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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2004
(mark one)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES AND
EXCHANGE ACT OF 1934
For the transition period from ______________ to _______________
Commission File Number 0-23852
MRO SOFTWARE, INC.
(Exact name of registrant as specified in its charter)
MASSACHUSETTS 04-2448516
(State or other jurisdiction (I.R.S employer incorporation or organization)
identification number)
100 CROSBY DRIVE, BEDFORD MASSACHUSETTS 01730
(Address of principal executive offices, including zip code)
(781) 280-2000
(Registrant's telephone number, including area code)
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes [X] No [ ]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act)
Yes [X] No [ ]
Number of shares outstanding of the Registrant's common stock as of the latest
practicable date: 24,981,129 shares of common stock, $.01 par value per share,
as of August 9, 2004.
Page 1
MRO SOFTWARE, INC.
10-Q INDEX
PAGE
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
Consolidated Balance Sheets (unaudited) as of June 30, 2004 and
September 30, 2003. 3
Consolidated Statements of Operations (unaudited)
for the three and nine months ended June 30, 2004 and June 30, 2003. 4
Consolidated Statements of Cash Flows (unaudited)
for the nine months ended June 30, 2004 and June 30, 2003. 5
Notes to Consolidated Financial Statements (unaudited). 6
ITEM 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations 13
ITEM 3. Quantitative and Qualitative Disclosures about Market Risk 24
ITEM 4. Controls and Procedures 24
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 25
Item 2. Changes in Securities 25
Item 3. Defaults upon Senior Executives 25
Item 4. Submission of Matter to a Vote of Security Holders 25
Item 5. Other Information 25
Item 6. Exhibits and Reports on Form 8-K 25
SIGNATURE 27
Page 2
MRO SOFTWARE, INC.
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
JUNE 30, SEPTEMBER 30,
(IN THOUSANDS, EXCEPT PER SHARE DATA) 2004 2003
-------- -------------
ASSETS
Current assets:
Cash and cash equivalents $ 48,358 $ 73,662
Marketable securities 1,189 1,102
Accounts receivable, trade, less allowance
for doubtful accounts of $2,468 at June 30, 2004
and $2,741 at September 30, 2003, respectively 33,668 28,833
Prepaid expenses and other current assets 5,925 4,177
Deferred income taxes 2,223 2,242
-------- ----------
Total current assets 91,363 110,016
-------- ----------
Marketable securities 49,857 19,809
Property and equipment, net 8,287 8,239
Goodwill 46,210 46,210
Intangible assets, net 5,241 7,700
Notes receivable 357 593
Deferred income taxes 8,517 9,267
Other assets 4,223 3,427
-------- ----------
Total assets $214,055 $ 205,261
======== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued expenses $ 13,040 $ 15,701
Accrued compensation 8,136 8,357
Income taxes payable 3,395 4,741
Deferred revenue 30,554 28,734
Other current liabilities 392 --
-------- ----------
Total current liabilities 55,517 57,533
-------- ----------
Other long term liabilities 1,113 35
Deferred revenue 1,024 1,181
Stockholders' equity
Preferred stock, $.01 par value;1,000 authorized,
none issued and outstanding
Common stock, $.01 par value;50,000 authorized; 24,981 and 24,576 issued
and outstanding at June 30, 2004 and September 30, 2003, respectively 250 246
Additional paid-in capital 118,541 115,093
Deferred compensation (418) (298)
Retained earnings 37,402 31,163
Accumulated other comprehensive income 626 308
-------- ----------
Total stockholders' equity 156,401 146,512
-------- ----------
Total liabilities and stockholders' equity $214,055 $ 205,261
======== ==========
The accompanying notes are an integral part of the consolidated financial
statements.
3
MRO SOFTWARE, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
THREE MONTHS ENDED NINE MONTHS ENDED
JUNE 30, JUNE 30,
(IN THOUSANDS, EXCEPT PER SHARE DATA) 2004 2003 2004 2003
------------ ------------ ----------- ----------
Revenues:
Software $ 12,996 $ 15,348 $ 36,658 $ 35,685
Support and services 33,304 32,287 99,166 95,226
------------ ------------ ----------- ----------
Total revenues 46,300 47,635 135,824 130,911
------------ ------------ ----------- ----------
Cost of revenues:
Software 1,582 2,596 5,289 5,801
Support and services 14,960 14,662 45,140 44,103
------------ ------------ ----------- ----------
Total cost of revenues 16,542 17,258 50,429 49,904
------------ ------------ ----------- ----------
Gross profit 29,758 30,377 85,395 81,007
Operating expenses:
Sales and marketing 13,941 16,074 41,486 45,765
Product development 7,001 6,512 21,104 19,656
General and administrative 4,280 4,764 13,134 13,118
Amortization of other intangibles 165 226 574 704
------------ ------------ ----------- ----------
Total operating expenses 25,387 27,576 76,298 79,243
------------ ------------ ----------- ----------
Income from operations 4,371 2,801 9,097 1,764
Interest income 313 205 761 596
Other income/(expense), net 35 169 (292) 1,150
------------ ------------ ----------- ----------
Income before income taxes 4,719 3,175 9,566 3,510
Provision for income taxes 1,631 1,158 3,327 1,276
------------ ------------ ----------- ----------
Net income $ 3,088 $ 2,017 $ 6,239 $ 2,234
============ ============ =========== ==========
Net income per share, basic $ 0.12 $ 0.08 $ 0.25 $ 0.09
------------ ------------ ----------- ----------
Net income per share, diluted $ 0.12 $ 0.08 $ 0.25 $ 0.09
------------ ------------ ----------- ----------
Shares used to calculate net income per share
Basic 24,873 24,457 24,766 24,390
Diluted 25,409 24,489 25,356 24,542
The accompanying notes are an integral part of the consolidated financial
statements.
4
MRO SOFTWARE, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
NINE MONTHS ENDED
JUNE 30,
----------------------------
(IN THOUSANDS) 2004 2003
----------- ------------
Cash flows from operating activities:
Net income $ 6,239 $ 2,234
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation 3,536 3,427
Amortization of other intangibles 2,459 3,235
Amortization of premium on marketable securities 89 ---
(Gain) on sale of services operations and disposal of equipment --- (395)
Stock-based compensation 166 120
Deferred income taxes 785 414
Changes in operating assets and liabilities:
Accounts receivable (4,141) 2,490
Prepaid expenses and other assets 78 (1,206)
Accounts payable, accrued expenses and other liabilities (3,766) (2,903)
Accrued compensation (349) (421)
Income taxes payable (1,344) (477)
Deferred revenue 1,027 3,407
----------- ------------
Net cash provided by operating activities 4,779 9,925
----------- ------------
Cash flows from investing activities:
Acquisitions of property and equipment and other
capital expenditures (3,597) (2,069)
Purchase of marketable securities (58,654) (32,983)
Sale of marketable securities 28,250 12,775
----------- ------------
Net cash used in investing activities (34,001) (22,277)
----------- ------------
Cash flows from financing activities:
Proceeds from exercise of employee stock options
and stock purchases 3,167 1,529
----------- ------------
Net cash provided by financing activities 3,167 1,529
----------- ------------
Effect of exchange rate changes on cash 751 1,298
----------- ------------
Net decrease in cash and cash equivalents (25,304) (9,525)
Cash and cash equivalents, beginning of period 73,662 67,315
----------- ------------
Cash and cash equivalents, end of period $ 48,358 $ 57,790
=========== ============
Supplemental disclosure of noncash financing activities:
Restricted stock awards $ 166 $ 120
The accompanying notes are an integral part of the consolidated financial
statements.
5
MRO SOFTWARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
A. BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements include the
accounts of MRO Software, Inc. ("MRO") and its majority-owned subsidiaries
(collectively, the "Company"), as of June 30, 2004 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 and 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) 06/30/04 06/30/03
-------- --------
Net income $ 3,088 $ 2,017
Denominator:
Weighted average common shares
outstanding-basic 24,873 24,457
Effect of dilutive securities (1) 536 32
-------- --------
Weighted average common shares
outstanding-diluted 25,409 24,489
======== ========
Net income per share, basic $ 0.12 $ 0.08
Net income per share, diluted $ 0.12 $ 0.08
NINE MONTHS ENDED
(IN THOUSANDS, EXCEPT PER SHARE DATA) 06/30/04 06/30/03
-------- --------
Net income $ 6,239 $ 2,234
Denominator:
Weighted average common shares
outstanding-basic 24,766 24,390
Effect of dilutive securities (1) 590 152
-------- --------
Weighted average common shares
outstanding-diluted 25,356 24,542
======== ========
Net income per share, basic $ 0.25 $ 0.09
Net income per share, diluted $ 0.25 $ 0.09
(1) Options to purchase 1,567,000 shares and 4,389,000 shares of the Company's
Common Stock for the three months ended June 30, 2004 and 2003, respectively and
1,554,000 shares and 3,218,000 shares for the nine months ended June 30, 2004
and 2003, 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 536,000 shares and 590,000 shares
and 32,000 shares and 152,000 shares were included in the computation of diluted
net income per share for the three and nine months ended June 30, 2004 and 2003,
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.
Page 7
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
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. 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:
THREE MONTHS ENDED
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) 06/30/04 06/30/03
-------- --------
Net income
As reported $ 3,088 $ 2,017
Add: Stock-based employee compensation
expense included in net income 61 50
Deduct: Stock-based employee compensation
expense determined under the fair value
based method for all awards, net of
related tax effects (1,610) (3,158)
Pro forma net income/(loss) $ 1,539 $ (1,091)
Earnings/(loss) per share:
Basic - as reported $ 0.12 $ 0.08
Basic - pro forma $ 0.06 $ (0.05)
Diluted - as reported $ 0.12 $ 0.08
Diluted - pro forma $ 0.06 $ (0.05)
NINE MONTHS ENDED
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) 06/30/04 06/30/03
-------- --------
Net income
As reported $ 6,239 $ 2,234
Add: Stock-based employee compensation
expense included in net income 166 120
Deduct: Stock-based employee compensation
expense determined under the fair value
based method for all awards, net of
related tax effects (5,413) (8,457)
Pro forma net income/(loss) $ 992 $ (6,103)
Earnings/(loss) per share:
Basic - as reported $ 0.25 $ 0.09
Basic - pro forma $ 0.04 $ (0.25)
Diluted - as reported $ 0.25 $ 0.09
Diluted - pro forma $ 0.04 $ (0.25)
With the exception of restricted stock awards to non-employee members and the
Chairman of the board of directors, no stock-based compensation cost is
reflected in net income, as all stock-based awards granted
Page 8
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) 06/30/04 06/30/03
-------- --------
Net income $ 3,088 $ 2,017
Other comprehensive net income,
Net of tax:
Unrealized loss on securities arising during period (194) (225)
Foreign currency translation adjustment (336) 702
-------- --------
Comprehensive income $ 2,558 $ 2,494
======== ========
NINE MONTHS ENDED
(IN THOUSANDS) 06/30/04 06/30/03
-------- --------
Net income $ 6,239 $ 2,234
Other comprehensive net income,
Net of tax:
Unrealized loss on securities arising during period (122) (257)
Foreign currency translation adjustment 440 1,482
-------- --------
Comprehensive income $ 6,557 $ 3,459
======== ========
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, 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:
THREE MONTHS ENDED
(IN THOUSANDS) 06/30/04 06/30/03
-------- --------
Revenues:
United States $ 26,510 $ 28,476
Other Americas 2,375 2,722
Intercompany 3,093 2,952
-------- --------
Subtotal $ 31,978 $ 34,150
Europe/Middle East and Africa 14,516 12,458
Asia/Pacific 2,899 3,979
Page 9
Intercompany (3,093) (2,952)
-------- --------
Total revenues $ 46,300 $ 47,635
======== ========
NINE MONTHS ENDED
(IN THOUSANDS) 06/30/04 06/30/03
-------- --------
Revenues:
United States $ 77,010 $ 77,939
Other Americas 7,469 8,024
Intercompany 9,205 6,102
-------- --------
Subtotal $ 93,684 $ 92,065
Europe/Middle East and Africa 42,581 34,649
Asia/Pacific 8,764 10,299
Intercompany (9,205) (6,102)
-------- --------
Total revenues $135,824 $130,911
======== ========
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.
No customer accounted for more than 10% of total revenues.
F. GOODWILL AND OTHER INTANGIBLE ASSETS
Intangible assets as of June 30, 2004 and September 30, 2003 consist of the
following:
(IN THOUSANDS) 06/30/04 09/30/03
-------- --------
Goodwill $ 46,210 $ 46,210
Acquired technology 15,744 15,744
Accumulated amortization (11,154) (9,269)
-------- --------
Sub-total acquired technology 4,590 6,475
-------- --------
Other intangibles 3,009 3,009
Accumulated amortization (2,358) (1,784)
-------- --------
Sub-total other intangibles 651 1,225
-------- --------
Total intangible assets, net $ 51,451 $ 53,910
======== ========
Other intangibles consist of customer contracts, backlog, customer lists and
non-compete agreements.
Amortization expense of other intangible assets was $638 thousand and $1.1
million for the three months ended June 30, 2004 and 2003, respectively, and
$2.5 million and $3.2 million for the nine months ended June 30, 2004 and 2003,
respectively.
As of June 30, 2004, remaining amortization expense on existing intangibles for
the next five years is as follows:
Page 10
(in thousands)
- -------------
2004 (remaining 3 mos.) $ 565
2005 2,240
2006 1,383
2007 477
2008 477
2009 99
-------
Total $ 5,241
-------
G. GUARANTOR ARRANGEMENTS
On January 17, 2003, the Company sold its industrial data normalization services
operations. Prior to the sale, the Company had guaranteed the obligations of its
subsidiary under an office lease covering the operation's principal place of
business. This guaranty remains in full force and effect. As of June 30, 2004,
the maximum potential amount due under this guaranty is $400 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 June 30, 2004.
We warrant that our software products will perform substantially in accordance
with the product specifications as contained in certain associated
documentation, 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 June 30, 2004.
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 as negotiated may vary in duration and nature, and
our obligations to indemnify may be 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
Page 11
sufficient to cover a refund of the license and 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 June 30, 2004.
When we acquire a business or a company, we may 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
grand fathered 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 June 30, 2004.
H. SUBSEQUENT EVENT
On July 9, 2004, the Company completed the acquisition of Raptor ASA
Corporation, a provider of software solutions for the aviation industry. The
total purchase price of the acquisition was $1.1 million. The amount of $600
thousand was payable at closing. The amount of $200 thousand is payable within
thirty days after the first anniversary of the closing and $300 thousand is
payable within thirty days after the second anniversary of the closing. Both of
these payments are contingent upon the Seller's completion of knowledge transfer
milestones.
Page 12
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 THREE AND NINE MONTHS ENDED JUNE 30, 2004
- Net income increased $1.1 million over the comparable quarter for
the prior year and $4.0 million over the comparable prior nine-month
period.
- Overall gross margin decreased by $600 thousand or 2% over the
comparable quarter for the prior year and increased $4.4 million or
5% over the comparable prior nine-month period. The decrease for the
three months ended June 30, 2004 as compared to the three months
ended June 30, 2003 is due to the decrease in software licenses sold
without a commensurate decrease in expenses and an increase in the
use of third party consultants implementing the Company's products.
The increase for the nine months ended June 30, 2004 as compared to
the nine months ended June 30, 2003 is due to an increase in
software and support revenues without a commensurate increase in
personnel and operating costs and a decrease in amortization of
acquired technology.
- Operating expenses, excluding amortization of intangibles decreased
$2.1 million or 8% over the comparable quarter for the prior year
and decreased $2.8 million or 4% over the comparable prior
Page 13
nine-month period. The majority of the decreases are attributable to
decreases in sales and marketing expenses due to a reduction in the
number of sales and marketing personnel. These decreases are
partially offset by increases in product development expenses due to
an increase in salaries and related benefits, as well as increases
in costs to translate our MAXIMO product into numerous foreign
languages.
- Total revenues decreased $1.3 million over the comparable quarter
for the prior year and increased $4.9 million over the comparable
prior nine-month period. International revenues accounted for 43% of
total revenues for the current quarter and year to date. Due to the
increased strength in certain foreign currencies, especially the
Euro, the British Pound and the Australian Dollar, the Company
estimates that the current quarters revenues resulted in an increase
of approximately $1.5 million as compared to the average prevailing
exchange rates of the comparable quarter and $6.2 million over the
comparable nine-month period. However, due to a similar effect of
the exchange rates on operating expenses, the overall impact of
foreign currency adjustments had an immaterial impact on net income
for the current quarter and the prior nine-month period.
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. The preparation of these financial statements requires that
management make estimates and judgments that affect the reported amounts of
assets, liabilities, revenues and expenses. These estimates and assumptions are
affected by management's application of accounting policies.
Critical accounting policies, in which different judgments and estimates by our
management could materially affect our reported condition and results of
operations, include revenue recognition, estimating the allowance for doubtful
accounts, deferred tax assets, and the valuation of long-lived assets. These
critical accounting policies and estimates should be read in conjunction with
the critical accounting policies and estimates included in the Company's Annual
Report on Form 10-K filed with the Securities and Exchange Commission on
December 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 Nine Nine
Months Months Months Months
Ended Change Ended Ended Change Ended
(in thousands) 06/30/04 % 06/30/03 06/30/04 % 06/30/03
- --------------------------------------------------------------------------------------------
Software licenses $ 12,996 (15)% $ 15,348 $ 36,658 3% $ 35,685
Percentage of total revenues 28% 32% 27% 27%
Support and services $ 33,304 3% $ 32,287 $ 99,166 4% $ 95,226
Percentage of total revenues 72% 68% 73% 73%
Total revenues $ 46,300 (3)% $ 47,635 $135,824 4% $130,911
The Company's revenues are derived primarily from two sources: (i) software
licenses, and (ii) fees for support and services.
Software license revenues decreased 15% to $13.0 million from $15.3 million for
the three months ended June 30, 2004 and 2003, respectively, and increased 3% to
$36.7 million from $35.7 million for the nine
Page 14
months ended June 30, 2004 and 2003, respectively. MAXIMO software license
revenues decreased 13% to $12.4 million from $14.2 million for the three months
ended June 30, 3004 and 2003, respectively, and increased 4% to $35.1 million
from $33.7 million for the nine months ended June 30, 2004 and 2003,
respectively. The decrease in MAXIMO software licenses for the three months
ended June 30, 2004 as compared to the three months ended June 30, 2003 is
attributable to a decrease in the average selling price and the number of
licenses sold offset by the positive effect of foreign exchange rates. Also,
during the three months ended June 30, 2003, the Company concluded a large
MAXIMO software license sale in the amount of $3.8 million. The increase in
MAXIMO software licenses for the nine months ended June 30, 2004 as compared to
the nine months ended June 30, 2003 is attributable to the positive effect of
foreign exchange rates and an increase in sales of MAXIMO solutions for vertical
industries. ITAM software license revenues were $637 thousand and $1.1 million
for the three months ended June 30, 2004 and 2003, respectively and $1.6 million
and $1.9 million for the nine months ended June 30, 2004 and 2003, respectively.
The Company expects that revenues from ITAM licenses will continue to fluctuate
over the next few quarters as a result of the Company's product development
plans to replace this product in conjunction with the next version of MAXIMO.
Support revenues increased 8% to $17.7 million from $16.4 million for the three
months ended June 30, 2004 and 2003, respectively, and increased 10% to $52.9
million from $48.2 million for the nine months ended June 30, 2004 and 2003,
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 positive effect of exchange rates. MAXIMO support
revenues increased 10% to $17.0 million from $15.5 million for the three months
ended June 30, 2004 and 2003, respectively, and increased 11% to $50.3 million
from $45.5 million for the nine months ended June 30, 2004 and 2003,
respectively. ITAM support revenues were $661 thousand and $873 thousand for the
three months ended June 30, 2004 and 2003, respectively, and $2.5 million and
$2.7 million for the nine months ended June 30, 2004 and 2003, respectively. The
decrease in ITAM support revenues for the three and nine months ended June 30,
2004 is attributable to termination of older MainControl contracts without
commensurate replacements from new customers.
Service revenues decreased 2% to $15.6 million from $15.9 million for the three
months ended June 30, 2004 and 2003, respectively, and decreased 1% to $46.3
million from $47.0 million for the nine months ended June 30, 2004 and 2003,
respectively. The decline in service revenues for the three months ended June
30, 2004 as compared to the three months ended June 30, 2003 was comprised of a
decline of $550 thousand in ITAM service revenues related to the decreases in
software licenses sold, offset by an increase in MAXIMO service revenues of $250
thousand. The decline in service revenues for the nine months ended June 30,
2004 as compared to the nine months ended June 30, 2003 was comprised of a
decline of $1.0 million in Enterprise Catalog Management services revenues due
to the sale of our industrial data normalization services operations in January
2003, and by a decline in ITAM services revenues of $1.1 million due to a
decrease in demand. The declines in ITAM and Enterprise Catalog Management
service revenues were offset by an increase in MAXIMO service revenues of $1.7
million. The increase in MAXIMO services revenues was attributable to an
increase in demand for product implementation services consistent with software
revenue growth.
Page 15
COST OF REVENUES
Three Three Nine Nine
Months Months Months Months
Ended Change Ended Ended Change Ended
(in thousands) 06/30/04 % 06/30/03 06/30/04 % 06/30/03
- -----------------------------------------------------------------------------------------------------
Cost of software licenses $ 1,582 (39)% $ 2,596 $ 5,289 (9)% $ 5,801
Percentage of software license 12% 17% 14% 16%
Cost of support and services $ 14,960 $ 14,662 $ 45,140 $ 44,103
Percentage of support and services 45% 2% 45% 46% 2% 46%
Total cost of revenues $ 16,542 $ 17,258 $ 50,429 $ 49,904
Percentage of total revenues 36% (4)% 36% 37% 1% 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 for the three months ended June 30, 2004 as
compared to the three months ended June 30, 2003 was primarily attributable to a
decrease in software purchased for resale related to the demand for our MAXIMO
Mobile Suite product and a decrease in the amortization of acquired technology
due to the cessation of amortization of a fully amortized asset. The decrease
for the nine months ended June 30, 2004 as compared to the nine months ended
June 30, 2003 was due to a decrease in the amortization of acquired technology
due to the cessation of amortization of a fully amortized asset. This decrease
was partially off set by an increase in software purchased for resale related to
the demand for our MAXIMO Mobile Suite product. Amortization of acquired
technology was $473 thousand and $844 thousand for the three months ended June
30, 2004 and 2003, respectively and $1.9 million and $2.5 million for the nine
months ended June 30, 2004 and 2003, respectively.
Cost of support and services consists primarily of personnel costs for employees
and the related costs of benefits and facilities, costs for utilization of third
party consultants, and costs to support the MRO Operations Center. Cost of
support revenues decreased 3% to $2.7 million from $2.8 million for the three
months ended June 30, 2004 and 2003, respectively, and remained flat at $8.0
million for the nine months ended June 30, 2004 and 2003, respectively. The
decrease for the three months ended June 30, 2004 as compared to the three
months ended June 30, 2003 is due to a decrease in personnel and operating
expenses. Cost of support revenues, as a percentage of total support revenues
was 15% and 17% for both the three and nine months ended June 30, 2004 and 2003,
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 increased 3% to $12.3 million from $11.9 million for
the three months ended June 30, 2004 and 2003, respectively, and increased 3% to
$37.2 million from $36.1 million for the nine months ended June 30, 2004 and
2003, respectively. Cost of service revenues, as a percentage of total service
revenues was 79% and 75% for the three months ended June 30, 2004 and 2003,
respectively and 80% and 77% for the nine months ended June 30, 2004 and 2003,
respectively. The increases for the three months ended June 30, 2004 as compared
to the three months ended June 30, 2003 is attributable to an increase in
salaries and related benefits of $200 thousand and increases in utilization of
third party consultants of $220 thousand offset by a decrease of $55 thousand in
travel and entertainment expenses. The increases for the nine months ended June
30, 2004 as compared to the nine months ended June 30, 2003 is attributable to
an increase in salaries and related benefits of $600 thousand and an increase in
the utilization of third party consultants of $1.4 million to implement MAXIMO.
The increases were partially offset by a decrease of $420 thousand in travel and
entertainment expenses and a $500 thousand decrease in the use of third party
service providers by our industrial data normalization services operations that
was sold in January 2003.
Page 16
OPERATING EXPENSES
Three Three Nine Nine
Months Months Months Months
Ended Change Ended Ended Change Ended
(in thousands) 06/30/04 % 06/30/03 06/30/04 % 06/30/03
- ----------------------------------------------------------------------------------------------------
Sales and marketing $ 13,941 (13)% $ 16,074 $ 41,486 (9)% $ 45,765
Percentage of total revenues 30% 34% 31% 35%
Product development $ 7,001 8% $ 6,512 $ 21,104 7% $ 19,656
Percentage of total revenues 15% 14% 16% 15%
General and administrative $ 4,280 (10)% $ 4,764 $ 13,134 1% $ 13,118
Percentage of total revenues 9% 10% 10% 10%
Amortization of other intangibles $ 165 (27)% $ 226 $ 574 (18)% $ 704
Percentage of total revenues 1% 1% 1% 1%
Sales and marketing expenses decreased 13% to $13.9 million from $16.1 million
for the three months ended June 30, 2004 and 2003, respectively, and decreased
9% to $41.5 million from $45.8 million for the nine months ended June 30, 2004
and 2003, respectively. The decrease for the three months ended June 30, 2004 as
compared to the three months ended June 30, 2003 was primarily attributable to a
$1.2 million decrease in salaries and related benefits due to a reduction in the
number of sales and marketing personnel, a $300 thousand decrease in advertising
expenses and a $400 thousand decrease in sales commissions due to the decrease
in software license revenues. The decrease for the nine months ended June 30,
2004 as compared to the nine months ended June 30, 2003 was primarily
attributable to a $3.4 million decrease in salaries and related benefits due to
a reduced number of sales and marketing personnel and a $1.2 million decrease in
advertising expenses. In addition, in the three and nine months ended June 30,
2003, the Company recorded $700 thousand of severance costs related to a
reorganization of the sales and marketing organization. The decreases for the
nine months ended June 30, 2004 as compared to the nine months ended June 30,
2003 were partially offset by a $700 thousand increase in sales commissions due
to increases in software license sales and changes in the sales commission
policy that was implemented at the beginning of fiscal year 2004.
Product development expenses increased 8% to $7.0 million from $6.5 million for
the three months ended June 30, 2004 and 2003, respectively and increased 7% to
$21.1 million from $19.7 million for the nine months ended June 30, 2004 and
2003, respectively. The increase for both the three and nine months ended June
30, 2004 as compared to the three and nine months ended June 30, 2003 was
primarily attributable to increases in product development salaries and related
benefits and increases in the costs to translate our products into foreign
languages. The Company is focusing the majority of its development on a new
version of MAXIMO. The new version will incorporate the features of ITAM and a
new product in the consolidated service desk market. The Company also expects to
continue to make enhancements to MAXIMO and to 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 $4.3 million from $4.8
million for the three months ended June 30, 2004 and 2003, respectively, and
remained flat at $13.1 million for the nine months ended June 30, 2004 and 2003,
respectively. The decrease for the three months ended June 30, 2004 as compared
to the three months ended June 30, 2003 was primarily attributable to a general
decrease in budgeted spending and a decrease in bad debt reserves of $75
thousand.
The decrease in amortization of other intangibles expense for the three and nine
months ended June 30, 2004 and 2003, respectively and was due to the cessation
in the amortization of a fully amortized intangible asset.
Page 17
NON-OPERATING EXPENSES
Three Three Nine Nine
Months Months Months Months
Ended Change Ended Ended Change Ended
(in thousands) 06/30/04 % 06/30/03 06/30/04 % 06/30/03
- ----------------------------------------------------------------------------------------------------
Interest income $ 313 53% $ 205 $ 761 28% $ 596
Other income/(expense), net $ 35 (79)% $ 169 $(292) (125)% $ 1,150
Interest income is attributable to interest earned on marketable securities and
cash and cash equivalents. The decrease in other income was due to foreign
currency exchange rate transaction losses. Also contributing to the decrease for
the nine months ended June 30, 2004 is a one-time gain of approximately $407
thousand from the sale of the Company's industrial data normalization services
operations in January 2003.
INCOME TAXES
The Company made a provision for taxes at the effective rate of 35% for the
three and nine months ended June 30, 2004, respectively, and 36% for the three
and nine months ended June 30, 2003, respectively. The decrease in the effective
tax rate is primarily attributable to the utilization of net operating loss
carryforwards. The tax provision was calculated on income generated in domestic
and foreign tax jurisdictions and changes in the Company's net deferred tax
assets and liabilities.
LIQUIDITY AND CAPITAL RESOURCES
As of June 30, 2004, the Company had cash and cash equivalents of $48.4 million
and marketable securities of $51.0 million, and working capital of $35.8
million.
Cash provided by operations was $4.8 million for the nine months ended June 30,
2004, primarily attributable to income generated by operations, offset by
payments of accrued liabilities and an increase in trade receivables.
Cash used in investing activities was $34.0 million for the nine months ended
June 30, 2004 and was primarily used in the purchase of marketable securities,
partially offset by sales of securities.
Cash provided by financing activities was $3.2 million for the nine months ended
June 30, 2004 and represents proceeds from the Company's Employee Stock Option
and Purchase Plans.
As of June 30, 2004, 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 June 30, 2005. 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
Page 18
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 its 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.
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 in a state
of continuous decline. 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
Page 19
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 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 current 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.
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, SAIC, Accenture, Hewlett-Packard Company and others. In
order to generate revenue through these relationships, each party must
coordinate with and support the 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 20
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 platform, utilizing the same leading edge
Internet-centric architecture and technologies as contained in MAXIMO 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.
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, 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.
Page 21
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.
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. 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 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 transactions 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.
Page 22
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 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 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 23
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 June 30, 2004, the Company held $99.4 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 June 30, 2004, 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 24
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)
4. Instruments Defining the Rights of Security Holders, Including
Indentures
Page 25
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 April 15, 2004, the Company filed a current report on Form 8-K disclosing its
results of operations for the quarter ended March 31, 2004.
On July 15, 2004, the Company filed a current report on Form 8-K disclosing its
results of operations for the quarter ended June 30, 2004.
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 26
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: August 13, 2004 By: /s/ Peter J. Rice
---------------------------
Peter J. Rice
Executive Vice President -
Finance and Administration,
Chief Financial Officer and
Treasurer
(Principal Financial Officer)
Page 27
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 28