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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
FOR THE FISCAL YEAR ENDED SEPTEMBER 30, 2003
(mark one)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
AND EXCHANGE ACT OF 1934
For the transition period from _______________ to __________________
Commission File Number 0-23852
MRO SOFTWARE, INC.
(Exact name of registrant as specified in its charter)
MASSACHUSETTS 04-2448516
(State or other jurisdiction of (I.R.S. employer
incorporation or organization) identification number)
100 CROSBY DRIVE, BEDFORD, MASSACHUSETTS 01730
(Address of principal executive offices, including zip code)
(781) 280-2000
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $.01 par value
----------------------------
(Title of Class)
----------------
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes [X] No
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to the Form 10-K [ ]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Exchange Act Rule 12b-2). Yes [X] No
The aggregate market value of the voting and non-voting common equity held by
non-affiliates computed by reference to the last sale price on March 31, 2003
was $116,151,579.
Number of shares outstanding of the Registrant's common stock as of the latest
practicable date: 24,720,247 shares of common stock, $.01 par value per share,
as of December 19, 2003.
DOCUMENT INCORPORATED BY REFERENCE
Certain portions of the Company's Definitive Proxy Statement for its 2004 Annual
Meeting of Stockholders are incorporated by reference into Part III of this
Annual Report on Form 10-K.
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EXPLANATORY NOTE
This Annual Report on Form 10-K, as well as documents incorporated herein by
reference, may contain forward-looking statements (within the meaning of section
27A of the Securities Act of 1933, as amended, and section 21E of the Securities
Exchange Act of 1934, as amended). The following and similar expressions
identify forward-looking statements: "expects", "anticipates", and "estimates".
Forward-looking statements include, without limitation, statements related to:
the Company's plans, objectives, expectations and intentions; the timing of,
availability and functionality of products under development or recently
introduced; and market and general economic conditions. Important factors that
could cause actual results to differ materially from those suggested by the
forward-looking statements for various reasons, include those discussed under
the heading "Factors Affecting Future Performance" below. These forward-looking
statements speak only as of the date of this Annual Report, and the Company
disclaims any obligation to update such forward-looking statements as a result
of any change in circumstances or otherwise.
MRO Software, Inc., incorporated in May 1968, under the laws of the Commonwealth
of Massachusetts, is hereinafter sometimes referred to as the "Company", "MROI",
"our", "us", or "we".
MAXIMO(R) and MainControl(R), are registered trademarks of MROI. MRO
Software(TM), Make It All Count(TM) MAXIMO Enterprise(TM), MAXIMO Extended
Enterprise(TM), MAXIMO Buyer(TM), MAXIMO Scheduler(TM), MAXIMO Workflow(TM),
MAXIMO Enterprise Adapter(TM), MAXIMO Illustrated Parts Catalog, Supplier
E-Commerce Adapter(TM), MRO.COM(TM), and MRO Operations Center(SM) are
trademarks and service marks of MROI. IBM(R), WebSphere, AIX and DB2 are
trademarks of IBM Corporation, or its subsidiaries. Microsoft(R) is a registered
trademark of Microsoft Corporation, Oracle(R) is a registered trademark of
Oracle Corporation, and Java(R) is a registered trademark of Sun Microsystems
Corporation. Other company and product names may be trademarks of the respective
companies.
[C] 2003 MRO Software, Inc. All rights reserved.
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PART I
ITEM 1. BUSINESS
MRO Software is a leading global provider of strategic asset management
solutions, software and related services. Strategic asset management is the
management and optimization of the business processes required to keep our
customers' critical assets productive. Critical assets are 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. 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.
MAXIMO, the Company's flagship product targeting the Enterprise Asset Management
("EAM") market, was first released in 1991. MAXIMO enables customers to manage
the Maintenance, Repair and Operations ("MRO") of their significant assets.
Businesses, government agencies and other organizations use MAXIMO across their
enterprises to assist in the management of their high-value capital assets such
as plants, facilities and production equipment to cut MRO inventories and supply
chain costs, control maintenance expenses, reduce downtime, and more effectively
deploy assets, personnel and other resources. MAXIMO delivers robust
functionality, drawing upon the Company's established track record as a provider
of large-scale applications critical to the operations of major industrial
companies.
In fiscal 2001, the Company released MAXIMO 5. MAXIMO 5 is based on pure
Internet component-based technology that lowers the total cost of ownership for
enterprise application systems and allows customers to support their global
enterprise or single sites via a Web browser. This architecture significantly
streamlines operations by reducing the time and cost associated with deployment,
support and training.
Also, in fiscal 2001, the Company changed its name to MRO Software, Inc. and its
NASDAQ trading symbol to "MROI".
In fiscal 2002, the Company acquired MainControl, Inc. and began to market and
sell the MainControl product, which enables customers to manage their
information technology (IT) assets, such as hardware and software used in their
desktop, telecommunications, networking and computing infrastructure. Targeting
the IT asset management (ITAM) market, the MainControl Product (re-branded as
MAXIMO MainControl) enables our customers to manage their IT assets through
procurement, contracts, compliance, inventory, finance, service management,
business continuity and retirement, while enabling information to be correlated
and shared across discrete functional areas of an organization.
Our solutions for EAM (MAXIMO) and ITAM (MAXIMO MainControl) markets, combine to
address the market we define as Strategic Asset Management (SAM).
In fiscal 2003, the Company has focused on enhancing and adding functionality to
its MAXIMO and MAXIMO MainControl products in its endeavor to be the premier
vendor for strategic asset management solutions. We have also focused on
developing Industry Solutions that meet the unique needs of different vertical
industries, consisting of pre-configured, industry-specific, focused
applications delivered on the MAXIMO 5 technology platform.
The Company reports all its revenue in one reportable business segment, the
strategic asset management segment.
BUSINESS STRATEGY
Our objective is to be the leading provider of strategic asset management
solutions. We have focused on building our business strategies around key
strengths that we believe will drive future success and allow the Company to
continue to be a stable, profitable and growth oriented software company. Key
elements of our strategy include the following:
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INDUSTRY SOLUTIONS. We believe that our extensive expertise in asset
management solutions for production, facilities, fleet, and IT, --
enhanced by our vertical domain knowledge in many industries will
distinguish us from our competitors
EXPAND SOLUTIONS OFFERED TO OUR CUSTOMER BASE. We believe that our
large and diverse customer base provides a stable foundation on which
to grow the business. We intend to strengthen our relationship with our
existing customers, while actively pursuing new customers both
domestically and internationally. The Company also recognizes the
opportunity to provide ITAM solutions to its existing EAM customer base
and has begun to execute on this strategy.
MAINTAIN RESEARCH AND DEVELOPMENT INVESTMENT. We believe that our
products have a significant architectural advantage that offers both a
unique solution to our users and also establishes key differentiation
from competitors in our market. We believe that we must continue to
invest in research and development initiatives in order to further
leverage this architectural advantage into the future.
MANAGE COSTS AND PRESERVE CASH RESERVES. We believe that the strength
of our cash position, absence of long-term debt and recent history of
positive earnings distinguishes us from our competitors. We will
continue to manage costs and preserve cash.
PURSUE STRATEGIC RELATIONSHIPS AND ACQUISITIONS. We will continue to
pursue strategic relationships and alliances that help us to access a
broader set of customers. We may pursue acquisitions of companies that
have technologies or products that are complementary to our products.
PRODUCTS
MAXIMO
MAXIMO is the market-leading solution in the Enterprise Asset Management (EAM)
market. MAXIMO helps companies in asset-intensive industries increase their
return on assets while decreasing their operational costs, including the costs
of transacting with their suppliers. The MAXIMO suite of software products is
used to plan and manage ongoing Maintenance Repair and Operations (MRO) and to
track related labor, parts and costs. Using MAXIMO, customers can prioritize
tasks, assign work based on the availability of necessary parts and labor, and
analyze equipment failures in order to implement appropriate preventive
maintenance measures. MAXIMO is available in English, Brazilian Portuguese,
Dutch, French, German, Italian, Japanese, Korean, Swedish, Latin American
Spanish, and Simplified Chinese. MAXIMO is also localized into additional
non-English languages via our local agents.
MAXIMO FEATURES
MAXIMO is composed of a series of comprehensive capabilities that communicate
with a relational database management system. MAXIMO operates on a variety of
commonly used server hardware platforms and network operating systems and also
uses leading commercial SQL databases, including Oracle and Microsoft SQL
Server. Core application features and functions in MAXIMO include:
ASSET MANAGEMENT. Asset management means identifying, tracking,
locating, maintaining and analyzing physical assets, especially those
that impact the customer's revenue stream. MAXIMO 5 captures critical
asset-related data and makes it easily accessible for analysis,
planning and more informed decision-making.
WORK MANAGEMENT. MAXIMO 5 work management capabilities track all
aspects related to work performed on assets, from initial work request
through work order generation, job completion and recording of actual
results. The ability to track, manage and analyze work requests, labor,
planning and scheduling can help organizations improve productivity.
Work management compares budgets or estimates against actual and
historical work orders.
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MATERIALS MANAGEMENT. MAXIMO 5 materials management capabilities help
generate significant savings by accurately tracking materials and their
usage, allowing reductions in inventory and elimination of unnecessary
spending. MAXIMO 5 provides the capability to consolidate vendor lists,
automate procurement processes, track repairable spares and reduce
inventory levels, which creates greater efficiency and ensures that the
customer has the right parts at the right time.
PURCHASING. MAXIMO 5 purchasing capabilities enable organizations to
plan and consolidate, demand, and streamline purchasing processes and
comply with existing purchasing contracts. MAXIMO purchasing creates
requests for proposals, blanket purchase orders and purchase
agreements, purchase requisitions and purchase orders, records receipt
of parts, analyzes vendor performance and integrates with accounting
applications, including invoice matching and multiple currency
functionality.
ANALYTICS. The ability to analyze data captured in MAXIMO 5 provides
companies with critical knowledge to improve and optimize their
maintenance initiatives across all functional areas. MAXIMO 5 Key
Performance Indicators (KPIs) and Reports make it possible to identify
areas or activities that need improvement. In addition to KPIs, MAXIMO
5 provides a comprehensive set of pre-defined functional and exception
reports that provide detailed information on all customer maintenance
operations.
MAXIMO OPTIONS
A variety of options can be added on to expand the capabilities of MAXIMO,
including the following: MAXIMO Mobile Suite, MAXIMO Project Manager, MAXIMO
Desktop Requisition, MAXIMO Illustrated Parts Catalog, MAXIMO Enterprise
Adapters, MAXIMO e-Commerce Adapters and MAXIMO Workflow.
MAXIMO INDUSTRY SOLUTIONS
The Company seeks to expand its market share in target vertical markets by
offering pre-configured, industry-specific, focused applications for MAXIMO 5.
We are focused on the following industries: public sector, utilities, oil and
gas, nuclear, aviation, transportation, pharmaceuticals, power generation, and
power transmission and distribution.
Each is supported with scalable solutions running on industry-standard
databases, application servers and hardware platforms, complemented by offerings
from key alliance partners with the appropriate domain expertise.
MAXIMO MAINCONTROL
MAXIMO MainControl is a leading solution for the IT Asset Management (ITAM)
market and provides management of IT assets across their entire lifecycle from
planning and procurement to retirement and disposal.
MAXIMO MAINCONTROL FEATURES
MAXIMO MainControl addresses the numerous IT asset management issues facing an
organization, such as:
ASSET DISCOVERY & TRACKING: enables the user with autodiscovery tools
and software usage tracking tools to provide knowledge of where assets
are at all times. MAXIMO MainControl enables users to track history of
asset location, owners, users and configuration changes while tracking
all moves, adds and changes.
CONTRACT MANAGEMENT: enables the user to track and manage contracts and
obligations, from purchase contracts to subscription, lease,
maintenance, software licensing and service contracts.
FINANCIAL MANAGEMENT: supports budget planning with a spreadsheet
import/export facility and allows budget tracking by account, cost
center and cost type to assist with technology procurement.
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PROCUREMENT: provides comprehensive, online management of IT asset
procurement and is able to fully integrate with a wide variety of
procurement systems. Maximo MainControl enables users to select vendors
and equipment from online catalogs, check contract terms, generate
purchase requisitions, approve requests, generate orders and allocate
planned expenses to budget accounts. Users can fulfill orders from
stock or place new orders.
SERVICE MANAGEMENT: manages all requests regarding IT assets and
services, provides a complete history of all activities involved in
problem resolution, planning and change management activities. This
capability also empowers the help desk technician, improves service
levels and increases employee productivity.
COMPLIANCE: ensures software license compliance, tracks and manages all
software installations in the organization. Provides the ability to
establish a software management process to track license terms and to
assist with internal software audits.
BUSINESS CONTINUITY: supports the requirements to integrate and
automate the response and recovery process for technology assets in the
event of a business disruption.
ONLINE COMMERCE SERVICES (OCS)
MRO Software provides solutions to support asset-centric procurement by offering
distributors and manufacturers of industrial and office products the
capabilities to successfully implement or augment their e-Commerce initiatives.
These services give industrial suppliers a fast and simple way to conduct
business over the Internet with users of MAXIMO Buyer or of other procurement
applications. By using these hosted services, companies can immediately
participate in Internet-based commerce and ensure their ability to provide
service to existing customers and new prospects. OCS supports multiple
languages, currencies and tax codes, with 24/7/365 availability.
OCS FEATURES
OCS provides suppliers with a variety of hosted applications including the
ability to accept, process and respond to electronic purchase orders transmitted
from MAXIMO and other popular e-Procurement applications; to manage supplier and
buyer profiles and relationships; and to process e-Commerce transactions. This
service also provides suppliers with the capabilities to host an on-line
searchable electronic catalog, and with the tools for the management,
customization and publishing of electronic catalog content. Our customers have
the ability to provide a Web storefront with comparison tools, shopping cart,
e-Commerce transaction processing and payment processing. OCS also provides
suppliers with the capability to provide real-time pricing and availability to
buyers as well as real-time transaction processing by integrating with the
suppliers' back-end ERP systems.
PRODUCT ARCHITECTURE
MAXIMO 5 components are built on Java technology, specifically the Java 2
Platform, Enterprise Edition ("J2EE"), to take full advantage of today's
enterprise environment. J2EE defines a standard for developing multi-tier
enterprise applications. J2EE simplifies enterprise applications by basing them
on standardized, modular components, by providing a complete set of services to
those components, and by handling many details of application behavior
automatically. MAXIMO 5 is the first asset management solution to be developed
and commercially deployed on a standards-based pure-Internet architecture.
MAXIMO, with its industry-leading, best-of-breed functionality, was designed
with global organizations in mind.
J2EE provides application portability, scalability, interoperability and
security models for Internet applications. For example, it has an extensive
library of routines for Internet protocols like HTTP and FTP. This makes
creating and managing network connections much easier, enabling applications to
open and access objects across the Internet via URLs with the same ease as
accessing a local file system. Also, because HTTP is a request-response protocol
and individual requests are treated independently, Internet applications need a
mechanism for identifying a particular client and the state of any conversation
it is having with that client.
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By providing session management capabilities, the MAXIMO Web servers and
applications servers can easily manage session states for Internet-based
connections.
MAXIMO's use of open standards supports a broad range of server platforms,
network operating systems and communications protocols. These open standards
provide customers with the flexibility to match their computing resources to
their needs, and facilitates tight integration to critical business systems.
These standards also provide the ability to collaborate with virtually any
procurement network, marketplace or on a one-on-one basis with suppliers.
Our asset-centric procurement solutions use an Internet oriented, scaleable
architecture to support a full Web browser-based environment. OCS allows
communications between buyers and suppliers in a real-time manner, based on XML
standards. OCS applications are hosted by the Company at an outsourced hosting
facility.
STANDARDS BASED INTEROPERABILITY
Enterprises today require systems that will collaborate within their enterprise
and with their partners and customers. They require business systems that will
address their business needs efficiently and adapt to changes as their business
needs or environment changes. Our interoperability products simplify and
expedite the implementation of our core product suites. These products are based
upon our extensive experience in providing integration with a number of major
marketplaces and ERP systems such as those offered by SAP, Oracle and
PeopleSoft. Our MAXIMO 5 interoperability framework supports the more common
collaboration patterns found between an asset management system like MAXIMO and
other enterprise business systems. This allows enterprises to focus on their
operational procedures, and provides them with flexibility to choose which
business system to use to manage specific business processes.
SERVICES
CUSTOMER SUPPORT
A high level of customer service and technical support is critical to customer
satisfaction in our industry. Many of the Company's customers implement our
products in complex, large-scale IT environments on which the success of their
organizations depend. The Company believes that its approach to support has been
and will continue to be a significant factor in the market acceptance of its
products.
The Company employs a technical hot-line support staff of 114 employees
operating out of the Company's corporate headquarters in Massachusetts and four
international technical response centers located in the United Kingdom,
Australia, Canada, and Brazil as well as in four satellite support offices in
China, Korea, Mexico and McLean Virginia. Support services are provided on a
seven-day week, 24-hour day basis using our support centers in UK, Australia,
United States (Bedford, MA) and Canada. The Company also provides premium
support via resources dedicated to meeting the needs of our larger
enterprise-wide clients. Premium Support is a fee-based service provided in
addition to the standard support provided to all of our clients.
Subscribers to the Company's annual support contracts are entitled to receive
(i) customer service and technical support by telephone, fax, on-line
via the Internet and electronic media (ii) a newsletter and periodic technical
bulletins, (iii) an invitation to attend the Company's annual user group meeting
and (iv) periodic software updates and software upgrades. Support contracts are
a stable source of recurring revenue.
PROFESSIONAL AND EDUCATIONAL SERVICES
The Company offers services designed to assist customers in meeting the
challenges of successfully implementing the Company's business solutions. The
Company employs a consulting and training staff of 268 employees. The Company's
international distributors also provide services within their geographic
territories.
The Company provides consulting services to assist customers in planning and
carrying out the implementation of the Company's solutions. In some cases,
customers
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install and implement MAXIMO systems and perform any necessary modifications
themselves with only limited assistance from the Company. In other cases,
particularly where an integrated solution is required, the Company provides
comprehensive implementation planning, project management, network
communications and system integration services. The Company also contracts with
third-party consultants as needed in order to augment its services needs.
The Company conducts comprehensive training programs covering Company
applications and concepts for its end-users. Training is offered at the
Company's headquarters in Massachusetts and at regional centers located in
California, Georgia, Virginia, Australia, France, Germany, Italy, Sweden, the
United Kingdom and the Netherlands. The Company also offers on-site training
classes at customer sites upon request. For those customers that look for
alternative forms of training, we also offer computer-based training that
consist of a series of self-paced lessons and Web-based training.
CUSTOMERS
The Company's customers are found in a broad range of vertical industries
including: aviation, facility/property management, discrete and process
manufacturing, public sector, oil and gas, transportation, aviation, utilities,
financial services consumer/retail and professional services. The Company's
products have been installed and are supported in all major markets worldwide.
Local language support is provided in many of these markets.
SALES AND MARKETING
The Company markets its products in the United States through a marketing and
direct sales organization of 116 persons operating out of its Massachusetts
headquarters and sales offices located in California, Colorado, Florida,
Georgia, Illinois, Maryland, Michigan, New Jersey, New York, Texas and Virginia.
In addition, the Company markets its products outside the United States through
a sales force of 102 persons from sales offices in Australia, Belgium, Brazil,
Canada, China, France, Germany, Hong Kong, India, Italy, Japan, Mexico, the
Netherlands, Singapore, Sweden, Thailand and the United Kingdom and through
distributors in parts of Africa, Asia, Europe, the Middle East, and Latin
America. Approximately 41%, 38%, and 34% of the Company's total revenues in
fiscal 2003, 2002, and 2001, respectively, were derived from sales outside the
United States. The United Kingdom represented 15%, 13%, and 11% of the sales
outside the United States in fiscal 2003, 2002, and 2001, respectively.
Approximately 9%, 8%, and 8% of the Company's total long-lived assets in fiscal
2003, 2002, and 2001, respectively, are located outside the United States.
The Company markets its products through advertising campaigns in national trade
periodicals, direct mail, public relations activities, seminars and its Web site
(http://www.mro.com). These efforts are supplemented by listings in relevant
trade directories, exhibitions at trade shows and conference appearances.
Initial leads are qualified by the tele-marketing operation before being turned
over to either the direct sales force or tele-sales.
In certain situations, the Company uses resellers that are located around the
world to supplement our direct sales force in territories where the Company does
not have subsidiaries or a strong direct sales infrastructure.
The sales cycle for strategic asset management products, from the initial sales
presentation to the issuance of a purchase order, typically ranges from nine to
twelve months. The Company believes that customers generally choose the
Company's products and services based on the features they provide and upon a
preference for the product architecture, implementation time, domain expertise
and ease of use.
Delivery lead times for the Company's products are short and, consequently,
substantially all of the Company's software revenues in each quarter result from
the orders received in the quarter. Accordingly, the Company only maintains a
backlog for its consulting and training services and believes that its backlog
at any point in time is not a reliable indicator of future sales and earnings.
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STRATEGIC ALLIANCES
MRO Software's alliance program is designed to bring value to asset-intensive
companies on a global basis through collaboration with world-class product and
service partners. Our alliance program enhances the Company's market reach while
at the same time ensuring that exacting standards of quality are met in
partnering engagements. Management of our relationships with alliance partners
is an important component of the Company's business strategy. The goal of this
strategy is to enhance our future revenue streams by broadening our market reach
through the addition of partner resources.
The Company works closely with major consulting and systems integrators and has
formed alliances with such firms as Booz Allen Hamilton, Deloitte Consulting,
Hewlett Packard, IBM Global Services and SAIC. In addition, the Company has
partnerships with specific solution providers that offer a complementary
solution to MAXIMO, such as Bentley Nevada, Computational Systems, Inc., Fisher
Rosemount, Isograph, Meridium, Inc., OSI Software Inc., Optram, Inc., SKF, Inc.,
and Tech Assist.
The Company has also developed managed services, reseller and OEM relationships.
We have agreements with partners such as ABB Service Worldwide (an affiliate of
Asea Brown Boveri), Hewlett Packard and Rockwell Automation, who resell our
products using their own sales forces. We market the Syclo Inc. products as part
of the MAXIMO Mobile solution.
The Company has licensing arrangements with companies that offer technology that
enhances the performance of our solutions, broadens their applicability and or
optimizes their functionality. The Company re-brands and sells some of its
technology partners' products on an OEM basis, while products from other
technology partners are either embedded in our solutions or offered as separate
add-ons. We select technology partners based on their technological expertise,
and we seek partners with leading edge technology conducive to the advancements
that we have planned for our own products and services. Some of our technology
partners are BEA Software, Hewlett Packard, IBM, Oracle, Microsoft and Sun
Microsystems. These licenses are generally non-exclusive, worldwide licenses
that terminate on varying dates.
COMPETITION
The Company's suite of strategic asset management solutions has many diverse
competitors offering a wide range of differing products, services and
technologies. The Company expects competition to intensify as current
competitors expand their product offerings and new competitors enter the market.
The current competitors include traditional Enterprise Resource Management
providers such as SAP, Peoplesoft and Oracle. Our competitors also include niche
providers such as Datastream and Indus International that focus on segments of
the EAM market, and Computer Associates and Peregrine Systems that focus on the
IT asset management market.
PRODUCT DEVELOPMENT
The Company has made substantial investments in research and software product
development. The Company's total product development expenses in fiscal years
2003, 2002 and 2001 were $26.5 million, $26.9 million and $27.6 million,
respectively. The Company's research and development staff consists of 203
employees and a number of outside consultants. The Company's development
organization is comprised of relatively small teams of senior level developers
and engineers, who focus on different areas of development. The Company
maintains development centers in Bedford, Massachusetts; London, Ontario; Grand
Rapids, Michigan, and McLean, Virginia.
In fiscal 2003, the Company has focused its development efforts on enhancing and
adding functionality to its MAXIMO 5 and MAXIMO MainControl products. We have
also focused on developing Industry Solutions that meet the unique needs of
different
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vertical industries by offering pre-configured, industry-specific, focused
applications delivered on the MAXIMO technology platform. We will continue to
develop enhancements to our MAXIMO 5 and MAXIMO MainControl products, as well
as, to continue to research and investigate new technologies that would
complement the Company's product strategies in the future.
PROPRIETARY RIGHTS AND LICENSES
The Company has registered a number of its trademarks with the United States
Patent and Trademark Office. Registrations with equivalent offices in many
foreign countries in which the Company or its distributors do business have been
obtained or are in process. The Company has obtained two U. S. Patents -- (no.
6,325,522 B2) for inventory sharing as it relates to electronic commerce and
(no. 6,519,588 B1) covering a proprietary system and method for representing
structured information. The Company has filed or intends to file patent
applications in other countries within key geographies for both.
The Company regards its software as proprietary and attempts to protect its
rights with a combination of patent, trademark, copyright and employee and third
party non-disclosure agreements. Despite these precautions, it may be possible
for unauthorized parties to copy or reverse-engineer portions of the Company's
products. While the Company's competitive position could conceivably be
threatened by its inability to protect its proprietary information, the Company
believes that patent, copyright and trademark protection are less important to
the Company's success than other factors such as knowledge, ability and
experience of the Company's personnel, and ongoing product development, support
and innovation.
The Company's software products are usually licensed to customers under a
perpetual, non-transferable, non-exclusive license that stipulates how many
users may access the system. The Company relies on both "shrink wrap" and "click
wrap" licenses and negotiated agreements. A shrink wrap license agreement is a
printed license agreement included with packaged software that sets forth the
terms and conditions under which the purchaser can use the product, and purports
to bind the purchaser to such terms and conditions by its acceptance and
purchase of the software. A click wrap license agreement is displayed to an
end-user during the online registration and delivery process, and purports to
bind the end-user to its terms and conditions when the end-user acknowledges and
agrees to those terms and conditions via an interactive process. Certain
provisions of the Company's shrink-wrap and click wrap licenses, including
provisions protecting against unauthorized use, copying, transfer and disclosure
of the licensed program, may be unenforceable under the laws of certain
jurisdictions. In addition, the laws of some foreign countries do not protect
the Company's proprietary rights to the same extent as do the laws of the United
States.
PRODUCTION
The principal materials and components used in the Company's software products
are CD-ROMs containing software and documentation, and occasionally hard copy
installation guides. The Company occasionally uses third-party vendors to print
user manuals, packaging and related materials. The majority of CD-ROM
duplication is done by the Company's manufacturing and distribution facility
located at its corporate headquarters. The Company also now offers documentation
to its customers via its secured, customer support Web site. To date, the
Company has been able to obtain adequate supplies of all components and
materials and has not experienced any material difficulties or delays in
manufacture and assembly of its products or materials due to product defects.
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EMPLOYEES
As of September 30, 2003, the Company had 890 full-time employees including
sales, marketing and related services, product research and development,
customer support, training and consulting services, and finance, administration,
information technology, human resources, manufacturing and office services. The
Company's employees are not represented by any collective bargaining
organization, and the Company has never experienced a work stoppage. The Company
believes that its relations with employees are good.
ITEM 2. PROPERTIES
The Company leases its corporate headquarters and its manufacturing and
distribution facilities in Bedford Massachusetts. The leased facility consists
of approximately 115,000 square feet. In October 2002, the Company and the sub
landlord agreed to extend the lease term until December 31, 2009. The average
annual base rent is $1.1 million. Additionally, the Company estimates that its
annual operating expenses under the recently renegotiated lease will be
approximately $1 million based on information currently available. The actual
costs will depend on such factors as actual electricity usage, real estate taxes
and operating costs. Under the terms of its lease, the Company has the ability
to sublease the space. The Company leases additional sales offices in
California, Colorado, Florida, Georgia, Idaho, Illinois, Kansas, North Carolina,
Maryland, Michigan, Missouri, New Jersey, New York, Tennessee, Texas and
Virginia. The Company also leases offices for its international operations in,
Australia, Brazil, Canada, China, France, Germany, Hong Kong, India, Italy,
Mexico, the Netherlands, Singapore, Sweden, Thailand and the United Kingdom.
ITEM 3. LEGAL PROCEEDINGS
As of the date of this Annual Report on Form 10-K, the Company is not a party to
any legal proceedings the outcome of which, in the opinion of management, would
have a material adverse effect on the Company's results of operations or
financial condition.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
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.
NONE.
Page 11
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
PRICE RANGE OF COMMON STOCK
The Company's Common Stock is traded in the over-the-counter market and prices
are quoted on the National Association of Securities Dealers Automated Quotation
National Market System ("NASDAQ National Market") under the symbol MROI. As of
December 19, 2003, there were approximately 120 holders of record of the
Company's Common Stock. Most of the Company's stock is held in street names
through one or more nominees.
The following table sets forth the high and low per share sale prices of the
Company's Common Stock, as reported on the NASDAQ National Market consolidated
reporting system for each quarterly period within the two year period ended
September 30, 2003.
FISCAL 2003 HIGH LOW
First Quarter $13.20 $5.85
Second Quarter $13.87 $6.83
Third Quarter $ 9.90 $5.88
Fourth Quarter $15.11 $8.41
FISCAL 2002 HIGH LOW
First Quarter $25.84 $ 8.43
Second Quarter $29.85 $11.16
Third Quarter $15.07 $10.39
Fourth Quarter $12.30 $ 6.65
On October 15, 1999, the Company's Board of Directors approved a 2-for-1 stock
split in the form of a dividend of its common stock to be paid to all
shareholders of record on December 15, 1999. The payment distribution date for
the stock dividend was December 22, 1999. The Company's authorized common stock,
$0.01 par value per share, was also increased from 15,350,000 to 50,000,000
shares. All share and per share data has been restated to reflect this stock
split in the form of a dividend as though it had occurred at the beginning of
the earliest period presented.
Since the Company's initial public offering in 1994, the Company has not
declared or paid cash dividends on its Common Stock. The Company currently
intends to retain any future earnings to finance growth and therefore does not
anticipate paying cash dividends in the foreseeable future.
Certain provisions of the Company's Articles of Organization, as amended, and
Bylaws could delay the removal of incumbent directors and could make a merger,
tender offer or proxy contest involving the Company more difficult, even if such
events would be beneficial to the interests of the stockholders. In addition,
the Company has 1,000,000 shares of authorized Preferred Stock. The Company may
issue shares of such Preferred Stock in the future without further stockholder
approval and upon such terms and conditions, and having such rights, privileges
and preferences, as the Board of Directors may determine. The rights of the
holders of common stock will be subject to, and may be adversely affected by,
the rights of the holders of any Preferred Stock that may be issued in the
future. The issuance of Preferred Stock, while providing flexibility in
connection with possible acquisitions and other corporate purposes, could have
the effect of making it more difficult for a third party to acquire, or of
discouraging a third party from acquiring, a majority or the outstanding voting
stock of the Company. In addition, the staggered terms of the Company's Board of
Directors could have the effect of delaying or deferring a change in control of
the Company.
In January 1998, the Board of Directors of the Company adopted a stockholder
rights plan by declaring a dividend distribution of one preferred stock purchase
right (one "Right") on each share of the Company's Common Stock outstanding on
January 27, 1998 or, in certain circumstances, issued thereafter. Initially, the
Rights are not
Page 12
exercisable, not represented by separate Right certificates and do not trade
separately from the Company's Common Stock. Ten days after a tender offer or
acquisition of 15% or more of the Company's common stock, each right may be
exercised for $140 ("Exercise Price") to purchase one one-thousandth of one
share of the Company's Series A Junior Participating Preferred Stock. Each one
one-thousandth of each share of Series A Junior Participating Preferred Stock
will generally be afforded economic rights similar to one share of the Company's
common stock. In addition, after such rights are triggered, each right entitles
the holder to purchase common stock of the Company with a fair value of twice
the Exercise Price or, in certain circumstances, securities of the acquiring
company for the Exercise Price. Each Right expires in January 2008 and, during
specified periods, the Company may redeem or exchange each Right for $.01 or one
share of common stock, respectively. The Rights Agreement has been filed by the
Company with the Securities and Exchange Commission as an exhibit to a
Registration Statement on Form 8-A dated February 2, 1998.
Stockholders are urged to review the Rights Agreement for a complete
understanding of the Rights Plan. The Rights Plan, while providing the Board of
Directors with flexibility in connection with possible acquisitions and
deterring unfair or coercive takeover tactics, could have the effect of making
it more difficult for a third party to acquire, or of discouraging a third party
from acquiring, beneficial ownership of 15% or more of the outstanding shares of
the Company's Common Stock.
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
The selected consolidated financial data of the Company set forth below has been
derived from the audited consolidated financial statements for the Company for
the periods indicated. This selected consolidated financial data should be read
in conjunction with "Management's Discussion and Analysis of Consolidated
Financial Condition and Results of Operations" and the Company's consolidated
financial statements and the notes thereto included elsewhere herein.
YEAR ENDED SEPTEMBER 30,
-------------------------------------------------------------
(in thousands, except
per share data)
2003 2002 2001 2000 1999
---- ---- ---- ---- ----
Revenues $176,877 $171,881 $185,450 $168,661 $145,665
Income/(loss) from operations 5,742 (15,319) (20,755) (571) 24,333
Net income/(loss) 4,870 (10,551) (15,468) 2,102 17,880
Net income/(loss) per share, basic 0.20 (0.46) (0.70) 0.10 0.87
Net income/(loss) per share, diluted 0.20 (0.46) (0.70) 0.09 0.85
Shares used to calculate net income/
(loss) per share
Basic 24,429 23,171 22,148 21,682 20,459
Diluted 24,653 23,171 22,148 22,786 21,094
------------------------------------------------------------
Total assets 205,261 192,153 171,453 180,945 159,033
Long-term obligations 1,216 405 150 171 282
On October 15, 1999, the Company's Board of Directors approved a 2-for-1 stock
split in the form of a dividend of its common stock to be paid to all
shareholders of record on December 15, 1999. The payment distribution date for
the stock dividend was December 22, 1999. All historical share and per data has
been restated to reflect this stock split as though it had occurred at the
beginning of the earliest period presented.
Page 13
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
FORWARD-LOOKING STATEMENTS
In addition to historical information, this Annual Report on Form 10-K, as well
as documents incorporated herein by reference, may contain forward-looking
statements (within the meaning of section 27A of the Securities Act of 1933, as
amended, and section 21E of the Securities Exchange Act of 1934, as amended).
The following and similar expressions identify forward-looking statements:
"expects", "anticipates", and "estimates". Forward-looking statements include,
without limitation, statements related to: the Company's plans, objectives,
expectations and intentions; the timing of, availability and functionality of
products under development or recently introduced; and market and general
economic conditions. Important factors that could cause actual results to differ
materially from those suggested by the forward-looking statements for various
reasons, include those discussed under the heading "Factors Affecting Future
Performance" below. These forward-looking statements speak only as of the date
of this Annual Report, and the Company disclaims any obligation to update such
forward looking statements as a result of any change in circumstances or
otherwise.
OVERVIEW
MRO Software is a leading global provider of strategic asset management
solutions, software and related services. Strategic asset management is the
management and optimization of the business processes required to keep our
customers' critical assets productive. Critical assets are 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
enables the asset-centric procurement capabilities of our EAM software products
through the MRO Operations Center. 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.
At the beginning of fiscal 2003, the Strategic MRO offerings were renamed
strategic asset management and consist of the MAXIMO and MAXIMO MainControl
products. Enterprise Catalog Management services were offered up until January
17, 2003 (see services operations 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 industrial data normalization services
operations and recorded a gain of $407 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. Also,
due to the sale of this business, the Company will no longer sell Enterprise
Catalog Management services. The services operations were purchased by
International Materials Solutions, Inc. The fair value of the assets sold net of
the liabilities assumed was $593 thousand.
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
Page 14
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.
REVENUE RECOGNITION
SOFTWARE PRODUCTS
The Company licenses its software products under noncancellable license
agreements. Software license fee revenues are generally recognized upon contract
execution and product shipment, provided that collection of the resulting
receivable is deemed probable, the fees are fixed or determinable, and no
significant modification or customization of the software is required.
Our customers do not have any right of return except as stipulated under a
standard 90-day warranty that runs concurrent with post-contract product support
(PCS). The Company does not maintain any reserves with respect to this warranty
based on a history of performance of our software. On the rare occasion that a
customer insists on conditions of acceptance, the Company defers revenue until
the customer's acceptance is obtained and the condition has been satisfied.
Revenue from products sold through indirect channels ("resellers") is recognized
upon shipment of the software, as long as evidence of an arrangement exists,
collectibility is probable and the fee is fixed or determinable and the
reseller's obligation to pay us is not contingent upon resale of our product.
Revenue is recorded net of any commissions or discounts. Our resellers do not
have any right of return beyond the standard 90-day performance warranty that
runs concurrent with post-contract product support (PCS).
SERVICES REVENUES
Services revenues are comprised of consulting and training fees related to
installation of the Company's software solutions, maintenance/support ("PCS")
contracts for software products, content management and subscription based fees
related to the Company's Online Commerce Services ("OCS") business. Consulting,
training and content management services are generally recognized as the
services are performed. PCS revenues are recognized ratably over the term of the
agreement, generally one year. Customers typically subscribe to OCS on an annual
basis and revenue is recorded as services revenue and recognized on a
straight-line basis over the applicable subscription period.
Many of our software arrangements include consulting implementation services
sold separately under consulting contracts. We consider whether the services
revenue can be recognized separately from the software revenue by analyzing the
nature of the services (i.e. if the services are essential to the functionality
of the software), the level of risk, availability of services from other
vendors, acceptance criteria, milestone payments and fixed price terms. For
those contracts that contain fixed price arrangements, if we can reliably
estimate the hours required to complete the implementation services and if we
have vendor specific objective evidence ("VSOE") for the fair value of the
hourly rates for consultants, we recognize the software license fee separately
from the services revenues. The services revenues are recognized as they are
delivered and the related costs as they are incurred. For those fixed price
arrangements where we cannot reliably estimate the hours required to complete
the implementation services and we do not have VSOE for the fair value of the
hourly rates for consultants, the software license value is recognized together
with the consulting services over the period the consulting services are
provided.
MULTIPLE ELEMENT ARRANGEMENTS
The Company's multiple element arrangements could include the following three
elements: (a) software license, (b) PCS, and (c) consulting, training and other
services ("services"). Revenue is allocated to the elements of the arrangement
based upon the VSOE of fair value of each
Page 15
element. The Company uses the residual method to recognize its software license
revenue, because while we are able to determine the VSOE of fair value of PCS
and services, we are unable to determine the fair value of software licenses.
Under the residual method, the fair value of undelivered elements (PCS and/or
services) is deferred and recognized when the PCS and/or services are delivered.
The difference between the amount of the total arrangement and the amount
attributable to the elements for which fair value is determinable (PCS and/or
services) is recognized as software license revenue. VSOE is established for PCS
and is based on the price of PCS when sold separately. The PCS renewal rate is a
relatively consistent percentage of the stipulated software license fee, offered
to all customers. VSOE for consulting services is based on fixed hourly rates
set according to the skill level of the consultant required. VSOE for training
services is based on an established per-student fee structure. For those
multi-element arrangements, where we cannot establish VSOE for the undelivered
elements, the software license value is recognized together with the consulting
services over the period the consulting services are provided. Contract
accounting is applied to any arrangement that includes significant customization
or modification of the software.
We assess whether fees are fixed or determinable at the time of sale and
recognize revenue if all other revenue recognition requirements are met. Our
standard payment terms are net 30 days. Payment terms that extend beyond net 30
days from the contract date but are within twelve months are generally deemed to
be fixed or determinable based on our successful history of collecting on such
arrangements. For those customers who are deemed not to be credit-worthy,
revenue is deferred until payment is received.
ALLOWANCES FOR DOUBTFUL ACCOUNTS AND SALES RETURNS
The Company maintains allowances for doubtful accounts, which reflect the
Company's estimate of the amounts owed by customers that customers will be
unable or otherwise fail to pay. The allowance for doubtful accounts is based on
Management's assessment of the collectibility of customer accounts and factors
such as historical experience, credit quality, age of the accounts receivable
balance, and current economic conditions. Management performs ongoing credit
evaluations of its customers' financial condition and limits the amount of
credit when deemed necessary. The Company believes that the current estimate of
allowances for doubtful accounts recorded as of September 30, 2003 adequately
covers any potential credit risks. However, if the financial condition of our
customers deteriorates and their payment defaults exceed our estimates, then we
may need to increase our allowance reserves, which will result in a charge to
income in the period that the adjustment is made.
The Company did not record a provision for estimated sales returns. Based on our
history of sales returns and an analysis of credit memos, we determined that a
provision was not needed. If the historical data we used to calculate the basis
for a provision does not properly reflect future returns, then a provision for
returns will be recorded, and a charge to income will result, in the period that
such a determination is made.
DEFERRED INCOME TAXES
The Company accounts for income taxes under the asset and liability approach for
accounting and reporting for income taxes in accordance with Financial
Accounting Standards Board 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, the expected tax benefit of operating loss carryforwards and the
expected benefit of tax credit carryforwards. Changes in deferred tax assets and
liabilities are recorded in the provision for income taxes. The Company
continually assesses the realizability of its deferred tax asset. The deferred
tax asset may be reduced by a valuation allowance if, based on the weight of
available evidence, it is more likely than not that some portion or all of the
recorded deferred tax assets will not be realized in future periods. 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
Page 16
for the Company consists of our recent cumulative operating losses, which were
attributable to unprofitable internet commerce businesses that we were engaged
in. We have since ceased operation of these unprofitable businesses and we
believe that we have substantial positive evidence that would negate the need
for a valuation allowance. The positive evidence consists of the current year
cumulative pre-tax profits and projected future pre-tax profits, as well as, a
consistent 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
September 30, 2003 is $11.5 million.
The Company has established a valuation allowance with respect to the net
operating losses acquired from Applied Image Technology, Inc. ($1.3 million),
various state net operating loss carryforwards ($266 thousand), and certain
Canadian net operating loss carryforwards ($40 thousand). 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
reduction in the net valuation allowance in fiscal 2003 from fiscal 2002 is
primarily attributable to the utilization of net operating loss carryforwards.
VALUATION OF LONG-LIVED ASSETS
Long-lived assets are amortized over their estimated useful lives. The Company
reviews its long-lived assets, with the exception of goodwill, for impairment
whenever events or changes in circumstances indicate that the carrying amount of
these assets may exceed their fair value. The Company estimates whether future
cash flows expected to result from the use of assets exceed the carrying amount
of the assets. In the event that the Company judges that an impairment exists,
all or a portion of the asset will be written-off based on the amount by which
the carrying amount exceeds the fair value of the asset. In order to determine
the fair value, the Company obtains quoted market prices or utilizes valuation
techniques, such as discounted cash flows.
The Company also periodically assesses the useful life of its fixed assets and
may in the future need to adjust the life of an asset or write-it off.
Goodwill is tested annually for impairment or whenever events or changes in
circumstances suggest that the carrying value may not be recoverable. If the
carrying amount of the net tangible and intangible assets in a reporting unit
exceeds the reporting units fair value, a detailed impairment loss analysis
would be performed to calculate the amount of impairment, if any.
Page 17
RESULTS OF OPERATIONS
The following table sets forth, for the periods indicated, certain financial
data as a percentage of total revenues:
YEAR ENDED SEPTEMBER 30,
------------------------
2003 2002 2001
---- ---- ----
Revenues:
Software 28% 29% 33%
Support and services 72 71 67
--- --- ---
Total revenues: 100 100 100
Total cost of revenues 38 40 41
--- --- ---
Gross profit 62 60 59
--- --- ---
Operating expenses:
Sales and marketing 33 34 38
Product development 15 16 15
General and administration 10 11 11
Amortization of goodwill
and other intangibles 1 8 6
--- --- ---
Total operating expenses: 59 69 70
--- --- ---
Income/(loss) from operations 3 (9) (11)
Other income 1 1 1
--- --- ---
Income/(loss) before income taxes 4 (8) (10)
Provision/(benefit) for income taxes 1 (2) (2)
--- --- ---
Net income/(loss) 3% (6)% (8)%
--- --- ---
Page 18
REVENUES
The Company's revenues are derived primarily from two sources: (i) software
licenses, and (ii) fees for support and services.
Fiscal Fiscal Fiscal
Year Year Year
Ended Change Ended Change Ended
(in thousands) 9/30/03 % 9/30/02 % 9/30/01
- ------------------------------------------------------------------------------------------------
Software licenses $ 49,904 2% $ 49,035 (20)% $ 61,337
Percentage of total revenues 28% 29% 33%
Support and services $126,973 3% $122,846 (1)% $124,113
Percentage of total of revenues 72% 71% 67%
Total revenues $176,877 3% $171,881 (7)% $185,450
FISCAL 2003 COMPARED TO FISCAL 2002: Software license revenues increased 2% to
$49.9 million in fiscal 2003 from $49.0 million in fiscal 2002. The increase in
fiscal 2003 as compared to fiscal 2002 is mainly attributable to an increase in
IT asset management software licenses (MAXIMO MainControl) revenues, which
increased to $3.6 million from $2.7 million for fiscal 2003 and 2002,
respectively. The Company purchased the MAXIMO MainControl product in June 2002
and therefore only recognized four months of revenue from this product in fiscal
2002. MAXIMO software licenses increased slightly to $46.2 million in fiscal
2003 from $45.6 million in fiscal 2002. The Company attributes the relatively
flat software revenue to the saturation of our traditional EAM market, and
continued difficult IT spending environment and adverse economic conditions in
the general economy. The Company is also experiencing longer sales cycles.
Support revenues increased 18% to $65.2 million in fiscal 2003 from $55.4
million in fiscal 2002. Support revenues have increased as a result of a
cumulative increase in the number of MAXIMO customers, a strong renewal rate
(90%) for support contracts, and the addition of customers assumed as a result
of our acquisition of the MAXIMO MainControl business. MAXIMO support revenues
increased 13% to $61.6 million in fiscal 2003 from $54.3 million in fiscal 2002.
MAXIMO MainControl support revenues, primarily attributable to contracts assumed
in connection with the June 2002 acquisition of MainControl, Inc., were $3.6
million and $807 thousand for fiscal 2003 and 2002, respectively.
Service revenues decreased 8% to $61.8 million in fiscal 2003 from $67.4 million
in fiscal 2002. The overall decline in service revenues in fiscal 2003 as
compared to fiscal 2002 is comprised of a decline in MAXIMO service revenues of
$4.3 million, a decline in Enterprise Catalog Management service revenues of
$3.9 million, and a decline in OCS revenues of $300 thousand, partially offset
by an increase in IT asset management revenues of $2.7 million. The decrease in
MAXIMO service revenues is primarily due to a cumulative decline in the number
of MAXIMO software licenses sold and increased competition from independent
consulting firms who implement MAXIMO or other enterprise-wide solutions. The
decrease in Enterprise Catalog Management services revenues is primarily
attributable to the sale of the industrial data normalization services
operations in January 2003. The decline in OCS revenues is attributable to a
decrease in the number of customers renewing annual service contracts. The
increase in MAXIMO MainControl service revenues reflects the comparison of
revenues for all of fiscal 2003 with only four months of revenue from this
product in fiscal 2002.
FISCAL 2002 COMPARED TO FISCAL 2001: Software license revenues decreased 20% to
$49.0 million in fiscal 2002 from $61.3 million in fiscal 2001. The decrease in
fiscal 2002 was mainly attributable to a decrease in MAXIMO software license
revenues. MAXIMO software license revenues decreased 25% to $45.6 million in
fiscal 2002 from $60.7 million in 2001. The Company attributed this decrease to
a continued slowdown in its customers' IT spending, slower than expected
adoption of MAXIMO 5, and overall adverse economic conditions. The Company
recognized $2.7 million of software license revenues related to MAXIMO
MainControl, acquired in June 2002.
Page 19
Support revenues increased 17% to $55.4 million in fiscal 2002 from $47.3
million in fiscal 2001. Support revenues increased as a result of an increase in
the number of MAXIMO customers and a strong renewal rate for support contracts.
MAXIMO support revenues increased 17% to $54.3 million in fiscal 2002 from $46.4
million in fiscal 2001. The Company recognized $807 thousand of support revenues
related to its MAXIMO MainControl product. Enterprise Catalog Management support
revenues decreased 23% to $173 thousand in fiscal 2002 from $225 thousand in
fiscal 2001. The decline in Enterprise Catalog Management support revenues was
due to a relatively weak renewal rate and a small number of customers.
Service revenues decreased 12% to $67.5 million in fiscal 2002 from $76.8
million in fiscal 2001. MAXIMO service revenues decreased 3% to $58.5 million
from $60.4 million in fiscal 2002 and 2001, respectively. The decrease from
fiscal 2001 to fiscal 2002 was primarily due to a decline in MAXIMO software
licenses sold, which reduced the demand for services related to customer
implementations. The Company recognized $793 thousand of service revenues
related to its MAXIMO MainControl product. Enterprise Catalog Management service
revenues decreased 67% to $4.9 million in fiscal 2002 from $14.5 million in
fiscal 2001. Enterprise Catalog Management services revenues consists of content
normalization services, and the decrease in these revenues was due to a
continued decrease in demand for these services, and a stagnant e-Commerce
market. Also, in fiscal 2001, $7.2 million of Enterprise Catalog services
revenue was attributable to a single large contract for content
normalization/cataloging services that did not recur in fiscal 2002.
OCS support and service revenues increased 36% to $3.4 million in fiscal 2002
from $2.5 million in fiscal 2001. The increase was primarily attributable to a
single large subscription contract for $1.5 million, which was recognized
ratably over the 18-month term of the contract.
Page 20
COST OF REVENUES
Fiscal Fiscal Fiscal
Year Year Year
Ended Change Ended Change Ended
(in thousands) 9/30/03 % 9/30/02 % 9/30/01
- ------------------------------------------------------------------------------------------------
Cost of software licenses $ 8,314 19% $ 7,012 50% $ 4,685
Percentage of software licenses 17% 14% 8%
Cost of support and services $58,618 (5)% $61,862 (12)% $70,423
Percentage of support and services 46% 50% 57%
Total cost of revenues $66,932 (3)% $68,874 (8)% $75,108
Percentage of total revenues 38% 40% 41%
FISCAL 2003 COMPARED TO FISCAL 2002: Cost of software license revenues consists
of software purchased for resale, royalties paid to vendors of third party
software, the cost of software product packaging and media, certain employee
costs related to software duplication, packaging and shipping, and amortization
of acquired technology. The increase in cost of software license revenues in
fiscal 2003 as compared to fiscal 2002 is primarily attributable to software
purchased for resale related to our MAXIMO Mobile Suite product and amortization
of acquired technology. Cost of software purchased for resale increased $982
thousand in fiscal 2003 as compared to fiscal 2002 due to an increase in demand.
Amortization of acquired technology was $3.4 million in fiscal 2003 and $3.0
million in fiscal 2002 and is attributable to technology acquired from
MainControl, Inc. in June 2002.
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 13% to $9.6 million in fiscal 2003 from $8.5 million
in fiscal 2002. 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 15% in both fiscal 2003 and 2002.
Cost of service revenues decreased 8% to $49.0 million in fiscal 2003 from $53.4
million in fiscal 2002. The decrease in the cost of service revenues in fiscal
2003 as compared to fiscal 2002 was attributable to a $2.1 million reduction in
personnel and related benefits and facilities costs and a $2.2 million decrease
for the cost of third party consultants due to the sale of the industrial data
normalization services operations in January 2003. Cost of service revenues, as
a percentage of total service revenues was 79% in both fiscal 2003 and 2002.
FISCAL 2002 COMPARED TO FISCAL 2001: Cost of software license revenues consists
of software purchased for resale, royalties paid to vendors of third party
software, the cost of software product packaging and media, certain employee
costs related to software duplication, packaging and shipping, and amortization
of acquired technology. The increase in the cost of software license revenues in
fiscal 2002 as compared to fiscal 2001 was due to a $1.7 million increase in
royalties and software purchased for resale related to our MAXIMO Mobile Suite,
and a $750 thousand increase in amortization of acquired technology related to
technology acquired from MainControl, Inc. in June 2002.
Cost of support and services consists primarily of personnel costs for employees
and the related costs of benefits and facilities, costs for utilization of third
party consultants, and costs to support the MRO Operations Center. Cost of
support revenues was $8.5 million and $8.7 million in fiscal 2002 and 2001,
respectively. Cost of support revenues as a percentage of total support revenues
was 15% and 18% in fiscal 2002 and 2001, respectively. The decrease in cost of
support revenues was attributable to a decrease in number of internal resources
allocated to support the MRO Operations Center, which was implemented in
recognition of the slower than anticipated adoption of these services.
Cost of service revenues was $53.4 million and $61.7 million in fiscal 2002 and
2001, respectively. The decrease in cost of service revenues was primarily
attributable to a $9.0 million decrease for the costs of third party consultants
implementing the Company's products, a decrease of $1.5 million in travel costs
and
Page 21
an overall decrease in spending. Offsetting this decrease was a charge of $2
million for employee termination and other costs related to a reduction in
workforce for our OCS and Enterprise Catalog Management businesses. Our services
backlog in fiscal 2002 decreased compared to prior periods, and as a result we
utilized more in-house consultants to perform services instead of third parties.
Cost of service revenues as a percentage of total service revenues was 79% and
80% in fiscal 2002 and 2001, respectively.
OPERATING EXPENSES
Fiscal Fiscal Fiscal
Year Year Year
Ended Change Ended Change Ended
(in thousands) 9/30/03 % 9/30/02 % 9/30/01
- ------------------------------------------------------------------------------------------------
Sales and marketing $59,117 1% $58,806 (18)% $71,651
Percentage of total revenues 33% 34% 39%
Product development $26,476 (2)% $26,897 (2)% $27,559
Percentage of total revenues 15% 16% 15%
General and administrative $17,702 (10)% $19,698 1% $19,573
Percentage of total revenues 10% 11% 11%
Amortization of goodwill and
other intangibles $ 908 (93)% $12,925 5% $12,314
Percentage of total revenues 1% 8% 7%
FISCAL 2003 COMPARED TO 2002: Sales and marketing expenses increased slightly to
$59.1 million in fiscal 2003 from $58.8 million in fiscal 2002. The increase in
fiscal 2003 as compared to fiscal 2002 is primarily attributable to a $1.2
million increase in personnel and related benefits, including severance costs
related to reorganization of the sales and marketing departments, and a $900
thousand increase in sales commissions paid on revenues from software licenses
sold. Partially offsetting this increase is a $1.8 million decrease in
advertising, travel expenses, and general sales expenses.
Product development expenses decreased 2% to $26.5 million in fiscal 2003 from
$26.9 million in fiscal 2002. The decrease in fiscal 2003 as compared to fiscal
2002 is attributable to a decrease in the costs to translate our products into
foreign languages, as most of the cost to translate MAXIMO 5 was absorbed in
fiscal 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 10% to $17.7 million in fiscal
2003 from $19.7 million in fiscal 2002. The decrease was primarily due to a $1.4
million decrease in bad debt provisions, a $1.2 million decrease in general and
administrative salaries and related benefits due to a decrease in the number of
general and administrative personnel, and a general decrease in spending.
Partially offsetting this decrease was a $525 thousand increase in insurance
premiums year over year.
The decrease in amortization of goodwill and other intangibles expense was due
to the adoption of SFAS No. 142 by the Company on October 1, 2002. In accordance
with SFAS No. 142, goodwill is no longer amortized. Intangibles and other
identifiable assets will continue to be amortized. Goodwill amortization was
$11.8 million in fiscal 2002.
FISCAL 2002 COMPARED TO 2001: Sales and marketing expenses decreased 18% to
$58.8 million in fiscal 2002 from $71.7 million in fiscal 2001. The decrease in
sales and marketing expenses in fiscal 2002 as compared to 2001 was primarily
attributable to a $3.0 million decrease in travel costs, a $5.0 million decrease
in sales commissions due to the decrease in MAXIMO software license revenues, a
$1 million decrease in advertising expenses, and an overall decrease in
spending. Also, in fiscal 2001, the Company issued a warrant valued at $3.3
million to i2 Technologies, Inc and recorded this as a one-time sales and
marketing expense.
Page 22
Product development expenses decreased 2% to $26.9 million in fiscal 2002 from
$27.6 million in fiscal 2001. The decrease in product development expenses was
attributable to a decrease in the cost of purchased software and an overall
decrease in spending. The Company will continue to make enhancements to MAXIMO
5, as well as its other product offerings.
General and administrative expenses increased slightly in fiscal 2002 as
compared to fiscal 2001. While certain expenses such as insurance premiums and
accounting and tax fees increased $600 thousand year over year, these increases
were offset by an overall decrease in spending. Also, in fiscal 2001, the
Company made a one-time payment in the amount of $650 thousand to W.W. Grainger,
Inc. for the repurchase of a stock option agreement.
The increase in amortization of goodwill and other intangibles expense was due
to the acquisition of businesses.
NON-OPERATING EXPENSES
Fiscal Fiscal Fiscal
Year Year Year
Ended Change Ended Change Ended
(in thousands) 9/30/03 % 9/30/02 % 9/30/01
- ------------------------------------------------------------------------------------------------
Interest income $ 811 (17)% $ 974 (39)% $ 1,594
Other income/(expense), net $ 1,161 1,135% $ (94) (79)% $ (450)
FISCAL 2003 AS COMPARED TO 2002: Interest income is attributable to interest
earned on marketable securities and cash and cash equivalents. Due to
unfavorable interest yields, the Company earned less interest on its investments
in fiscal 2003. The change in other income was due to foreign currency exchange
rate gains and a gain of $407 thousand on the sale of the industrial data
normalization services operations in January 2003.
FISCAL 2002 COMPARED TO 2001: Interest income is attributable to interest earned
on marketable securities and cash and cash equivalents. Due to unfavorable
interest yields, the Company did not reinvest its portfolio with short-term
treasuries and municipal bonds. The Company instead decided to reinvest its cash
in short-term securities such as money market funds until rates increase. The
change in other income/(expense) was primarily due to losses caused by currency
rate fluctuations.
INCOME TAXES
The Company's effective tax rate was 37% for fiscal 2003. The difference between
the effective tax rate and the federal statutory tax rate of 35% in 2003 is due
to the non-deductible nature of certain intangible amortization expenses, the
impact of foreign rate differentials, and state income taxes offset by net
operating loss utilization and research and development credits. In fiscal 2002
the effective tax rate was a benefit of 27%. The difference between the
effective tax rate and the federal statutory rate of 35% was due to the
non-deductible nature of certain intangible and goodwill amortization expenses
and the impact of foreign rate differentials.
LIQUIDITY AND CAPITAL RESOURCES
As of September 30, 2003, the Company had cash and cash equivalents of $73.7
million and marketable securities of $20.9 million, and working capital of $52.5
million.
Cash provided by operations was $26.1 million for the twelve months ended
September 30, 2003 primarily attributable to income generated from operations,
the collection of accounts receivables, and income tax refunds, offset by the
payment of liabilities.
Cash used in investing activities was $23.2 million for the twelve months ended
September 30, 2003 and was primarily used in the purchase and sale of marketable
securities.
Page 23
Cash provided by financing activities was $2.0 million for the twelve months
ended September 30, 2003 and represents proceeds from the Company's Employee
Stock Option and Purchase Plans.
As of September 30, 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 leases its office facilities under operating lease agreements, which
expire at various dates through June 30, 2019. The Company pays all insurance,
utilities, and pro rated portions of any increase in certain operating expenses
and real estate taxes. The aggregated rent expense under these leases was $6.2
million, $6.5 million, and $6.6 million for fiscal 2003, 2002 and 2001,
respectively.
The operating leases provide for minimum aggregate future rentals as of
September 30, 2003 as follows:
(in thousands)
2004................................................................ $ 3,934
2005................................................................ 3,269
2006................................................................ 2,921
2007................................................................ 2,823
2008 and thereafter................................................. 21,103
-------
$34,050
=======
The following table summarizes our contractual obligations as of September 30,
2003. The contractual obligations are primarily related to office leases,
equipment leases and contracts for our MRO Operations Center.
Payments due by Period
(in thousands) Less than 1-3 3-5 More than
Contractual Obligations Total 1 year years years 5 years
- --------------------------------------------------------------------------------------------------
Operating leases
Leased premises $34,050 $ 3,934 $6,190 $5,337 $ 18,589
Equipment/Automobiles $ 3,763 $ 2,567 $1,193 $ 3 ---
Purchase obligations $5,410 $ 3,577 $1,833 --- ---
Total $43,223 $10,078 $9,216 $5,340 $ 18,589
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 September 30, 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 long-term 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".
Page 24
RECENT ACCOUNTING PRONOUNCEMENTS
In January 2003, the FASB issued interpretation No. 46, "Consolidation of
Variable Interest Entities" (FIN 46). This interpretation of Accounting Research
Bulletin No. 51, "Consolidated Financial Statements," addresses consolidation by
business enterprises of variable interest entities (VIEs) that either: (1) do
not have sufficient equity investment at risk to permit the entity to finance
its activities without additional subordinated financial support, or (2) the
equity investors lack an essential characteristic of a controlling financial
interest. The FASB intends to issue a revised FIN 46 ("FIN 46-R"). For all
Special Purpose Entities ("SPEs") created prior to February 1, 2003, companies
must apply either the provisions of FIN 46 or early adopt the provisions of FIN
46-R at the end of the first interim or annual reporting period ending after
December 15, 2003. If companies apply FIN 46 for such period, the provisions of
FIN 46-R must be applied as of the end of the first interim or annual reporting
period ending after March 15, 2004. For all non-SPEs created prior to February
1, 2003, companies will be required to adopt FIN 46-R at the end of the first
interim or annual reporting period ending after March 15, 2004. For all
entities (regardless of whether the entity is an interim or annual reporting
period ending after March 15, 2004. For all entities (regardless of whether the
entity is an SPE) that were created subsequent to January 31, 2003, companies
were already required to apply the provisions of FIN 46, and will continue
doing so unless companies elect to early adopt the provisions of FIN 46-R as of
the first interim or annual reporting period ending after December 15, 2003. If
the FIN 46-R is not early adopted, companies are required to apply FIN 46-R to
those post-January 31, 2003 entities as of the end of the first interim or
annual reporting period ending after March 15, 2004. As of September 30, 2003,
the Company believes it did not have any VIEs and therefore FIN 46 had no
material impact on our financial statements.
In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain
Financial Instruments with Characteristics of Both Liabilities and Equity" (SFAS
150). This statement establishes new standards for classification, measurement
and disclosure of certain types of financial instruments having characteristics
of both liabilities and equity, including instruments that are mandatorily
redeemable and that embody obligations requiring or permitting settlement by
transferring assets or by issuing an entity's own shares. SFAS 150 is effective
for financial instruments entered into or modified after May 31, 2003 and for
contracts in existence at the start of the first interim period beginning after
June 15, 2003. The FASB has deferred indefinitely the effective date for
sections of SFAS 150 applicable to certain mandatorily redeemable financial
instruments. As of September 30, 2003, the Company had no financial instruments
that could be classified with characteristics of both liabilities and equity and
therefore SFAS 150 had no material impact on our financial statements.
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.
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, with a negative effect on our revenues and operations. As
industrial companies experience downturns, they often delay or cease spending on
capital assets and IT infrastructure (including software and related services).
As a result, our revenues have in the past fallen, and may again in the future
fall, below expectations. The slump in the economy in general, and the market
for IT software and services in particular, have continued for an extended
period of time. While our forecasting systems and metrics have generally been
reliable in informing our projections and guidance for future performance, the
current economic downturn
Page 25
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
they might not be valid during a period of economic recovery. As a result, our
expectations and guidance for future performance may not be accurate. If the US
and worldwide economies do not recover and if growth in IT spending does 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 the enterprise asset
management market 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 will continue to mature, there will be fewer sales
opportunities for the Company, 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 enterprise asset management
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 transmission 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 additional internal development, to deliver products that
address markets that are new to the Company, such as the IT asset management and
consolidated service desk markets. There can be no assurance that we will be
able to develop and market our Industry Solutions or new products on time, with
acceptable quality and with such functions and features that meet the
requirements of customers in these 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 be 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 abilities
to enhance our current products, to develop and introduce new products that keep
pace with technological developments, to respond to evolving customer
requirements and changing industry standards, to offer functionality and other
innovations that are unique to our products and superior to those of our
competitors, and ultimately to achieve market acceptance. In particular, we
believe that we must continue to innovate and develop new functionality 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 market definitions or changes in
customer requirements within particular market segments, 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
Page 26
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.
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, our 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, applications,
functions and features are developing rapidly and are continuously being
introduced, competing for acceptance in the market, and changing, and we must
accurately anticipate technology and market 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, in the event that our development efforts are not
progressing as intended, or if our new product releases or technologies are not
successful in the markets they are intended to address, we may increase our rate
of expenditure in this area over and above the level of investment experienced
in the past or previously projected, which could have a material adverse effect
on our results of operation or financial condition.
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, this market has become fragmented, and some
market analysts and prospective MAXIMO MainControl customers have questioned the
validity of the product category, and adopted a "wait and see" attitude towards
purchasing products in this market. Peregrine's Plan of Reorganization was
recently confirmed, and as a result Peregrine may successfully emerge from
bankruptcy. It remains to be seen whether Peregrine's reorganization has enabled
Peregrine to streamline its operations and restructure its pre-bankruptcy
liabilities in a manner that will render it as a stronger competitor in the ITAM
market, and there can be no assurance that this market will coalesce and gain
momentum, or that the Company will achieve its desired market share.
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., Booz Allen Hamilton, SAIC, 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. Our ability to
generate revenues through these relationships depends in large part upon the
efforts of these other companies, which are outside of our control. The efforts
of these companies may in turn be influenced by factors internal to these
companies, or by developments in their respective industries or markets, that we
fail to anticipate.
We have in the past successfully engaged in cooperative software sales efforts
with PeopleSoft, Inc., a vendor of an enterprise resource planning ("ERP")
system that does not compete with our products, and with which MAXIMO is
successfully integrated. PeopleSoft recently acquired J.D. Edwards & Co., which
markets a
Page 27
product that competes with MAXIMO. As a result, it is highly likely that
PeopleSoft will cease to act in cooperation with the Company, as it markets its
new J.D. Edwards product and our software sales may decline as a result.
In addition, we have agreed to develop a version of MAXIMO, which will operate
with IBM's Websphere, AIX and DB2 products, and to market the IBM versions of
our products in preference to other versions. MAXIMO sales will therefore be
affected by the success and acceptance of the IBM Websphere, AIX and DB2
products relative to those of IBM's competitors. We may experience difficulties
in gaining market acceptance of the IBM version of our products, and
difficulties in integrating and coordinating our products and sales efforts with
those of IBM. Finally, our alliance with IBM may be viewed negatively by
customers or prospects that have not adopted the IBM technology platform, and
competitive alliances may emerge among other companies that are more attractive
to our customers and prospective customers.
OUR QUARTERLY OPERATING RESULTS ARE SUBJECT TO FLUCTUATIONS AND TO SEASONAL
VARIATION.
We have experienced, and may in the future experience, significant
period-to-period fluctuations in revenues and operating results, which may
negatively impact the price of our stock. 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 each
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, and divergence of
those results from our expectations. 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. 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. However, in many
cases the people who purchased MAXIMO may not have responsibility for management
of their company's IT assets. 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 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 as contained in MAXIMO 5, in
order to provide a common platform from which a customer's critical assets may
be managed. It is also possible that prospective customers may prefer to wait
until this integrated solution is available before purchasing MAXIMO
MainControl, and it is 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.
Page 28
ACQUISITIONS MAY FAIL TO MEET OUR EXPECTATIONS.
We may from time to time purchase other companies or their products or
technologies. While we exercise due diligence in determining the nature of the
assets and liabilities of such acquired companies and whether their products or
technologies are suitable and of commercial quality, there can be no assurances
that we will not acquire unanticipated or undisclosed liabilities or that
operations from and after the date of acquisition can be predicted from prior
performance or will meet our expectations. There can also be no assurances that
acquired products or technologies will be of commercial quality or meet
our expectations, that we will be able to employ and retain the personnel
necessary for us to achieve continuity in the acquired business and 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 our 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 markets for strategic asset maintenance software such as MAXIMO and MAXIMO
MainControl are fragmented by geography, by market and industry segments, by
hardware platform and by industry orientation, and are 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
(recently acquired by PeopleSoft) and others. MAXIMO MainControl competes with
companies in IT asset management market, such as Peregrine Systems and Computer
Associates. 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.
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, hardware and network
discovery, user interface, business intelligence, content and graphics
capabilities developed by these
Page 29
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 their 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
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 is 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
addition, when our Industry Solutions are first delivered, they may not include
all of the functionality required by the initial customers, and we may complete
the development effort under a services contract with the customer. In cases
where services are provided either for the future delivery of functionality or
on a fixed price basis and our standard 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 not be able to recognize the software license
revenue from such transactions at the time the agreements are signed, but rather
may be required to recognize such license revenue under the contract or other
method of accounting, or to recognize a greater portion or (or all) of the
revenue from these transactions as services revenue. This would likely result in
a postponement of recognition of, or a reduction in, software license revenues,
and have an adverse impact on the results of our operations.
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. Finally, we sell
our products through distributors and resellers, and are therefore dependent on
those companies to take appropriate steps to adequately implement our
contractual protections, and to enforce and protect our rights. 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
Page 30
claim of any patent or any other proprietary rights of others, we cannot give
any assurance that third parties will not assert infringement claims in the
future. Litigation may be necessary to enforce our intellectual property rights,
to protect our trade secrets, to determine the validity and scope of the
proprietary rights of others, or to defend against claims of infringement or
invalidity. Such litigation could result in substantial costs and diversion of
resources, could result in the deterioration or outright loss of our patent
rights, copyrights or other intellectual property, and could potentially have a
material adverse result on our operating results and financial condition.
LOSS OF THE SERVICES OF ONE OR MORE OF OUR KEY EXECUTIVE OFFICERS OR INABILITY
TO RECRUIT NEEDED SALES, SERVICES AND TECHNICAL PERSONNEL COULD ADVERSELY AFFECT
OUR BUSINESS.
We are highly dependent on certain key executive officers, technical and sales
employees, and the loss of one or more of such employees could have an adverse
impact on our future operations. We do not have employment contracts with any
personnel, and we do not maintain any so-called "key person" life insurance
policies on any personnel. We continue to hire a significant number of
additional sales, services and technical personnel. Competition for hiring of
such personnel in the software industry is intense, and from time to time we may
experience difficulty in locating candidates with the appropriate qualifications
within the desired geographic locations, or with certain industry specific
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 been significant fluctuations in the market price of our common
stock, recently and over longer time periods. 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
technology 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.
Page 31
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company's primary exposures to market risk are the effect of fluctuations in
interest rates earned on its cash equivalents and marketable securities and
exposures to foreign currency exchange rate fluctuations.
At September 30, 2003, the Company held $94.6 million in cash equivalents and
marketable securities consisting of taxable and tax exempt municipal securities.
Cash equivalents are classified as available for sale and valued at amortized
cost, which approximates fair market value. A hypothetical 10 percent increase
in interest rates would not have a material impact on the fair market value of
these instruments due to their short maturity.
The Company develops its products in the United States and markets them in North
America, Europe, Middle East and Africa, Australia, Asia Pacific and Latin
America. As a result, our financial results could be affected by factors such as
changes in foreign currency exchange rates or weak economic conditions in
foreign markets. Currently, the Company has no hedging contracts.
Page 32
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Information with respect to exhibits and financial statement schedules are
included in Part IV item 14(a)(1) and (2).
QUARTERLY FINANCIAL DATA (UNAUDITED)
The Company believes that period-to-period comparisons of its results of
operations are not necessarily meaningful and should not be relied upon as an
indication of future performance.
(in thousands, except per share amounts)
2003 QUARTER
Year
Dec.31, Mar. 31, June 30, Sep. 30, Ended
ENDED: 2002 2003 2003 2003 2003
------ ------- -------- -------- -------- --------
Total revenues $43,888 $ 39,388 $ 47,635 $45,966 $176,877
Gross profit 27,110 23,520 30,377 28,938 109,945
Income/(loss) from operations 61 (1,098) 2,801 3,978 5,742
Income/(loss) before income taxes 609 (274) 3,175 4,204 7,714
Provision/(benefit) from income taxes 214 (96) 1,158 1,568 2,844
Net income/(loss) 395 (178) 2,017 2,636 4,870
Net income/(loss) per share, diluted $ 0.02 $ (0.01) $ 0.08 $ 0.11 $ 0.20
2002 QUARTER
Year
Dec.31, Mar. 31, June 30, Sep. 30, Ended
ENDED: 2001 2002 2002 2002 2002
------ ------- -------- -------- -------- --------
Total revenues $46,476 $ 37,888 $ 41,443 $ 46,074 $171,881
Gross profit 28,423 20,800 24,079 29,705 103,007
Loss from operations (2,891) (7,060) (3,110) (2,258) (15,319)
Loss before income taxes (2,622) (6,870) (2,374) (2,573) (14,439)
Benefit from income taxes (697) (2,040) (540) (611) (3,888)
Net loss (1,925) (4,830) (1,834) (1,962) (10,551)
Net loss per share, diluted $ (0.09) $ (0.21) $ (0.08) $ (0.08) $ (0.46)
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None
Page 33
PART III
ITEM 10. DIRECTORS AND OFFICERS OF THE REGISTRANT
The directors and executive officers of the Company as of September 30, 2003 are
as follows. Messrs. Drapeau and Fishman are Class III Directors, whose terms
expire in 2005. Messrs. Daniels and McMullen are Class I Directors, whose terms
expire in 2006. Messrs. Sayre and Stanzler are Class II Directors, whose terms
expire in 2004.
NAME AGE POSITION
---- --- --------
Norman E. Drapeau, Jr. 43 President, Chief Executive Officer and
Director Class III
Robert L. Daniels 61 Executive Chairman of the Board - Class I
Peter J. Rice 51 Executive Vice President - Finance and
Administration, Chief Financial Officer and Treasurer
Patricia C. Foye 48 Executive Vice President, Global Marketing
& Strategic Alliances
William J. Sawyer 57 Executive Vice President- Operations
Ted D. Williams 55 Executive Vice President- Worldwide Sales
John W. Young 51 Executive Vice President - Products and
Technology
Craig Newfield 44 Vice President, General Counsel and Clerk
Richard P. Fishman 57 Director - Class III
John A. McMullen 61 Director - Class I
Stephen B. Sayre 52 Director - Class II
Alan L. Stanzler 60 Director - Class II
NORMAN E. DRAPEAU, JR. joined the Company in 1982 as an applications
analyst. Since that time, he has held various positions with the Company,
including, from 1984 to 1987, that of Manager of Customer Support and from 1989
through 1991, that of Director, Product Marketing. In 1991, Mr. Drapeau was
appointed Vice President, Corporate Marketing, in 1992 was appointed Vice
President - Americas and in July 1996 was appointed Executive Vice President -
Worldwide Sales and Marketing, serving in that capacity until January 1998. In
January 1998, Mr. Drapeau was appointed Executive Vice President and Chief
Operating Officer and was also elected a director of the Company. In May 1998,
Mr. Drapeau was elected President and Chief Executive Officer. On October 30,
2003, Mr. Drapeau was appointed to the Board of Directors of Authoria, Inc.
ROBERT L. DANIELS founded the Company in 1968 and has been a director
since that time. Mr. Daniels served as Chairman of the Board and Chief Executive
Officer from 1968 to 1996 and as President from 1968 to 1995. In May 1998, Mr.
Daniels was elected Executive Chairman of the Board.
PETER J. RICE joined the Company in 2000 as Executive Vice President of
Finance and Administration, Chief Financial Officer, and Treasurer of the
Company. From 1998 to 2000, Mr. Rice was Vice President of Finance and
Administration, Chief Financial Officer, and Treasurer of Interleaf, a developer
of e-publishing and e-content software products. Interleaf was sold to
Broadvision, Inc. in 2000. From 1995 to 1998, Mr. Rice was Vice President, Chief
Financial Officer and Treasurer for Media 100, Inc., a provider of digital media
and content design, and creation and delivery tools. From 1990 to 1995, Mr. Rice
was Vice President, Corporate Controller and Chief Accounting Officer of M/A
Com, Inc. Prior thereto, Mr. Rice
Page 34
held senior financial management positions at Apollo Computer and Atex, Inc. On
December 10, 2001, Mr. Rice was appointed to the board of directors of Engage,
Inc.
PATRICIA C. FOYE joined the Company in July 2001 as Executive Vice
President, Global Marketing and Strategic Alliances. From September 2000 to June
2001, Ms. Foye was Vice President, Worldwide Sales and Marketing for HMS
Software, Inc., an application software company centered in the aerospace
defense markets. From May 1999 to May 2000, Ms. Foye was President of
Allenbrook, Inc., a private firm focused on the development of policy management
system for insurance and financial markets. From 1998 to 1999, Ms. Foye was Vice
President and General Manager of QAD, Inc., leading the Electronics and
Industrial business segment, the largest vertical business for QAD. From 1994 to
1998, Ms. Foye held senior management positions at Digital Equipment
Corporation, a hardware and software vendor and Marcam Corporation, an ERP
applications vendor.
WILLIAM J. SAWYER joined the Company in 1978 as an applications
consultant and served in various sales and services positions from 1978 to 1984.
Mr. Sawyer was a Vice President of the Company from 1984 to 1990 and Executive
Vice President from 1990 until November 1997. In November 1997, Mr. Sawyer left
the Company and joined Peritus Software Services, Inc., a software application
company, as Vice President, Operations. Mr. Sawyer rejoined the Company in
October 1998 as Executive Vice President, Operations.
TED D. WILLIAMS originally joined the Company in 1984 and served as
Director, MAXIMO until 1988. From 1988 to 1993, Mr. Williams was President and
Chief Operating Officer of Comac Systems Corporation, a software application
company. In 1993, Mr. Williams rejoined the Company as Director, Eastern
Regional Sales. He was appointed Vice President-North American Sales in 1996 and
Vice President-Worldwide sales in January 1998. In October 1998, Mr. Williams
was appointed Executive Vice President-Worldwide Sales.
JOHN W. YOUNG originally joined the Company in 1985 and served until
1988 as MAXIMO Product Manager. From 1988 to 1992, Mr. Young was Vice President
of Sales of Comac Systems Corporation, a software application company. In 1992
he rejoined the Company as Director of MAXIMO Product Design, was appointed Vice
President - Research and Development of the Company in 1995 and was appointed
Executive Vice President - Products and Technology of the Company in 1998. On
June 24, 2003, Mr. Young was appointed to the Board of Directors of NSI
Software, Inc.
CRAIG NEWFIELD joined the Company as Vice President, General Counsel
and Clerk in September 2000. From October 1997 through August 2000, Mr. Newfield
was Vice President, General Counsel and Clerk of Interleaf, Inc., a developer of
e-publishing and e-content software products. Interleaf was sold to Broadvision,
Inc. in 2000. From April 1996 through September 1997, Mr. Newfield was General
Counsel and Secretary of OneWave, Inc., since renamed Primix Solutions, an IT
service provider. From February 1993 to April 1996, Mr. Newfield served as
in-house counsel for Marcam Corporation.
RICHARD P. FISHMAN was elected as a director in March 1999. Mr. Fishman
is currently Executive Vice President at MacAndrews & Forbes Group, Inc., where
he is responsible for venture capital investing. From 1995 to 1997, Mr. Fishman
served as Managing Director of GeoPartners Research, Inc., a strategy and
management-consulting firm, where he headed the firm's venture capital
activities. From 1995 to 1997, Mr. Fishman was also Of Counsel at the law firm
of Akin, Gump, Strauss, Hauer & Feld L.L.P. Mr. Fishman served as President and
Chief Executive Officer of Thinking Machines Corporation from 1993 to 1994 and
was a partner at the law firm of Milbank, Tweed, Hadley & McCoy from 1987 until
1993.
JOHN A. MCMULLEN was elected as a director in April 2000. Mr. McMullen
is the Managing Principal of Cambridge Meridian Group, Inc., a
strategy-consulting firm that serves Fortune 500 and technology-based companies,
with which he has been employed since 1985. Mr. McMullen taught business
strategy at Harvard Law School from the mid 1980's to 1990 and, as one of the
original members of CMGI's Board of Directors, served on that Board from 1988
through 1999. He currently serves on the Board of Ezenia, Inc., a NASDAQ listed
company, in a term that began last year. In addition, he serves, or has served,
on the boards of twelve other private, chiefly technology-oriented companies.
From 1993 to 1997 he was an informal advisor to Senator Bill Bradley (NJ). In
1998 he ran for the United States Senate from Vermont.
Page 35
STEPHEN B. SAYRE was originally elected as a director in September
1998, and re-elected in March 2001. Mr. Sayre is currently the Vice President of
Marketing and Business Development for Endeca Technologies, Inc. From June 2000
to March 2001, Mr. Sayre was Vice President of Marketing for Idiom, Inc. From
1994 to 2000, he was the Senior Vice President of Marketing at Lotus Development
Corporation, a subsidiary of IBM Corporation, a hardware and software vendor.
Prior to joining Lotus in 1994, Mr. Sayre was President of Boston Treasury
Systems and has held other senior executive level positions with Cullinet
Software and Easel Corporation.
ALAN L. STANZLER was originally elected as a director in May 1998, and
re-elected in March 2001. Mr. Stanzler served as a director of the Company from
1992 to 1994, and as Clerk of the Company from 1990 to 1996. Mr. Stanzler is Of
Counsel at the law firm of Stanzler, Funderburk & Castellon, L.L.P. From 1998 to
September 2001, Mr. Stanzler was a partner of the law firm of Maselan Jones &
Stanzler, P.C. From 1995 to 1998, Mr. Stanzler was a member of the law firm of
Davis, Malm & D'Agostine, P.C.
All directors hold office until the expiration of their respective terms as
described above and until their respective successors are duly elected and
qualified. Executive officers of the Company are appointed by and serve at the
discretion of the Board of Directors.
PART III
(ITEMS 11,12,13)
In accordance with general instruction G (3) to Form 10-K, the information
required by Items 10-13 of this report is incorporated by reference from the
Company's definitive Proxy Statement for its 2003 Annual Meeting of Stockholders
to be filed, pursuant to Regulation 14A, within 120 days after the end of the
Company's fiscal year ended September 30, 2003.
ITEM 14. CONTROLS AND PROCEDURES
MRO Software carries out periodic evaluations, 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 such
evaluations, the Chief Executive Officer and the Chief Financial Officer
concluded that, as of September 30, 2003, our disclosure controls and procedures
were effective to timely alert them to any material information relating to the
Company (including its consolidated subsidiaries) that would be 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 continue 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.
Page 36
PART IV
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
The financial statements and schedules filed as part of this Report are
listed in the following Index to Financial Statements and Schedules. The
exhibits filed as part of this Report are listed in the accompanying Index to
Exhibits.
(a) The following documents are filed as a part of this Report:
1. Consolidated Financial Statements. The following Consolidated
Financial Statements of the Company are filed as part of this
report:
PAGE
----
Report of Independent Accountants 41
Consolidated Balance Sheets -
September 30, 2003 and 2002 42
Consolidated Statements of Operations -
Years Ended September 30, 2003, 2002 and 2001 43
Consolidated Statements of Cash Flows -
Years Ended September 30, 2003, 2002 and 2001 44
Consolidated Statements of Stockholders' Equity -
Years Ended September 30, 2003, 2002 and 2001 45
Notes to Consolidated Financial Statements 46
2. Financial Statement Schedule.
SCHEDULE PAGE
-------- ----
II Valuation and Qualifying Accounts 69
Schedules not listed above have been omitted because they are
not applicable or are not required, or the information
required to be set forth therein is included in the
consolidated Financial Statements or Notes thereto.
2. Exhibits.
3. Instruments Defining the Rights of Security-Holders
3.1 Amended and Restated Articles of Organization of the
Company (included as Exhibit 3.3 to the Company's
Registration Statement on Form S-1, Registration No.
33-76420, and incorporated herein by reference)
3.2 Restated By-Laws of the Company, as amended (included
as Exhibit 3.2 to the Company's Annual Report on Form
10-K for the fiscal year ended September 30, 1996,
File No. 0-23852, and incorporated herein by
reference)
3.3 Amendment to By-Laws adopted on February 1, 2001
(included as Exhibit 3.3 to the Company's Current
Report on Form 10-Q for the quarter ended March 31,
2001, File No. 0-23852 and incorporated herein by
reference)
3.4 Form of Certificate of Designation of Series A Junior
Participating Preferred Stock of MRO Software, Inc.
(which is attached as Exhibit A to the Rights
Agreement included as Exhibit 4 (b) to the Company's
Current Report on Form 8-K dated February 2, 1998,
File No. 0-23852, and incorporated herein by
reference)
3.5 Amendment to Articles of Organization adopted on
December 15, 1999 (included as Exhibit 3.4 to the
Company's Form 10-Q for the quarter ended December
31, 1999, File No. 0-23852, and incorporated herein
by reference)
Page 37
3.6 Amendment to Articles of Organization, dated March 6,
2001 (included as Exhibit 3.4 to the Company's
Current Report on Form 8-K dated March 9, 2001, File
No. 0-23852, and incorporated herein by reference)
4. Instruments Defining the Rights of Security Holders, Including
Indentures
4.1 Specimen certificate for the Common Stock, $.01 par
value, of the Company (included as Exhibit 4.1 to the
Company's Current Report on Form 10-Q for the quarter
ended December 31,2001, File No. 0-23852 and
incorporated herein by references)
4.2 Article 4B of the Amended and Restated Articles of
Organization of the Company (included as Exhibit 4.1
to the Company's Registration Statement on Form S-1,
Registration No. 33-76420, and incorporated herein by
reference)
4.3 Rights Agreement dated as of January 27, 1998,
between the Company and BankBoston, N.A. as Rights
Agent (included as Exhibit 4 (a) to the Company's
Current Report on Form 8-K dated February 2, 1998,
File No. 0-23852, an incorporated herein by
reference)
4.4 Form of Certificate of Designation of Series A Junior
Participating Preferred Stock of the Company
(included as Exhibit 4 (b) to the Company's Current
report on Form 8-K dated February 2, 1998, File No.
0-23852, and incorporated herein by reference)
4.5 Form of Rights Certificate (included as Exhibit 4 (c)
to the Company's Current Report on Form 8-K dated
February 2, 1998, File No. 0-23852, and incorporated
herein by reference)
31.1 Certification 302
31.2 Certification 302
32.1 Certification 906
9. Voting Trust Agreements
9.1 Shareholders Agreement between Robert L. Daniels and
Susan H. Daniels dated August 1, 2001 (included as
Exhibit 9.1 to the Company's Annual Report on Form
10-K for the fiscal year ended September 30, 2001,
File No. 0-23852, and incorporated herein by
reference)
10. Material Contracts
10.1 Year ended September 30, 2003 Executive Bonus Plan
10.2 Form of Indemnity Agreement between the Company
and each of Norman E. Drapeau, Jr., Robert L.
Daniels, Peter J. Rice, Patricia C. Foye, William
J. Sawyer, Ted D. Williams, John W. Young, Craig
Newfield, Richard P. Fishman, John A. McMullen,
Stephen B. Sayre, and Alan L. Stanzler
21. Subsidiaries of the registrant
21.1 Subsidiaries of the Company
23. Consent of independent accountants
23.1 Consent of PricewaterhouseCoopers LLP
(b)Reports on Form 8-K
On 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.
Page 38
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.
On July 17, 2003, the Company filed a current report on Form 8-K disclosing its
results of operations for the quarter ended June 30, 2003.
On October 30, 2003, the Company filed a current report on Form 8-K disclosing
its results of operations for the quarter ended September 30, 2003.
The Company will furnish a copy of any exhibit listed to requesting stockholders
upon payment of the Company's reasonable expense in furnishing those materials.
Page 39
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
Dated: December 29, 2003
MRO SOFTWARE, INC.
By: /s/ Norman E. Drapeau, Jr.
-----------------------------------------
Norman E. Drapeau, Jr.
President and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the registrant and
in the capacities and on the dates indicated.
/s/ Norman E. Drapeau, Jr. President and Chief December 29, 2003
- ---------------------------- Executive Officer
Norman E. Drapeau, Jr. (Principal Executive
Officer)
/s/ Robert L. Daniels Executive Chairman of December 29, 2003
- ---------------------------- the Board
Robert L. Daniels
/s/ Peter J. Rice Executive Vice President, December 29, 2003
- ---------------------------- Chief Financial Officer
Peter J. Rice and Treasurer
(Principal Financial and
Accounting Officer)
/s/ Richard P. Fishman Director December 29, 2003
- ----------------------------
Richard P. Fishman
/s/ John A. McMullen Director December 29, 2003
- ----------------------------
John A. McMullen
/s/ Stephen B. Sayre Director December 29, 2003
- ----------------------------
Stephen B. Sayre
/s/ Alan L. Stanzler Director December 29, 2003
- ----------------------------
Alan L. Stanzler
Page 40
REPORT OF INDEPENDENT AUDITORS
To the Board of Directors and Stockholders of MRO Software, Inc.:
In our opinion, the consolidated financial statements listed in the index
appearing under Item 15(a)(1) present fairly, in all material respects, the
financial position of MRO Software, Inc. and its subsidiaries at September 30,
2003 and 2002, and the results of their operations and their cash flows for each
of the three years in the period ended September 30, 2003 in conformity with
accounting principles generally accepted in the United States of America. In
addition, in our opinion, the financial statement schedule listed in the index
appearing under Item 15(a)(2) presents fairly, in all material respects, the
information set forth therein when read in conjunction with the related
consolidated financial statements. These financial statements and financial
statement schedule are the responsibility of the Company's management; our
responsibility is to express an opinion on these financial statements and
financial statement schedule based on our audits. We conducted our audits of
these statements in accordance with auditing standards generally accepted in the
United States of America, which require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements, assessing
the accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
PricewaterhouseCoopers LLP
Boston, Massachusetts
October 29, 2003
Page 41
MRO SOFTWARE, INC.
CONSOLIDATED BALANCE SHEETS
SEPTEMBER 30, SEPTEMBER 30,
2003 2002
---- ----
(in thousands)
ASSETS
Current assets:
Cash and cash equivalents $ 73,662 $ 67,315
Marketable securities 1,102 ---
Accounts receivable, trade, less allowance
for doubtful accounts of $2,741 and $3,421
at September 30, 2003 and 2002, respectively 28,833 35,433
Prepaid expenses and other current assets 4,177 6,429
Deferred income taxes 2,242 2,613
--------- ---------
Total current assets 110,016 111,790
--------- ---------
Marketable securities 19,809 500
Property and equipment, net 8,239 10,156
Goodwill, net 46,210 46,370
Intangible assets, net 7,700 11,996
Notes receivable 593 ---
Deferred income taxes 9,267 9,056
Other assets 3,427 2,285
--------- ---------
Total assets $ 205,261 $ 192,153
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued expenses $ 15,701 $ 16,844
Accrued compensation 8,357 9,081
Income taxes payable 4,741 ---
Deferred revenue 28,734 27,536
Other current liabilities --- 267
--------- ---------
Total current liabilities 57,533 53,728
--------- ---------
Other long term liabilities 35 379
Deferred revenue 1,181 26
Commitments and contingencies (Note K)
Stockholders' equity
Preferred stock, $.01 par value;1,000 authorized,
none issued and outstanding
Common stock, $.01 par value;50,000 authorized;
24,576 and 24,267 issued and outstanding at
September 30, 2003 and 2002, respectively 246 243
Additional paid-in capital 115,093 112,700
Deferred compensation (298) (176)
Retained earnings 31,163 26,293
Accumulated other comprehensive income/(loss) 308 (1,040)
--------- ---------
Total stockholders' equity 146,512 138,020
--------- ---------
Total liabilities and stockholders' equity $ 205,261 $ 192,153
========= =========
The accompanying notes are an integral part of the
consolidated financial statements.
Page 42
MRO SOFTWARE, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
YEAR ENDED SEPTEMBER 30,
------------------------
2003 2002 2001
---- ---- ----
(in thousands, except per share data)
Revenues:
Software $ 49,904 $ 49,035 $ 61,337
Support and services 126,973 122,846 124,113
--------- --------- ---------
Total revenues 176,877 171,881 185,450
--------- --------- ---------
Cost of revenues:
Software 8,314 7,012 4,685
Support and services 58,618 61,862 70,423
--------- --------- ---------
Total cost of revenues 66,932 68,874 75,108
--------- --------- ---------
Gross profit 109,945 103,007 110,342
Operating expenses:
Sales and marketing 59,117 58,806 71,651
Product development 26,476 26,897 27,559
General and administrative 17,702 19,698 19,573
Amortization of goodwill and other intangibles 908 12,925 12,314
--------- --------- ---------
Total operating expenses 104,203 118,326 131,097
--------- --------- ---------
Income/(loss) from operations 5,742 (15,319) (20,755)
Interest income 811 974 1,594
Other income/(expense), net 1,161 (94) (450)
--------- --------- ---------
Income/(loss) before income taxes 7,714 (14,439) (19,611)
Provision/(benefit) for income taxes 2,844 (3,888) (4,143)
--------- --------- ---------
Net income/(loss) 4,870 $ (10,551) $ (15,468)
========= ========= =========
Net income/(loss) per share, basic $ 0.20 $ (0.46) $ (0.70)
--------- --------- ---------
Net income/(loss) per share, diluted $ 0.20 $ (0.46) $ (0.70)
--------- --------- ---------
Shares used to calculate net income/(loss) per share
Basic 24,429 23,171 22,148
Diluted 24,653 23,171 22,148
The accompanying notes are an integral part of the
consolidated financial statements.
Page 43
MRO SOFTWARE, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEAR ENDED SEPTEMBER 30,
------------------------
2003 2002 2001
---- ---- ----
(in thousands)
Cash flows from operating activities:
Net income/(loss) $ 4,870 $(10,551) $(15,468)
Adjustments to reconcile net income/(loss) to net
cash provided by operating activities:
Depreciation 4,480 5,154 5,488
Amortization of goodwill and other intangibles 4,284 15,921 14,585
Loss on sale and disposal of property
and equipment 28 59 1,407
Gain on sale of services operations (407) --- ---
Amortization of premium on marketable securities --- 48 7
Stock-based compensation 171 108 265
i2 warrant expense --- --- 3,287
Deferred income taxes 309 (2,497) 41
Changes in operating assets and liabilities,
net of effect of acquisitions:
Accounts receivable 7,863 9,510 4,448
Prepaid expenses and other assets 207 (1,199) 1,851
Accounts payable, accrued expenses and other
liabilities (1,910) (3,986) 517
Accrued compensation (1,025) (4,286) 2,323
Income taxes payable 5,958 --- 177
Tax benefit on exercise of employee stock purchases 92 2,675 10
Deferred revenue 1,193 5,494 957
-------- -------- --------
Net cash provided by operating activities 26,113 16,450 19,894
-------- -------- --------
Cash flows from investing activities:
Acquisitions of businesses, net of cash acquired --- (1,293) (3,700)
Acquisitions of property and equipment and other
capital expenditures (2,661) (3,005) (3,841)
Purchases of marketable securities (40,406) --- (10,012)
Sales of marketable securities 19,900 5,682 9,079
-------- -------- --------
Net cash (used in)/provided by investing activities (23,167) 1,384 (8,474)
-------- -------- --------
Cash flows from financing activities:
Payment of line of credit --- --- (2,278)
Proceeds from exercise of stock purchases 2,011 6,858 1,263
-------- -------- --------
Net cash provided by/(used in) financing activities 2,011 6,858 (1,015)
-------- -------- --------
Effect of exchange rate changes on cash 1,390 508 126
-------- -------- --------
Net increase in cash and cash equivalents 6,347 25,200 10,531
Cash and cash equivalents, beginning of year 67,315 42,115 31,584
-------- -------- --------
Cash and cash equivalents, end of year 73,662 $ 67,315 $ 42,115
======== ======== ========
The accompanying notes are an integral part of the
consolidated financial statements.
Page 44
MRO SOFTWARE, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Common Stock Accumulated
------------- Additional Other Total
Shares Par Paid-in Deferred Retained Comprehensive Stockholders' Comprehensive
(in thousands) Issued Value Capital Compensation Earnings Income/(loss) Equity Income/(loss)
- ------------------------------------------------------------------------------------------------------------------------------
Balance at September 30, 2000 22,069 220 83,185 (233) 52,312 (1,292) 134,192
Stock options exercised and
related tax benefit,
employee stock purchases 156 2 1,271 1,273
Warrant issued to
i2 Technologies, Inc. 3,287 3,287
Deferred compensation,
related to common stock
grants 25 1 316 (317) ---
Stock-based compensation 265 265
Net loss (15,468) (15,468) $(15,468)
Translation adjustment (176) (176) (176)
Net unrealized loss on
marketable securities,
net of tax (20) (20) (20)
--------
Comprehensive loss $(15,664)
--------
- ------------------------------------------------------------------------------------------------------------------------------
Balance at September 30, 2001 22,250 223 88,059 (285) 36,844 (1,488) 123,353
Stock options exercised and
related tax benefit,
employee stock purchases 653 6 9,527 9,533
Stock issued to
i2 Technologies, Inc. 268 3 (3) ---
Acquisitions, net of merger
expenses 1,096 11 15,117 15,128
Stock-based compensation 109 109
Net loss (10,551) (10,551) $(10,551)
Translation adjustment 448 448 448
--------
Comprehensive loss $(10,103)
--------
- ------------------------------------------------------------------------------------------------------------------------------
Balance at September 30, 2002 24,267 $ 243 $112,700 $ (176) $ 26,293 $ (1,040) $138,020
Stock options exercised and
related tax benefit,
employee stock purchases 284 3 2,100 2,103
Deferred compensation,
related to common stock
grants 25 293 (293) ---
Stock-based compensation 171 171
Net income 4,870 4,870 4,870
Translation adjustment 1,445 1,445 1,445
Net unrealized loss on
Marketable securities, net
of
tax (97) (97) (97)
--------
Comprehensive income $ 6,218
--------
- ------------------------------------------------------------------------------------------------------------------------------
Balance at September 30, 2003 24,576 $ 246 $115,093 $ (298) $ 31,163 $308 $146,512
- ------------------------------------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of the
consolidated financial statements.
Page 45
MRO SOFTWARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
A. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES:
NATURE OF BUSINESS
The Company develops, markets, sells and distributes strategic asset
management solutions used by businesses, government agencies and other
organizations to manage their high-value capital assets, such as plants,
facilities, production equipment, and IT assets. The Company's integrated suite
of applications optimizes performance, improves productivity and service levels
and enables asset-related sourcing and procurement across the entire spectrum of
strategic assets.
BASIS OF PRESENTATION
The consolidated financial statements include the accounts of MRO
Software, Inc. ("MROI") and its majority-owned subsidiaries (collectively, the
"Company"). All intercompany accounts and transactions have been eliminated.
Certain prior year financial statement items have been reclassified to conform
to the current year presentation.
USE OF ESTIMATES
The Company's financial statements are prepared in accordance with
accounting principles generally accepted in the United States of America
("GAAP"). These accounting principles require management to make estimates and
assumptions that affect the reported amount of assets and liabilities and
disclosures of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. To the extent there are material differences between these
estimates and actual results, our financial statements would be affected.
CASH AND CASH EQUIVALENTS
The Company considers all highly liquid instruments purchased with
original maturities of three months or less to be cash equivalents. Our cash
equivalents consist mainly of money market mutual funds, which are stated at
cost plus accrued interest, which approximates fair value.
CONCENTRATION OF CREDIT RISK
Financial instruments, which potentially subject the Company to
concentration of credit risk, consist primarily of temporary cash investments,
marketable securities and accounts receivable. The majority of our cash is
maintained with one major financial institution in the United States. The cash
balances with this bank in the United States exceeds the amount of insurance
provided on such deposits. The counterparties to the agreements relating to
marketable securities and investment instruments consist of various United
States governmental units and financial institutions of high credit standing.
Credit risk on accounts receivable is minimized as a result of the diverse
nature of the Company's customer base. The Company performs ongoing credit
evaluations of its customers' financial condition and limits the amount of
credit when deemed necessary.
COMPREHENSIVE INCOME
The Company's comprehensive income is comprised of net income, foreign
currency translation adjustments and unrealized gains and losses on
available-for-sale investments, net of tax. Comprehensive income is included in
the stockholders' equity section of the balance sheet.
DERIVATIVE FINANCIAL INSTRUMENTS
Financial Accounting Standards No. 133. "Accounting for Derivative
Instruments and Hedging Activities" ("SFAS 133"), establishes accounting and
reporting standards for derivative instruments, and requires that all
derivatives be recorded on the balance sheet at fair value. The Company does not
have derivative financial instruments.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amounts (stated at cost) of cash and cash equivalents,
accounts receivable, accounts payable and accrued expenses approximate fair
value because of their short-term nature.
Page 46
FOREIGN CURRENCY
Assets and liabilities are translated at current exchange rates at the
balance sheet dates. The translation adjustments made on translation of the
balance sheet are recorded as a separate component of stockholders' equity.
Revenues and expenses are translated into U.S. dollars at average exchange
rates. Foreign currency transaction gains and losses are included in determining
net income. The Company recorded a net gain of $532 thousand, a net loss of $85
thousand, and net gain of $103 thousand for fiscal 2003, 2002, and 2001,
respectively.
MARKETABLE SECURITIES
The Company's marketable securities are classified as
available-for-sale and are stated at their fair value. All marketable securities
are held in the Company's name and are held in custody with two major financial
institutions. The fair value of marketable securities was determined based on
quoted market prices. Unrealized gains and losses on securities classified as
available-for-sale are reported as a separate component of stockholders' equity
and are included in other comprehensive income.
DEPRECIATION AND AMORTIZATION
Property and equipment are stated at cost, net of depreciation and
amortization.
Depreciation is computed over the estimated useful lives of the assets
as follows:
Description Estimated Useful Life
----------- ---------------------
Computer equipment & software 3 years
Vehicles 3 years
Furniture and fixtures 5 years
Leasehold improvements are amortized on the straight-line method over
the shorter of their estimated useful life or the remaining term of the lease.
Maintenance and repairs are charged to expense as incurred. Upon retirement or
sale, the cost of the assets disposed of and the related accumulated
depreciation are removed from the accounts and any resulting gain or loss is
included in the determination of net income.
LONG-LIVED ASSETS
GOODWILL
The Company adopted Financial Accounting Standards No. 142, "Goodwill
and Other Intangible Assets" ("FAS 142") on July 1, 2001, which was applicable
for all assets acquired after June 30, 2001. FAS 142 requires that goodwill no
longer be amortized, but instead, be tested annually for impairment. Also, in
accordance with this standard, the Company ceased amortization of goodwill
associated with acquisitions purchased prior to the adoption date, at the
beginning of its fiscal year, October 1, 2002. In addition, within six months of
adopting this accounting method, a transitional impairment test must be
completed, and any impairment identified must be treated as a cumulative effect
of a change in accounting principle. In testing for potential impairment all
remaining goodwill has been assigned to one reporting unit and reviewed for
impairment at the entity level. The Company completed a transitional impairment
test as of March 31, 2003. A subsequent impairment analysis was performed as of
September 30, 2003. No impairment was recognized on either testing date.
INTANGIBLE ASSETS OTHER THAN GOODWILL
Long-lived assets are amortized over their estimated useful lives. The
Company periodically reviews the long-lived assets, including intangible assets
resulting from acquisitions, for impairment whenever events or changes in
circumstances indicate that the carrying amount of these assets may exceed their
fair value. The Company estimates whether future cash flows expected to result
from the use of assets exceed the carrying amount of the assets. In the event
that the Company judges that an impairment exists, all or a portion of the asset
will be written off based on the amount by which the carrying amount exceeds the
fair value of the asset. In order to determine the fair value, the Company
obtains quoted market prices or utilizes valuation techniques, such as
discounted cash flows.
RESEARCH AND DEVELOPMENT
Costs related to research, design and development of products are
charged to research and development expenses as incurred. Software development
costs are
Page 47
capitalized beginning when a product's technological feasibility has been
established and ending when a product is available for general release to
customers. Generally, our products are released soon after technological
feasibility has been established. Costs eligible for capitalization under SFAS
No. 86 were not significant to our consolidated financial statements and all
software development costs have been expenses as incurred.
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.
INCOME TAXES
The Company accounts for income taxes under the asset and liability
approach for accounting and reporting for income taxes. The Company computes
deferred income taxes, net of valuation allowances, for the estimated future tax
effects of temporary differences between the financial statement and tax basis
of assets and liabilities. Changes in deferred tax assets and liabilities are
recorded in the provision for income taxes. A valuation allowance is recorded to
reduce deferred tax assets to the amount of future tax benefit that is more
likely than not to be realized. We consider current and projected taxable income
and ongoing tax planning strategies when assessing the need for a valuation
allowance. Any increase in a valuation allowance could have a material adverse
impact on our income tax provision and net income in the period in which the
determination is made.
The Company has not provided for the U.S. income tax on earnings of its
foreign subsidiaries as it considers certain of these earnings are intended to
be permanently reinvested. At September 30, 2003, the undistributed earnings of
foreign subsidiaries were $7.8 million.
REVENUE RECOGNITION
SOFTWARE PRODUCTS
The Company licenses its software products under noncancellable license
agreements. Software license fee revenues are generally recognized upon contract
execution and product shipment, provided that collection of the resulting
receivable is deemed probable, the fees are fixed or determinable, and no
significant modification or customization of the software is required.
Our customers do not have any right of return except as stipulated under a
standard 90-day warranty that runs concurrent with post-contract product support
(PCS). The Company does not maintain any reserves with respect to this warranty
based on a history of performance of our software. On the rare occasion that a
customer insists on conditions of acceptance, the Company defers revenue until
the customer's acceptance is obtained and the condition has been satisfied.
Revenue from products sold through indirect channels ("resellers") is
recognized upon shipment of the software, as long as evidence of an arrangement
exists, collectibility is probable and the fee is fixed or determinable and the
resellers obligation to pay us is not contingent upon resale of our product.
Revenue is recorded net of any commissions or discounts. Our resellers do not
have any right of return beyond the standard 90-day performance warranty that
runs concurrent with post-contract product support (PCS).
SERVICES REVENUES
Services revenues are comprised of consulting and training fees related
to installation of the Company's software solutions, maintenance/support ("PCS")
contracts for software products, content management and subscription based fees
related to the Company's Online Commerce Services ("OCS") business. Consulting,
training and content management services are generally recognized as the
services are performed. PCS revenues are recognized ratably over the term of the
agreement, generally one year. Customers typically subscribe to OCS on an annual
basis and
Page 48
revenue is recorded as services revenue and recognized on a straight-line basis
over the applicable subscription period.
Many of our software arrangements include consulting implementation
services sold separately under consulting contracts. We consider whether the
services revenue can be recognized separately from the software revenue by
analyzing the nature of the services (i.e. if the services are essential to the
functionality of the software), the level of risk, availability of services from
other vendors, acceptance criteria, milestone payments and fixed price terms.
Contract accounting is applied to any arrangement that includes significant
customization or modification of the software.
MULTIPLE ELEMENT ARRANGEMENTS
The Company's multiple element arrangements could include the following
three elements: (a) software license, (b) PCS, and (c) consulting, training and
other services ("services"). Revenue is allocated to the elements of the
arrangement based upon the vendor specific objective evidence ("VSOE") of fair
value of each element. The Company uses the residual method to recognize its
software license revenue, because while we are able to determine the VSOE of
fair value of PCS and services, we are unable to determine the fair
value of software licenses. Under the residual method, the fair value of
undelivered elements (PCS and/or services) is deferred and recognized when the
PCS and/or services are delivered. The difference between the amount of the
total arrangement and the amount attributable to the elements for which fair
value is determinable (PCS and/or services) is recognized as software license
revenue. VSOE is established for PCS and is based on the price of PCS when sold
separately. The PCS renewal rate is a relatively consistent percentage of the
stipulated software license fee, offered to all customers. VSOE for consulting
services is based on fixed hourly rates set according to the skill level of the
consultant required. VSOE for training services is based on an established
per-student fee structure.
We assess whether fees are fixed or determinable at the time of sale
and recognize revenue if all other revenue recognition requirements are met. Our
standard payment terms are net 30 days. Payment terms that extend beyond net 30
days from the contract date but are within twelve months are generally deemed to
be fixed or determinable based on our successful history of collecting on such
arrangements. For those customers who are deemed not to be credit-worthy,
revenue is deferred until payment is received.
Shipping and handling fees associated with our products are recorded as
revenue and the associated costs are recorded as cost of software sales.
ALLOWANCES FOR DOUBTFUL ACCOUNTS AND SALES RETURNS
The Company maintains allowances for doubtful accounts, which reflect
the Company's estimate of the amounts owed by customers that customers will be
unable or otherwise fail to pay. The allowance for doubtful accounts is based on
Management's assessment of the collectibility of customer accounts and factors
such as historical experience, credit quality, age of the accounts receivable
balance, and current economic conditions. Management performs ongoing credit
evaluations of its customers' financial condition and limits the amount of
credit when deemed necessary. The Company did not record a provision for
estimated sales returns. Based on our history of sales returns and an analysis
of credit memos, we determined that a provision was not needed.
DEFERRED REVENUE
Revenue on all software license transactions in which there are
significant outstanding obligations is deferred and recognized once such
obligations are fulfilled. Deferred revenue also includes maintenance contracts,
annual commerce fees and OCS fees billed in advance.
Page 49
ADVERTISING EXPENSE
The Company recognizes advertising expense as incurred. Advertising
expense was approximately $4.7 million, $4.9 million, and $5.8 million for
fiscal years 2003, 2002, and 2001, respectively.
STOCK-BASED COMPENSATION
The Company grants stock options to its employees and outside
directors. Such grants are for a fixed number of shares with an exercise price
equal to the fair value of the shares at the date of grant. Statement of
Financial Accounting Standards No. 148 ("SFAS 148") amends Statement of
Financial Accounting Standards No. 123 ("SFAS 123") to provide alternative
methods of transition to the SFAS 123 fair value method of accounting for
stock-based employee compensation. In addition, SFAS 148 requires disclosure of
the effects of an entity's accounting policy with respect to stock-based
employee compensation on reported net income (loss) and earnings per share in
annual and interim financial statements.
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. The fair value of the Company's stock options was estimated
using the Black-Scholes option-pricing model. This model was developed for use
in estimated fair value of traded options that have no vesting restrictions and
are fully transferable. This model requires the input of highly subjective
assumptions including the expected stock price volatility. Because the Company's
stock options have characteristics significantly different from those of traded
options, and because changes in the subjective input assumptions can materially
affect the fair value estimates, in management's opinion, the Black-Scholes
model does not necessarily provide a reliable single measure of the fair value
of its stock options.
The fair value of the Company's stock options was estimated using the
following weighted-average assumptions:
Year Ended September 30,
-----------------------------------
2003 2002 2001
---- ---- ----
Expected life (in years) 3.36 3.69 3.35
Volatility 90% 93% 95%
Risk-free interest rate 2.36% 3.99% 4.5%
Dividend yield 0% 0% 0%
Under SFAS 123, the weighted-average estimated fair value of options
granted during fiscal 2003, 2002 and 2001 was $7.36, $14.21 and $5.95 per share,
respectively.
Proforma information
The Company complies with the pro forma disclosure requirements of
SFAS 123 as amended by SFAS 148. 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 123 to stock-based
employee compensation:
Year Ended September 30,
------------------------------------------
2003 2002 2001
---- ---- ----
(in thousands, except per share amounts)
Net income/(loss)
As reported ............................... $ 4,870 $ (10,551) $ (15,468)
Add: Stock-based employee compensation
expense included in net income ........... 171 109 31
Deduct: Stock-based employee compensation
expense determined under the fair value
based method for all awards, net of
related tax effects ...................... $ (10,751) $ (10,075) $ (9,498)
Page 50
Pro forma net loss ........................... $ (5,710) $ (20,517) $ (24,935)
Earnings/(loss) per share:
Basic - as reported ....................... $ 0.20 $ (0.46) $ (0.70)
Basic - pro forma ......................... $ (0.23) $ (0.89) $ (1.13)
Diluted - as reported ..................... $ 0.20 $ (0.46) $ (0.70)
Diluted - pro forma .......................... $ (0.23) $ (0.89) $ (1.13)
With the exception of restricted stock awards to non-employee members of the
board of directors, no stock-based compensation cost is reflected in net income,
as all stock-based awards granted under the Company's plans consist of stock
options that have an exercise price equal to the market value of the underlying
common stock on the date of grant.
RECENT ACCOUNTING PRONOUNCEMENTS
In January 2003, the FASB issued interpretation No. 46, "Consolidation
of Variable Interest Entities" (FIN 46). This interpretation of Accounting
Research Bulletin No. 51 "Consolidated Financial Statements," addresses
consolidation by business enterprises of variable interest entities (VIEs) that
either: (1) do not have sufficient equity investment at risk to permit the
entity to finance its activities without additional subordinated financial
support, or (2) the equity investors lack an essential characteristic of a
controlling financial interest. The FASB intends to issue a revised FIN 46 ("FIN
46-R"). For all Special Purpose Entities ("SPEs") created prior to February 1,
2003, companies must apply either the provisions of FIN 46 or early adopt the
provisions of FIN 46-R at the end of the first interim or annual reporting
period ending after December 15, 2003. If companies apply FIN 46 for such
period, the provisions of FIN 46-R must be applied as of the end of the first
interim or annual reporting period ending after March 15, 2004. For all non-SPEs
created prior to February 1, 2003, companies will be required to adopt FIN 46-R
at the end of the first interim or annual reporting period ending after March
15, 2004. For all entities (regardless of whether the entity is an SPE) that
were created subsequent to January 31, 2003, companies were already required to
apply the provisions of FIN 46, and will continue doing so unless companies
elect to early adopt the provisions of FIN 46-R as of the first interim or
annual reporting period ending after December 15, 2003. If the FIN 46-R is not
early adopted, companies are required to apply FIN 46-R to those post-January
31, 2003 entities as of the end of the first interim or annual reporting period
ending after March 15, 2004. As of September 30, 2003, the Company believes it
did not have any VIEs and therefore this statement had no impact on the
financials statements.
In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain
Financial Instruments with Characteristics of Both Liabilities and Equity" (SFAS
150). This statement establishes new standards for classification, measurement
and disclosure of certain types of financial instruments having characteristics
of both liabilities and equity, including instruments that are mandatorily
redeemable and that embody obligations requiring or permitting settlement by
transferring assets or by issuing an entity's own shares. SFAS 150 is effective
for financial instruments entered into or modified after May 31, 2003 and for
contracts in existence at the start of the first interim period beginning after
June 15, 2003. The FASB has deferred indefinitely the effective date for
sections of SFAS 150 applicable to certain mandatorily redeemable financial
instruments. As of September 30, 2003, the Company had no financial instruments
that could be classified with characteristics of both liabilities and equity and
therefore this statement had no impact on the financial statements.
Page 51
B. INCOME TAXES:
The components of income/(loss) before income taxes and the
provision/(benefit) for income taxes consist of the following:
Year Ended September 30,
------------------------------------
(in thousands) 2003 2002 2001
-------- -------- --------
Income/(loss) before income taxes:
United States ................................. $ 4,867 $(17,683) $(22,183)
Foreign ....................................... 2,847 3,244 2,572
-------- -------- --------
$ 7,714 $(14,439) $(19,611)
======== ======== ========
The provision/(benefit) for income taxes consists of:
Current taxes:
Federal ....................................... 547 (3,151) (2,850)
State ......................................... 196 131 364
Foreign ....................................... 1,298 1,297 1,034
Foreign withholding taxes ..................... 591 349 868
-------- -------- --------
$ 2,632 $ (1,374) $ (584)
======== ======== ========
Deferred taxes:
Federal ....................................... 561 (2,141) (3,159)
State ......................................... 20 (422) (521)
Foreign ....................................... (369) 49 121
-------- -------- --------
212 (2,514) (3,559)
-------- -------- --------
Total ................................. $ 2,844 $ (3,888) $ (4,143)
======== ======== ========
The reconciliation of the Company's income tax provision to the
statutory federal tax rate is as follows:
Year Ended September 30,
--------------------------
2003 2002 2001
---- ----- ----
Statutory federal tax rate ............... 35.0% (35.0)% (35.0)%
FSC benefit .............................. (0.7) -- --
State taxes, net of federal tax benefit... 1.4 .3 1.3
R&D credit ............................... (5.4) (.7) (1.5)
Exempt interest .......................... (0.1) -- --
Net operating loss utilization ........... (6.6) -- --
Meals and entertainment .................. 1.5 .8 1.1
Foreign taxes ............................ 7.8 1.6 3.2
Warrant expense .......................... -- -- 5.9
Goodwill and intangibles amortization .... 4.5 6.4 4.7
Other .................................... (0.5) (.3) (0.8)
---- ----- -----
Effective tax rate ....................... 36.9% (26.9)% (21.1)%
==== ===== =====
Page 52
The components of the deferred tax provision are:
Year Ended September 30,
---------------------------------
(in thousands) 2003 2002 2001
------- ------- -------
Depreciation .................... $ (767) $ 67 $ (17)
Allowance for doubtful accounts.. 263 177 (462)
Software capitalization ......... (472) 539 516
Deferred revenue ................ (4) 67 (310)
Goodwill ........................ 1,707 (2,297) (2,626)
Intangibles ..................... (518) (903) (408)
Translation gain ................ 304 25 19
Accrued benefits/vacation ....... (133) --- ---
Research and development credit.. (100) (100) (300)
Other ........................... (68) (89) 29
------- ------- -------
$ 212 $(2,514) $(3,559)
======= ======= =======
The components of the deferred tax assets and liabilities are as
follows:
As of September 30,
----------------------
(in thousands) 2003 2002
-------- --------
Deferred tax assets:
Deferred revenue ................ $ 687 $ 683
Deferred rent ................... 14 14
Allowance for doubtful accounts.. 702 965
Accrued benefits/vacation ....... 323 190
Depreciation .................... 1,374 607
Package design .................. 54 75
Amortized intangibles ........... 2,284 1,766
Other reserves .................. 244 127
Goodwill ........................ 4,914 6,621
Translation loss ................ 431 735
Net operating loss carryforward.. 1,794 2,434
Foreign tax credit carryforward.. 132 132
Research and development credit.. 800 700
Valuation allowance ............. (1,644) (2,284)
-------- --------
........................................ $ 12,109 $ 12,765
-------- --------
Deferred tax liabilities:
Amortized software ............... $ 600 $ 1,072
Other ............................ -- 24
-------- --------
........................................ $ 600 $ 1,096
-------- --------
Net deferred tax assets ............... $ 11,509 $ 11,669
======== ========
At September 30, 2003, the Company had foreign tax credit carryforwards
of approximately $132 thousand, which expire in fiscal year 2004.
At September 30, 2003, the Company had foreign net operating loss
carryforwards of approximately $92 thousand, which will expire in 2004.
At September 30, 2003, the Company had total domestic net operating
loss carryforwards of approximately $3.8 million attributable to the acquisition
of
Page 53
Applied Image Technology, Inc. ("AIT"). In accordance with the provisions of
Internal Revenue Code Section 382, the Company's utilization of AIT's net
operating loss carryforward is estimated to be limited to approximately $600
thousand per year. The domestic net operating loss carryforwards will generally
expire in varying amounts from 2004 through 2019. At September 30, 2003, the
Company had state apportioned net operating loss carryforwards of approximately
$4.3 million expiring in various years from 2005 through 2022, which are also
subject to statutory limitations on their utilization.
The Company continually assesses the realizability of its deferred tax
asset. The deferred tax asset may be reduced by a valuation allowance, if based
on the weight of available evidence, it is more likely than not that some
portion or all of the recorded deferred tax assets will not be realized in
future periods. 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, which were attributable to unprofitable businesses that we
were engaged in. We have since divested of these unprofitable businesses and we
believe that we have substantial off-setting positive evidence that would negate
the need for a valuation allowance. The positive evidence consists of the
current year cumulative pre-tax profits and projected future pre-tax profits, as
well as, 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
September 30, 2003 is $11.5 million.
The Company has established a valuation allowance with respect to the
net operating losses acquired from Applied Image Technology, Inc. ($1.3
million), various state net operating loss carryforwards ($266 thousand), and
certain Canadian net operating loss carryforwards ($40 thousand). 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
reduction in the net valuation allowance in fiscal 2003 from fiscal 2002 is
primarily attributable to the utilization of net operating loss carryforwards.
C. ACQUISITIONS
On June 14, 2002, the Company completed the acquisition of MainControl,
Inc. ("MainControl"), a provider of IT asset management solutions. The purpose
of the acquisition was to expand the Company's product base and enable us to
offer products that manage a broader range of an enterprise's strategic assets.
Under the terms of the acquisition agreement, the Company acquired all
outstanding equity of MainControl for a combination of MRO common stock and
cash. The Company paid $3.2 million in cash, of which $420 thousand was
contingent on certain revenue thresholds, and issued 1,096,296 shares valued at
$13.80 per share. The share price was calculated by averaging the closing price
of a share of MRO Software's stock for five days before and five days after the
announcement date of the merger, as reported by the NASDAQ National Market. The
total purchase price, including transaction expenses of $784 thousand, was $18.6
million. The Company allocated the purchase price as such: $3.7 million to
current and other assets, $3.1 million to acquired technology, $1.2 million to
customer contracts, $100 thousand to backlog, $200 thousand to software
documentation, $700 thousand to a non-compete agreement, $15.8 million to
goodwill, and $6.2 million to current liabilities. The purchase price allocation
was based on then-current intentions for future use of the acquired assets,
estimate of future projected cash flows, analysis of historical financial
results and review of customer contracts. Acquired technology will be amortized
over six and one-half years, customer contracts will be amortized over four
years, backlog will be amortized over one year, software documentation will be
amortized over three years and the non-compete agreement will be amortized over
two years.
Page 54
On August 22, 2001, the Company completed the acquisition of Collego
Corporation, a provider of catalog content management enterprise applications
for industrial suppliers. The total purchase price of the acquisition was $4.7
million. In August 2002, the Company paid $750 thousand to the former
shareholders as a result of certain contingencies met subsequent to the
acquisition. The contingent amount had been held in escrow to be paid upon
expiration of twelve months from the closing, if these certain contingencies
were met. These payments were recorded as additional goodwill. The Company
estimated the fair market value of the assets acquired and liabilities assumed
at the date of acquisition and allocated $4.7 million to goodwill and intangible
assets, mainly acquired technology.
D. SALE OF ASSETS
On January 17, 2003, the Company sold the industrial data normalization
services operations. The sale included software and technology used in such
operations, contracts with customers, suppliers and vendors, and trademarks
associated with such operations. Additionally, the workforce was included as
part of the sale. 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 OCS offerings.
The assets and workforce 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 $407 thousand and is included in
other income. The fair value of the assets sold net of the liabilities assumed
was $593 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 no value was attributed to the
stock purchase warrants due to the limited operating history of the buyer.
E. NET INCOME PER SHARE:
Basic and diluted income/(loss) per share are calculated as follows:
Year Ended September 30,
-----------------------------------
(in thousands, except per share amounts) 2003 2002 2001
-------- -------- --------
Net income/(loss) ............................. $ 4,870 $(10,551) $(15,468)
Denominator:
Weighted average common shares
outstanding - basic ......................... 24,429 23,171 22,148
Effect of dilutive securities ................. 224 -- --
(primarily stock options)
-------- -------- --------
Weighted average common shares
outstanding - diluted ....................... 24,653 23,171 22,148
======== ======== ========
Net income/(loss) per share - basic and diluted $ 0.20 $ (0.46) $ (0.70)
Options to purchase shares of the Company's common stock of 2,863,000,
1,847,000 and 1,879,000 for fiscal 2003, 2002 and 2001, respectively, were
outstanding but were not included in the computation of diluted net
income/(loss) per share because the exercise price of the options was greater
than the weighted average market price
Page 55
of the common stock during the period. Common stock equivalents of 224,000
shares were included in the computation of diluted net income per share for
fiscal 2003. Options to purchase shares of the Company's common stock of 717,000
and 508,000 for fiscal 2002 and 2001, respectively, were outstanding but were
excluded from the computations of diluted net loss per share as the effect was
anti-dilutive due to the Company's net loss.
F. MARKETABLE SECURITIES:
The Company classifies its marketable securities as "available for
sale" and carries them at aggregate fair value. Unrealized gains and losses are
included as a component of stockholders' equity, net of tax effect. Realized
gains and losses are determined based on the specific identified cost of the
securities. Dividend and interest income, including amortization of the premium
and discount arising at acquisition, are included in other income. The pre-tax
unrealized holding gains and (losses) for the year ended September 30, 2003 were
$0 and $(149) thousand, respectively. There were no pre-tax unrealized holding
gains and (losses) for the year ended September 30, 2002.
As of September 30, 2003, marketable securities consisted of the
following:
Amortized Fair Market
(in thousands) Cost Value
---- -----
Current:
Securities with maturity date of less than one year:
Certificates of deposit 1,100 1,101
Corporate securities 1 1
------- -------
$ 1,101 $ 1,102
------- -------
Noncurrent:
Securities with maturity date of more than one year:
U.S. government securities 15,297 15,222
Tax exempt municipal securities 75 75
Corporate bonds 4,207 4,139
Certificates of deposit 380 373
------- -------
$19,959 $19,809
------- -------
Total.................... $21,060 $20,911
------- -------
As of September 30, 2002, marketable securities consisted of the
following:
Amortized Fair Market
(in thousands) Cost Value
---- -----
Noncurrent:
Securities with maturity date greater than one year:
Tax exempt municipal securities .................. 500 500
---- ----
$500 $500
---- ----
Total ............ $500 $500
==== ====
Page 56
G. PROPERTY AND EQUIPMENT:
Property and equipment are stated at cost and consist of the following:
As of September 30,
----------------------
(in thousands) 2003 2002
-------- --------
Computer equipment ............................. $ 6,724 $ 6,649
Purchased software ............................. 15,717 14,265
Vehicles ....................................... 16 16
Furniture and fixtures ......................... 6,504 7,089
Leasehold improvements ......................... 4,294 4,538
-------- --------
................................................. 33,255 32,557
Less accumulated depreciation and amortization.. (25,016) (22,401)
-------- --------
$ 8,239 $ 10,156
======== ========
Total depreciation and amortization expense was $4.5 million, $5.2
million, and $5.5 million for fiscal 2003, 2002 and 2001, respectively. Included
in depreciation and amortization expense is amortization expense for purchased
and internal use software of $2.6 million, $2.9 million, and $3.2 million for
fiscal 2003, 2002 and 2001, respectively.
H. GOODWILL AND OTHER INTANGIBLE ASSETS:
In July 2001, the Financial Accounting Standards Board ("FASB") issued
"SFAS" No. 141, "Business Combinations" and SFAS No. 142, "Goodwill and Other
Intangible Assets." The statements were effective for business combinations
initiated after June 30, 2001, with the entire provisions of SFAS No. 142
becoming effective for the Company commencing with its 2003 fiscal year. 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 this accounting
method, a transitional impairment test must be completed, and any impairment
identified must be treated as a cumulative effect of a change in accounting
principle. New criteria have been established that determine whether an acquired
intangible asset should be recognized separately from goodwill. In testing for
potential impairment all remaining goodwill has been assigned to one reporting
unit and reviewed for impairment at the entity level. The Company completed a
transitional impairment test as of March 31, 2003. A subsequent impairment
analysis was performed as of September 30, 2003. No impairment was recognized on
either testing date.
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 twelve months ended September 30, 2002 and 2001,
respectively.
For the twelve months For the twelve
ended September 30, months ended
(in thousands, except per share amounts) 2002 September 30, 2001
- ---------------------------------------- --------------------- ------------------
Net loss, as reported $ (10,551) $ (15,468)
Add back: impact of goodwill amortization,
net of tax benefit 8,174 8,447
Adjusted net loss $ (2,377) $ (7,021)
Net loss per share, basic and diluted, as
reported $ (0.46) $ (0.70)
Add back: impact of goodwill amortization,
net of taxes $ (0.36) $ (0.38)
Adjusted net loss per share, basic and diluted $ (0.10) $ (0.32)
Page 57
In fiscal 2003, $160 thousand of goodwill was disposed of as a result
of the sale of assets of our industrial data normalization services operations.
The change in the carrying amount of goodwill as of September 30, 2003 and 2002
are as follows:
(in thousands)
Balance as of October 1, 2001 $ 41,506
Goodwill acquired during year 16,622
Amortization (11,758)
Balance as of September 30, 2002 46,370
Goodwill disposed of related to sale of
services operations (See Footnote D) (160)
--------
Balance as of September 30, 2003 $ 46,210
========
Intangible assets consist of the following:
As of September 30,
---------------------------
(in thousands) 2003 2002
-------- --------
Goodwill ......................................... $ 77,853 $ 78,013
Accumulated amortization ......................... (31,643) (31,643)
-------- --------
Sub-total Goodwill ............................... 46,210 46,370
-------- --------
Acquired technology .............................. 15,744 15,744
Accumulated amortization ......................... (9,269) (5,894)
-------- --------
Sub-total acquired technology .................... 6,475 9,850
-------- --------
Other intangibles ................................ 3,009 3,932
Accumulated amortization ......................... (1,784) (1,786)
-------- --------
Sub-total other intangibles ...................... 1,225 2,146
-------- --------
Total intangible assets, net ..................... $ 53,910 $ 58,366
======== ========
Other intangibles consist of customer contracts, backlog, customer
lists and non-compete agreements.
Amortization expense of intangible assets was $4.3 million, $15.9
million and $14.6 million for fiscal 2003, 2002 and 2001, respectively. The 2002
and 2001 amounts included amortization of goodwill.
As of September 30, 2003, remaining amortization expense on existing
intangibles for the next five years is as follows:
Page 58
(in thousands)
2004 $3,024
2005 2,240
2006 1,383
2007 477
2008 477
------
Total $7,601
I. ACCRUED COMPENSATION:
A summary of accrued compensation consists of the following:
As of September 30,
-----------------------
(in thousands) 2003 2002
-------- --------
Accrued payroll, bonus and 401(k) contribution......... $ 2,713 $ 3,149
Accrued sales commissions ............................. 3,462 3,838
Accrued vacation pay .................................. 2,182 2,094
-------- --------
$ 8,357 $ 9,081
======== ========
J. OTHER LIABILITIES:
A summary of other liabilities consists of the following:
As of September 30,
-----------------------
(in thousands) 2003 2002
-------- --------
Current:
Deferred lease obligation.............................. --- $ 36
Non-cancelable commitments............................. --- 65
Non-cancelable lease termination costs................. --- 166
-------- --------
$ --- $ 267
======== ========
Long term:
Non-cancelable lease termination costs ................ 5 257
Security deposit obligation ........................... 30 122
Unearned maintenance ........................... 1,181 26
-------- --------
$ 1,216 $ 405
======== ========
Page 59
K. COMMITMENTS AND CONTINGENCIES:
The Company leases its office facilities under operating lease
agreements, which expire at various dates through June 30, 2019. The Company
pays all insurance, utilities, and pro rated portions of any increase in certain
operating expenses and real estate taxes. The aggregated rent expense under
these leases was $6.2 million, $6.5 million, and $6.6 million for fiscal 2003,
2002 and 2001, respectively.
The operating leases provide for minimum aggregate future rentals as of
September 30, 2003 as follows:
(in thousands)
2004.................................................................... $ 3,934
2005.................................................................... 3,269
2006.................................................................... 2,921
2007.................................................................... 2,823
2008 and thereafter..................................................... 21,103
-------
$34,050
=======
The Company is not a party to any legal proceedings the outcome of
which, in the opinion of management, would have a material adverse effect on the
Company's results of operations or financial condition.
L. EMPLOYEE BENEFITS:
CASH OR DEFERRED PLAN
The MRO Software, Inc. Cash or Deferred Plan (the "Plan") is a defined
contribution plan available to substantially all of MROI's domestic employees.
The Plan was established in 1988 under Section 401(a) of the Internal Revenue
Code. Under the Plan, employees may make voluntary contributions based on a
percentage of their pretax earnings.
Effective January 1, 1993, the Plan was amended to provide for both a
guaranteed and a discretionary contribution made by MROI. Amounts charged to
expense for this Plan in fiscal 2003, 2002, and 2001 were $359 thousand, $530
thousand, and $665 thousand, respectively.
1994 Incentive and Nonqualified Stock Option Plans
On March 10, 1994, the Board of Directors of the Company adopted the
1994 Incentive and Nonqualified Stock Option Plan (the "1994 Option Plan") that
provided for the grant of nonqualified and incentive stock options to directors
and employees. On January 25, 1996, the Board of Directors of the Company voted
to increase the number of shares of Common Stock that may be issued from
1,800,000 to 3,600,000.
The exercise price of incentive options must be at least equal to the
fair market value on the date of grant. The exercise price of nonqualified
options must not be less than 85% of the fair market value on the date of grant.
Options generally vest in equal installments over four years.
On March 4, 1999, the Board of Directors of the Company elected to
terminate the 1994 Option Plan upon the adoption of the 1999 Equity Incentive
Plan (the "1999 Plan"). The stockholders of the Company, on March 24, 1999,
approved amendments to the vesting and transferability of options granted to
outside directors under the 1994 Option Plan.
Amended and Restated 1999 Equity Incentive Plan
On March 24, 1999, the Company's stockholders and the Board of
Directors of the Company adopted the 1999 Equity Incentive Plan (the "1999
Plan") that provided for
Page 60
the grant of incentive stock options, non statutory stock options, stock
bonuses, rights to purchase restricted stock, stock appreciation rights and
other awards based upon the Company's common stock. Up to 1,850,000 shares of
Common Stock (subject to adjustment upon certain changes in the capitalization
of the Company) may be issued pursuant to grants awarded under the 1999 Plan.
The 1999 Plan was amended and restated on April 25, 2000 to adjust the amount of
options granted to non-employee directors of the Company.
On November 15, 2000, the Board of Directors of the Company voted to
increase the number of shares of Common Stock that may be issued from 1,850,000
to 4,050,000. This increase was approved by the Company's stockholders on March
6, 2001.
On January 16, 2002 the Board of Directors voted to change the manner
in which stock awards are granted to non-employee directors. The provision for
automatic grants of initial options and additional options was eliminated.
Non-employee directors are now eligible to receive stock awards in the same
manner and to the same degree as all other eligible persons, as determined by
the Board of Directors on a discretionary basis. These changes were approved by
the Company's Stockholders on March 6, 2002.
The exercise price of incentive options must be at least equal to the
fair market value on the date of grant. The exercise price of nonqualified
options must not be less than 85% of the fair market value on the date of grant.
Options granted prior to March 2001 generally vest over four years in four equal
annual installments. Options granted from and after March 2001 generally vest
over four years, with 25% vesting one year from the date of grant and 75%
vesting in equal monthly installments over the subsequent three years. Awards of
options under the 1999 Plan may be made until March 24, 2009. No incentive
options may extend for more than ten years from the date of grant.
Stock option activity is summarized as follows:
Weighted
No. of Shares Average Price
------------- -------------
Outstanding shares at September 30, 2000 3,250,353 $ 22.42
2001
Granted 1,125,000 $ 9.25
Canceled (203,726) $ 25.35
Exercised (26,650) $ 8.79
---------
Outstanding at September 30, 2001 4,144,977 $ 18.79
2002
Granted 138,500 $ 21.60
Canceled (175,642) $ 22.22
Exercised (531,736) $ 10.27
---------
Outstanding at September 30, 2002 3,576,099 $ 19.99
2003
Granted 1,073,500 $ 11.89
Canceled (261,528) $ 19.74
Exercised (84,794) $ 8.29
---------
Outstanding at September 30, 2003 4,303,277 $ 18.22
Page 61
The following table summarizes information about stock options
outstanding at September 30, 2003:
Options Outstanding Options Exercisable
- ----------------------------------------------------------------------- ------------------------------
Number Weighted-Avg
Outstanding Remaining Number
Range of As of Contractual Weighted-Avg Exercisable Weighted-Avg
Exercise Prices 9/30/03 Life (years) Exercise Price As of 9/30/03 Exercise Price
- --------------- ------- ------------ -------------- ------------- --------------
$2.83-3.17 45,938 .6 $ 2.90 45,938 $ 2.90
$7.53-11.25 1,427,113 6.3 $ 8.95 1,083,214 $ 9.04
$11.30-16.06 1,415,976 8.0 $ 12.45 372,658 $ 13.51
$17.00-25.47 688,125 6.9 $ 23.67 535,237 $ 23.69
$28.40-42.50 546,625 6.0 $ 37.86 438,416 $ 37.79
$54.50-59.13 168,000 6.3 $ 58.90 126,000 $ 58.90
$85.00-85.00 11,500 6.4 $ 85.00 8,625 $ 85.00
--------- ---------
Total 4,303,277 2,610,088
Page 62
EMPLOYEE STOCK PURCHASE PLAN
On March 10, 1994, the Board of Directors of the Company adopted the
1994 Employee Stock Purchase Plan that provides for a maximum issuance of
450,000 shares of Common Stock for purchase by eligible employees at 85% of the
lower of the fair market value of the Company's Common Stock on either the first
or last day of the semi-annual offering period. No compensation expense is
recorded in connection with the plan.
On January 16, 2002, the Board of Directors adopted the 2002 Employee
Stock Purchase Plan authorizing the issuance of up to 750,000 shares of the
Company's Common Stock. Eligible employees may purchase Common Stock of the
Company through payroll deductions. The purchase price is 85% of the fair market
value based on the lowest price on (a) the semi-annual offering commencement
date (b) the semi-annual offering termination date or (c) the first of each
month in a semi-annual offering period. The effective date of the 2002 Employee
Stock Purchase Plan is June 1, 2002. The Board of Directors also voted to
terminate the Company's 1994 Employee Stock Purchase Plan, effective May 30,
2002.
During fiscal year ended September 30, 2003, employees purchased 99,805 shares
at a price of $7.31 and 99,828 shares at a price of $5.94 for the offering
periods ended November 30, 2002 and May 31, 2003, respectively. Total shares
purchased in 2002 and 2001 were 121,126 and 129,776, respectively.
M. STOCKHOLDERS' EQUITY:
PREFERRED STOCK
On March 11,1994, the issuance of up to 1,000,000 shares of preferred
stock, $0.01 par value was authorized by the Stockholders of the Company. The
Board of Directors has the authority to issue the preferred stock in one or more
series and to fix rights, preferences, privileges and restrictions, including
dividends, and the number of shares constituting any series and the designation
of such series.
In January 1998, the Board of Directors of the Company adopted a
stockholder rights plan by declaring a dividend distribution of one preferred
stock purchase right (one "Right") on each share of the Company's Common Stock
outstanding on January 27, 1998 or, in certain circumstances, issued thereafter.
Initially, the Rights are not exercisable, are not represented by separate Right
certificates and do not trade separately from the Company's Common Stock. Ten
days after a tender offer or acquisition of 15% or more of the Company's common
stock, each right may be exercised for $140 ("Exercise Price") to purchase one
one thousandth of one share of the Company's Series A Junior Participating
Preferred Stock. Each one one-thousandth of a share of Series A Junior
Participating Preferred Stock will generally be afforded economic rights similar
to one share of the Company's common stock. In addition after such rights are
triggered, each Right entitles the holder to purchase common stock of the
Company with a fair value of twice the Exercise Price or, in certain
circumstances, securities of the acquiring company for the Exercise price. Each
Right expires in January 2008 and, during specified periods, the Company may
redeem or exchange each Right for $.01 or one share of common stock. The Rights
Agreement has been filed by the Company with the Securities and Exchange
Commission as an exhibit to a Registration Statement on Form 8-A dated February
2, 1998. Stockholders are urged to review the Rights Agreement for a complete
understanding of the Rights Plan. The Rights Plan, while providing the Board of
Directors with flexibility in connection with possible acquisitions and
deterring unfair or coercive takeover tactics, could have the effect of making
it more difficult for a third party to acquire, or of discouraging a third party
from acquiring, beneficial ownership of 15% or more of the outstanding shares of
the Company's Common Stock.
COMMON STOCK
In April 1999, the Company signed agreements with W.W. Grainger, Inc.
("Grainger"), a provider of MRO supplies and related information in North
America. Grainger acquired 1,000,000 shares of the Company's common stock for
$14.5 million, less expenses of $954 thousand and acquired a two-year option to
purchase 5% of the Company's wholly owned subsidiary, MRO.com, Inc. for an
exercise price of $3.8 million. This option was terminated by agreement of the
parties in November of 2000.
Page 63
In June 2001, the Company paid $650 thousand to Grainger, recorded as general
and administrative expenses, to re-purchase the option agreement.
On October 15, 1999, the Company's Board of Directors approved a
2-for-1 stock split in the form of a dividend of its common stock to be paid to
all shareholders on December 22, 1999. The stock split was subject to
shareholder approval of an increase in the Company's authorized common stock,
$0.01 par value per share, from 15,350,000 shares to 50,000,000 shares.
Stockholders approved the transaction on December 15, 1999. All share and per
share data has been restated to reflect this stock split as though it had
occurred at the earliest period presented.
In December 2000, the Company issued a stock purchase warrant to i2
Technologies, Inc. ("i2") under which i2 had the right to purchase up to 500,000
shares of the Company's common stock at an exercise price of $10.25 per share.
The Company valued the warrant at $3.3 million using the Black-Scholes valuation
model, with the following assumptions: (1) risk-free interest rate of 4.8%; (2)
life of 2.5 years; and (3) volatility of 105%. The warrant was immediately
exercisable and was recorded as a one-time non-cash sales and marketing expense
in the three months ended December 31, 2000. On March 14, 2002, i2 exercised the
entire warrant on a "net exercise" or "cashless" basis, pursuant to which the
exercise price was paid by reducing the number of shares issued, and as a result
268,823 shares were issued to i2 upon exercise of the warrant and there was no
cash received by the Company.
On September 28, 2000, the Company executed a restricted stock
agreement with one employee. In exchange for continued employment, the employee
received 15,000 shares vesting equally in amounts of 5,000 on each September 30,
2001, 2002, and 2003. In May 2001, the vesting period of the 15,000 shares was
amended. Under the amended agreement, 5,000 shares vested on October 1, 2001,
and the remaining 10,000 shares vested on January 2, 2002 and the restricted
stock agreement was no longer conditioned on employment. The shares were
recorded at fair market value on the date of issuance as deferred compensation
and the related amount was recorded as sales and marketing expense during fiscal
2001, as there is no continuing obligation of the employee beyond September 30,
2001
On June 18, 2001, each non-employee Director received an outright grant
of 6,250 shares of restricted stock vesting on a quarterly basis over three
years in twelve equal installments vesting on the 15th day of the second month
of each quarter, subject to acceleration under certain circumstances. The shares
were recorded at fair market value on the date of issuance as deferred
compensation and the related amount is being recorded as general and
administrative expenses over the vesting period.
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
administrative expenses over the vesting period.
N. 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". 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.
Page 64
On January 17, 2003, the Company sold the industrial data normalization
services operations. Prior to the sale, the Company had guaranteed the
obligations of services operations under the office lease of the operation's
principal place of business. This guaranty remains in full force and effect
following the sale. As of September 30, 2003, the maximum potential amount due
under this guaranty is $800 thousand. 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
September 30, 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 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 September 30, 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 generally 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 to our knowledge 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 September 30, 2003.
When as part of an acquisition we acquire a company, we assume
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
Page 65
December 31, 2002. Accordingly, we have no liabilities recorded for the
assumption of any such liabilities as of September 30, 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 has executed contracts with each of its directors
and officers, pursuant to which the Company is obligated to indemnify those
individuals to the full extent provided under the Company's Articles of
Organization. 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. We have no liabilities recorded for any such agreements as of
September 30, 2003.
Page 66
O. 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 (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 EAM 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:
Year Ended September 30,
---------------------------------------
(in thousands) 2003 2002 2001
--------- --------- ---------
Revenues:
United States ............................ $ 104,735 $ 106,770 $ 122,025
Other Americas ........................... 10,654 7,558 9,246
Intercompany revenues .................... 11,536 9,940 6,717
--------- --------- ---------
Subtotal ........................... $ 126,925 $ 124,268 $ 137,988
--------- --------- ---------
Europe/Middle East and Africa ............ 48,148 45,905 43,986
Asia/Pacific ............................. 13,340 11,648 10,193
Consolidating eliminations ............... (11,536) (9,940) (6,717)
--------- --------- ---------
Total revenues ..................... $ 176,877 $ 171,881 $ 185,450
--------- --------- ---------
(Loss)/income from operations:
United States ............................ $ (5,140) $ (21,444) $ (21,329)
Other Americas ........................... (2,761) (6,901) (8,203)
Europe/Middle East and Africa ............ 14,846 13,855 11,393
Asia/Pacific ............................. (1,203) (829) (2,616)
--------- --------- ---------
$ 5,742 $ (15,319) $ (20,755)
--------- --------- ---------
As of September 30,
-------------------
(in thousands) 2003 2002
------- -------
Long-lived assets:
United States ............................ $59,777 $65,436
Other Americas ........................... 1,535 1,621
Europe/Middle East and Africa ............ 3,773 3,501
Asia/Pacific ............................. 704 250
------- -------
$65,789 $70,808
------- -------
Page 67
The Company has subsidiaries in foreign countries, which sell the
Company's products and services in their respective geographic areas.
Intercompany revenues primarily represent shipments of software to international
subsidiaries and are eliminated from consolidated revenues. Income (loss) from
operations excludes interest income, interest expense, provision for income
taxes and transaction gains and losses.
No customer accounted for more than 10% of revenue in fiscal 2003, 2002
or 2001.
P. SUPPLEMENTAL CASH FLOW DISCLOSURES:
Cash paid for interest and taxes was as follows:
Year Ended September 30,
------------------------
(in thousands) 2003 2002 2001
---- ---- ----
Interest................................... $ 39 $ 45 $ 59
Income taxes............................... 1,550 2,490 1,430
Acquisitions of businesses were as follows:
Year Ended September 30,
------------------------
(in thousands) 2003 2002 2001
---- ---- ----
Fair value of assets acquired.............. $--- $23,573 $3,766
Fair value of liabilities assumed.......... --- (5,630) 66
Net cash paid for acquisitions............. $--- $ 1,293 $3,700
Page 68
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
COL. A COL. B COL. C COL. D COL. E
- ---------------------------------------------------------------------------------------------------------
ADDITIONS
-----------------------
BALANCE AT CHARGED TO CHARGED TO BALANCE AT
BEGINNING COSTS AND OTHER END OF
OF PERIOD EXPENSES ACCOUNTS DEDUCTIONS PERIOD
------------------------------------------------------------------
YEAR ENDED SEP. 30, 2003
Allowance for doubtful accounts $3,420,799 $ 118,558 --------- $ 797,894 $2,741,463
YEAR ENDED SEP. 30, 2002
Allowance for doubtful accounts $3,848,916 $1,753,282 --------- $2,181,399 $3,420,799
YEAR ENDED SEP. 30, 2001
Allowance for doubtful accounts $2,824,714 $2,916,923 --------- $1,892,721 $3,848,916
Page 69
EXHIBIT INDEX
EXHIBIT
NO. DESCRIPTION
3.1 Amended and Restated Articles of Organization of the Company (included
as Exhibit 3.3 to the Company's Registration Statement on Form S-1,
Registration No. 33-76420, and incorporated herein by reference)
3.2 Restated By-Laws of the Company, as amended (included as Exhibit 3.2
to the Company's Annual Report on Form 10-K for the fiscal year ended
September 30, 1996 File No. 0-23852 and incorporated herein by
reference)
3.3 Amendment to By-Laws adopted on February 1, 2001 (included as
Exhibit 3.3 to the Company's Current Report on Form 10-Q for the
quarter ended March 31, 2001, File No. 0-23852 and incorporated herein
by reference)
3.4 Form of Certificate of Designation of Series A Junior Participating
Preferred Stock of MRO Software, Inc. (which is attached as Exhibit A
to the Rights Agreement included as Exhibit 4 (b) to the Company's
Current Report on Form 8-K dated February 2, 1998, File No. 0-23852,
and incorporated herein by reference) 4.1 Specimen certificate for the
Common Stock, $.01, of the Company (included as Exhibit
4.1 to the Company's Current Report on Form 10-Q for the quarter ended
December 31, 2001, File No. 0-23852 and incorporated herein by
reference)
4.2 Article 4B of the Amended and Restated Articles of Organization of the
Company (included as Exhibit 4.1 to the Company's Registration
Statement on Form S-1, Registration No. 33-76420, and incorporated
herein by reference)
4.3 Rights Agreement dated as of January 27, 1998, between the Company and
BankBoston, N.A. as Rights Agent (included as Exhibit 4 (a) to the
Company's Current Report on Form 8-K dated February 2, 1998, File
No. 0-23852, and incorporated herein by reference)
4.4 Form of Certificate of Designation of Series A Junior Participating
Preferred Stock of MRO Software, Inc. (included as Exhibit 4 (b) to the
Company's Current Report on Form 8-K dated February 2, 1998, File No.
0-23852, and incorporated herein by reference)
4.5 Form of Rights Certificate (included as Exhibit 4 (c) to the Company's
Current Report on Form 8-K dated February 2, 1998, File No. 0-23852,
and incorporated herein by reference)
31.1 Certification 302
31.2 Certification 302
32.1 Certification 906
9.1 Shareholders Agreement between Robert L. Daniels and Susan H. Daniels
dated August 1, 2001 (included as Exhibit 9.1 to the Company's Annual
Report on Form 10-K for the fiscal year ended September 30, 2001 File
No. 0-23852, and incorporated herein by reference)
10.1 Year Ended September 30, 2003 Executive Bonus Plan
10.2 Form of Indemnity Agreement between the Company and each of Norman E.
Drapeau, Jr., Robert L. Daniels, Peter J. Rice, Patricia C. Foye,
William J. Sawyer, Ted D. Williams, John W. Young, Craig Newfield,
Richard P. Fishman, John A. McMullen, Stephen B. Sayre, and Alan L.
Stanzler
21.1 Subsidiaries of the Company
23.1 Consent of PricewaterhouseCoopers LLP
Page 70