customer contracts, $100 thousand to backlog, $200 thousand to
software documentation, $700 thousand to a non-compete agreement, $15.8 million
to goodwill, and $6.2 million to current liabilities. The purchase price
allocation was based on then-current intentions for future use of the acquired
assets, estimate of future projected cash flows, analysis of historical
financial results and review of customer contracts. Acquired technology will be
amortized over six and one-half years, customer contracts will be amortized over
four years, backlog will be amortized over one year, software documentation will
be amortized over three years and the non-compete agreement will be amortized
over two years.
Page 20
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,
------------------------------------------
2002 2001 2000
---- ---- ----
Revenues:
Software 29% 33% 42%
Support and services 71 67 58
---- ---- ----
Total revenues: 100 100 100
Total cost of revenues 40 41 35
---- ---- ----
Gross profit 60 59 65
---- ---- ----
Operating expenses:
Sales and marketing 34 38 40
Product development 16 15 13
General and administration 11 11 9
Amortization of goodwill
and other intangibles 8 6 4
---- ---- ----
Total operating expenses: 69 70 66
---- ---- ----
Loss from operations (9) (11) (1)
Other income 1 1 2
---- ---- ----
(Loss)/income before income taxes (8) (10) 1
Benefit for income taxes (2) (2) --
---- ---- ----
Net (loss)/income (6)% (8)% 1%
---- ---- ----
Page 21
REVENUES
The Company's revenues are derived primarily from two sources: (i) software
licenses, and (ii) fees for support and services. The Company has organized its
product offerings into three categories: (1) Asset management products and
services, (2) Enterprise Catalog Management products and services and (3) Online
Commerce Services. Our Asset management products consist of the MAXIMO and
MAXIMO MainControl software products and services. Enterprise Catalog Management
products consist of content normalization/cataloging software products and
services and the Collego Catalog Manager software products and services. Online
Commerce Services are the hosted solutions that enable manufacturers and
suppliers to engage in online commerce according to their needs.
Fiscal Fiscal Fiscal
Year Year Year
Ended Change Ended Change Ended
(in thousands) 9/30/02 % 9/30/01 % 9/30/00
- ---------------------------------------------------------------------------------------------------
Software licenses $ 49,035 (20)% $ 61,337 (14)% $ 70,987
Percentage of total revenues 29% 33% 42%
Support and services $122,846 (1)% $124,113 27% $ 97,674
Percentage of total of revenues 71% 67% 58%
Total revenues $171,881 (7)% $185,450 10% $168,661
FISCAL 2002 COMPARED TO FISCAL 2001: Software license revenues decreased 20% in
fiscal 2002 as compared to fiscal 2001. The decrease in fiscal 2002 was mainly
attributable to a decrease in MAXIMO software license revenues. MAXIMO software
license revenues decreased 25% to $45.6 million in fiscal 2002 from $60.7
million in 2001. The Company attributes this decrease to a continued slowdown in
its customers' IT spending, slower than expected adoption of MAXIMO 5, and
overall adverse economic conditions. The Company recognized $2.7 million of
software license revenues related to its IT asset management product (MAXIMO
MainControl) that was acquired from MainControl, Inc. in June 2002. Enterprise
Catalog Management software licenses increased 23% to $708 thousand in fiscal
2002 from $577 thousand in fiscal 2001. The Company has not yet realized any
software license revenue from its Collego Catalog Management product, which was
acquired in August 2001. This product has been incorporated into OCS and has not
been offered for sale as a stand-alone product since July 2002.
Support revenues were $55.3 million and $47.3 million in fiscal 2002 and 2001,
respectively. Support revenues have increased as a result of an increase in the
number of MAXIMO customers and a strong renewal rate for maintenance contracts.
Approximately 94% of our customers renewed their annual maintenance contracts.
MAXIMO support revenues were $54.3 million and $46.4 million in fiscal 2002 and
2001, respectively. The Company recognized $807 thousand of support revenues
related to its MAXIMO MainControl product that was acquired from MainControl,
Inc. in June 2002. Enterprise Catalog Management support revenues decreased 23%
to $173 thousand in fiscal 2002 from $225 thousand in fiscal 2001. The decline
in Enterprise Catalog Management support revenues is due to a relatively weak
renewal rate and a small number of customers.
Service revenues were $67.5 million and $76.8 million in fiscal 2002 and 2001,
respectively. MAXIMO service revenues decreased 3% to $58.5 million from $60.4
million in fiscal 2002 and 2001, respectively. The decrease from fiscal 2001 to
fiscal 2002 is primarily due to a decline in MAXIMO software licenses sold,
which reduced the demand for services related to customer implementations. The
Company derives a large portion of its services revenues from the implementation
of MAXIMO software that has recently been sold to new customers, and our
services revenues are therefore driven largely by our MAXIMO license sales. The
Company recognized $793 thousand of service revenues related to its MAXIMO
MainControl product that was acquired from MainControl, Inc. in June 2002.
Enterprise Catalog Management service revenues decreased 67% to $4.8 million in
fiscal 2002 from $14.5 million in fiscal 2001. Enterprise Catalog Management
services revenues consists of content normalization services, and the decrease
in these revenues is due to a continued
Page 22
decrease in demand for these services, and a stagnant e-commerce market. Also,
in fiscal 2001, $7.2 million of Enterprise Catalog services revenue was
attributable to a single large contract for content normalization/cataloging
services that did not recur in fiscal 2002. The Company expects service content
normalization/cataloging revenues to continue to decline, and does not consider
these services as being strategically aligned with the Company's primary MAXIMO
business.
OCS support and service revenues increased 36% to $3.4 million in fiscal 2002
from $2.5 million in fiscal 2001. The increase is primarily attributable to a
single large subscription contract for $1.5 million, which is being recognized
ratably over the 18-month term of the contract. While this service offering has
experienced moderate growth over prior periods, the adoption rate of these
services by the industrial supplier community continues to be slower than
originally anticipated, and stagnant. The Company will maintain its investment
in this solution commensurate with the level of sales, while simultaneously
controlling operating and administrative expenses.
FISCAL 2001 COMPARED TO FISCAL 2000: Software license revenues decreased 14% in
fiscal 2001 as compared to fiscal 2000. The decrease in fiscal 2001 was
primarily attributable to our change to an ASP subscription model for our Online
Commerce ("OCS") products and a decline in revenue sales from our Enterprise
Catalog Management products, offset in part by an increase in Strategic MRO
software licenses (MAXIMO), as more fully described below.
(1) Change to ASP Model for OCS (Supply-Side) Products. In fiscal
2001, with the high-end of the market for supply-side on-line
commerce software saturated, the Company began to target the
low-end of the market and transitioned to an ASP subscription
model for its Supply-Side OCS products, which was more
appropriate to the low-end of the market. The change to an ASP
model combined with the focus on a different supplier market
affected the Company's customer base and its revenues for
fiscal 2001 as follows: (a) the Company's customer base was
broadened from a smaller number of relatively large industrial
suppliers purchasing perpetual licenses of Supply-Side
products at a high price point, to greater numbers of
relatively small suppliers, purchasing annual subscriptions to
these products at a low price point, and (b) we changed from
recording revenues as upfront perpetual software licenses to
recording revenues as services, ratably over the service
period, which is generally one year. The change to an ASP
model, combined with the change in focus to a new supplier
market, resulted in a decrease of software revenues from our
Supply-Side OCS products. In fiscal 2000, the Company recorded
revenue of $8.6 million from its sales of perpetual licenses
of its Supply-Side OCS products. During all of fiscal 2001,
the Company recorded all revenue from its Supply-Side OCS
products as service revenues. This change in the target market
segment and sales model accounts for $8.6 million of the
decline in Supply-Side software license revenues.
(2) ENTERPRISE CATALOG MANAGEMENT (INTERMAT). The Company
recognized $7.4 million of INTERMAT software revenues in
fiscal 2000, of which $7.2 million was attributable to one
large customer transaction that was non-recurring. The Company
recognized only $577 thousand of INTERMAT software revenues in
fiscal 2001. This decline in INTERMAT software sales accounts
for $6.8 million of the decline in Supply-Side software
license revenues.
(3) MAXIMO. MAXIMO software licenses increased 10% to $60.7
million from $55.0 million in fiscal 2001, which partially
offset the foregoing decreases. The increase was attributable
to several large software licenses in excess of $1 million
sold in North America and Europe.
Support revenues were $47.3 million and $36.6 million in fiscal 2001 and 2000,
respectively. Support revenues increased as a result of an increase in the
number of MAXIMO customers supported by the Company and a strong renewal rate
for maintenance contracts. MAXIMO support revenues were $46.4 million and $35.9
million in fiscal 2001 and 2000, respectively. Enterprise Catalog Management
support revenues were $225 thousand and $64 thousand in fiscal 2001 and 2000,
respectively. The increase in Enterprise Catalog support revenues is
attributable to the sequential increase in the number of licenses sold.
Page 23
Service revenues were $76.8 million and $61.1 million in fiscal 2001 and 2000,
respectively. MAXIMO service revenues increased 15% to $60.4 million in fiscal
2001 from $52.3 million in fiscal 2000, respectively. The increase was primarily
due to an increase in MAXIMO software licenses sold, which positively impacted
the demand for services related to customer implementations. Enterprise Catalog
Management service revenues increased 99% to $14.5 million in fiscal 2001 from
$7.3 million in fiscal 2000. In fiscal 2001, $7.2 million of Enterprise Catalog
services revenue was attributable to a single large contract for content
normalization/cataloging services.
OCS support and service revenues increased 19% to $2.5 million from $2.1 million
in fiscal 2001 and 2000, respectively. OCS revenues represent subscription based
service fees. Customers typically subscribe to OCS on an annual basis and
revenue is recorded as services revenue and recognized on a straight-line basis
over the applicable subscription period.
Page 24
COST OF REVENUES
Fiscal Fiscal Fiscal
Year Year Year
Ended Change Ended Change Ended
(in thousands) 9/30/02 % 9/30/01 % 9/30/00
- ------------------------------------------------------------------------------------------------------
Software licenses $ 7,012 50% $ 4,685 (13)% $ 5,390
Percentage of software licenses 14% 8% 8%
Support and services $61,862 (12)% $70,423 31% $53,651
Percentage of support and services 50% 57% 55%
Total cost of revenues $68,874 (8)% $75,108 27% $59,041
Percentage of total revenues 40% 41% 35%
FISCAL 2002 COMPARED TO FISCAL 2001: 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, certain employee
costs related to software duplication, packaging and shipping, and amortization
of acquired technology. The increase in the cost of software license revenues in
fiscal 2002 as compared to fiscal 2001 was due to a $1.7 million increase in
royalties and software purchased for resale related to our MAXIMO Mobile Suite,
and a $750 thousand increase in amortization of acquired technology.
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. Cost of
support revenues was $8.5 million and $8.7 million in fiscal 2002 and 2001,
respectively. Cost of support revenues as a percentage of total support revenues
was 15% and 18% in fiscal 2002 and 2001, respectively. The decrease in cost of
support revenues was attributable to a decrease in number of internal resources
allocated to support the OCS operations center, which was implemented in
recognition of the slower than anticipated adoption of these services.
Cost of service revenues was $53.4 million and $61.7 million in fiscal 2002 and
2001, respectively. The decrease in cost of service revenues was primarily
attributable to a $9.0 million decrease for the costs of third party consultants
implementing the Company's products, a decrease of $1.5 million in travel costs
and an overall decrease in discretionary spending. Offsetting this decrease was
a charge of $2 million for employee termination and other costs related to the
reduction in workforce for our OCS and Enterprise Catalog Management businesses.
Our services backlog in fiscal 2002 decreased compared to prior periods, and as
a result we utilized more in-house consultants to perform services instead of
third parties. Cost of service revenues as a percentage of total service
revenues was 79% and 80% in fiscal 2002 and 2001, respectively.
FISCAL 2001 COMPARED TO FISCAL 2000: The decrease in the cost of software
license revenues in fiscal 2001 as compared to fiscal 2000 was primarily
attributable to a $2.0 million decrease in royalties and software purchased for
resale related to our MAXIMO Mobile Suite, offset by a $2.8 million increase in
amortization of acquired technology.
The increase in cost of support revenues in fiscal 2001 as compared to fiscal
2000 was attributable to an increase in the number of internal resources
allocated to support the OCS operations center. Cost of support revenues as a
percentage of total support revenues was 18% and 22% in fiscal 2001 and 2000,
respectively.
Cost of service revenues was $61.7 million and $45.5 million in fiscal 2001 and
2000, respectively. The increase in cost of service revenues was primarily
attributable to an increase of $10.0 million in the costs of third party
consultants related to a large contract for software catalog/content management
services, $4.0 million attributable to the costs of third party consultants
implementing our MAXIMO product, and $2.0 million related to reimbursable travel
expenses. Cost of service revenues as a percentage of total service revenues
was 80% and 74%, respectively. The increase in cost of service revenues as a
percentage of total services revenues
Page 25
is attributable to higher utilization of third party consultants, therefore,
impacting service margins.
OPERATING EXPENSES
Fiscal Fiscal Fiscal
Year Year Year
Ended Change Ended Change Ended
(in thousands) 9/30/02 % 9/30/01 % 9/30/00
- -----------------------------------------------------------------------------------------------------
Sales and marketing $58,806 (18)% $71,651 7% $66,870
Percentage of total revenues 34% 39% 40%
Product development $26,897 (2)% $27,559 29% $21,288
Percentage of total revenues 16% 15% 13%
General and administrative $19,698 .06% $19,573 29% $15,131
Percentage of total revenues 11% 11% 9%
Amortization of goodwill and
other intangibles $12,925 .05% $12,314 .04% $ 6,902
Percentage of total revenues .08% .07% .04%
FISCAL 2002 COMPARED TO 2001: The decrease in sales and marketing expenses in
fiscal 2002 as compared to 2001 was primarily attributable to a $3.0 million
decrease in travel costs, a $5.0 million decrease in sales commissions due to
the decrease in MAXIMO software license revenues, a $1 million decrease in
advertising expenses, and an overall decrease in discretionary spending. Also,
in fiscal 2001, the Company issued a warrant valued at $3.3 million to i2
Technologies, Inc and recorded this as a one-time sales and marketing expense.
The decrease in product development expenses was attributable to a decrease in
the cost of purchased software and an overall decrease in discretionary
spending. The Company will continue to make enhancements to MAXIMO 5, as well as
its other product offerings.
General and administrative expenses increased slightly in fiscal 2002 as
compared to fiscal 2001. While certain expenses such as insurance premiums and
accounting and tax fees have increased year over year in the amount of $600
thousand, the Company has offset these increases with an overall decrease in
discretionary spending. Also, in fiscal 2001, the Company paid $650 thousand to
W.W. Grainger, Inc. as a one-time payment for the repurchase of a stock option
agreement.
FISCAL 2001 COMPARED TO 2000: The increase in sales and marketing expenses in
fiscal 2001 as compared to fiscal 2000 was primarily attributable to a $2.1
million increase in sales commissions due to an increase in MAXIMO software
license revenues, and a one-time charge of $3.3 million for a warrant issued to
i2 Technologies, Inc. in fiscal 2001, partially offset by a $1.0 million
decrease in travel costs and a $500 thousand decrease in advertising expenses.
The increase in product development expenses in fiscal 2001 as compared to
fiscal 2000 was primarily attributable to an increase in the number of employees
hired through acquisitions to further develop our e-commerce products and make
enhancements to the Company's MAXIMO products, as well as, a $2 million increase
in costs to translate our software product into foreign languages.
The increase in general and administrative expenses in fiscal 2001 as compared
to fiscal 2000 was primarily due to salaries and related benefits, as well as,
other expenses to support the increasing revenues and global expansion of the
Company in fiscal 2001. In fiscal 2001, the Company paid $650 thousand to W.W.
Grainger, Inc. as payment for the repurchase of a stock option agreement. Also
contributing to the increase was an additional provision for bad debt expenses
to cover foreign receivables and the write-off of $1 million receivable from a
company that filed for bankruptcy protection.
FISCAL 2002 COMPARED TO 2001 AND 2000 (GOODWILL AND OTHER INTANGIBLES): The
increase in goodwill and other intangibles amortization expense in fiscal 2002,
2001 and 2000 were attributable to the acquisition of businesses.
Page 26
NON-OPERATING EXPENSES
Fiscal Fiscal Fiscal
Year Year Year
Ended Change Ended Change Ended
(in thousands) 9/30/02 % 9/30/01 % 9/30/00
- -----------------------------------------------------------------------------------------------------
Interest income $974 (39)% $1,594 (49)% $3,114
Other (expense)/income, net $(94) (121)% $ (450) (165)% $ 686
FISCAL 2002 COMPARED TO 2001: Interest income is attributable to interest earned
on marketable securities and cash and cash equivalents. Due to unfavorable
interest yields, the Company did not reinvest its portfolio with short-term
treasuries and municipal bonds. The Company instead has reinvested its cash in
short-term securities such as money market funds until rates rise on securities.
The change in other income/(expense) was primarily due to losses caused by
currency rate fluctuations.
FISCAL 2001 COMPARED TO 2000: The decrease in interest income was attributable
to a reduction in marketable securities and cash equivalents, which occurred
because the Company expended cash in the acquisitions of businesses. The change
in other income/(expense) was primarily due to a one-time gain of $1.7 million
for the sale of a short-term investment in fiscal 2000 that was not repeated in
fiscal 2001 and losses caused by currency rate fluctuations.
INCOME TAXES
The Company's effective tax rate was a benefit of 27% and 21% for fiscal 2002
and 2001, respectively. The difference between the effective tax rates and the
federal statutory tax rate of 35% is due to the non-deductible nature of certain
intangible and goodwill amortization expenses and the impact of foreign rate
differentials.
LIQUIDITY AND CAPITAL RESOURCES
As of September 30, 2002, the Company had cash and cash equivalents of $67.3
million and marketable securities of $500 thousand and working capital of $58.1
million.
Cash provided by operations was $16.5 million for the twelve months ended
September 30, 2002 primarily attributable to the collection of accounts
receivables, deferred revenue of $5.5 million, and a federal tax refund of
approximately $5 million.
Cash provided by investing activities was $1.4 million for the twelve months
ended September 30, 2002 and was primarily due to the maturities of marketable
securities, offset by the expenditure of $2.8 million in cash for the
acquisition of MainControl, Inc. and the acquisition of fixed assets.
Cash provided by financing activities was $6.8 million for the twelve months
ended September 30, 2002 and represents proceeds from the exercise of employee
stock options.
As of September 30, 2002, the Company's principal commitments consist primarily
of office space and equipment operating leases for its U.S. and European
headquarters. Under the terms of the U.S. lease agreement, the Company favorably
renewed its lease for reduced rates through December 31, 2009. The Company
leases its facilities and certain equipment under non-cancelable operating lease
agreements that expire at various dates through September 2007.
Page 27
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 $6.5
million, $6.6 million, and $6.0 million for fiscal 2002, 2001 and 2000,
respectively.
The operating leases provide for minimum aggregate future rentals as of
September 30, 2002 as follows:
(in thousands)
2003................................................................. $ 4,872
2004................................................................. 3,476
2005................................................................. 2,972
2006................................................................. 2,821
2007 and thereafter.................................................. 22,166
-------
$36,307
=======
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.
The Company expects that its cash flow from operations will be sufficient to
meet its working capital and capital expenditure requirements through at least
September 30, 2003. The Company's liquidity and working capital requirements,
including the current portions of any long-term commitments, are satisfied
through its cash flow from operations, leaving its cash reserves available for
acquisitions, other investments and unanticipated expenditures. The Company has
no debt obligations. The factors, which might impact the Company's cash flows,
are the same factors as those, which might impact the Company's business and
operations generally, as described below under the heading "Factors Affecting
Future Performance". Should the Company experience a downturn in cash flows from
operations, the Company's cash and marketable securities will be sufficient to
meet its working capital and planned capital expenditure requirements through at
least September 30, 2003.
EFFECT OF NEW ACCOUNTING PRONOUNCEMENTS
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 acquisitions 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 are 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.
Upon adoption of SFAS 142, goodwill will no longer be amortized and assembled
workforce will be combined with goodwill. As of September 30, 2002, the
unamortized balance of goodwill is $46.4 million. The Company will be required
to measure goodwill for impairment as part of the transition provision of SFAS
142. The Company is required to complete transition impairment tests no later
than March 31, 2003. Any impairment, if any, resulting from these transition
tests will be recognized as the cumulative effect of a change in accounting
principle. As of September 30, 2002, the unamortized balance of intangibles and
other identifiable assets is $12 million, which will continue to be amortized
upon adoption of SFAS No 142.
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
Page 28
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 does not expect that the adoption of SFAS No. 144 will have
a material impact on its financial position, results of operations and cash
flows.
In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs Associated
with Exit or Disposal Activities" ("SFAS 146"). This statement addresses
financial accounting and reporting for costs associated with exit or disposal
activities and nullifies EITF Issue No. 94-3, "Liability Recognition for Certain
Employee Termination Benefits and Other Costs to Exit an Activity (including
Certain Costs Incurred in a Restructuring)" ("EITF 94-3"). SFAS 146 requires
that a liability for a cost associated with an exit or disposal activity be
recognized when the liability is incurred. EITF 94-3 allowed for an exit cost
liability to be recognized at the date of an entity's commitment to an exit
plan. SFAS 146 also requires that liabilities recorded in connection with exit
plans be initially measured at fair value. The provisions of SFAS 146 are
effective for exit or disposal activities that are initiated after December 31,
2002, with early adoption encouraged. The Company will adopt SFAS 146 on October
1, 2002 and does not expect that the adoption will have a material impact on its
financial position, results of operations or cash flows.
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 our authorized officers, directors,
employees, agents and representatives, acting on behalf of the Company, 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 forward-looking
statements.
OUR INABILITY TO KEEP PACE WITH THE RAPID CHANGES IN TECHNOLOGY THAT
CHARACTERIZE OUR INDUSTRY WOULD DAMAGE OUR COMPETITIVE POSITION.
The computer software industry is characterized by rapid technological advances,
changes in customer requirements and frequent product introductions and
enhancements by us and by our competitors. Our success depends on our ability to
continue to enhance our 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, we believe that we must continue to respond quickly
to users' needs for new functionality and to advances in hardware and operating
systems, and that we must continue to create products that conform to industry
standards regarding the communication and interoperability among software,
hardware and communications products of different vendors. If we fail to
anticipate or respond adequately to technological developments and changes in
customer requirements, or if we have any significant delays in product
development or introduction, then we could lose competitiveness and revenues. We
cannot give any assurance that we will be successful in developing and marketing
new products or product enhancements, or that we will not experience significant
delays in our development efforts. In addition, we cannot give any assurance
that our new products and product enhancements will achieve market acceptance.
Finally, when we develop new products or enhancements to our 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
Page 29
could have a material, adverse impact on ongoing sales of existing products, and
on the Company's business and our results of operations.
WE DEPEND SUBSTANTIALLY ON OUR MAXIMO(R) PRODUCT, AND ANY DEVELOPMENTS THAT
CAUSED REDUCED MARKET ACCEPTANCE OF MAXIMO WOULD HARM OUR BUSINESS.
Most of our revenues are derived from the licensing of our MAXIMO family of
products and sales of related services and support. Our financial performance
depends largely on continued market acceptance of MAXIMO, and on the acceptance
and market penetration of MAXIMO 5, the new Internet-centric version of MAXIMO.
We believe that continued market acceptance of MAXIMO, and our revenue stability
and growth, will largely depend on our ability to continue to enhance and
broaden the capabilities of MAXIMO 5, both by broadening the core MAXIMO
functionality and developing specialized functionality targeted at key customer
industries. Any factor adversely affecting sales of MAXIMO, such as delays in
further development, significant software flaws, incompatibility with
significant hardware platforms, operating systems or databases, increased
competition or negative evaluations of the product would have a material adverse
effect on the Company's business and our results of operations. In addition, as
with any new software product, it is possible that our customers will experience
difficulties in implementing MAXIMO 5 and achieving the desired performance,
either as a result of the inherent instability of new technology, or of a
perceived shortfall in the functionality of a new product in comparison with the
prior, more mature versions. If our MAXIMO 5 customers have difficulties
installing and using the software or if they are not satisfied with the
performance or functionality of MAXIMO 5, and if we were therefore unable to
obtain customer references, our MAXIMO sales would suffer, which would have an
adverse impact on our business and our results of operations.
THE MARKET ADDRESSED BY OUR MAXIMO MAINCONTROL PRODUCT IS IN TURMOIL, AND A
SIGNIFICANT NEW COMPETITOR MAY EMERGE.
Our MAXIMO MainControl product is targeted at the IT asset maintenance market.
In the past, Peregrine Systems, Inc. had the biggest single share of this
market; Peregrine recently filed for bankruptcy protection. As a result of
Peregrine's bankruptcy, some prospective MAXIMO MainControl customers have
questioned the validity of the market, and some have adopted a "wait and see"
attitude towards purchasing products in this market. The ultimate disposition of
Peregrine's IT asset-related business may have a detrimental affect on the
Company's ability to market its MAXIMO MainControl product. If Peregrine
successfully emerges from bankruptcy with streamlined operations and without the
burden of its pre-bankruptcy liabilities, the Company may be faced with a
stronger competitor. During the bankruptcy process, Peregrine may auction off
its IT asset-related business, and the buyer could become a significant
competitor of the Company in this market. This new competitor may have
previously been a competitor of the Company, or it may be a new entrant in the
Company's competitive landscape. There is considerable uncertainty about the
future of Peregrine's IT asset-related business, and the prospects for the IT
asset maintenance market and the Company's ability to market and sell MAXIMO
MainControl may be affected by the outcome of Peregrine's bankruptcy
proceedings. The Company has included sales of MAXIMO MainControl in its
projections and guidance for fiscal 2003, and if the ITAM market or Peregrine's
bankruptcy has an adverse affect on MAXIMO MainControl sales, there could be an
adverse impact on our business and results of operations.
OUR ONLINE COMMERCE SERVICES OFFERING MAY DECLINE FURTHER.
Our OCS business is dependent on the success and growth of the online
business-to-business market in general, and OCS operations and revenues have
declined as the market for business-to-business e-Commerce platforms and
supporting solutions has experienced significant turmoil, general downturn, and
demand for these solutions has been sharply reduced. There is no clear
indication of whether or when this market may re-emerge, or the direction that
it may take. As a result, we cannot predict whether or when solutions that
enable business-to-business e-Commerce, marketplaces or exchanges, such as OCS,
will gain acceptance and be adopted on a repeated or predictable basis. We are
unlikely to see any growth in revenues from our OCS
Page 30
solutions until the markets for business-to-business solutions in general, and
for e-Commerce initiatives related to industrial products and services in
particular, stabilize, move and grow in an understandable and predictable
direction and our existing OCS revenues may be reduced further if these markets
continue to decline.
OUR SALES EFFORTS RELY ON DISTRIBUTORS, RESELLERS, SALES AGENTS AND OTHER
CHANNEL PARTNERS, AND ON COMPANIES WITH WHICH WE HAVE STRATEGIC RELATIONSHIPS,
WHOSE ACTIONS WE CANNOT CONTROL.
As part of our efforts to maintain and grow our revenues, we must depend on our
existing distribution channels, and we must also develop new channels. We cannot
control the actions of our distributors, resellers, agents and other channel
partners, and if these companies suffer business downturns or fail to meet their
objectives, our revenues and results of operations will suffer as a result.
We have entered into strategic relationships with various larger companies, such
as IBM Corporation, i2 Technologies, Inc., Rockwell Automation, A.T. Kearney,
Inc., and others. In order to generate incremental revenue through these
relationships, we must integrate our products and solutions with those of the
other companies. Each party to those strategic relationships must coordinate
with and support each other's sales and marketing efforts, and each party must
make significant sales and marketing efforts. In addition, we have agreed to
develop a version of MAXIMO, which will operate with IBM's Websphere, AIX and
DB2 products, and to market the IBM versions of our products in preference to
other versions. MAXIMO sales will therefore be affected by the success and
acceptance of the IBM Websphere, AIX and DB2 products relative to those of IBM's
competitors. We may experience difficulties in gaining market acceptance of the
IBM version of our products, and difficulties in integrating and coordinating
our products and sales efforts with those of IBM. Finally, our alliance with IBM
may be viewed negatively by customers or prospects that have not adopted the IBM
technology platform, and competitive alliances may emerge among other companies
that are more attractive to our customers and prospective customers.
OUR QUARTERLY OPERATING RESULTS ARE SUBJECT TO FLUCTUATIONS AND TO SEASONAL
VARIATION.
We have 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. We believe that these quarterly
fluctuations are partly attributable to our sales commission policies, which
compensate members of our direct sales force for meeting or exceeding annual
quotas, and therefore tend to influence our fourth and first quarter revenues.
In addition, our 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. We typically realize a significant portion of our revenue from
sales of software licenses in the last two weeks of a quarter, frequently even
in the last few 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, we believe 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.
WE FACE CHALLENGES WITH THE MAINCONTROL ACQUISITION, AND WE MAY NOT BE
SUCCESSFUL IN ADDRESSING A NEW AND BROADER MARKET.
We recently completed the acquisition of MainControl, Inc., which markets a
product that enables companies to manage, track and maintain their information
technology (IT) assets, such as computers, telephones and networks. One of the
assumptions underlying our acquisition of MainControl was that our existing
customers might be interested in purchasing our new IT product, however, in many
cases the people who purchased MAXIMO may not have responsibility for or
authority covering the management of their company's IT assets. With the
acquisition of MainControl, our positioning with existing and prospective
customers has changed, in that we are now offering products, which can manage
more of a company's critical physical assets, such as its IT assets, in addition
to those managed by MAXIMO, such as plant floor assets, vehicles and facilities.
If we are unable to obtain access to executive
Page 31
levels in our customers' and prospective customers' organizations, we will be
unable to sell a solution that covers more than just the plant floor assets, the
vehicle fleet, the facilities or the IT assets. Moreover, it is possible that
our attempts to characterize this combination of target markets as a single or
composite market will not be accepted within the industry, by market analysts or
by our customers, and as a result we will not gain the cross-market sales
opportunities and synergies that we hoped for in the MainControl acquisition.
PRODUCTS AND TECHNOLOGIES WE ACQUIRE THROUGH ACQUISITIONS MAY FAIL TO MEET OUR
EXPECTATIONS.
We may from time to time purchase software products or technologies from other
companies, or as part of our acquisition of other companies, such as our
acquisition of MainControl. While we exercise 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
ultimately meet our expectations, that we will be able to employ and retain the
personnel necessary for us to effectively exploit the new products or
technologies, that we will be able to successfully integrate the new products or
technologies with or into our existing products and product architecture, that
we will be able to effectively distribute the new products or technologies
through our existing sales force and channels, that we 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 us, or that such
existing customers may not demand that we remedy problems that were not known or
disclosed at the time of the acquisition. As a result of the foregoing, we may
not realize the benefits intended from such acquisitions or recover its
investments, which would have a material adverse impact on our business and our
results of operations.
WE FACE INTENSE COMPETITION IN THE MARKETS WE SERVE.
The market for strategic asset maintenance software such as MAXIMO and MAXIMO
MainControl 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 Systems, Inc.
and Indus International, Inc. MAXIMO also competes with integrated ERP systems,
which include integrated maintenance modules offered by several large vendors,
such as SAP, Oracle, JD Edwards and others. MAXIMO MainControl competes with
companies in IT asset management market, such as Computer Associates, Inc. and
Peregrine Systems, Inc. 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.
Certain of our competitors have greater financial, marketing, service and
support and technological resources than we do. 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, we could be at a
competitive disadvantage.
OUR INTERNATIONAL OPERATIONS SUBJECT US TO SPECIAL RISKS.
A significant portion of our 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.
Page 32
OUR SOFTWARE PRODUCTS ARE DEPENDENT ON THIRD PARTY PROVIDERS OF SOFTWARE AND
SERVICES, AND FAILURE OF THESE PARTIES TO PERFORM AS EXPECTED, OR TERMINATION OF
OUR RELATIONSHIPS WITH THEM, COULD HARM OUR BUSINESS.
We have entered into nonexclusive license agreements with other software
vendors, pursuant to which we incorporate into our products and solutions
software providing certain application development, user interface, business
intelligence, content and graphics capabilities developed by these companies. We
have also agreed to bundle IBM's Websphere application server, its AIX operating
system and DB2 database programs with MAXIMO. If we cannot renew these licenses
(at all or on commercially reasonable terms), or if any of such vendors were to
become unable to support and enhance its products, we 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 FAILURE TO SUCCESSFULLY ANTICIPATE TRENDS IN INTERNET TECHNOLOGY AND
STANDARDS COULD PREVENT OUR PRODUCTS AND SERVICES FROM ACHIEVING OR MAINTAINING
MARKET ACCEPTANCE.
We recently released MAXIMO 5, 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 an emerging
market with many standards and technologies either competing for acceptance or
remaining to be developed. Accordingly, for our MAXIMO and OCS offerings to be
successful, we must accurately predict and successfully implement those
standards and technologies that ultimately gain long-term acceptance in the
market.
We believe that electronic commerce products and technologies complement our
strategic asset management products. We cannot give any assurance that we will
successfully anticipate trends in this market, that we will be successful in
Internet technology development or acquisition efforts or that our Internet
applications, if developed, will achieve market acceptance.
WE MAY HAVE EXPOSURE TO ADDITIONAL INCOME TAX LIABILITIES.
We are subject to income taxes in both the United States and various foreign
jurisdictions. The amount of taxes paid is subject to our interpretation of
applicable tax laws in the jurisdictions in which we file. Periodically, we are
subject to income tax audits. While we believe that we have complied with all
applicable tax laws, there can be no assurance that a governing tax authority
will not have a different interpretation of the law and assess us with
additional taxes. Should we be assessed with additional taxes, there could be a
material adverse effect on our results of operations or financial condition.
CHANGES IN REGULATIONS OR CRITICAL ACCOUNTING POLICIES COULD MATERIALLY
ADVERSELY AFFECT US.
New laws, regulations or standards related to us or our products, and new
accounting pronouncements, could be implemented or changed in a manner that
could adversely affect our business, results of operations or financial
condition.
WE MAY BE FORCED TO PERFORM MORE FIXED PRICE SERVICES CONTRACTS.
A trend may be emerging among customers in our market towards offering
consulting and implementation services on a fixed price basis, whereby the
Company agrees to deliver the contract requirements for a fixed fee, regardless
of the actual number of person-hours actually provided, as opposed to our
traditional services arrangements where we deliver services on a time and
materials basis. In cases where services are provided on a fixed price basis and
software is licensed at the same time, and if the services are essential to the
overall solution desired by the customer or if the Company cannot determine the
fair value of the services being delivered, then the Company may be required to
recognize the license revenue from such transactions under the contract method
of accounting.
Page 33
This would likely result in a postponement of recognition of, or even a
reduction in, software license revenues, and could adversely affect our results
of operation.
WE MAY BE UNABLE TO EFFECTIVELY PROTECT OUR INTELLECTUAL PROPERTY.
Our success is dependent upon our proprietary technology. We currently have one
United States patent and one patent pending within the U.S. (and corresponding
applications pending in various foreign countries), and we protect our
technology primarily through copyrights, trademarks, trade secrets and employee
and third-party nondisclosure agreements. Our 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, our shrink-wrap and click wrap licenses may be
accompanied by specifically negotiated agreements signed by the licensee, in
many cases our shrink-wrap and click wrap licenses are not negotiated with or
signed by individual licensees. Certain provisions of our shrink-wrap and click
wrap licenses, including provisions protecting against unauthorized use,
copying, transfer and disclosure of the licensed program, and limitations or
liabilities and exclusions of remedies, may be unenforceable under the laws of
certain jurisdictions. In addition, the laws of some foreign countries do not
protect our proprietary rights to the same extent, as do the laws of the United
States. We cannot give any assurance that the steps that we have taken to
protect our proprietary rights will be adequate to prevent misappropriation of
our technology or development by others of similar technology. Although we
believe that our products and technology do not infringe on any valid claim of
any patent or any other proprietary rights of others, we cannot give any
assurance that third parties will not assert infringement claims in the future.
Litigation may be necessary to enforce our intellectual property rights, to
protect our 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 our patent
rights, copyrights or other intellectual property, and could potentially have a
material adverse result on our operating results and financial condition.
LOSS OF THE SERVICES OF ONE OR MORE OF OUR KEY EXECUTIVE OFFICERS OR INABILITY
TO RECRUIT NEEDED SALES, SERVICES AND TECHNICAL PERSONNEL COULD ADVERSELY AFFECT
OUR BUSINESS.
We are 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 our future operations. We do not have employment contracts with any
personnel, and we do not maintain any so-called "key person" life insurance
policies on any personnel. We continue 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 from time to time we may
experience 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 we will be able to retain our
existing personnel or attract additional qualified employees.
OUR STOCK PRICE HAS BEEN VOLATILE, AND YOU COULD INCUR LOSSES AS A RESULT OF
FUTURE FLUCTUATIONS IN OUR STOCK PRICE.
There have recently been significant fluctuations in the market price of our
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 our 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.
OUR BUSINESS IS SENSITIVE TO GENERAL ECONOMIC CONDITIONS, AND TO OVERALL
DOWNTURNS IN THE ECONOMY AND IN INDUSTRIAL SPENDING.
The US and worldwide economies have recently experienced a recession or similar
conditions, with a negative effect on our revenues and operations. As industrial
Page 34
companies experience downturns, they often delay or cease spending on capital
assets and IT infrastructure (including software and related services). As a
result, our revenues have in the past fallen, and may again in the future fall,
below expectations. If the US and worldwide economies do not recover and if
growth and IT spending do not materialize, our revenues may be decreased, and
there could be a material adverse result on our operating results and financial
condition.
OTHER RISKS
The foregoing is not a complete description of all risks relevant to our 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 we file with the SEC in the future. We undertake no obligation to release
publicly any revision to the foregoing or any 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.
Page 35
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, 2002, the Company held $67.8 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 foreign currency exchange rates or weak economic conditions in
foreign markets. Currently, the Company has no hedging contracts.
Page 36
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)
2002 QUARTER
Year
Dec.31, Mar. 31, June 30, Sep. 30, Ended
ENDED: 2001 2002 2002 2002 2002
------- -------- -------- -------- --------
Total revenues $46,476 $37,888 $41,443 $46,074 $171,881
Gross profit 28,423 20,800 24,079 29,705 103,007
Loss from operations (2,891) (7,060) (3,110) (2,258) (15,319)
Loss before income taxes (2,622) (6,870) (2,374) (2,573) (14,439)
Benefit from income taxes (697) (2,040) (540) (611) (3,888)
Net loss (1,925) (4,830) (1,834) (1,962) (10,551)
Net loss per share, diluted $ (0.09) $ (0.21) $ (0.08) $ (0.08) $ (0.46)
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)
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None
Page 37
PART III
ITEM 10. DIRECTORS AND OFFICERS OF THE REGISTRANT
The directors and executive officers of the Company as of September 30, 2002 are
as follows. Messrs. Drapeau and Fishman are Class III Directors, whose terms
expire in 2004. 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. 42 President and Chief Executive Officer and Director Class III
Robert L. Daniels 60 Executive Chairman of the Board - Class I
Peter J. Rice 50 Executive Vice President - Finance and
Administration, Chief Financial Officer and Treasurer
Patricia C. Foye 47 Executive Vice President, Global Marketing & Strategic Alliances
William J. Sawyer 56 Executive Vice President- Operations
Ted D. Williams 54 Executive Vice President- Worldwide Sales
John W. Young 50 Executive Vice President - Products and
Technology
Craig Newfield 43 Vice President, General Counsel and Clerk
Richard P. Fishman 56 Director - Class III
John A. McMullen 60 Director - Class I
Stephen B. Sayre 51 Director - Class II
Alan L. Stanzler 59 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.
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 thereto, 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.
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 38
Digital Equipment Corporation, a hardware and software vendor and Marcam
Corporation, an ERP applications vendor.
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 Akin, 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 39
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, the information
required by Items 10-13 of this report is incorporated by reference from the
Company's definitive Proxy Statement for its 2002 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, 2002.
ITEM 14. CONTROLS AND PROCEDURES
Within the 90-day period prior to filing this report, MRO Software carried out
an evaluation, under the supervision of the Company's management, including our
Chief Executive Officer and Chief Financial Officer, of the effectiveness of the
design and operation of our disclosure controls and procedures pursuant to
Exchange Act Rule 13a-15. Based upon that evaluation, the Chief Executive
Officer and the Chief Financial Officer concluded that our disclosure controls
and procedures are effective to timely alert them to any material information
relating to the Company (including its consolidated subsidiaries) that is
required to be included in our periodic filings with the Securities and Exchange
Commission. There have been no significant changes in the Company's internal
controls or in other factors that could significantly affect internal controls
subsequent to their evaluation.
The Company intends to review and evaluate the design and effectiveness of our
disclosure controls and procedures on an ongoing basis and to improve our
controls and procedures over time and to correct any deficiencies that we may
discover in the future. Our goal is to ensure that our senior management has
timely access to all material financial and non-financial information concerning
our business. While we believe the present design of our disclosure controls and
procedures is effective to achieve our goal, future events affecting our
business may cause us to modify our disclosure controls and procedures.
Page 40
PART IV
ITEM 15. 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 46
Consolidated Balance Sheets -
September 30, 2002 and 2001 47
Consolidated Statements of Operations -
Years Ended September 30, 2002, 2001 and 2000 48
Consolidated Statements of Cash Flows -
Years Ended September 30, 2002, 2001 and 2000 49
Consolidated Statements of Stockholders' Equity -
Years Ended September 30, 2002, 2001 and 2000 50
Notes to Consolidated Financial Statements 51
2. Financial Statement Schedule.
SCHEDULE PAGE
II Valuation and Qualifying Accounts 72
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)
Page 41
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, $.01 par value, of
the Company (included as Exhibit 4.1 to the Company's Current
Report on Form 10-Q for the quarter ended December 31,2001,
File No. 0-23852 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 the
Company 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 the Company (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
9.1 Shareholders Agreement between Robert L. Daniels and Susan
H. Daniels dated August 1, 2001
10. Material Contracts
10.1 Fiscal Year 2002 Executive Bonus Plan (included as Exhibit 10.1
to the Company's Quarterly Report on Form 10-Q for the quarter
ended March 31, 2002, 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
On July 12, 2002, the Company filed an 8-K related to the completion of
the Company's acquisition of MainControl, Inc.
On August 12, 2002, the Company filed an amendment to its Report on Form
8-K filed on July 12, 2002, which included the Financial Statements and
Pro-Forma financial disclosure of MRO Software, Inc. and MainControl, Inc.
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 42
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 30, 2002
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 30, 2002
- ---------------------------- Executive Officer
Norman E. Drapeau, Jr. (Principal Executive
Officer)
/s/ Robert L. Daniels Executive Chairman of December 30, 2002
- ---------------------------- the Board
Robert L. Daniels
/s/ Peter J. Rice Executive Vice President, December 30, 2002
- ---------------------------- Chief Financial Officer
Peter J. Rice and Treasurer
(Principal Financial and
Accounting Officer)
/s/ Richard P. Fishman Director December 30, 2002
- ----------------------------
Richard P. Fishman
/s/ John A. McMullen Director December 30, 2002
- ----------------------------
John A. McMullen
/s/ Stephen B. Sayre Director December 30, 2002
- ----------------------------
Stephen B. Sayre
/s/ Alan L. Stanzler Director December 30, 2002
- ----------------------------
Alan L. Stanzler
Page 43
CERTIFICATION
I, NORMAN E. DRAPEAU, JR., certify that:
(1) I have reviewed this annual report on Form 10-K of MRO Software, Inc.
a Massachusetts corporation;
(2) Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this annual
report;
(3) Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this annual report;
(4) The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
(a) designed such disclosure controls and procedures to ensure
that material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this annual report is
being prepared;
(b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to the filing
date of this annual report (the "Evaluation Date"); and
(c) presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
(5) The registrant's other certifying officer and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the audit
committee of the registrant's board of directors (or persons performing the
equivalent functions):
(a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's ability
to record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
(b) any fraud, whether or not material, that involves management
or other employees who have a significant role in the registrant's
internal controls; and
(6) The registrant's other certifying officer and I have indicated in this
annual report whether or not there were significant changes in internal controls
or in other factors that could significantly affect internal controls subsequent
to the date of our most recent evaluation, including any corrective actions with
regard to significant deficiencies and material weaknesses.
Date: December 30, 2002
By: /s/ Norman E. Drapeau, Jr.
---------------------------------
Norman E. Drapeau, Jr.
President and Chief Executive Officer
(Principal Executive Officer)
Page 44
I, PETER J. RICE, certify that:
(1) I have reviewed this annual report on Form 10-K of MRO Software, Inc.
a Massachusetts corporation;
(2) Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this annual
report;
(3) Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this annual report;
(4) The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
(a) designed such disclosure controls and procedures to ensure
that material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this annual report is
being prepared;
(b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to the filing
date of this annual report (the "Evaluation Date"); and
(c) presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
(5) The registrant's other certifying officer and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the audit
committee of the registrant's board of directors (or persons performing the
equivalent functions):
(a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's ability
to record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
(b) any fraud, whether or not material, that involves management
or other employees who have a significant role in the registrant's
internal controls; and
(6) The registrant's other certifying officer and I have indicated in this
annual report whether or not there were significant changes in internal controls
or in other factors that could significantly affect internal controls subsequent
to the date of our most recent evaluation, including any corrective actions with
regard to significant deficiencies and material weaknesses.
Date: December 30, 2002
By: /s/ Peter J. Rice
---------------------------------
Peter J. Rice
Chief Financial Officer and Treasurer
(Principal Financial and Accounting Officer)
Page 45
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 15(a)(1) present fairly, in all material respects, the
financial position of MRO Software, Inc. and its subsidiaries at September 30,
2002 and 2001, and the results of their operations and their cash flows for each
of the three years in the period ended September 30, 2002 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 15(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 29, 2002
Page 46
MRO SOFTWARE, INC.
CONSOLIDATED BALANCE SHEETS
SEPTEMBER 30, SEPTEMBER 30,
2002 2001
---- ----
(in thousands)
ASSETS
Current assets:
Cash and cash equivalents $ 67,315 $ 42,115
Marketable securities -- 5,532
Accounts receivable, trade, less allowance
for doubtful accounts of $3,421 and $3,849
at September 30, 2002 and 2001, respectively 35,433 42,746
Prepaid expenses and other current assets 6,429 5,099
Deferred income taxes 2,613 3,045
--------- ---------
Total current assets 111,790 98,537
--------- ---------
Marketable securities 500 707
Property and equipment, net 10,156 11,669
Intangible assets, net 58,366 52,353
Other assets -security deposits 2,285 2,082
Deferred income taxes 9,056 6,105
--------- ---------
Total assets $ 192,153 $ 171,453
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued expenses $ 16,844 $ 16,445
Accrued compensation 9,081 10,789
Income taxes payable -- 823
Other current liabilities 267 --
Deferred revenue 27,536 19,893
--------- ---------
Total current liabilities 53,728 47,950
--------- ---------
Other long term liabilities 405 150
Commitments and contingencies (Note L)
Stockholders' equity
Preferred stock, $.01 par value;1,000 authorized,
none issued and outstanding
Common stock, $.01 par value;50,000 authorized;
24,267 and 22,250 issued and outstanding at
September 30, 2002 and 2001, respectively 243 223
Additional paid-in capital 112,700 88,059
Deferred compensation (176) (285)
Retained earnings 26,293 36,844
Accumulated other comprehensive loss (1,040) (1,488)
--------- ---------
Total stockholders' equity 138,020 123,353
--------- ---------
Total liabilities and stockholders' equity $ 192,153 $ 171,453
========= =========
The accompanying notes are an integral part of the
consolidated financial statements.
Page 47
MRO SOFTWARE, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
YEAR ENDED SEPTEMBER 30,
--------------------------------------------
2002 2001 2000
---- ---- ----
(in thousands, except per share data)
Revenues:
Software $ 49,035 $ 61,337 $ 70,987
Support and services 122,846 124,113 97,674
-------- -------- --------
Total revenues 171,881 185,450 168,661
-------- -------- --------
Cost of revenues:
Software 7,012 4,685 5,390
Support and services 61,862 70,423 53,651
-------- -------- --------
Total cost of revenues 68,874 75,108 59,041
-------- -------- --------
Gross profit 103,007 110,342 109,620
Operating expenses:
Sales and marketing 58,806 71,651 66,870
Product development 26,897 27,559 21,288
General and administrative 19,698 19,573 15,131
Amortization of goodwill and other intangibles 12,925 12,314 6,902
-------- -------- --------
Total operating expenses 118,326 131,097 110,191
-------- -------- --------
Loss from operations (15,319) (20,755) (571)
Interest income 974 1,594 3,114
Other (expense)/income, net (94) (450) 686
-------- -------- --------
(Loss)/income before income taxes (14,439) (19,611) 3,229
(Benefit)/provision for income taxes (3,888) (4,143) 1,127
-------- -------- --------
Net (loss)/income $(10,551) $(15,468) $ 2,102
======== ======== ========
Net (loss)/income per share, basic $ (0.46) $ (0.70) $ 0.10
-------- -------- --------
Net (loss)/income per share, diluted $ (0.46) $ (0.70) $ 0.09
-------- -------- --------
Shares used to calculate net (loss)/income per share
Basic 23,171 22,148 21,682
Diluted 23,171 22,148 22,786
The accompanying notes are an integral part of the
consolidated financial statements.
Page 48
MRO SOFTWARE, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEAR ENDED SEPTEMBER 30,
-------------------------------------------
2002 2001 2000
---- ---- ----
(in thousands)
Cash flows from operating activities:
Net (loss)/income $(10,551) $(15,468) $ 2,102
Adjustments to reconcile net (loss)/income to net
cash provided by operating activities:
Depreciation and amortization 21,075 20,073 13,094
Loss on sale and disposal of property
and equipment 59 1,407 49
Amortization of premium on marketable securities 48 7 108
Stock-based compensation 108 265 --
i2 warrant expense -- 3,287 --
Deferred income taxes (2,497) 41 (6,484)
Changes in operating assets and liabilities,
net of effect of acquisitions:
Accounts receivable 9,510 4,448 (9,350)
Prepaid expenses and other assets (1,199) 1,851 (4,855)
Accounts payable and accrued expenses (1,949) 516 6,076
Accrued compensation (4,286) 2,323 (91)
Income taxes payable (2,037) 177 (3,446)
Tax benefit on exercise of employee stock options 2,675 10 6,000
Deferred revenue 5,494 957 2,352
-------- -------- --------
Net cash provided by operating activities 16,450 19,894 5,555
-------- -------- --------
Cash flows from investing activities:
Acquisitions of businesses, net of cash acquired (1,293) (3,700) (62,278)
Acquisitions of property and equipment and other
capital expenditures (3,005) (3,841) (9,291)
Purchases of marketable securities (10,012) (51,884)
Sales of marketable securities 5,682 9,079 84,839
-------- -------- --------
Net cash provided by/ (used in) investing activities 1,384 (8,474) (38,614)
-------- -------- --------
Cash flows from financing activities:
Payment of line of credit -- (2,278) --
Proceeds from exercise of stock options 6,858 1,263 5,102
-------- -------- --------
Net cash provided by/ (used in) financing activities 6,858 (1,015) 5,102
-------- -------- --------
Effect of exchange rate changes on cash 508 126 (362)
-------- -------- --------
Net increase/(decrease)in cash and cash equivalents 25,200 10,531 (28,319)
Cash and cash equivalents, beginning of year 42,115 31,584 59,903
-------- -------- --------
Cash and cash equivalents, end of year $ 67,315 $ 42,115 $ 31,584
======== ======== ========
The accompanying notes are an integral part of the
consolidated financial statements.
Page 49
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, 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
Stock options exercised and
related tax benefit,
employee stock purchases 653 6 9,527 9,533
Stock issued to
i2 Technologies, Inc. 268 3 (3) --
Acquisitions, net of merger
expenses 1,096 11 15,117 15,128
Stock-based compensation 109 109
Net loss (10,551) (10,551) $(10,551)
Translation adjustment 448 448 448
Comprehensive loss $ 10,103
--------
- -----------------------------------------------------------------------------------------------------------------------------------
Balance at September 30, 2002 24,267 $243 $112,700 $(176) $ 26,293 $(1,040) $138,020
- -----------------------------------------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of the
consolidated financial statements.
Page 50
MRO SOFTWARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
A. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES:
NATURE OF BUSINESS
The Company develops, markets, sells and distributes strategic asset
management solutions used by businesses, government agencies and other
organizations to manage their high-value capital assets, such as plants,
facilities, production equipment, and IT assets. The Company's integrated suite
of applications optimizes performance, improves productivity and service levels
and enables asset-related sourcing and procurement across the entire spectrum of
strategic assets.
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 conform to the current
year presentation.
USE OF ESTIMATES
The Company's financial statements are prepared in accordance with
accounting principles generally accepted in the United States of America
("GAAP"). These accounting principles require 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. To the extent there are material differences between these
estimates and actual results, our financial statements would be affected.
CASH AND CASH EQUIVALENTS
The Company considers all highly liquid instruments purchased with original
maturities of three months or less to be cash equivalents. Our cash equivalents
consist mainly of money market mutual funds, which are stated at cost, which
approximates fair 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.
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.
DERIVATIVE FINANCIAL INSTRUMENTS
Financial Accounting Standards No. 133. "Accounting for Derivative
Instruments and Hedging Activities" ("SFAS 133"), establishes accounting and
reporting standards for derivative instruments, and requires that all
derivatives be recorded on the balance sheet at fair value. The Company does not
have derivative financial instruments.
Page 51
FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amounts (stated at cost) of cash and cash equivalents, accounts
receivable, accounts payable and accrued expenses approximate fair value because
of their short-term nature.
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 loss of $85 thousand, a net gain of $103
thousand, and net loss of $890 thousand for fiscal 2002, 2001, and 2000,
respectively.
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 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.
DEPRECIATION AND AMORTIZATION
Property and equipment are stated at cost, net of depreciation and
amortization.
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.
The Company periodically assesses the useful life of its fixed assets and
intangibles and may in the future need to adjust the life of an asset and write
it off.
GOODWILL AND OTHER INTANGIBLE ASSETS
Goodwill is recorded in connection with certain acquisitions and represents
the excess purchase price over the amounts allocated to assets acquired and
liabilities assumed. Goodwill associated with acquisitions subsequent to June
30, 2001, will no longer be amortized. As of October 1, 2002, goodwill
associated with all acquisitions will no longer be amortized. The accounting for
other intangible assets is based on the asset's useful life. The useful life of
an intangible asset is the period over which the asset is expected to contribute
directly or indirectly to the Company's future cash flows. Other intangible
assets consist of acquired technology, material contracts and agreements,
customer lists and other purchased intangibles. Other intangible assets are
amortized on a straight-line basis over their estimated useful life, ranging
from one to six years.
IMPAIRMENT OF LONG-LIVED ASSETS
Long-lived assets are amortized over their estimated useful lives. The
Company periodically reviews the long-lived assets, including intangible assets
resulting from acquisitions, for impairment whenever events or changes in
circumstances indicate that the carrying amount of these assets may exceed their
fair value. The Company estimates whether future cash flows expected to result
from the use of assets exceed the carrying amount of the assets. In the event
that the Company judges that an impairment exists, all or a portion of the asset
will be written off based on the amount by which the carrying amount exceeds
Page 52
the fair value of the asset. In order to determine the fair value, the Company
obtains quoted market prices or utilizes valuation techniques, such as
discounted cash flows. The Company's products and businesses are operated as a
single product suite and do not maintain separate cash flows or operating
margins. As of September 30, 2002, all remaining goodwill has been assigned to
one reporting unit and will be reviewed for impairment at the entity level.
RESEARCH AND DEVELOPMENT
Costs related to research, design and development of products are charged to
research and development expenses as incurred. Costs eligible for capitalization
under SFAS No. 86 were not material to our consolidated financial statements.
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.
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, net of valuation allowances, for the estimated future tax effects
of temporary differences between the financial statement and tax basis of assets
and liabilities. Changes in deferred tax assets and liabilities are recorded in
the provision for income taxes. A valuation allowance is recorded to reduce
deferred tax assets to the amount of future tax benefit that is more likely than
not to be realized. We consider projected future taxable income and ongoing tax
planning strategies when assessing the need for a valuation allowance. Any
increase in a valuation allowance could have a material adverse impact on our
income tax provision and net income in the period in which the determination is
made.
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, 2002, the undistributed earnings of
foreign subsidiaries were $5.9 million.
REVENUE RECOGNITION
The Company licenses its software products under noncancellable license
agreements. Software license fee revenues are generally recognized upon contract
execution and shipment, provided collection of the resulting receivable is
deemed probable, the fees are fixed or determinable, and no significant
modification or customization of the software is required. Services revenues are
comprised of consulting and training fees related to installation of the
Company's software solutions, maintenance/support ("PCS") 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 ("OCS") business. Consulting, training, content management and
cataloging services are generally recognized as the services are performed. PCS
revenues are recognized ratably over the term of the agreement, generally one
year. Customers typically subscribe to OCS on an annual basis and revenue is
recorded as services revenue and recognized on a straight-line basis over the
applicable subscription period.
The Company's multi-element arrangements could include the following three
elements: (a) software license, (b) PCS, and (c) consulting, training and other
services ("services"). Revenue is allocated to the elements of the arrangement
based upon the vendor specific objective evidence ("VSOE") of fair value of each
element. The Company uses the residual method to recognize its software license
revenue, because while we are able to determine the VSOE of fair value of PCS
and services, we are unable to determine the VSOE of the fair value of software
licenses. Under the residual method, the fair value of undelivered elements (PCS
and/or services) is deferred and recognized when the PCS and/or services are
delivered. The difference between the amount of the total arrangement and the
amount attributable to the undelivered elements (PCS and/or services) is
recognized as software license revenue. VSOE is established for PCS and is based
on the price of PCS when sold separately. The PCS renewal rate is a relatively
consistent percentage of the
Page 53
stipulated software license fee, offered to all customers. VSOE for consulting
services is based on fixed hourly rates set according to the skill level of the
consultant required. VSOE for training services is based on an established
per-student fee structure. For those multi-element arrangements, where we
cannot establish VSOE for the undelivered element, the software license value
is recognized together with the consulting services over the period the
consulting services are provided. Contract accounting is applied to any
arrangement that includes significant customization or modification of the
software.
Revenue for services is generally recognized as the services are performed.
If there is significant uncertainty about receipt of payment, revenue is
deferred until the uncertainty is sufficiently resolved. In situations that
involve disputes, any conceded amounts are written off against revenue in the
period that the dispute is resolved.
Our customers do not have any right of return except as stipulated under a
standard 90-day warranty that runs concurrent with PCS. The Company does not
maintain any reserves with respect to this warranty based on a history of high
performance of our software. On the rare occasion that a customer insists on
conditions of acceptance, the Company defers revenue until the customer's
acceptance is obtained and the condition has been satisfied.
We assess whether fees are fixed or determinable at the time of sale and
recognize revenue if all other revenue recognition requirements are met. Our
standard payment terms are net 30 days. Payment terms that extend beyond net 30
days from the contract date but are within twelve months are generally deemed to
be fixed or determinable based on our successful history of collecting on such
types of arrangements. For those customers who are deemed not to be
credit-worthy, revenue is deferred until payment is received.
Revenue from products sold through indirect channels ("resellers") is
recognized upon shipment of the software, as long as evidence of an arrangement
exists, collectibility is probable and the fee is fixed or determinable. Revenue
is recorded net of any commissions or discounts. Our resellers do not have any
right of return beyond the standard 90-day performance warranty that runs
concurrent with PCS.
Shipping and handling fees associated with our products are recorded as
revenue and the associated costs are recorded as cost of software sales.
ALLOWANCES FOR DOUBTFUL ACCOUNTS AND SALES RETURNS
The Company maintains allowances for doubtful accounts, which reflects the
Company's estimate of the amounts owed by customers that customers will be
unable or otherwise fail to pay. Management performs ongoing credit evaluations
of its customers' financial condition and limits the amount of credit when
deemed necessary. The Company believes that the current estimate of allowances
for doubtful accounts recorded as of September 30, 2002, adequately covers any
potential credit risks. However, if the financial condition of our customers
deteriorates and their payment defaults exceed our estimates, then we may need
to increase our allowance reserves, which will result in a charge to income in
the period that the adjustment is made.
The Company did not record a provision for estimated sales returns. Based on
our history of sales returns and an analysis of credit memos, we determined that
a provision was not needed. If the historical data we used to calculate the
basis for a provision does not properly reflect future returns, then a provision
for returns will be recorded in the period that such a determination is made.
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.
ADVERTISING EXPENSE
The Company recognizes advertising expense as incurred. Advertising expense
was approximately $4.9 million, $5.8 million, and $6.3 million for fiscal 2002,
2001, and 2000, respectively.
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
Page 54
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.
NEW ACCOUNTING STANDARDS
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 acquisitions 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 are 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.
Upon adoption of SFAS 142, goodwill will no longer be amortized and assembled
workforce will be combined with goodwill. As of September 30, 2002, the
unamortized balance of goodwill is $46.4 million. The Company will be required
to measure goodwill for impairment as part of the transition provision of SFAS
142. The Company is required to complete transition impairment tests no later
than March 31, 2003. Any impairment, if any, resulting from these transition
tests will be recognized as the cumulative effect of a change in accounting
principle. As of September 30, 2002, the unamortized balance of intangibles and
other identifiable assets is $12 million, which will continue to be amortized
upon adoption of SFAS No 142.
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 does not expect that the adoption of SFAS No. 144 will have
a material impact on its financial position, results of operations and cash
flows.
In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs Associated
with Exit or Disposal Activities" ("SFAS 146"). This statement addresses
financial accounting and reporting for costs associated with exit or disposal
activities and nullifies EITF Issue No. 94-3, "Liability Recognition for Certain
Employee Termination Benefits and Other Costs to Exit an Activity (including
Certain Costs Incurred in a Restructuring)" ("EITF 94-3"). SFAS 146 requires
that a liability for a cost associated with an exit or disposal activity be
recognized when the liability is incurred. EITF 94-3 allowed for an exit cost
liability to be recognized at the date of an entity's commitment to an exit
plan. SFAS 146 also requires that liabilities recorded in connection with exit
plans be initially measured at fair value. The provisions of SFAS 146 are
effective for exit or disposal activities that are initiated after December 31,
2002, with early adoption encouraged. The Company will adopt SFAS 146 on October
1, 2002 and does not expect that the adoption will have a material impact on its
financial position, results of operations or cash flows.
Page 55
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) 2002 2001 2000
-------- -------- --------
(Loss)/income before income taxes:
United States ............................... $(17,683) $(22,183) $ 892
Foreign ..................................... 3,244 2,572 2,337
-------- -------- --------
$(14,439) $(19,611) $ 3,229
======== ======== ========
The (benefit)/provision for income taxes consists of:
Current taxes:
Federal ..................................... (3,151) (2,850) 2,008
State ....................................... 131 364 604
Foreign ..................................... 1,297 1,034 792
Foreign withholding taxes ................... 349 868 522
-------- -------- --------
$ (1,374) $ (584) $ 3,926
======== ======== ========
Deferred taxes:
Federal .................................... (2,141) (3,159) (2,216)
State ...................................... (422) (521) (378)
Foreign .................................... 49 121 (205)
-------- -------- --------
(2,514) (3,559) (2,799)
-------- -------- --------
Total ................................ $ (3,888) $ (4,143) $ 1,127
======== ======== ========
The reconciliation of the Company's income tax provision to the statutory
federal tax rate is as follows:
Year Ended September 30,
--------------------------------------
2002 2001 2000
-------- -------- --------
Statutory federal tax rate .................. (35.0)% (35.0)% 35.0%
FSC benefit ................................. -- -- (4.9)
State taxes, net of federal tax benefit...... .3 1.3 13.9
R&D credit .................................. (.7) (1.5) (9.3)
Exempt interest ............................. -- -- (5.7)
Net operating loss utilization .............. -- -- (6.2)
Meals and entertainment ..................... .8 1.1 5.8
Foreign taxes ............................... 1.6 3.2 7.8
Warrant expense.............................. -- 5.9 --
Goodwill and intangibles amortization........ 6.4 4.7 --
Other ....................................... (.3) (0.8) (1.5)
-------- ------- --------
Effective tax rate .......................... (26.9)% (21.1)% 34.9%
======== ======= ========
Page 56
The components of the deferred tax provision are:
Year Ended September 30,
--------------------------------------
(in thousands) 2002 2001 2000
-------- -------- --------
Depreciation ............................. $ 67 $ (17) $ (310)
Allowance for doubtful accounts .......... 177 (462) 110
Software capitalization .................. 539 516 39
Deferred revenue ......................... 67 (310) 63
Net operating loss utilization ........... -- -- (200)
Goodwill ................................. (2,297) (2,626) (1,459)
Intangibles .............................. (903) (408) (441)
Translation loss ......................... 25 19 (347)
Foreign tax credit ....................... -- -- 118
Research and development credit .......... (100) (300) (300)
Other .................................... (89) 29 (72)
-------- -------- --------
$ (2,514) $ (3,559) $ (2,799)
======== ======== ========
The components of the deferred tax assets and liabilities are as follows:
As of September 30,
------------------------
(in thousands) 2002 2001
--------- --------
Deferred tax assets:
Deferred revenue ...................... $ 683 $ 750
Deferred rent ......................... 14 28
Allowance for doubtful accounts ....... 965 1,142
Accrued vacation ...................... 190 196
Depreciation .......................... 607 674
Package design ........................ 75 82
Amortized intangibles................. 1,766 863
Other reserves ........................ 127 23
Goodwill .............................. 6,621 4,324
Translation loss ...................... 735 760
Net operating loss carryforward........ 2,434 2,248
Foreign tax credit carryforward........ 132 132
Research and development credit ....... 700 600
Valuation allowance ................... (2,284) (2,048)
--------- --------
$ 12,765 $ 9,774
--------- --------
Deferred tax liabilities:
Amortized software .................... $ 1,072 $ 533
Other.................................. 24 91
--------- --------
$ 1,096 $ 624
--------- --------
Net deferred tax assets ..................... $ 11,669 $ 9,150
========= ========
At September 30, 2002, the Company had foreign tax credit carryforwards of
approximately $132 thousand, which expire in fiscal year 2004.
At September 30, 2002, the Company had foreign net operating loss
carryforwards of approximately $580 thousand, which will generally expire in
varying amounts from 2003 through 2004.
Page 57
At September 30, 2002, the Company had total domestic net operating loss
carryforwards of approximately $4.6 million 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
thousand per year. The domestic net operating loss carryforwards will generally
expire in varying amounts from 2002 through 2019. At September 30, 2002, the
Company had State apportioned net operating loss carryforwards of approximately
$7.0 million expiring in various years from 2005 through 2022, which are also
subject to statutory limitations on their utilization.
The Company continually assesses the realizability of its deferred tax
asset. A valuation allowance is recorded to reduce deferred tax assets to the
amount of future expected tax benefit when it is more likely than not to be
realized. All available evidence, both positive and negative, is considered in
the determination of recording a valuation allowance. We consider future taxable
income and ongoing tax planning strategies when assessing the need for a
valuation allowance. Negative evidence that would suggest the need for a
valuation allowance for the Company consists of recent cumulative operating
losses. However, since these operating losses are attributable to several
charges that we believe are non-recurring in nature, the Company has not
recorded a valuation allowance in relation to these losses. The non-recurring
charges contributing to the Company's recent cumulative operating losses consist
of goodwill amortization from recent acquisitions and a large initial investment
into the Internet e-Commerce market. Positive evidence that would negate the
need for a valuation allowance consists of the projection of future pre-tax
profits and a strong earnings history for the Company prior to these operating
loss years. The Company believes future taxable income will be sufficient to
realize the deferred tax benefit of the net deferred tax assets.
The Company has established a valuation allowance with respect to certain
Canadian net operating loss carryforwards, the net operating losses acquired
from Applied Image Technologies, Inc. (AIT), and various State net operating
loss carryforwards. The valuation allowance was based upon expected earnings
within individual tax jurisdictions and statutory limitations imposed by tax
jurisdictions, which will more likely than not reduce our ability to realize the
net operating loss carryforwards. These valuation allowances are $156 thousand,
$1.6 million and $581 thousand, respectively.
C. ACQUISITIONS:
On June 14, 2002, the Company completed the acquisition of MainControl, Inc.
("MainControl"), a provider of IT asset management solutions. The purpose of the
acquisition was to expand the Company's product base and enable us to offer
products that manage a broader range of an enterprise's strategic assets. The
Company reports the revenues of IT asset management with its Strategic MRO
product offering and has re-named this combined product offering strategic asset
management. Under the terms of the acquisition agreement, the Company acquired
all outstanding equity of MainControl for a combination of MRO common stock and
cash. The Company paid $2.8 million in cash and issued 1,096,296 shares valued
at $13.80 per share. The share price was calculated by averaging the closing
price of a share of MRO Software's stock for five days before and five days
after the announcement date of the merger, as reported by the NASDAQ National
Market. The total purchase price, including transaction expenses of $784
thousand, was $18.6 million. An additional amount of $700 thousand is payable
contingent upon reaching certain revenue thresholds through December 2002; $420
thousand of the contingent amount has been paid and recorded as goodwill at
September 30, 2002. If the remaining $280 thousand of contingent payments are
made, the Company will account for the payments as additional purchase price and
will allocate it to goodwill. The Company allocated the purchase price as such:
$3.7 million to current and other assets, $3.1 million to acquired technology,
$1.2 million to customer contracts, $100 thousand to backlog, $200 thousand to
software documentation, $700 thousand to a non-compete agreement, $15.8 million
to goodwill, and $6.2 million to current liabilities. The purchase price
allocation was based on then-current intentions for future use of the acquired
assets, estimate of future projected cash flows, analysis of historical
financial results and review of customer contracts. Acquired technology will be
amortized over six and one-half years, customer contracts will be amortized over
four years, backlog will be amortized over one year, software documentation will
be
Page 58
amortized over three years and the non-compete agreement will be amortized
over two years.
On August 22, 2001, the Company completed the acquisition of Collego
Corporation, a provider of catalog content management enterprise applications
for industrial suppliers. The total purchase price of the acquisition was $4.7
million. In August 2002, the Company paid $750 thousand to the former
shareholders as a result of certain contingencies met subsequent to the
acquisition. The contingent amount had been held in escrow to be paid upon
expiration of twelve months from the closing, if these certain contingencies
were met. These payments were recorded as additional goodwill. The Company
estimated the fair market value of the assets acquired and liabilities assumed
at the date of acquisition and allocated $4.7 million to goodwill and intangible
assets, mainly acquired technology.
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 $4.5 million,
215,000 shares of the Company's common stock and also assumed liabilities of
$3.1 million. The Company allocated the purchase price as such: $6.0 million to
goodwill, $4.4 million to other intangibles, and the rest to assets acquired and
liabilities assumed based on the estimated fair market value at the date of
acquisition. Other intangible assets, consisting of acquired technology, are
being amortized over periods of three to five years on a straight-line basis.
Goodwill deductible for tax purposes is $951 thousand. At September 30, 2002,
the net book value of goodwill was $3.6 million.
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
$2.0 million plus acquisition expenses. Goodwill of $2.0 million was recorded at
the time of acquisition. At September 30, 2002, the net book value of goodwill
was $1.2 million.
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 $1.3 million plus acquisition expenses. Goodwill of $1.4 million was
recorded at the time of acquisition. At September 30, 2002, the net book value
of goodwill was $892 thousand.
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 $55.1 million plus acquisition costs of
$1.3 million. 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 $49.3 million was allocated
to goodwill and $5.0 million was allocated to other intangible assets. Goodwill
deductible for tax purposes is $49.3 million. At September 30, 2002, the net
book value of goodwill was $23.8 million. Other intangible assets, consisting
mainly of acquired technology, are being amortized over a period of three to
four 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
$1.2 million plus acquisition expenses.
Page 59
The following reflects unaudited proforma combined results of MROI and
MainControl, Inc. as if the acquisition had taken place at the beginning of
fiscal year 2002 and 2001. This proforma information is presented for
informational purposes only and is not necessarily indicative of the results of
operations that actually would have been achieved had the acquisition been
consummated as of that time, nor is it intended to be a projection of future
results.
Year Ended September 30,
-------------------------
2002 2001
---- ----
(in thousands, except per share amounts)
Revenue
MROI ............................................. $ 171,881 $ 185,450
MainControl, Inc. ................................ 5,546 14,015
--------- ---------
Combined ......................................... $ 177,427 $ 199,465
========= =========
Net (loss)/income
MROI ............................................. $ (10,551) $ (15,468)
MainControl, Inc. ................................ (12,625) (15,217)
Amortization of intangible assets, excluding
goodwill ....................................... (1,328) (1,328)
--------- ---------
Combined ......................................... $ (24,504) $ (32,013)
========= =========
Basic (loss)/income per share .................... $ (1.06) $ (1.45)
Diluted (loss)/income per share .................. $ (1.06) $ (1.45)
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) 2002 2001 2000
-------- -------- -------
Net (loss)/income ........................... $(10,551) $(15,468) $ 2,102
Denominator:
Weighted average common shares
outstanding - basic ........................ 23,171 22,148 21,682
Effect of dilutive securities
(primarily stock options) .................. -- -- 1,104
-------- -------- -------
Weighted average common shares
outstanding - diluted....................... 23,171 22,148 22,786
======== ======== =======
Net (loss)/income per share - basic $ (0.46) $ (0.70) $ 0.10
Net (loss)/income per share - diluted $ (0.46) $ (0.70) $ 0.09
Options to purchase shares of the Company's common stock of 1,847,000 and
1,879,000 for fiscal 2002 and 2001, respectively, were outstanding but were
excluded from the computations of diluted net (loss) per share
Page 60
as the effect was anti-dilutive due to the Company's net loss. Options to
purchase shares of the Company's common stock of 660,000 for fiscal 2000 were
outstanding but were not included in the computation of diluted net 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.
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.
At September 30, 2002, the Company had one marketable security, maturing in the
year 2017. Dividend and interest income, including amortization of the premium
and discount arising at acquisition, are included in other income. There were no
pre-tax unrealized holding gains and (losses) for the year ended September 30,
2002. The pre-tax unrealized holding gains and (losses) for the year ended
September 30, 2001 were $18 thousand and $(4 thousand), respectively.
As of September 30, 2002, marketable securities consisted of the following:
Amortized Fair Market
(in thousands) Cost Value
---- -----
Noncurrent:
Securities with maturity date greater than one year:
Tax exempt municipal securities ................... 500 500
---- ----
$500 $500
---- ----
Total ............. $500 $500
==== ====
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
Tax exempt municipal securities.................... 991 991
------- -------
5,518 5,532
------- -------
Noncurrent:
Securities with maturity date greater than one year:
Tax exempt municipal securities ................... 707 707
------- -------
707 707
------- -------
Total ............. $ 6,225 $ 6,239
======= =======
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 $1.7 million.
Page 61
G. PROPERTY AND EQUIPMENT:
Property and equipment are stated at cost and consist of the following:
As of September 30,
-----------------------
(in thousands) 2002 2001
-------- --------
Computer equipment .................................... $ 6,649 $ 7,935
Purchased software ................................... 14,265 13,212
Vehicles .............................................. 16 55
Furniture and fixtures ................................ 7,089 6,622
Leasehold improvements ................................ 4,538 4,227
-------- --------
32,557 32,051
Less accumulated depreciation and amortization ........ (22,401) (20,382)
-------- --------
$ 10,156 $ 11,669
======== ========
Total depreciation and amortization expense was $5.2 million, $5.5 million,
and $5.5 million for fiscal 2002, 2001 and 2000, respectively. Included in
depreciation and amortization expense is amortization expense for purchased and
internal use software of $2.9 million, $3.2 million, and $2.6 million for fiscal
2002, 2001 and 2000, respectively.
H. INTANGIBLE ASSETS:
Intangible assets consist of the following:
As of September 30,
-----------------------
(in thousands) 2002 2001
-------- --------
Goodwill .............................................. $ 71,294 $ 55,622
Workforce in place .................................... 6,719 5,768
-------- --------
Sub-total indefinite lived assets ..................... 78,013 61,390
-------- --------
Acquired technology ................................... 15,744 12,644
Customer list ......................................... 411 411
Backlog ............................................... 398 298
Leasehold advantage ................................... 224 224
Subscriber list ....................................... 699 1,199
Customer contracts .................................... 1,200 --
Non-compete ........................................... 700 --
Other ................................................. 300 133
-------- --------
Sub-total other intangibles ........................... 19,676 14,909
-------- --------
Total intangible assets .............................. 97,689 76,299
Accumulated amortization ............................. (39,323) (23,946)
-------- --------
Total intangible assets, net .......................... $ 58,366 $ 52,353
======== ========
Amortization expense was $12.9 million, $12.3 million and $7.0 million for
fiscal 2002, 2001 and 2000, respectively. Amortization expense of acquired
technology was $3.0 million, $2.2 million and $651 thousand for fiscal 2002,
2001 and 2000, respectively, and is included in cost of sales in the Statement
of Operations. As of October 1, 2002, the Company will combine workforce in
place with goodwill.
Page 62
In September 2002, the Company negotiated the terms of a sale of its
newsletter business, Modern Distribution Management. The Company determined that
the carrying value of this asset exceeded its fair value and consequently
recognized an impairment loss of $500 thousand. The impairment loss is recorded
as a component of amortization of goodwill and other intangible assets expense
in the Statement of Operations for fiscal 2002.
I. ACCRUED COMPENSATION:
A summary of accrued compensation consists of the following:
As of September 30,
-----------------------
(in thousands) 2002 2001
-------- --------
Accrued payroll, bonus and 401(k) contribution ........ 3,149 3,018
Accrued sales commissions ............................. 3,838 6,454
Accrued vacation pay .................................. 2,094 1,317
------ -------
$9,081 $10,789
====== =======
J. OTHER LIABILITIES:
A summary of other liabilities consists of the following:
As of September 30,
-----------------------
(in thousands) 2002 2001
------- -------
Current:
Deferred lease obligation............................. 36 --
Non-cancelable commitments............................ 65 --
Non-cancelable lease termination costs................ 166 --
---- -----
$267 $ --
==== =====
Long term:
Deferred lease obligation............................. -- $108
Non-cancelable lease termination costs................ 257 --
Security deposit obligation........................... 122 --
Unearned maintenance.................................. 26 42
---- -----
$405 $ 150
==== =====
K. BANK LINE OF CREDIT:
At September 30, 2000, the Company's subsidiary, AIT, had a $2.5 million
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.
Page 63
L. 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 $6.5 million, $6.6 million, and $6.0 million for fiscal 2002,
2001 and 2000, respectively.
The operating leases provide for minimum aggregate future rentals as of
September 30, 2002 as follows:
(in thousands)
2003............................................................... $ 4,872
2004............................................................... 3,476
2005............................................................... 2,972
2006............................................................... 2,821
2007 and thereafter................................................ 22,166
-------
$36,307
=======
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.
M. 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 2002, 2001, and 2000 were $530 thousand, $665
thousand, and $656 thousand, respectively.
Page 64
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.
1999 Equity Incentive Plan
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.
On January 16, 2002 the Board of Directors voted to change the manner in
which stock awards are granted to non-employee directors. The provision for
automatic grants of initial options and additional options was eliminated.
Non-employee directors are now eligible to receive stock awards in the same
manner and to the same degree as all other eligible persons, as determined by
the Board of Directors on a discretionary basis. These changes were approved by
the Company's Stockholders on March 6, 2002.
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
granted prior to March 2001 generally vest over four years in four equal annual
installments. Options granted from and after March 2001 generally vest over four
years, with 25% vesting one year from the date of grant and 75% vesting in equal
monthly installments over the subsequent three 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.
Page 65
Stock option activity is summarized as follows:
Weighted
No. of Shares Average Price
------------- -------------
Outstanding shares at September 30, 1999 2,166,036 $10.30
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
2002
Granted 138,500 $21.60
Canceled (175,642) $22.22
Exercised (531,736) $10.27
---------
Outstanding at September 30, 2002 3,576,099 $19.99
Exercisable at September 30, 2002 1,888,906 $19.52
Page 66
The following table summarizes information about stock options outstanding at
September 30, 2002:
Options Outstanding Options Exercisable
- ---------------------------------------------------------------------- ------------------------------
Number Weighted-Avg
Outstanding Remaining Number
Range of As of Contractual Weighted-Avg Exercisable Weighted-Avg
Exercise Prices 9/30/02 Life (years) Exercise Price As of 9/30/02 Exercise Price
- --------------- ------- ------------ -------------- ------------- --------------
$ 2.83- 3.17 51,538 1.6 $ 2.90 51,538 $ 2.90
$ 6.81- 9.81 1,402,478 7.5 $ 8.73 642,939 $ 8.81
$10.35-15.50 493,458 5.1 $12.35 434,930 $12.42
$15.80-23.33 281,625 8.7 $19.46 65,999 $17.43
$24.06-29.63 623,500 7.6 $25.18 311,000 $25.16
$36.50-54.50 551,500 7.0 $38.67 296,250 $38.54
$59.13-85.00 172,000 7.3 $60.93 86,250 $61.00
--------- ---------
Total 3,576,099 1,888,906
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
Black-Scholes 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,
----------------------------------
2002 2001 2000
---- ---- ----
Expected life (in years) 3.69 3.35 3.36
Volatility 93% 95% 91%
Risk-free interest rate 3.99% 4.5% 6.22%
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,
-----------------------------------
2002 2001 2000
---- ---- ----
(in thousands, except per share amounts)
Net (loss)/income
As reported................................ $(10,551) $(15,468) $ 2,102
Pro forma $(20,517) $(24,935) $(4,713)
Net (loss)/income per share, basic
As reported................................ $ (0.46) $ (0.70) $ 0.10
Pro forma $ (0.89) $ (1.13) $ (0.22)
Net (loss)/income per share, diluted
As reported................................ $ (0.46) $ (0.70) $ 0.09
Pro forma $ (0.89) $ (1.13) $ (0.22)
Page 67
Under SFAS 123, the weighted-average estimated fair value of options granted
during fiscal 2002, 2001 and 2000 was $14.21, $5.95 and $21.92 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.
On January 16, 2002, the Board of Directors adopted the 2002 Employee Stock
Purchase Plan authorizing the issuance of up to 750,000 shares of the Company's
Common Stock. Eligible employees may purchase Common Stock of the Company
through payroll deductions. The purchase price is 85% of the fair market value
based on the lowest price on (a) the semi-annual offering commencement date (b)
the semi-annual offering termination date or (c) the first of each month in a
semi-annual offering period. The effective date of the 2002 Employee Stock
Purchase Plan is June 1, 2002. The Board of Directors also voted to terminate
the Company's 1994 Employee Stock Purchase Plan, effective May 30, 2002.
During fiscal year ended September 30, 2002, employees purchased 66,574
shares at a price of $11.73 and 54,552 shares at a price of $11.26 for the
offering periods ended November 30, 2001 and May 31, 2002, respectively.
Approximately 355 employees participated in the plan during the fiscal year
ended September 30, 2002. Total shares purchased in 2001 and 2000 were 129,776
and 39,699, respectively.
N. 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 by the Stockholders of the Company. 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, are 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 a 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. 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.
Page 68
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
$14.5 million, less expenses of $954 thousand and acquired a two-year option to
purchase 5% of the Company's wholly owned subsidiary, MRO.com, Inc. for an
exercise price of $3.8 million. This option was terminated by agreement of the
parties in November of 2000. In June 2001, the Company paid $650 thousand to
Grainger, recorded as general and administrative expenses, to re-purchase the
option agreement.
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 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 stock purchase warrant to i2
Technologies, Inc. ("i2") under which i2 had the right to purchase up to 500,000
shares of the Company's common stock at an exercise price of $10.25 per share.
The Company valued the warrant at $3.3 million 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 was immediately
exercisable and was recorded as a one-time non-cash sales and marketing expense
in the three months ended December 31, 2000. On March 14, 2002, i2 exercised the
entire warrant on a "net exercise" or "cashless" basis, pursuant to which the
exercise price was paid by reducing the number of shares issued, and as a result
268,823 shares were issued to i2 upon exercise of the warrant and there was no
cash received by the Company.
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 vested on October 1, 2001,
and the remaining 10,000 shares vested 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 obligation 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
in 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 69
O. SUPPLEMENTAL CASH FLOW DISCLOSURES:
Cash paid for interest and taxes was as follows:
Year Ended September 30,
------------------------------------
(in thousands) 2002 2001 2000
---- ---- ----
Interest................................... $ 45 $ 59 $ 107
Income taxes............................... 2,490 1,430 4,773
Acquisitions of businesses were as follows:
Year Ended September 30,
-------------------------------------
(in thousands) 2002 2001 2000
---- ---- ----
Fair value of assets acquired.............. $23,573 $ 3,766 $71,783
Fair value of liabilities assumed.......... (5,630) 66 (4,446)
Net cash paid for acquisitions............. $ 1,293 $ 3,700 $62,278
P. SEGMENT INFORMATION, GEOGRAPHIC DATA AND MAJOR CUSTOMERS:
In fiscal year 2001, the Company operated in two reportable industry
segments: (1) the development, marketing and support of "Demand-Side" software
products and services, consisting of MAXIMO(R) Enterprise(TM) and MAXIMO
Extended Enterprise(TM) and (2) the development, marketing and support of
"Supply-Side" software products and services, consisting of Enterprise Catalog
Content Management and OCS. During fiscal year 2001, the Company's management
assessed the operating results of these segments separately and allocated
resources accordingly.
Beginning in fiscal year 2002, the "Demand-Side" product offerings were
re-named Strategic MRO, and the "Supply-Side" product offerings were split into
two distinct products groups: Enterprise Catalog Management and OCS. With the
acquisition of MainControl, Inc, the Company acquired an IT asset management
product and the Company redefined its three product groups as such: (1) Asset
Management products and services (MAXIMO and MAXIMO MainControl), (2) Enterprise
Catalog Management products and services and (3) Online Commerce Services. The
Company reports revenues for these three product groups but does not allocate
operating expenses to these three product groups and therefore reports operating
results for one reportable industry segment -- Strategic Asset Management. The
Company's management assesses its operating results on an aggregate basis to
make decisions about resources to be allocated to the various product groups.
All segment-reported financial information contained in this report has been
restated to reflect the Company's repositioning to one industry segment,
effective in the first quarter of fiscal year 2002.
The Company manages its business across the following geographic areas:
United States, Other Americas (Canada and Latin America), Europe/Middle East and
Africa, and Asia Pacific.
A summary of the Company's revenues by geographical area was as follows:
Year Ended September 30,
---------------------------------------
(in thousands) 2002 2001 2000
--------- --------- ---------
Revenues:
United States ............................ $ 106,770 $ 122,025 $ 103,623
Other Americas ........................... 7,558 9,246 12,485
Intercompany revenues .................... 9,940 6,717 2,867
--------- --------- ---------
Subtotal ........................... $ 124,268 $ 137,988 $ 118,948
--------- --------- ---------
Page 70
Europe/Middle East and Africa ............ 45,905 43,986 41,415
Asia/Pacific ............................. 11,648 10,193 11,165
Consolidating eliminations ............... (9,940) (6,717) (2,867)
--------- --------- ---------
Total revenues ..................... $ 171,881 $ 185,450 $ 168,661
--------- --------- ---------
(Loss)/income from operations:
United States ............................ $ (21,444) $ (21,329) $ 2,561
Other Americas ........................... (6,901) (8,203) (7,880)
Europe/Middle East and Africa ............ 13,855 11,393 8,646
Asia/Pacific ............................. (829) (2,616) (3,898)
--------- --------- ---------
$ (15,319) $ (20,755) $ (571)
--------- --------- ---------
As of September 30,
-----------------------
(in thousands) 2002 2001
-------- --------
Long-lived assets:
United States ............................. $65,436 $ 60,282
Other Americas ............................ 1,621 2,037
Europe/Middle East and Africa ............. 3,501 3,388
Asia/Pacific .............................. 250 397
------- --------
$70,808 $ 66,104
------- --------
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 2002, 2001 or
2000.
Q. SUBSEQUENT EVENT
In October 2002, the Company finalized sale of its newsletter business,
Modern Distribution Management. The assets of the sale include a subscriber
list, copyrights and trademarks. Under the terms of the agreement, the purchaser
will assume all the unfulfilled subscription liabilities of the newsletter as of
the date of purchase. The assumption of the liabilities and the agreement of the
buyer to perform certain services related to the newsletter represents the full
consideration paid for this business.
Page 71
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, 2002
Allowance for doubtful accounts $3,848,916 $1,753,282 -- $2,181,399 $3,420,799
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
Page 72
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
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)
4.1 Specimen certificate for the Common Stock, $.01, of the Company (included
as Exhibit 4.1 to the Company's Current Report on Form 10-Q for the
quarter ended December 31, 2001, File No. 0-23852 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 the Company 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 (included as Exhibit 9.1 to the Company's Annual
Report on Form 10-K for the fiscal year ended September 30, 2001
File No. 0-23852 and incorporated herein by reference)
10.1 Fiscal Year 2002 Executive Bonus Plan (included as Exhibit 10.1 to the
Company's Quarterly Report on Form 10-Q for the quarter ended March 31,
2002, Commission File No. 0-23852 and incorporated herein by reference)
21.1 Subsidiaries of the Company
23.1 Consent of PricewaterhouseCoopers LLP
Page 73