Back to GetFilings.com
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
FOR THE QUARTERLY PERIOD ENDED DECEMBER 31, 2002
(mark one)
|X| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
| | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES AND
EXCHANGE ACT OF 1934
For the transition period from ______________ to _______________
Commission File Number 0-23852
MRO SOFTWARE, INC.
(Exact name of registrant as specified in its charter)
MASSACHUSETTS 04-2448516
(State or other jurisdiction (I.R.S employer
incorporation or organization) identification number)
100 CROSBY DRIVE, BEDFORD MASSACHUSETTS 01730
(Address of principal executive offices, including zip code)
(781) 280-2000
(Registrant's telephone number, including area code)
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes |X| No | |
Number of shares outstanding of the Registrant's common stock as of the latest
practicable date: 24,382,734 shares of common stock, $.01 par value per share,
as of January 31, 2003.
1
MRO SOFTWARE, INC.
10-Q INDEX
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements Page
Consolidated Balance Sheets (unaudited) as of December 31, 2002
and September 30, 2002. 3
Consolidated Statements of Operations (unaudited) for the three
months ended December 31, 2002 and 2001. 4
Consolidated Statements of Cash Flows (unaudited) for the three
months ended December 31, 2002 and 2001. 5
Notes to Consolidated Financial Statements (unaudited). 6
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 11
Item 3. Quantitative and Qualitative Disclosures about Market Risk 27
Item 4. Controls and Procedures 27
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 28
Item 2. Changes in Securities 28
Item 3. Defaults upon Senior Executives 28
Item 4. Submission of Matter to a Vote of Security Holders 28
Item 5. Other Information 28
Item 6. Exhibits and Reports on Form 8-K 28
SIGNATURE 30
2
MRO SOFTWARE, INC.
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
DECEMBER 31, SEPTEMBER 30,
2002 2002
---- ----
ASSETS
(IN THOUSANDS)
Current assets:
Cash and cash equivalents $ 70,515 $ 67,315
Accounts receivable, trade, less allowance
for doubtful accounts of $3,469 at December 31, 2002
and $3,421 at September 30, 2002, respectively 31,754 35,433
Prepaid expenses and other current assets 7,516 6,429
Deferred income taxes 2,559 2,613
--------- ---------
Total current assets 112,344 111,790
--------- ---------
Marketable securities 500 500
Property and equipment, net 9,645 10,156
Intangible assets, net 57,274 58,366
Other assets 2,398 2,285
Deferred income taxes 8,569 9,056
--------- ---------
Total assets $ 190,730 $ 192,153
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued expenses $ 14,517 $ 16,844
Accrued compensation 8,140 9,081
Other current liabilities 130 267
Deferred revenue 26,805 27,536
--------- ---------
Total current liabilities 49,592 53,728
--------- ---------
Other long term liabilities 342 379
Deferred revenue 1,036 26
Stockholders' equity
Preferred stock, $.01 par value;1,000 authorized,
none issued and outstanding
Common stock, $.01 par value;50,000 authorized;
24,375 and 24,267 issued at December 31, 2002
and September 30, 2002, respectively 244 243
Additional paid-in capital 113,498 112,700
Deferred compensation (149) (176)
Retained earnings 26,688 26,293
Accumulated other comprehensive loss (521) (1,040)
--------- ---------
Total stockholders' equity 139,760 138,020
--------- ---------
Total liabilities and stockholders' equity $ 190,730 $ 192,153
========= =========
The accompanying notes are an integral part of the consolidated financial
statements.
3
MRO SOFTWARE, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
THREE MONTHS ENDED
DECEMBER 31,
-------------------
2002 2001
---- ----
(IN THOUSANDS, EXCEPT PER SHARE DATA)
Revenues:
Software $ 12,685 $ 13,825
Support and services 31,203 32,651
-------- --------
Total revenues 43,888 46,476
-------- --------
Cost of revenues:
Software 1,850 1,957
Support and services 14,928 16,946
-------- --------
Total cost of revenues 16,778 18,903
-------- --------
Gross profit 27,110 27,573
Operating expenses:
Sales and marketing 15,399 16,016
Product development 6,756 6,667
General and administrative 4,646 4,728
Amortization of goodwill and other intangibles 248 3,053
-------- --------
Total operating expenses 27,049 30,464
-------- --------
Income/(loss) from operations 61 (2,891)
Interest income 210 272
Other income/(expense), net 338 (3)
-------- --------
Income/(loss) before income taxes 609 (2,622)
Provision for (benefit) from income taxes 214 (697)
-------- --------
Net income/(loss) $ 395 $ (1,925)
======== ========
Net income/(loss) per share, basic $ 0.02 $ (0.09)
-------- --------
Net income/(loss) per share, diluted $ 0.02 $ (0.09)
-------- --------
Shares used to calculate net loss per share
Basic 24,306 22,311
Diluted 24,478 22,311
The accompanying notes are an integral part of the consolidated financial
statements.
4
MRO SOFTWARE, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
THREE MONTHS ENDED
DECEMBER 31,
---------------------
2002 2001
---- ----
Cash flows from operating activities:
Net income/(loss) $ 395 $ (1,925)
Adjustments to reconcile net income/(loss) to net
cash provided by operating activities:
Depreciation 1,212 1,393
Amortization of goodwill and other intangibles 1,098 3,903
Amortization of premium on marketable securities -- 16
Stock-based compensation 27 27
Deferred income taxes 560 (973)
Changes in operating assets and liabilities, net of effect of
acquisitions:
Accounts receivable 3,829 4,430
Prepaid expenses and other assets (884) (1,589)
Accounts payable, accrued expenses and other liabilities (2,690) 370
Accrued compensation (1,037) (2,609)
Deferred revenue 4 2,235
-------- --------
Net cash provided by operating activities 2,514 5,278
-------- --------
Cash flows from investing activities:
Acquisitions of property and equipment and other
capital expenditures (708) (855)
Sale of marketable securities -- 980
-------- --------
Net cash (used in)/provided by investing activities (708) 125
-------- --------
Cash flows from financing activities:
Proceeds from exercise of stock options and employee
stock purchases 799 2,037
-------- --------
Net cash provided by financing activities 799 2,037
-------- --------
Effect of exchange rate changes on cash 595 85
-------- --------
Net increase in cash and cash equivalents 3,200 7,525
Cash and cash equivalents, beginning of period 67,315 42,115
-------- --------
Cash and cash equivalents, end of period $ 70,515 $ 49,640
======== ========
The accompanying notes are an integral part of the consolidated financial
statements.
5
MRO SOFTWARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
A. BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements include the
accounts of MRO Software, Inc. ("MRO") and its majority-owned subsidiaries
(collectively, the "Company"), as of December 31, 2002 and have been prepared by
the Company in accordance with generally accepted accounting principles for
interim reporting and with the instructions to Form 10-Q and Article 10 of
Regulation S-X. All intercompany accounts and transactions have been eliminated.
In the opinion of management, the accompanying unaudited consolidated financial
statements contain all adjustments, consisting only of those of a normal
recurring nature, necessary for a fair presentation of the Company's financial
position, results of operations and cash flows at the dates and for the periods
indicated. The results of operations for the periods presented herein are not
necessarily indicative of the results of operations to be expected for the
entire fiscal year, which ends on September 30, 2003, or for any other future
period.
These consolidated financial statements should be read in conjunction with the
consolidated financial statements and notes thereto for the year ended September
30, 2002 included in the Company's Annual Report on Form 10-K filed with the
Securities and Exchange Commission on December 30, 2002.
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
Certain prior year financial statement items have been reclassified to conform
to the current year's format.
B. 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 of 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.
6
Basic and diluted income per share are calculated as follows:
THREE MONTHS ENDED
(IN THOUSANDS, EXCEPT PER SHARE DATA) 12/31/02 12/31/01
-------- --------
Net income/(loss) $ 395 $ (1,925)
Denominator:
Weighted average common shares
outstanding-basic 24,306 22,311
Effect of dilutive securities (1) 172 --
-------- --------
Weighted average common shares
outstanding-diluted 24,478 22,311
======== ========
Net income/(loss) per share, basic $ 0.02 $ (0.09)
Net income/(loss) per share, diluted $ 0.02 $ (0.09)
(1) Options to purchase 2,402,471 shares of the Company's common stock were
outstanding as of the three months ended December 31, 2002 but were not included
in the computation of diluted net income per share because the exercise price of
the options were greater than the weighted average market price of the common
stock during the period. Options to purchase 1,033,966 shares of the Company's
common stock were outstanding as of the three months ended December 31, 2001 but
were excluded from the computation of diluted net loss per share as the effect
was anti-dilutive to the Company's net loss.
C. COMPREHENSIVE LOSS:
The following table reflects the components of comprehensive net loss:
THREE MONTHS ENDED
DECEMBER 31,
(IN THOUSANDS) 12/31/02 12/31/01
-------- --------
Net income/(loss) $ 395 $(1,925)
Other comprehensive net income/(loss),
Net of tax:
Unrealized loss on securities arising during period -- (10)
Foreign currency translation adjustment 519 83
------- -------
Comprehensive income/(loss) $ 914 $(1,852)
======= =======
7
D. SEGMENT INFORMATION, GEOGRAPHIC DATA AND MAJOR CUSTOMERS:
The Company reports revenues and income under one reportable industry segment,
Strategic Asset Management. Our Strategic Asset Management solutions include
MAXIMO for the Enterprise Asset Management market and MAXIMO MainControl for the
IT Asset Management market. We also offer Online Commerce Services (OCS) that
enable our asset-centric procurement capabilities. The Company does not
allocate expenses to these product groups, and all operating results are
assessed on an aggregate basis to make decisions about the allocation of
resources.
The Company manages its business in 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:
THREE MONTHS ENDED
DECEMBER 31,
(IN THOUSANDS) 2002 2001
---- ----
Revenues:
United States $ 25,931 $ 28,657
Other Americas 3,655 2,403
Intercompany 1,698 3,373
-------- --------
Subtotal $ 31,284 $ 34,433
Europe/Middle East and Africa 11,208 12,712
Asia/Pacific 3,094 2,704
Intercompany (1,698) (3,373)
-------- --------
Total revenues $ 43,888 $ 46,476
======== ========
The Company has subsidiaries in foreign countries, which sell the Company's
products and services in their respective geographic areas. Intercompany
primarily represent shipments of software to international subsidiaries and are
eliminated from consolidated revenues.
E. ACCOUNTING PRONOUNCEMENTS
8
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 adopted 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.
In December 2002, the FASB issued SFAS No. 148 ("SFAS 148"), "Accounting for
Stock-Based Compensation-Transition and Disclosure", an amendment to SFAS No.
123. SFAS 148 amends FASB Statement No. 123 ("SFAS 123"), "Accounting for
Stock-Based Compensation", to provide alternative methods of transition for a
voluntary change to the fair value based method of accounting for stock-based
employee compensation. In addition, SFAS 148 amends the disclosure requirements
of SFAS 123 to require prominent disclosures in both annual and interim
financial statements about the method of accounting for stock-based employee
compensation and the effect of the method used on reported results. The
transition and annual disclosure provisions of SFAS 148 are effective for fiscal
years ending after December 15, 2002, with earlier application permitted in
certain circumstances. The interim disclosure provisions are effective for
financial reports containing financial statements for interim periods beginning
after December 15, 2002. The Company will report in accordance with the
disclosure requirements of SFAS 148 beginning with its quarter ended March 31,
2003.
F. Goodwill and Other Intangible Assets
In July 2001, the FASB issued Statement of Financial Accounting Standards
("SFAS") No. 141, "Business Combinations" and SFAS No. 142, "Goodwill and Other
Intangible Assets." These new statements require use of the purchase method of
accounting for all business combinations initiated after June 30, 2001, thereby
eliminating use of the pooling-of-interests method. Goodwill is no longer
amortized but tested annually for impairment. In addition, within six months of
adopting the accounting standard, a transitional impairment test must be
completed, and any impairments identified must be treated as a cumulative effect
of a change in accounting principle. Additionally, new criteria have been
established that determine whether an acquired intangible asset should be
recognized separately from goodwill. The statements were effective for business
combinations initiated after June 30, 2001, with the entire provisions of SFAS
No. 142 becoming effective for the Company commencing with its 2003 fiscal year.
MRO has not completed its transitional impairment test. As a result of adopting
SFAS No. 142, approximately $12.2 million of goodwill amortization will not be
recognized in fiscal 2003.
9
The following is a reconciliation of reported net loss to adjusted net income
and reported net loss per share to adjusted net income per share had SFAS No.
142 been in effect for the three months ended December 31, 2001 (table in
thousands, except per share amounts):
For the
Three Months Ended
December 31, 2001
-----------------
Net loss $ (1,925)
Add back: impact of goodwill amortization,
net of tax benefit 2,053
Adjusted net income $ 128
Net loss per share, basic and diluted $ (0.09)
Add back: Impact of goodwill amortization,
net of taxes 0.10
Adjusted net income per share, basic and diluted 0.01
Intangible assets as of December 31, 2002 and September 30, 2002 consist of
the following: (table in thousands):
(in thousands) December 31 September 30
2002 2002
-------- --------
Goodwill $ 78,013 $ 78,013
Accumulated amortization (31,643) (31,643)
-------- --------
Sub-total Goodwill 46,370 46,370
-------- --------
Purchased Technology $ 15,744 $ 15,744
Accumulated amortization (6,738) (5,894)
-------- --------
Sub-total Purchased technology 9,006 9,850
-------- --------
Other intangibles $ 3,233 $ 3,932
Accumulated amortization (1,335) (1,786)
-------- --------
Sub-total other intangibles 1,898 2,146
-------- --------
Other intangibles consist of customer contracts, backlog, customer lists,
non-compete agreements and leasehold advantages.
Amortization expense of intangible assets was $1.1 million and $3.9
million for the three months ended December 31, 2002 and December 31, 2001,
respectively. The 2001 amounts included amortization of goodwill. As of December
31, 2002, amortization expense on existing intangibles for the next five years
is as follows
(in thousands):
2003 $ 3,204
2004 3,024
2005 2,240
2006 1,383
2007 477
-------
Total $10,328
-------
There were no changes in the carrying amount of goodwill, net, for the three
months ended December 31, 2002.
G. SUBSEQUENT EVENT
Sale of Assets of Catalog Services Operation
On January 17, 2003, MRO Software, Inc. (the "Company") sold the assets that had
been used in the industrial data normalization services operations of its wholly
owned subsidiary INTERMAT, Inc. The assets included software and technology used
in such operations, contracts with customers, suppliers and vendors, and
trademarks associated with such operations. INTERMAT, Inc. was acquired by the
Company in March 2000.
The assets were purchased by International Materials Solutions, Inc. (the
"Buyer"). As consideration for the assets, the Buyer assumed all liabilities
arising in connection with the assets and the associated business operations
from and after January 1, 2003 and delivered two promissory notes in the face
amount of $1 million each, together with a stock purchase warrant representing
the right to purchase five (5%) percent of the Buyer's common stock. One
promissory note is payable over a period of three years commencing July 1, 2003,
and the other promissory note is payable in full on June 30, 2006. Each note
bears interest at the prime rate plus one (1%) percent per year, and will
accelerate upon a change in control of the Buyer, or upon a default by Buyer
under certain obligations in the transaction documents. The promissory notes are
subordinate to working capital financing obtained by the Buyer, and the Buyer
has agreed not to obtain such financing in excess of $2 million. The Company
retained comprehensive, non-exclusive rights to the software and technology used
in the business, which has also been embedded in the Company's MAXIMO(R) and
Online Commerce Services offerings.
10
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
FORWARD-LOOKING STATEMENTS
In addition to historical information, this Quarterly Report on Form 10-Q, 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 Quarterly Report, and the Company disclaims any obligation to update
such forward looking statements as a result of any change in circumstances or
otherwise.
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, 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. These
critical accounting policies and estimates should be read in conjunction with
the critical accounting policies and estimates included in the Company's Annual
Report on Form 10-K filed with the Securities and Exchange Commission on
December 30, 2002. The Company includes and updates critical accounting policies
and estimates in interim periods if a new critical accounting policy is adopted
or amended or if there are material changes in related judgments or conditions
underlying the Company's estimates in the interim period.
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 SFAS No. 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, and the expected tax benefit
of operating loss carryforwards. Changes in deferred tax assets and
11
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 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 as
of December 31, 2002 is $11.1 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. The related valuation allowance as of December
31, 2002 is $2.2 million.
OVERVIEW
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 and MAXIMO MainControl
for the IT Asset Management (ITAM) market. We also offer Online Commerce
Services (OCS) that enable 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 products and services, 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.
12
During fiscal 2002, the Company's product offerings were Strategic MRO,
Enterprise Catalog Management, and OCS. As all of these products were
complementary to one another, the Company reported in one operating 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
strategic asset management solutions (MAXIMO and MAXIMO MainControl).
At the beginning of fiscal 2003, the Strategic MRO offerings have been renamed
strategic asset management and consist of the MAXIMO and MAXIMO MainControl
products. Our asset-centric procurement products consist of Online Commerce
Services and Enterprise Catalog Management. The Company reports revenues for
these product groups but does not allocate expenses to these product groups. The
Company's management assesses operating results on an aggregate basis to make
decisions about the allocation of resources.
On January 17, 2003, the Company sold the assets of its INTERMAT industrial data
normalization services operations. Under the terms of the sale, the Company
retained comprehensive, non-exclusive rights to the software and technology used
in the business, which has been embedded in the Company's MAXIMO and Online
Commerce Services offerings.
RESULTS OF OPERATIONS
REVENUES
Three Three
Months Months
Ended CHANGE Ended
(in thousands) 12/31/02 % 12/31/01
-------- ------ --------
Software licenses $12,685 (8)% $13,825
Percentage of total revenues 29% 30%
Support and services $31,203 (5)% $32,651
Percentage of total revenues 71% 70%
Total revenues $43,888 (6)% $46,476
The Company's revenues are derived primarily from two sources: (i) software
licenses, and (ii) fees for support and services.
Software license revenues decreased 9% to $12.6 million from $13.8 million for
the three months ended December 31, 2002 and 2001, respectively. The decrease
was mainly attributable to a decrease in MAXIMO software license revenues, which
decreased 8% to $12.5 million from $13.6 million for the three months ended
December 31, 2002 and 2001, respectively. The Company attributes this decrease
to the continued difficult IT spending environment and adverse economic
conditions among our customers and in the general economy, as a result of which
our customers are deferring or canceling their IT projects, and the Company is
experiencing longer and less successful sales cycles. The Company did not
recognize any software license revenues
13
related to its IT asset management product (MAXIMO MainControl) for the three
months ended December 31, 2002. The Company purchased the MAXIMO MainControl
product in June 2002. In the quarter ending September 30, 2002, the Company
recognized $2.7 million of software license revenue that was generated by the
MainControl sales pipeline in existence at the time of the acquisition. In the
quarter ended December 31, 2002, the Company has restructured its sales
organizations to rebuild and expand the MAXIMO MainControl sales force and
pipeline in a manner consistent with MRO's business model, which is organized by
specific industry, geographies, and sales skill sets.
Support revenues increased 21% to $15.5 million from $12.8 million for the three
months ended December 31, 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. MAXIMO support revenues increased
17% to $14.8 million from $12.7 million for the three months ended December 2002
and 2001, respectively. The Company recognized $700 thousand of support revenues
related to its MAXIMO MainControl product.
Service revenues decreased 22% to $15.7 million from $19.9 million for the three
months ended December 31, 2002 and 2001, respectively. MAXIMO service revenues
decreased 19% to $13.4 million from $16.4 million for the three months ended
December 31, 2002 and 2001, respectively. The decease 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 recent MAXIMO license sales. MAXIMO MainControl service revenues
were $539 thousand for the three months ended December 31, 2002. Enterprise
Catalog Management services revenues decreased 62% to $1.0 million from $2.6
million for the three months ended December 31, 2002 and 2001, respectively.
The Company has organized its product offerings into two categories: (1)
Strategic asset management products and services and (2) Asset-centric
procurement products and services. Total strategic asset management revenues
were $42.0 million and $42.7 million for the three months ended December 31,
2002 and 2001, respectively. MAXIMO revenues represented 93% and 92% of total
revenues for the three months ended December 31, 2002 and 2001, respectively.
MAXIMO MainControl revenues were $1.2 million for the three months ended
December 31, 2002. OCS revenues decreased 22% to $709 thousand from $910
thousand for the three months ended December 31, 2002 and 2001, respectively.
The Company will maintain its investment in this solution commensurate with the
level of sales, while simultaneously controlling operating and administrative
expenses. Enterprise Catalog Management revenues decreased 59% to $1.2 million
from $2.9 million for the three months ended December 31, 2002 and 2001,
respectively. The Company sold the assets related to its Catalog Services
operations of the Company in January 2003 and therefore will not recognize any
more services revenue related to Enterprise Catalog Management.
14
COST OF REVENUES
Three Three
Months Months
Ended CHANGE Ended
(in thousands) 12/31/02 % 12/31/01
-------- ------ --------
Software licenses $ 1,850 (6)% $ 1,957
Percentage of software licenses 15% 15%
Support and services $ 14,928 (12)% $ 16,946
Percentage of support and services 48% 52%
Total cost of revenues $ 16,778 (12)% $ 18,903
Percentage of total revenues 39% 41%
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. Cost of
software license revenues decreased 6% to $1.9 million from $2.0 million for the
three months ended December 31, 2002 and 2001, respectively. The decrease in the
cost of software license revenues was due to a $100 thousand decrease in
software purchased for resale related to our MAXIMO Mobile Suite product. Cost
of software licenseslicenses, as a percentage of software licenses were 15% for
the three months ended December 31, 2002 and 2001, respectively. Amortization of
acquired technology was $844 thousand and $850 thousand for the three months
ended December 31, 2002 and 2001, respectively.
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 increased 32% to $2.5 million from $1.9 million for the three
months ended December 31, 2002 and 2001, respectively. Cost of support revenues,
as a percentage of total support revenues were 17% and 16% for the three months
ended December 31, 2002 and 2001, respectively. The increase in cost of support
revenues was attributable to an increase in personnel due to an increase in the
number of customers.
Cost of service revenues decreased 18% to $12.4 million from $15.0 million for
the three months ended December 31, 2002 and 2001, respectively. The decrease in
cost of service revenues was primarily attributable to a $1.8 million decrease
for the costs of third party consultants implementing the Company's products, a
$400 thousand decrease in reimbursable travel expenses and an overall decrease
in spending. Cost of service revenues, as a percentage of total service revenues
were 79% and 76% for the three months ended December 2002 and 2001,
respectively. The increase in cost of service revenues as a percentage of total
services revenues was due to costs to support the Enterprise Catalog Management
service offering without a commensurate increase in revenues.
15
OPERATING EXPENSES
Three Three
Months Months
Ended CHANGE Ended
(in thousands) 12/31/02 % 12/31/01
-------- ------ --------
Sales and marketing $15,399 (4)% $16,016
Percentage of total revenues 35% 35%
Product development $ 6,756 2% $ 6,667
Percentage of total revenues 16% 15%
General and administrative $ 4,646 (2)% $ 4,728
Percentage of total revenues 11% 11%
Amortization of goodwill and other intangibles $ 248 (92)% $ 3,053
Percentage of total revenues .01% 7%
Sales and marketing expenses decreased 4% to $15.4 million from $16.0 million
for the three months ended December 31, 2002 and 2001, respectively. The
decrease was primarily attributable to a $735 thousand decrease in sales
commissions due to the decrease in MAXIMO software license revenues. Offsetting
this decrease is a $120 thousand increase in personnel costs and related
benefits due to an increase in the number of sales and marketing personnel,
mainly from the acquisition of MainControl, Inc.
Product development expenses increased 2% to $6.8 million from $6.7 million for
the three months ended December 31, 2002 and 2001, respectively. The Company
expects to continue to make enhancements to MAXIMO 5, integrate MAXIMO
MainControl into its overall product architecture and develop industry-specific
functionality, in a manner commensurate with future expectations of revenues and
income from sales of the resulting product enhancements and functionality.
General and administrative expenses decreased 2% to $4.6 million from $4.7
million for the three months ended December 31, 2002 and 2001, respectively. The
decrease is due mainly to a decrease in general and administrative salaries and
related benefits due to a decrease in the number of general and administrative
personnel.
The decrease in amortization of goodwill and other intangibles expense is due to
the adoption of SFAS No. 142 by the Company on October 1, 2002. In accordance
with SFAS No. 142, goodwill will no longer be amortized. Intangibles and other
identifiable assets will continue to be amortized. Goodwill amortization was
$2.9 million for the three months ended December 31, 2001. Other intangible
amortization expense was $248 thousand and $110 thousand for the three months
ended December 31, 2002 and 2001, respectively.
16
NON-OPERATING EXPENSES
Three Three
Months Months
Ended CHANGE Ended
(in thousands) 12/31/02 % 12/31/01
-------- ------ --------
Interest income $ 210 (23)% $ 272
Other income /(expense) $ 338 112% $ (3)
Interest income is attributable to interest earned on marketable securities and
cash equivalents. Due to unfavorable interest yields, the Company did not
reinvest its portfolio in short-term treasuries and municipal bonds as they
matured. 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 due to gains attributable to currency rate fluctuations.
INCOME TAXES
The Company's effective tax rate was a provision of 35% and a benefit of 27% for
the three months ended December 31, 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 amortization expenses.
LIQUIDITY AND CAPITAL RESOURCES
As of December 31, 2002, the Company had cash and cash equivalents of $70.5
million, marketable securities of $500 thousand, and working capital of $62.8
million.
Cash provided by operating activities was $2.5 million for the three months
ended December 31, 2002 was primarily attributable to the collection of accounts
receivables, offset by accounts payable, accrued compensation, and prepaid
expenses and other assets. The days sales outstanding decreased from 74 days to
65 days for the three months ended December 31, 2002 and 2001, respectively.
Cash used in investing activities was $708 thousand for the three months ended
December 31, 2002 and was used in the acquisition of fixed assets.
Cash provided by financing activities was $799 thousand for the three months
ended December 31, 2002 and represents proceeds from the Company's 2002 Employee
Stock Purchase Plan.
As of December 31, 2002, the Company's principal commitments consist primarily
of office space and equipment operating leases for its U.S. and European
headquarters. The Company's corporate headquarters are under lease through
December 31, 2009. The Company leases its other facilities and certain equipment
under non-cancelable operating lease agreements that expire at various dates
through June 30, 2019.
17
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
December 31, 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 December 31, 2003.
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 BUSINESS IS SENSITIVE TO GENERAL ECONOMIC CONDITIONS, AND OVERALL DOWNTURNS
IN THE ECONOMY AND IN INDUSTRIAL SPENDING, AND OUR FORECASTING SYSTEMS HAVE
NEVER BEEN TESTED UNDER CONDITIONS OF EXTENDED ECONOMIC DOWNTURN.
Over the past several quarters, the US and worldwide economies have experienced
recession or similar conditions, with a negative effect on our revenues and
operations. As industrial 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. The slump in the economy, in
general, and the market for IT software and services, in particular, have
continued for an extended period of time. While our forecasting systems and
metrics have generally been reliable in informing our projections and guidance
for future performance, the current economic downturn has persisted for a length
of time that is unprecedented in the Company's recent
18
history, our forecasting systems may not be valid under such conditions, and our
expectations and guidance for future performance may not be accurate. 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.
THE TRADITIONAL MARKET FOR OUR MAXIMO PRODUCT IS MATURE AND SATURATED AND
PRESENTS LIMITED OPPORTUNITY FOR GROWTH.
MAXIMO has been the industry-leading plant floor capital asset maintenance
product for a number of years, and we have acquired a large number of customers
in this market. However, most large industrial organizations have made
significant investments in systems that support the maintenance of their capital
assets, and opportunities for new MAXIMO sales in this market segment are more
limited than they have been in the past. In addition, the emergence and growth
of this market attracted a large number of competitors, and most of the largest
software companies that sell into complementary markets have developed competing
asset maintenance products. It is likely that this market segment will continue
to mature, there will be fewer sales opportunities in our traditional asset
maintenance market, and competitive forces will put downward pressure on our
average sales prices and rates of success. While we continue to strengthen and
broaden our MAXIMO offering, and reach into new markets, these efforts may not
be sufficient to overcome the effects of maturity and saturation in our
traditional market, and our revenues, margins, results of operation and
financial condition may be adversely impacted.
OUR INABILITY TO KEEP PACE WITH THE RAPID CHANGES IN TECHNOLOGY AND CUSTOMER
DEMANDS 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. As our market
continues to mature, we must also develop products that are richly functional in
specialized "vertical" market areas to meet the demands of customers is
particular industries or market segments. 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 could have a material, adverse
impact on ongoing sales of existing products, and on the Company's business and
our results of operations.
19
WE DEPEND SUBSTANTIALLY ON OUR MAXIMO 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 by 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 filed for bankruptcy protection in September 2002. As a result
of Peregrine's bankruptcy, some prospective MAXIMO MainControl customers have
questioned the validity of the product category, 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 might 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. The Official Unsecured Creditors Committee has
petitioned for the appointment of a Trustee to take control of Peregrine's
assets and business, and we cannot predict what such a trustee would do with
Peregrine's business or assets, or what affect such actions might have on the
ITAM market or the Company's ability to successfully sell its MAXIMO MainControl
and compete in this market. 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
20
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.
REVENUES ASSOCIATED WITH OUR ONLINE COMMERCE SERVICES OFFERING MAY DECLINE
FURTHER.
Our Online Commerce Services ("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 and a
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
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.
21
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 disproportionately 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 the
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.
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 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
22
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 Peregrine Systems, Inc. and
Computer Associates, Inc. Currently, MAXIMO competes with products of a number
of large vendors, some of which have traditionally provided maintenance
software operating in a client/server environment and are now developing or
offering systems that are web-architeched. 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 and performance to enter the enterprise 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.
23
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.
24
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 demanding
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. 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.
25
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 macroeconomic and market conditions unrelated to our
performance may also affect demand for our products and services, our results of
operations, and our stock price.
OTHER 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.
26
ITEM 3. 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 and cash equivalents and marketable securities
and exposures to foreign currency exchange rate fluctuations.
At December 31, 2002, the Company held $71.0 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.
ITEM 4. 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.
27
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
NONE
ITEM 2 RECENT SALES OF UNREGISTERED SECURITIES, USE OF PROCEEDS FROM
REGISTERED SECURITIES CHANGES IN SECURITIES
NONE
ITEM 3 DEFAULTS UPON SENIOR SECURITIES
NONE
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.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
3.1 Amended and Restated Articles of Organization of the Company (included
as Exhibit 3.3 to the Company's Registration Statement on Form S-1,
Registration No. 33-76420, and incorporated herein by reference)
3.2 Restated By-Laws of the Company, as amended (included as Exhibit 3.2
to the Company's Annual Report on Form 10-K for the fiscal year ended
September 30, 1996, File No. 0-23852, and incorporated herein by
reference)
3.3 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)
28
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)
(b) Reports on Form 8-K
No current reports on Form 8-K were filed during the three months ended
December 31, 2002.
On January 31, 2003, The Company filed on Form 8-K, in Item 2, its sale
of assets associated with the industrial normalization services operations
of its wholly owned subsidiary INTERMAT, Inc.
29
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
MRO SOFTWARE, INC.
Date: February 14, 2003 By: /s/ Peter J. Rice
----------------- --------------------------
Peter J. Rice
Executive Vice President -
Finance and Administration,
Chief Financial Officer and
Treasurer
(Principal Financial Officer)
30
CERTIFICATION
I, NORMAN E. DRAPEAU, JR., certify that:
(1) I have reviewed this quarterly report on Form 10-Q of MRO Software, Inc. a
Massachusetts corporation:
(2) Based on my knowledge, this quarterly 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 quarterly
report;
(3) Based on my knowledge, the financial statements, and other financial
information included in this quarterly 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 quarterly 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 quarterly 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
quarterly report (the "Evaluation Date"); and
(c) presented in this quarterly 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
quarterly 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.
31
Date: February 14, 2003
By: /s/ Norman E. Drapeau, Jr.
- ---------------------------------
Norman E. Drapeau, Jr.
President and Chief Executive Officer
(Principal Executive Officer)
32
I, PETER J. RICE, certify that:
(1) I have reviewed this quarterly report on Form 10-Q of MRO Software, Inc. a
Massachusetts corporation;
(2) Based on my knowledge, this quarterly 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 quarterly
report;
(3) Based on my knowledge, the financial statements, and other financial
information included in this quarterly 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 quarterly 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 quarterly 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
quarterly report (the "Evaluation Date"); and
(c) presented in this quarterly 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
quarterly 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.
33
Date: February 14, 2003
By: /s/ Peter J. Rice
- ---------------------------------
Peter J. Rice
Chief Financial Officer and Treasurer
(Principal Financial and Accounting Officer)
34