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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2003
(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 ________
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act)
Yes X No ________
Number of shares outstanding of the Registrant's common stock as of the latest
practicable date: 24,420,297 shares of common stock, $.01 par value per share,
as of May 12, 2003.
1
MRO SOFTWARE, INC.
10-Q INDEX
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements Page
Consolidated Balance Sheets (unaudited) as of March 3
31, 2003 and September 30, 2002.
Consolidated Statements of Operations (unaudited) 4
for the three and six months ended March 31, 2003 and 2002.
Consolidated Statements of Cash Flows (unaudited) 5
for the six months ended March 31, 2003 and 2002.
Notes to Consolidated Financial Statements 6
(unaudited).
Item 2. Management's Discussion and Analysis of Financial 14
Condition and Results of Operations
Item 3. Quantitative and Qualitative Disclosures about 31
Market Risk
Item 4. Controls and Procedures 31
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 32
Item 2. Changes in Securities 32
Item 3. Defaults upon Senior Executives 32
Item 4. Submission of Matter to a Vote of Security Holders 32
Item 5. Other Information 32
Item 6. Exhibits and Reports on Form 8-K 33
SIGNATURE 35
2
MRO SOFTWARE, INC.
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
ASSETS MARCH 31, SEPTEMBER 30,
--------- -------------
2003 2002
--------- ---------
(in thousands)
Current assets:
Cash and cash equivalents $ 72,782 $ 67,315
Marketable securities 1,001 --
Accounts receivable, trade, less allowance
for doubtful accounts of $3,066 at March 31, 2003
and $3,421 at September 30, 2002 28,501 35,433
Prepaid expenses and other current assets 8,326 6,429
Deferred income taxes 2,564 2,613
--------- ---------
Total current assets 113,174 111,790
--------- ---------
Marketable securities 500 500
Property and equipment, net 8,809 10,156
Goodwill, net 46,210 46,370
Intangible assets, net 9,818 11,996
Other assets 3,372 2,285
Deferred income taxes 8,657 9,056
--------- ---------
Total assets $ 190,540 $ 192,153
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued expenses $ 12,772 $ 16,844
Accrued compensation 6,251 9,081
Other current liabilities 234 267
Deferred revenue 29,785 27,536
--------- ---------
Total current liabilities 49,042 53,728
--------- ---------
Other long term liabilities 24 379
Deferred revenue 1,472 26
Stockholders' equity
Preferred stock, $.01 par value;1,000 authorized,
none issued and outstanding
Common stock, $.01 par value;50,000 authorized;
24,420 and 24,267 issued at March 31, 2003
and September 30, 2002, respectively 244 243
Additional paid-in capital 113,939 112,700
Deferred compensation (399) (176)
Retained earnings 26,510 26,293
Accumulated other comprehensive loss (292) (1,040)
--------- ---------
Total stockholders' equity 140,002 138,020
--------- ---------
Total liabilities and stockholders' equity $ 190,540 $ 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 SIX MONTHS ENDED
MARCH 31, MARCH 31,
---------------------- -----------------------
2003 2002 2003 2002
-------- -------- -------- --------
(in thousands, except per share data)
Revenues:
Software $ 7,652 $ 7,777 $ 20,337 $ 21,602
Support and services 31,736 30,111 62,939 62,762
-------- -------- -------- --------
Total revenues 39,388 37,888 83,276 84,364
-------- -------- -------- --------
Cost of revenues:
Software 1,355 1,403 3,205 3,360
Support and services 14,513 15,685 29,441 32,631
-------- -------- -------- --------
Total cost of revenues 15,868 17,088 32,646 35,991
-------- -------- -------- --------
Gross profit 23,520 20,800 50,630 48,373
Operating expenses:
Sales and marketing 14,292 13,695 29,691 29,711
Product development 6,388 6,494 13,144 13,161
General and administrative 3,708 4,619 8,354 9,347
Amortization of goodwill and other intangibles 230 3,052 478 6,105
-------- -------- -------- --------
Total operating expenses 24,618 27,860 51,667 58,324
-------- -------- -------- --------
Loss from operations (1,098) (7,060) (1,037) (9,951)
Interest income 181 261 391 533
Other income/(expense), net 643 (71) 981 (74)
-------- -------- -------- --------
(Loss)/income before income taxes (274) (6,870) 335 (9,492)
(Benefit)/provision for income taxes (96) (2,040) 118 (2,737)
-------- -------- -------- --------
Net (loss)/income $ (178) $ (4,830) $ 217 $ (6,755)
======== ======== ======== ========
Net (loss)/income per share, basic $ (0.01) $ (0.21) $ 0.01 $ (0.30)
-------- -------- -------- --------
Net (loss)/income per share, diluted $ (0.01) $ (0.21) $ 0.01 $ (0.30)
-------- -------- -------- --------
Shares used to calculate net loss per share
Basic 24,407 22,775 24,356 22,543
Diluted 24,407 22,775 24,568 22,543
The accompanying notes are an integral part of the consolidated financial
statements.
4
MRO SOFTWARE, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
SIX MONTHS ENDED
MARCH 31,
----------------------
2003 2002
-------- --------
(IN THOUSANDS)
Cash flows from operating activities:
Net income/(loss) $ 217 $ (6,755)
Adjustments to reconcile net income/(loss) to net
cash provided by operating activities:
Depreciation 2,313 2,569
Amortization of goodwill and other intangibles 2,166 6,788
(Gain)/loss on sale and disposal of property
and equipment (114) --
(Gain)/loss on sale of INTERMAT, Inc. (446) --
Amortization of premium on marketable securities -- 40
Stock-based compensation 70 54
Deferred income taxes 486 (2,045)
Changes in operating assets and liabilities, net of effect of
acquisitions:
Accounts receivable 7,334 10,568
Prepaid expenses and other assets (1,057) (2,974)
Accounts payable, accrued expenses and other liabilities (5,326) (77)
Accrued compensation (2,929) (3,942)
Deferred revenue 3,215 4,474
-------- --------
Net cash provided by operating activities 5,929 8,700
-------- --------
Cash flows from investing activities:
Acquisitions of property and equipment and other
capital expenditures (1,367) (745)
Purchase of marketable securities (1,000) --
Sale of marketable securities -- 4,932
-------- --------
Net cash (used in)/provided by investing activities (2,367) 4,187
-------- --------
Cash flows from financing activities:
Proceeds from exercise of stock options and employee
stock purchases 946 6,129
-------- --------
Net cash provided by financing activities 946 6,129
-------- --------
Effect of exchange rate changes on cash 959 (16)
-------- --------
Net increase in cash and cash equivalents 5,467 19,000
Cash and cash equivalents, beginning of period 67,315 42,115
-------- --------
Cash and cash equivalents, end of period $ 72,782 $ 61,115
======== ========
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 March 31, 2003 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 (loss)/income per share are calculated as follows:
THREE MONTHS ENDED
(IN THOUSANDS, EXCEPT PER SHARE DATA) 03/31/03 03/31/02
-------- --------
Net (loss) $ (178) $ (4,830)
Denominator:
Weighted average common shares
outstanding-basic 24,407 22,775
Effect of dilutive securities (1) -- --
-------- --------
Weighted average common shares
outstanding-diluted 24,407 22,775
======== ========
Net (loss) per share, basic $ (0.01) $ (0.21)
Net (loss) per share, diluted $ (0.01) $ (0.21)
SIX MONTHS ENDED
(IN THOUSANDS, EXCEPT PER SHARE DATA) 03/31/03 03/31/02
-------- --------
Net income/(loss) $ 217 $ (6,755)
Denominator:
Weighted average common shares
outstanding-basic 24,356 22,543
Effect of dilutive securities (1) 212 --
-------- --------
Weighted average common shares
outstanding-diluted 24,568 22,543
======== ========
Net income/(loss) per share, basic $ 0.01 $ (0.30)
Net income/(loss) per share, diluted $ 0.01 $ (0.30)
(1) Options to purchase 2,862,000 shares and 1,381,000 shares of the Company's
Common Stock for the three months ended March 31, 2003 and 2002, respectively
and 2,632,000 shares and 1,458,000 shares for the six months ended March 31,
2003 and 2002, respectively, were outstanding but were not included in the
computations of diluted net loss per share because the exercise price of the
options was greater than the weighted average market price of the common stock
during the period. Common stock equivalents of 252,000 shares and 1,329,000
shares for the three months ended March 31, 2003 and 2002, respectively and
1,177,000 shares for the six months ended March 31, 2002, were excluded from the
computation of diluted net income/(loss) per share.
7
C. ACCOUNTING POLICIES
The Company accounts for stock-based employee compensation using the intrinsic
value method under the recognition and measurement principles of APB Opinion No.
25, "Accounting for Stock Issued to Employees" and related interpretations. With
the exception of restricted stock awards to members of the board of directors,
no stock-based employee compensation cost is reflected in net income, as all
options granted under the Company's plan have an exercise price equal to the
market value of the underlying common stock on the date of grant. The following
table illustrates the effect on net income and earnings per share on a pro forma
basis as if the Company had applied the fair value recognition provisions of
SFAS No. 123, "Accounting for Stock-Based Compensation" to stock-based employee
compensation:
THREE MONTHS ENDED
(in thousands, except per share amounts) 03/31/03 03/31/02
--------- ---------
Net loss
As reported $ (178) $ (4,830)
Deduct: stock-based employee
compensation expense determined under the
fair value based method for all awards, net
of related tax effects (2,459) (2,223)
--------- ---------
Pro forma net loss $ (2,637) $ (7,053)
========= =========
Earnings per share:
Basic - as reported $ (0.01) $ (0.21)
Basic - pro forma $ (0.11) $ (0.31)
Diluted - as reported $ (0.01) $ (0.21)
Diluted - pro forma $ (0.11) $ (0.31)
SIX MONTHS ENDED
(in thousands, except per share amounts) 03/31/03 03/31/02
---------- ----------
Net income (loss)
As reported $ 217 $ (6,755)
Deduct: stock-based employee
compensation expense determined under the
fair value based method for all awards, net
of related tax effects (5,229) (4,761)
---------- ----------
Pro forma net loss $ (5,012) $ (11,516)
========== ==========
Earnings per share:
Basic - as reported $ 0.01 $ (0.30)
Basic - pro forma $ (0.21) $ (0.51)
Diluted - as reported $ 0.01 $ (0.30)
Diluted - pro forma $ (0.21) $ (0.51)
8
D. COMPREHENSIVE INCOME/(LOSS):
The following table reflects the components of comprehensive net income/(loss):
THREE MONTHS ENDED
(IN THOUSANDS) 03/31/03 03/31/02
-------- --------
Net loss $ (178) $(4,830)
Other comprehensive net income/(loss),
Net of tax:
Unrealized (loss)/gain on securities arising during period (32) 2
Foreign currency translation adjustment 261 (122)
------- -------
Comprehensive income/(loss) $ 51 $(4,950)
======= =======
SIX MONTHS ENDED
(IN THOUSANDS) 03/31/03 03/31/02
-------- --------
Net income/(loss) $ 217 $(6,755)
Other comprehensive net income/(loss),
Net of tax:
Unrealized loss on securities arising during period (32) (8)
Foreign currency translation adjustment 780 (39)
------- -------
Comprehensive income/(loss) $ 965 $(6,802)
======= =======
E. 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 software products and
services include MAXIMO for the Enterprise Asset Management market and MAXIMO
MainControl for the IT Asset Management market ("ITAM"). We also offer Online
Commerce Services (OCS) that enable the asset-centric procurement capabilities
of our software products. 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 is as follows:
9
THREE MONTHS ENDED
(IN THOUSANDS) 03/31/03 03/31/02
-------- --------
Revenues:
United States $ 23,532 $ 23,775
Other Americas 1,648 1,375
Intercompany 1,451 1,444
-------- --------
Subtotal $ 26,631 $ 26,594
Europe/Middle East and Africa 10,983 10,265
Asia/Pacific 3,225 2,473
Intercompany (1,451) (1,444)
-------- --------
Total revenues $ 39,388 $ 37,888
======== ========
SIX MONTHS ENDED
(IN THOUSANDS) 03/31/03 03/31/02
-------- --------
Revenues:
United States $ 49,462 $ 52,432
Other Americas 5,303 3,778
Intercompany 3,150 4,817
-------- --------
Subtotal $ 57,915 $ 61,027
Europe/Middle East and Africa 22,191 22,977
Asia/Pacific 6,320 5,177
Intercompany (3,150) (4,817)
-------- --------
Total revenues $ 83,276 $ 84,364
======== ========
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.
F. GOODWILL AND OTHER INTANGIBLE ASSETS
In July 2001, the Financial Accounting Standards Board ("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.
10
142 becoming effective for the Company commencing with its 2003 fiscal year. In
the quarter ended March 31, 2003, the Company completed its transitional
impairment test and there were no impairments recognized.
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 and six months ended March 31, 2002.
FOR THE THREE FOR THE SIX
MONTHS ENDED MONTHS ENDED
MARCH 31, 2002 MARCH 31, 2002
-------------- --------------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
Net loss, as reported $ (4,830) $(6,755)
Add back: impact of goodwill amortization, net of tax benefit 1,978 4,022
Adjusted net income $ (2,852) $(2,733)
Net loss per share, basic and diluted, as reported $ (0.21) $ (0.30)
Add back: impact of goodwill amortization, net of taxes $ 0.09 $ 0.18
Adjusted net loss per share, basic and diluted $ (0.12) $ (0.12)
Intangible assets as of March 31, 2003 and September 30, 2002 consist of the
following:
MARCH 31, SEPTEMBER 30,
(IN THOUSANDS) 2003 2002
-------- --------
Goodwill $ 77,853 $ 78,013
Accumulated amortization (31,643) (31,643)
-------- --------
Sub-total Goodwill $ 46,210 $ 46,370
-------- --------
Purchased technology $ 15,744 $ 15,744
Accumulated amortization (7,582) (5,894)
-------- --------
Sub-total Purchased technology $ 8,162 $ 9,850
-------- --------
Other intangibles $ 3,009 $ 3,932
Accumulated amortization (1,353) (1,786)
-------- --------
Sub-total other intangibles $ 1,656 $ 2,146
======== ========
Other intangibles consist of customer contracts, backlog, customer lists and
non-compete agreements.
Amortization expense of intangible assets was $1.1 million and $3.6 million for
the three months ended March 31, 2003 and March 31, 2002, respectively and $2.2
million and $7.5 million for the six months ended March 31, 2003 and March 31,
2002, respectively. The 2002 amounts
11
included amortization of goodwill. As of March 31, 2003, remaining amortization
expense on existing intangibles for the next five years is as follows:
(IN THOUSANDS)
2003 (remaining 6 months) $ 2,118
2004 3,024
2005 2,240
2006 1,383
2007 477
-------
Total $ 9,242
-------
In the quarter ended March 31, 2003, $160 thousand of goodwill was disposed of
as a result of the sale of assets of INTERMAT, Inc. The change in the carrying
amount of goodwill as of March 31, 2003 is as follows:
(in thousands)
Balance as of October 1, 2002 $46,370
Goodwill acquired during year --
Impairment losses --
Goodwill disposed of related to sale of
business unit (160)
-------
Balance as of March 31, 2003 $46,210
=======
G. SALE OF ASSETS
Sale of Assets of Catalog Services Operation
On January 17, 2003, 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. 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.
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 gain recorded on the
sale of these assets was $446 thousand and is included in other income. The fair
value of net assets sold and liabilities assumed was $554 thousand. For purposes
of calculating
12
the gain on the sale, $1 million of promissory note receivable, due and payable
on June 30, 2006, has not been valued due to uncertainty of collection and the
stock purchase warrants were not valued due to the limited operating history of
the buyer.
H. GUARANTOR ARRANGEMENTS
In November 2002, the FASB issued Financial Accounting Standards Board
Interpretation No. 45, "Guarantor's Accounting and Disclosure Requirements for
Guarantees, Including Indirect Guarantees of Indebtedness of Others, an
interpretation of FASB Statements No. 5, 57, and 107 and rescission of FASB
Interpretation No. 34 (FIN 45). FIN 45 requires that a guarantor recognize, at
the inception of a guarantee, a liability for the fair value of the obligation
undertaken by issuing the guarantee. FIN 45 also requires additional disclosures
to be made by a guarantor in its interim and annual financial statements about
its obligations under certain guarantees it has issued. The accounting
requirements for the initial recognition of guarantees are applicable on a
prospective basis for guarantees issued or modified after December 31, 2002. The
disclosure requirements are effective for all guarantees outstanding, regardless
of when they were issued or modified, during the second quarter of fiscal 2003.
The adoption of FIN 45 did not have a material effect on our consolidated
financial statements. The following is a summary of our agreements that we have
determined are within the scope of FIN 45.
On January 17, 2003, the Company sold the assets that had been used in the
industrial data normalization services operations of its wholly owned subsidiary
INTERMAT, Inc. Prior to the sale, the Company had guaranteed the obligations of
its subsidiary under the office lease of the subsidiary's principal place of
business. This guaranty remains in full force and effect following the sale.
The maximum potential amount due under this guaranty is $1,008,000. In
accordance with the terms of the sale, the buyer has assumed primary liability
under the lease and is obligated to indemnify the Company against all
obligations arising under the lease. Based on the Company's evaluation of the
buyer's ability to make the payments due under this lease, the Company believes
that the estimated fair value of this guaranty is minimal. Accordingly, we have
no liabilities recorded for this guaranty as of March 31, 2003.
We warrant that our software products will perform substantially in accordance
with the product specifications as contained in the associated end-user guide
which is provided with the products, for a period of ninety days from initial
delivery of the products to the customer. Our sole obligation under this
warranty is to use reasonable efforts to correct a verified problem that is
brought to our attention during the warranty period, or if we are unable to
provide a correction we are obligated to accept the return of the product and
refund the license fee paid. We warrant that our professional services will be
provided in accordance with good professional practice, and that any custom
software developed by our services organization will perform substantially in
accordance with its approved specifications, for a period of thirty days from
initial delivery of the services to the customer. Our sole obligation under
this warranty is to use reasonable efforts to correct a verified problem that is
brought to our attention during the warranty period, or if we are unable to
provide a correction we are obligated to accept the return of the deliverables
and refund the fee paid for the services. If necessary, we would provide for
the estimated cost of product and services warranties based on specific warranty
claims and claim history. However, we have never incurred significant expense
under our product or services warranties, our liability for breach of warranty
is limited to the amount of the license or services fees actually paid, and we
maintain insurance covering such claims in an amount sufficient to cover a
refund of the license or services fees paid by any particular customer during
the last 12 months. As a result, we believe the estimated fair value of these
warranty obligations is minimal. Accordingly, we have no liabilities recorded
for these warranty obligations as of March 31, 2003.
Under our standard end-user license agreement, we agree to indemnify our
customers against infringement claims that may be brought by third parties
asserting that our products infringe on certain intellectual property rights.
In our services agreements with customers, we will also as a matter of standard
practice agree to indemnify customers (a) against claims that may be brought by
third parties asserting that the results of our services infringe on certain
intellectual property rights, (b) against damages caused by our breach of
certain confidentiality provisions in the contract, and (c) against damages to
personal property, and death, caused by our services personnel while on-site at
customer premises. These indemnification provisions are usually based on our
standard contractual terms. All such provisions, whether based on our standard
contracts or negotiated with a given customer, are entered into in the normal
course of business based on an assessment that the risk of loss is remote. The
terms of the indemnifications vary in duration and nature, and our obligations
to indemnify are frequently unlimited as to amount. There have been no demands
for indemnity, and the contingencies triggering the obligation to indemnify have
not occurred and are not expected to occur. The Company maintains insurance
that covers such indemnification obligations, and the amount of coverage that we
maintain is sufficient to cover a refund of the services fees received from any
particular customer during the last 12 months. Historically, the Company has
not made any material payments pursuant to any such indemnity obligations.
Accordingly, we have no liabilities recorded for any such indemnity obligations
as of March 31, 2003.
When as part of an acquisition we acquire a company, we assume the liability for
certain events or occurrences that took place prior to the date of acquisition.
The maximum potential amount of future payments we could be required to make for
such obligations is undeterminable at this time. All of these obligations were
grandfathered under the provisions of FIN No. 45 as they were in effect prior to
December 31, 2002. Accordingly, we have no liabilities recorded for the
assumption of any such liabilities as of March 31, 2003.
Pursuant to the Company's Articles of Organization, the Company is obligated to
indemnify its directors, officers and other individuals serving at the request
of the Company as a director or officer or in a similar capacity in another
entity to the fullest extent authorized under Massachusetts Business Corporation
Law. The Company maintains Directors and Officers insurance that covers these
indemnification obligations, up to the dollar amount of coverage maintained.
Since these indemnification obligations are generally not subject to limitation
with respect to duration or amount, the Company does not believe that it is
possible to determine the maximum potential amount due under these
indemnifications. All of these indemnification agreements were grandfathered
under the provisions of FIN No. 45 as they were in effect prior to December 31,
2002. Accordingly, we have no liabilities recorded for any such agreements as of
March 31, 2003.
I. COMMON STOCK
On January 27, 2003, 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 administration expenses
over the vesting period.
J. ACCOUNTING PRONOUNCEMENTS
In June 2002, the Financial Accounting Standard Board ("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.
13
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 liabilities
are recorded in the provision for income taxes. The Company continually assesses
the
14
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 our financial projections change and
it becomes more likely than not 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 March 31, 2003 is $11.2 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 March
31, 2003 is $2.1 million.
OVERVIEW
MRO Software is a leading global provider of strategic asset management software
and related services. 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 software products and services allow our customers to
manage the complete lifecycle of their strategic assets, including: planning,
procurement, deployment, tracking, maintenance and retirement. Our strategic
asset management software products and services 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 the asset-centric procurement capabilities of our software products.
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.
15
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 service
offerings, creating an asset-centric procurement solution that would complement
our strategic asset management software products (MAXIMO and MAXIMO
MainControl).
At the beginning of fiscal 2003, the Strategic MRO offerings were renamed
strategic asset management and consist of the MAXIMO and MAXIMO MainControl
products. Our Online Commerce Services (OCS) enable the asset-centric
procurement capabilities of our software products. Enterprise catalog management
services were offered up until January 17, 2003 (see Intermat, Inc. sale in the
following paragraph). The Company continues to report in one operating segment
and 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 and recorded a gain of $446 thousand (recorded
as other income). 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 Six Six
Months Months Months Months
Ended Change Ended Ended Change Ended
(in thousands) 03/31/03 % 03/31/02 03/31/03 % 03/31/02
-------- ------ -------- -------- ------ --------
Software licenses $ 7,652 (2%) $ 7,777 $20,337 (6%) $21,602
Percentage of total revenues 19% 21% 24% 26%
Support and services $31,736 5% $30,111 $62,939 0% $62,762
Percentage of total revenues 81% 79% 76% 74%
Total revenues $39,388 4% $37,888 $83,276 (1%) $84,364
The Company's revenues are derived primarily from two sources: (i) software
licenses, and (ii) fees for support and services.
Software license revenues decreased 2% to $7.6 million from $7.7 million for the
three months ended March 31, 2003 and 2002, respectively and 6% to $20.3 million
from $21.6 million for the six months ended March 31, 2003 and 2002,
respectively. The decreases were mainly attributable to decreases in MAXIMO
software license revenues, which decreased 9% to $6.9 million from $7.6 million
for the three months ended March 31, 2003 and 2002, respectively and 8% to $19.5
million from $21.1 million for the six months ended March 31, 2003 and 2002,
16
respectively. The Company attributes these decreases to the continued difficult
IT spending environment and adverse economic conditions among our customers and
in the general economy, as a result of which some of our customers are deferring
or canceling their IT projects. The Company is also experiencing longer sales
cycles. The Company recognized $719 thousand in software license revenues
related to its IT asset management product (MAXIMO MainControl) for the three
and six months ended March 31, 2003. The Company purchased the MAXIMO
MainControl product in June 2002. In the quarter ended December 31, 2002, the
Company 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, with the expectation that this reorganization will improve MAXIMO
MainControl sales.
Support revenues increased 24% to $16.3 million from $13.1 million for the three
months ended March 31, 2003 and 2002, respectively and increased 23% to $31.9
million from $25.9 million for the six months ended March 31, 2003 and 2002,
respectively. Support revenues have increased as a result of a cumulative
increase in the number of MAXIMO customers, the addition of contracts assumed
from the ITAM business and a strong renewal rate (98%) for maintenance
contracts. MAXIMO support revenues increased 17% to $15.2 million from $13.0
million for the three months ended March 31, 2003 and 2002, respectively and
increased 16% to $30.0 million from $25.9 million for the six months ended March
31, 2003 and 2002, respectively. MAXIMO MainControl support revenues, primarily
attributable to contracts assumed in connection with the June 2002 acquisition
of MainControl, Inc., were $1.1 million and $1.8 million for the three and six
months ended March 31, 2003.
Service revenues decreased 9% to $15.4 million from $17.0 million for the three
months ended March 31, 2003 and 2002, respectively and 16% to $31.1 million from
$36.9 million for the six months ended March 31, 2003 and 2002, respectively.
MAXIMO service revenues decreased 11% to $13.5 million from $15.1 million for
the three months ended March 31, 2003 and 2002, respectively and 14% to $26.9
million from $31.4 million for the six months ended March 31, 2003 and 2002,
respectively. The decreases are 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. In addition, the Company has been subject to increased
competition from independent consulting firms, who implement MAXIMO with other
enterprise-wide solutions. MAXIMO MainControl service revenues were $1.1 million
and $1.6 million for the three and six months ended March 31, 2003. OCS revenues
decreased 15% to $804 thousand from $941 thousand for the three months ended
March 31, 2003 and 2002, respectively and 21% to $1.5 million from $1.9 million
for the six months ended March 31, 2003 and 2002, respectively. The decline in
OCS revenues is attributable to a decrease in renewal contracts. Enterprise
Catalog Management services revenues decreased 100% to $0 from $953 thousand for
the three months ended March 31, 2003 and 2002, respectively and 72% to $1.0
million from $3.6 million for the six months ended March 31, 2003 and 2002,
respectively. The decline is due to the sale of INTERMAT, Inc. in January 2003.
Total strategic asset management revenues were $38.6 million and $35.7 million
for the three months ended March 31, 2003 and 2002, respectively and $80.6
million and $78.4 million for the six months ended March 31, 2003 and 2002,
17
respectively. MAXIMO revenues represented 91% and 94% of total revenues for the
three months ended March 31, 2003 and 2002, respectively and 92% and 93% of
total revenues for the six months ended March 31, 2003 and 2002, respectively.
MAXIMO MainControl revenues were $2.9 million and $4.2 million for the three and
six months ended March 31, 2003. OCS revenues decreased 15% to $804 thousand
from $941 thousand for the three months ended March 31, 2003 and 2002,
respectively and 21% to $1.5 million from $1.9 million for the six months ended
March 31, 2003 and 2002, respectively. The Company will maintain its current
infrastructure and development activities in OCS commensurate with the level of
sales, while simultaneously controlling operating and administrative expenses.
Enterprise Catalog Management revenues decreased 100% to $0 from $1.2 million
for the three months ended March 31, 2003 and 2002, respectively and 71% to $1.2
million from $4.1 million for the six month ended March 31, 2003 and 2002,
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.
COST OF REVENUES
Three Three Six Six
Months Months Months Months
Ended Change Ended Ended Change Ended
(in thousands) 03/31/03 % 03/31/02 03/31/03 % 03/31/02
-------- ------ -------- -------- ------ --------
Cost of software licenses $ 1,355 (3%) $ 1,403 $ 3,205 (5%) $ 3,360
Percentage of software license 18% 18% 16% 16%
Cost of support and services $14,513 (7%) $15,685 $29,441 (10%) $32,631
Percentage of support and services 46% 52% 47% 52%
Total cost of revenues
Percentage of total revenues $15,868 (7%) $17,088 $32,646 (9%) $35,991
40% 45% 39% 43%
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 were flat at $1.4 million for the three months ended
March 31, 2003 and 2002, respectively and decreased 5% to $3.2 million from $3.4
million for the six months ended March 31, 2003 and 2002, respectively. Cost of
software licenses, as a percentage of software licenses was 18% for the three
months ended March 31, 2003 and 2002, respectively and 16% for the six months
ended March 31, 2003 and 2002, respectively. The primary components of cost of
software licenses are royalties and software purchased for resale and
amortization of acquired technology. In the three months ended March 31, 2003 as
compared to the three months ended March 31, 2002, software purchased for resale
related to our MAXIMO Mobile Suite product decreased $400 thousand due to
decrease in demand and amortization of acquired technology increased $300
thousand. The increase in amortization is attributable to technology acquired
from MainControl, Inc. In the six months ended March 31, 2003 as compared to
March 31, 2002, software purchased for resale related to our MAXIMO Mobile Suite
product decreased $480 thousand due to decrease in demand and amortization of
acquired technology increased $300 thousand. The increase in amortization is
attributable to technology acquired from MainControl, Inc. Amortization of
acquired technology was $844 thousand and $557
18
thousand for the three months ended March 31, 2003 and 2002, respectively and
$1.7 million and $1.4 million for the six months ended March 31, 2003 and 2002,
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 29% to $2.7 million from $2.1 million for the three
months ended March 31, 2003 and 2002, respectively and 30% to $5.2 million from
$4.0 million for the six months ended March 31, 2003 and 2002, respectively. The
increase in cost of support revenues was primarily attributable to an increase
in personnel. Cost of support revenues, as a percentage of total support
revenues was 16% for the three months ended March 31, 2003 and 2002,
respectively and 16% for the six months ended March 31, 2003 and 2002,
respectively.
Cost of service revenues decreased 13% to $11.9 million from $13.6 million for
the three months ended March 31, 2003 and 2002, respectively and 15% to $24.2
million from $28.6 million for the six months ended March 31, 2003 and 2002,
respectively. The decrease in the cost of service revenues for the three months
ended March 31, 2003 as compared to the three months ended March 31, 2002 was
attributable to a decrease of $1.8 million attributable to the reduction in
personnel and related benefits and facilities costs related to the sale of
INTERMAT, Inc. in January 2003. The decrease in the cost of service revenues for
the six months ended March 31, 2003 as compared to the six months ended March
31, 2002 was primarily attributable to a decrease of $2.9 million attributable
to the reduction in personnel and related benefits and facilities costs related
to the sale of INTERMAT, Inc. in January 2003 and a $1.1 million decrease for
the costs of third party consultants implementing the Company's products due to
reduced utilization of external consultants. Cost of service revenues, as a
percentage of total service revenues was 77% and 80% for the three months ended
March 31, 2003 and 2002, respectively and 78% for the six months ended March 31,
2003 and 2002, respectively. Improveed margins are primarily the result of the
sale of INTERMAT, Inc., a lower-margin business.
OPERATING EXPENSES
Three Three Six Six
Months Months Months Months
Ended Change Ended Ended Change Ended
(in thousands) 03/31/03 % 03/31/02 03/31/03 % 03/31/02
-------- ------ -------- -------- ------ --------
Sales and marketing $14,292 4% $13,695 $29,691 0% $29,711
Percentage of total revenues 36% 36% 36% 35%
Product development $ 6,388 (2%) $ 6,494 $13,144 0% $13,161
Percentage of total revenues 16% 17% 16% 16%
General and administrative $ 3,708 (20%) $ 4,619 $ 8,354 (11%) $ 9,347
Percentage of total revenues 9% 12% 10% 11%
Amortization of goodwill and other intangibles
Percentage of total revenues $ 230 (92%) $ 3,052 $ 478 (92%) $ 6,105
1% 8% 1% 7%
19
Sales and marketing expenses increased 4% to $14.3 million from $13.7 million
for the three months ended March 31, 2003 and 2002, respectively and remained
flat at $29.7 million for the six months ended March 31, 2003 compared to the
six months ended March 31, 2002. The increase for the three months ended March
31, 2003 compared to the three months ended March 31, 2002 is primarily
attributable to an increase of $850 thousand in personnel and related benefits.
Offsetting this increase is a $350 thousand decrease in marketing and
advertising expenditures and a $100 thousand reduction in travel expenses. In
the six months ended March 31, 2003 compared to the six months ended March 31,
2002, increases in personnel and related benefits of $1.0 million were offset by
decreases in marketing and advertising expenditures of $350 thousand, decreases
in travel of $150 thousand, decreases in sales commissions of $350 thousand and
an overall decrease in discretionary spending.
Product development expenses decreased 2% to $6.4 million from $6.5 million for
the three months ended March 31, 2003 and 2002, respectively and remained flat
at $13.2 million for the six months ended March 31, 2003 as compared to the six
months ended March 31, 2002. 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 20% to $3.7 million from $4.6
million for the three months ended March 31, 2003 and 2002, respectively and 10%
to $8.4 million from $9.3 million for the six months ended March 31, 2003 and
2002, respectively. The decrease for the three and six months ended March 31,
2003 compared to the three and six months ended March 31, 2002 is due to
decreases in outside professional services.
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 and $5.9 million for the three and six months ended March 31, 2002.
Other intangible amortization expense was $230 thousand and $104 thousand for
the three months ended March 31, 2003 and 2002, respectively and $478 thousand
and $208 thousand for the six months ended March 31, 2002 and 2002,
respectively. The increases for the three and six months ended March 31, 2003
are due to amortization of intangibles acquired from MainControl, Inc.
20
NON-OPERATING EXPENSES
Three Three Six Six
Months Months Months Months
Ended Change Ended Ended Change Ended
(in thousands) 03/31/03 % 03/31/02 03/31/03 % 03/31/02
-------- ------ -------- -------- ------ --------
Interest income $181 (31%) $261 $391 (27%) $533
Other income/(expense), net $643 806% $(71) $981 1,226% $(74)
Interest income is attributable to interest earned on marketable securities and
cash equivalents. The Company is researching conservative investment strategies
in order to improve its interest yields. The change in other income/(expense)
was due to fluctuations in foreign currency exchange rates and the gain on the
sale of INTERMAT Inc.
Included in other income for the three months ended March 31, 2003 is a gain of
$446 thousand for the sale of the assets related to INTERMAT, Inc. 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 fair value of net assets sold and liabilities
assumed was $554 thousand. For purposes of calculating the gain on the sale, the
$1 million of promissory note receivable, due and payable on June 30, 2006, has
not been valued due to uncertainty of collection and the stock purchase warrants
were not valued due to the limited operating history of the buyer.
INCOME TAXES
The Company's effective tax rate for the six months ended March 31, 2003 was
35%. The effective tax rate for the six months ended March 31, 2002 was a
benefit of 29%. The difference between the effective tax rate and the federal
statutory tax rate of 35% in 2003 due to the non-deductible nature of certain
intangible and goodwill costs.
LIQUIDITY AND CAPITAL RESOURCES
As of March 31, 2003, the Company had cash and cash equivalents of $72.8
million, marketable securities of $1.5 million, and working capital of $64.1
million.
Cash provided by operating activities was $5.9 million for the six months ended
March 31, 2003 was primarily attributable to the collection of accounts
receivable, offset by payments of accounts payable and accrued compensation.
21
Cash used in investing activities was $2.4 million for the six months ended
March 31, 2003 and was used in the acquisition of fixed assets primarily
computer equipment, and the purchase of marketable securities.
Cash provided by financing activities was $946 thousand for the six months ended
March 31, 2003 and represents proceeds from the Company's Employee Stock
Purchase Plan.
As of March 31, 2003, 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.
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 together with its current
cash and marketable securities will be sufficient to meet its working capital
and capital expenditure requirements through at least March 31, 2004. 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, include those which
might impact the Company's business and operations generally, as described below
under the heading "Factors Affecting Future Performance".
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 prove
to be 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.
22
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
difficult conditions. 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 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 and 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 have 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
our MAXIMO offering, 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 materially and adversely
impacted.
OUR EFFORTS TO REACH INTO NEW MARKETS WITH MAXIMO AND WITH NEW PRODUCTS MAY NOT
BE SUCCESSFUL.
Given the maturity and saturation of our traditional asset maintenance market,
in order to maintain revenues at their current levels and to grow our business,
we are attempting to broaden our product offerings and find additional sources
of revenues, in two ways. First, we are tailoring and extending MAXIMO to meet
the needs of specific industries in which the Company has a presence, such as
the nuclear, transportation, power transportation and distribution, and other
industries. We refer to these industry-specific MAXIMO offerings as "Industry
Solutions." "Second, we are attempting, through the MainControl acquisition and
internal development, to deliver products that address markets that are new to
the Company, such as IT asset management, and consolidated service desk. There
can be no assurance that we will be able to develop and market these Industry
Solutions or new products on time, with acceptable quality and in a manner which
meets the requirements of customers in these industries and markets. If our
Industry Solutions and newly acquired or developed products do not gain market
acceptance and generate revenues from new industries or markets, we may not able
to grow our business or maintain revenues at current levels, and our revenues,
margins, results of operation and financial condition may be materially and
adversely impacted.
IF WE ARE UNABLE TO KEEP PACE WITH THE RAPID CHANGES IN TECHNOLOGY AND CUSTOMER
DEMAND THAT CHARACTERIZE OUR INDUSTRY, OUR COMPETITIVE POSITION COULD BE
IMPAIRED.
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
could have a material and adverse impact on ongoing sales of existing products,
and on the Company's business and our results of operations.
23
WE DEPEND SUBSTANTIALLY ON OUR MAXIMO PRODUCT, AND ANY DEVELOPMENTS THAT CAUSE
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. New Internet technologies, standards and applications are
developing rapidly and are continuously being introduced, competing for
acceptance in the market, and changing, and we must accurately anticipate
technology trends and make the right choices in order to keep MAXIMO 5 at the
forefront in its market from a technological perspective. 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, poor technology decisions 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 ("ITAM")
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
effect on the Company's ability to market its MAXIMO MainControl product. If
24
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 in the ITAM market. During the bankruptcy process,
Peregrine may auction off its IT asset-related business, a Trustee could be
appointed to take control of Peregrine's assets and business or Peregrine could
cease operations and be liquidated, and we cannot predict what might happen, or
what effect these or possible alternative outcomes of the bankruptcy process
might have on the ITAM market or the Company's ability to successfully sell its
MAXIMO MainControl product and compete in this market. 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 a material and 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 has experienced a significant
downturn, and demand for these services has been sharply reduced. There is no
clear indication of whether or when the market for services associated with
business-to-business e-Commerce may re-emerge, or the direction that it may
take. We are unlikely to see any growth in revenues from our OCS solutions, and
our existing OCS revenues may be reduced further if this market continues to
decline.
OUR SALES EFFORTS DEPEND IN PART ON STRATEGIC RELATIONSHIPS WITH OTHER COMPANIES
We have entered into strategic relationships with various larger companies, such
as IBM Corporation, Deloitte Consulting L.P., Rockwell Automation, A.T. Kearney,
Inc., and others. In order to generate 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 investments. In addition, we have agreed to develop
25
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 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 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 acquired MainControl, Inc., which developed 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 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
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 might not
26
gain the cross-market sales opportunities and synergies that we hoped for in
the MainControl acquisition. Finally, we have announced our intention to
integrate the MAXIMO MainControl product into our MAXIMO 5 platform, utilizing
the same leading edge Internet-centric architecture and technologies, in order
to provide a common platform from which a customer's critical assets may be
managed. It is possible that prospective customers may prefer to wait until this
integrated solution is available before purchasing MAXIMO MainControl, and it is
also possible that during the interim period while the integrated version is
under development such customers may decide to purchase a competing product; in
either case revenues from MAXIMO MainControl would be deferred, or lost
entirely, and there could be a material and adverse impact on our business and
results of operations.
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 aquire them 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 to us 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 our now developing or offering
systems that are web-architected. 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.
27
A significant portion of our total revenues and expenses are derived and
incurred 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.
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 there 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.
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
28
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 and adverse effect on our results of operations or financial condition.
CHANGES IN REGULATIONS OR CRITICAL ACCOUNTING POLICIES COULD MATERIALLY AND
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 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 two
United States patents (and other corresponding patents or 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,
29
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
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.
30
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 March 31, 2003, the Company held $74.3 million in cash equivalents and
marketable securities consisting of taxable and tax-exempt municipal securities.
Cash equivalents are classified as available for sale and valued at amortized
cost, which approximates fair market value. A hypothetical 10 percent increase
in interest rates would not have a material impact on the fair market value of
these instruments due to their short maturity.
The Company develops its products in the United States and markets them in North
America, Europe, Middle East and Africa, Australia, Asia Pacific and Latin
America. As a result, our financial results could be affected by factors such as
changes in 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 require us to modify our disclosure controls and procedures.
31
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
The Company held the Annual Meeting of Stockholders on March 4, 2003. At the
Annual Meeting, the stockholders of the Company voted to approve the following
actions by the following votes:
1. To elect Robert L. Daniels and John A. McMullen as Class I Directors of the
Company to serve until the 2006 Annual Meeting.
No. of Shares/Votes
For Authority Withheld
--- ------------------
Robert L. Daniels 12,919,520 4,373,312
John A. McMullen 16,778,342 514,490
The names of each other director whose term of office as a director continued
after the meeting are: Norman E. Drapeau, Jr., Richard P. Fishman, Stephen B.
Sayre and Alan L. Stanzler.
2. To ratify the appointment by the Board of Directors of PricewaterhouseCoopers
LLP as the Company's independent public accountants for the 2003 fiscal year.
No. of Shares/Votes
-------------------
For 16,844,275
Against 440,118
Abstain 8,439
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.
32
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)
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
33
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
On January 31, 2003, the Company filed a current Report on Form 8-K,
disclosing in Item 2, its sale of assets associated with the
industrial normalization services operations of its wholly owned
subsidiary INTERMAT, Inc.
On March 28, 2003 the Company filed a Current Report on Form 8-KA,
amending its Form 8-K filed on January 31, 2003 related to its sale
of assets associated with the industrial normalization services
operations of its wholly owned subsidiary INTERMAT, Inc. to include
financial statements.
On April 2, 2003, the Company filed a Current Report on Form 8-K,
disclosing its preliminary results for the quarter ended March 31,
2003.
On April 18, 2003, the Company filed a Current Report on Form 8-K,
disclosing its results of operations for the quarter ended March 31,
2003.
34
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: May 15, 2003 By: /s/ Peter J. Rice
------------ -----------------
Peter J. Rice
Executive Vice President -
Finance and Administration,
Chief Financial Officer and
Treasurer
(Principal Financial Officer)
35
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.
Date: May 15, 2003
By: /s/ Norman E. Drapeau, Jr.
- ---------------------------------
Norman E. Drapeau, Jr.
President and Chief Executive Officer
(Principal Executive Officer)
36
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.
Date: May 15, 2003
By: /s/ Peter J. Rice
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Peter J. Rice
Chief Financial Officer and Treasurer
(Principal Financial and Accounting Officer)