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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
FOR THE QUARTERLY PERIOD ENDED DECEMBER 31, 2003
(mark one)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
SECURITIES AND EXCHANGE ACT OF 1934
For the transition period from ______________ to _______________
Commission File Number 0-23852
MRO SOFTWARE, INC.
(Exact name of registrant as specified in its charter)
MASSACHUSETTS 04-2448516
(State or other jurisdiction (I.R.S employer incorporation
identification number) or organization)
100 CROSBY DRIVE, BEDFORD MASSACHUSETTS 01730
(Address of principal executive offices, including zip code)
(781) 280-2000
(Registrant's telephone number, including area code)
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes [X] No
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act)
Yes [X] No
Number of shares outstanding of the Registrant's common stock as of the latest
practicable date: 24,785,647 shares of common stock, $.01 par value per share,
as of February 10, 2004.
Page 1
MRO SOFTWARE, INC.
10-Q INDEX
PAGE
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
Consolidated Balance Sheets (unaudited) as of December 31,
2003 and September 30, 2003. 3
Consolidated Statements of Operations (unaudited) for the
three months ended December 31, 2003 and 2002. 4
Consolidated Statements of Cash Flows (unaudited) for the
three months ended December 31, 2003 and 2002. 5
Notes to Consolidated Financial Statements (unaudited). 6
ITEM 2. Management's Discussion and Analysis of Financial Condition and Results of
Operations 12
ITEM 3. Quantitative and Qualitative Disclosures about Market Risk 23
ITEM 4. Controls and Procedures 23
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 24
Item 2. Changes in Securities 24
Item 3. Defaults upon Senior Executives 24
Item 4. Submission of Matter to a Vote of Security Holders 24
Item 5. Other Information 24
Item 6. Exhibits and Reports on Form 8-K 24
SIGNATURE 26
Page 2
MRO SOFTWARE, INC.
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
DECEMBER 31, SEPTEMBER 30,
(IN THOUSANDS, EXCEPT PER SHARE DATA) 2003 2003
------------ -------------
ASSETS
Current assets:
Cash and cash equivalents $ 49,495 $ 73,662
Marketable securities 1,102 1,102
Accounts receivable, trade, less allowance
for doubtful accounts of $2,758 at December 31, 2003
and $2,741 at September 30, 2003, respectively 31,524 28,833
Prepaid expenses and other current assets 5,870 4,177
Deferred income taxes 2,358 2,242
--------- ---------
Total current assets 90,349 110,016
--------- ---------
Marketable securities 39,735 19,809
Property and equipment, net 7,670 8,239
Goodwill, net 46,210 46,210
Intangible assets, net 6,743 7,700
Notes receivable 519 593
Deferred income taxes 9,117 9,267
Other assets 4,181 3,427
--------- ---------
Total assets $ 204,524 $ 205,261
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued expenses $ 12,503 $ 15,701
Accrued compensation 7,858 8,357
Income taxes payable 4,323 4,741
Deferred revenue 28,507 28,734
--------- ---------
Total current liabilities 53,191 57,533
--------- ---------
Other long term liabilities 30 35
Deferred revenue 1,059 1,181
Stockholders' equity
Preferred stock, $.01 par value;1,000 authorized,
none issued and outstanding
Common stock, $.01 par value;50,000 authorized;
24,721 and 24,576 issued and outstanding at
December 31, 2003 and September 30, 2003, respectively 247 246
Additional paid-in capital 116,218 115,093
Deferred compensation (248) (298)
Retained earnings 32,915 31,163
Accumulated other comprehensive income 1,112 308
--------- ---------
Total stockholders' equity 150,244 146,512
--------- ---------
Total liabilities and stockholders' equity $ 204,524 $ 205,261
========= =========
The accompanying notes are an integral part of the
consolidated financial statements.
Page 3
MRO SOFTWARE, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
THREE MONTHS ENDED
DECEMBER 31,
(IN THOUSANDS, EXCEPT PER SHARE DATA) 2003 2002
---- ----
Revenues:
Software $ 12,210 $ 12,685
Support and services 32,692 31,203
--------- ---------
Total revenues 44,902 43,888
--------- ---------
Cost of revenues:
Software 1,812 1,850
Support and services 14,773 14,928
--------- ---------
Total cost of revenues 16,585 16,778
--------- ---------
Gross profit 28,317 27,110
Operating expenses:
Sales and marketing 13,710 15,399
Product development 7,006 6,756
General and administrative 4,465 4,646
Amortization of other intangibles 205 248
--------- ---------
Total operating expenses 25,386 27,049
--------- ---------
Income from operations 2,931 61
Interest income 204 210
Other (expense)/income, net (440) 338
--------- ---------
Income before income taxes 2,695 609
Provision for income taxes 943 214
--------- ---------
Net income $ 1,752 $ 395
========= =========
Net income per share, basic $ 0.07 $ 0.02
--------- ---------
Net income per share, diluted $ 0.07 $ 0.02
--------- ---------
Shares used to calculate net income per share
Basic 24,629 24,306
Diluted 25,200 24,478
The accompanying notes are an integral part of the
consolidated financial statements.
Page 4
MRO SOFTWARE, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
THREE MONTHS ENDED
DECEMBER 31,
2003 2002
---- ----
(IN THOUSANDS)
Cash flows from operating activities:
Net income $ 1,752 $ 395
Adjustments to reconcile net income to net
cash (used in)/provided by operating activities:
Depreciation 1,193 1,212
Amortization of other intangibles 957 1,098
Stock-based compensation 50 27
Deferred income taxes 129 560
Changes in operating assets and liabilities:
Accounts receivable (1,952) 3,829
Prepaid expenses and other assets (1,483) (884)
Accounts payable, accrued expenses and other
liabilities (4,582) (2,690)
Accrued compensation (681) (1,037)
Deferred revenue (1,084) 4
-------- --------
Net cash (used in)/provided by operating activities (5,701) 2,514
-------- --------
Cash flows from investing activities:
Acquisitions of property and equipment and other
capital expenditures (622) (708)
Purchase of marketable securities (20,007) ---
-------- --------
Net cash used in investing activities (20,629) (708)
-------- --------
Cash flows from financing activities:
Proceeds from exercise of stock purchases 956 799
-------- --------
Net cash provided by financing activities 956 799
-------- --------
Effect of exchange rate changes on cash 1,207 595
-------- --------
Net (decrease)/increase in cash and cash equivalents (24,167) 3,200
Cash and cash equivalents, beginning of period 73,662 67,315
-------- --------
Cash and cash equivalents, end of period $ 49,495 $ 70,515
======== ========
The accompanying notes are an integral part of the
consolidated financial statements.
Page 5
MRO SOFTWARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
A. BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements include the
accounts of MRO Software, Inc. ("MRO") and its majority-owned subsidiaries
(collectively, the "Company"), as of December 31, 2003 and have been prepared by
the Company in accordance with generally accepted accounting principles for
interim reporting and with the instructions to Form 10-Q and Article 10 of
Regulation S-X. All intercompany accounts and transactions have been eliminated.
In the opinion of management, the accompanying unaudited consolidated financial
statements contain all adjustments, consisting only of those of a normal
recurring nature, necessary for a fair presentation of the Company's financial
position, results of operations and cash flows at the dates and for the periods
indicated. The results of operations for the periods presented herein are not
necessarily indicative of the results of operations to be expected for the
entire fiscal year, which ends on September 30, 2004, or for any other future
period.
These consolidated financial statements should be read in conjunction with the
consolidated financial statements and notes thereto for the year ended September
30, 2003 included in the Company's Annual Report on Form 10-K filed with the
Securities and Exchange Commission on December 29, 2003.
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
Certain prior year financial statement items have been reclassified to conform
to the current year's format.
B. INCOME PER SHARE
Basic income 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 number 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.
Page 6
Basic and diluted income per share are calculated as follows:
THREE MONTHS ENDED
(IN THOUSANDS, EXCEPT PER SHARE DATA) 12/31/03 12/31/02
- ------------------------------------- -------- --------
Net income $ 1,752 $ 395
Denominator:
Weighted average common shares
outstanding-basic 24,629 24,306
Effect of dilutive securities (1) 571 172
------- -------
Weighted average common shares
outstanding-diluted 25,200 24,478
======= =======
Net income per share, basic and diluted $ 0.07 $ 0.02
(1) Options to purchase 1,555,792 shares and 2,402,471 shares of the Company's
Common Stock for the three months ended December 31, 2003 and 2002, respectively
were outstanding but were not included in the computations of diluted net income
per share because the exercise price of the options was greater than the
weighted average market price of the common stock during the period. Common
stock equivalents of 571,000 shares and 172,000 shares were included in the
computation of diluted net income per share for the three months ended December
31, 2003 and 2002, respectively.
C. ACCOUNTING POLICIES
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. The Company accounts for stock-based
employee compensation using the intrinsic value method under the recognition and
measurement principles of the Accounting Principals Board ("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 estimating 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.
PRO FORMA INFORMATION
The Company complies with the pro forma disclosure requirements of the Financial
Accounting Standards Board ("FASB") SFAS No. 123 as amended by SFAS No. 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 No. 123 to stock-based employee compensation:
Page 7
THREE MONTHS ENDED
12/31/03 12/31/02
-------- --------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
Net income
As reported $ 1,752 $ 395
Add: Stock-based employee compensation
expense included in net income 50 27
Deduct: Stock-based employee compensation
expense determined under the fair value
based method for all awards, net of
related tax effects (2,573) (2,761)
Pro forma net loss $ (771) $ (2,339)
Earnings/(loss) per share:
Basic - as reported $ 0.07 $ 0.02
Basic - pro forma $ (0.03) $ (0.10)
Diluted - as reported $ 0.07 $ 0.02
Diluted - pro forma $ (0.03) $ (0.10)
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.
D. COMPREHENSIVE INCOME:
The following table reflects the components of comprehensive net income:
THREE MONTHS ENDED
(IN THOUSANDS) 12/31/03 12/31/02
-------------- -------- --------
Net income $ 1,752 $ 395
Other comprehensive net income,
Net of tax:
Unrealized loss on securities arising during period (82) --
Foreign currency translation adjustment 886 519
------- -------
Comprehensive income $ 2,556 $ 914
======= =======
E. SEGMENT INFORMATION, GEOGRAPHIC DATA AND MAJOR CUSTOMERS:
The Company reports revenues and income under one reportable industry segment,
Strategic Asset Management. Our Strategic Asset Management software products and
services include MAXIMO for the Enterprise Asset Management ("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 and ITAM 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 ("U.S."), Other Americas (Canada and Latin America), Europe/Middle East
and Africa, and Asia Pacific.
Page 8
A summary of the Company's revenues by geographical area is as follows:
THREE MONTHS ENDED
12/31/03 12/31/02
(IN THOUSANDS) -------- --------
Revenues:
United States $ 27,502 $ 25,931
Other Americas 2,197 3,655
Intercompany 3,859 1,698
-------- --------
Subtotal $ 33,558 $ 31,284
Europe/Middle East and Africa 12,572 11,208
Asia/Pacific 2,631 3,094
Intercompany (3,859) (1,698)
-------- --------
Total revenues $ 44,902 $ 43,888
======== ========
The Company has subsidiaries in foreign countries, which sell the Company's
products and services in their respective geographic areas. Intercompany
revenues primarily represent shipments of software to international subsidiaries
and are eliminated from consolidated revenues.
F. GOODWILL AND OTHER INTANGIBLE ASSETS
Intangible assets as of December 31, 2003 and September 30, 2003 consist of the
following:
12/31/03 09/30/03
(IN THOUSANDS) -------- --------
Goodwill $ 77,853 $ 77,853
Accumulated amortization (31,643) (31,643)
-------- --------
Sub-total Goodwill 46,210 46,210
-------- --------
Acquired technology 15,744 15,744
Accumulated amortization (10,021) (9,269)
-------- --------
Sub-total acquired technology 5,723 6,475
-------- --------
Other intangibles 3,009 3,009
Accumulated amortization (1,989) (1,784)
-------- --------
Sub-total other intangibles 1,020 1,225
-------- --------
Total intangible assets, net $ 52,953 $ 53,910
======== ========
Other intangibles consist of customer contracts, backlog, customer lists and
non-compete agreements.
Amortization expense of intangible assets was $957 thousand and $1.1 million for
the three months ended December 31, 2003 and 2002, respectively.
Page 9
As of December 31, 2003, remaining amortization expense on existing intangibles
for the next five years is as follows:
(in thousands)
2004 (remaining 9 mos.) $2,067
2005 2,240
2006 1,383
2007 477
2008 477
2009 99
------
Total $6,743
------
G. ACCOUNTING PRONOUNCEMENTS
In December 2003, the Financial Accounting Standards Board ("FASB" or the
"Board") issued FASB Interpretation No. 46 (revised December 2003),
Consolidation of Variable Interest Entities ("FIN 46R"), to address certain
implementation issues. FIN 46R clarifies some of the provisions of FIN 46 and
exempts certain entities from its requirements.
FIN 46R requires the application of either FIN 46 or FIN 46R by "Public
Entities" (as defined in paragraph 395 of FASB Statement No. 123, Accounting for
Stock-Based Compensation) to all Special Purpose Entities ("SPEs") created prior
to February 1, 2003 at the end of the first interim or annual reporting period
ending after December 15, 2003. All entities created after January 31, 2003 by
Public Entities were already required to be analyzed under FIN 46, and they must
continue to do so, unless FIN 46R is adopted early. FIN 46R will be applicable
to all non-SPEs created prior to February 1, 2003 by Public Entities that are
not small business issuers at the end of the first interim or annual reporting
period ending after March 15, 2004.
The Company does not enter into transactions involving entities whose activities
are primarily related to securitizations or other forms of asset-backed
financings or single-lessee leasing arrangements, thus the required adoption of
FIN 46R for all SPE's created prior to February 1, 2003 had no impact on MRO.
The Company has not created any entities subsequent to January 31, 2003 that
require accounting under FIN 46. The Company believes that it does not have
variable entities as defined in FIN 46R. The adoption of FIN 46R in the interim
period ending March 31, 2004 will have no impact on the Company's financial
statements.
H. GUARANTOR ARRANGEMENTS
In November 2002, the FASB issued Financial Accounting Standards Board
Interpretation No. 45, "Guarantor's Accounting and Disclosure Requirements for
Guarantees, Including Indirect Guarantees of Indebtedness of Others". FIN 45
requires that a guarantor recognize, at the inception of a guarantee, a
liability for the fair value of the obligation undertaken by issuing the
guarantee. FIN 45 also requires additional disclosures to be made by a guarantor
in its interim and annual financial statements about its obligations under
certain guarantees it has issued. The accounting requirements for the initial
recognition of guarantees are applicable on a prospective basis for guarantees
issued or modified after December 31, 2002. The disclosure requirements are
effective for all guarantees outstanding, regardless of when they were issued or
modified, during the second quarter of fiscal 2003. The adoption of FIN 45 did
not have a material effect on our consolidated financial statements. The
following is a summary of our agreements that we have determined are within the
scope of FIN 45.
On January 17, 2003, the Company sold the 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 December 31, 2003, the maximum potential amount due under this guaranty is
$600 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 December
31, 2003.
Page 10
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 December 31, 2003.
Under our standard end-user license agreement, we agree to indemnify our
customers against infringement claims that may be brought by third parties
asserting that our products infringe on certain intellectual property rights. In
our services agreements with customers, we will also, as a matter of standard
practice, agree to indemnify customers (a) against claims that may be brought by
third parties asserting that the results of our services infringe on certain
intellectual property rights, (b) against damages caused by our breach of
certain confidentiality provisions in the contract, and (c) against damages to
personal property, and death, caused by our services personnel while on-site at
customer premises. These indemnification provisions are 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 December 31, 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
December 31, 2002. Accordingly, we have no liabilities recorded for the
assumption of any such liabilities as of December 31, 2003.
Pursuant to the Company's Articles of Organization, the Company is obligated to
indemnify its directors, officers and other individuals serving at the request
of the Company as a director or officer or in a similar capacity in another
entity to the fullest extent authorized under Massachusetts Business Corporation
Law. The Company 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 December 31, 2003.
Page 11
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
FORWARD-LOOKING STATEMENTS
In addition to historical information, this Quarterly Report on Form 10-Q, as
well as documents incorporated herein by reference, may contain forward-looking
statements (within the meaning of section 27A of the Securities Act of 1933, as
amended, and section 21E of the Securities Exchange Act of 1934, as amended).
The following and similar expressions identify forward-looking statements:
"expects," "anticipates," and "estimates". Forward-looking statements include,
without limitation, statements related to: the Company's plans, objectives,
expectations and intentions; the timing of, availability and functionality of
products under development or recently introduced; and market and general
economic conditions. Important factors that could cause actual results to differ
materially from those suggested by the forward-looking statements for various
reasons, include those discussed under the heading "Factors Affecting Future
Performance" below. These forward-looking statements speak only as of the date
of this Quarterly Report, and the Company disclaims any obligation to update
such forward looking statements as a result of any change in circumstances or
otherwise.
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.
The Company reports all its revenues in one reportable business segment, the
strategic asset management segment.
KEY HIGHLIGHTS OF THE COMPANY'S FIRST QUARTER OF FISCAL 2004
- Net income increased $1.4 million over the comparable quarter for the
prior year.
- Overall gross margin improved by $1.2 million or 4% over the comparable
quarter for the prior year. The improvement is due to the sale of our
industrial data normalization services operations in January 2003, a low
margin business, as well as an increase in support revenues without a
commensurate increase in personnel and operating costs.
- We have continued our focus on improving operating margins and
streamlining costs. Quarterly operating expenses, excluding amortization
of intangibles, decreased $1.6 million or 6% over the comparable quarter
for the prior year. The majority of this savings was due to a decrease in
sales and marketing personnel.
- Total revenues increased $1 million over the comparable quarter for the
prior year. International revenues accounted for 39% of total revenues
for the current quarter. Due to the increased strength in certain foreign
currencies, especially the Euro and the British Pound, the current
quarter's revenues were positively impacted by approximately $1.9 million
as compared to the average prevailing exchange rates of the comparable
quarter. However, the overall impact of foreign currency adjustments had
an immaterial impact on net income for the current quarter.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
The Company's discussion and analysis of its financial condition 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 ("U.S."). The preparation of these financial statements
requires that management make estimates and judgments that affect the reported
amounts of assets, liabilities, revenues and expenses. These estimates and
assumptions are affected by management's application of accounting policies.
Page 12
Critical accounting policies, in which different judgments and estimates by our
management could materially affect our reported condition and results of
operations, include revenue recognition, estimating the allowance for doubtful
accounts, deferred tax assets, and the valuation of long-lived assets. These
critical accounting policies and estimates should be read in conjunction with
the critical accounting policies and estimates included in the Company's Annual
Report on Form 10-K filed with the Securities and Exchange Commission on
December 29, 2003. The Company includes and updates critical accounting policies
and estimates in interim periods if a new critical accounting policy is adopted
or amended or if there are material changes in related judgments or conditions
underlying the Company's estimates in the interim period.
RESULTS OF OPERATIONS
REVENUES
Three Three
Months Months
Ended Change Ended
(in thousands) 12/31/03 % 12/31/02
- ------------------------------------------------------------------------------------------------
Software licenses $12,210 (4)% $12,685
Percentage of total revenues 27% 29%
Support and services $32,692 5% $31,203
Percentage of total revenues 73% 71%
Total revenues $44,902 2% $43,888
The Company's revenues are derived primarily from two sources: (i) software
licenses, and (ii) fees for support and services.
Software license revenues decreased 4% to $12.2 million from $12.7 million for
the three months ended December 31, 2003 and 2002, respectively due to a
decrease in the number of licenses sold. The decline in software license
revenues is comprised of a decline in MAXIMO software license revenues of $1
million partially offset by an increase of $700 thousand of ITAM (MAXIMO
MainControl) software license revenues. There were no ITAM software licenses
sold in the three months ended December 31, 2002.
Support revenues increased 11% to $17.2 million from $15.5 million for the three
months ended December 31, 2003 and 2002, respectively. 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 9% to $16.1 million from $14.8
million for the three months ended December 2003 and 2002, respectively. ITAM
support revenues were $1.1 million and $700 thousand for the three months ended
December 31, 2003 and 2002, respectively.
Service revenues decreased 1% to $15.5 million from $15.7 million for the three
months ended December 31, 2003 and 2002, respectively. The decline in service
revenues was comprised of a decline in Enterprise Catalog Management service
revenues of $1 million, partially offset by an increase in MAXIMO service
revenues of $800 thousand. The decrease in Enterprise Catalog Management
services revenues was primarily attributable to the sale of the industrial data
normalization services operations in January 2003. The increase in MAXIMO
service revenues was attributable to implementations of software sold in the
previous year.
Page 13
COST OF REVENUES
Three Three
Months Months
Ended Change Ended
(in thousands) 12/31/03 % 12/31/02
- ------------------------------------------------------------------------------------------------
Cost of software licenses $ 1,812 (2)% $ 1,850
Percentage of software licenses 15% 15%
Cost of support and services $14,773 (1)% $14,928
Percentage of support and services 45% 48%
Total cost of revenues $16,585 (1)% $16,778
Percentage of total revenues 37% 38%
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 decrease in
cost of software license revenues was primarily attributable to a decrease in
amortization of acquired technology due to cessation of amortization of a fully
amortized asset. Amortization of acquired technology was $752 thousand in the
three months ended December 31, 2003 and $844 thousand in the three months ended
December 31, 2002. Partially offsetting this decrease was software purchased for
resale related to our MAXIMO Mobile Suite product.
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 remained flat at $2.5 million for the three months ended
December 31, 2003 and 2002, respectively. Cost of support revenues, as a
percentage of total support revenues was 15% and 16% for the three months ended
December 31, 2003 and 2002, respectively. The decrease as a percentage of total
support revenues was attributable to an increase in support revenues without a
commensurate increase in expenses and personnel.
Cost of service revenues decreased slightly to $12.3 million from $12.4 million
for the three months ended December 31, 2003 and 2002, respectively. The
decrease was primarily attributable to a decrease in personnel and related
benefits and facilities due to the sale of the industrial data normalization
services operation in January 2003. Cost of service revenues, as a percentage of
total service revenues was 79% for both the three months ended December 31, 2003
and 2002, respectively.
OPERATING EXPENSES
Three Three
Months Months
Ended Change Ended
(in thousands) 12/31/03 % 12/31/02
- ------------------------------------------------------------------------------------------------
Sales and marketing $13,710 (11)% $ 15,399
Percentage of total revenues 31% 35%
Product development $ 7,006 4 % $ 6,756
Percentage of total revenues 16% 15%
General and administrative $ 4,465 (4)% $ 4,646
Percentage of total revenues 10% 11%
Page 14
Amortization of other intangibles $ 205 (17)% $ 248
Percentage of total revenues 1% 1%
Sales and marketing expenses decreased 11% to $13.7 million from $15.4 million
for the three months ended December 31, 2003 and December 31, 2002,
respectively. The decrease was primarily attributable to a $1.6 million decrease
in salaries and related benefits due to a reduced number of sales and marketing
personnel and a $600 thousand decrease in advertising expenses. The decreases
were partially offset by a $560 thousand increase in sales commissions due to
changes in the sales commission policy.
Product development expenses increased 4% to $7.0 million from $6.8 million for
the three months ended December 31, 2003 and December 2002, respectively. The
increase was primarily attributable to increases in product and development
salaries and related benefits and increases in the costs to translate our
products into foreign languages. 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 4% to $4.5 million from $4.6
million for the three months ended December 31, 2003 and December 31, 2002,
respectively. The decrease was primarily attributable to decreases in general
and administrative salaries and related benefits due to a decrease in personnel
and a general decrease in budgeted spending.
The decrease in amortization of other intangibles expense for the three months
ended December 31, 2003 and December 31, 2002, respectively was due to cessation
of amortization of a fully amortized intangible asset.
NON-OPERATING EXPENSES
Three Three
Months Months
Ended Change Ended
(in thousands) 12/31/03 % 12/31/02
- ------------------------------------------------------------------------------------------------
Interest income $ 204 (3)% $210
Other (expense)/income, net $(440) (230)% $338
Interest income is attributable to interest earned on marketable securities and
cash and cash equivalents. Due to the decline in bond rates, the Company earned
less income on its short-term investments and U.S. government backed securities.
The decrease in other income was due to foreign currency exchange rate
transaction losses.
INCOME TAXES
The Company's effective tax rate was a provision of 35% for both the three
months ended December 31, 2003 and 2002, respectively. The tax provision was
calculated on income generated in domestic and foreign tax jurisdictions and on
changes in the Company's net deferred tax assets and liabilities.
LIQUIDITY AND CAPITAL RESOURCES
As of December 31, 2003, the Company had cash and cash equivalents of $49.5
million and marketable securities of $40.8 million, and working capital of $37.2
million.
Page 15
Cash used in operations was $5.7 million for the three months ended December
31, 2003 primarily attributable to the payment of liabilities, offset by income
generated from operations, and the collection of accounts receivables. During
the quarter, we used cash to pay annual incentive bonuses and sales commissions,
which were based on our previous quarter's seasonally high revenue and income.
Cash was also used to pay annual royalty contracts and pre-pay some other
commitments in order to take advantage of some early payment discounts. In
addition, we paid income taxes of $700,000. The Company's Days Sales Outstanding
(DSO) increased slightly from 57 days in the previous quarter to 63 days in the
current quarter due to timing of receiving certain customer payments. Timing of
cash payments and cash collections can cause fluctuations of cash balances
quarter over quarter, but we expect to generate cash from operations throughout
the remainder of the fiscal year.
Cash used in investing activities was $20.6 million for the three months ended
December 31, 2003 and was primarily used in the purchase of marketable
securities.
Cash provided by financing activities was $956 thousand for the three months
ended December 31, 2003 and represents proceeds from the Company's Employee
Stock Option and Purchase Plans.
As of December 31, 2003, the Company's principal commitments consist primarily
of office space and equipment operating leases for its U.S. and European
headquarters. The Company's corporate headquarters are under lease through
December 31, 2009. The Company leases its other facilities and certain equipment
under non-cancelable operating lease agreements that expire at various dates
through June 30, 2019.
The Company may use a portion of its cash to acquire additional businesses,
products or technologies complementary to its business. The Company also plans
to make investments over the next year in its products and technology.
The Company expects that its cash flow from operations together with its current
cash and marketable securities will be sufficient to meet its working capital
and capital expenditure requirements through at least December 31, 2004. The
Company's liquidity and working capital requirements, including the current
portions of any long-term commitments, are satisfied through its cash flow from
operations, leaving its cash reserves available for acquisitions, other
investments and unanticipated expenditures. The Company has no 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."
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 United States ("U.S.") 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
Page 16
economic downturn has persisted for a length of time that is unprecedented in
the Company's recent history, our forecasting systems may not be valid under
such conditions, and they may 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 U.S. 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 EAM 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 EAM 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 ITAM 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
Page 17
assurance that we will be successful in developing and marketing new products or
product enhancements, or that we will not experience significant delays in our
development efforts. In addition, we cannot give any assurance that our new
products and product enhancements will achieve market acceptance. Finally, when
we develop new products, or enhancements to our existing products, it is
possible that potential customers will defer or delay their decisions to
purchase existing products while the newer products and enhancements are being
developed, released and proven in the market. Such delays could have a material
and adverse impact on ongoing sales of existing products, and on the Company's
business and our results of operations.
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 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., Booz Allen & Hamilton Inc., SAIC,
Hewlett-Packard Company and others. In order to generate revenue through these
relationships, each party 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.
Page 18
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 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.
When we acquired MainControl, Inc., which developed a product that enables
companies to manage, track and maintain their IT assets, such as computers,
telephones and networks, one of our assumptions 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. 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 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 19
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 management 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
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 ITAM 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 are 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 U.S. 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, U.S. export laws and
regulatory requirements. Trade protection measures and import and export
licensing requirements subject us to additional regulation and may prevent us
from shipping products to a particular market and increase our operating costs.
Page 20
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 companies. We have agreed to develop a version
of MAXIMO which will operate with IBM's Websphere application server, its AIX
operating system and DB2 database programs. 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 U.S. 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 all) of the revenue
from these transaction as services revenue. This would likely result in a
postponement of recognition of, or even 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
U.S. 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 online. 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
Page 21
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 U.S.
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 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.
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 22
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company's primary exposures to market risk are the effect of fluctuations in
interest rates earned on its cash equivalents and marketable securities and
exposures to foreign currency exchange rate fluctuations.
At December 31, 2003, the Company held $90.3 million in cash equivalents and
marketable securities consisting of taxable and tax exempt municipal securities.
Cash equivalents are classified as available for sale and valued at amortized
cost, which approximates fair market value. A hypothetical 10 percent increase
in interest rates would not have a material impact on the fair market value of
these instruments due to their short maturity.
The Company develops its products in the United States and markets them in North
America, Europe, Middle East and Africa, Australia, Asia Pacific and Latin
America. As a result, our financial results could be affected by factors such as
changes in foreign currency exchange rates or weak economic conditions in
foreign markets. Currently, the Company has no hedging contracts.
ITEM 4. CONTROLS AND PROCEDURES
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 December 31, 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 23
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
NONE
ITEM 2 RECENT SALES OF UNREGISTERED SECURITIES, USE OF PROCEEDS FROM
REGISTERED SECURITIES CHANGES IN SECURITIES
NONE
ITEM 3 DEFAULTS UPON SENIOR SECURITIES
NONE
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
NONE
ITEM 5. OTHER INFORMATION
CERTIFICATION UNDER SARBANES-OXLEY ACT
OUR CHIEF EXECUTIVE OFFICER AND CHIEF FINANCIAL OFFICER HAVE FURNISHED TO THE
SEC THE CERTIFICATION WITH RESPECT TO THIS REPORT THAT IS REQUIRED BY SECTION
906 OF THE SARBANES-OXLEY ACT OF 2002.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
3. Instruments Defining the Rights of Security-Holders
3.1 Amended and Restated Articles of Organization of the Company
(included as Exhibit 3.3 to the Company's Registration
Statement on Form S-1, Registration No. 33-76420, and
incorporated herein by reference)
3.2 Restated By-Laws of the Company, as amended (included as
Exhibit 3.2 to the Company's Annual Report on Form 10-K for
the fiscal year ended September 30, 1996, File No. 0-23852,
and incorporated herein by reference)
3.3 Amendment to By-Laws adopted on February 1, 2001 (included as
Exhibit 3.3 to the Company's Current Report on Form 10-Q for
the quarter ended March 31, 2001, File No. 0-23852 and
incorporated herein by reference)
3.4 Form of Certificate of Designation of Series A Junior
Participating Preferred Stock of MRO Software, Inc. (which is
attached as Exhibit A to the Rights Agreement included as
Exhibit 4 (b) to the Company's Current Report on Form 8-K
dated February 2, 1998, File No. 0-23852, and incorporated
herein by reference)
3.5 Amendment to Articles of Organization adopted on December 15,
1999 (included as Exhibit 3.4 to the Company's Form 10-Q for
the quarter ended December 31, 1999, File No. 0-23852, and
incorporated herein by reference)
3.6 Amendment to Articles of Organization, dated March 6, 2001
(included as Exhibit 3.4 to the Company's Current Report on
Form 8-K dated March 9, 2001, File No. 0-23852, and
incorporated herein by reference)
Page 24
4. Instruments Defining the Rights of Security Holders, Including
Indentures
4.1 Specimen certificate for the Common Stock, $.01 par value, of
the Company (included as Exhibit 4.1 to the Company's Current
Report on Form 10-Q for the quarter ended December 31,2001,
File No. 0-23852 and incorporated herein by references)
4.2 Article 4B of the Amended and Restated Articles of
Organization of the Company (included as Exhibit 4.1 to the
Company's Registration Statement on Form S-1, Registration No.
33-76420, and incorporated herein by reference)
4.3 Rights Agreement dated as of January 27, 1998, between the
Company and BankBoston, N.A. as Rights Agent (included as
Exhibit 4 (a) to the Company's Current Report on Form 8-K
dated February 2, 1998, File No. 0-23852, an incorporated
herein by reference)
4.4 Form of Certificate of Designation of Series A Junior
Participating Preferred Stock of the Company (included as
Exhibit 4 (b) to the Company's Current report on Form 8-K
dated February 2, 1998, File No. 0-23852, and incorporated
herein by reference)
4.5 Form of Rights Certificate (included as Exhibit 4 (c) to the
Company's Current Report on Form 8-K dated February 2, 1998,
File No. 0-23852, and incorporated herein by reference)
9. Voting Trust Agreements
9.1 Shareholders Agreement between Robert L. Daniels and Susan H.
Daniels dated August 1, 2001 (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)
31.1 Certification pursuant to Section 302 of the Sarbanes-Oxley Act of
2002, Rule 13a-14(a)/15d-14(a), by Chief Executive Officer.
31.2 Certification pursuant to Section 302 of the Sarbanes-Oxley Act of
2002, Rule 13a-14(a)/15d-14(a), by Chief Financial Officer.
32.1 Certification pursuant to Section 906 of the Sarbanes-Oxley Act of
2002, 18 U.S.C. Section 1350 by Chief Executive Officer and Chief
Financial Officer.
(b) Reports on Form 8-K
On January 22, 2004, the Company filed a current report on Form 8-K disclosing
its results of operations for the quarter ended December 31, 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 25
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
MRO SOFTWARE, INC.
Date: February 17, 2004 By: /s/ Peter J. Rice
-----------------
Peter J. Rice
Executive Vice President -
Finance and Administration,
Chief Financial Officer and
Treasurer
(Principal Financial Officer)
Page 26
EXHIBIT INDEX
EXHIBIT
NO. DESCRIPTION PAGE
3.1 Amended and Restated Articles of Organization of the Company (included as
Exhibit 3.3 to the Company's Registration Statement on Form S-1,
Registration No. 33-76420, and incorporated herein by reference)
3.2 Restated By-Laws of the Company, as amended (included as Exhibit 3.2 to
the Company's Annual Report on Form 10-K for the fiscal year ended
September 30, 1996 File No. 0-23852 and incorporated herein by reference)
3.3 Amendment to By-Laws adopted on February 1, 2001 (included as
Exhibit 3.3 to the Company's Current Report on Form 10-Q for the quarter
ended March 31, 2001, File No. 0-23852 and incorporated herein by
reference)
3.4 Form of Certificate of Designation of Series A Junior Participating
Preferred Stock of MRO Software, Inc. (which is attached as Exhibit A to
the Rights Agreement included as Exhibit 4 (b) to the Company's Current
Report on Form 8-K dated February 2, 1998, File No. 0-23852, and
incorporated herein by reference)
4.1 Specimen certificate for the Common Stock, $.01, of the Company (included
as Exhibit 4.1 to the Company's Current Report on Form 10-Q for the
quarter ended December 31, 2001, File No. 0-23852 and incorporated herein
by reference)
4.2 Article 4B of the Amended and Restated Articles of Organization of the
Company (included as Exhibit 4.1 to the Company's Registration Statement
on Form S-1, Registration No. 33-76420, and incorporated herein by
reference)
4.3 Rights Agreement dated as of January 27, 1998, between the Company and
BankBoston, N.A. as Rights Agent (included as Exhibit 4 (a) to the
Company's Current Report on Form 8-K dated February 2, 1998, File
No.0-23852, and incorporated herein by reference)
4.4 Form of Certificate of Designation of Series A Junior Participating
Preferred Stock of MRO Software, Inc. (included as Exhibit 4 (b) to the
Company's Current Report on Form 8-K dated February 2, 1998, File No.
0-23852, and incorporated herein by reference)
4.5 Form of Rights Certificate (included as Exhibit 4 (c) to the Company's
Current Report on Form 8-K dated February 2, 1998, File No. 0-23852, and
incorporated herein by reference)
9.1 Shareholders Agreement between Robert L. Daniels and Susan H. Daniels
dated August 1, 2001 (included as Exhibit 9.1 to the Company's Annual
Report on Form 10-K for the fiscal year ended September 30, 2001 File No.
0-23852, and incorporated herein by reference)
31.1 Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002,
Rule 13a-14(a)/15d-14(a), by Chief Executive Officer.
31.2 Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002,
Rule 13a-14(a)/15d-14(a), by Chief Financial Officer.
32.1 Certification pursuant to Section 906 of the Sarbanes-Oxley Act of 2002,
18 U.S.C. Section 1350 by Chief Executive Officer and Chief Financial
Officer.
Page 27