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
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
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.
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
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.
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.
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.
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.
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
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.
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.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
PART II
ITEM 5.
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.
Since the Company's initial public offering in 1994, the Company has not declared or paid cash dividends on its Common Stock. The Company currently intends to retain any future earnings to finance growth and therefore does not anticipate paying cash dividends in the foreseeable future.
Certain provisions of the Company's Articles of Organization, as amended, and Bylaws could delay the removal of incumbent directors and could make a merger, tender offer or proxy contest involving the Company more difficult, even if such events would be
beneficial to the interests of the stockholders. In addition, the Company has 1,000,000 shares of authorized Preferred Stock. The Company may issue shares of such Preferred Stock in the future without further stockholder approval and upon such terms and conditions, and having such rights, privileges and preferences, as the Board of Directors may determine. The rights of the holders of common stock will be subject to, and may be adversely affected by, the rights of the holders of any Preferred Stock that may be issued in the future. The issuance of Preferred Stock, while providing flexibility in connection with possible acquisitions and other corporate purposes, could have the effect of making it more difficult for a third party to acquire, or of discouraging a third party from acquiring, a majority 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.
ITEM 6.
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)
FIVE-YEAR SUMMARY FISCAL YEAR ENDED SEPTEMBER 30,
CONSOLIDATED BALANCE SHEET DATA
(in thousands)
ITEM 7.
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
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
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.
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.
RESULTS OF OPERATIONS
The following table sets forth, for the periods indicated, certain financial data as a percentage of total revenues:
* In accordance with FAS No. 142, the company ceased amortization of goodwill at the beginning of its fiscal year October 1, 2002.
REVENUES
The Company's revenues are derived primarily from two sources: (i) software licenses, and (ii) fees for support and services.
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.
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 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
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 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.
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 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.
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.
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.
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
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
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
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
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.
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.
ITEM 7A.
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.
ITEM 8.
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)
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:
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:
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.
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
MRO SOFTWARE, INC. CONSOLIDATED BALANCE SHEETS
The accompanying notes are an integral part of the consolidated financial statements.
MRO SOFTWARE, INC. CONSOLIDATED STATEMENTS OF OPERATIONS
The accompanying notes are an integral part of the consolidated financial statements.
MRO SOFTWARE, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS
The accompanying notes are an integral part of the consolidated financial statements.
MRO SOFTWARE, INC. CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
The accompanying notes are an integral part of the consolidated financial statements.
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
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:
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
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
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.
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:
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:
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
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:
The reconciliation of the Company's income tax provision to the statutory federal tax rate is as follows:
The components of the deferred tax assets and liabilities are as follows:
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
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:
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:
The following table provides a breakdown of the investments with unrealized losses at September 30, 2004:
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)
G. PROPERTY AND EQUIPMENT:
Property and equipment are stated at cost and consist of the following:
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.
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.
Changes in the amount of goodwill for the years ended September 30, 2004 and 2003 are as follows:
(in thousands)
Intangible assets consist of the following:
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)
I. ACCRUED COMPENSATION:
A summary of accrued compensation consists of the following:
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:
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.
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.
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:
The following table summarizes information about stock options outstanding at September 30, 2004:
EMPLOYEE STOCK PURCHASE PLAN
On March 10, 1994, the Board of Directors of the Company adopted the 1994 Employee Stock Purchase Plan that provides for a maximum issuance of 450,000 shares of Common Stock for purchase by eligible employees at 85% of the lower of the fair market value of the Company's Common Stock on either the first or last day of the semi-annual offering period. No compensation expense is recorded in connection with the plan.
On January 16, 2002, the Board of Directors adopted the 2002 Employee Stock Purchase Plan authorizing the issuance of up to 750,000 shares of the Company's Common Stock. Eligible employees may purchase Common Stock of the Company through payroll deductions. The purchase price is 85% of the fair market value based on the lowest price on (a) the semi-annual offering commencement date (b) the semi-annual offering termination date or (c) the first of each month in a semi-annual offering period. The effective date of the 2002 Employee Stock Purchase Plan is June 1, 2002. The Board of Directors also voted to terminate the Company's 1994 Employee Stock Purchase Plan, effective May 30, 2002.
During fiscal year ended September 30, 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;
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,
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
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:
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:
Acquisitions of businesses were as follows:
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
ITEM 9.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable.
ITEM 9A.
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.
ITEM 9B. OTHER INFORMATION
NONE.
PART III
ITEM 10
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.
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.,
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.
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
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
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
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
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.
PART IV
ITEM 15.
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)
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.
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
EXHIBIT INDEX