Back to GetFilings.com
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
FOR THE FISCAL YEAR ENDED SEPTEMBER 30, 2004
(mark one)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES AND
EXCHANGE ACT OF 1934
For the transition period from _______________ to __________________
Commission File Number 0-23852
MRO SOFTWARE, INC.
(Exact name of registrant as specified in its charter)
MASSACHUSETTS 04-2448516
(State or other jurisdiction of (I.R.S. employer
incorporation or organization) identification number)
100 CROSBY DRIVE, BEDFORD, MASSACHUSETTS 01730
(Address of principal executive offices, including zip code)
(781) 280-2000
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $.01 par value
----------------------------
(Title of Class)
----------------
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to the Form 10-K []
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Exchange Act Rule 12b-2).
Yes [X] No [ ]
The aggregate market value of the voting and non-voting common equity held by
non-affiliates computed by reference to the last sale price on March 31, 2004
was $202,874,056.
Number of shares outstanding of the Registrant's common stock as of the latest
practicable date: 25,215,604 shares of common stock, $.01 par value per share,
as of December 10, 2004.
DOCUMENT INCORPORATED BY REFERENCE
The information called for by Part III is incorporated by reference to the
definitive Proxy Statement for the Annual Meeting of Stockholders of the
Company, which will be filed with the Securities and Exchange Commission not
later than 120 days after September 30, 2004.
Page 1
MRO SOFTWARE, INC.
FISCAL 2004 FORM 10-K
INDEX
ITEM PAGE
- ---- ----
PART I
Item 1: Business 4
Item 2: Properties 11
Item 3: Legal Proceedings 12
Item 4: Submission of Matters to a Vote of Security Holders 12
PART II
Item 5: Market for Registrant's Common Equity, Related Stockholder 12
Matters and Issuer Purchases of Equity Securities
Item 6: Selected Financial Data 14
Item 7: Management's Discussion and Analysis of Financial 15
Condition and Results of Operations
Item 7A: Quantitative and Qualitative Disclosures About Market 32
Risk
Item 8: Financial Statements and Supplementary Data 33
Item 9: Changes in Disagreements with Accountants on Accounting 60
and Financial Disclosure
Item 9A: Controls and Procedures 60
Item 9B: Other Information 60
PART III
Item 10: Directors, Executive Officers, Promoters and Control Persons 61
of the Registrant
Item 11: Executive Compensation 63
Item 12: Security Ownership of Certain Beneficial Owners and Management 63
Item 13: Certain Relationships and Related Transactions 63
Item 14: Principal Accountant Fees and Services 63
PART IV
Item 15: Exhibits, Financial Statement Schedules and Reports on Form 64
8-K
Signatures 66
Exhibit Index
Page 2
EXPLANATORY NOTE
This Annual Report on Form 10-K, as well as documents incorporated herein by
reference, may contain forward-looking statements (within the meaning of section
27A of the Securities Act of 1933, as amended, and section 21E of the Securities
Exchange Act of 1934, as amended). The following and similar expressions
identify forward-looking statements: "expects", "anticipates", and "estimates".
Forward-looking statements include, without limitation, statements related to:
the Company's plans, objectives, expectations and intentions; the timing of,
availability and functionality of products under development or recently
introduced; and market and general economic conditions. Important factors that
could cause actual results to differ materially from those suggested by the
forward-looking statements for various reasons, include those discussed under
the heading "Factors Affecting Future Performance" below. These forward-looking
statements speak only as of the date of this Annual Report, and the Company
disclaims any obligation to update such forward-looking statements as a result
of any change in circumstances or otherwise.
MRO Software, Inc., incorporated in May 1968, under the laws of the Commonwealth
of Massachusetts, is hereinafter sometimes referred to as the "Company", "MROI",
"our", "us", or "we".
MAXIMO(R) and MainControl(R) are registered trademarks of MROI. MRO
Software(TM), Make It All Count(R) MAXIMO Enterprise(TM), MAXIMO Extended
Enterprise(TM), MAXIMO Enterprise Suite(TM), MAXIMO Buyer(TM), MAXIMO
Scheduler(TM), MAXIMO Workflow(TM), MAXIMO Project Manager, MAXIMO
Discovery(TM), MAXIMO Enterprise Adapter(TM), MAXIMO Mobile Suite(TM), MAXIMO
Illustrated Parts Catalog(TM), Supplier E-Commerce Adapter(TM), MRO.COM(TM) and
MRO Operations Center(SM) are trademarks and service marks of MROI. IBM(R),
WebSphere, AIX and DB2 are trademarks of IBM Corporation, or its subsidiaries.
Microsoft(R) is a registered trademark of Microsoft Corporation, Oracle(R) is a
registered trademark of Oracle Corporation, and Java(R) is a registered
trademark of Sun Microsystems Corporation. Other company and product names may
be trademarks of the respective companies.
(C) 2004 MRO Software, Inc. All rights reserved.
Page 3
PART I
ITEM 1. BUSINESS
GENERAL
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, transportation 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 critical
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. 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.
MRO Software was incorporated in Massachusetts in 1968 as Project Software &
Development, Inc. (PSDI). In fiscal 2001, the Company changed its name to MRO
Software, Inc. and its trading symbol to "MROI". Our headquarters are located in
Bedford, Massachusetts, U.S.A., and our website may be viewed at www.mro.com.
Through a link on the Investor Relations section of our website, we make
available all the following filings as soon as reasonably practicable after they
are electronically filed with or furnished to the Securities and Exchange
Commission ("SEC"): our Annual Report on Form 10-K, Quarterly Reports on Form
10-Q, Current Reports on Form 8-K and any amendments to those reports filed or
furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of
1934. All such filings are available free of charge.
During the past two years, the Company has made significant investments in the
development of our next generation of MAXIMO: Maximo Enterprise Suite (MXES).
The main objective of the MXES product is to accomplish the following: First,
this new suite of products will incorporate the Company's current EAM and ITAM
capabilities onto a common platform - the MAXIMO multi-tier enterprise
environment. Second, MXES will deliver a greatly enhanced application set for
the EAM and ITAM markets. Third, MXES will deliver substantial new IT Help Desk
and Service Desk functionality, and allow the Company to enter new markets that
present significant opportunities for new revenue streams. The Help Desk and
Service Desk markets are new to the Company, and our initial strategy for
penetrating these markets will be to target existing MAXIMO customers. We
believe that our MAXIMO customers are seeking to consolidate software
applications. We will promote MXES as a means for our customers to realize
reduced IT costs and enhanced productivity by consolidating all of their EAM,
ITAM, Help Desk and Service Desk applications onto one platform. We will also
compete in Help Desk and Service Desk opportunities where MAXIMO has not been
installed, and conversely, we believe that the addition of these products will
improve our ability to sell into the traditional EAM and ITAM markets. MXES will
also include specific functionality for the outsourced service provider market
that the Company believes is a growing market segment. The Company expects MXES
to be generally available to customers early in calendar year 2005.
Our objective is to create a sustainable competitive advantage by serving the
market for strategic asset and service management. Our approach is to provide
customers with the ability to consolidate fragmented point solutions with a
single, flexible, functional and modern software product capable of managing a
wide variety of asset-related business processes. We have focused on building
our business strategies around key strengths, such as our commitment to research
and development, our diverse customer base, and our domain knowledge of complex
asset management business problems. We believe that our extensive expertise in
asset management solutions for production, facilities, transportation, and IT --
combined with our vertical domain knowledge in many industries - can and will
distinguish us from our competitors. We
Page 4
believe that our steadfast focus on this holistic approach to asset and service
management will drive future success and allow the Company to continue to be a
stable, profitable and growth-oriented company.
During fiscal 2004, the Company completed the acquisition of Raptor ASA
Corporation, a provider of software solutions for the aviation industry. The
Raptor technology will be integrated into MXES. We also expanded our focus on
MAXIMO Industry Solutions. These vertically specialized solutions provide deep
functionality that addresses specific requirements of certain key industries
that we have targeted. We are focused on the following industries: utilities
(including nuclear, fossil-fueled and other generation, transmission and
distribution), oil and gas, aviation, transportation, and pharmaceuticals.
During fiscal 2004, we upgraded the MAXIMO Transportation Industry Solution and
released new industry solutions for the pharmaceutical, oil & gas, and the
nuclear energy industry. These solutions have been brought to market on a timely
basis because they are built on the MAXIMO platform, which enables rapid
development of functional layers that leverage MAXIMO's existing capabilities
without having to make changes to MAXIMO.
The Company reports all its revenue in one reportable business segment. The
Company markets its products through a direct sales organization in all
geographies, and in combination with distributors outside of North America. MRO
Software has sales offices throughout North America, Europe, Asia/Pacific and
Latin America. Financial information relating to business segments and
international operations can be found in Note N of the Consolidated Financial
Statements, in Item 8 of this Annual Report on Form 10-K.
PRODUCTS
MAXIMO (MAXIMO EAM)
MAXIMO is the market-leading solution in the EAM market. MAXIMO helps companies
in asset-intensive industries increase their return on assets (ROA) while
decreasing their operational costs, including the costs of transacting with
their suppliers. The MAXIMO suite of software products is used to plan and
manage ongoing Maintenance Repair and Operations (MRO) and to track related
labor, parts and costs. Using MAXIMO, customers can prioritize tasks, assign
work based on the availability of necessary parts and labor, and analyze
equipment failures in order to implement appropriate preventive maintenance
measures. MAXIMO is available in English, Brazilian Portuguese, Dutch, French,
German, Italian, Japanese, Korean, Swedish, Latin American Spanish, and
Simplified Chinese. MAXIMO is also localized into additional non-English
languages via our local agents.
MAXIMO FEATURES
MAXIMO is composed of a series of comprehensive capabilities that communicate
with a relational database management system. MAXIMO operates on a variety of
commonly used server hardware platforms and network operating systems, and also
uses leading commercial databases, including Oracle and Microsoft SQL Server.
Core application features and functions in MAXIMO include:
ASSET MANAGEMENT. MAXIMO Asset management means identifying, tracking, locating,
maintaining and analyzing physical assets, especially those that impact the
customer's operations and performance, including their revenue stream. MAXIMO
captures critical asset-related data and makes it easily accessible and useful
in driving our customers' business processes, and for analysis, planning and
real-time decision-making.
WORK MANAGEMENT. MAXIMO work management capabilities execute all processes
related to work performed on assets, from initial work request through work
order generation, job completion and recording of actual results. The ability to
track, manage and analyze work requests, labor, planning and scheduling can help
Page 5
organizations improve productivity. Work management compares budgets or
estimates against actual and historical work orders.
MATERIALS MANAGEMENT. MAXIMO materials management capabilities enable our
customers to consolidate vendor lists, automate procurement processes, track
repairable spares and reduce inventory levels. As a result, customers can
generate significant savings by accurately tracking materials and their usage,
reduce their inventory and eliminate unnecessary spending. MAXIMO creates
greater efficiency and ensures that the customer has the right parts at the
right time.
PROCUREMENT. MAXIMO procurement capabilities enable organizations to plan and
consolidate purchasing activity, streamline purchasing processes and comply with
existing purchase contracts. MAXIMO purchasing creates requests for proposals,
blanket purchase orders and purchase agreements, purchase requisitions and
purchase orders, records receipt of goods, analyzes vendor performance and
integrates with accounting applications, including invoice matching and multiple
currency functionality.
ANALYSIS. The ability to analyze data captured in MAXIMO provides companies with
critical knowledge to improve and optimize their maintenance initiatives across
all functional areas. MAXIMO Key Performance Indicators (KPIs) and reports make
it possible to identify areas or activities that need improvement. In addition
to KPIs, MAXIMO provides a comprehensive set of pre-defined functional and
exception reports that provide detailed information on all customer maintenance
operations.
MAXIMO INDUSTRY SOLUTIONS. The Company seeks to expand its market share in
targeted vertical markets by offering pre-configured, industry-specific, focused
applications for MAXIMO. We are focused on the following industries: utilities
(including nuclear, fossil-fueled and other generation, transmission and
distribution), oil and gas, aviation, transportation, and pharmaceuticals. Each
industry is supported with scalable solutions that embody our deep domain
expertise and that run on industry-standard databases, application servers and
hardware platforms, complemented by offerings from key alliance partners in
certain sub-specialty areas.
MAXIMO OPTIONS
In addition to the robust capabilities provided by MAXIMO there are many options
available for those that require extended functionality. A variety of options
can be added on to expand the capabilities of MAXIMO, including the following:
MAXIMO Mobile Suite, MAXIMO Project Manager, MAXIMO Desktop Requisition, MAXIMO
Illustrated Parts Catalog, MAXIMO Enterprise Adapters, MAXIMO e-Commerce
Adapters, MAXIMO Workflow, and Online Commerce Services (OCS).
ONLINE COMMERCE SERVICES (OCS)
MRO Software provides solutions to support asset-centric procurement by offering
distributors and manufacturers of industrial and office products the
capabilities to successfully implement or augment their e-Commerce initiatives.
OCS provides suppliers with a variety of hosted applications including the
ability to accept, process and respond to electronic purchase orders transmitted
from MAXIMO and other popular e-Procurement applications; to manage supplier and
buyer profiles and relationships; and to process e-Commerce transactions. This
service also provides suppliers with the capabilities to host an on-line
searchable electronic catalog, and with the tools for the management,
customization and publication of electronic catalog content. Our customers have
the ability to provide a Web storefront with comparison tools, shopping cart,
e-Commerce transaction processing and payment processing. OCS also provides
suppliers with the capability to provide real-time pricing and availability to
buyers as well as real-time transaction processing by integrating with the
suppliers "back-end" ERP systems.
MAXIMO MAINCONTROL (MAXIMO ITAM)
MAXIMO MainControl is a leading solution for the ITAM market and provides
management of IT assets across their entire lifecycle from planning and
procurement to retirement and disposal.
Page 6
MAXIMO MAINCONTROL FEATURES
MAXIMO MainControl addresses the numerous IT asset management issues facing an
organization, such as:
MAXIMO ASSET TRACKER: provides autodiscovery and software usage tracking tools,
that enables the user to know where its IT assets (hardware, software and
peripherals) are at all times, and to see the asset location history, owners,
users and configuration changes.
CONTRACT MANAGEMENT: enables the user to track and manage contracts and
obligations, from purchase contracts to subscription, lease, maintenance,
software licensing and service contracts.
FINANCIAL MANAGEMENT: supports budget planning with a spreadsheet import/export
facility and allows budget tracking by account, cost center and cost type to
assist with technology procurement and management.
PROCUREMENT: provides comprehensive, online management of IT asset procurement
and the ability to fully integrate with a wide variety of procurement systems.
MAXIMO MainControl enables users to select vendors and equipment from online
catalogs, check contract terms, generate purchase requisitions, approve
requests, generate orders and allocate planned expenses to budget accounts.
SERVICE MANAGEMENT: manages all requests regarding IT assets and services,
provides a complete history of all activities involved in problem resolution,
planning and change management activities. This capability improves service
levels and increases employee productivity.
COMPLIANCE: tracks and manages all software installations in the organization,
and allows the user to ensure software license compliance. Customers are able to
establish a software management process to track license terms, and to conduct
internal software audits and other compliance-related activities.
BUSINESS CONTINUITY: supports the requirements to integrate and automate the
response and recovery process for technology assets in the event of a business
disruption.
PRODUCT ARCHITECTURE
MAXIMO components are built on Sun Microsystem's Java technology, specifically
the Java 2 Platform, Enterprise Edition ("J2EE"), to take full advantage of
today's enterprise environment. J2EE defines a standard for developing
multi-tier enterprise applications. J2EE simplifies enterprise applications by
basing them on standardized, modular components, by providing a complete set of
services to those components, and by handling many details of application
behavior automatically. MAXIMO is the first asset management solution to be
developed and commercially deployed on a standards-based pure-Internet
architecture. MAXIMO, with its industry-leading, best-of-breed functionality,
was designed with global organizations in mind.
J2EE provides application portability, scalability, interoperability and
security models for Internet applications. For example, it has an extensive
library of routines for Internet protocols like HTTP and FTP. This makes
creating and managing network connections much easier, enabling applications to
open and access objects across the Internet via URLs with the same ease as
accessing a local file system. Also, because HTTP is a request-response protocol
and individual requests are treated independently, an Internet application needs
a mechanism for identifying a particular client and the state of any
"conversation" it is having with that client. The MAXIMO Web servers and
applications servers provide session management capabilities, and can easily
manage session states for Internet-based connections.
MAXIMO's use of open standards supports a broad range of server platforms,
network operating systems and communications protocols. These open standards
provide customers with the flexibility to match their computing resources to
their needs, and facilitates tight integration to critical business systems.
These standards also
Page 7
provide the ability to collaborate with virtually any procurement network,
marketplace or on a one-on-one basis with suppliers.
Our asset-centric procurement solutions (OCS) use an Internet oriented,
scaleable architecture to support a full Web browser-based environment. OCS
allows real-time communications between buyers and suppliers based on XML
standards. OCS applications are hosted by the Company at an outsourced hosting
facility.
STANDARDS BASED INTEROPERABILITY
Enterprises today require systems that will collaborate within their enterprise
and with their partners and customers. They require business systems that will
address their business needs efficiently and adapt to changes as their business
needs or environment changes. Our interoperability products simplify and
expedite the implementation of our core product suites. These products are based
upon our extensive experience in providing integration with a number of major
marketplaces and ERP systems such as those offered by SAP AG, Oracle Corporation
and PeopleSoft, Inc. Our MAXIMO interoperability framework supports
collaboration between MAXIMO and those enterprise business systems for which
this requirement most frequently arises. This allows enterprises to focus on
their operational procedures, and provides them with the flexibility to choose
which business system to use to manage specific business processes.
SERVICES
CUSTOMER SUPPORT
A high level of customer service and technical support is critical to customer
satisfaction in our industry. Many of the Company's customers implement our
products in complex, large-scale IT environments on which the success of their
organizations depend. The Company believes that its approach to support has been
and will continue to be a significant factor in the market acceptance of its
products.
As of September 30, 2004, the Company employed a technical hot-line support
staff of 102 employees operating out of the Company's corporate headquarters in
Massachusetts and four international technical response centers located in the
United Kingdom, Australia, Canada, and Brazil as well as in six satellite
support offices in China, Korea, Mexico, Japan, Sweden and McLean, Virginia.
Support services are provided on a seven-day week, 24-hour day basis using our
support centers in United Kingdom, Australia, United States (Bedford, MA) and
Canada. The Company also provides premium support via resources dedicated to
meeting the needs of our larger enterprise-wide clients. Premium Support is a
fee-based service provided in addition to all of the standard support provided
to all of our clients.
Subscribers to the Company's annual support services are entitled to receive (i)
customer service and technical support by telephone, fax, online via the
Internet and electronic mail (ii) a newsletter and periodic technical bulletins,
(iii) an invitation to attend the Company's annual user group meeting and (iv)
periodic software updates and software upgrades. Support contracts are a stable
source of recurring revenue.
PROFESSIONAL AND EDUCATIONAL SERVICES
The Company offers services designed to assist customers in completing the
process of successfully implementing the Company's business solutions and
getting the most value from MAXIMO. As of September 30, 2004, the Company
employed a consulting and training staff of 255 employees. The Company's
international distributors also provide services within their geographic
territories.
The Company provides consulting services to assist customers in planning and
carrying out the implementation of the Company's solutions. In some cases,
customers install and implement MAXIMO systems and perform any necessary
modifications themselves with only limited assistance from the Company. In other
cases, particularly where an integrated solution is required, the Company
provides comprehensive implementation planning, project management, network
communications and system integration services. The Company also contracts with
third-party consultants as needed in order to augment its services needs.
Page 8
The Company conducts comprehensive training programs covering Company
applications and concepts for its end-users and partners. Training is offered at
the Company's headquarters in Massachusetts and at regional centers in
California, Georgia, Virginia, Australia, France, Germany, Italy, Sweden, the
United Kingdom and the Netherlands. The Company also offers on-site training
classes at customer sites upon request. We also offer Web-based training that
consist of a series of self-paced lessons and virtual classroom training.
CUSTOMERS
The Company's customers operate in a broad range of vertical industries
including: facility/property management, discrete and process manufacturing,
public sector, oil and gas, transportation, aviation, utilities, financial
services consumer/retail, pharmaceutical and professional services. The
Company's products have been installed and are supported in all major markets
worldwide. Local language support is provided in many of these markets.
SALES AND MARKETING
The Company markets its products in the United States through a marketing and
direct sales organization. As of September 30, 2004, we employed a marketing and
direct sales organization of 119 employees operating out of its Massachusetts
headquarters and sales offices in California, Colorado, Florida, Georgia,
Illinois, Maryland, Michigan, New Jersey, New York, Texas and Virginia. In
addition, the Company markets its products outside the United States through a
sales force of 100 employees, operating from sales offices in Australia, Brazil,
Canada, China, France, Germany, Hong Kong, Italy, Japan, Korea, Mexico, the
Netherlands, Singapore, Sweden, Thailand and the United Kingdom and through
distributors in parts of Africa, Asia, Europe, the Middle East, and Latin
America. Approximately 40% of the Company's total revenues were derived from
sales outside the United States for fiscal years ended 2004, 2003 and 2002,
respectively. The United Kingdom represented approximately 15% of these
international sales for fiscal years ended 2004, 2003, and 2002, respectively.
Approximately 9% of the Company's total long-lived assets were located outside
the United States for fiscal years ended 2004, 2003, and 2002, respectively.
The Company markets its products through advertising campaigns in national trade
periodicals, direct mail, public relations activities, seminars and its Web site
(http://www.mro.com). These efforts are supplemented by listings in relevant
trade directories, exhibitions at trade shows and conference appearances.
Initial leads are qualified by our tele-marketing operation before being turned
over to either the direct sales force or tele-sales.
In certain situations, the Company uses resellers that are located around the
world to supplement our direct sales force in territories where the Company does
not have subsidiaries or a strong direct sales infrastructure.
The sales cycle for strategic asset management products, from the initial sales
presentation to the issuance of a purchase order, typically ranges from nine to
twelve months. The Company believes that customers generally choose the
Company's products and services based on the features they provide and upon a
preference for the product architecture, reduced implementation time, extensive
domain expertise and ease of use, and the resulting low total cost of ownership
and demonstrable return on investment.
Delivery lead times for the Company's products are short and, consequently,
substantially all of the Company's software revenues in each quarter result from
the orders received in the quarter. Accordingly, the Company only maintains a
backlog for its consulting and training services and believes that its backlog
at any point in time is not a reliable indicator of future sales and earnings.
STRATEGIC ALLIANCES
MRO Software's alliance program is designed to bring value to asset-intensive
companies on a global basis through collaboration with world-class product and
service partners. Our alliance program enhances the Company's market reach and
potential revenue streams while at the same time ensuring that exacting
standards of quality are met in partnering engagements.
Page 9
The Company works closely with major consultancies and systems integrators and
has formed alliances with such firms as HP, IBM and SAIC. The Company also works
closely with consulting and systems integration firms that offer deep domain
expertise in very select core markets that complement ours. Examples would
include CGI-AMS (part of CGI Group, Inc.) and EMA, Inc. In addition, the Company
has partnerships with specific solution providers that offer a complementary
solution to MAXIMO, such as Barchan Associates, LLC, Bentley Nevada, LLC,
Computational Systems, Inc., Cyco Software, Environmental Systems Research
Institute, Inc. (ESRI), Fisher-Rosemount Systems, Inc, Intergraph Corporation,
Meridium, Inc., Mobile Data Solutions, Inc., Optram, Inc., OSIsoft, Inc.,
Primavera Systems, Inc. and Spescom Software, Inc.
The Company has also developed managed services, reseller and OEM relationships.
We have agreements with partners such as ABB Service Worldwide (an affiliate of
Asea Brown Boveri), Accenture, and HP, who resell our products using their own
sales resources. We market the Syclo, LLC. products as part of the MAXIMO Mobile
solution.
The Company has licensing arrangements with companies that offer technology that
enhances the performance of our solutions, broadens their applicability and or
optimizes their functionality. The Company re-brands and sells some of its
technology partners' products on an OEM basis, while products from other
technology partners are either embedded in our solutions or offered as separate
add-ons. We continuously monitor the marketplace for partners with leading edge
technology conducive to the advancements that we have planned for our own
products and services, and create new agreements as appropriate. Technology
partners include: BEA Software, HP, IBM, Oracle Corporation, Microsoft Corp.,
Sun Microsystems, Inc., Syclo LLC and Actuate Corporation.
COMPETITION
The Company's suite of strategic asset management solutions has many diverse
competitors offering a wide range of differing products, services and
technologies. The Company expects competition to intensify as current
competitors expand their product offerings and new competitors enter the market.
The current competitors include traditional Enterprise Resource Management (ERM)
providers such as SAP, PeopleSoft and Oracle. Our competitors also include niche
providers such as Datastream Systems Inc. and Indus International that focus on
segments of the EAM market. BMC Software, Computer Associates and Peregrine
Systems are competitors that focus on the ITAM market. With the expansion into
the IT Service Desk and IT Help Desk markets, the Company expects competition in
these markets to include BMC Software, Computer Associates, Peregrine and HP.
PRODUCT DEVELOPMENT
The Company has made substantial investments in research and software product
development. The Company's total product development expenses in fiscal years
2004, 2003 and 2002 were $28.5 million, $26.5 million and $26.9 million,
respectively. As of September 30, 2004, the Company's research and development
staff consisted of 210 employees. The Company's development organization is
comprised of relatively small teams of senior level developers and engineers,
who focus on different areas of development. The Company maintains development
centers in Massachusetts, Florida, Michigan, Virginia, Canada and Brazil. We
also utilize the services of offshore technology partners in India to supplement
our development efforts.
In fiscal 2004, the Company focused its development efforts on enhancing and
adding functionality to its MAXIMO EAM and MAXIMO ITAM products, in particular
the MXES product. We have also focused on developing MAXIMO Industry Solutions
that meet the unique needs of different vertical industries by offering
pre-configured, industry-specific, focused applications delivered on the MAXIMO
technology platform. We will continue to develop enhancements to our MAXIMO
products, as well as, to continue to research and investigate new technologies
that would complement the Company's product strategies in the future.
Page 10
PROPRIETARY RIGHTS AND LICENSES
The Company has registered a number of its trademarks with the United States
Patent and Trademark Office. Registrations with equivalent offices in many
foreign countries in which the Company or its distributors do business have been
obtained or are in process. The Company has obtained two U. S. Patents - (no.
6,325,522 B2) for inventory sharing as it relates to electronic commerce and
(no. 6,519,588 B1) covering a proprietary system and method for representing
structured information. The Company has filed or intends to file patent
applications in other countries within key geographies for both.
The Company regards its software as proprietary and attempts to protect its
rights with a combination of patent, trademark, copyright and employee and third
party non-disclosure agreements. Despite these precautions, it may be possible
for unauthorized parties to copy or reverse-engineer portions of the Company's
products. While the Company's competitive position could conceivably be
threatened by its inability to protect its proprietary information, the Company
believes that patent, copyright and trademark protection are less important to
the Company's success than other factors such as knowledge, ability and
experience of the Company's personnel, and ongoing product development, support
and innovation.
The Company's software products are usually licensed to customers under a
perpetual, non-transferable, non-exclusive license that stipulates how many
users may access the system. The Company relies on both "shrink wrap" and "click
wrap" licenses and negotiated agreements. A shrink wrap license agreement is a
printed license agreement included with packaged software that sets forth the
terms and conditions under which the purchaser can use the product, and purports
to bind the purchaser to such terms and conditions by its acceptance and
purchase of the software. A click wrap license agreement is displayed to an
end-user during the online registration and delivery process, and purports to
bind the end-user to its terms and conditions when the end-user acknowledges and
agrees to those terms and conditions via an interactive process. Certain
provisions of the Company's shrink-wrap and click wrap licenses, including
provisions protecting against unauthorized use, copying, transfer and disclosure
of the licensed program, may be unenforceable under the laws of certain
jurisdictions. In addition, the laws of some foreign countries do not protect
the Company's proprietary rights to the same extent, as do the laws of the
United States.
PRODUCTION
The principal materials and components used in the Company's software products
are CD-ROMs containing software and documentation, and occasionally hard copy
installation guides. The Company occasionally uses third-party vendors to print
user manuals, packaging and related materials. The majority of CD-ROM
duplication is done by the Company's manufacturing and distribution facility
located at its corporate headquarters. The Company also now offers documentation
to its customers via its secured, customer support Web site. To date, the
Company has been able to obtain adequate supplies of all components and
materials and has not experienced any material difficulties or delays in
manufacture and assembly of its products or materials due to product defects.
EMPLOYEES
As of September 30, 2004, the Company had 878 full-time employees including
sales, marketing and related services, product research and development,
customer support, training and consulting services, finance and administration,
information technology, human resources, manufacturing and office services. The
Company's employees are not represented by any collective bargaining
organization, and the Company has never experienced a work stoppage. The Company
believes that its relations with employees are good.
ITEM 2. PROPERTIES
The Company leases its corporate headquarters and its manufacturing and
distribution facilities in Bedford, Massachusetts. The leased facility consists
of approximately 115,000 square feet and the lease ends December 31, 2009. The
average annual base
Page 11
rent is $1.0 million. Additionally, the Company estimates that its annual
operating expenses under the recently renegotiated lease will be approximately
$1.1 million, based on information currently available. The actual costs will
depend on such factors as actual electricity usage, real estate taxes and
operating costs. Under the terms of its lease, the Company has the ability to
sublease the space. The Company leases additional sales offices in California,
Colorado, Florida, Georgia, Kansas, North Carolina, Michigan, New Jersey, New
York, Texas, Virginia and Washington. The Company also leases offices for its
international operations in, Australia, Brazil, Canada, China, France, Germany,
Hong Kong, Italy, Japan, Korea, Mexico, the Netherlands, Singapore, Sweden,
Thailand and the United Kingdom.
We believe our facilities are adequate for our current and near-term needs, and
that we will be able to locate additional facilities as needed. See Note J.
Commitments and contingencies for more information about our leases.
ITEM 3. LEGAL PROCEEDINGS
As of the date of this Annual Report on Form 10-K, the Company is not a party to
any legal proceedings the outcome of which, in the opinion of management, would
have a material adverse effect on the Company's results of operations or
financial condition.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
AND ISSUER'S PURCHASES OF EQUITY SECURITIES
PRICE RANGE OF COMMON STOCK
The Company's Common Stock is traded in the over-the-counter market and prices
are quoted on the National Association of Securities Dealers Automated Quotation
National Market System ("NASDAQ National Market") under the symbol MROI. As of
December 10, 2004, there were approximately 96 holders of record of the
Company's Common Stock. Most of the Company's stock is held in street names
through one or more nominees.
The following table sets forth the high and low per share sale prices of the
Company's Common Stock, as reported on the NASDAQ National Market consolidated
reporting system for each quarterly period within the two year period ended
September 30, 2004.
FISCAL 2004 HIGH LOW
First Quarter $14.70 $11.78
Second Quarter $18.15 $10.93
Third Quarter $14.83 $11.48
Fourth Quarter $13.61 $8.70
FISCAL 2003 HIGH LOW
First Quarter $13.20 $5.85
Second Quarter $13.87 $6.83
Third Quarter $9.90 $5.88
Fourth Quarter $15.11 $8.41
Since the Company's initial public offering in 1994, the Company has not
declared or paid cash dividends on its Common Stock. The Company currently
intends to retain any future earnings to finance growth and therefore does not
anticipate paying cash dividends in the foreseeable future.
Certain provisions of the Company's Articles of Organization, as amended, and
Bylaws could delay the removal of incumbent directors and could make a merger,
tender offer or proxy contest involving the Company more difficult, even if such
events would be
Page 12
beneficial to the interests of the stockholders. In addition, the Company has
1,000,000 shares of authorized Preferred Stock. The Company may issue shares of
such Preferred Stock in the future without further stockholder approval and upon
such terms and conditions, and having such rights, privileges and preferences,
as the Board of Directors may determine. The rights of the holders of common
stock will be subject to, and may be adversely affected by, the rights of the
holders of any Preferred Stock that may be issued in the future. The issuance of
Preferred Stock, while providing flexibility in connection with possible
acquisitions and other corporate purposes, could have the effect of making it
more difficult for a third party to acquire, or of discouraging a third party
from acquiring, a majority of the outstanding voting stock of the Company. In
addition, the staggered terms of the Company's Board of Directors could have the
effect of delaying or deferring a change in control of the Company.
In January 1998, the Board of Directors of the Company adopted a stockholder
rights plan by declaring a dividend distribution of one preferred stock purchase
right (one "Right") on each share of the Company's Common Stock outstanding on
January 27, 1998 or, in certain circumstances, issued thereafter. Initially, the
Rights are not exercisable, not represented by separate Right certificates and
do not trade separately from the Company's Common Stock. Ten days after a tender
offer or acquisition of 15% or more of the Company's common stock, each right
may be exercised for $140 ("Exercise Price") to purchase one one-thousandth of
one share of the Company's Series A Junior Participating Preferred Stock. Each
one one-thousandth of each share of Series A Junior Participating Preferred
Stock will generally be afforded economic rights similar to one share of the
Company's common stock. In addition, after such rights are triggered, each right
entitles the holder to purchase common stock of the Company with a fair value of
twice the Exercise Price or, in certain circumstances, securities of the
acquiring company for the Exercise Price. Each Right expires in January 2008
and, during specified periods, the Company may redeem or exchange each Right for
$.01 or one share of common stock, respectively. The Rights Agreement has been
filed by the Company with the Securities and Exchange Commission as an exhibit
to a Registration Statement on Form 8-A dated February 2, 1998.
Stockholders are urged to review the Rights Agreement for a complete
understanding of the Rights Plan. The Rights Plan, while providing the Board of
Directors with flexibility in connection with possible acquisitions and
deterring unfair or coercive takeover tactics, could have the effect of making
it more difficult for a third party to acquire, or of discouraging a third party
from acquiring, beneficial ownership of 15% or more of the outstanding shares of
the Company's Common Stock.
SECURITIES AUTHORIZED FOR ISSUANCE UNDER EQUITY COMPENSATION PLAN
Information regarding securities authorized for issuance under equity
compensation plans is incorporated by reference to the definitive Proxy
Statement for the 2004 Annual Meeting of Stockholders of the Company, which will
be filed with the Securities and Exchange Commission not later than 120 days
after September 30, 2004.
Page 13
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
The selected consolidated financial data of the Company set forth below has been
derived from the audited consolidated financial statements for the Company for
the periods indicated. This selected consolidated financial data should be read
in conjunction with "Management's Discussion and Analysis of Consolidated
Financial Condition and Results of Operations" and the Company's consolidated
financial statements and the notes thereto included elsewhere herein.
FIVE-YEAR SUMMARY
FISCAL YEAR ENDED SEPTEMBER 30,
CONSOLIDATED STATEMENT OF OPERATIONS DATA
(in thousands, except per share data)
2004 2003 2002 2001 2000
---- ---- ---- ---- ----
Revenues $185,689 $176,877 $171,881 $185,450 $168,661
Income/(loss) from operations 14,643 5,742 (15,319) (20,755) (571)
Net income/(loss) 10,340 4,870 (10,551) (15,468) 2,102
Net income/(loss) per share, basic 0.41 0.20 (0.46) (0.70) 0.10
Net income/(loss) per share, diluted 0.40 0.20 (0.46) (0.70) 0.09
Shares used to calculate net income/
(loss) per share
Basic 24,811 24,429 23,171 22,148 21,682
Diluted 25,290 24,653 23,171 22,148 22,786
FIVE-YEAR SUMMARY
FISCAL YEAR ENDED SEPTEMBER 30,
CONSOLIDATED BALANCE SHEET DATA
(in thousands)
2004 2003 2002 2001 2000
---- ---- ---- ---- ----
Cash, cash equivalents and
marketable securities $108,407 $94,573 $67,815 $48,354 $36,884
Working capital 78,161 53,391 58,893 51,471 50,509
Total assets 222,721 205,261 192,153 171,453 180,945
Long-term obligations 3,435 2,049 1,236 1,034 587
Total stockholders' equity 161,135 146,512 138,020 123,353 134,192
Page 14
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
FORWARD-LOOKING STATEMENTS
In addition to historical information, this Annual Report on Form 10-K, as well
as documents incorporated herein by reference, may contain forward-looking
statements (within the meaning of section 27A of the Securities Act of 1933, as
amended, and section 21E of the Securities Exchange Act of 1934, as amended).
The following and similar expressions identify forward-looking statements:
"expects," "anticipates," and "estimates". Forward-looking statements include,
without limitation, statements related to: the Company's plans, objectives,
expectations and intentions; the timing of, availability and functionality of
products under development or recently introduced; and market and general
economic conditions. Important factors that could cause actual results to differ
materially from those suggested by the forward-looking statements for various
reasons, include those discussed under the heading "Factors Affecting Future
Performance" below. These forward-looking statements speak only as of the date
of this Annual Report, and the Company disclaims any obligation to update such
forward looking statements as a result of any change in circumstances or
otherwise.
OVERVIEW
MRO Software is a leading global provider of strategic asset management
solutions, software and related services. Strategic asset management is the
management and optimization of the business processes required to keep our
customers' critical assets productive. Critical assets are those that have a
significant impact on operations and performance, including assets used in
production, facilities, transportation 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 critical
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. 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. The Company's management assesses operating
results on an aggregate basis to make decisions about the allocation of
resources. Our actual results are reported in United States dollars.
International revenues accounted for 43% of total revenues for fiscal year 2004
and therefore the fluctuation in exchange rates can have a significant impact on
our results of operations. In fiscal 2004, the fluctuation in the Euro dollar
and the British pound, in particular, had a favorable impact on our revenue
results. We assess the impact of foreign currency exchange rates on our business
by recalculating the current period's financial results using the comparable
period's exchange rates to devise a constant currency rate in order to compare
period over period results. Total actual revenues increased 5% in fiscal 2004
compared to fiscal 2003, however, in constant currency terms the increase is
estimated to be 1%. The exchange rates had a similar impact on direct and
operating expenses and therefore, the overall impact on net income was
immaterial for fiscal year 2004.
In July 2004, the Company completed the acquisition of Raptor ASA Corporation, a
provider of software solutions for the aviation industry. The Raptor Technology
will be integrated into the Company's next generation of products, Maximo
Enterprise Suite (MXES). The total purchase price of the acquisition was $1.1
million. The amount of $600 thousand was paid 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 future payments are contingent upon
the completion of knowledge transfer milestones, however, neither payment is
contingent on any employment of the selling principals with the Company. The
Company allocated the purchase price as such: $910 thousand to acquired
technology, $560 thousand to goodwill and $370 thousand to deferred tax
liability. The deferred tax liability
Page 15
represents the cumulative tax effect of the book to tax difference in basis for
the acquired technology. The acquired technology will be amortized over five
years.
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, income taxes, and the valuation of long-lived assets.
REVENUE RECOGNITION
SOFTWARE PRODUCTS
The Company primarily licenses its software products under noncancellable
license agreements. Software license fee revenues are generally recognized upon
contract execution and product shipment, provided that collection of the
resulting receivable is deemed probable, the fees are fixed or determinable, and
no significant modification or customization of the software is required.
Our customers do not have any right of return except as stipulated under a
standard 90-day warranty that runs concurrent with post contract support (PCS).
The Company does not maintain any reserves with respect to this warranty based
on a history of performance of our software. On the rare occasion that a
customer insists on conditions of acceptance, the Company defers revenue until
the customer's acceptance is obtained and the condition has been satisfied.
Revenue from products sold through indirect channels ("resellers") is recognized
upon shipment of the software, as long as evidence of an arrangement exists,
collectibility is probable and the fee is fixed or determinable and the
reseller's obligation to pay us is not contingent upon resale of our product.
Revenue is recorded net of any commissions or discounts payable to these
resellers. Our resellers do not have any right of return beyond the standard
90-day performance warranty that runs concurrent with PCS.
SERVICES REVENUES
Services revenues are comprised of consulting and training fees related to
installation of the Company's software solutions, maintenance/support (PCS)
contracts for software products, and subscription based fees related to the
Company's OCS business. Consulting and training services are generally
recognized as the services are performed. PCS revenues are recognized ratably
over the term of the agreement, generally one year. Customers typically
subscribe to OCS on an annual basis and revenue is recorded as services revenue
and recognized on a straight-line basis over the applicable subscription period.
Many of our software arrangements include consulting implementation services
sold separately under consulting contracts. We consider whether the services
revenue can be recognized separately from the software revenue by analyzing the
nature of the services (i.e. if the services are essential to the functionality
of the software), the level of risk, availability of services from other
vendors, acceptance criteria, milestone payments and fixed price terms. For
those contracts that contain fixed price arrangements, if we can reliably
estimate the hours required to complete the implementation services and if we
have vendor specific objective evidence (VSOE) for
Page 16
the fair value of the hourly rates for consultants, we recognize the software
license fee separately from the services revenues. The services revenues are
recognized as they are delivered and the related costs as they are incurred. If
at any point in time the costs exceed revenues, we immediately accrue for
estimated losses using cost estimates that are based on average fully burdened
daily rates applicable to the consulting organization delivering the services.
For those fixed price arrangements where we cannot reliably estimate the hours
required to complete the implementation services and we do not have VSOE for the
fair value of the hourly rates for consultants, the software license value is
recognized together with the consulting services over the period the consulting
services are provided.
MULTIPLE ELEMENT ARRANGEMENTS
The Company's multiple element arrangements could include the following three
elements: (a) software license, (b) PCS, and (c) consulting, training and other
services ("services"). Revenue is allocated to the elements of the arrangement
based upon the VSOE of fair value of each element. The Company uses the residual
method to recognize its software license revenue, because while we are able to
determine the VSOE of fair value of PCS and services, we are unable to determine
the fair value of software licenses. Under the residual method, the fair value
of undelivered elements (PCS and/or services) is deferred and recognized when
the PCS and/or services are delivered. The difference between the amount of the
total arrangement and the amount attributable to the elements for which fair
value is determinable (PCS and/or services) is recognized as software license
revenue. VSOE is established for PCS and is based on the price of PCS when sold
separately. The PCS renewal rate is a relatively consistent percentage of the
stipulated software license fee, offered to all customers. VSOE for consulting
services is based on fixed hourly rates set according to the skill level of the
consultant required. VSOE for training services is based on an established
per-student fee structure. For those multi-element arrangements, where we cannot
establish VSOE for the undelivered elements, the software license value is
recognized together with the consulting services over the period the consulting
services are provided. Contract accounting is applied to any arrangement that
includes significant customization or modification of the software.
We assess whether fees are fixed or determinable at the time of sale and
recognize revenue if all other revenue recognition requirements are met. Our
standard payment terms are net 30 days. Payment terms that extend beyond net 30
days from the contract date but are within twelve months are generally deemed to
be fixed or determinable based on our successful history of collecting on such
arrangements. For those customers who are deemed not to be credit-worthy,
revenue is deferred until payment is received.
ALLOWANCES FOR DOUBTFUL ACCOUNTS AND SALES RETURNS
The Company maintains allowances for doubtful accounts, which reflect the
Company's estimate of the amounts owed by customers that customers will be
unable or otherwise fail to pay. The allowance for doubtful accounts is based on
Management's assessment of the collectibility of customer accounts and factors
such as historical experience, credit quality, age of the accounts receivable
balance, and current economic conditions. Management performs ongoing credit
evaluations of its customers' financial condition and limits the amount of
credit when deemed necessary. The Company believes that the current estimate of
allowances for doubtful accounts recorded as of September 30, 2004 adequately
covers any potential credit risks. However, if the financial condition of our
customers deteriorates and their payment defaults exceed our estimates, then we
may need to increase our allowance reserves, which will result in a charge to
income in the period that the adjustment is made.
The Company did not record a provision for estimated sales returns. Based on our
history of sales returns and an analysis of credit memos, we determined that a
provision was not needed. If the historical data we used to calculate the basis
for a provision does not properly reflect future returns, then a provision for
returns will be recorded, and a charge to income will result, in the period that
such a determination is made.
Page 17
INCOME TAXES
Deferred Income Taxes
The Company accounts for income taxes under the asset and liability approach for
accounting and reporting for income taxes in accordance with Financial
Accounting Standards Board No. 109. The Company computes deferred income taxes,
net of valuation allowances, for the estimated future tax effects of temporary
differences between the financial statement and tax basis of assets and
liabilities, the expected tax benefit of operating loss carryforwards and the
expected benefit of tax credit carryforwards. Changes in deferred tax assets and
liabilities are recorded in the provision for income taxes. The Company
continually assesses the realizability of its deferred tax asset. The deferred
tax asset may be reduced by a valuation allowance if, based on the weight of
available evidence, it is more likely than not that some portion or all of the
recorded deferred tax assets will not be realized in future periods. All
available evidence, both positive and negative, is considered in the
determination of recording a valuation allowance. The Company believes future
taxable income will be sufficient to realize the deferred tax benefit of the net
deferred tax assets. In the event that it is determined that our financial
projections change and it becomes more likely than not that we cannot realize
the net deferred tax assets, an adjustment to the net deferred tax assets will
be made and will result in a charge to income in the period such a determination
is made. The net deferred tax asset amount as of September 30, 2004 is $9.1
million.
The Company has established a valuation allowance with respect to various net
operating losses assumed from acquisitions. The valuation
allowance was based upon expected earnings within individual tax jurisdictions
and statutory limitations imposed by tax jurisdictions, which will more likely
than not reduce our ability to realize the net operating loss carryforwards. The
reduction in the net valuation allowance in fiscal 2004 from fiscal 2003 is
primarily attributable to the utilization of previously unbenefited losses.
Tax Contingencies
Tax contingencies are recorded to address potential exposures involving tax
positions we have taken that could be challenged by taxing authorities. These
potential exposures result from the varying application of statutes, rules,
regulations and interpretations. Our estimate of the value of our tax
contingencies contains assumptions based on past experiences and judgments about
potential actions by taxing jurisdictions. It is possible that the ultimate
resolution of these matters may be greater or less than the amount that we have
accrued.
VALUATION OF LONG-LIVED ASSETS
Long-lived assets are amortized over their estimated useful lives. The Company
reviews its long-lived assets, with the exception of goodwill, for impairment
whenever events or changes in circumstances indicate that the carrying amount of
these assets may exceed their fair value. The Company estimates whether future
cash flows expected to result from the use of assets exceed the carrying amount
of the assets. In the event that the Company judges that an impairment exists,
all or a portion of the asset will be written-off based on the amount by which
the carrying amount exceeds the fair value of the asset. In order to determine
the fair value, the Company obtains quoted market prices or utilizes valuation
techniques, such as discounted cash flows.
The Company also periodically assesses the useful life of its fixed assets and
may in the future need to adjust the life of an asset or write-it off.
Goodwill is tested annually for impairment or whenever events or changes in
circumstances suggest that the carrying value may not be recoverable. If the
carrying amount of the net tangible and intangible assets in a reporting unit
exceeds the reporting units fair value, a detailed impairment loss analysis
would be performed to calculate the amount of impairment, if any.
Page 18
RESULTS OF OPERATIONS
The following table sets forth, for the periods indicated, certain financial
data as a percentage of total revenues:
YEAR ENDED SEPTEMBER 30,
------------------------
2004 2003 2002
---- ---- ----
Revenues:
Software 28% 28% 29%
Support and services 72 72 71
---- ---- ----
Total revenues: 100 100 100
Total cost of revenues 36 38 40
---- ---- ----
Gross profit 64 62 60
---- ---- ----
Operating expenses:
Sales and marketing 30 33 34
Product development 15 15 16
General and administration 10 10 11
Amortization of other
intangibles and goodwill * 1 1 8
---- ---- ----
Total operating expenses: 56 59 69
---- ---- ----
Income/(loss) from operations 8 3 (9)
Other income 1 1 1
---- ---- ----
Income/(loss) before income taxes 9 4 (8)
Provision/(benefit) for income taxes 3 1 (2)
---- ---- ----
Net income/(loss) 6% 3% (6)%
---- ---- ----
* In accordance with FAS No. 142, the company ceased amortization of goodwill at
the beginning of its fiscal year October 1, 2002.
Page 19
REVENUES
The Company's revenues are derived primarily from two sources: (i) software
licenses, and (ii) fees for support and services.
Fiscal Fiscal Fiscal
Year Year Year
Ended Change Ended Change Ended
(in thousands) 9/30/04 % 9/30/03 % 9/30/02
- -------------- ------- ------ ------- ------ -------
Software licenses $ 52,583 5% $ 49,904 2% $ 49,035
Percentage of total revenues 28% 28% 29%
Support and services $133,106 5% $126,973 3% $122,846
Percentage of total of revenues 72% 72% 71%
Total revenues $185,689 5% $176,877 3% $171,881
FISCAL 2004 COMPARED TO FISCAL 2003: Software license revenues increased 5% in
fiscal 2004 compared to fiscal 2003 and increased approximately 1% using
constant currency rates. The Company attributes the relatively flat overall
software revenue to the saturation of our traditional EAM market and long sales
cycles for large multi-site, multi-user contracts. MAXIMO EAM software license
revenues comprised 95% of total software revenues in fiscal 2004. MAXIMO EAM
software license revenues increased 8% in fiscal 2004 compared to fiscal 2003
enhanced by the release of MAXIMO Industry Solutions targeted at specific
vertical markets. ITAM software license revenues declined 30% in fiscal 2004
compared to fiscal 2003. Historically, ITAM software licenses have fluctuated
from quarter to quarter; and we expect that this trend will continue over the
next few quarters as a result of the Company's plans to replace this product in
conjunction with the commercial release of the next version of MAXIMO, Maximo
Enterprise Suite (MXES). The Company expects to have this new version available
early in calendar year 2005 but expects little or no revenue impact until the
second half of fiscal year 2005.
Support revenues increased 10% to $71.5 million in fiscal 2004 from $65.2
million in fiscal 2003 and increased approximately 6% using constant currency
rates. Support revenues have increased as a result of a cumulative increase in
the number of MAXIMO EAM customers and a strong renewal rate (90%) for support
contracts. MAXIMO EAM support revenues comprised 95% of total support revenues
in fiscal 2004 and increased 11% in fiscal 2004 compared to fiscal 2003. ITAM
support revenues decreased 3% in fiscal 2004 compared to fiscal 2003 due to
termination of contracts without commensurate replacements from new customers.
Service revenues decreased 1% to $61.6 million in fiscal 2004 from $61.8 million
in fiscal 2003 and decreased 5% using constant currency rates. The decrease in
service revenues in fiscal 2004 as compared to fiscal 2003 was comprised of the
following: (1) a decline of 40% in ITAM service revenues related to the decrease
in software licenses sold and (2) a $ 1 million decline in service revenues as a
result of the sale of our industrial data normalization services operations in
the second quarter of fiscal 2003. These decreases were partially offset by a 5%
increase in MAXIMO EAM services revenues. In constant currency terms, MAXIMO EAM
service revenues were flat over the comparable period. Overall, our services
business operates in a highly competitive industry and there are numerous
independent consulting firms who implement MAXIMO.
FISCAL 2003 COMPARED TO FISCAL 2002: Software license revenues increased 2% in
fiscal 2003 compared to fiscal 2002. The impact of exchange rates was immaterial
for these comparative periods. The increase in fiscal 2003 as compared to fiscal
2002 was mainly attributable to an increase of 33% in ITAM software licenses
revenues. The Company purchased the MAXIMO Main Control (ITAM) product in June
2002 and therefore only recognized four months of revenue from this product in
fiscal 2002 versus twelve months of revenue in fiscal 2003. MAXIMO EAM software
licenses were flat in fiscal 2003 compared to fiscal 2002 and we attribute this
to the saturation of our traditional EAM market, a difficult IT spending
environment and adverse economic conditions in the general economy. The Company
was also experiencing longer sales cycles.
Page 20
Support revenues increased 18% to $65.2 million in fiscal 2003 from $55.4
million in fiscal 2002. The impact of exchange rates was immaterial for these
comparative periods. Support revenues increased as a result of a cumulative
increase in the number of MAXIMO EAM 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 EAM support revenues
comprised 94% of total support revenues in fiscal 2003 and increased 13% in
fiscal 2003 compared to fiscal 2002. ITAM support revenues, primarily
attributable to contracts assumed in connection with the June 2002 acquisition
of MainControl, Inc., were $3.6 million and $807 thousand for fiscal 2003 and
2002, respectively.
Service revenues decreased 8% to $61.8 million in fiscal 2003 from $67.4 million
in fiscal 2002. The impact of exchange rates was immaterial for these
comparative periods. The overall decline in service revenues in fiscal 2003 as
compared to fiscal 2002 was comprised of the following: (1) a 7% decline in
MAXIMO EAM service revenues due to a cumulative decline in the number of MAXIMO
EAM software licenses sold and increased competition from independent consulting
firms who implement MAXIMO, (2) an 80% decline in industrial data normalization
service revenues due to the sale of this business in January 2003, and (3) a 12%
decline in OCS revenues due to a decrease in the number of customers renewing
annual service contracts. The decrease was partially offset by a 354% increase
in ITAM revenues. The increase in ITAM service revenues reflects the comparison
of revenues for twelve months in fiscal 2003 with only four months of revenue
from this product in fiscal 2002.
COST OF REVENUES
Fiscal Fiscal Fiscal
Year Year Year
Ended Change Ended Change Ended
(in thousands) 9/30/04 % 9/30/03 % 9/30/02
- -------------- ------- ------ ------- ------ -------
Cost of software licenses $ 7,143 (14)% $ 8,314 19% $ 7,012
Percentage of software licenses 14% 17% 14%
Cost of support and services $60,144 3% $58,618 (5)% $61,862
Percentage of support and services 45% 46% 50%
Total cost of revenues $67,287 1% $66,932 (3)% $68,874
Percentage of total revenues 36% 38% 40%
FISCAL 2004 COMPARED TO FISCAL 2003: 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 the cost of software license revenues in
fiscal 2004 as compared to fiscal 2003 was primarily attributable to a decrease
in the amortization of acquired technology due to the cessation of amortization
of fully amortized assets. Amortization of acquired technology was $2.4 million
and $3.4 million for fiscal 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 increased 5% to $11.0 million in fiscal 2004 from $10.5 million
in fiscal 2003. The increase in fiscal 2004 was primarily attributable to
general increases in salaries and related benefits and operating expenses needed
to support all of our product lines. Cost of support revenues, as a percentage
of total support revenues was 15% and 16% for fiscal 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 operating expenses and personnel.
Cost of service revenues increased 2% to $49.2 million in fiscal 2004 from $48.1
million in fiscal 2003. Cost of service revenues, as a percentage of total
service revenues was 80% and 78% for fiscal 2004 and fiscal 2003, respectively.
The increase in fiscal 2004 as compared to fiscal 2003 were attributable to an
increase of $1.0 million for the utilization of third party consultants to
implement our products, an increase of $650 thousand in salaries and related
benefits and an
Page 21
increase of $400 thousand in service incentives due to additional headcount.
These increases were partially offset by a decrease of $780 thousand in travel
and entertainment expenses.
FISCAL 2003 COMPARED TO FISCAL 2002: Cost of software license revenues consists
of software purchased for resale, royalties paid to vendors of third party
software, the cost of software product packaging and media, certain employee
costs related to software duplication, packaging and shipping, and amortization
of acquired technology. The increase in cost of software license revenues in
fiscal 2003 as compared to fiscal 2002 was primarily attributable to software
purchased for resale related to our MAXIMO Mobile Suite product and amortization
of acquired technology. Cost of software purchased for resale increased $982
thousand in fiscal 2003 as compared to fiscal 2002 due to an increase in demand
for the MAXIMO Mobile Suite product. Amortization of acquired technology was
$3.4 million in fiscal 2003 and $3.0 million in fiscal 2002 and the increase was
attributable to technology acquired from MainControl, Inc. in June 2002.
Cost of support and services consists primarily of personnel costs for employees
and the related costs of benefits and facilities, costs for utilization of third
party consultants, and costs to support the MRO Operations Center. Cost of
support revenues increased 24% to $10.5 million in fiscal 2003 from $8.5 million
in fiscal 2002. The increase in cost of support revenues was primarily
attributable to an increase in headcount. Cost of support revenues, as a
percentage of total support revenues was 16% and 15% for fiscal 2003 and 2002,
respectively.
Cost of service revenues decreased 10% to $48.1 million in fiscal 2003 from
$53.4 million in fiscal 2002. The decrease in the cost of service revenues in
fiscal 2003 as compared to fiscal 2002 was primarily attributable to a $2.1
million reduction in personnel and related benefits and facilities costs and a
$2.2 million decrease for the cost of third party consultants due to the sale of
the industrial data normalization services operations in January 2003. Cost of
service revenues, as a percentage of total service revenues was 78% and 79% for
fiscal 2003 and 2002, respectively.
OPERATING EXPENSES
Fiscal Fiscal Fiscal
Year Year Year
Ended Change Ended Change Ended
(in thousands) 9/30/04 % 9/30/03 % 9/30/02
- -------------- ------- ------ ------- ------ -------
Sales and marketing $56,762 (4)% $59,117 1% $58,806
Percentage of total revenues 31% 33% 34%
Product development $28,492 8% $26,476 (2)% $26,897
Percentage of total revenues 15% 15% 16%
General and administrative $17,839 1% $17,702 (10)% $19,698
Percentage of total revenues 10% 10% 11%
Amortization of other intangibles
and goodwill $ 666 (27)% $ 908 (93)% $12,925
Percentage of total revenues 1% 1% 8%
FISCAL 2004 COMPARED TO 2003: Sales and marketing expenses decreased 4% to $56.7
million in fiscal 2004 from $59.1 in fiscal 2003. The decrease in fiscal 2004 as
compared to fiscal 2003 was primarily attributable to a $2.9 million decrease in
salaries and related benefits due to a reduced number of sales and marketing
personnel and a $1.4 million decrease in advertising expenses. These decreases
were partially offset by a $1.4 million increase in sales commissions due to
increases in software license sales and a more favorable sales commission policy
for fiscal 2004 and a $340 thousand increase in travel and entertainment
expenses.
Product development expenses increased 8% to $28.5 million in fiscal 2004 from
$26.5 million in fiscal 2003. The increase 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 has
focused the majority of its development on a new generation of products, MXES.
Page 22
MXES will incorporate the Company's current EAM and ITAM capabilities,
delivered on a common platform along with new functionality that will include IT
Help and Service Desk capabilities as well as a greatly enhanced
application set for the EAM market.
General and administrative expenses increased 1% to $17.8 million in fiscal 2004
from $17.7 million in fiscal 2003. The increase was primarily attributable to an
increase in salaries and related benefits, property and business taxes, and
insurance premiums. These increases were offset by a decrease in U.S. bad debt
reserves of $375 thousand.
The decrease in amortization of other intangibles expense in fiscal 2004 as
compared to fiscal 2003 was due to several assets becoming fully amortized
during the first three quarters of fiscal 2004.
FISCAL 2003 COMPARED TO 2002: Sales and marketing expenses increased slightly to
$59.1 million in fiscal 2003 from $58.8 million in fiscal 2002. The increase in
fiscal 2003 as compared to fiscal 2002 was primarily attributable to a $1.2
million increase in personnel and related benefits, including severance costs
related to reorganization of the sales and marketing departments, and a $900
thousand increase in sales commissions paid on revenues from software licenses
sold. Partially offsetting this increase was a $1.8 million decrease in
advertising, travel expenses, and general sales expenses.
Product development expenses decreased 2% to $26.5 million in fiscal 2003 from
$26.9 million in fiscal 2002. The decrease in fiscal 2003 as compared to fiscal
2002 was attributable to a decrease in the costs to translate our products into
foreign languages, as most of the cost to translate the MAXIMO EAM product was
absorbed in fiscal 2002.
General and administrative expenses decreased 10% to $17.7 million in fiscal
2003 from $19.7 million in fiscal 2002. The decrease was primarily due to a $1.4
million decrease in bad debt provisions, a $1.2 million decrease in general and
administrative salaries and related benefits due to a decrease in the number of
general and administrative personnel, and a general decrease in spending.
Partially offsetting this decrease was a $525 thousand increase in insurance
premiums year over year.
The decrease in amortization of goodwill and other intangibles expense was due
to the adoption of SFAS No. 142 by the Company on October 1, 2002. In accordance
with SFAS No. 142, goodwill is no longer amortized. Intangibles and other
identifiable assets will continue to be amortized. Goodwill amortization was
$11.8 million in fiscal 2002.
NON-OPERATING EXPENSES
Fiscal Fiscal Fiscal
Year Year Year
Ended Change Ended Change Ended
(in thousands) 9/30/04 % 9/30/03 % 9/30/02
- -------------- ------- ------ ------- ------ -------
Interest income $1,258 55% $ 811 (17)% $974
Other income/(expense), net $ 6 (99)% $1,161 1,135% $(94)
FISCAL 2004 AS COMPARED TO 2003: Interest income is attributable to interest
earned on marketable securities and cash and cash equivalents. The Company
invests a large portion of its cash in marketable securities such as United
States treasury and treasury-backed instruments, municipal bonds and highly
rated conservative corporate bonds. We were able to earn more income in fiscal
2004 as compared to fiscal 2003 because we invested more cash into higher
yielding securities and the overall U.S. bond market improved over the previous
comparable period. The change in other income was primarily due to a swing in
foreign currency transaction gains and losses. The Company reported net currency
transaction losses of $506 thousand in fiscal 2004 compared to net currency
transaction gains of $532 thousand in fiscal 2003. Also, in fiscal 2004, the
Company recorded an additional $452 thousand in other income related to the sale
of its industrial data normalization services operations.
Page 23
FISCAL 2003 AS COMPARED TO 2002: Due to unfavorable interest yields in the bond
market in 2003, the Company earned less interest on its investments in fiscal
2003. The change in other income was due to foreign currency exchange rate gains
of $532 thousand and a gain of $407 thousand on the sale of the industrial data
normalization services operations in January 2003 to International Materials
Solutions, Inc.
INCOME TAXES
The Company's effective tax rate was 35% for fiscal 2004. The decrease in the
effective tax rate in fiscal 2004 as compared to the fiscal 2003 tax rate was
primarily due to the reduction in non-deductible amortization and the
utilization of state net operating losses and research and development credits.
The Company's effective tax rate was 37% for fiscal 2003. The difference between
the effective tax rate and the federal statutory tax rate of 35% in 2003 was due
to the non-deductible nature of certain intangible amortization expenses, the
impact of foreign rate differentials, and state income taxes offset by state net
operating loss utilization and research and development credits.
LIQUIDITY AND CAPITAL RESOURCES
As of September 30, 2004, the Company had cash and cash equivalents of $57.0
million and marketable securities of $51.4 million, and working capital of $78.2
million.
Cash provided by operations was $13.2 million for the twelve months ended
September 30, 2004 primarily attributable to income generated from operations
and income tax refunds.
Cash used in investing activities was $33.9 million for the twelve months ended
September 30, 2004 and was primarily used in the purchase and sale of marketable
securities. We also received payment of $1.3 million as settlement of an
outstanding obligation from International Materials Solutions, Inc. relative to
their purchase of our industrial data normalization services operations in
January 2003.
Cash provided by financing activities was $3.2 million for the twelve months
ended September 30, 2004 and represents proceeds from the Company's Employee
Stock Option and Purchase Plans.
As of September 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 leases its office facilities under operating lease agreements, which
expire at various dates through June 30, 2019. The Company pays all insurance,
utilities, and pro rated portions of any increase in certain operating expenses
and real estate taxes. The aggregated rent expense under these leases was $6.9
million, $6.2 million, and $6.5 million for fiscal 2004, 2003 and 2002,
respectively.
The following table summarizes our contractual obligations as of September 30,
2004. The contractual obligations are primarily related to office leases,
equipment leases and contracts for hosting our financial applications.
Page 24
PAYMENTS DUE BY PERIOD
LESS THAN 1-3 3-5 MORE THAN
CONTRACTUAL OBLIGATIONS TOTAL 1 YEAR YEARS YEARS 5 YEARS
- ----------------------- ----- --------- ----- ----- ---------
(IN THOUSANDS)
Operating leases
Leased premises $34,650 $ 4,130 $6,812 $6,153 $17,555
Equipment/Automobiles $ 1,717 $ 1,275 $ 426 $ 15 1
Purchase obligations $ 3,296 $ 1,457 $1,839 -- --
------- ------- ------ ------ -------
Total $39,663 $ 6,862 $9,077 $6,168 $17,556
======= ======= ====== ====== =======
The Company may use a portion of its cash to acquire additional businesses,
products or technologies complementary to its business. The Company also plans
to make investments over the next year in its products and technology.
The Company expects that its cash flow from operations together with its current
cash and marketable securities will be sufficient to meet its working capital
and capital expenditure requirements through at least September 30, 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 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".
RECENT ACCOUNTING PRONOUNCEMENTS
In October 2004, the American Jobs Creation Act of 2004 ("AJCA") was signed into
law. The AJCA contains a series of provisions several of which are pertinent to
the Company.
The AJCA creates a temporary incentive for U.S. multinational corporations to
repatriate accumulated income abroad by providing an 85% dividends received
deduction for certain dividends from controlled foreign corporations. It has
been the Company's practice to permanently reinvest all foreign earnings into
its foreign operations and the Company currently still plans to continue to
reinvest its foreign earnings permanently into its foreign operations. Should
the Company determine that it plans to repatriate any of its foreign earnings,
the Company will be required to establish a deferred tax liability on such
earnings.
The AJCA eliminates the extraterritorial income exclusion for transactions
occurring after December 31, 2004. However, the AJCA provides transitional
relief, allowing an exclusion of 80% (of the exclusion previously allowable) for
transactions occurring in calendar 2005 and 60% for transactions occurring in
calendar 2006.
The AJCA also provides U.S. corporations with an income tax deduction equal to a
stipulated percentage of qualified income from domestic production activities
("qualified activities"). The deduction, which cannot exceed 50% of annual wages
paid, is phased in as follows: 3% of qualified activities of the Company's
fiscal years 2006 and 2007, 6% in fiscal years 2008 through 2010, and 9% in
fiscal year 2011 and thereafter. The Company believes that it qualifies for the
deduction. In November 2004, the Financial Accounting Standards Board issued a
staff position (FAS 109-a) indicating that the domestic manufacturing deduction
should be accounted for as a special deduction. As such, the tax benefit of the
deduction will be accounted for in the periods in which the qualifying
activities occur, i.e., the years in which the deductions are taken on the
Company's tax returns. This benefit will be included in the Company's annual
effective tax rate, but will not result in a re-measurement of deferred income
taxes.
The AJCA may have an impact on the Company's tax rate for 2005 and future years.
The outcome at this time is not yet known.
Page 25
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.
WE DEPEND SUBSTANTIALLY ON OUR MAXIMO EAM PRODUCT
Most of our revenues are derived from the licensing of our MAXIMO EAM family of
products and sales of related services and support. Our financial performance
depends largely on continued market acceptance of these products. We believe
that continued market acceptance and our revenue stability and growth will
largely depend on our ability to continue to enhance and broaden the
capabilities of these products. If we are unable to continue to enhance and
improve MAXIMO EAM so that it delivers the capabilities required by existing and
potential customers and remains competitive with other products in the market,
or if a trend emerges such that customers decide to consolidate their IT systems
and eliminate their standalone of "best-of-breed" EAM application software
altogether, our revenues, margins and results of operations and financial
condition may be materially and adversely affected.
THE TRADITIONAL MARKET FOR OUR MAXIMO EAM 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. To
be competitive in the EAM market, we have made significant investments in MAXIMO
EAM to meet the needs of specific industries in which the Company has a
presence, such as the nuclear, transportation, power generation, transmission
and distribution, and other industries. We refer to these industry-specific
MAXIMO offerings as "Industry Solutions". While we continue to strengthen our
MAXIMO EAM 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
affected.
OUR EFFORTS TO REACH INTO NEW MARKETS WITH NEW PRODUCTS MAY NOT BE SUCCESSFUL.
Given the maturity and saturation of the 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. We are attempting, through acquisitions and internal development, to
deliver products that address markets that are new to the Company, such as the
ITAM and Help and Service Desk markets. The culmination of these efforts will be
embodied in Maximo Enterprise Suite (MXES), which is scheduled for release in
early calendar
Page 26
2005. Our development of MXES and of our MAXIMO EAM Industry Solutions, and our
ability to derive revenue and grow the Company, is subject to the following
risks, among others:
- - We may not be able to develop and market our new products (including MXES)
on time, with acceptable quality or with functions and features that meet
the requirements of customers in these markets.
- - Current potential customers who are considering the purchase of our MAXIMO
EAM or MAXIMO ITAM products may decide to postpone their purchase in
anticipation of the release of MXES.
- - The MXES Help and Service Desk products may not contain all of the
functionality deemed necessary by prospective buyers in these markets.
- - It is possible that the Company's sales, service or support personnel may
not be adequately trained and/or staffed to sell, implement or support the
new products. Newly developed products require a higher level of
development, distribution and support expenditures in the early stages of
their product lifecycles.
- - 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 affect on our results of operation or financial
condition.
- - The launch of MXES may not result in any new revenues while serving as a
major distraction from our efforts to maintain revenues at current levels
in our traditional EAM market.
- - We are positioning the combination of our traditional EAM functionality
with the new ITAM and Help and Service Desk in a single offering as a
logical suite of software products, which may enable our customers to
consolidate their information technology (IT) systems. Our customers may
not value this combination of products in a single architecture, or they
may believe that other overlapping and proven suites are more desirable,
or that the intrinsic value of having a broad suite of developed products
does not outweigh the functional advantages offered by existing and
experienced "best-of-breed" vendors in any one of the markets viewed
separately, especially the ITAM and Help and Service Desk markets where
our offering is new and unproven.
If any of our newly 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 operations and financial condition may be materially and adversely
affected.
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 many
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
Page 27
significant delays in product development or introduction, then we could lose
competitiveness and revenues.
OUR SALES EFFORTS DEPEND IN PART ON STRATEGIC RELATIONSHIPS WITH OTHER
COMPANIES.
We have entered into strategic relationships with various larger companies, such
as HP, IBM, SAIC 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.
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. 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 INTENSE COMPETITION IN THE MARKETS WE SERVE.
The markets for strategic asset management software such as MAXIMO EAM, MAXIMO
ITAM and Maximo Enterprise Suite (MXES) 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. We also compete with
integrated ERP systems, which include integrated maintenance modules offered by
several large vendors, such as SAP, Oracle, and others. In the ITAM market we
compete with companies such as Peregrine Systems, Computer Associates and BMC
Software. MXES will compete with all of these companies, plus additional
companies in the Help and Service Desk markets, such as HP. 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.
Current or potential competitors may make strategic acquisitions thereby
increasing their ability to deliver products that better address the needs of
our customers. There is no assurance that we will be able to compete
successfully should this occur and this could have a material adverse effect on
our financial condition and results of operations.
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
Page 28
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, mobile technology, report writing, application
servers, 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. We are subject to
continuous examinations of our income tax returns by the Internal Revenue
Service and other tax authorities. We regularly assess the likelihood of adverse
outcomes resulting from these examinations to determine the adequacy of our
provision for income taxes. 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 the Company 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.
The Company may be eligible for several tax benefits provided for under the
American Jobs Creation Act of 2004, which was signed into law on October 22,
2004. The potential tax benefits include a temporary 85% foreign dividends
received deduction for certain dividends received from controlled foreign
corporations. There are several statutory requirements, which must be met if the
Company determines that the 85% dividends received deduction is advantageous.
However, if the Company does not appropriately comply with the statutory
requirements then the 85% foreign dividends received deduction could be
forfeited resulting in a potentially adverse affect on the results of
operations.
WE MAY PERFORM MORE FIXED PRICE SERVICES CONTRACTS.
A trend has emerged and is continuing among customers in our market towards
demanding consulting and implementation services on a fixed-price basis, whereby
the Company agrees to deliver the contract requirements for a fixed fee,
regardless of the number of person-hours actually provided, as opposed to our
traditional services arrangements where we deliver services on a
time-and-materials basis. In cases where services are provided 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
Page 29
transactions at the time the agreements are signed, but rather may be required
to recognize such license revenue under the contract 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 affect 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 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 affect 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.
WE ARE EXPOSED TO FLUCTUATIONS IN THE MARKET VALUES OF OUR PORTFOLIO INVESTMENTS
AND IN INTEREST RATES.
We invest a significant portion of our cash in marketable securities. These
securities are classified as available-for-sale and are recorded at fair value
on the Consolidated Balance Sheet with unrealized gains or losses reported as a
separate component of accumulated other comprehensive income (loss), net of tax.
Economic downturns and other factors subject these securities to volatility in
the market place. As a result, we may recognize the decline in fair value of
these investments.
Page 30
OUR STOCK PRICE HAS BEEN VOLATILE, AND YOU COULD INCUR LOSSES AS A RESULT OF
FUTURE FLUCTUATIONS IN OUR STOCK PRICE.
There have been significant fluctuations in the market price of our common
stock, recently and over longer time periods. In addition, the stock market in
general has recently experienced substantial price and volume fluctuations,
which have particularly affected the market prices of many software and
technology companies and which have often been unrelated to the operating
performance of such companies. These broad market fluctuations also may
adversely affect the market price of our common stock. In addition, general
macroeconomic and market conditions unrelated to our performance may also affect
demand for our products and services, our results of operations, and our stock
price.
OTHER RISKS
The foregoing is not a complete description of all risks relevant to our future
performance, and the foregoing should be read and understood together with and
in the context of similar discussions which may be contained in the documents
that we file with the SEC in the future. We undertake no obligation to release
publicly any revision to the foregoing or any update to any forward-looking
statements to reflect events or circumstances after the date of such statements
or to reflect the occurrence of anticipated or unanticipated events.
Page 31
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company's primary exposures to market risk are the effect of fluctuations in
interest rates earned on its cash equivalents and marketable securities and
exposures to foreign currency exchange rate fluctuations.
At September 30, 2004, the Company held $108.4 million in cash equivalents and
marketable securities consisting of taxable and tax exempt municipal securities.
Interest rate movements affect the interest income we earn. The Company places
its investments with high quality issuers and limits risk by purchasing only
investment-grade securities. 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. As of September 30 2004, the Company did not engage in foreign
currency hedging activities.
Page 32
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
QUARTERLY FINANCIAL DATA (UNAUDITED)
The Company believes that period-to-period comparisons of its results of
operations are not necessarily meaningful and should not be relied upon as an
indication of future performance.
(in thousands, except per share amounts)
Year
Dec. 31, Mar. 31, June 30, Sep. 30, ended
2004 QUARTER ENDED: 2003 2004 2004 2004 2004
- ------------------- -------- -------- -------- -------- --------
Total revenues $44,902 $44,622 $46,300 $49,865 $185,689
Gross profit 28,317 27,320 29,758 33,007 118,402
Income from operations 2,931 1,795 4,371 5,546 14,643
Income before income taxes 2,695 2,152 4,719 6,341 15,907
Provision for income taxes 943 753 1,631 2,240 5,567
Net income 1,752 1,399 3,088 4,101 10,340
Net income per share, basic $ 0.07 $ 0.06 $ 0.12 $ 0.16 $ 0.41
Net income per share, diluted $ 0.07 $ 0.05 $ 0.12 $ 0.16 $ 0.40
Year
Dec. 31, Mar. 31, June 30, Sep. 30, ended
2003 QUARTER ENDED: 2002 2003 2003 2003 2003
- ------------------- -------- -------- -------- -------- --------
Total revenues $43,888 $39,388 $47,635 $45,966 $176,877
Gross profit 27,110 23,520 30,377 28,938 109,945
Income/(loss) from operations 61 (1,098) 2,801 3,978 5,742
Income/(loss) before income taxes 609 (274) 3,175 4,204 7,714
Provision/(benefit) for income taxes 214 (96) 1,158 1,568 2,844
Net income/(loss) 395 (178) 2,017 2,636 4,870
Net income/(loss) per share, basic and
diluted $ 0.02 $ (0.01) $ 0.08 $ 0.11 $ 0.20
The Financial statements and schedules filed as part of this Report are
listed in the following Index to Financial Statements and Schedules.
1. INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
The following financial statements are filed as part of this Report:
PAGE
----
Report of Independent Registered Public Accounting Firm 34
Consolidated Balance Sheets - 35
September 30, 2004 and 2003
Consolidated Statements of Operations - 36
Years Ended September 30, 2004, 2003 and 2002
Consolidated Statements of Cash Flows - 37
Years Ended September 30, 2004, 2003 and 2002
Consolidated Statements of Stockholders' Equity 38
Years Ended September 30, 2004, 2003 and 2002
Notes to Consolidated Financial Statements 39
2. INDEX TO FINANCIAL STATEMENT SCHEDULES
The following financial statement schedule is filed as part of this
report and should be read in conjunction with the Consolidated
Financial Statements:
SCHEDULE PAGE
- -------- ----
II Valuation and Qualifying Accounts 59
All other schedules not listed above have been omitted because they
are not applicable or are not required, or the information required
to be set forth therein is included in the consolidated Financial
Statements or Notes thereto.
Page 33
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders of MRO Software, Inc.:
In our opinion, the consolidated financial statements listed in the index
appearing under Item 15(a)(1) present fairly, in all material respects, the
financial position of MRO Software, Inc. and its subsidiaries at September 30,
2004 and 2003, and the results of their operations and their cash flows for each
of the three years in the period ended September 30, 2004 in conformity with
accounting principles generally accepted in the United States of America. In
addition, in our opinion, the financial statement schedule listed in the index
appearing under Item 15(a)(2) presents fairly, in all material respects, the
information set forth therein when read in conjunction with the related
consolidated financial statements. These financial statements and financial
statement schedule are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements and
financial statement schedule based on our audits. We conducted our audits of
these statements in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant estimates
made by management, and evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
PricewaterhouseCoopers LLP
Boston, Massachusetts
November 12, 2004
Page 34
MRO SOFTWARE, INC.
CONSOLIDATED BALANCE SHEETS
SEPTEMBER 30, SEPTEMBER 30,
2004 2003
---- ----
(in thousands)
ASSETS
Current assets:
Cash and cash equivalents $ 56,982 $ 73,662
Marketable securities 36,152 1,177
Accounts receivable, trade, less allowance
for doubtful accounts of $2,324 at September 30, 2004
and $2,741 at September 30, 2003, respectively 36,636 28,833
Prepaid expenses and other current assets 5,072 4,177
Deferred income taxes 1,470 2,242
-------- ---------
Total current assets 136,312 110,091
-------- ---------
Marketable securities 15,273 19,734
Property and equipment, net 7,227 8,239
Goodwill 46,768 46,210
Intangible assets, net 5,541 7,700
Notes receivable -- 593
Deferred income taxes 7,611 9,267
Other assets 3,989 3,427
-------- ---------
Total assets $222,721 $ 205,261
======== =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued expenses $ 12,871 $ 14,819
Accrued compensation 10,142 8,357
Income taxes payable 5,473 4,741
Deferred revenue 29,373 28,734
Deferred lease obligation 292 49
-------- ---------
Total current liabilities 58,151 56,700
-------- ---------
Deferred lease obligation 2,210 838
Deferred revenue 900 1,181
Other long term liabilities 325 30
Commitments and contingencies (Note J)
Stockholders' equity
Preferred stock, $.01 par value; 1,000 authorized,
none issued and outstanding
Common stock, $.01 par value; 50,000 authorized;
24,983 and 24,576 issued and outstanding at
September 30, 2004 and 2003, respectively 250 246
Additional paid-in capital 118,903 115,093
Deferred compensation (370) (298)
Retained earnings 41,503 31,163
Accumulated other comprehensive income 849 308
-------- ---------
Total stockholders' equity 161,135 146,512
-------- ---------
Total liabilities and stockholders' equity $222,721 $ 205,261
======== =========
The accompanying notes are an integral part of the
consolidated financial statements.
Page 35
MRO SOFTWARE, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
YEAR ENDED SEPTEMBER 30,
------------------------
2004 2003 2002
---- ---- ----
(in thousands, except per share data)
Revenues:
Software $ 52,583 $ 49,904 $ 49,035
Support and services 133,106 126,973 122,846
--------- --------- -------
Total revenues 185,689 176,877 171,881
--------- --------- -------
Cost of revenues:
Software 7,143 8,314 7,012
Support and services 60,144 58,618 61,862
--------- --------- -------
Total cost of revenues 67,287 66,932 68,874
--------- --------- -------
Gross profit 118,402 109,945 103,007
Operating expenses:
Sales and marketing 56,762 59,117 58,806
Product development 28,492 26,476 26,897
General and administrative 17,839 17,702 19,698
Amortization of other intangibles and goodwill 666 908 12,925
--------- --------- ---------
Total operating expenses 103,759 104,203 118,326
--------- --------- ---------
Income/(loss) from operations 14,643 5,742 (15,319)
Interest income 1,258 811 974
Other income/(expense), net 6 1,161 (94)
--------- --------- ---------
Income/(loss) before income taxes 15,907 7,714 (14,439)
Provision/(benefit) for income taxes 5,567 2,844 (3,888)
--------- --------- ---------
Net income/(loss) $ 10,340 $ 4,870 $ (10,551)
========= ========= =========
Net income/(loss) per share, basic $ 0.41 $ 0.20 $ (0.46)
--------- --------- ---------
Net income/(loss) per share, diluted $ 0.40 $ 0.20 $ (0.46)
--------- --------- ---------
Shares used to calculate net income/(loss) per share
Basic 24,811 24,429 23,171
Diluted 25,290 24,653 23,171
The accompanying notes are an integral part of the
consolidated financial statements.
Page 36
MRO SOFTWARE, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEAR ENDED SEPTEMBER 30,
------------------------
2004 2003 2002
---- ---- ----
(in thousands)
Cash flows from operating activities:
Net income/(loss) $ 10,340 $ 4,870 $(10,551)
Adjustments to reconcile net income/(loss) to net
cash provided by operating activities:
Depreciation 4,933 4,480 5,154
Amortization of goodwill and other intangibles 3,070 4,284 15,921
Gain on sale of services operation (452) (407) --
Disposal of equipment -- 28 59
Amortization of premium on marketable securities 108 -- 47
Stock-based compensation 214 171 109
Deferred income taxes 2,137 309 (2,497)
Changes in operating assets and liabilities,
net of effect of acquisitions:
Accounts receivable (6,932) 7,863 9,510
Prepaid expenses and other assets 773 207 (1,199)
Accounts payable, accrued expenses and other
liabilities (3,275) (1,910) (3,986)
Accrued compensation 1,585 (1,025) (4,286)
Income taxes payable 734 5,958 --
Tax benefit on exercise of employee stock purchases 341 92 2,675
Deferred revenue (411) 1,193 5,494
-------- -------- --------
Net cash provided by operating activities 13,165 26,113 16,450
-------- -------- --------
Cash flows from investing activities:
Acquisitions of businesses, net of cash acquired (605) -- (1,293)
Proceeds from sale of services operation 1,300 -- --
Acquisitions of property and equipment and other
capital expenditures (3,943) (2,661) (3,005)
Purchases of marketable securities (58,956) (40,406) --
Sales of marketable securities 28,307 19,900 5,682
-------- -------- --------
Net cash (used in)/provided by investing activities (33,897) (23,167) 1,384
-------- -------- --------
Cash flows from financing activities:
Proceeds from exercise of employee stock options
and stock purchases 3,188 2,011 6,858
-------- -------- --------
Net cash provided by financing activities 3,188 2,011 6,858
-------- -------- --------
Effect of exchange rate changes on cash 864 1,390 508
-------- -------- --------
Net (decrease)/increase in cash and cash equivalents (16,680) 6,347 25,200
Cash and cash equivalents, beginning of year 73,662 67,315 42,115
-------- -------- --------
Cash and cash equivalents, end of year $ 56,982 $ 73,662 $ 67,315
======== ======== ========
Supplemental disclosure on noncash financing activities:
Restricted stock awards $ 214 $ 171 $ 109
The accompanying notes are an integral part of the
consolidated financial statements.
Page 37
MRO SOFTWARE, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Common Stock Accumulated
------------ Additional Other Total
Shares Par Paid-in Deferred Retained Comprehensive Stockholders' Comprehensive
(in thousands) Issued Value Capital Compensation Earnings Income/(loss) Equity Income/(loss)
- -------------- ------ ----- ------- ------------ -------- ------------- ------ -------------
Balance at September 30, 2001 22,250 $ 223 $ 88,059 $ (285) $ 36,844 $ (1,488) $ 123,353
Stock options exercised and
related tax benefit,
employee stock purchases 653 6 9,527 9,533
Stock issued to
i2 Technologies, Inc. 268 3 (3) --
Acquisitions, net of merger
expenses 1,096 11 15,117 15,128
Stock-based compensation 109 109
Net loss (10,551) (10,551) $ (10,551)
Translation adjustment 448 448 448
-------------
Comprehensive loss $ (10,103)
------ ----- --------- ------------ -------- ------------- ------------- -------------
Balance at September 30, 2002 24,267 $ 243 $ 112,700 $ (176) $ 26,293 $ (1,040) $ 138,020
Stock options exercised and
related tax benefit,
employee stock purchases 284 3 2,100 2,103
Deferred compensation,
related to common stock
grants 25 293 (293) --
Stock-based compensation 171 171
Net income 4,870 4,870 $ 4,870
Translation adjustment 1,445 1,445 1,445
Net unrealized loss on
marketable securities, net
of tax (97) (97) (97)
-------------
Comprehensive income $ 6,218
------ ----- --------- ------------ -------- ------------- ------------- -------------
Balance at September 30, 2003 24,576 $ 246 $ 115,093 $ (298) $ 31,163 $ 308 $ 146,512
Stock options exercised and
related tax benefit,
employee stock purchases 383 4 3,524 3,528
Deferred compensation,
related to common stock
grants 24 -- 286 (286) --
Stock-based compensation 214 214
Net income 10,340 10,340 $ 10,340
Translation adjustment 624 624 624
Net unrealized loss on
marketable securities, net
of tax (83) (83) (83)
-------------
Comprehensive income $ 10,881
------ ----- --------- ------------ -------- ------------- ------------- -------------
Balance at September 30, 2004 24,983 $ 250 $ 118,903 $ (370) $ 41,503 $ 849 $ 161,135
------ ----- --------- ------------ -------- ------------- -------------
The accompanying notes are an integral part of the
consolidated financial statements.
Page 38
MRO SOFTWARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
A. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES:
NATURE OF BUSINESS
The Company develops, markets, sells and distributes strategic asset
management solutions used by businesses, government agencies and other
organizations to manage their high-value capital assets, such as plants,
facilities, production equipment, and IT assets. The Company's integrated suite
of applications optimizes performance, improves productivity and service levels
and enables asset-related sourcing and procurement across the entire spectrum of
strategic assets.
BASIS OF PRESENTATION
The consolidated financial statements include the accounts of MRO Software,
Inc. ("MROI") and its majority-owned subsidiaries (collectively, the "Company").
All intercompany accounts and transactions have been eliminated. Certain prior
year financial statement items have been reclassified to conform to the current
year presentation.
USE OF ESTIMATES
The Company's financial statements are prepared in accordance with
accounting principles generally accepted in the United States of America
("GAAP"). These accounting principles require management to make estimates and
assumptions that affect the reported amount of assets and liabilities and
disclosures of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. To the extent there are material differences between these
estimates and actual results, our financial statements would be affected.
CASH AND CASH EQUIVALENTS
The Company considers all highly liquid instruments purchased with original
maturities of three months or less to be cash equivalents. Our cash equivalents
consist mainly of money market mutual funds, which are stated at cost plus
accrued interest, which approximates fair value.
CONCENTRATION OF CREDIT RISK
Financial instruments, which potentially subject the Company to
concentration of credit risk, consist primarily of temporary cash investments,
marketable securities and accounts receivable. The majority of our cash is
maintained with several financial institutions in the United States and Europe.
Deposits held with these banks may exceed the amount of insurance provided on
such deposits. The counterparties to the agreements relating to marketable
securities and investment instruments consist of various United States
governmental units and financial institutions of high credit standing. Credit
risk on accounts receivable is minimized as a result of the diverse nature of
the Company's customer base. The Company performs ongoing credit evaluations of
its customers' financial condition and limits the amount of credit when deemed
necessary.
COMPREHENSIVE INCOME
The Company's comprehensive income is comprised of net income, foreign
currency translation adjustments and unrealized gains and losses on
available-for-sale investments, net of tax. Comprehensive income is included in
the stockholders' equity section of the balance sheet.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amounts (stated at cost) of cash and cash equivalents, accounts
receivable, accounts payable and accrued expenses approximate fair value because
of their short-term nature.
FOREIGN CURRENCY
Assets and liabilities are translated at current exchange rates at the
balance sheet dates. The translation adjustments made on translation of the
balance sheet are recorded as a separate component of stockholders' equity.
Revenues and expenses are translated into U.S. dollars at average exchange
rates. Foreign currency transaction gains and losses are included in determining
net income. The Company
Page 39
recorded a net loss of $506 thousand, a net gain of $532 thousand, a net loss of
$85 thousand for fiscal 2004, 2003, and 2002, respectively.
MARKETABLE SECURITIES
The Company's marketable securities are classified as available-for-sale and
are stated at their fair value. All marketable securities are held in the
Company's name and are held in custody with a major financial institution. The
fair value of marketable securities was determined based on quoted market
prices. Unrealized gains and losses on securities classified as
available-for-sale are reported as a separate component of stockholders' equity
and are included in other comprehensive income.
DEPRECIATION AND AMORTIZATION
Property and equipment are stated at cost, net of depreciation and
amortization.
Depreciation is computed over the estimated useful lives of the assets as
follows:
Description Estimated Useful Life
- ----------- ---------------------
Computer equipment & software 3 years
Vehicles 3 years
Furniture and fixtures 5 years
Leasehold improvements are amortized on the straight-line method over the
shorter of their estimated useful life or the remaining term of the lease.
Maintenance and repairs are charged to expense as incurred. Upon retirement or
sale, the cost of the assets disposed of and the related accumulated
depreciation are removed from the accounts and any resulting gain or loss is
included in the determination of net income.
LONG-LIVED ASSETS
GOODWILL
In accordance with "Statement of Financial Accounting Board ("SFAS No.
141",) "Business Combinations", the Company accounts for acquisitions under the
purchase method of Accounting. SFAS 142 requires that goodwill no longer be
amortized, but instead, be tested annually for impairment or whenever events
occur which may indicate possible impairment. Also, in accordance with this
standard, the Company ceased amortization of goodwill associated with
acquisitions purchased prior to the adoption date, at the beginning of its
fiscal year, October 1, 2002. The impairment analysis performed at September 30,
2004 concluded that no impairment of goodwill occurred.
INTANGIBLE ASSETS OTHER THAN GOODWILL
Long-lived assets are amortized over their estimated useful lives. The
Company periodically reviews the long-lived assets, including intangible assets
resulting from acquisitions, for impairment whenever events or changes in
circumstances indicate that the carrying amount of these assets may exceed their
fair value. The Company estimates whether future cash flows expected to result
from the use of assets exceed the carrying amount of the assets. In the event
that the Company judges that an impairment exists, all or a portion of the asset
will be written off based on the amount by which the carrying amount exceeds the
fair value of the asset. In order to determine the fair value, the Company
obtains quoted market prices or utilizes valuation techniques, such as
discounted cash flows.
RESEARCH AND DEVELOPMENT
Costs related to research, design and development of products are charged
to research and development expenses as incurred. Software development costs are
capitalized beginning when a product's technological feasibility has been
established and ending when a product is available for general release to
customers. Generally, our products are released soon after technological
feasibility has been established. Costs eligible for capitalization under SFAS
No. 86 were not significant to our consolidated financial statements and all
software development costs have been expenses as incurred.
INCOME PER SHARE
Basic income (loss) per share is computed by dividing income or loss
available to common shareholders by the weighted average number of common shares
outstanding. Diluted income per share is computed by dividing income or loss
available to common shareholders by the weighted average of common shares
outstanding plus dilutive
Page 40
potential common shares. For purposes of this calculation, stock options are
considered dilutive potential common shares in periods in which they have a
dilutive effect. All potential dilutive common shares are excluded from the
computation of net loss per share because they are anti-dilutive.
INCOME TAXES
The Company accounts for income taxes under the asset and liability approach
for accounting and reporting for income taxes. The Company computes deferred
income taxes, net of valuation allowances, for the estimated future tax effects
of temporary differences between the financial statement and tax basis of assets
and liabilities. Changes in deferred tax assets and liabilities are recorded in
the provision for income taxes. A valuation allowance is recorded to reduce
deferred tax assets to the amount of future tax benefit that is more likely than
not to be realized. Any increase in a valuation allowance could have a material
adverse impact on our income tax provision and net income in the period in which
the determination is made.
The Company has not provided for the U.S. income tax on earnings of its
foreign subsidiaries as it considers certain of these earnings are intended to
be permanently reinvested. At September 30, 2004, the undistributed earnings of
foreign subsidiaries were $11.1 million.
REVENUE RECOGNITION
SOFTWARE PRODUCTS
The Company primarily licenses its software products under noncancellable
license agreements. Software license fee revenues are generally recognized upon
contract execution and product shipment, provided that collection of the
resulting receivable is deemed probable, the fees are fixed or determinable, and
no significant modification or customization of the software is required.
Our customers do not have any right of return except as stipulated under a
standard 90-day warranty that runs concurrent with post contract support (PCS).
The Company does not maintain any reserves with respect to this warranty based
on a history of performance of our software. On the rare occasion that a
customer insists on conditions of acceptance, the Company defers revenue until
the customer's acceptance is obtained and the condition has been satisfied.
Revenue from products sold through indirect channels ("resellers") is
recognized upon shipment of the software, as long as evidence of an arrangement
exists, collectibility is probable and the fee is fixed or determinable and the
resellers obligation to pay us is not contingent upon resale of our product.
Revenue is recorded net of any commissions or discounts. Our resellers do not
have any right of return beyond the standard 90-day performance warranty that
runs concurrent with PCS.
SERVICES REVENUES
Services revenues are comprised of consulting and training fees related to
installation of the Company's software solutions, maintenance/support (PCS)
contracts for software products, and subscription based fees related to the
Company's Online Commerce Services (OCS) business. Consulting and training
services are generally recognized as the services are performed. PCS revenues
are recognized ratably over the term of the agreement, generally one year.
Customers typically subscribe to OCS on an annual basis and revenue is recorded
as services revenue and recognized on a straight-line basis over the applicable
subscription period.
Many of our software arrangements include consulting implementation services
sold separately under consulting contracts. We consider whether the services
revenue can be recognized separately from the software revenue by analyzing the
nature of the services (i.e. if the services are essential to the functionality
of the software), the level of risk, availability of services from other
vendors, acceptance criteria, milestone payments and fixed price terms. For
those contracts that contain fixed
Page 41
price arrangements, if we can reliably estimate the hours required to complete
the implementation services and if we have vendor specific objective evidence
(VSOE) for the fair value of the hourly rates for consultants, we recognize the
software license fee separately from the services revenues. The services
revenues are recognized as they are delivered and the related costs as they are
incurred. If at any point in time the costs exceed revenues, we immediately
accrue for estimated losses using cost estimates that are based on average fully
burdened daily rates applicable to the consulting organization delivering the
services. For those fixed price arrangements where we cannot reliably estimate
the hours required to complete the implementation services and we do not have
VSOE for the fair value of the hourly rates for consultants, the software
license value is recognized together with the consulting services over the
period the consulting services are provided.
MULTIPLE ELEMENT ARRANGEMENTS
The Company's multiple element arrangements could include the following three
elements: (a) software license, (b) PCS, and (c) consulting, training and other
services ("services"). Revenue is allocated to the elements of the arrangement
based upon the vendor specific objective evidence (VSOE) of fair value of each
element. The Company uses the residual method to recognize its software license
revenue, because while we are able to determine the VSOE of fair value of PCS
and services, we are unable to determine the fair value of software licenses.
Under the residual method, the fair value of undelivered elements (PCS and/or
services) is deferred and recognized when the PCS and/or services are delivered.
The difference between the amount of the total arrangement and the amount
attributable to the elements for which fair value is determinable (PCS and/or
services) is recognized as software license revenue. VSOE is established for PCS
and is based on the price of PCS when sold separately. The PCS renewal rate is a
relatively consistent percentage of the stipulated software license fee, offered
to all customers. VSOE for consulting services is based on fixed hourly rates
set according to the skill level of the consultant required. VSOE for training
services is based on an established per-student fee structure.
We assess whether fees are fixed or determinable at the time of sale and
recognize revenue if all other revenue recognition requirements are met. Our
standard payment terms are net 30 days. Payment terms that extend beyond net 30
days from the contract date but are within twelve months are generally deemed to
be fixed or determinable based on our successful history of collecting on such
arrangements. For those customers who are deemed not to be credit-worthy,
revenue is deferred until payment is received.
Shipping and handling fees associated with our products are recorded as
revenue and the associated costs are recorded as cost of software sales.
ALLOWANCES FOR DOUBTFUL ACCOUNTS AND SALES RETURNS
The Company maintains allowances for doubtful accounts, which reflect the
Company's estimate of the amounts owed by customers that customers will be
unable or otherwise fail to pay. The allowance for doubtful accounts is based on
Management's assessment of the collectibility of customer accounts and factors
such as historical experience, credit quality, age of the accounts receivable
balance, and current economic conditions. Management performs ongoing credit
evaluations of its customers' financial condition and limits the amount of
credit when deemed necessary. The Company did not record a provision for
estimated sales returns. Based on our history of sales returns and an analysis
of credit memos, we determined that a provision was not needed.
DEFERRED REVENUE
Revenue on all software license transactions in which there are significant
outstanding obligations is deferred and recognized once such obligations are
fulfilled. Deferred revenue also includes maintenance contracts, and OCS fees
billed in advance.
ADVERTISING EXPENSE
The Company recognizes advertising expense as incurred. Advertising expense
was approximately $3.3 million, $4.7 million, and $4.9 million for fiscal years
2004, 2003, and 2002, respectively.
Page 42
STOCK-BASED COMPENSATION
The Company grants stock options to its employees and outside directors.
Such grants are for a fixed number of shares with an exercise price equal to the
fair value of the shares at the date of grant. Statement of Financial Accounting
Standards No. 148 ("SFAS 148") amends Statement of Financial Accounting
Standards No. 123 ("SFAS 123") to provide alternative methods of transition to
the SFAS 123 fair value method of accounting for stock-based employee
compensation. In addition, SFAS 148 requires disclosure of the effects of an
entity's accounting policy with respect to stock-based employee compensation on
reported net income (loss) and earnings per share in annual and interim
financial statements.
The Company accounts for stock-based employee compensation using the
intrinsic value method under the recognition and measurement principles of APB
Opinion No. 25, "Accounting for Stock Issued to Employees" and related
interpretations. The fair value of the Company's stock options was estimated
using the Black-Scholes option-pricing model. This model was developed for use
in estimated fair value of traded options that have no vesting restrictions and
are fully transferable. This model requires the input of highly subjective
assumptions including the expected stock price volatility. Because the Company's
stock options have characteristics significantly different from those of traded
options, and because changes in the subjective input assumptions can materially
affect the fair value estimates, in management's opinion, the Black-Scholes
model does not necessarily provide a reliable single measure of the fair value
of its stock options.
The fair value of the Company's stock options was estimated using the
following weighted-average assumptions:
Stock Options
Year Ended September 30,
------------------------------------
2004 2003 2002
---- ---- ----
Expected life (in years) 3.31 3.36 3.69
Volatility 75% 90% 93%
Risk-free interest rate 2.18% 2.36% 3.99%
Dividend yield 0% 0% 0%
Employee Stock Purchase Plan
Year Ended September 30,
------------------------------------
2004 2003 2002
---- ---- ----
Expected life (in years) 1.00 1.00 1.00
Volatility 55% 77% 93%
Risk-free interest rate 1.02% 1.58% 2.95%
Dividend yield 0% 0% 0%
Under SFAS 123, the weighted-average estimated fair value of options granted
during fiscal 2004, 2003 and 2002 was $6.70, $7.36 and $14.21 per share,
respectively.
Proforma information
The Company complies with the pro forma disclosure requirements of SFAS
123 as amended by SFAS 148. The following table illustrates the effect on net
income and earnings per share on a pro forma basis as if the Company had applied
the fair value recognition provisions of SFAS 123 to stock-based employee
compensation:
Page 43
Year Ended September 30,
------------------------------------
2004 2003 2002
---- ---- ----
(in thousands, except per share amounts)
Net income/(loss)
As reported............................... $10,340 $ 4,870 $(10,551)
Add: Stock-based employee compensation...
expense included in net income/(loss).... 214 171 109
Deduct: Stock-based employee compensation.
expense determined under the fair value...
based method for all awards, net of.......
related tax effects....................... $(7,027) $(10,751) $(10,075)
Pro forma net income/(loss).................. $ 3,527 $ (5,710) $(20,517)
Earnings/(loss) per share:
Basic - as reported........................ $ 0.41 $ 0.20 $ (0.46)
Basic - pro forma.......................... $ 0.14 $ (0.23) $ (0.89)
Diluted - as reported...................... $ 0.40 $ 0.20 $ (0.46)
Diluted - pro forma........................ $ 0.14 $ (0.23) $ (0.89)
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.
CONSOLIDATION OF VARIABLE INTEREST ENTITIES
In January 2003, the FASB issued FASB Interpretation No. 46 ("FIN 46"),
"Consolidation of Variable Interest Entities". FIN 46 requires that if an entity
is the primary beneficiary of a variable interest entity, the assets,
liabilities, and results of operations of the variable interest entity should be
included in the consolidated financial statements of the entity. In December
2003, the FASB issued a revision to FIN 46, FIN 46 (R), to address certain
implementation issues. FIN 46(R) clarifies some of the provisions of FIN 46 and
exempts certain entities from its requirements.
FIN 46 (R) requires the application of either FIN 46 or FIN 46 (R) 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 46 (R) is adopted
early. FIN 46 (R)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, and thus the
required adoption of FIN 46R for all SPE's created prior to February 1, 2003 had
no impact on the Company. The Company has not created any entities subsequent to
January 31, 2003 that requires accounting under FIN 46. The Company believes
that it does not have variable interest entities as defined in FIN 46 (R). The
adoption of FIN 46(R) has no impact on the Company's financial statements.
RECENT ACCOUNTING PRONOUNCEMENTS
In October 2004, the American Jobs Creation Act of 2004 ("AJCA") was signed
into law. The AJCA contains a series of provisions several of which are
pertinent to the Company.
The AJCA creates a temporary incentive for U.S. multinational corporations
to repatriate accumulated income abroad by providing an 85% dividends received
deduction for certain dividends from controlled foreign corporations. It has
been the Company's practice to permanently reinvest all foreign earnings into
its foreign operations and the Company currently still plans to continue to
reinvest its foreign
Page 44
earnings permanently into its foreign operations. Should the Company determine
that it plans to repatriate any of its foreign earnings, the Company will be
required to establish a deferred tax liability on such earnings.
The AJCA eliminates the extraterritorial income exclusion for transactions
occurring after December 31, 2004. However, the AJCA provides transitional
relief, allowing an exclusion of 80% (of the exclusion previously allowable) for
transactions occurring in calendar 2005 and 60% for transactions occurring in
calendar 2006.
The AJCA also provides U.S. corporations with an income tax deduction equal
to a stipulated percentage of qualified income from domestic production
activities ("qualified activities"). The deduction, which cannot exceed 50% of
annual wages paid, is phased in as follows: 3% of qualified activities of the
Company's fiscal years 2006 and 2007, 6% in fiscal years 2008 through 2010, and
9% in fiscal year 2011 and thereafter. The Company believes that it qualifies
for the deduction. In November 2004, the Financial Accounting Standards Board
issued a staff position (FAS 109-a) indicating that the domestic manufacturing
deduction should be accounted for as a special deduction. As such, the tax
benefit of the deduction will be accounted for in the periods in which the
qualifying activities occur, i.e., the years in which the deductions are taken
on the Company's tax returns. This benefit will be included in the Company's
annual effective tax rate, but will not result in a re-measurement of deferred
income taxes.
The AJCA may have an impact on the Company's tax rate for 2005 and future
years. The outcome at this time is not yet known.
B. INCOME TAXES:
The components of income/(loss) before income taxes and the
provision/(benefit) for income taxes consist of the following:
Year Ended September 30,
------------------------------------
2004 2003 2002
-------- -------- -------
(in thousands)
Income/(loss) before income taxes:
United States ............................... $ 11,707 $ 4,867 $(17,683)
Foreign ..................................... 4,200 2,847 3,244
-------- -------- --------
$ 15,907 $ 7,714 $(14,439)
======== ======== ========
The provision/(benefit) for income taxes consists of:
Current taxes:
Federal ..................................... 1,748 547 (3,151)
State ....................................... 195 196 131
Foreign ..................................... 1,072 1,298 1,297
Foreign withholding taxes ................... 357 591 349
-------- -------- --------
$ 3,372 $ 2,632 $ (1,374)
======== ======== ========
Deferred taxes:
Federal .................................... 1,567 561 (2,141)
State ...................................... 359 20 (422)
Foreign .................................... 269 (369) 49
-------- -------- --------
2,195 212 (2,514)
-------- -------- --------
Total ................................ $ 5,567 $ 2,844 $ (3,888)
======== ======== ========
Page 45
The reconciliation of the Company's income tax provision to the statutory
federal tax rate is as follows:
Year Ended September 30,
------------------------------
2004 2003 2002
------- ------- --------
Statutory federal tax rate................ 35.0% 35.0% (35.0)%
Export sales benefit...................... (1.1) (.70) --
State taxes, net of federal tax benefit... 2.6 1.4 0.3
R&D credit................................ (2.9) (5.4) (0.7)
Exempt interest........................... (0.5) (0.1) --
Previously unbenefited losses............. (1.2) (6.6) --
Meals and entertainment................... 0.6 1.5 0.8
Foreign taxes............................. 2.5 7.8 1.6
Goodwill and intangibles amortization..... -- 4.5 6.4
Other..................................... -- (0.5) (0.3)
------- ------- --------
Effective tax rate........................ 35.0% 36.9% (26.9)%
======= ======= ========
The components of the deferred tax assets and liabilities are as follows:
As of September 30,
----------------------
2004 2003
------- -------
(in thousands)
Deferred tax assets:
Deferred revenue.................... $ 289 $ 687
Deferred rent....................... 620 14
Allowance for doubtful accounts..... 491 702
Accrued vacation.................... 322 323
Depreciation........................ 510 1,374
Package design...................... 58 54
Amortized intangibles............... 2,586 2,284
Other reserves...................... 368 244
Goodwill............................ 3,169 4,914
Translation gain/loss............... 538 431
Net operating loss carryforward..... 868 1,794
Page 46
Foreign tax credit carryforward..... -- 132
Research and development credit..... 509 800
Valuation allowance................. (868) (1,644)
------- -------
$ 9,460 $12,109
------- -------
Deferred tax liabilities:
Amortized software.................... $ 329 $ 600
Other................................. 50 --
------- -------
$ 379 $ 600
------- -------
Net deferred taxes......................... $ 9,081 $11,509
======= =======
At September 30, 2004, the Company had total domestic net operating loss
carryforwards of approximately $1.9 million attributable to the acquisition of
Applied Image Technology, Inc. ("AIT"). In accordance with the provisions of
Internal Revenue Code Section 382, the Company's utilization of AIT's net
operating loss carryforward is estimated to be limited to approximately $600
thousand per year. The domestic net operating loss carryforwards will generally
expire in varying amounts from 2008 through 2018. At September 30, 2004, the
Company had state apportioned net operating loss carryforwards of approximately
$3.1 million expiring in various years from 2005 through 2022, which are also
subject to statutory limitations on their utilization.
The Company continually assesses the realizability of its deferred tax
asset. The deferred tax asset may be reduced by a valuation allowance if, based
on the weight of available evidence, it is more likely than not that some
portion or all of the recorded deferred tax assets will not be realized in
future periods. All available evidence, both positive and negative, is
considered in the determination of recording a valuation allowance. The Company
believes future taxable income will be sufficient to realize the deferred tax
benefit of the net deferred tax assets. In the event that it is determined that
our financial projections change and it becomes more likely than not that we
cannot realize the net deferred tax assets, an adjustment to the net deferred
tax assets will be made and will result in a charge to income in the period such
a determination is made. The net deferred tax asset amount as of September 30,
2004 is $9.1 million.
The Company has established a valuation allowance with respect to various
net operating losses assumed from acquisitions. The valuation
allowance was based upon expected earnings within individual tax jurisdictions
and statutory limitations imposed by tax jurisdictions, which will more likely
than not reduce our ability to realize the net operating loss carryforwards. The
reduction in the net valuation allowance in fiscal 2004 from fiscal 2003 is
primarily attributable to the utilization of previously unbenefited losses.
C. ACQUISITIONS
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 paid 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 completion of knowledge transfer
milestones, however, neither payment is contingent on any employment of the
selling principals with the Company. The Company allocated the purchase price as
such: $910 thousand to acquired technology, $560 thousand to goodwill and $370
thousand to deferred tax liability. The deferred tax liability represents the
cumulative tax effect of the book to tax difference in basis for the acquired
technology. The acquired technology will be amortized over five years.
On June 14, 2002, the Company completed the acquisition of MainControl, Inc.
("MainControl"), a provider of IT asset management solutions. The purpose of the
Page 47
acquisition was to expand the Company's product base and enable us to offer
products that manage a broader range of an enterprise's strategic assets. Under
the terms of the acquisition agreement, the Company acquired all outstanding
equity of MainControl for a combination of MRO common stock and cash. The
Company paid $3.2 million in cash, of which $420 thousand was contingent on
certain revenue thresholds, and issued 1,096,296 shares valued at $13.80 per
share. The share price was calculated by averaging the closing price of a share
of MRO Software's stock for five days before and five days after the
announcement date of the merger, as reported by the NASDAQ National Market. The
total purchase price, including transaction expenses of $784 thousand, was $18.6
million. The Company allocated the purchase price as such: $3.7 million to
current and other assets, $3.1 million to acquired technology, $1.2 million to
customer contracts, $100 thousand to backlog, $200 thousand to software
documentation, $700 thousand to a non-compete agreement, $15.8 million to
goodwill, and $6.2 million to current liabilities. The purchase price allocation
was based on then-current intentions for future use of the acquired assets,
estimate of future projected cash flows, analysis of historical financial
results and review of customer contracts. Acquired technology will be amortized
over six and one-half years, customer contracts will be amortized over four
years, backlog will be amortized over one year, software documentation will be
amortized over three years and the non-compete agreement will be amortized over
two years.
D. SALE OF ASSETS
On January 17, 2003, the Company sold the industrial data normalization
services operations to International Materials Solutions, Inc. (the "Buyer").
The sale included software and technology used in such operations, contracts
with customers, suppliers and vendors, and trademarks associated with such
operations. Additionally, the workforce was included as part of the sale. The
Company retained comprehensive, non-exclusive rights to the software and
technology used in the business, which has also been embedded in the Company's
MAXIMO(R) and OCS offerings. As consideration for the assets, the Buyer assumed
all liabilities arising in connection with the assets and the associated
business operations from and after January 1, 2003 and delivered two promissory
notes in the face amount of $1 million each, together with a stock purchase
warrant representing the right to purchase five (5%) percent of the Buyer's
common stock. One promissory note was a term note payable over a period of three
years commencing July 1, 2003, and the other promissory note was a balloon note
payable in full on June 30, 2006. The gain recorded on the sale of these assets
was $407 thousand and was included in other income in fiscal 2003. For purposes
of calculating the gain on the sale, the $1 million promissory balloon note
receivable was not valued due to uncertainty of collection and no value was
attributed to the stock purchase warrants due to the limited operating history
of the buyer.
On July 29, 2004, the Company and the Buyer entered into a termination
agreement where the Company consented to the sale of the Buyer's business to an
unrelated party and settled the outstanding obligation between the Company and
the Buyer. In exchange for $1.3 million, received September 2004, the Company
released the Buyer from all obligations due pursuant to the original January 17,
2003 sale. The gain recorded as a result of the termination agreement was $452
thousand and is included in other income in fiscal 2004. The gain represents the
difference between the $1.3 million received by the Company and the carrying
amount of the term note.
E. NET INCOME PER SHARE:
Basic and diluted income/(loss) per share are calculated as follows:
Year Ended September 30,
------------------------------
2004 2003 2002
---- ---- ----
(in thousands, except per share amounts)
Net income/(loss) ........................... $10,340 $ 4,870 $(10,551)
Denominator:
Weighted average common shares
outstanding - basic ....................... 24,811 24,429 23,171
Page 48
Effect of dilutive securities................ 479 224 --
(primarily stock options)
------- ------- --------
Weighted average common shares
outstanding - diluted...................... 25,290 24,653 23,171
======= ======= ========
Net income/(loss) per share - basic $ 0.41 $ 0.20 $ (0.46)
Net income/(loss) per share - diluted $ 0.40 $ 0.20 $ (0.46)
Options to purchase shares of the Company's common stock of 2,147,000,
2,863,000 and 1,847,000 for fiscal 2004, 2003 and 2002, respectively, were
outstanding but were not included in the computation of diluted net
income/(loss) per share because the exercise price of the options was greater
than the weighted average market price of the common stock during the period.
Common stock equivalents of 479,000 and 224,000 shares were included in the
computation of diluted net income per share for fiscal 2004 and 2003,
respectively. Options to purchase shares of the Company's common stock of
717,000 for fiscal 2002 were outstanding but were excluded from the computations
of diluted net loss per share as the effect was anti-dilutive due to the
Company's net loss.
F. MARKETABLE SECURITIES:
The Company classifies its marketable securities as "available for sale" and
carries them at aggregate fair value. Unrealized gains and losses are included
as a component of stockholders' equity, net of tax effect. Realized gains and
losses are determined based on the specific identified cost of the securities.
Dividend and interest income, including amortization of the premium and discount
arising at acquisition, are included in other income. The pre-tax unrealized
holding gains and (losses) for the year ended September 30, 2004 were $10
thousand and ($286) thousand, respectively.
The following table summarizes the Company's investments:
Gross Gross
As of September 30, 2004 Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
(in thousands) ---- ----- ------ -----
U.S. Government Securities $12,288 $(219) $12,069
Corporate Bonds 4,107 $10 (62) 4,055
Tax Exempt Municipal Securities 33,925 33,925
Certificates of Deposit 1,380 (5) 1,375
Corporate Securities 1 1
------- --- ----- -------
Total $51,701 $10 $(286) $51,425
------- --- ----- -------
Reported As:
Current Assets - Marketable Securities 36,152
Marketable Securities 15,273
-------
Total $51,425
=======
Gross Gross
As of September 30, 2003 Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
(in thousands) ---- ----- ------ -----
U.S. Government Securities $15,297 $(75) $15,222
Corporate Bonds 4,207 (68) 4,139
Tax Exempt Municipal Securities 75 75
Certificates of Deposit 1,480 (6) 1,474
Corporate Securities 1 1
------- ----- -------
Total $21,060 $(149) $20,911
------- ----- -------
Reported As:
Current Assets - Marketable Securities 1,177
Marketable Securities 19,734
-------
Total $20,911
=======
Page 49
The following table provides a breakdown of the investments with unrealized
losses at September 30, 2004:
Less 12 Months
Than 12 Months or Greater Total
-------------- ---------- -----
Gross Gross Gross
Fair Unrealized Fair Unrealized Fair Unrealized
Value Losses Value Losses Value Losses
----- ------ ----- ------ ----- ------
(in thousands)
U.S. Government
Securities $12,069 $(219) $12,069 $(219)
Corporate Bonds 1,980 (62) 1,980 (62)
Certificates
Of Deposit 375 (5) 375 (5)
------- ----- ------- -----
Total $14,424 $(286) $14,424 $(286)
------- ----- ------- -----
The gross unrealized losses related to the U.S. government securities and the
certificates of deposit are due to changes in interest rates. The gross
unrealized losses related to the corporate bonds are due to changes in market
prices. The Company has the intent and the ability to hold these investments for
a period of time sufficient to allow for anticipated recovery in market value.
Substantially all of the Company's investments are rated investment grade or
better. As a result of these factors, the Company has determined that the gross
unrealized losses on its investment securities at September 30, 2004 are
temporary in nature.
The following table summarizes the maturities of the Company's investments
at September 30, 2004:
(in thousands)
Amortized Fair
Cost Value
---- -----
Less than one year $36,149 $36,151
Due in 1-2 years 11,508 11,334
Due in 2-5 years 4,044 3,940
------- -------
Total $51,701 $51,425
======= =======
G. PROPERTY AND EQUIPMENT:
Property and equipment are stated at cost and consist of the following:
As of September 30,
-----------------------
2004 2003
-------- --------
(in thousands)
Computer equipment .................................... $ 7,271 $ 6,724
Purchased and internal use software .................. 16,261 15,717
Vehicles .............................................. 16 16
Furniture and fixtures ................................ 6,178 6,504
Leasehold improvements ................................ 6,229 4,294
-------- --------
35,955 33,255
Less accumulated depreciation and amortization ........ (28,728) (25,016)
-------- --------
$ 7,227 $ 8,239
======== ========
Total depreciation and amortization expense was $4.9 million, $4.5 million,
and $5.2 million for fiscal 2004, 2003 and 2002, respectively. Included in
depreciation and amortization expense is amortization expense for purchased and
internal use software of $2.9 million, $2.6 million, and $2.9 million for fiscal
2004, 2003 and 2002, respectively.
Page 50
H. GOODWILL AND OTHER INTANGIBLE ASSETS:
In accordance with SFAS No. 141, "Business Combinations", the Company
accounts for acquisitions under the purchase method of Accounting. Goodwill is
tested annually for impairment. In testing for potential impairment all
remaining goodwill has been assigned to one reporting unit and reviewed for
impairment at the entity level. The impairment analysis performed at September
30, 2004 concluded that no impairment of goodwill occurred.
The following is a reconciliation of reported net loss to adjusted net loss
and reported net loss per share to adjusted net loss per share had SFAS No. 142
been in effect for the twelve months ended September 30, 2002.
For the twelve
months ended
September 30, 2002
-------------------
(in thousands, except per share amounts)
Net loss, as reported $(10,551)
Add back: impact of goodwill amortization, net
of tax benefit 8,174
Adjusted net loss $ (2,377)
Net loss per share, basic and diluted, as
reported $ (0.46)
Add back: impact of goodwill amortization, net
of taxes $ (0.36)
Adjusted net loss per share, basic and diluted $ (0.10)
Changes in the amount of goodwill for the years ended September 30, 2004 and
2003 are as follows:
(in thousands)
Balance as of September 30, 2002 $46,370
Goodwill disposed of related to sale of
services operations (See Footnote D) (160)
-------
Balance as of September 30, 2003 46,210
Goodwill acquired during the period 558
(See Footnote C) -------
Balance as of September 30, 2004 $46,768
=======
Intangible assets consist of the following:
As of September 30,
------------------------
2004 2003
------- -------
(in thousands)
Goodwill, net...................................... 46,768 46,210
Acquired technology ............................... 16,654 15,744
Accumulated amortization .......................... (11,673) (9,269)
------- -------
Sub-total acquired technology...................... 4,981 6,475
------- -------
Other intangibles.................................. 2,711 3,009
Accumulated amortization .......................... (2,151) (1,784)
------- -------
Sub-total other intangibles ....................... 560 1,225
------- -------
Total intangible assets, net ..................... $52,309 $53,910
======= =======
Page 51
Other intangibles consist of customer contracts, backlog, customer lists and
non-compete agreements.
Amortization expense of intangible assets was $3.1 million, $4.3 million and
$15.9 million for fiscal 2004, 2003 and 2002, respectively. The 2002 amount
includes amortization of goodwill.
As of September 30, 2004, remaining amortization expense on existing
intangibles for the next five years is as follows:
(in thousands)
2005 $2,422
2006 1,565
2007 659
2008 659
2009 236
------
Total $5,541
======
I. ACCRUED COMPENSATION:
A summary of accrued compensation consists of the following:
As of September 30,
-----------------------
2004 2003
-------- --------
(in thousands)
Accrued compensation and 401(k) contribution....... $ 3,195 $ 2,713
Accrued sales commissions ......................... 4,582 3,462
Accrued vacation pay .............................. 2,365 2,182
-------- --------
$ 10,142 $ 8,357
======== ========
J. COMMITMENTS AND CONTINGENCIES:
The Company leases its office facilities under operating lease agreements,
which expire at various dates through June 30, 2019. The Company pays all
insurance, utilities, and pro rated portions of any increase in certain
operating expenses and real estate taxes. The aggregated rent expense under
these leases was $6.9 million, $6.2 million, and $6.5 million for fiscal 2004,
2003 and 2002, respectively.
The operating leases provide for minimum aggregate future rentals as of
September 30, 2004 as follows:
(in thousands)
2005----------------------------------------------------------------- $ 4,130
2006----------------------------------------------------------------- 3,557
2007----------------------------------------------------------------- 3,255
2008----------------------------------------------------------------- 3,055
2009 and thereafter-------------------------------------------------- 20,653
-------
$34,650
=======
The Company is not a party to any legal proceedings the outcome of which, in
the opinion of management, would have a material adverse effect on the Company's
results of operations or financial condition. The Company has other long-term
non-cancelable commitments with vendors totaling $5.0 million as of September
30, 2004.
Page 52
K. EMPLOYEE BENEFITS:
CASH OR DEFERRED PLAN
The MRO Software, Inc. Cash or Deferred Plan (the "Plan") is a defined
contribution plan available to substantially all of MROI's domestic employees.
The Plan was established in 1988 under Section 401(a) of the Internal Revenue
Code. Under the Plan, employees may make voluntary contributions based on a
percentage of their pretax earnings.
Effective January 1, 1993, the Plan was amended to provide for both a
guaranteed and a discretionary contribution made by MROI. Amounts charged to
expense for this Plan in fiscal 2004, 2003, and 2002 were $563 thousand, $359
thousand, and $530 thousand, respectively. The Company also makes contributions
to pension plans for our international subsidiaries. Our practice is to fund the
various plans in amounts at least sufficient to meet the minimum requirements of
local laws and regulations or make a contribution equal to the contribution made
to U.S. domestic employees. Amounts charged to expense for our international
employees for fiscal 2004, 2003, and 2002 were $1.2 million, $998 thousand, and
$831 thousand respectively.
1994 INCENTIVE AND NONQUALIFIED STOCK OPTION PLANS
On March 10, 1994, the Board of Directors of the Company adopted the 1994
Incentive and Nonqualified Stock Option Plan (the "1994 Option Plan") that
provided for the grant of nonqualified and incentive stock options to directors
and employees. On January 25, 1996, the Board of Directors of the Company voted
to increase the number of shares of Common Stock that may be issued from
1,800,000 to 3,600,000.
The exercise price of incentive options must be at least equal to the fair
market value on the date of grant. The exercise price of nonqualified options
must not be less than 85% of the fair market value on the date of grant. Options
generally vest in equal installments over four years.
On March 4, 1999, the Board of Directors of the Company elected to terminate
the 1994 Option Plan upon the adoption of the 1999 Equity Incentive Plan (the
"1999 Plan"). The stockholders of the Company, on March 24, 1999, approved
amendments to the vesting and transferability of options granted to outside
directors under the 1994 Option Plan.
AMENDED AND RESTATED 1999 EQUITY INCENTIVE PLAN
On March 24, 1999, the Company's stockholders and the Board of Directors of
the Company adopted the 1999 Equity Incentive Plan (the "1999 Plan") that
provided for the grant of incentive stock options, non statutory stock options,
stock bonuses, rights to purchase restricted stock, stock appreciation rights
and other awards based upon the Company's common stock. Up to 1,850,000 shares
of Common Stock (subject to adjustment upon certain changes in the
capitalization of the Company) may be issued pursuant to grants awarded under
the 1999 Plan. The 1999 Plan was amended and restated on April 25, 2000 to
adjust the amount of options granted to non-employee directors of the Company.
On November 15, 2000, the Board of Directors of the Company voted to
increase the number of shares of Common Stock that may be issued from 1,850,000
to 4,050,000. This increase was approved by the Company's stockholders on March
6, 2001.
On January 16, 2002 the Board of Directors voted to change the manner in
which stock awards are granted to non-employee directors. The provision for
automatic grants of initial options and additional options was eliminated.
Non-employee directors are now eligible to receive stock awards in the same
manner and to the same degree as all other eligible persons, as determined by
the Board of Directors on a discretionary basis. These changes were approved by
the Company's Stockholders on March 6, 2002.
On January 23, 2004, the Board of Directors of the Company voted to increase
the number of shares of Common Stock that may be issued from 4,050,000 to
5,250,000. This increase was approved by the Company's stockholders on March 9,
2004.
Page 53
The exercise price of incentive options must be at least equal to the fair
market value on the date of grant. The exercise price of nonqualified options
must not be less than 85% of the fair market value on the date of grant. Options
granted prior to March 2001 generally vest over four years in four equal annual
installments. Options granted from and after March 2001 generally vest over four
years, with 25% vesting one year from the date of grant and 75% vesting in equal
monthly installments over the subsequent three years. Awards of options under
the 1999 Plan may be made until March 24, 2009. No incentive options may extend
for more than ten years from the date of grant.
Stock option activity is summarized as follows:
Weighted
No. of Shares Average Price
------------- -------------
Outstanding shares at September 30, 2001 4,144,977 $18.79
2002
Granted 138,500 $21.60
Canceled (175,642) $22.22
Exercised (531,736) $10.27
---------
Outstanding at September 30, 2002 3,576,099 $19.99
Options exercisable at September 30, 2002 1,888,906 $19.52
2003
Granted 1,073,500 $11.89
Canceled (261,528) $19.74
Exercised (84,794) $ 8.29
---------
Outstanding at September 30, 2003 4,303,277 $18.22
Options exercisable at September 30, 2003 2,610,088 $20.06
2004
Granted 1,011,562 $11.93
Canceled (65,384) $20.34
Exercised (191,967) $7.95
---------
Outstanding at September 30, 2004 5,057,488 $17.32
Options exercisable at September 30, 2004 3,362,666 $20.12
The following table summarizes information about stock options outstanding
at September 30, 2004:
Options Outstanding Options Exercisable
- ---------------------------------------------------------------- ------------------------------
Number Weighted-Avg
Range of Outstanding Remaining Number
Exercise Prices As of Contractual Weighted-Avg Exercisable Weighted-Avg
9/30/04 Life (years) Exercise Price As of 9/30/04 Exercise Price
- --------------- ------- ------------ -------------- ------------- --------------
$7.53-11.25 1,300,420 5.2 $ 8.98 1,185,825 $ 9.00
$11.30-16.06 2,369,943 8.1 $12.23 795,313 $12.76
$17.00-25.47 677,625 6.0 $23.66 672,362 $23.67
$28.40-42.50 530,000 5.3 $37.83 529,666 $37.84
$54.50-59.13 168,000 5.3 $58.90 168,000 $58.90
$85.00-85.00 11,500 5.4 $85.00 11,500 $85.00
- ----- ----- --------- --- ------ --------- ------
5,057,488 3,362,666
EMPLOYEE STOCK PURCHASE PLAN
On March 10, 1994, the Board of Directors of the Company adopted the 1994
Employee Stock Purchase Plan that provides for a maximum issuance of 450,000
shares of Common Stock for purchase by eligible employees at 85% of the lower of
the fair market value of the Company's Common Stock on either the first or last
day of the semi-annual offering period. No compensation expense is recorded in
connection with the plan.
Page 54
On January 16, 2002, the Board of Directors adopted the 2002 Employee Stock
Purchase Plan authorizing the issuance of up to 750,000 shares of the Company's
Common Stock. Eligible employees may purchase Common Stock of the Company
through payroll deductions. The purchase price is 85% of the fair market value
based on the lowest price on (a) the semi-annual offering commencement date (b)
the semi-annual offering termination date or (c) the first of each month in a
semi-annual offering period. The effective date of the 2002 Employee Stock
Purchase Plan is June 1, 2002. The Board of Directors also voted to terminate
the Company's 1994 Employee Stock Purchase Plan, effective May 30, 2002.
During fiscal year ended September 30, 2004, employees purchased 99,831
shares at a price of $7.58 and 90,620 shares at a price of $9.95 for the
offering periods ended November 30, 2003 and May 31, 2004, respectively. Total
shares purchased in 2003 and 2002 were 199,633 and 121,126, respectively.
L. STOCKHOLDERS' EQUITY:
DEFERRED COMPENSATION
Unvested stock options assumed in connection with acquisitions are recorded
as stock-based compensation as a reduction of stockholders' equity. The amount
recorded is equal to the difference between the exercise price of the unvested
options and the fair market value of our stock as of the closing date of the
acquisition. Restricted stock granted to employees that is subject to vesting,
is also recorded as deferred stock-based compensation equal to the difference
between the purchase price and the fair market value of the stock at the date of
grant. Deferred stock-based compensation is amortized on a straight-line basis
over the vesting term of these options and stock awards.
PREFERRED STOCK
On March 11, 1994, the issuance of up to 1,000,000 shares of preferred
stock, $0.01 par value was authorized by the Stockholders of the Company. The
Board of Directors has the authority to issue the preferred stock in one or more
series and to fix rights, preferences, privileges and restrictions, including
dividends, and the number of shares constituting any series and the designation
of such series.
In January 1998, the Board of Directors of the Company adopted a stockholder
rights plan by declaring a dividend distribution of one preferred stock purchase
right (one "Right") on each share of the Company's Common Stock outstanding on
January 27, 1998 or, in certain circumstances, issued thereafter. Initially, the
Rights are not exercisable, are not represented by separate Right certificates
and do not trade separately from the Company's Common Stock. Ten days after a
tender offer or acquisition of 15% or more of the Company's common stock, each
right may be exercised for $140 ("Exercise Price") to purchase one one
thousandth of one share of the Company's Series A Junior Participating Preferred
Stock. Each one one-thousandth of a share of Series A Junior Participating
Preferred Stock will generally be afforded economic rights similar to one share
of the Company's common stock. In addition after such rights are triggered, each
Right entitles the holder to purchase common stock of the Company with a fair
value of twice the Exercise Price or, in certain circumstances, securities of
the acquiring company for the Exercise price. Each Right expires in January 2008
and, during specified periods, the Company may redeem or exchange each Right for
$.01 or one share of common stock. The Rights Agreement has been filed by the
Company with the Securities and Exchange Commission as an exhibit to a
Registration Statement on Form 8-A dated February 2, 1998. Stockholders are
urged to review the Rights Agreement for a complete understanding of the Rights
Plan. The Rights Plan, while providing the Board of Directors with flexibility
in connection with possible acquisitions and deterring unfair or coercive
takeover tactics, could have the effect of making it more difficult for a third
party to acquire, or of discouraging a third party from acquiring, beneficial
ownership of 15% or more of the outstanding shares of the Company's Common
Stock.
COMMON STOCK
In December 2000, the Company issued a stock purchase warrant to i2
Technologies, Inc. ("i2") under which i2 had the right to purchase up to 500,000
shares of the Company's common stock at an exercise price of $10.25 per share.
The Company valued the warrant at $3.3 million using the Black-Scholes valuation
model, with the following assumptions: (1) risk-free interest rate of 4.8%; (2)
life of 2.5 years;
Page 55
and (3) volatility of 105%. The warrant was immediately exercisable and was
recorded as a one-time non-cash sales and marketing expense in the three months
ended December 31, 2000. On March 14, 2002, i2 exercised the entire warrant on a
"net exercise" or "cashless" basis, pursuant to which the exercise price was
paid by reducing the number of shares issued, and as a result 268,823 shares
were issued to i2 upon exercise of the warrant and there was no cash received by
the Company.
On September 28, 2000, the Company executed a restricted stock agreement
with one employee. In exchange for continued employment, the employee received
15,000 shares vesting equally in amounts of 5,000 on each September 30, 2001,
2002, and 2003. In May 2001, the vesting period of the 15,000 shares was
amended. Under the amended agreement, 5,000 shares vested on October 1, 2001,
and the remaining 10,000 shares vested on January 2, 2002 and the restricted
stock agreement was no longer conditioned on employment. The shares were
recorded at fair market value on the date of issuance as deferred compensation
and the related amount was recorded as sales and marketing expense during fiscal
2001, as there is no continuing obligation of the employee beyond September 30,
2001
On June 18, 2001, each non-employee Director received an outright grant of
6,250 shares of restricted stock vesting on a quarterly basis over three years
in twelve equal installments vesting on the 15th day of the second month of each
quarter, subject to acceleration under certain circumstances. The shares were
recorded at fair market value ($12.65 per share) on the date of issuance as
deferred compensation and the related amount is being recorded as general and
administrative expenses over the vesting period.
On January 27, 2003, each non-employee director received an outright grant
of 6,250 shares of restricted stock vesting on a quarterly basis over three
years in twelve equal installments vesting on the 15th day of the second month
of each quarter, subject to acceleration under certain circumstances. The shares
were recorded at fair market value ($11.73 per share) on the date of issuance as
deferred compensation and the related amount is being recorded as general and
administrative expenses over the vesting period.
On March 15, 2004, each non-employee director and the Chairman of the Board
received an outright grant of 4,800 shares of restricted stock vesting on a
quarterly basis over three years in twelve equal installments on the 15th day of
the second month of each quarter, subject to acceleration under certain
circumstances. The shares were recorded at fair market value ($11.89 per share)
on the date of issuance as deferred compensation and the value of the vested
shares is being recorded as general and administrative expense.
M. GUARANTOR ARRANGEMENTS
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
Page 56
warranty obligations is minimal. Accordingly, we have no liabilities recorded
for these warranty obligations as of September 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 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 September 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 September 30, 2004.
N. 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 EAM and MAXIMO ITAM. The Company does not
allocate expenses to these product groups, and all operating results are
assessed on an aggregate basis to make decisions about the allocation of
resources.
The Company manages its business in the following geographic areas: United
States, Other Americas (Canada and Latin America), Europe/Middle East and
Africa, and Asia Pacific.
A summary of the Company's revenues by geographical area is as follows:
Year Ended September 30,
------------------------
2004 2003 2002
-------- -------- ---------
(in thousands)
Revenues:
United States ......................... $105,815 $104,735 $ 106,770
Other Americas ........................ 9,907 10,654 7,558
Intercompany revenues ................. 13,912 11,536 9,940
-------- -------- ---------
Subtotal ............. $129,634 $126,925 $ 124,268
-------- -------- ---------
Europe/Middle East and Africa ......... 57,863 48,148 45,905
Page 57
Asia/Pacific .......................... 12,104 13,340 11,648
Intercompany revenues ................. (13,912) (11,536) (9,940)
-------- -------- ---------
Total revenues ....... $185,689 $176,877 $ 171,881
-------- -------- ---------
Income/(loss)from operations:
United States ......................... $385 $ (5,140) $ (21,444)
Other Americas ........................ (3,085) (2,761) (6,901)
Europe/Middle East and Africa ......... 17,394 14,846 13,855
Asia/Pacific .......................... (51) (1,203) (829)
-------- -------- ---------
$ 14,643 $ 5,742 $ (15,319)
-------- -------- ---------
As of September 30,
-----------------------
2004 2003
-------- -------
(in thousands)
Long-lived assets:
United States ............................. $ 57,764 $60,157
Other Americas ............................ 1,276 1,535
Europe/Middle East and Africa ............. 3,885 3,773
Asia/Pacific .............................. 600 704
-------- -------
$ 63,525 $66,169
-------- -------
The Company has subsidiaries in foreign countries, which sell the Company's
products and services in their respective geographic areas. Intercompany
revenues reflect our transfer pricing policies and primarily represent shipments
of software to international subsidiaries. Intercompany revenues are eliminated
from consolidated revenues. Income (loss) from operations excludes interest
income, interest expense, provision for income taxes and transaction gains and
losses.
No customer accounted for more than 10% of revenue in fiscal 2004, 2003 or
2002.
O. SUPPLEMENTAL CASH FLOW DISCLOSURES:
Cash paid for interest and taxes was as follows:
Year Ended September 30,
------------------------
2004 2003 2002
---- ---- ----
(in thousands)
Interest, net................................. $ 173 $ 39 $ 45
Income taxes.................................. 3,988 1,550 2,490
Acquisitions of businesses were as follows:
Year Ended September 30,
------------------------
2004 2003 2002
---- ---- ----
(in thousands)
Fair value of assets acquired.............. $1,469 $ -- $23,573
Fair value of liabilities assumed.......... (864) -- (5,630)
Net cash paid for acquisitions............. $ 605 $ -- $ 1,293
Page 58
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
COL. A COL. B COL. C COL. D COL.E
- ------ ------ ------ ------ -----
ADDITIONS
------------------
BALANCE AT CHARGED TO CHARGED TO WRITE-OFFS BALANCE AT
BEGINNING COSTS AND OTHER AND REVERSAL END OF
OF PERIOD EXPENSES ACCOUNTS OF RESERVES PERIOD
------------ ---------- ---------- ------------- -----------
YEAR ENDED SEP.30, 2004
Allowance for doubtful accounts $2,741,463 $118,376 --------- $535,998 $2,323,841
YEAR ENDED SEP.30, 2003
Allowance for doubtful accounts $3,420,799 $118,558 --------- $797,894 $2,741,463
YEAR ENDED SEP.30, 2002
Allowance for doubtful accounts $3,848,916 $1,753,282 --------- $2,181,399 $3,420,799
Page 59
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable.
ITEM 9A. CONTROLS AND PROCEDURES
MRO Software carries out periodic evaluations, under the supervision of the
Company's management, including our Chief Executive Officer and Chief Financial
Officer, of the effectiveness of the design and operation of our disclosure
controls and procedures pursuant to Exchange Act Rule 13a-15. Based upon such
evaluations, the Chief Executive Officer and the Chief Financial Officer
concluded that, as of September 30, 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.
While 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 is currently undergoing a comprehensive effort
to comply with Section 404 of the Sarbanes-Oxley Act of 2002. Compliance is
required for our fiscal year ended September 30, 2005. This effort includes
documenting and testing of internal controls. To date, the Company has not
identified any material weaknesses in its internal control as defined by the
Public Company Accounting Oversight Board. The Company will continue with its
efforts of compliance and will modify or improve its controls as needed. The
matters noted herein have been discussed with the Company's Audit Committee.
ITEM 9B. OTHER INFORMATION
NONE.
Page 60
PART III
ITEM 10
DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS OF THE REGISTRANT
The following table shows the Company's executive officers as of December 14,
2004 and their areas of responsibility. Their biographies follow the table.
NAME AGE POSITION
- ---- --- --------
Norman E. Drapeau, Jr. 44 President, Chief Executive Officer and
Director Class III
Peter J. Rice 52 Executive Vice President - Finance and
Administration, Chief Financial Officer
and Treasurer
Patricia C. Foye 49 Executive Vice President, Global Marketing
& Strategic Alliances
William J. Sawyer 58 Executive Vice President- Operations
John W. Young 52 Executive Vice President - Products and
Technology
Craig Newfield 45 Vice President, General Counsel and
Secretary
Robert L. Daniels 62 Chairman of the Board - Class I
Richard P. Fishman 58 Director - Class III
John A. McMullen 62 Director - Class I
Stephen B. Sayre 53 Director - Class II
Alan L. Stanzler 61 Director - Class II
NORMAN E. DRAPEAU, JR. joined the Company in 1982 as an applications
analyst. Since that time, he has held various positions with the Company,
including, from 1984 to 1987, that of Manager of Customer Support and from 1989
through 1991, that of Director, Product Marketing. In 1991, Mr. Drapeau was
appointed Vice President, Corporate Marketing, in 1992 was appointed Vice
President - Americas and in July 1996 was appointed Executive Vice President -
Worldwide Sales and Marketing, serving in that capacity until January 1998. In
January 1998, Mr. Drapeau was appointed Executive Vice President and Chief
Operating Officer and was also elected a director of the Company. In May 1998,
Mr. Drapeau was elected President and Chief Executive Officer. On October 30,
2003, Mr. Drapeau was appointed to the Board of Directors of Authoria, Inc.
PETER J. RICE joined the Company in 2000 as Executive Vice President of
Finance and Administration, Chief Financial Officer, and Treasurer of the
Company. From 1998 to 2000, Mr. Rice was Vice President of Finance and
Administration, Chief Financial Officer, and Treasurer of Interleaf, a developer
of e-publishing and e-content software products. Interleaf was sold to
Broadvision, Inc. in 2000. From 1995 to 1998, Mr. Rice was Vice President, Chief
Financial Officer and Treasurer for Media 100, Inc., a provider of digital media
and content design, and creation and delivery tools. From 1990 to 1995, Mr. Rice
was Vice President, Corporate Controller and Chief Accounting Officer of M/A
Com, Inc. Prior there to; Mr. Rice held senior financial management positions at
Apollo Computer and Atex, Inc.
PATRICIA C. FOYE joined the Company in July 2001 as Executive Vice
President, Global Marketing and Strategic Alliances. From September 2000 to June
2001, Ms. Foye was Vice President, Worldwide Sales and Marketing for HMS
Software, Inc.; an application software company centered in the aerospace
defense markets. From May 1999 to May 2000, Ms. Foye was President of
Allenbrook, Inc., a private firm focused on the development of policy management
system for insurance and financial markets. From 1998 to 1999, Ms. Foye was Vice
President and General Manager of QAD, Inc.,
Page 61
leading the Electronics and Industrial business segment, the largest vertical
business for QAD. From 1994 to 1998, Ms. Foye held senior management positions
at Digital Equipment Corporation, a hardware and software vendor and Marcam
Corporation, an ERP applications vendor.
WILLIAM J. SAWYER joined the Company in 1978 as an applications consultant
and served in various sales and services positions from 1978 to 1984. Mr. Sawyer
was a Vice President of the Company from 1984 to 1990 and Executive Vice
President from 1990 until November 1997. In November 1997, Mr. Sawyer left the
Company and joined Peritus Software Services, Inc., a software application
company, as Vice President, Operations. Mr. Sawyer rejoined the Company in
October 1998 as Executive Vice President, Operations.
JOHN W. YOUNG originally joined the Company in 1985 and served until 1988
as MAXIMO Product Manager. From 1988 to 1992, Mr. Young was Vice President of
Sales of Comac Systems Corporation, a software application company. In 1992 he
rejoined the Company as Director of MAXIMO Product Design, was appointed Vice
President - Research and Development of the Company in 1995 and was appointed
Executive Vice President - Products and Technology of the Company in 1998. On
June 24, 2003, Mr. Young was appointed to the Board of Directors of NSI
Software, Inc.
CRAIG NEWFIELD joined the Company as Vice President, General Counsel and
Secretary in September 2000. From October 1997 through August 2000, Mr. Newfield
was Vice President, General Counsel and Secretary of Interleaf, Inc., a
developer of e-publishing and e-content software products. Interleaf was sold to
Broadvision, Inc. in 2000. From April 1996 through September 1997, Mr. Newfield
was General Counsel and Secretary of OneWave, Inc., since renamed Primix
Solutions, an IT service provider. From February 1993 to April 1996, Mr.
Newfield served as in-house counsel for Marcam Corporation.
ROBERT L. DANIELS founded the Company in 1968 and has been a director
since that time. Mr. Daniels served as Chairman of the Board and Chief Executive
Officer from 1968 to 1996 and as President from 1968 to 1995. From May 1998
through November 30, 2004, Mr. Daniels served as Executive Chairman of the
Board. As of December 1, 2004, Mr. Daniels serves as a non-employee Chairman of
the Board.
RICHARD P. FISHMAN has served as a director since March 1999. Mr. Fishman
is currently Senior Managing Partner of MAF Capital Partners, a venture capital
firm. From 1998 to 2002, Mr. Fishman was Executive Vice President at MacAndrews
& Forbes Group, Inc., where he was responsible for venture capital investing.
From 1995 to 1997, Mr. Fishman served as Managing Director of GeoPartners
Research, Inc., a strategy and management-consulting firm, where he headed the
firm's venture capital activities. Mr. Fishman served as President and Chief
Executive Officer of Thinking Machines Corporation from 1993 to 1994 and was a
partner at the law firm of Milbank, Tweed, Hadley & McCoy from 1987 until 1993.
JOHN A. MCMULLEN has served as a director since April 2000. Mr. McMullen
is the Managing Principal of Cambridge Meridian Group, Inc., a
strategy-consulting firm that serves Fortune 500 and technology-based companies,
with which he has been employed since 1985. Mr. McMullen taught business
strategy at Harvard Law School from the mid 1980's to 1990 and, as one of the
original members of CMGI's Board of Directors, served on that Board from 1988
through 1999. He currently serves on the Board of Ezenia, Inc., a NASDAQ listed
company, in a term that began last year. In addition, he serves, or has served,
on the boards of twelve other private, chiefly technology-oriented companies.
From 1993 to 1997 he was an informal advisor to Senator Bill Bradley (NJ). In
1998 he ran for the United States Senate from Vermont.
STEPHEN B. SAYRE has served as a director since September 1998. Mr. Sayre
is currently the Vice President of Marketing and Business Development for Endeca
Technologies, Inc. From June 2000 to March 2001, Mr. Sayre was Vice President of
Marketing for Idiom, Inc. From 1994 to 2000, he was the Senior Vice President of
Marketing at Lotus Development Corporation, a subsidiary of IBM Corporation, a
hardware and software vendor. Prior to joining Lotus in 1994, Mr. Sayre was
President of Boston Treasury Systems and has held other senior executive level
positions with Cullinet Software and Easel Corporation.
Page 62
ALAN L. STANZLER has served as a director since May 1998. Mr. Stanzler
also served as a director of the Company from 1992 to 1994, and as Clerk of the
Company from 1990 to 1996. Mr. Stanzler is Of Counsel at the law firm of
Stanzler, Funderburk & Castellon, L.L.P. From 1998 to September 2001, Mr.
Stanzler was a partner of the law firm of Maselan Jones & Stanzler, P.C.
The Company has adopted a Code of Ethics that applies to all our directors and
employees including, without limitation, our principal executive officer, our
chairman, our principal financial officer, our principal accounting officer, our
controller, and all of our employees performing financial or accounting
functions. Our Code of Ethics is posted on our website, www.mro.com, and may be
found under the "Investor Relations" section by clicking on "Corporate
Governance" and then clicking on "Code of Conduct". We intend to continue to
satisfy the disclosure requirement under Item 5.01 of Form 8-K regarding an
amendment to, or waiver from, a provision of our Code of Ethics by posting such
information on our website.
ITEM 11
EXECUTIVE COMPENSATION
The information set forth in the Proxy Statement for the 2004 annual meeting of
the stockholders to be filed, pursuant to Regulation 14A, within 120 days after
the end of the Company's fiscal year ended September 30, 2004 is incorporated
herein by reference.
ITEM 12
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information set forth in the Proxy Statement for the 2004 annual meeting of
the stockholders to be filed, pursuant to Regulation 14A, within 120 days after
the end of the Company's fiscal year ended September 30, 2004 is incorporated
herein by reference.
ITEM 13
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information set forth in the Proxy Statement for the 2004 annual meeting of
the stockholders to be filed, pursuant to Regulation 14A, within 120 days after
the end of the Company's fiscal year ended September 30, 2004 is incorporated
herein by reference.
ITEM 14
PRINCIPAL ACCOUNTANT FEES AND SERVICES
The information set forth in the Proxy Statement for the 2004 annual meeting of
the stockholders to be filed, pursuant to Regulation 14A, within 120 days after
the end of the Company's fiscal year ended September 30, 2004 is incorporated
herein by reference.
Page 63
PART IV
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) The following documents are filed as a part of this Report:
1. Consolidated Financial Statements - See Index to Consolidated Financial
Statements in Part II, Item 8 on page 33
2. Financial Statement Schedules - See Index to Consolidated Financial
Statements in Part II, Item 8 on page 33
3. Exhibits
3.1 Amended and Restated Articles of Organization of the Company
(included as Exhibit 3.3 to the Company's Registration Statement on
Form S-1, Registration No. 33-76420, and incorporated herein by
reference)
3.2 Restated By-Laws of the Company, as amended (included as Exhibit
3.2 to the Company's Annual Report on Form 10-K for the fiscal year
ended September 30, 1996, File No. 0-23852, and incorporated herein
by reference)
3.3 Amendment to By-Laws adopted on February 1, 2001 (included as
Exhibit 3.3 to the Company's Current Report on Form 10-Q for the
quarter ended March 31, 2001, File No. 0-23852 and incorporated
herein by reference)
3.4 Form of Certificate of Designation of Series A Junior Participating
Preferred Stock of MRO Software, Inc. (which is attached as Exhibit
A to the Rights Agreement included as Exhibit 4 (b) to the
Company's Current Report on Form 8-K dated February 2, 1998, File
No. 0-23852, and incorporated herein by reference)
3.5 Amendment to Articles of Organization adopted on December 15, 1999
(included as Exhibit 3.4 to the Company's Form 10-Q for the quarter
ended December 31, 1999, File No. 0-23852, and incorporated herein
by reference)
3.6 Amendment to Articles of Organization, dated March 6, 2001
(included as Exhibit 3.4 to the Company's Current Report on Form
8-K dated March 9, 2001, File No. 0-23852, and incorporated herein
by reference)
3.7 Nonstatutory Stock Option Agreement Form
3.8 Stock Option Agreement Form for Employees
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)
Page 64
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)
10. Material Contracts
10.1 Year Ended September 30, 2004 Executive Bonus Plan
21. Subsidiaries of the registrant
21.1 Subsidiaries of the Company
23. Consent of Independent Registered Public Accounting Firm
23.1 Consent of PricewaterhouseCoopers LLP
31. Rule 13a-14(a)/15d-14(a) Certifications
31.1 Certification of Chief Executive Officer Pursuant to Section 302 of
the Sarbanes - Oxley Act of 2002
31.2 Certification of Chief Financial Officer Pursuant to Section 302 of
the Sarbanes - Oxley Act of 2002
32. Section 1350 Certifications
32.1 Certification of Chief Executive Officer and Chief Financial
Officer Pursuant to Section 906 of the Sarbanes - Oxley Act of 2002
(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.
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 31, 2004.
On October 21, 2004, the Company filed a current report on Form 8-K disclosing
the resignation of the Company's Executive Vice President of Worldwide Sales,
effective October 31, 2004.
On November 4, 2004, the Company filed a current report on Form 8-K disclosing
its results of operations for the quarter and year ended September 30, 2004.
Page 65
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
Dated: December 14, 2004
MRO SOFTWARE, INC.
By: /s/ Norman E. Drapeau, Jr.
---------------------------
Norman E. Drapeau, Jr.
President and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the registrant and
in the capacities and on the dates indicated.
/s/ Norman E. Drapeau, Jr. President and Chief December 14, 2004
- ---------------------------- Executive Officer
Norman E. Drapeau, Jr. (Principal Executive
Officer)
/s/ Peter J. Rice Executive Vice President, December 14, 2004
- ---------------------------- Chief Financial Officer
Peter J. Rice and Treasurer
(Principal Financial and
Accounting Officer)
/s/ Robert L. Daniels Chairman of the Board December 14, 2004
- ----------------------------
Robert L. Daniels
/s/ Richard P. Fishman Director December 14, 2004
- ----------------------------
Richard P. Fishman
/s/ John A. McMullen Director December 14, 2004
- ----------------------------
John A. McMullen
/s/ Stephen B. Sayre Director December 14, 2004
- ----------------------------
Stephen B. Sayre
/s/ Alan L. Stanzler Director December 14, 2004
- ----------------------------
Alan L. Stanzler
Page 66
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 Exhibit3.3to
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)
3.7 Nonstatutory Stock Option Agreement Form
3.8 Stock Option Agreement Form for Employees
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)
10.1 Year Ended September 30, 2004 Executive Bonus Plan
21.1 Subsidiaries of the Company
23.1 Consent of PricewaterhouseCoopers LLP
31.1 Certification of Chief Executive Officer Pursuant to Section 302 of the
Sarbanes - Oxley Act of 2002
31.2 Certification of Chief Financial Officer Pursuant to Section 302 of the
Sarbanes - Oxley Act of 2002
32.1 Certification of Chief Executive Officer and Chief Financial Officer
Pursuant to Section 906 of the Sarbanes - Oxley Act of 2002
Page 67